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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 3, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-23169
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SEAGATE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0397623
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
915 DISC DRIVE, SCOTTS VALLEY, CALIFORNIA 95066
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(831) 438-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Series A Preferred Stock, $.001 par value per share
Common Stock, $.001 par value per share
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of July 3, 1998 was $4,705,604. Shares of Common Stock held by
each officer, each director and each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock as of July
3, 1998 was 975,567.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
CERTAIN FORWARD-LOOKING INFORMATION
The information contained in this Form 10-K includes forward-looking
statements. Since this information is based on current expectations that
involve risks and uncertainties, actual results could differ materially from
those expressed in the forward-looking statements. Various important factors
known to Seagate Software, Inc. (the "Company" or "Seagate Software") that
could cause such material differences are identified in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operating Results" contained in Item 7 of
this Form 10-K. Certain sections of this Form 10-K have been identified as
containing forward-looking statements. The reader is cautioned that other
sections and other sentences not so identified may also contain forward-
looking information.
ITEM 1. BUSINESS
GENERAL
The Company develops and markets software products and provides related
services enabling business users and information technology ("IT")
professionals to store, access and manage enterprise information.
Headquartered in Scotts Valley, California, the Company has over 40 offices
and operations in 17 countries worldwide. The Company is a majority-owned and
consolidated subsidiary of Seagate Technology, Inc. (the "Parent Company" or
"Seagate Technology"), a data technology company that provides products for
storing, managing and accessing digital information on computer systems. As of
July 3, 1998, the Parent Company and one of its subsidiaries held 99.7% of the
Company's outstanding capital stock. On a diluted basis, the outstanding
minority interests of the Company amounted to approximately 17.8%, which
consisted of Common Stock and options to purchase its Common Stock issued
pursuant to the Seagate Software 1996 Stock Option Plan (the "Option Plan").
Such options to purchase the Company's Common Stock are held by certain
employees, directors and consultants of the Company and the Parent Company.
The Company believes that managing the exponential growth of information and
the growing need for information infrastructures combined with increasingly
decentralized decision making are key challenges inherent in today's
client/server computing environments. The Company's strategy is to respond to
these challenges by offering Enterprise Information Management ("EIM")
software solutions which consist of three core components -- Information
Delivery, Information Analysis and Information Availability. The purpose of
EIM is to integrate departmental information, optimize decision-making and
ensure consistent access to information by providing comprehensive data
availability and protection. Seagate Software is comprised of two operating
groups, Information Management Group ("IMG") and Network & Storage Management
Group ("NSMG"), each focused on the growing need for superior EIM.
IMG offers business intelligence ("BI") software solutions featuring the
Delivery and Analysis components of EIM. IMG's products include features such
as query and reporting, automated report scheduling and distribution,
information delivery across the World Wide Web, on-line analytical processing
("OLAP"), forecasting, statistical analysis, discovery and data mining.
NSMG offers network and storage management software solutions, which focus
on the Availability component of EIM by enabling IT professionals to manage
distributed network resources and to secure and protect enterprise data.
NSMG's products include features such as system backup, disaster recovery,
migration, replication, automated client protection, storage resource
management, scheduling, event correlation and desktop management.
The Company's strategy is to deliver a comprehensive EIM solution to its
customers by developing a technology roadmap that leverages the core
competencies of its BI and network and storage management products.
Combinations of EIM components are available today in a number of integrated
solutions from the Company. Seagate Backup Exec, Seagate Desktop Management
Suite, Seagate Manage Exec and Seagate
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NerveCenter provide the combination of Information Availability and
Information Analysis by integrating technology from Seagate Crystal Reports.
Seagate Crystal Reports, Seagate Crystal Info and Seagate Holos provide a
combination of technology that delivers Information Delivery and Information
Analysis solutions.
PRODUCTS
Seagate Software offers a breadth of BI and network and storage management
products featuring EIM functionality:
EIM Products For Business Intelligence
. Seagate Crystal Reports for Microsoft BackOffice(TM) -- Generates a set of
top-requested reports to ease systems administration functions for the
Microsoft BackOffice family of products.
. Seagate Crystal Info(TM) -- Provides decision-makers with shared access to
reporting and analysis capabilities, so users get fast access to business
information without having to interact with the database. Whether using a
Web browser or Windows, users can schedule, view and analyze reports and
multidimensional OLAP cubes in a secure environment. This product contains
an enterprise-friendly multi-tier architecture to lower network traffic
and increase user productivity.
. Seagate Crystal Reports(TM) -- Provides query and report writing functions
for Windows. A developer and end-user tool, Seagate Crystal Reports allows
users to access most types of PC and structured query language data and
design a variety of reports and integrate them into database applications.
. Seagate Holos(R) -- Provides a flexible OLAP development environment for
rapidly delivering a range of applications that focus on key business
issues and accurately reflect business processes. These "business-aware"
applications allow enterprises to harness and analyze the increasing
volumes of data and guide users to the information to improve decision-
making.
EIM Products For Network and Storage Management
. Seagate Backup Exec(R) Desktop Editions -- Provides complete plug-and-play
backup and restore functions for desktop users running Microsoft Windows
NT Workstation, Windows 98, Windows 95, Windows 3.x and DOS.
. Seagate Backup Exec(R) Server and Enterprise Editions -- Provides a backup
and restore solution for server and network users running Novell NetWare,
Microsoft Windows NT LANs and workstations.
. Seagate Backup Exec(R) Storage Migrator -- Facilitates the proactive
management of inactive data by migrating it from on-line storage (such as
disk drives) to near-line devices (such as optical drives) or to archival
storage resources (such as tape devices) over user-defined periods of time
through a multi-tier hierarchical storage management ("HSM") application
delivering enterprise functionality to client/server environments.
. Seagate Client Exec(TM) -- Protects critical client data on workstations
and laptops. Users receive automatic, regular and transparent protection
of their critical data, and administrators have the flexibility to control
which users are protected, what type of data is protected and when the
protection should occur.
. Seagate Desktop Management Suite(TM) -- Provides a fully integrated suite
of software solutions including network inventory, software distribution,
remote control, network backup and software metering.
. Seagate ExecView(TM) -- Provides an integrated cross-platform storage
management console for enterprise networks using Microsoft Windows NT and
Novell NetWare. Users can manage both Seagate Backup Exec for NetWare and
Seagate Backup Exec for Windows NT servers from a single console.
. Seagate Manage Exec(TM) -- Centralizes enterprise administration by
providing IT professionals with a unique view of servers worldwide and
real-time problem analysis through a proactive server health monitoring,
alerting and reporting solution.
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. Seagate NerveCenter(R) -- Provides an enterprise-event automation solution
for Windows NT and UNIX environments.
. Seagate WinINSTALL(TM) -- Provides a script-free, automated software
distribution tool for 16- and 32-bit applications.
The Company provides its software products to customers under non-exclusive,
non-transferable license agreements (including shrink-wrap licenses for
certain products). As is customary in the software industry, in order to
protect its intellectual property rights, the Company does not sell or
transfer title to its software products to customers. The Company enters into
both object-code only and source-code licenses of its products. Under the
Company's current standard end-user license agreement, licensed software may
be used solely for the customers' internal operations and only at specified
sites, which may be comprised of a stand-alone computer, a single network
server with multiple terminals or multiple network servers with multiple
terminals.
STRATEGIC RELATIONSHIPS
The Company has developed strategic relationships with a number of
application software developers and computer hardware manufacturers that sell
and support the Company's products as well as integrate the Company's products
into their operating system platforms. Such strategic relationships have been
established with Compaq, Hewlett-Packard, IBM, Informix, Microsoft, Netscape,
Novell, Oracle, PeopleSoft and Seagate Technology's original equipment
manufacturer ("OEM") tape drive operations.
The Company's strategic relationship with Microsoft includes the bundling of
its leading BI and storage management products with selected Microsoft
products. Seagate Crystal Reports is bundled with Microsoft BackOffice
products and developer tools such as Microsoft Visual Basic, and Seagate
Crystal Info is bundled in BackOffice Server 4.0. Additionally, the Company
developed the backup utility for Microsoft Windows 98 and is developing the
system disaster recovery and backup utilities for Windows NT 5.0. The Company
has also developed the HSM technology to be included in Windows NT Server
5.0.*
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses of approximately
$47,173,000, $42,842,000 and $36,897,000 in 1998, 1997 and 1996, respectively.
Certain of the research and development expenses, which have not been material
to date, are funded by the Company's customers. The Company is pursuing its
product development objectives by continuing its emphasis on internally
developing new software products and product enhancements, acquiring products,
technologies and businesses complementary to the Company's existing product
lines and forming alliances with leading technology companies.*
SALES AND MARKETING
The Company employs a multi-faceted sales strategy. The Company utilizes
direct sales forces and certain indirect sales channels, such as distributors
and OEM relationships, for sales of its selected products to end users. These
distributors and OEMs may also sell other products that are complementary to
or compete with those of the Company. The Company provides sales and marketing
programs to encourage the sale of its products, but there can be no assurance
that its distributors and OEMs will not place a higher priority on competing
products. Agreements with its distributors and OEMs are generally non-
exclusive and may be terminated by either party without cause. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Factors Affecting Future Operating Results."
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* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
3
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The Company generally markets its products domestically and overseas through
a network of wholly-owned subsidiaries. These subsidiaries utilize authorized
distributors and direct sales forces. The Company adapts certain products for
foreign markets, including translation and documentation, and the Company
prepares marketing and sales support programs accordingly. The Company has
organized its sales management into geographical regions to increase the
effectiveness of its sales efforts. Each region has offices established in
cities and countries near its largest existing or prospective partners and
customers. There are four regions: the Americas, Europe/Middle East/Africa,
Japan, and Asia/Pacific.
The Company's marketing efforts are designed to increase awareness and
consideration of, and to generate leads for, the Company's products. Marketing
activities include print advertising in trade and technical publications, on-
line advertising on the World Wide Web, cooperative marketing with
distributors and resellers, participation in seminars and tradeshows, mailings
to end users and other public relations efforts. The Company's marketing
groups produce or oversee the production of substantially all of the on-line
and print product literature, brochures, advertising and similar marketing and
promotional material for the Company.
Revenue from one third party customer, Ingram Micro Inc., accounted for 22%,
18% and 16% of the Company's total revenues in 1998, 1997 and 1996,
respectively. Indirect revenues, which include sales to distributors and OEMs,
were 69%, 63% and 70% of total revenues during 1998, 1997 and 1996,
respectively. Revenues outside of the Americas were 32%, 30% and 11% of total
revenues during 1998, 1997 and 1996, respectively.
During 1998 the Company generated export revenues from the United States of
approximately $66,250,000. Revenues and expenses from the Company's operations
outside of the Americas were approximately $26,809,000 and $52,143,000,
respectively, as translated to the U.S. dollar from foreign currencies. The
principal currency for such operations is the British pound. The Company
believes that its exposure to foreign currency fluctuations is not material
and does not engage in foreign currency hedging programs.*
TECHNICAL SUPPORT AND MAINTENANCE
The Company's technical support groups, located at various sites around the
world, including the U.S., Canada and Europe, provide pre-sale, installation
and post-sale support to current users and potential customers evaluating the
Company's products. Certain technical support groups also offer seven-day, 24-
hour toll-free telephone services. The Company believes that effective
technical support during product evaluation substantially contributes to
product acceptance, and that post-sale support has been, and will continue to
be, a substantial factor in maintaining customer satisfaction.*
The Company offers maintenance programs for certain of its software
products, which may consist of product enhancements, updated products and
technical support. Generally, customers renew maintenance and support on an
annual basis by paying a maintenance fee. Maintenance revenue implicit in new
product sales and recurring maintenance charges are recognized ratably over
the period the maintenance and support services are to be provided.
COMPETITION
The business intelligence and network and storage management software
markets in which the Company competes are comprised of numerous competitors,
and the Company expects competition to increase.* The Company has recently
experienced increased competition from additional entrants into its markets,
including companies that specialize in the development, marketing and support
of information management and network
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* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
4
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and storage management software products. Many of the Company's current and
prospective competitors have significantly greater financial, technical and
marketing resources than the Company. In addition, many prospective customers
may have the internal capability to implement solutions to their problems.
The competitive factors affecting the market for the Company's software
products include the following: product functionality; performance and
reliability; demonstrable economic benefits for users relative to cost; price;
quality of customer support and user documentation and ease of installation;
vendor reputation; experience; and financial stability. The Company believes
that it currently competes effectively with respect to these factors. The
Company's ability to remain competitive will depend, to a great extent, upon
its ongoing performance in the areas of product development and customer
support.* To be successful in the future, the Company must respond promptly
and effectively to the challenges of technological change and its competitors'
innovations by continually enhancing its own product offerings.* Performance
in these areas will, in turn, depend upon the Company's ability to attract and
retain highly qualified technical personnel in a competitive market for
experienced and talented software developers.* The Company also expects to
continue its strategy of identifying and acquiring business intelligence and
network and storage management assets and technologies and businesses that
have developed such products and technologies.*
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company by and through its Parent Company and/or predecessor companies,
has been awarded four (4) United States patents and has three (3) United
States and three (3) foreign patent applications pending. Because software
technology changes rapidly, the Company believes that the improvement of
existing products, reliance upon trade secrets and unpatented proprietary
know-how and development of new products are generally more important than
patent protection. The Company nevertheless believes that patents are of value
to its business and intends to continue its efforts to obtain patents, when
available, in connection with its research and development programs.* There
can be no assurance that any patents obtained will provide substantial
protection or be of commercial benefit to the Company, or that their validity
will not be challenged.
The Company's license agreements have restrictions in place to protect and
defend the Company's intellectual property. The Company realizes that although
it has incorporated these restrictions, there is a possibility for
unauthorized use of its software. In addition to relying on these contractual
rights, the Company has an ongoing trademark registration program in which it
registers certain of its product names, slogans, and logos in the United
States and in some foreign countries.
EMPLOYEES
As of July 3, 1998, the Company employed approximately 1,800 persons. The
Company's success is highly dependent on its ability to attract and retain
qualified employees. Competition for qualified employees is intense in the
software industry. None of the Company's employees are represented by a labor
union or are the subject of a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that its employee relations are
good.
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* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
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ITEM 2. PROPERTIES
Seagate Software's executive offices are located in Scotts Valley,
California. Principal facilities are located in Florida, California, Canada
and the United Kingdom. A major portion of the Company's facilities are
occupied under leases that expire at various times through 2008. The following
is a summary of square footage leased by the Company:
FACILITIES
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TOTAL
LOCATION SQUARE FEET
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North America
California
Central California....................................... 53,429
Northern California...................................... 16,084(1)
Colorado................................................... 18,348
Mid-Continent.............................................. 7,607
Northeast USA.............................................. 33,428
Southeast USA.............................................. 121,112(2)
Other USA.................................................. 5,481(3)
Canada..................................................... 140,044
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Total North America.................................... 395,533
Europe
England.................................................... 39,141
Germany.................................................... 6,858(4)
Other Europe............................................... 10,379
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Total Europe........................................... 56,378
Asia
Australia.................................................. 11,233
Japan...................................................... 6,938
Hong Kong.................................................. 2,206
Other Pacific Rim.......................................... 3,885
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Total Asia............................................. 24,262
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Total................................................ 476,173
=======
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(1) Excludes approximately 44,361 square feet of space leased to others.
(2) Excludes approximately 5,000 square feet of unoccupied space.
(3) Excludes approximately 19,206 square feet of unoccupied space.
(4) Excludes approximately 3,263 square feet of space leased to others.
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ITEM 3. LEGAL PROCEEDINGS
On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral
agreement and infringement of a Vedatech U.K. copyright in the Japanese
translation of one of the Company's products (the "Complaint") and seeking
monetary and injunctive relief. No specific damage amount has yet been
claimed. The Company has hired local counsel in the U.K., reviewed documents
and conducted interviews. The Company filed an initial response in the U.K.
court on January 13, 1998 and now in the discovery process. The Company
believes the Complaint has no merit and intends to vigorously defend the
action. However, if an unfavorable outcome were to arise, there can be no
assurance that such outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations.
In addition to the foregoing, the Company is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of July 3, 1998, the Company had outstanding 975,567 shares of Common
Stock held by 225 shareholders and 54,633,333 shares of Series A Preferred
Stock (including shares exchangeable to Series A Preferred Stock) held by the
Parent Company and one of its subsidiaries. There is no established public
trading market for any class of the Company's securities.
The Company has not paid any dividends on any of its capital stock and does
not anticipate that any cash dividends will be declared in the foreseeable
future.*
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* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
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ITEM 6. SELECTED FINANCIAL DATA
The consolidated financial data with respect to the fiscal years ended July
3, 1998, June 27, 1997 and June 28, 1996 are derived from the audited
Consolidated Financial Statements of the Company that are included or
incorporated by reference in this Form 10-K. The consolidated financial data
set forth below with respect to the fiscal years ended June 30, 1995 and July
1, 1994 are derived from the Consolidated Financial Statements of the Company
that are not included in this Form 10-K. The following data should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-K and in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
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<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JULY 3, JUNE 27, JUNE 28, JUNE 30, JULY 1,
1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................... $293,226 $216,950 $ 141,586 $ 92,796 $ 30,696
Gross profit................ 242,766 169,161 112,567 70,417 23,556
Income (loss) from
operations................. 6,905 (64,033) (137,806) (80,166) (11,068)
Net loss.................... (8,490) (57,700) (129,668) (82,864) (6,884)
Net loss per common share
(basic and diluted)........ (51.59) (852.11)
Total assets................ 136,040 143,594 201,598 101,928 20,854
Stockholders' equity........ $ 54,149 $ 61,618 $ 115,602 $ 47,215 $ 6,978
Weighted average common
shares outstanding......... 164,571 67,714
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") and contained elsewhere in this
Form 10-K are forward-looking statements based on current expectations, and
entail various risks and uncertainties that could cause actual results to
differ from those projected in such forward-looking statements. Certain of
these risks and uncertainties are set forth below in the sections entitled
"Liquidity and Capital Resources" and "Factors Affecting Future Operating
Results". Certain sections in this Form 10-K have been identified as
containing forward-looking statements. The reader is cautioned that other
sections and other sentences not so identified may also contain forward-
looking information.
OVERVIEW
The Company develops and markets software products and provides related
services enabling business users and information technology ("IT")
professionals to manage enterprise information. Headquartered in Scotts
Valley, California, the Company has over 40 offices and operations in 17
countries worldwide. The Company is a majority-owned and consolidated
subsidiary of Seagate Technology, Inc. (the "Parent Company" or "Seagate
Technology"), a data technology company that provides products for storing,
managing and accessing digital information on computer systems. As of July 3,
1998, the Parent Company and one of its subsidiaries held 99.7% of the
Company's outstanding capital stock. On a diluted basis, the outstanding
minority interests of the Company amounted to approximately 17.8%, which
consisted of Common Stock and options to purchase its Common Stock issued
pursuant to the Option Plan. Such options to purchase the Company's Common
Stock are held by certain employees, directors and consultants of the Company
and the Parent Company.
The Company was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to the Parent Company's merger with Crystal
Computer Services, Inc., a company engaged in
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developing and marketing report writing software. From August 1994 to June
1996, the Parent Company acquired eight software companies, which were engaged
in developing and marketing business intelligence ("BI") or network and/or
storage management software products. In February 1996, the Parent Company
merged with Conner Peripherals, Inc. ("Conner") in a transaction accounted for
as a pooling-of-interests. In connection with the merger, the Parent Company
purchased the outstanding minority interests in Conner's storage management
software operations under Arcada Holdings, Inc. ("Arcada"). In April 1996, the
Parent Company consolidated its software operations into Seagate Software.
In June 1998, the Company acquired all of the outstanding capital stock of
Eastman Software Storage Management Group, Inc. ("Eastman"), a company engaged
in developing, producing and marketing HSM products for the Windows NT
platform. The purchase price of approximately $10,000,000 was paid in cash.
Approximately $6,800,000 of the total purchase price represented the estimated
value of in-process technology that had not yet reached technological
feasibility, had no alternative future uses and was charged to the Company's
operations in the quarter ended July 3, 1998. The Company accounted for the
acquisition using the purchase method, and the results of operations of
Eastman are only included in the Company's operations since the acquisition
was completed. Pro forma financial information is not presented as such
amounts are not material.
The Company operates and reports financial results on a fiscal year of 52 or
53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996
ended on June 28, 1996. Fiscal 1998 was comprised of 53 weeks and fiscals 1997
and 1996 were comprised of 52 weeks. All references to years in this Form 10-K
represent fiscal years unless otherwise noted.
Arcada, which was acquired by the Company pursuant to Seagate Technology's
merger with Conner, had a fiscal year that ended on the Saturday closest to
December 31. Accordingly, Arcada's statement of operations for the year ended
December 30, 1995 has been combined with the Company's statement of operations
for the year ended June 30, 1995. In order to conform Arcada's fiscal year end
to the Company's fiscal year end, the Company's consolidated statement of
operations for the year ended June 28, 1996 includes six months (July 1, 1995
through December 31, 1995) for Arcada which are also included in the Company's
consolidated statement of operations for the year ended June 30, 1995.
1998 VERSUS 1997
REVENUES. The Company's revenues are primarily derived from the sale of
product licenses, software maintenance, technical support, training and
consulting. The Company recognizes license revenues in accordance with
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition". Revenues from software license agreements are
recognized at the time of product delivery, provided there are no significant
vendor obligations remaining to be fulfilled and collectibility is probable.
Service revenues from customer maintenance fees for ongoing customer support
and product updates are recognized ratably over the maintenance term, which is
typically 12 months. Service revenues from training and consulting are
recognized when such services are performed.
Total revenues increased 35% to $293,226,000 in 1998 from $216,950,000 in
1997. License revenues grew 33% to $243,285,000 in 1998 from $183,556,000 in
1997 due primarily to increased sales of Seagate Backup Exec, NSMG's leading
storage management product featuring backup and restore solutions for
Microsoft's Windows NT Server and Windows NT Workstation operating systems.
License revenue growth was also due to increased sales of Seagate Crystal
Reports and Seagate Crystal Info, IMG's leading business intelligence products
featuring enterprise report writing and scheduling technologies. The Company
continued to expand both its indirect and direct sales channels. Indirect
revenues, which include distribution and OEM sales, increased 37% to
$203,273,000 in 1998 from $147,991,000 in 1997 while direct revenues, which
include corporate licensing and other direct sales to users, increased 30% to
$89,953,000 in 1998 from $68,959,000 in 1997. Revenues increased within the
Americas 30% to $198,820,000 in 1998 from $153,368,000 in 1997 and
internationally 48% to $94,407,000 in 1998 from $63,582,000 in 1997, which was
due in part to the Company's continued expansion
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of its European distribution channel. Revenues from Seagate Technology
decreased 5% primarily due to fewer unit shipments to Seagate Technology's OEM
tape drive operations. Total maintenance, support and other revenues grew 61%
to $44,472,000 in 1998 from $27,632,000 in 1997 primarily due to increases in
the sales of maintenance agreements and training and consulting services
resulting from a larger installed customer base.
During 1998 the Company generated export revenues from the United States of
approximately $66,250,000. Revenues and expenses from the Company's operations
outside of the Americas were approximately $26,809,000 and $52,143,000,
respectively, as translated to the U.S. dollar from foreign currencies. The
principal currency for such operations is the British pound. The Company
believes that its exposure to foreign currency fluctuations is not material
and does not engage in foreign currency hedging programs.*
COST OF REVENUES. The cost of revenues consists of amortization of acquired
developed technology, royalties, product packaging, documentation,
duplication, production and the cost of maintenance, technical support and
consulting services. Acquired developed technology is amortized based on the
greater of the straight-line method over its estimated useful life (30 to 48
months) or the ratio of current revenues to the total of current and
anticipated future revenues. The decrease in the cost of license revenues to
$16,963,000 in 1998 from $17,535,000 in 1997, representing 7% and 10% of
related license revenues, respectively, and the decrease in the cost of
license revenues from Seagate Technology was due primarily to reductions in
product packaging and documentation costs resulting from a shift in mix to CD-
ROMs from disks and increased sales of higher-margin server products. The
increase in the cost of maintenance, support and other revenues to $19,687,000
in 1998 from $6,560,000 in 1997, representing 44% and 24% of related service
revenues, respectively, was primarily due to expansion of the Company's
professional services workforce necessary to support the growth in training
and consulting revenues. The decrease in the amortization of developed
technology to $13,271,000 in 1998 from $21,860,000 in 1997, representing 5%
and 10% of total revenues, respectively, was primarily due to write-downs of
certain developed technologies amounting to approximately $6,918,000 during
1997 as a result of asset values that had become impaired based on reductions
in estimated future cash flows.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel-related expenses, advertising, sales and marketing promotions and
customer technical support costs. The increase in sales and marketing expenses
to $129,343,000 in 1998 from $107,706,000 in 1997, representing 44% and 50% of
total revenues, respectively, was primarily due to expansion of the Company's
sales force and increases in advertising, promotion and technical support
costs necessary to support revenue growth. Such increases were partially
offset by reductions in workforce in 1997 within the NSMG business unit due to
facility consolidations.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel-related expenses, depreciation of development equipment
and facilities and occupancy costs. In accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed", software development costs are
expensed as incurred until technological feasibility has been established, at
which time such costs are capitalized until the product is available for
general release to customers. To date, the establishment of technological
feasibility of the Company's products and general release of such software has
substantially coincided. As a result, software development costs qualifying
for capitalization have been insignificant.
The increase in research and development expenses to $47,173,000 in 1998
from $42,842,000 in 1997, representing 16% and 20% of total revenues,
respectively, was primarily due to increases in personnel and related
expenses, new product development and localization costs, partially offset by
facility consolidations and reductions in workforce in 1997 within the NSMG
business unit.
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
10
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel-related expenses for finance, legal, information
technology, human resources, general management, fixed asset provisions and
outside services. The increase in general and administrative expenses to
$37,124,000 in 1998 from $36,861,000 in 1997, representing 13% and 17% of
total revenues, respectively, was primarily due to increases in personnel and
related expenses and legal costs, partially offset by facility consolidations
and reductions in workforce in 1997 within the NSMG business unit.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of its
acquisitions, the Company has acquired a number of projects and products that
were considered in-process research and development on the date of
acquisition. The Company determined that purchased in-process technology had
not reached technological feasibility as no working model or detail program
design existed at the time of purchase, and no alternative uses had been
identified. Accordingly, in-process research and development was expensed when
acquired. During 1998, $6,800,000 of in-process research and development was
written off in connection with the purchase of Eastman Software Storage
Management Group, Inc. During 1997, total write-offs of in-process research
and development were $2,613,000. The Company incurred this charge in
connection with additional amounts paid with respect to the June 1996
acquisition of Holistic Systems, Ltd. ("Holistic").
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents the
excess of the purchase price of acquired companies over the estimated fair
values of the tangible and intangible net assets acquired. Goodwill is
amortized on a straight-line basis over five to seven years. Other intangible
assets consist of acquired trademarks, assembled workforces, distribution
networks, developed technology, customer bases, and covenants not to compete.
Amortization of other intangibles, other than acquired developed technology,
which is included in the cost of revenues, is provided based on the straight-
line method over the respective useful lives of the assets ranging from one to
five years. The decrease in the amortization of goodwill and other intangibles
to $15,421,000 in 1998 from $27,202,000 in 1997, representing 5% and 13% of
total revenues, respectively, was primarily due to decreases in amortization
expense based on lower levels of intangible assets and write-downs and write-
offs of the carrying value of goodwill and other intangible assets of
approximately $1,900,000 in 1998 versus $10,259,000 in 1997 as a result of
asset values that had become impaired based on reductions in estimated future
cash flows.
RESTRUCTURING. Restructuring charges were $2,524,000 in 1997, representing
1% of total revenues. The restructuring charges were incurred as a result of
reorganizations and closures within the NSMG business unit for the reduction
of personnel, write-off or write-down of equipment, intangibles and other
assets, closure of duplicate facilities, fees for legal and accounting
services, contract cancellations and other related expenses.
UNUSUAL ITEMS. Unusual items of $13,446,000 were recognized during 1997,
representing 6% of total revenues. In connection with the June 1996
acquisition of Holistic, $18,000,000 of funds were placed in escrow pending
the outcome of certain purchase price contingencies. Prior to the expiration
of the contingency period, the Company elected to release the funds to the
Holistic shareholders even though certain contingencies had not been met. Of
the $18,000,000 total contingency payment, the Company recorded $13,446,000 as
compensation expense for amounts paid to former Holistic shareholders who were
employees of the Company and recorded the remaining $4,554,000 paid to non-
employee shareholders as additional purchase price.
The Company released the funds prior to the expiration of the contingency
period, because in order to position the IMG business unit for future growth
and product development, the Company needed to begin an aggressive plan to
integrate the operations of Holistic. These activities resulted in the
diversion of the attention of certain Holistic employees from their
responsibilities at Holistic. As such, Holistic's ability to achieve the
purchase price contingencies necessary to trigger the $18,000,000 contingency
payment was impaired. The Company believed that the Holistic employees should
not be penalized, because they had sacrificed achievement of their individual
goals in order to meet the overall needs of the Company. Accordingly, the
Company elected to make the full payment of $18,000,000.
11
<PAGE>
INTEREST AND OTHER, NET. Total interest and other, net decreased to a net
expense of $10,000 in 1998 from a net expense of $2,381,000 in 1997,
representing 0% and 1% of total revenues, respectively. The decrease in
interest and other, net was primarily due to lower interest expense on a lower
level of outstanding borrowings from Seagate Technology and an increase in
foreign exchange gains.
INCOME TAXES. The Company recorded a $15,385,000 provision for income taxes
at an effective rate of 223% in 1998 compared with a $8,714,000 benefit from
income taxes at an effective rate of 13% for 1997. The effective rate used to
record the provision for income taxes in 1998 was greater than the statutory
rate primarily due to foreign tax rates that were in excess of the U.S.
statutory tax rate, increases in the valuation allowance for deferred tax
assets and goodwill amortization for certain acquisitions that were not
deductible for tax purposes. The effective rate used to record the benefit
from income taxes in 1997 was less than the statutory rate primarily due to
increases in the valuation allowance for deferred tax assets and goodwill
amortization for certain acquisitions that were not deductible for tax
purposes.
1997 VERSUS 1996
REVENUES. Total revenues increased 53% to $216,950,000 in 1997 from
$141,586,000 in 1996. The increase in licensing revenues was due in part to
growth in the market for business intelligence and IT infrastructure
management software products and related services, expansion of the Company's
European distribution channels and market demand for NSMG's Seagate Backup
Exec, a storage management product that supports Microsoft's Windows NT
operating system. The increase in maintenance, support and other revenues was
due in part to higher training and consulting revenues resulting from a larger
customer base. Additionally, the 1997 results included a full year of
operations for the 1996 acquisitions of OnDemand Software, Inc. ("OnDemand")
and Holistic. These 1996 acquisitions accounted for increases in licensing,
licensing from Seagate Technology and maintenance, support and other revenues
of approximately $26,039,000, $842,000 and $14,758,000, respectively, in 1997
as compared with 1996.
During 1997 the Company generated export revenues from the United States of
approximately $44,129,000. Revenues and expenses from the Company's operations
outside of the Americas were approximately $18,896,000 and $23,938,000,
respectively, as translated to the U.S. dollar from foreign currencies. The
principal currency for such operations is the British pound.
COST OF REVENUES. The cost of revenues increased to $47,789,000 in 1997 from
$29,019,000 in 1996, representing 22% and 20% of total revenues, respectively.
The majority of the increase in absolute dollars was due to an increase in the
amortization of acquired developed technology due to a higher level of
intangible assets and an increase in IMG's costs related to service revenues
and related costs resulting from the inclusion of a full year of operations in
1997 of the 1996 acquisition of Holistic. Additionally, in 1997 the Company
wrote off and wrote down certain developed technologies amounting to
approximately $6,918,000 as a result of asset values that had become impaired
based on the Company's phasing out of certain products.
SALES AND MARKETING. Sales and marketing costs increased to $107,706,000 in
1997 from $71,129,000 in 1996, representing 50% of total revenues in both
periods. The increase in absolute dollars was due to increased personnel,
advertising and promotion costs necessary to support revenue growth and the
expansion of the Company's European distribution channel. Additionally, the
1997 results included a full year of operations for the Company's 1996
acquisitions compared with a partial year of operations in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$42,842,000 in 1997 from $36,897,000 in 1996, representing 20% and 26% of
total revenues, respectively. The increase in absolute dollars was primarily
due to increases in personnel and related expenses, new product development
and localization costs, partially offset by facility consolidations and
reductions in workforce within the NSMG business unit. Additionally, the 1997
results included a full year of operations for the Company's 1996 acquisitions
compared with a partial year of operations in 1996.
12
<PAGE>
GENERAL AND ADMINISTRATIVE. Total general and administrative expenses
increased to $36,861,000 in 1997 from $22,852,000 in 1996, representing 17%
and 16% of total revenues, respectively. The increase in absolute dollars was
primarily due to increases in personnel and related expenses and increases in
corporate administrative expenses and information systems necessary to support
the Company's growth. Additionally, the 1997 results included a full year of
operations for the Company's 1996 acquisitions compared with a partial year of
operations in 1996.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. During 1997, total write-
offs of in-process research and development were $2,613,000. The Company
incurred this charge in connection with additional amounts paid with respect
to the June 1996 acquisition of Holistic. During 1996, total write-offs of in-
process research and development were $96,958,000, which resulted from the
Company's 1996 acquisitions.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles increased to $27,202,000 in 1997 from $13,035,000 in 1996,
representing 13% and 9% of total revenues, respectively. The increase in
absolute dollars was primarily due to increased amortization expense on a
higher level of intangible assets and write-downs and write-offs of the
carrying value of goodwill and other intangible assets of approximately
$10,259,000 based on shortfalls of estimated future cash flows.
RESTRUCTURING. Restructuring charges were $2,524,000 in 1997 and $9,502,000
in 1996, representing 1% and 7% of total revenues, respectively. The
restructuring charges were incurred in both years as a result of
reorganizations and closures within the NSMG business unit for the reduction
of personnel, write-off or write-down of equipment, intangibles and other
assets, closure of duplicate facilities, fees for legal and accounting
services, contract cancellations and other related expenses.
UNUSUAL ITEMS. In connection with the June 1996 acquisition of Holistic, the
Company recorded $13,446,000 in fiscal 1997, representing 6% of total
revenues, as compensation expense for amounts paid to former Holistic
shareholders who were employees of the Company.
INTEREST AND OTHER, NET. Total interest and other, net increased to a net
expense of $2,381,000 in 1997 from a net expense of $610,000 in 1996,
representing 1% and 0% of total revenues, respectively. The increase in
interest and other, net was primarily due to higher interest expense on a
higher level of outstanding borrowings from Seagate Technology.
INCOME TAXES. The Company recorded a $8,714,000 benefit from income taxes at
an effective rate of 13% in 1997 compared with a $8,748,000 benefit from
income taxes at an effective rate of 6% for 1996. The effective rate used to
record the benefit from income taxes in each fiscal year was less than the
statutory rate primarily due to increases in the valuation allowance for
deferred tax assets and charges in 1996 for in-process research and
development for certain acquisitions that were not deductible for tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash was $15,130,000 and $12,085,000 as of July 3, 1998
and June 27, 1997, respectively. The increase in cash was primarily due to
cash provided by operating activities and the sale of common stock under the
Option Plan, partially offset by a reduction in the Company's loan payable
balance to the Parent Company, acquisition of a business, purchases of
property and equipment and purchases of intangible assets. The Company's cash
is maintained in highly liquid operating accounts and primarily consists of
bank deposits.
The Company's operations have been financed by cash flows from operating
activities and borrowings from the Parent Company. Such borrowings are
available to the Company under a Revolving Loan Agreement, between the Company
and Seagate Technology, which was renewed on July 4, 1998 on substantially the
same terms and conditions as the prior agreement which was dated June 28,
1996. Under the Revolving Loan Agreement, Seagate Technology finances certain
of the Company's working capital requirements. The Revolving
13
<PAGE>
Loan Agreement, which provides for maximum borrowings of up to $60,000,000, is
renewable every two years. Beginning in fiscal year 1999, the Company will pay
interest at the LIBOR rate plus 2% per annum on such borrowings; the Company
previously paid interest at 6%. The loan balance was $16,054,000 as of July 3,
1998.
In addition to the Revolving Loan Agreement with Seagate Technology, certain
foreign subsidiaries have line of credit facilities with third party financial
institutions. These line of credit facilities provide for additional
borrowings of up to an equivalent of approximately $1,100,000 at July 3, 1998.
Interest rates payable on borrowings are based on local bank prime interest
rates. At July 3, 1998, there were no outstanding borrowings under any of
these lines of credit.
During the year ended July 3, 1998, the Company made investments in property
and equipment totaling approximately $10,387,000 for new office facilities,
leasehold improvements, computers, furniture and office equipment. The Company
presently anticipates it will make investments in 1999 of approximately
$15,000,000 in property and equipment.* Additionally, product development
activities may include cash used to acquire technology.* The Company expects
that such investments will be funded from existing cash balances and cash
flows from operations.*
The Company believes its current cash balances, its available borrowings
from the Parent Company and cash flows generated from the Company's operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.* Furthermore, the
Company anticipates that future operating and investing activities may be
financed by additional borrowings from the Parent Company, equity financing or
other sources.* The Company believes that additional financing from the Parent
Company will be available at a reasonable cost.*
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which the Company currently
is required to adopt for transactions entered into after July 3, 1998. SOP 97-
2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The Company has assessed the impact of
the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its
policies and procedures. The Company believes that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on the Company's revenues or
results of operations.
The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131") during
fiscal 1999. Both standards will require additional disclosure, but will not
have a material effect on the Company's financial position or results of
operations.* SFAS 130 establishes standards for the reporting and display of
comprehensive income and is expected to first be reflected in the Company's
first quarter of 1999 interim financial statements. The components of
comprehensive income include net income and items that are currently reported
directly as a component of shareholders' equity such as changes in foreign
currency translation adjustments and changes in the fair value of available-
for-sale financial instruments. SFAS 131 changes the way companies report
segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating
resources. SFAS 131 will first be reflected in the Company's 1999 Annual
Report on Form 10-K.
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
14
<PAGE>
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. The
Company has not yet determined the impact, if any, of adopting this statement.
The disclosures prescribed by SOP 98-1 will be effective for the Company's
consolidated financial statements for the fiscal year ending June 30, 2000.
FACTORS AFFECTING FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN ANNUAL AND/OR QUARTERLY OPERATING RESULTS. The
Company's future results of operations may be subject to substantial
fluctuations.* The Company operates with no backlog because its software
products are generally shipped shortly after orders are received. Annual
and/or quarterly sales and operating results therefore depend on the volume
and timing of and the ability to fill orders received within a given quarter,
and such factors are difficult to forecast.* The Company recognizes a
substantial portion of its revenue in the last month of each quarter and,
therefore, may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall.* If revenue levels in a given year or
quarter are below expectations, the Company's operating results may be
materially adversely affected.*
The Company expects to experience significant fluctuations in annual and/or
quarterly operating results based upon a number of factors including, but not
limited to, (i) market acceptance of new products and product enhancements,
(ii) the Company's ability to develop, introduce and market new products and
product enhancements in a timely fashion, (iii) the timing of large orders,
(iv) increased competition, (v) changes in pricing policies by the Company
and/or its competitors, (vi) the Company's ability to control costs, (vii) the
amount of one-time charges incurred in future acquisitions, (viii) the
Company's ability to integrate future acquisitions into its operations, (ix)
technological changes in the Company's markets, (x) personnel changes and (xi)
general economic factors.* Because of these considerations, the Company
believes that a period-to-period comparison of its operations is not
necessarily meaningful and should not be relied upon as any indication of
future performance.
REVENUE CONCENTRATION. The Company derives a substantial majority of its
revenues from a limited number of software products and anticipates that
revenue from these products will continue to account for a majority of the
Company's revenues in the foreseeable future.* Broad market acceptance of such
products is therefore critical to the Company's future success, and failure to
achieve broad market acceptance of these products as a result of competition,
technological change or other factors would have a material adverse effect on
the business, operating results and financial condition of the Company.* The
life cycle of these products is difficult to estimate, and the Company's
future financial performance may depend in part on the successful development,
introduction and market acceptance of new products, applications and product
enhancements.* There can be no assurance that the Company will continue to be
successful in marketing its key products or any new products, applications or
product enhancements. Further, the Company derived 22% of its revenues from
sales to its top customer, Ingram Micro Inc., in 1998. A significant reduction
in orders from this customer, if not offset by increased sales to other
customers, could have a material adverse effect on the Company's business,
operating results, or financial condition.* Accordingly, there can be no
assurance that the Company will continue to be successful in marketing its
products to such customer.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by rapidly changing technology, changing
customer needs, evolving industry standards and
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
15
<PAGE>
frequent new product introductions. The Company's future success will
therefore depend on its ability to design, develop, test and support new
software products and enhancements on a timely and cost effective basis.*
There can be no assurance that the Company will be successful in developing
and marketing new products that respond to technological changes and changing
customer needs, or that the Company's new products will achieve market
acceptance. If the Company is unable for technological or other reasons to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results or financial condition could be materially adversely affected. If
potential new products are delayed or fail to achieve market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected. In addition, significant order deferrals due to
customers waiting for the introduction of new or announced products could have
a material adverse effect on the Company's business, operating results or
financial condition.
RELIANCE ON SALES STAFF AND CHANNEL PARTNERS. The Company sells and supports
its products through its sales staff and third party distributors and OEMs. In
particular, the Company has a strategic relationship with Microsoft pursuant
to which (i) the Company's products are bundled with Microsoft's products and
(ii) the Company has in the past and is currently participating in the
development of certain utilities and products for inclusion in Microsoft's
products. Any material diminution in the level and breadth of activities with
Microsoft could have a material adverse effect on the Company's business,
operating results or financial condition. The Company has made significant
expenditures in recent years for the expansion of its sales and marketing
force and plans to continue to expand its sales and marketing force.* The
Company's future success will depend in part upon the productivity of its
sales and marketing force and the ability of the Company to continue to
attract, integrate, train, motivate and retain new sales and marketing
personnel.* Competition for sales and marketing personnel in the software
industry is intense. There can be no assurance that the Company will be
successful in hiring and retaining such personnel in accordance with its
plans. There can be no assurance that the Company's recent and other planned
expenses in sales and marketing will ultimately prove to be successful or that
the incremental revenue generated will exceed the significant incremental
costs associated with these efforts. In addition, there can be no assurance
that the Company's sales and marketing organization will be able to compete
successfully against the significantly more extensive and better funded sales
and marketing operations of many of the Company's current and potential
competitors. If the Company is unable to develop and manage its sales and
marketing force expansion effectively, the Company's business, operating
results and financial condition would be materially adversely affected.
The Company derives a substantial portion of its revenue from the marketing
and distribution of its products by its distributors and OEMs. The Company's
agreements with distributors and OEMs typically allow such resellers to carry
product lines that are competitive with those of the Company and in many cases
may be terminated by either party without cause. There can be no assurance
that such distributors and OEMs will place high priority on the marketing of
the Company's products or that they will continue to carry the Company's
products. Loss of the Company's current distributors and OEMs or the inability
to attract new distributors and OEMs could materially adversely affect the
Company's business, operating results or financial condition.
COMPETITION. The markets for the Company's products are highly competitive
and characterized by rapidly changing technology and evolving standards. The
Company expects additional competition from other established and/or emerging
companies and as a result of future software industry consolidations.*
Increased competition can be expected to cause price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results or financial condition.
Current and potential competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products than the Company.* It is possible that new competitors or alliances
among competitors may
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
16
<PAGE>
emerge and rapidly acquire significant market share. In addition, network
operating system vendors could introduce new or upgrade existing operating
systems or environments that could render the Company's products obsolete and
unmarketable. There can be no assurance that the Company will successfully
compete against current or future competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business,
operating results or financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends to a
significant degree upon the continued service of its key members of management
as well as marketing, sales and product development personnel.* The loss of
one or more of the Company's key personnel would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes its future success will also depend in large part upon
its ability to attract and retain highly skilled management, marketing, sales
and product development personnel.* Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
employees or that it will be successful in attracting, assimilating and
retaining them in the future.
MANAGEMENT OF GROWTH. The Company is in the process of expanding the
geographic scope of its customer base and operations. This expansion has
resulted and will continue to result in substantial demands on the Company's
management resources.* The Company's future operating results will depend on
the ability of its officers and other key employees to continue to implement
and improve its operations, customer support and financial control systems and
to effectively expand, train and manage its employee base.
RISK OF ACQUISITIONS. The Company has acquired numerous businesses and
intends to enter into future business combinations and acquisitions of
complementary companies, products and technologies. There can, however, be no
assurance that suitable companies, divisions or products will be available for
acquisition.* Such acquisitions are inherently subject to certain risks,
including the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of the Company's ongoing
business, the potential inability to retain key technical and managerial
personnel, additional expenses associated with the amortization of acquired
intangible assets, and the potential impairment of relationships with
employees and customers as a result of any integration of new personnel. There
can be no assurance that the Company will be successful in overcoming these
risks or that such transactions will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
RISKS OF INFRINGEMENT. The Company's success depends to a substantial degree
on its proprietary technology. The Company relies on a combination of patent,
copyright, trademark and trade secret rights, confidentiality procedures,
employee and third party nondisclosure agreements and licensing arrangements
to protect its proprietary rights. As part of its confidentiality procedures,
the Company enters into license agreements with respect to its software,
documentation and other proprietary information. In licensing its products,
the Company relies in part on shrink wrap licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Despite the precautions undertaken by the Company, it may be
possible for a third party to copy or otherwise obtain and use the Company's
products and technology without authorization. Policing unauthorized use of
the Company's products is difficult and, although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem.*
PROTECTION OF INTELLECTUAL PROPERTY. No assurance can be given that
competitors will not successfully challenge the validity or scope of the
Company's patents, copyrights and trademarks and that such patents, copyrights
and trademarks will provide a competitive advantage to the Company. As part of
its confidentiality procedures, the Company generally enters into non-
disclosure agreements with its employees, distributors and
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
17
<PAGE>
corporate partners, and license agreements with respect to its software
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently. Effective protection of intellectual property rights
is unavailable or limited in certain foreign countries. There can be no
assurance that the Company's protection of its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or design around any
patents issued to the Company or other intellectual property rights of the
Company.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company believes that software product
developers will be increasingly subject to claims of infringement as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in the industry segment overlaps.* Any such
claims, with or without merit, could result in costly litigation that could
absorb significant management time, which could have a material adverse effect
on the Company's business, operating results or financial condition.* Such
claims might require the Company to enter into royalty or license agreements.
Such royalty or license agreements, if required, may not be available on terms
acceptable to the Company or at all, and the Company's inability to enter such
agreements could have a material adverse effect on the Company's business,
operating results or financial condition.
PRODUCT LIABILITY. The Company markets its products to customers for
information technology system management and resource optimization and to
access, analyze, report and deliver enterprise data. The Company's license
agreements with its customers typically contain provisions designed to limit
the Company's exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in the
Company's license agreements may not be effective as a result of existing or
future federal, state or local laws or ordinances or unfavorable judicial
decisions. The sale and support of its products by the Company may entail the
risk of such claims, which could be substantial in light of the use of such
products in system management, resource optimization and BI applications. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results or
financial condition.
POTENTIAL LITIGATION/LIABILITY RELATED TO YEAR 2000 READINESS. It is
unlikely that, commencing in the Year 2000, the functionality of certain
operating environments will be adversely affected when one or more component
products of the environment is unable to process four-digit characters
representing years.* This could result in a system failure or miscalculation
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in normal business
activities. The Year 2000 problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two-
digit year value to 00.
The Company's products are used in numerous operating environments. The
Company considers a product Year 2000 ready if the product's performance and
functionality are unaffected by processing dates prior to, during, and after
the Year 2000, but only if all products (for example hardware, firmware, and
software) used with the product properly exchange accurate date data with it.
The company has determined that certain of its software products are not and
will not be Year 2000 ready and is taking measures to inform its customers of
that fact. The inability of one or more of the Company's products to properly
manage and manipulate data related to the Year 2000 could result in a material
adverse effect on the Company's business, financial condition or results of
operations, including increased warranty costs, customer satisfaction issues
and potential lawsuits.
Even if the Company successfully brings certain of its products into Year
2000 readiness and publicizes the non-readiness of its other products, the
Company anticipates that substantial litigation may be brought against
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
18
<PAGE>
vendors of all component products of noncompliant operating environments,
including the Company.* The Company's agreements with its customers typically
contain provisions designed to limit the Company's liability for such claims.
It is possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. The Company believes
that any such claims, with or without merit, could result in costly litigation
(and possible adverse judgment) that could absorb significant management and
product development time and potentially result in significant liability to
the Company, which could have a material adverse effect on the Company's
business, operating results or financial condition.*
The Company has initiated a program to address Year 2000 readiness in its
internal systems. It has also initiated communications with its large
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company is still in the process of conducting its Year 2000 audit
and therefore is unable to make a reasonable estimate of the costs associated
with Year 2000 readiness. Accordingly, no assurance can be given that the
costs required to address the Year 2000 issue will not have a material adverse
effect on the Company's business, financial condition or results of
operations. Assessment and remediation are proceeding in tandem, and the
Company intends to have its critical internal systems in Year 2000 compliance
by July 3, 1999.* These activities are intended to encompass all major
categories of systems in use by the Company, including manufacturing,
engineering, sales, finance and human resources. The costs incurred to date
related to these programs have not been and are not expected to be material.*
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems and in the systems of its suppliers, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sale of products.* Therefore, the Company is
developing contingency plans for continuing operations in the event such
problems arise.
The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
readiness.* These expenditures may result in reduced funds available to
purchase products such as those offered by the Company, which could have a
material adverse effect on the Company's business, operating results or
financial condition.*
SOFTWARE PRODUCT ERRORS OR DEFECTS. Software products as complex as those
offered by the Company frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Despite
product testing, the Company's recently introduced products or any products
may contain defects or software errors and, as a result, the Company may
experience delayed or lost revenues during the period required to correct any
defects or errors.* Any such defects or errors could result in adverse
customer reactions, negative publicity regarding the Company and its products,
harm to the Company's reputation or loss of or delay in market acceptance, or
could require extensive product changes, any of which could have a material
adverse effect upon the Company's business, operating results or financial
condition.
RISK OF INTERNATIONAL SALES. The Company's international business involves a
number of risks, including lack of acceptance of localized products, cultural
differences in the conduct of business, longer accounts receivable payment
cycles, greater difficulty in accounts receivable collection, seasonality due
to the slow down in European business activity during the summer months,
unexpected changes in regulatory requirements, royalties and withholding taxes
that restrict repatriation of earnings, tariffs and other trade barriers,
difficulty in hiring qualified personnel, economic and political conditions in
each country, management of an enterprise spread over various countries, the
burden of complying with a wide variety of foreign laws and an increase in
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
19
<PAGE>
international competition. A majority of the Company's international sales are
currently denominated in U.S. dollars, and an increase in the value of the
U.S. dollar relative to foreign currencies could make the Company's products
more expensive and potentially less competitive in foreign markets. There can
be no assurance that such factors will not have a material adverse effect on
the Company's future international sales and therefore the overall operating
results and financial condition of the Company.
The Company continues to expand its international operations, which requires
significant management attention and financial resources and could materially
adversely affect the Company's operating results. To the extent the Company is
unable to effect this expansion in a timely manner, the Company growth, if
any, in international sales will be limited and the Company's business,
operating results or financial condition could be materially adversely
affected.
The Company anticipates that the recent deterioration of the underlying
economic conditions in certain Asian countries may have an impact on its sales
to customers or OEMs located in those countries due to the impact of currency
fluctuations on the relative price of the Company's products and/or
restrictions on government spending imposed by the International Monetary Fund
(the "IMF") on those countries receiving the IMF's assistance.* In addition,
customers in those countries may face reduced access to working capital to
fund component purchases, such as the Company's products, due to higher
interest rates, reduced bank lending due to contractions in the money supply
or the deterioration in the customer's or its bank's financial condition or
the inability to access local equity financing. During fiscal 1998, sales to
OEMs or end-user customers located in or to OEMs whose end customers were
located in the countries of Japan, Korea, Malaysia, Thailand, Taiwan and Hong
Kong were not material to the Company's business, operating results or
financial condition.
The Company is in the process of addressing the issues raised by the
introduction of the Single European Currency ("Euro") as of January 1, 1999
and during the transition period through January 1, 2002. The Company expects
that its internal systems that will be affected by the initial introduction of
the Euro will be Euro-capable by January 1, 1999 and does not expect the costs
of system modifications to be material. The Company does not presently expect
that introduction and use of the Euro will materially affect the Company's
foreign exchange activities, or the Company's use of derivative instruments,
or will result in any material increase in costs to the Company.* While the
Company will continue to evaluate the impact of the Euro introduction over
time, based on currently available information, management does not believe
that the introduction of the Euro currency will have a material adverse impact
on the Company's financial condition or overall trends in results of
operations.*
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Readers are
cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... 22
Consolidated Balance Sheets as of July 3, 1998 and June 27, 1997........... 23
Consolidated Statements of Operations for the Years Ended
July 3, 1998, June 27, 1997 and June 28, 1996............................. 24
Consolidated Statements of Cash Flows for the Years Ended
July 3, 1998, June 27, 1997 and June 28, 1996............................. 25
Consolidated Statements of Stockholders' Equity for the Years Ended
July 3, 1998, June 27, 1997 and June 28, 1996............................. 26
Notes to the Consolidated Financial Statements............................. 27
</TABLE>
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Software, Inc.
We have audited the accompanying consolidated balance sheets of Seagate
Software, Inc. as of July 3, 1998 and June 27, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 3, 1998. Our audits also
included the financial statement schedule listed in the Index at Item
14(a)(2). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Seagate Software, Inc. at July 3, 1998 and June 27, 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended July 3, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
July 17, 1998
22
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1998 1997
--------- ---------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ 15,130 $ 12,085
Accounts receivable, net................................. 46,564 28,172
Inventories.............................................. 1,117 3,206
Other current assets..................................... 2,474 4,040
--------- ---------
Total current assets................................. 65,285 47,503
Property, equipment and leasehold improvements, net...... 16,876 20,785
Goodwill and other intangibles, net...................... 53,879 75,306
--------- ---------
Total assets......................................... $ 136,040 $ 143,594
========= =========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Loan payable to Seagate Technology....................... $ 16,054 $ 28,971
Accounts payable......................................... 10,994 9,116
Accrued employee compensation............................ 14,365 10,267
Accrued expenses......................................... 15,339 16,035
Accrued income taxes..................................... 5,562 2,699
Deferred revenue......................................... 13,714 8,354
--------- ---------
Total current liabilities............................ 76,028 75,442
Deferred income taxes.................................... 1,691 6,233
Other liabilities........................................ 255 301
--------- ---------
Total liabilities.................................... 77,974 81,976
Common stock subject to repurchase....................... 3,917 --
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C>
Convertible preferred stock, $.001 par value--73,000,000
shares authorized;
Series A: shares issued and outstanding--54,633,333 in
1998 and 1997 (aggregate liquidation preference of
$409,750 in 1998 and 1997)............................ 55 55
Common stock, $.001 par value--95,600,000 shares
authorized; shares issued and outstanding--235,502 in
1998 and 83,355 in 1997................................. -- --
Additional paid-in capital............................... 343,526 342,091
Accumulated deficit...................................... (289,175) (280,685)
Foreign currency translation adjustment.................. (257) 157
--------- ---------
Total stockholders' equity........................... 54,149 61,618
--------- ---------
Total liabilities and stockholders' equity........... $ 136,040 $ 143,594
========= =========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
JULY 3, JUNE 27, JUNE 28,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Licensing..................................... $243,285 $183,556 $ 124,380
Licensing from Seagate Technology............. 5,469 5,762 9,374
Maintenance, support and other................ 44,472 27,632 7,832
-------- -------- ---------
Total revenues.............................. 293,226 216,950 141,586
Cost of revenues:
Licensing..................................... 16,963 17,535 14,885
Licensing from Seagate Technology............. 539 1,834 3,999
Maintenance, support and other................ 19,687 6,560 194
Amortization of developed technologies........ 13,271 21,860 9,941
-------- -------- ---------
Total cost of revenues...................... 50,460 47,789 29,019
-------- -------- ---------
Gross profit.................................... 242,766 169,161 112,567
Operating expenses:
Sales and marketing........................... 129,343 107,706 71,129
Research and development...................... 47,173 42,842 36,897
General and administrative.................... 37,124 36,861 22,852
In-process research and development........... 6,800 2,613 96,958
Amortization of goodwill and other
intangibles.................................. 15,421 27,202 13,035
Restructuring costs........................... -- 2,524 9,502
Unusual items................................. -- 13,446 --
-------- -------- ---------
Total operating expenses.................... 235,861 233,194 250,373
-------- -------- ---------
Income (loss) from operations................... 6,905 (64,033) (137,806)
Interest expense................................ (1,021) (2,688) (970)
Other, net...................................... 1,011 307 360
-------- -------- ---------
Interest and other, net....................... (10) (2,381) (610)
-------- -------- ---------
Income (loss) before income taxes............... 6,895 (66,414) (138,416)
Benefit from (provision for) income taxes....... (15,385) 8,714 8,748
-------- -------- ---------
Net loss........................................ $ (8,490) $(57,700) $(129,668)
======== ======== =========
Net loss per common share:
Basic......................................... $ (51.59) $(852.11)
Diluted....................................... $ (51.59) $(852.11)
Number of shares used in per share computations:
Basic......................................... 164,571 67,714
Diluted....................................... 164,571 67,714
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
JULY 3, JUNE 27, JUNE 28,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (8,490) $(57,700) $(129,668)
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization................. 39,152 41,381 24,737
Deferred income taxes......................... (4,542) (7,505) (3,021)
Write-off of in-process research and
development.................................. 6,800 2,613 96,958
Write-off or write-down of goodwill and
intangibles.................................. 1,900 17,192 2,157
Unusual items................................. -- 13,446 --
Write-offs due to restructure................. -- 1,494 4,427
Changes in operating assets and liabilities:
Accounts receivable......................... (18,157) 4,583 (12,129)
Inventories................................. 2,099 (1,581) (11)
Other current assets........................ 1,575 (1,207) 1,080
Accounts payable............................ 1,552 (1,609) 4,887
Accrued employee compensation............... 4,020 2,078 2,570
Accrued expenses............................ (725) 2,430 4,629
Accrued income taxes........................ 3,633 5,796 (3,297)
Deferred revenue............................ 5,285 2,648 1,613
Other liabilities........................... (46) 44 (3,267)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................... 34,056 24,103 (8,335)
INVESTING ACTIVITIES
Acquisitions of businesses, net of cash
acquired....................................... (10,000) -- (94,007)
Acquisition of property, equipment and leasehold
improvements, net.............................. (7,992) (15,823) (10,167)
Escrow establishment............................ -- -- (18,000)
Decrease in other non-current assets, net....... -- -- 1,560
Acquisition of intangibles...................... (4,270) -- --
-------- -------- ---------
Net cash (used in) investing activities....... (22,262) (15,823) (120,614)
FINANCING ACTIVITIES
Sale of common stock............................ 665 79 --
Sale of common stock subject to repurchase...... 3,917 -- --
Funding by Seagate Technology for acquisitions
of businesses.................................. -- -- 108,400
Borrowings from Seagate Technology, net......... (12,917) (4,020) 20,418
-------- -------- ---------
Net cash provided by (used in) financing
activities................................... (8,335) (3,941) 128,818
Effect of exchange rate changes on cash......... (414) 151 8
-------- -------- ---------
Increase (decrease) in cash................... 3,045 4,490 (123)
Elimination of Arcada's net cash activity for
the duplicated six months ended December 31,
1995......................................... -- -- 1,768
Cash at the beginning of the year............... 12,085 7,595 5,950
-------- -------- ---------
Cash at the end of the year..................... $ 15,130 $ 12,085 $ 7,595
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.......................... $ 50 $ 214 $ 36
Cash paid for income taxes...................... 7,945 2,357 4,892
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE FOREIGN
FOR THE YEARS ENDED JULY PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
3, 1998, JUNE 27, 1997 ----------------- -------------- PAID-IN TRANSLATION ACCUMULATED
AND JUNE 28, 1996 SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
- ------------------------ ---------- ------ ------- ------ ---------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1995................... -- $ -- -- $ -- $140,610 $ 2 $ (93,397) $ 47,215
Acquisition by Seagate
Technology of OnDemand
Software, Inc. and
minority interest of
Arcada Holdings, Inc... -- -- -- -- 98,249 -- -- 98,249
Issuance of convertible
preferred stock and
common stock to Seagate
Technology pursuant to
the formation of
Seagate Software....... 34,500,000 34 62,500 -- (34) -- -- --
Issuance of convertible
preferred stock to
Seagate Technology
pursuant to the
acquisition of Calypso
Software Systems,
Inc.................... 1,733,333 2 -- -- 13,797 -- -- 13,799
Issuance of convertible
preferred stock to
Seagate Technology
pursuant to the
acquisition of Holistic
Systems, Ltd........... 11,200,000 11 -- -- 84,046 -- -- 84,057
Income tax benefit from
Seagate Technology
stock option exercises. -- -- -- -- 1,866 -- -- 1,866
Foreign currency
translation
adjustment............. -- -- -- -- -- 4 -- 4
Net loss................ -- -- -- -- -- -- (129,668) (129,668)
Elimination of Arcada
Holdings, Inc. activity
for the duplicated six
months ended December
31, 1995............... -- -- -- -- -- -- 80 80
---------- ---- ------- ---- -------- ----- --------- ---------
BALANCE AT JUNE 28,
1996................... 47,433,333 47 62,500 -- 338,534 6 (222,985) 115,602
Income tax benefit from
Seagate Technology
stock option exercises. -- -- -- -- 3,486 -- -- 3,486
Issuance of common stock
upon exercise of
employee stock options. -- -- 20,855 -- 79 -- -- 79
Issuance of convertible
preferred stock
pursuant to the
transfer to the Company
of IMG Vancouver....... 7,200,000 8 -- -- (8) -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- 151 -- 151
Net loss................ -- -- -- -- -- -- (57,700) (57,700)
---------- ---- ------- ---- -------- ----- --------- ---------
BALANCE AT JUNE 27,
1997................... 54,633,333 55 83,355 -- 342,091 157 (280,685) 61,618
Income tax benefit from
Seagate Technology
stock option exercises. -- -- -- -- 770 -- -- 770
Issuance of common stock
upon exercise of
employee stock options. -- -- 152,147 -- 665 -- -- 665
Foreign currency
translation
adjustment............. -- -- -- -- -- (414) -- (414)
Net loss................ -- -- -- -- -- -- (8,490) (8,490)
---------- ---- ------- ---- -------- ----- --------- ---------
BALANCE AT JULY 3,
1998................... 54,633,333 $ 55 235,502 $ -- $343,526 $(257) $(289,175) $ 54,149
========== ==== ======= ==== ======== ===== ========= =========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Seagate Software, Inc. ("Seagate Software" or the
"Company") develops and markets software products and provides related
services enabling business users and information technology ("IT")
professionals to manage enterprise information. Headquartered in Scotts
Valley, California, the Company has over 40 offices and operations in 17
countries worldwide. The Company is a majority-owned and consolidated
subsidiary of Seagate Technology, Inc. (the "Parent Company" or "Seagate
Technology"), a data technology company that provides products for storing,
managing and accessing digital information on computer systems. As of July 3,
1998, the Parent Company and one of its subsidiaries held 99.7% of the
Company's outstanding capital stock. On a diluted basis, the outstanding
minority interests of the Company amounted to approximately 17.8%, which
consisted of Common Stock and options to purchase Common Stock issued pursuant
to the Option Plan. Such options to purchase the Company's Common Stock are
held by certain employees, directors and consultants of the Company and the
Parent Company.
BASIS OF PRESENTATION. These financial statements are presented as if the
Company had existed as an entity separate from Seagate Technology during the
periods presented and include the historical assets, liabilities, revenues and
expenses that are directly related to the Company's operations. Intercompany
transactions and balances have been eliminated.
The Company was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to the Parent Company's merger with Crystal
Computer Services, Inc., a company engaged in developing and marketing report
writing software. From August 1994 to June 1996, the Parent Company acquired
eight software companies, which were engaged in developing and marketing
business intelligence ("BI") or network and/or storage management software
products. In February 1996, the Parent Company merged with Conner Peripherals,
Inc. ("Conner") in a transaction accounted for as a pooling-of-interests. In
connection with the merger, the Parent Company purchased the outstanding
minority interests in Conner's storage management software operations under
Arcada Holdings, Inc. ("Arcada"). In April 1996, the Parent Company
consolidated its software operations into Seagate Software.
Prior to December 1996, Seagate Technology International ("STI"), a wholly-
owned subsidiary of Seagate Technology, owned all outstanding capital stock
(the "IMG Stock") of IMG Vancouver (formerly Crystal Services, Inc.). Pursuant
to an agreement among STI, Seagate Software and IMG Vancouver dated
December 19, 1996, STI surrendered the IMG Stock (which was subsequently
cancelled by IMG Vancouver) in exchange for 7,200,000 Convertible Preference
Shares of IMG Vancouver. On December 26, 1996, the Convertible Preference
Shares were exchanged for 7,200,000 Class B Exchangeable Shares of IMG
Vancouver. These Class B Exchangeable Shares do not have voting rights except
as required by law, but can be exchanged at STI's sole discretion for
7,200,000 shares of Seagate Software Series A Preferred Stock. In connection
with the issuance of the Class B Exchangeable Shares described above, STI was
granted voting rights in Seagate Software equivalent to 7,200,000 shares of
Series A Preferred Stock. Also on December 26, 1996, IMG Vancouver issued
10,000 Class A Common Shares, which carry the right to vote, to Seagate
Software. Seagate Software therefore now owns all voting shares of IMG
Vancouver. For financial reporting purposes, Seagate Software has control over
IMG Vancouver and therefore consolidates the results of IMG Vancouver.
Additionally, the 7,200,000 shares of Series A Preferred Stock of the Company
which STI could elect to receive in exchange for the Class B Exchangeable
Shares of IMG Vancouver have been treated as issued and outstanding shares of
Series A Preferred Stock of the Company.
In June 1998, the Company acquired all of the outstanding capital stock of
Eastman Software Storage Management Group, Inc. ("Eastman"), a company engaged
in developing, producing and marketing hierarchical storage management
products for the Windows NT platform. The purchase price of approximately
$10,000,000 was paid in cash. Approximately $6,800,000 of the total purchase
price represented the value of in-process
27
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
technology that had not yet reached technological feasibility, had no
alternative future use and was charged to the Company's operations in the
quarter ended July 3, 1998. The Company accounted for the acquisition using
the purchase method, and the results of operations of Eastman are only
included in the Company's operations since the acquisition was completed. Pro
forma financial information is not presented as such amounts are not material.
The Company operates and reports financial results on a fiscal year of 52 or
53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996
ended on June 28, 1996. Fiscal 1998 was comprised of 53 weeks and fiscals 1997
and 1996 were comprised of 52 weeks. Fiscal 1999 will be a 52-week year and
will end on July 2, 1999. All references to years in the notes to consolidated
financial statements represent fiscal years unless otherwise noted.
Arcada, which was acquired by the Company pursuant to Seagate Technology's
merger with Conner, had a fiscal year that ended on the Saturday closest to
December 31. Accordingly, Arcada's statement of operations for the year ended
December 30, 1995 has been combined with the Company's statement of operations
for the year ended June 30, 1995. In order to conform Arcada's fiscal year end
to the Company's fiscal year end, the Company's consolidated statement of
operations for the year ended June 28, 1996 includes six months (July 1, 1995
through December 31, 1995) for Arcada which are also included in the Company's
consolidated statement of operations for the year ended June 30, 1995.
ECONOMIC DEPENDENCE ON SEAGATE TECHNOLOGY. The Company has incurred net
losses since inception and had net losses aggregating $195,858,000 during
1998, 1997 and 1996, and had a working capital deficit at July 3, 1998 of
$10,743,000. On July 4, 1998 the Company and Seagate Technology renewed the
Revolving Loan Agreement on substantially the same terms and conditions as the
prior agreement which was dated June 28, 1996. Under the Revolving Loan
Agreement, Seagate Technology finances certain of the Company's working
capital needs. The Revolving Loan Agreement provides for maximum outstanding
borrowings of up to $60,000,000 and is renewable every two years. Outstanding
borrowings from the Parent Company were $16,054,000 and $28,971,000 at July 3,
1998 and June 27, 1997, respectively. Borrowings from the Parent Company
consist primarily of amounts used to fund the Company's operating activities.
Beginning in fiscal 1999, the Company will pay interest at the LIBOR rate plus
2% per annum on such borrowings; the Company previously paid interest at 6%.
The Company is economically dependent on Seagate Technology and believes that
to the extent future cash flows from operations and borrowings under the
existing loan agreement with Seagate Technology are not sufficient to fund the
Company's working capital deficit and planned activities during the next 12
months, that additional funding will be available at a reasonable cost from
Seagate Technology.
ACCOUNTING ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist primarily of
cash and accounts receivable. The Company places its cash and cash equivalents
in high credit quality financial institutions. Accounts receivable are derived
from revenues earned from customers primarily located in North America and
Europe. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and historically such losses have been immaterial.
Revenue from one third party customer, Ingram Micro Inc., accounted for 22%,
18% and 16% of the Company's total revenues in 1998, 1997 and 1996,
respectively.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the
remeasurement into U.S. dollars of amounts denominated in foreign
28
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currencies are included in net income for those operations whose functional
currency is the U.S. dollar. Gains and losses on translation into U.S. dollars
of foreign operations whose functional currency is the local currency are
recorded as a separate component of stockholders' equity.
CASH MANAGEMENT. Seagate Technology uses a centralized cash management
function for all of its domestic operations, including certain domestic
operations of the Company. A substantial majority of the Company's cash is
from balances maintained by the Company's foreign subsidiaries.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with an original maturity of 90 days or less at the time of
purchase to be cash equivalents. The Company typically uses available cash in
excess of amounts required for operating activities to pay amounts due under
the Revolving Loan Agreement. Accordingly, the Company has not had significant
cash equivalents to date.
INVENTORIES. Inventories are stated at the lower of cost (first in, first
out method) or market, and consist primarily of materials used in software
products, related supplies and packaging materials.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property and equipment,
including leasehold improvements, are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from two to five years. Assets under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the remaining lease term.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of the
purchase price of acquired companies over estimated fair values of tangible
and intangible net assets acquired. Goodwill is amortized on a straight-line
basis over five to seven years. The carrying values of long-term assets and
intangibles other than developed technology ("other intangibles") are reviewed
if facts and circumstances suggest that they may be impaired. If this review
indicates that carrying values of long-term assets and other intangibles and
associated goodwill will not be recoverable based on projected undiscounted
future cash flows, carrying values are reduced to estimated fair values by
first reducing goodwill and second by reducing long-term assets and other
intangibles.
Other intangible assets consist of trademarks, assembled workforces,
distribution networks, developed technology, customer bases, and covenants not
to compete related to acquisitions accounted for by the purchase method. See
Note on Business Combinations and Acquisitions. Amortization of purchased
intangibles, other than acquired developed technology, is provided on the
straight-line basis over the respective useful lives of the assets ranging
from 36 to 60 months for trademarks, 24 to 48 months for assembled workforces
and distribution networks, 12 to 36 months for customer bases and 18 to 24
months for covenants not to compete. In-process research and development
without alternative future use is expensed when acquired.
DEVELOPED TECHNOLOGY. The Company applies Statement of Financial Accounting
Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed", to software technologies developed
internally, acquired in business acquisitions, and purchased.
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based
on the Company's development process generally occurs upon the completion of a
working model. As the time period between the completion of a working model
and the general availability of software has been short, capitalization of
internal development costs has not been material to date. Capitalized costs
are amortized based on the greater of the straight-line basis over the
estimated product life (generally 30 to 48 months) or the ratio of current
revenues to the total of current and anticipated future revenues.
29
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenues to the total of current and anticipated future
revenues. The recoverability of the carrying value of purchased developed
technology and associated goodwill is reviewed periodically. If estimated
undiscounted future cash flows are not sufficient to recover combined carrying
value of the purchased developed technology and associated goodwill, the
carrying value of goodwill is first reduced and then the carrying value of
purchased developed technology is reduced by any remaining differences.
FAIR VALUE DISCLOSURES. The Company maintains its cash principally with
major banks in interest- and non-interest-bearing bank accounts. There are no
realized or unrealized gains or losses and fair value approximates carrying
value for all cash balances.
PUSHDOWN AND CARVEOUT ACCOUNTING. Seagate Technology has provided
substantial services to the Company, including general management, treasury,
tax, financial reporting, benefits administration, insurance, information
technology, legal, accounts payable and receivable and credit functions.
Seagate Technology has charged the Company for these services through
corporate expense allocations. The amount of corporate expense allocations is
dependent upon the total amount of allocable costs incurred by Seagate
Technology on behalf of Seagate Software less amounts charged as a specific
cost or expense rather than by allocation. Included in general and
administrative expenses are corporate allocation charges of $1,004,000,
$1,939,000 and $2,242,000 for 1998, 1997 and 1996, respectively. Included in
sales and marketing expenses are corporate allocation charges of $769,000,
$19,000 and $18,000 for 1998, 1997 and 1996, respectively.
The Company participated in Seagate Technology's profit sharing plan through
the first quarter of fiscal 1998 and in Seagate Technology's management bonus
plan during 1997. The Company has since adopted its own bonus plan.
Compensation expenses recorded by the Company under Seagate Technology's plans
totaled $0, $3,158,000 and $910,000 for 1998, 1997 and 1996, respectively.
The employees of the Company also participate in the Seagate Technology
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits
eligible employees who have completed thirty days of employment prior to the
inception of the offering period to purchase common stock of Seagate
Technology through payroll deductions at the lower of 85% of the fair market
value of the common stock at the beginning or at the end of each six-month
offering period. Under the plan, 115,058, 80,643 and 41,574 shares of common
stock of Seagate Technology were issued to the Company's employees in 1998,
1997 and 1996, respectively.
The employees of the Company also participate in the Seagate Technology tax-
deferred savings plan, the Seagate Technology, Inc. Savings and Investment
Plan ("the 401(k) plan"). The 401(k) plan is designed to provide qualified
employees with an accumulation of funds at retirement. Qualified employees may
elect to make contributions to the 401(k) plan on a monthly basis. The Company
may make annual contributions to the 401(k) plan at the discretion of the
Board of Directors. No material contributions were made by the Company in
fiscal years 1998, 1997 or 1996.
REVENUE RECOGNITION. The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition". The Company's total revenues are derived from
license revenues for its various software products as well as maintenance,
support, training and consulting. Revenues for maintenance, support services,
training and consulting are recognized separately from software licenses.
License revenues are recognized upon delivery of the product if no significant
vendor obligations remain and collection of the resulting receivable is
probable. Allowances for estimated future returns and price protection are
provided upon shipment. Maintenance and support revenues consist of ongoing
support and product updates and are recognized ratably over the term of the
contract, which
30
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is typically twelve months. Revenues from training and consulting are
recognized when the services are performed.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which the Company currently
is required to adopt for transactions entered into after July 3, 1998. SOP 97-
2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The Company has assessed the impact of
the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its
policies and procedures. The Company believes that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on the Company's revenues or
results of operations.
ADVERTISING EXPENSE. The cost of advertising is expensed as incurred. The
Company does not incur any direct response advertising costs. Advertising
costs totaled $19,112,000, $21,617,000 and $15,748,000 for 1998, 1997 and
1996, respectively.
NET LOSS PER SHARE. The net loss per common share is computed using the
weighted average number of shares of common stock outstanding during the
period. Common equivalent shares from common stock options and convertible
preferred stock are excluded from the computation of diluted net loss per
share, as their effect is antidilutive. The net loss per common share for 1996
is not presented because the Company's current capital structure did not exist
prior to April 1996, making presentation for prior periods not meaningful.
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). The adoption of SFAS 128 and the
required restatement of the 1997 net loss per share had no impact on the
Company because the weighted average shares used in the per share computations
were unchanged under SFAS 128 because the effect of stock options would have
been antidilutive. Below is a reconciliation of the numerator and denominator
used to calculate earnings per share (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1998 1997
------- --------
<S> <C> <C>
Net loss per share computation -- basic and diluted:
Numerator: Net loss.................................. $(8,490) $(57,700)
------- --------
Denominator:
Weighted average number of common shares
outstanding during the period..................... 164,571 67,714
------- --------
Net loss per share -- basic and diluted.......... $(51.59) $(852.11)
======= ========
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options and common stock subject to repurchase (assuming the proceeds would be
used to purchase treasury stock) aggregating 2,118,034 shares for the year
ended July 3, 1998 and 317,453 shares for 1997 were not included in the
diluted net loss per share computations because the effect would have been
antidilutive.
ACCOUNTS RECEIVABLE. Accounts receivable are summarized below, in thousands:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Accounts receivable..................................... $ 48,200 $29,442
Less allowance for non-collection....................... (1,636) (1,270)
-------- -------
$ 46,564 $28,172
======== =======
</TABLE>
31
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property, equipment and
leasehold improvements consisted of the following, in thousands:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Equipment............................. Two to five years $ 30,999 $ 30,009
Building and leasehold improvements... Life of lease 9,424 6,428
-------- --------
40,423 36,437
Less accumulated depreciation and
amortization......................... (23,547) (15,652)
-------- --------
$ 16,876 $ 20,785
======== ========
</TABLE>
Depreciation expense was $11,727,000, $8,911,000 and $3,918,000 in 1998,
1997 and 1996, respectively.
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles consisted of
the following, in thousands:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Goodwill............................................... $ 44,953 $ 46,200
Developed technology................................... 48,049 46,136
Trademarks............................................. 9,972 9,972
Assembled workforce.................................... 4,596 6,666
Distribution network................................... 2,925 2,925
Other intangibles...................................... 13,813 12,853
-------- --------
124,308 124,752
Accumulated amortization............................... (70,429) (49,446)
-------- --------
Goodwill and other intangibles......................... $ 53,879 $ 75,306
======== ========
</TABLE>
Amortization of developed technologies is included in costs of revenues. In
1998, 1997 and 1996 the amortization of goodwill and other intangibles
includes write-offs and write-downs to the estimated fair value of $1,900,000,
$10,259,000 and $2,157,000, respectively. In 1997 the amortization of acquired
developed technologies included in cost of revenues includes write-downs and
write-offs to net realizable value of $6,918,000.
COMMON STOCK SUBJECT TO REPURCHASE. Current employees and directors of the
Company and of Seagate Technology have exercised 740,065 shares of common
stock under the Option Plan. At July 3, 1998, 176,455 shares were vested and
563,610 shares were unvested. At the option of the employee or director,
within 30 days of termination such vested and unvested shares may be sold back
to the Company at the original issue price. In addition, upon termination,
unvested shares are subject to repurchase at the option of the Company at
original issue price. Because of the obligation to repurchase vested and
unvested shares of common stock, the Company has excluded the amounts
associated with the repurchase obligation from Stockholders' Equity in the
accompanying balance sheet. At July 3, 1998, the repurchase obligation
amounted to $3,917,000.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which the Company currently
is required to adopt for transactions entered into after July 3, 1998. SOP 97-
2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The Company has assessed the impact of
32
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its
policies and procedures. The Company believes that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on the Company's revenues or
results of operations.
The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131") during
fiscal 1999. Both standards will require additional disclosure, but will not
have a material effect on the Company's financial position or results of
operations. SFAS 130 establishes standards for the reporting and display of
comprehensive income and is expected to first be reflected in the Company's
first quarter of 1999 interim financial statements. The components of
comprehensive income include net income and items that are currently reported
directly as a component of stockholders' equity such as changes in foreign
currency translation adjustments and changes in the fair value of available-
for-sale financial instruments. SFAS 131 changes the way companies report
segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating
resources. SFAS 131 will first be reflected in the Company's 1999 Annual
Report on Form 10-K.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. The
Company has not yet determined the impact, if any, of adopting this statement.
The disclosures prescribed by SOP 98-1 will be effective for the Company's
consolidated financial statements for the fiscal year ending June 30, 2000.
BUSINESS COMBINATIONS AND ACQUISITIONS
The Company acquired Eastman Software Storage Management Group, Inc. in 1998
and Arcada Holdings, Inc., Holistic Systems, Ltd., Calypso Software Systems,
Inc., OnDemand Software, Inc. and Sytron Corporation in 1996. There were no
acquisitions in 1997.
VALUATION OF ACQUIRED INTANGIBLE ASSETS. Values assigned to acquired in-
process research and development, developed technology, distribution networks,
customer bases, trademarks, and assembled workforces were determined using
independent valuations obtained by the Company.
To determine the value of in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, associated
risks which included the inherent difficulties and uncertainties in completing
each project and thereby achieving technological feasibility and risks related
to the viability of and potential changes to future target markets. This
analysis resulted in amounts assigned to in-process research and development
for projects that had not yet reached technological feasibility and which did
not have alternative future uses.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account
risks related to the characteristics and applications of each product,
existing and future markets and assessments of the life cycle stage of each
product. Based on this analysis, the existing technologies that had reached
technological feasibility were capitalized.
To determine the value of the distribution networks and customer bases, the
Company considered, among other factors, the size of the current and potential
future customer bases, the quality of existing relationships with customers,
the historical costs to develop customer relationships, the expected income
and associated risks.
33
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Associated risks included the inherent difficulties and uncertainties in
transitioning the business relationships from the acquired entity to the
Company and risks related to the viability of and potential changes to future
target markets.
To determine the value of trademarks, the Company considered, among other
factors, the assumption that in lieu of ownership of a trademark, a company
would be willing to pay a royalty in order to exploit the related benefits of
such trademark.
To determine the value of assembled workforces, the Company considered,
among other factors, the costs to replace existing employees including search
costs, interview costs and training costs.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionally until there was no negative
goodwill.
ACQUISITION OF EASTMAN SOFTWARE STORAGE MANAGEMENT GROUP, INC. In June 1998,
the Company acquired all of the outstanding capital stock of Eastman Software
Storage Management Group, Inc. ("Eastman"), a company engaged in developing,
producing and marketing hierarchical storage management products for the
Windows NT platform. The purchase price of approximately $10,000,000 was paid
in cash. Approximately $6,800,000 of the total purchase price represented the
value of in-process technology that had not yet reached technological
feasibility, had no alternative future uses and was charged to the Company's
operations in the quarter ended July 3, 1998. The Company accounted for the
acquisition using the purchase method, and the results of operations of
Eastman are only included in the Company's operations since the date the
acquisition was completed. Pro forma financial information is not presented as
such amounts are not material. The following is a summary of the purchase
price allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ 535
Liabilities assumed............................................. (508)
Assembled workforce............................................. 340
Developed technology............................................ 500
In-process research and development............................. 6,800
Microsoft agreement............................................. 1,500
Goodwill........................................................ 833
-------
$10,000
=======
</TABLE>
34
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION OF HOLISTIC SYSTEMS, LTD. In June 1996, the Company acquired all
of the outstanding shares of Holistic Systems, Ltd. ("Holistic"), a company
engaged in developing, producing and marketing OLAP-compliant, integrated
enterprise business intelligence systems encompassing facilities for executive
information, decision support and other business intelligence applications.
The purchase price of approximately $85,458,000 was paid in cash, and a
portion of such consideration ($18,000,000) was placed in escrow for
contingent consideration. The escrow was released by the Company during the
third quarter of fiscal 1997. The Company accounted for the acquisition using
the purchase method, and the results of operations of Holistic are only
included in the Company's operations since the date the acquisition was
completed. The following is a summary of the initial purchase price
allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ 9,993
Liabilities assumed............................................. (5,087)
Trademarks...................................................... 5,889
Assembled workforce............................................. 1,890
Developed technology............................................ 16,453
Customer base................................................... 3,746
In-process research and development............................. 35,892
Restricted cash held in escrow.................................. 18,000
Deferred tax liability.......................................... (1,318)
Goodwill........................................................ --
-------
$85,458
=======
</TABLE>
As noted above, $18,000,000 of the acquisition consideration was held in
escrow as contingent consideration. The Company decided to release to the
former shareholders of Holistic the escrow funds of $18,000,000 in the third
quarter of fiscal 1997 even though the required contingencies had not been
satisfied. As a result, the Company recorded compensation expense as an
unusual item amounting to $13,446,000 for payments made to Company employees
who were also former shareholders of Holistic and an additional purchase price
amount of $4,554,000 for payments to former shareholders of Holistic who were
not employees of the Company. The additional purchase price was allocated
based on the same methodology as the original purchase price and in the third
quarter of 1997, the Company recorded an additional in-process research and
development write-off of $2,613,000, acquired intangible assets of $2,037,000
and a deferred tax liability of $96,000.
ACQUISITION OF CALYPSO SOFTWARE SYSTEMS, INC. In May 1996, the Company
acquired all of the outstanding shares of Calypso Software Systems, Inc.
("Calypso"), a company engaged in developing, producing and marketing software
for managing systems and applications in complex, distributed client/server
computer networks. The purchase price of approximately $13,865,000 was paid in
cash. The Company accounted for the acquisition using the purchase method, and
the results of operations of Calypso are only included in the Company's
operations since the date the acquisition was completed. The following is a
summary of the purchase price allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ 1,209
Liabilities assumed............................................. (245)
Assembled workforce............................................. 400
Developed technology............................................ 3,600
Customer base................................................... 540
In-process research and development............................. 5,400
Goodwill........................................................ 2,961
-------
$13,865
=======
</TABLE>
35
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION OF ONDEMAND SOFTWARE, INC. In March 1996, the Company acquired
all of the outstanding shares and stock options of OnDemand Software, Inc.
("OnDemand"), a company engaged in developing, producing and marketing
WinINSTALL, a product which automates installation, upgrades and uninstalls of
network applications throughout the enterprise. The purchase price of
approximately $13,425,000 was paid in cash. The Company accounted for the
acquisition using the purchase method, and the results of operations of
OnDemand are only included in the Company's operations since the date the
acquisition was completed. The following is a summary of the purchase price
allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ 832
Liabilities assumed............................................. (227)
Assembled workforce............................................. 270
Developed technology............................................ 2,000
Covenant not to compete......................................... 50
In-process research and development............................. 8,900
Goodwill........................................................ 1,600
-------
$13,425
=======
</TABLE>
ACQUISITION OF MINORITY INTEREST OF ARCADA HOLDINGS, INC. The combination of
Seagate Software with Arcada Holdings, Inc. ("Arcada"), a company which
develops, markets and supports data protection and storage management software
products that operated across multiple desktop and client/server environments,
was accounted for as a pooling-of-interests and, accordingly, all prior
periods presented in the accompanying consolidated financial statements
include the accounts and operations of Arcada. Arcada's results of operations
for the duplicated six months ended December 30, 1995 were as follows, in
thousands:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 30, 1995
-----------------
<S> <C>
Net revenues........................................... $37,700
Operating expenses..................................... 29,320
Other income........................................... 588
Net loss............................................... (80)
</TABLE>
In connection with the pooling-of-interests, the Company acquired the then
outstanding minority interest of Arcada. The minority interest was
approximately 31% on a fully diluted basis. The acquisition of the minority
interest was accounted for as a purchase and in connection with the
acquisition, Seagate Technology issued common stock and options to purchase
common stock with a fair market value of approximately $85,074,000. The
following is a summary of the purchase price allocation for the acquisition of
the minority interest, in thousands:
<TABLE>
<S> <C>
Assembled workforce............................................. $ 1,355
Distribution network............................................ 94
Corporate accounts.............................................. 375
Strategic alliances............................................. 1,437
OEM agreements.................................................. 3,217
Value added resellers........................................... 2,030
Trademarks...................................................... 2,811
Developed technology............................................ 4,623
In-process research and development............................. 43,949
Deferred tax liability.......................................... (6,254)
Goodwill........................................................ 31,437
-------
$85,074
=======
</TABLE>
36
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION OF SYTRON CORPORATION. In July 1995, Arcada Software, Inc., a
majority-owned subsidiary of Arcada, acquired the assets and liabilities of
Sytron Corporation ("Sytron"), a company which develops, produces and markets
software products for data storage management. The purchase price of
approximately $5,017,000 was paid in cash. Arcada accounted for the
acquisition using the purchase method, and the results of operations of Sytron
are only included in the Company's operations since the acquisition was
completed. The following is a summary of the purchase price allocation, in
thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets......................... $ 848
Liabilities assumed.............................................. (508)
Developed technology............................................. 1,487
In-process research and development.............................. 2,817
Goodwill......................................................... 373
------
$5,017
======
</TABLE>
STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 95,600,000 shares of
common stock and 73,000,000 shares of preferred stock, 54,633,333 of which
have been designated as Series A preferred stock and 18,366,667 of which
remain undesignated.
PREFERRED STOCK. The Series A preferred have the following rights,
preferences and privileges:
Conversion. The holders of the Series A preferred stock have the right to
convert the Series A preferred stock at any time into common stock. The Series
A preferred stock will be automatically converted into common stock, at the
then-effective conversion price, upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended. The initial conversion rate will
be one share of preferred stock for each share of common stock. The conversion
price of the Series A preferred stock will be subject to adjustment to reduce
the effect of dilution in the event that the Company issues additional shares
of common stock or equivalents.
Voting. Each share of Series A preferred stock entitles the holder to one
vote for each share of common stock into which such share could then be
converted. Except as required by law, the holders of shares of Series A
preferred stock and the holders of shares of common stock shall vote together
as one class on all matters submitted to a vote of stockholders of the
Company.
Dividend Preference. The holders of shares of Series A preferred stock shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, an annual cash dividend in the
amount of $0.45 per share (as adjusted to reflect any stock split, stock
dividend, combination, recapitalization and the like (collectively a
"Recapitalization") with respect to the Series A preferred stock), prior and
in preference to any declaration or payment of any dividend (payable other
than in common stock) on the common stock of the Company. Such dividends shall
not be cumulative, and no right shall accrue to holders of Series A preferred
stock by reason of the fact that dividends on such shares are not declared or
paid in any year. On the date that is the end of the first fiscal year in
which the Company recognizes net income after taxes, the holders of shares of
Series A preferred stock shall be entitled to receive, out of funds legally
available for the purpose, an annual cash dividend in the amount of $0.45 per
share (as adjusted to reflect any Recapitalization) prior and in preference to
any declaration or payment of any dividend (payable other than in common
stock) on the common stock of the Company (the "Cumulative Dividend"). The
Cumulative Dividend shall accrue from the Cumulative Dividend Date and shall
be payable only when, as and if determined by the Board, provided, that if the
Cumulative Dividend shall not have been paid and a sum sufficient for the
payment thereof set apart,
37
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the deficiency shall first be fully paid before any dividend or other
distribution (other than dividends payable solely in common stock) shall be
paid or declared and set apart for the common stock of the Company. In the
event any dividend shall be paid to the holders of common stock such dividend
shall be distributed among the holders of the common stock and the Series A
preferred stock in proportion to the shares of common stock then held by them
and the shares of common stock which they then have the right to acquire upon
the conversion of the Series A preferred stock held by them.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company or other reorganization, a distribution of $7.50 per
share, as adjusted to reflect any Recapitalization of Series A preferred
stock, plus all accrued or declared but unpaid dividends, if any, shall be
made to the holders of Series A preferred stock before any amount shall be
paid to the holders of common stock.
DIVIDENDS. No dividends have been declared, or paid, to date by the Company
on any of the outstanding common stock or preferred stock.
STOCK OPTION PLANS. The Option Plan provides for the issuance of either
incentive or nonstatutory stock options to employees and consultants of the
Company. The Company has reserved a total of 12,600,000 shares under the Plan.
Options granted under the Company's Plan are granted at fair market value,
expire ten years from the date of the grant and vest over four years; 20% at
the end of years one and two and 30% at the end of years three and four.
Following is a summary of stock option activity from the inception of the plan
through the year ended July 3, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at June 30, 1995..................... -- $ --
Granted.................................... 3,276,200 4.00
Exercised.................................. -- --
Canceled................................... (45,088) 4.00
----------
Balance at June 28, 1996..................... 3,231,112 4.00
Granted.................................... 2,851,255 5.42
Exercised.................................. (20,855) 4.00
Canceled................................... (973,733) 4.36
----------
Balance at June 27, 1997..................... 5,087,779 4.73
Granted.................................... 8,039,707 9.04
Exercised.................................. (892,212) 5.13
Canceled................................... (1,299,143) 5.27
----------
Balance at July 3, 1998...................... 10,936,131 7.81
==========
</TABLE>
38
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options available for grant were 750,802, 7,491,366 and 9,368,888 at the end
of fiscal 1998, 1997 and 1996, respectively. The following tables summarize
information about options outstanding at July 3, 1998.
<TABLE>
<CAPTION>
EXERCISABLE
OPTIONS OUTSTANDING OPTIONS
----------------------------------- ------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE (IN YEARS) PRICE OF SHARES PRICE
-------- ---------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$4.00 2,288,427 8.0 $ 4.00 891,653 $4.00
$6.00 3,860,158 9.0 6.00 305,374 6.00
$7.50-11.00 2,043,397 9.6 8.83 11,760 7.86
$12.75 2,744,149 10.0 12.75 -- --
---------- ---------
Total 10,936,131 9.1 7.81 1,208,787 4.54
========== =========
</TABLE>
PRO FORMA INFORMATION. In October 1995, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an
alternative to Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees" ("APBO 25") and requires additional disclosures. The
Company has elected to follow APBO 25 in accounting for stock options granted.
Under APBO 25, the Company generally recognized no compensation expense with
respect to such options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if the
Company had accounted for its stock options under the fair value method of
SFAS 123. The fair value of the Company's stock options was estimated using a
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, the Black-
Scholes model requires the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's stock options
granted to employees have characteristics significantly different from those
of exchange-traded options (and are not fully transferable) and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the Black-Scholes model does not
necessarily provide a reliable single measure of the fair value of its stock
options granted to employees. The fair value of the Company's stock options
granted to employees was estimated assuming no expected dividends and the
following weighted average assumptions:
<TABLE>
<CAPTION>
SEAGATE SOFTWARE
INCENTIVE STOCK SEAGATE TECHNOLOGY
OPTION PLAN EMPLOYEE STOCK
SHARES PURCHASE PLAN SHARES
------------------- ------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)... 3.67 3.65 3.65 .56 .50 .50
Risk-free interest rate.... 5.7% 6.2% 5.6% 5.5% 5.4% 5.4%
Volatility................. .55 .55 .55 .63 .46 .46
</TABLE>
The weighted average exercise price and weighted average fair value of stock
options granted in 1998 under the Company's Plan were $9.04 and $4.20 per
share, respectively. The weighted average purchase price and weighted average
fair value of shares granted in 1998 under the Seagate Technology Employee
Stock Purchase Plan (the "Purchase Plan") were $26.99 and $12.03,
respectively.
39
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
over the six-month purchase period for stock purchases under the Purchase
Plan. Pro forma net loss per common share for 1996 is not presented because
the Company's current capital structure did not exist prior to April 1996,
making presentation for prior periods not meaningful. The Company's pro forma
information follows, in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Net loss................................... $(15,716) $(61,568) $(130,043)
Net loss per common share.................. $ (95.50) $(909.24)
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, and the Company did not commence granting stock options for the purchase
of Seagate Software common stock until June 1996, the pro forma effect will
not be fully reflected until 2000.
INCOME TAXES
The Company is included in the consolidated federal and certain combined and
consolidated foreign and state income tax returns of Seagate Technology.
Seagate Technology and the Company have entered into a tax sharing agreement
(the "Tax Allocation Agreement") pursuant to which the Company computes
hypothetical tax returns (with certain modifications) as if the Company was
not included in consolidated or combined returns with Seagate Technology. The
Company must pay Seagate Technology the positive amount of any such
hypothetical taxes. If the hypothetical tax returns show entitlement to
refunds, including any refunds attributable to a carryback, then Seagate
Technology will pay the Company the amount of such refunds. At the end of
fiscal 1998, $8,500,000 in intercompany tax-related balances was due from the
Company to Seagate Technology. At the end of fiscal 1997 and 1996, there were
no intercompany tax-related balances outstanding between the Company and
Seagate Technology.
The (benefit from) provision for income taxes consisted of the following, in
thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current Tax Expense
Federal...................................... $ 9,444 $(5,007) $(7,196)
State........................................ 1,575 (384) (762)
Foreign...................................... 8,908 4,182 996
------- ------- -------
Total Current Tax Expense...................... 19,927 (1,209) (6,962)
Deferred Tax Expense
Federal...................................... (3,831) (6,330) (1,498)
State........................................ (711) (1,175) (288)
------- ------- -------
Total Deferred Tax Expense..................... (4,542) (7,505) (1,786)
------- ------- -------
(Benefit from) Provision for Income Taxes...... $15,385 $(8,714) $(8,748)
======= ======= =======
</TABLE>
The (benefit from) provision for income taxes has been computed on a
separate return basis (with certain modifications), except that pursuant to
the Tax Allocation Agreement, the tax benefits of certain of the Company's
fiscal 1997 and 1996 tax losses and credits were recognized in the year such
losses and credits were utilized by Seagate Technology in its tax returns. In
fiscal 1998, the Company did not recognize the benefit of certain tax credits
because they were not expected to be utilized by Seagate Technology in its tax
returns.
40
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma information assuming a tax benefit based on a separate return
basis is as follows, in thousands:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 3, 1998
------------
<S> <C>
Income before provision for income taxes...................... $6,895
Provision for income taxes.................................... 4,548
------
Net income.................................................... $2,347
======
</TABLE>
The income tax benefits related to the exercise of employee stock options
reduced amounts due to or increased amounts due from Seagate Technology
pursuant to the Tax Allocation Agreement and were credited to additional paid-
in capital. Such amounts approximated $770,000, $3,486,000 and $1,866,000 in
1998, 1997 and 1996, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows, in thousands:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Receivable reserves................................. $ 1,951 $ 1,859
Accrued warranty.................................... 244 192
Inventory write-downs not currently deductible...... 504 299
Accrued compensation and benefits................... 1,329 1,517
Depreciation........................................ (986) 827
Accrued restructuring............................... -- 963
Accrued expenses not currently deductible........... 2,532 850
Acquisition related items........................... 36,264 34,745
Domestic and foreign net operating loss
carryforwards...................................... 13,116 13,098
Tax credit carryforwards............................ 8,686 1,155
Other............................................... 2,164 2,372
-------- --------
Total Deferred Tax Assets......................... 65,804 57,877
Valuation allowance................................. (65,804) (57,877)
-------- --------
Net Deferred Tax Assets......................... -- --
======== ========
Deferred Tax Liabilities:
Acquisition related items........................... (1,691) (6,233)
-------- --------
Total Deferred Tax Liabilities.................... (1,691) (6,233)
-------- --------
Net Deferred Tax Liabilities.................... $ (1,691) $ (6,233)
======== ========
</TABLE>
A valuation allowance has been provided for the deferred tax assets as of
the end of fiscal 1998 and 1997. Realization of the deferred tax assets is
dependent on future earnings, the timing and amount of which are uncertain. In
addition, the net operating loss and tax credit carryforwards of acquired
subsidiaries are subject to further limitations on utilization due to the
"change in ownership" provisions of Internal Revenue Code Section 382 and the
"separate return limitation year" rules of the federal consolidated return
regulations. Approximately $8,213,000 of the valuation allowance in fiscal
1998 and 1997 is attributable to deferred tax assets that when realized, will
reduce unamortized goodwill or other intangible assets of the acquired
subsidiaries. The valuation allowance increased by $7,927,000, $11,946,000 and
$26,038,000 in 1998, 1997 and 1996, respectively.
41
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 27, 1997, the Company has domestic and foreign net operating loss
carryforwards of approximately $37,515,000 expiring in 2003 through 2010 if
not used to offset future taxable income. In addition, the Company, as of July
3, 1998, has research and development tax credit carryforwards of
approximately $1,155,000 expiring in 2005 through 2011 and foreign tax credit
carryforwards of $7,351,000, expiring in 2003, if not used to offset future
tax liabilities.
The reconciliation between the (benefit from) provision for income taxes at
the U.S. statutory rate and the effective rate is summarized as follows, in
thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
(Benefit) provision at U.S. statutory rate..... $ 2,413 $(23,245) $(48,446)
State income taxes (benefit), net.............. 393 (382) (762)
Foreign taxes in excess of the U.S. statutory
rate.......................................... 2,084 255 25
In-process research and development............ -- -- 15,382
Goodwill and other acquisition related items... 2,621 5,666 2,833
Valuation allowance............................ 7,927 8,871 22,216
Other.......................................... (53) 121 4
------- -------- --------
$15,385 $ (8,714) $ (8,748)
======= ======== ========
</TABLE>
Cumulative undistributed earnings of certain foreign operations of the
Company of $2,633,000 are considered to be permanently invested in non-U.S.
operations. No U.S. federal and state income tax has been provided on these
amounts. Additional U.S. federal and state income taxes that would have to be
provided if these earnings were repatriated to the U.S. cannot be determined
at this time.
RESTRUCTURING COSTS
During 1996, the Company recorded restructuring charges totaling $9,502,000
as a result of the acquisition of Arcada, a majority-owned subsidiary of
Seagate Technology that was acquired in connection with Seagate Technology's
merger with Conner. During 1997, the Company recorded restructuring charges of
approximately $2,524,000, which consisted of $3,481,000 resulting from NSMG's
consolidation efforts, offset by an adjustment to reduce the 1996
restructuring by $957,000 based upon completion of certain aspects of the
restructuring at less than originally estimated. The restructuring activities
are substantially complete except for remaining liabilities pertaining to
long-term lease commitments on excess and duplicate facilities.
42
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's restructuring activity for the
three years ended July 3, 1998, in thousands:
<TABLE>
<CAPTION>
EQUIPMENT, CONTRACT
SEVERANCES INTANGIBLES CANCELLATIONS
AND EXCESS AND OTHER PROFESSIONAL AND OTHER
BENEFITS FACILITIES ASSETS FEES EXPENSES TOTAL
---------- ---------- ----------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 restructuring
charges................ $1,554 $1,571 $ 5,630 $ 525 $ 222 $ 9,502
Cash charges............ (518) -- -- (568) -- (1,086)
Non-cash charges........ -- (121) (4,168) -- (138) (4,427)
------ ------ ------- ----- ----- -------
Reserve balances, June
28, 1996............... 1,036 1,450 1,462 (43) 84 3,989
1997 restructuring
charges................ 770 505 2,106 -- 100 3,481
Cash charges............ (975) (915) -- -- -- (1,890)
Non-cash charges........ -- (72) (1,422) -- -- (1,494)
Adjustments and
reclassifications...... (351) 267 (732) 43 (184) (957)
------ ------ ------- ----- ----- -------
Reserve balances, June
27, 1997............... 480 1,235 1,414 -- -- 3,129
Cash charges............ (373) (519) (9) -- -- (901)
Non-cash charges........ -- -- (1,045) -- -- (1,045)
Adjustments and
reclassifications...... (107) 467 (360) -- -- --
------ ------ ------- ----- ----- -------
Reserve balances, July
3, 1998................ $ -- $1,183 $ -- $ -- $ -- $ 1,183
====== ====== ======= ===== ===== =======
</TABLE>
LINES OF CREDIT
In addition to the Revolving Loan Agreement with Seagate Technology, certain
foreign subsidiaries have line of credit facilities with third party financial
institutions. These line of credit facilities provide for additional
borrowings of up to an equivalent of approximately $1,100,000 at July 3, 1998.
Interest rates payable on borrowings are based on local bank prime interest
rates. At July 3, 1998, there were no outstanding borrowings under any of
these lines of credit.
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment by developing, marketing
and supporting business intelligence and systems infrastructure management
software products, and related professional services. The following tables
summarize the Company's operations in different geographic areas, in
thousands:
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1998
--------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated
customers.................... $275,606 $ 17,620 $ -- $293,226
Transfers between geographic
areas........................ 2,368 30 (2,398) --
-------- -------- ------- --------
Total net sales............... $277,974 $ 17,650 (2,398) $293,226
Income (loss) from operations. 20,734 (13,829) -- 6,905
Other income (expense), net... 287 (297) -- (10)
-------- -------- ------- --------
Income (loss) before income
taxes........................ $ 21,021 $(14,126) $ -- $ 6,895
======== ======== ======= ========
Identifiable assets........... $111,129 $ 24,911 $ -- $136,040
======== ======== ======= ========
</TABLE>
43
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 27, 1997
--------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated
customers.................... $203,324 $13,626 $ -- $216,950
Transfers between geographic
areas........................ 861 841 (1,702) --
-------- ------- ------- --------
Total net sales............... $204,185 $14,467 $(1,702) $216,950
Loss from operations.......... (58,962) (5,071) -- (64,033)
Other expense, net............ (2,315) (66) -- (2,381)
-------- ------- ------- --------
Loss before income taxes...... $(61,277) $(5,137) $ -- $(66,414)
======== ======= ======= ========
Identifiable assets........... $103,880 $39,714 $ -- $143,594
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 28, 1996
----------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated
customers.................. $ 139,123 $ 2,463 $ -- $ 141,586
Transfers between geographic
areas...................... 312 -- (312) --
--------- -------- ----- ---------
Total net sales............. $ 139,435 $ 2,463 $(312) $ 141,586
Loss from operations........ (102,273) (35,533) -- (137,806)
Other income (expense), net. (644) 34 -- (610)
--------- -------- ----- ---------
Loss before income taxes.... $(102,917) $(35,499) $ -- $(138,416)
========= ======== ===== =========
Identifiable assets......... $ 155,730 $ 45,868 $ -- $ 201,598
========= ======== ===== =========
</TABLE>
The loss from operations includes net revenues less operating expenses. The
loss from operations in Europe for the year ended June 28, 1996 is primarily
related to the write-off of $35,892,000 of in-process research and development
in connection with the Holistic acquisition. The loss from operations in
Europe for the year ended June 27, 1997 includes approximately $7,662,000 of
amortization of intangible assets relating to the Holistic acquisition and
$2,613,000 relating to the write-off of in-process research and development
for contingent payments made to the former shareholders of Holistic during
1997. The loss from operations in Europe for the year ended July 3, 1998
includes approximately $9,138,000 of amortization of intangible assets
relating to the Holistic acquisition. The identifiable assets by geographic
area are those assets used in the Company's operations in each area.
The Company generated export revenues from the United States of
approximately $66,250,000, $44,129,000 and $33,617,000 in 1998, 1997 and 1996,
respectively.
44
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS
LEASES. The Company leases certain property, facilities and equipment under
non-cancelable lease agreements. Facility leases expire at various dates
through 2008 and contain various provisions for rental adjustments. The leases
require the Company to pay property taxes, insurance and normal maintenance
costs. The Company also occupies certain facilities owned by Seagate
Technology. Future minimum payments for operating leases were as follows at
July 3, 1998, in thousands:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999................................... $ 8,918
2000................................... 7,581
2001................................... 5,507
2002................................... 4,953
2003................................... 3,866
After 2003............................. 35,992
-------
$66,817
=======
</TABLE>
Total rent expense for all facility and equipment operating leases was
approximately $8,023,000, $5,292,000 and $3,181,000 for 1998, 1997 and 1996,
respectively.
NON-CANCELABLE CAPITAL OBLIGATIONS. Non-cancelable capital obligations
totaled $384,291 as of July 3, 1998.
LEGAL PROCEEDINGS
On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral
agreement and infringement of a Vedatech U.K. copyright in the Japanese
translation of one of the Company's products (the "Complaint") and seeking
monetary and injunctive relief. No specific damage amount has yet been
claimed. The Company has hired local counsel in the U.K., reviewed documents
and conducted interviews. The Company filed an initial response in the U.K.
court on January 13, 1998 and is now in the discovery process. The Company
believes the Complaint has no merit and intends to vigorously defend the
action. However, if an unfavorable outcome were to arise, there can be no
assurance that such outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations.
In addition to the foregoing, the Company is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on the
Company's financial position, liquidity or results of operations.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and certain information
about them as of September 2, 1998, are as follows:
<TABLE>
<CAPTION>
DIRECTOR OR
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<C> <C> <S> <C>
Stephen J. Luczo...... 41 Chairman of the Board of
Directors 1996
Gary B. Filler........ 57 Director 1996
Lawrence Perlman...... 60 Director 1996
Donald L. Waite....... 65 Director 1996
Terence R. Cunningham. 39 President and Chief Operating
Officer 1996
Gregory B. Kerfoot.... 38 Chief Strategic Officer 1996
Ellen E. Chamberlain.. 41 Senior Vice President, Treasurer
and Chief Financial Officer 1996
</TABLE>
Mr. Luczo currently serves as Chairman of the Board of Directors of the
Company and as Chief Executive Officer, President and Director of Seagate
Technology. Prior to becoming the Company's Board Chairman in July 1997, Mr.
Luczo served as the Company's Chief Operating Officer between March 1995 and
July 1997. Mr. Luczo joined Seagate Technology in October 1993 as Senior Vice
President, Corporate Development and was promoted to Executive Vice President,
Corporate Development in March 1995, where he served until September 1997. He
was promoted to President and Chief Operating Officer in September 1997,
serving in the latter capacity until August 1998. In July 1998, Mr. Luczo was
promoted to Chief Executive Officer and appointed to the Board of Directors.
Before joining Seagate Technology in 1993, Mr. Luczo was Senior Managing
Director and Co-head of the Bear Stearns and Co. Global Technology Group from
February 1992 to October 1993. Mr. Luczo also serves on the Boards of
Directors of Gadzoox Microsystems, Inc. and Dragon Systems, Inc.
Mr. Filler currently serves as a Director of the Company and as Co-chairman
of the Board of Directors of Seagate Technology. Mr. Filler has held various
positions on Seagate Technology's Board of Directors, including Vice Chairman
from October 1990 until September 1991, Chairman from September 1991 until
October 1992, and Co-chairman since July 1998. Mr. Filler has been a financial
consultant since September 1996. He was Senior Vice President and Chief
Financial Officer of Diamond Multimedia Systems, Inc., a multimedia and
graphics company, from January 1995 to September 1996. From June 1994 to
January 1995, Mr. Filler was a business consultant and private investor. From
February 1994 until June 1994, he served as Executive Vice President and Chief
Financial Officer of ASK Group, Inc., a computer systems company. Mr. Filler
also serves on the Board of Directors of Sento Corporation.
Mr. Perlman currently serves as a Director of the Company and as Co-chairman
of the Board of Directors of Seagate Technology. He was appointed Chairman of
the Board of Directors of Ceridian Corporation (formerly Control Data
Corporation), a technology-based services company, in November 1992. Mr.
Perlman previously held several executive positions at Ceridian Corporation,
including President and Chief Executive Officer of Imprimis Technology
Incorporated, a subsidiary of Control Data Corporation. He was a regent of the
University of Minnesota from 1992 to 1995. Mr. Perlman also serves on the
Boards of Directors of Computer Network Technology Corporation, AMDOCS
Limited, and Valspar Corporation.
46
<PAGE>
Mr. Waite currently serves as a Director of the Company and as Executive
Vice President, Chief Administrative Officer, and Assistant Secretary of
Seagate Technology. Since joining Seagate Technology in 1983, Mr. Waite has
served in various roles, including Chief Financial Officer from 1983 to
February 1998. He has served as Executive Vice President and Chief
Administrative Officer since March 1995 and as Assistant Secretary since July
1998. Mr. Waite also serves on the Boards of Directors of California Micro
Devices and CVC Holdings, Inc.
Mr. Cunningham currently serves as the Company's President and Chief
Operating Officer and as Executive Vice President and General Manager of NSMG.
He founded Crystal Computer Services, Inc. ("Crystal") in 1984 and served as
its President. In May 1994 he joined Seagate Technology in connection with its
acquisition of Crystal and continued as Crystal's President until May 1996,
when he was named President of the Storage Management Group. Later in 1996, he
was named Executive Vice President and General Manager of Seagate Software
NSMG. Since fiscal 1998 Mr. Cunningham has served as President and Chief
Operating Officer for the Company as well as Executive Vice President and
General Manager of NSMG. In his role as President and Chief Operating Officer
of the Company, Mr. Cunningham is responsible for the day to day operations of
Seagate Software and serves in a role functionally equivalent to that of a
chief executive officer of a corporation.
Mr. Kerfoot currently serves as the Company's Chief Strategic Officer and as
Executive Vice President and General Manager of IMG. He joined Crystal in
September 1988 as the Director of Research and Development and Chief Architect
of Crystal Reports. In May 1994 he joined Seagate Technology in connection
with its acquisition of Crystal and continued as Crystal's Director of
Research and Development until May 1996, when he was named President of the
Information Management Group. Later in 1996, he was named Executive Vice
President and General Manager of Seagate Software IMG. Since fiscal 1998 Mr.
Kerfoot has served as Chief Strategic Officer for the Company as well as
Executive Vice President and General Manager of IMG.
Ms. Chamberlain currently serves as the Company's Senior Vice President,
Treasurer, and Chief Financial Officer. She joined Seagate Technology in March
1985 and served in various finance positions, including Vice President and
Treasurer between November 1994 and February 1996. In March 1994, Ms.
Chamberlain began simultaneously supporting the development of the Company.
She served as the Company's Vice President between April and December 1996,
when she was promoted to Senior Vice President and Chief Financial Officer.
Ms. Chamberlain was also promoted to Treasurer of the Company in fiscal 1998
after serving as its Assistant Treasurer since April 1996.
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to the
President and to the three next most highly compensated executive officers of
the Company (the "Named Executive Officers") whose compensation exceeded
$100,000 in the fiscal year ended July 3, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
UNDERLYING
NAME AND FISCAL OTHER ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) GRANTED(1)
------------------ ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Stephen J. Luczo........ 1998 $ 92,756(2) $ -- $ 2,971(2) 150,000
Chairman of the Board 1997 100,000(2) 195,000(2) 1,659(2) 80,000
of Directors
Terence R. Cunningham... 1998 155,002 803,800(3) -- 550,000
President and Chief 1997 150,530 537,127(3) -- 100,000
Operating Officer
Gregory B. Kerfoot...... 1998 151,450 803,800(3) -- 550,000
Chief Strategic Officer 1997 139,947 953,292(3) -- 100,000
Ellen E. Chamberlain.... 1998 155,002 391,500(3) 12,000 127,500
Senior Vice President, 1997 155,000 221,500(4) 6,000 28,000
Treasurer, and Chief
Financial Officer
</TABLE>
- --------
(1) The stock options listed in the table represent options to purchase Common
Stock of the Company. See "Executive Compensation--Option Grants in Fiscal
1998" for additional information regarding options to purchase stock of
the Company granted during fiscal year 1998.
(2) Amount represents the percentage of Mr. Luczo's salary that directly
benefited the Company. This amount was directly paid by the Company to
Seagate Technology under a General Services Agreement. See Pushdown and
Carveout Accounting note to the Consolidated Financial Statements.
(3) Includes amounts earned under the Company's executive bonus plan.
(4) Includes amounts deferred under Seagate Technology's compensation plan.
48
<PAGE>
OPTION GRANTS IN 1998
The following table sets forth certain information concerning grants of
stock options to each of the Company's Named Executive Officers during the
fiscal year ended July 3, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(4)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) YEAR SHARE(2) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Luczo........ 50,000 0.62% $ 6.00(3) 08/29/07 $ 188,668 $ 478,123
50,000 0.62% 8.75(3) 02/02/08 275,141 697,262
50,000 0.62% 12.75(3) 07/01/08 400,920 1,016,011
Terence R. Cunningham... 200,000 2.49% 6.00(3) 08/29/07 754,674 1,912,491
100,000 1.24% 8.75(3) 02/02/08 550,283 1,394,525
250,000 3.11% 12.75(3) 07/01/08 2,004,602 5,080,054
Gregory B. Kerfoot...... 200,000 2.49% 6.00(3) 08/29/07 754,674 1,912,491
100,000 1.24% 8.75(3) 02/02/08 550,283 1,394,525
250,000 3.11% 12.75 07/01/08 2,004,602 5,080,054
Ellen E. Chamberlain.... 40,000 0.50% 6.00(3) 08/29/07 150,935 382,498
25,000 0.31% 8.75(3) 02/02/08 137,571 348,631
62,500 0.78% 12.75(3) 07/01/08 501,150 1,270,014
</TABLE>
- --------
(1) All stock options granted in fiscal 1998 vest over four years; 20% at the
end of years one and two and 30% at the end of years three and four. Under
the Option Plan, the Company's Board retains discretion to modify the
terms, including the price, of outstanding options.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock on the grant date, as determined by the
Compensation Committee of the Board of Directors of Seagate Software. To
determine the fair market value of the Company's Common Stock, the
Compensation Committee of the Board of Directors considers a number of
factors, including, but not limited to, the Company's current financial
performance and prospects for future growth and profitability, the status
of product releases and product integration, the absence of a resale
market for the Company's Common Stock, the liquidity preferences of the
Company's Series A Preferred Stock, the control position held by Seagate
Technology, and comparisons of certain key valuation metrics for the
Company with similar metrics for comparable publicly traded companies,
including measures of market capitalization based on revenue multiples,
price-to-earnings ratios and operating margins.
(3) Exercise price and withholding obligations may be paid in cash or by
delivery of already-owned shares subject to certain conditions.
(4) Potential realizable value is based on the assumption that the Company's
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
49
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth certain information regarding the exercise of
stock options in the last fiscal year by the persons named in the Summary
Compensation Table and the value of options held by such individuals at the
end of the fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT 1998 YEAR END AT 1998 YEAR END(2)
ACQUIRED RECEIVED ------------------------- -------------------------
NAME ON EXERCISE $(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Luczo........ -- $ -- 34,000 216,000 $245,500 $1,007,000
Terence R. Cunningham... 400,000 200,000 -- 350,000 -- 400,000
Gregory B. Kerfoot...... -- -- 100,000 650,000 755,000 2,545,000
Ellen E. Chamberlain.... 12,000 12,800 14,400 161,100 110,000 635,200
</TABLE>
- --------
(1) Market value of the Company's Common Stock at the exercise date minus the
exercise price.
(2) Market value of the Company's Common Stock at fiscal year end minus the
exercise price. The fair market value of Seagate Software Common Stock on
July 3, 1998, as determined by the Compensation Committee of the Board of
Directors, was $12.75 per share. To determine the fair market value of the
Company's Common Stock, the Compensation Committee of the Board of
Directors considers a number of factors, including, but not limited to,
the Company's current financial performance and prospects for future
growth and profitability, the status of product releases and product
integration, the absence of a resale market for the Company's Common
Stock, the liquidity preferences of the Company's Preferred Stock, the
control position held by Seagate Technology, and comparisons of certain
key valuation metrics for the Company with similar metrics for comparable
publicly traded companies, including measures of market capitalization
based on revenue multiples, price-to-earnings ratios and operating
margins.
EMPLOYMENT CONTRACTS, CHANGE-OF-CONTROL ARRANGEMENTS AND SEPARATION AGREEMENTS
The Company currently has no employment contracts with any of the Named
Officers who are currently employees of the Company, and the Company has no
compensatory plan or arrangement with such current Named Officers where the
amount to be paid exceeds $100,000 and which are activated upon resignation,
termination or retirement of any such Named Officer upon a change in control
of the Company.
In July 1998, Seagate Technology entered into a Separation Agreement and
Release with Alan F. Shugart pursuant to which Mr. Shugart is entitled to
receive $2.25 million in compensation (of which none will be paid by the
Company) plus certain benefits, the right to certain deferred compensation and
the continued vesting and lapse of repurchase rights in shares of the Parent
Company's common stock. In addition, options to purchase 88,000 shares of the
Company's common stock with exercise prices ranging from $4.00 to $12.75
previously granted to Mr. Shugart by the Company vested in full and will
remain exercisable until August 19, 2001.
50
<PAGE>
DIRECTOR COMPENSATION
Directors receive no additional cash compensation for service on the Board
of Directors and any of its committees or sub-committees. The following table
sets forth certain information concerning grants of stock options to each of
the Company's directors during the fiscal year ended July 3, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES EXERCISE OR BASE PRICE
NAME UNDERLYING OPTIONS GRANTED(1) PER SHARE(2)
---- ----------------------------- ----------------------
<S> <C> <C>
Alan F. Shugart(3)...... 30,000 $ 6.00
15,000 8.75
25,000 12.75
Stephen J. Luczo........ 50,000 6.00
50,000 8.75
50,000 12.75
Donald L. Waite......... -- --
Gary B. Filler.......... 15,000 6.00
Lawrence Perlman........ 15,000 6.00
</TABLE>
- --------
(1) All stock options granted in fiscal 1998 vest over four years; 20% at the
end of years one and two and 30% at the end of years three and four. Under
the Option Plan, the Company's Board retains discretion to modify the
terms, including the price, of outstanding options.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock on the grant date, as determined by the
Compensation Committee of the Board of Directors of Seagate Software. To
determine the fair market value of the Company's Common Stock, the
Compensation Committee of the Board of Directors considers a number of
factors, including, but not limited to, the Company's current financial
performance and prospects for future growth and profitability, the status
of product releases and product integration, the absence of a resale
market for the Company's Common Stock, the liquidity preferences of the
Company's Series A Preferred Stock, the control position held by Seagate
Technology, and comparisons of certain key valuation metrics for the
Company with similar metrics for comparable publicly traded companies,
including measures of market capitalization based on revenue multiples,
price-to-earnings ratios and operating margins.
(3) Mr. Shugart resigned as a director of the Company effective August 6, 1998
pursuant to the terms of the Separation Agreement and Release between
Seagate Technology, Inc. and Mr. Shugart.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than ten percent of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("Commission"). Executive officers, directors and greater than ten percent
stockholders are required by the Commission's regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons, the Company believes that with the exception
noted below, during the period from December 2, 1997 to July 3, 1998, its
executive officers and directors complied with all filing requirements. The
Company was delinquent in filing the initial reports on Form 3 by such persons
due upon the effectiveness of the Company's Registration Statement on Form 10
but filed such reports later in December 1997.
51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding shares of Common Stock and Series A
Preferred Stock on an as-converted basis (collectively with the Common Stock,
the "Common Equivalent Shares") as of July 3, 1998 by (i) each person who is
known to the Company to be the beneficial owner of 5% or more of the Company's
outstanding Common Equivalent Shares, (ii) each of the Company's executive
officers named in the Summary Compensation Table at Item 11, (iii) each of the
Company's directors in office as of July 3, 1998, and (iv) all directors and
executive officers as of July 3, 1998 as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
COMMON COMMON
EQUIVALENT EQUIVALENT
SHARES SHARES(1)
---------- ----------
<S> <C> <C>
Seagate Technology, Inc. (2)............................. 54,695,833 98.4%
920 Disc Drive
Scotts Valley, CA 95066
Alan F. Shugart (3)...................................... 54,795,833 98.5%
Stephen J. Luczo (4)..................................... 54,729,833 98.4%
Donald L. Waite (5)...................................... 54,715,833 98.4%
Gary B. Filler (6)....................................... 54,706,833 98.4%
Lawrence Perlman (7)..................................... 54,706,833 98.4%
Ellen E. Chamberlain (8)................................. 26,400 *
Terence R. Cunningham (9)................................ 400,000 *
Gregory B. Kerfoot (10).................................. 100,000 *
All directors and executive officers as a group (8 per-
sons) (11).............................................. 55,398,233 99.6%
</TABLE>
- --------
* Less than one percent.
(1) Applicable percentage ownership is based on 55,608,900 Common Equivalent
Shares outstanding as of July 3, 1998 together with applicable options
for such stockholder. The Company's Series A Preferred Stock is reflected
on an as-converted basis assuming a 1:1 conversion. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission based on factors including voting and investment power with
respect to shares subject to applicable community property laws. Common
Equivalent Shares subject to options currently exercisable or exercisable
within 60 days after July 3, 1998 are deemed outstanding for computing
the percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 7,200,000 shares of Class B Exchangeable Shares of Seagate
Software Information Management Group (Canada), Inc., Vancouver, British
Columbia ("IMG Vancouver"), which may be exchanged at the option of the
holder, Seagate Technology International, a subsidiary of the Parent
Company, for an equal number of shares of Series A Preferred Stock of the
Company within 60 days of July 3, 1998. Excludes 176,000 shares of the
Company's Common Stock held by or issuable pursuant to options granted to
Messrs. Shugart, Luczo, Waite, Filler and Perlman over which Seagate
Technology does not possess sole or shared voting or investment control
and therefore of which Seagate Technology disclaims beneficial ownership.
(3) Includes 88,000 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
shares of Class B Exchangeable Shares of IMG Vancouver) beneficially
owned by Seagate Technology to which Mr. Shugart may be deemed, in his
capacity as an officer of Seagate Technology, to have shared power to
vote or dispose of. However, Mr. Shugart disclaims such beneficial
ownership. Mr. Shugart resigned as a director of the Company effective
August 6, 1998.
52
<PAGE>
(4) Includes 34,000 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
shares of Class B Exchangeable Shares of IMG Vancouver) beneficially
owned by Seagate Technology to which Mr. Luczo may be deemed, in his
capacity as an officer of Seagate Technology, to have shared power to
vote or dispose of. However, Mr. Luczo disclaims such beneficial
ownership.
(5) Includes 12,000 shares of Common Stock that are subject to repurchase by
the Company. The Company's repurchase right lapses for 6,000 and 6,000
shares on April 4, 1999 and 2000, respectively. Includes 54,695,833
shares of Series A Preferred Stock (and 7,200,000 shares of Class B
Exchangeable Shares of IMG Vancouver) beneficially owned by Seagate
Technology to which Mr. Waite may be deemed, in his capacity as an
officer of Seagate Technology, to have shared power to vote or dispose
of. However, Mr. Waite disclaims such beneficial ownership.
(6) Includes 11,000 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
shares of Class B Exchangeable Shares of IMG Vancouver) beneficially
owned by Seagate Technology to which Mr. Filler may be deemed, in his
capacity as a director of Seagate Technology, to have shared power to
vote or dispose of. However, Mr. Filler disclaims such beneficial
ownership.
(7) Includes 11,000 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
shares of Class B Exchangeable Shares of IMG Vancouver) beneficially
owned by Seagate Technology to which Mr. Perlman may be deemed, in his
capacity as a director of Seagate Technology, to have shared power to
vote or dispose of. However, Mr. Perlman disclaims such beneficial
ownership.
(8) Includes 14,400 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
(9) Includes 260,000 shares of Common Stock that are subject to repurchase by
the Company on various dates through 2001.
(10) Includes 100,000 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
(11) Includes 258,400 shares of Common Stock that may be acquired upon the
exercise of stock options exercisable within 60 days after July 3, 1998.
See notes 2 through 7 to this table regarding reporting of shares held by
Seagate Technology.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a General Services Agreement between the Company and Seagate
Technology dated June 28, 1997 (the "General Services Agreement"), Seagate
Technology provides administrative, accounting and similar services requested
by the Company. The services provided by Seagate Technology may include, but
are not limited to: (i) providing general accounting services, budgeting,
forecasting, cost control and other financial planning services; (ii)
assisting with employee benefits administration, hiring and payroll
administration; (iii) providing legal and government relations services such
as preparing applications for export licenses; (iv) tax analysis,
documentation, reporting and withholding for customs duties, import taxes,
value-added taxes, and any other charges or taxes imposed on the Company's
products; (v) assisting the Company with federal, state, and international tax
planning, provisions, audits, and compliance, including income, sales and use,
property, VAT, and similar taxes; (vi) providing assistance relating to the
marketing, promotion, and sale of the Company's products; (vii) providing
services and support relating to information technology and facilities; and
(viii) managerial oversight, including screening of potential acquisitions,
partnerings, joint ventures, or similar transactions.
During 1998, 1997 and 1996 Seagate Technology charged the Company
$1,773,000, $1,958,000 and $2,260,000, respectively, for various corporate
services. The Company pays service fees to the Parent Company each fiscal year
that represent a reasonable estimate of the Parent Company's direct and
indirect costs incurred
53
<PAGE>
in performing services for the Company. Service fees are to be paid in equal
monthly installments within 30 days after the end of the month. Additionally,
the Company and Seagate Technology are required to review, on an annual basis,
the actual level of services provided and the corresponding reasonably
determinable direct and indirect costs incurred by the Parent Company pursuant
to the General Services Agreement. If the reasonably determinable costs are
greater than or less than the service fees paid, the difference will be
charged to or refunded to the Company, as the case may be, within 30 days
after such review.
The service fees assessed to the Company and the end of period adjustments
thereto are intended by the Company and Seagate Technology to allocate costs
for those services provided on a basis no less favorable than the Company
could obtain from an unaffiliated third party. The Company has audit rights
with respect to the computation and analysis of service fees pursuant to the
General Services Agreement. In addition, the Parent Company is required to
indemnify, defend and hold the Company harmless against any and all claims,
suits, actions, demands, proceedings, losses, damages, liabilities, costs and
expenses, including, without limitation, interest and reasonable attorneys'
fees, arising out of, relating to, or resulting from services performed by the
Parent Company pursuant to the General Services Agreement, other than those
liabilities that would not have arisen but for any act, error and/or omission
of the Company and/or any of its officers, directors, employees and/or agents.
Additionally, on July 4, 1998, the Company and Seagate Technology renewed
the Intercompany Revolving Loan Agreement ("Loan Agreement") on substantially
the same terms and conditions as the prior agreement which was dated June 28,
1996. Under the Revolving Loan Agreement, Seagate Technology finances certain
of the Company's working capital requirements. The Loan Agreement provides for
maximum borrowings of up to $60,000,000 and is renewable every two years.
Borrowings from the Parent Company were $16,054,000 and $28,971,000 at July 3,
1998 and June 27, 1997, respectively. Borrowings from the Parent Company
consist primarily of funding the Company's operating activities. During 1998,
gross borrowings and gross repayments under the Loan Agreement were
$175,919,000 and $188,836,000, respectively. Average outstanding borrowings
under the Loan Agreement were $14,656,000 during 1998. Beginning in fiscal
1999, the Company will pay interest at the LIBOR rate plus 2% per annum on
such borrowings; the Company previously paid interest at 6%.
Revenues from the Parent Company were $5,469,000, $5,762,000 and $9,374,000
in fiscal 1998, 1997 and 1996, respectively. This revenue primarily consisted
of shipments to Seagate Technology's OEM tape drive divisions located in Costa
Mesa, California and Scotland. Additionally, this revenue is supported by
license agreements, which have comparable terms and pricing as those
agreements between the Company and third party customers.
The Company is included in the consolidated federal and certain combined and
consolidated foreign and state income tax returns of Seagate Technology.
Seagate Technology and the Company have entered into a tax sharing agreement
(the "Tax Allocation Agreement") pursuant to which the Company computes
hypothetical tax returns as if the Company was not joined in consolidated or
combined returns with Seagate Technology. The Company must pay Seagate
Technology the positive amount of any such hypothetical taxes. If the
hypothetical tax returns show entitlement to refunds, including any refunds
attributable to a carryback, then Seagate Technology will pay the Company the
amount of such refunds. At year end for both 1998 and 1997, there were no
outstanding intercompany tax-related balances between the Company and Seagate
Technology.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The consolidated financial statements of Seagate
Software and subsidiaries and supplemental schedule of the registrant as
set forth under Item 8 are filed as part of this Form 10-K.
2. Financial Statement Schedules. The following consolidated financial
statement schedules of Seagate Software and subsidiaries are filed as part
of this Form 10-K and should be read in conjunction with the consolidated
financial statements of Seagate Software and subsidiaries.
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Schedule II--Valuation and Qualifying Accounts.......................... 58
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
The independent auditors' report with respect to the above-listed financial
statements and schedules appears on page 25 of this report on Form 10-K.
55
<PAGE>
3. Exhibits
<TABLE>
<C> <S>
3.1+ Certificate of Incorporation of Registrant, as amended
3.2+ Bylaws of Registrant, as amended
4.1+ Voting Agreement dated December 26, 1996 among the Registrant,
Seagate Software Information Management Group, Inc. and Seagate
Technology International Holdings
10.1+ 1996 Stock Option Plan, as amended, form of Stock Option Agreement
and form of Amendment to Stock Option Agreement
10.2(A) Seagate Technology, Inc. Employee Stock Purchase Plan, as amended
10.3+ Lease Agreement, dated December 27, 1994, between the Registrant and
Clover Investments, Inc.
10.4+ Lease Agreement, dated March 21, 1996 between the Registrant and 400
International Parkway Development Company
10.5*+ General Services Agreement dated June 28, 1997 between the Registrant
and Seagate Technology, Inc.
10.6+ Tax Allocation Agreement dated April 4, 1996 between the Registrant
and Seagate Technology, Inc.
10.7+ Intercompany Revolving Loan Agreement dated June 28, 1996 between the
Registrant and Seagate Technology, Inc.
10.7.1 Amendment No. 1 dated July 4, 1998 to Intercompany Revolving Loan
Agreement between the Registrant and Seagate Technology, Inc.
10.8+ Form of Indemnification Agreement entered into between the Registrant
and its directors and officers
10.9+ Support Agreement dated December 26, 1996 between the Registrant and
Seagate Software Information Management Group, Inc.
10.10 Lease Agreement dated as of November 1, 1997 by and among Seagate
Technology, Inc., Seagate Software Information Management Group,
Inc. and No. 163 Cathedral Ventures Ltd.
10.11(A) Separation Agreement and Release dated July 29, 1998 between Seagate
Technology, Inc. and Alan F. Shugart
13.1+ Holistic Systems Ltd. (now Seagate Software Information Management
Group Limited) Statements of Consolidated Profits and Cash Flows and
Related Notes Year Ended 31 March 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 57)
27.1 Financial Data Schedule
</TABLE>
- --------
* Confidential treatment has been requested for a portion of this exhibit
pursuant to a request for confidential treatment filed with the Securities
and Exchange Commission. Omitted portions have been filed separately with
the Commission.
+ Incorporated by reference to exhibits filed in response to Item 15(a),
"Exhibits" to the Registrant's Registration Statement on Form 10 as filed
with the Securities and Exchange Commission on October 3, 1997 as amended
on December 11, 1997.
(A) Incorporated by reference to exhibits filed in connection with Seagate
Technology's Annual Report on Form 10-K for the fiscal year ended July 3,
1998 as filed with the Securities and Exchange Commission on August 21,
1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended July 3, 1998.
56
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SEAGATE SOFTWARE, INC.
/s/ TERENCE R. CUNNINGHAM
By: _________________________________
TERENCE R. CUNNINGHAM
PRESIDENT AND CHIEF OPERATING
OFFICER
Dated: September 2, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS TERENCE R. CUNNINGHAM AND ELLEN E. CHAMBERLAIN,
JOINTLY AND SEVERALLY, HIS OR HER ATTORNEY-IN-FACT, EACH WITH THE POWER OF
SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES, TO SIGN ANY AMENDMENTS
TO THIS REPORT ON FORM 10-K AND TO FILE THE SAME, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-
IN-FACT, OR HIS SUBSTITUTE OR SUBSTITUTES, MAY DO OR CAUSE TO BE DONE BY
VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TERENCE R. CUNNINGHAM President and Chief September 2, 1998
____________________________________ Operating
(Terence R. Cunningham) Officer
/s/ GREGORY B. KERFOOT Chief Strategic Officer September 2, 1998
____________________________________
(Gregory B. Kerfoot)
/s/ ELLEN E. CHAMBERLAIN Senior Vice President, September 2, 1998
____________________________________ Treasurer
(Ellen E. Chamberlain) and Chief Financial
Officer
/s/ STEPHEN J. LUCZO Chairman of the Board of September 2, 1998
____________________________________ Directors
(Stephen J. Luczo)
/s/ GARY B. FILLER Director September 2, 1998
____________________________________
(Gary B. Filler)
/s/ LAWRENCE PERLMAN Director September 2, 1998
____________________________________
(Lawrence Perlman)
/s/ DONALD L. WAITE Director September 2, 1998
____________________________________
(Donald L. Waite)
</TABLE>
57
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) PERIOD
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED JULY 3, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts. $1,270,000 $1,177,000 $811,000 $1,636,000
========== ========== ======== ==========
YEAR ENDED JUNE 27, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts. $ 597,000 $1,522,000 $849,000 $1,270,000
========== ========== ======== ==========
YEAR ENDED JUNE 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts. $ 405,000 $ 408,000 $216,000 $ 597,000
========== ========== ======== ==========
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
58
<PAGE>
SEAGATE SOFTWARE, INC.
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1+ Certificate of Incorporation of Registrant, as amended
3.2+ Bylaws of Registrant, as amended
4.1+ Voting Agreement dated December 26, 1996 among the Registrant,
Seagate Software Information Management Group, Inc. and Seagate
Technology International Holdings
10.1+ 1996 Stock Option Plan, as amended, form of Stock Option Agreement
and form of Amendment to Stock Option Agreement
10.2(A) Seagate Technology, Inc. Employee Stock Purchase Plan, as amended
10.3+ Lease Agreement, dated December 27, 1994, between the Registrant and
Clover Investments, Inc.
10.4+ Lease Agreement, dated March 21, 1996 between the Registrant and 400
International Parkway Development Company
10.5*+ General Services Agreement dated June 28, 1997 between the
Registrant and Seagate Technology, Inc.
10.6+ Tax Allocation Agreement dated April 4, 1996 between the Registrant
and Seagate Technology, Inc.
10.7+ Intercompany Revolving Loan Agreement dated June 28, 1996 between
the Registrant and Seagate Technology, Inc.
10.7.1 Amendment No. 1 dated July 4, 1998 to Intercompany Revolving Loan
Agreement between the Registrant and Seagate Technology, Inc.
10.8+ Form of Indemnification Agreement entered into between the
Registrant and its directors and officers
10.9+ Support Agreement dated December 26, 1996 between the Registrant and
Seagate Software Information Management Group, Inc.
10.10 Lease Agreement dated as of November 1, 1997 by and among Seagate
Technology, Inc., Seagate Software Information Management Group,
Inc. and No. 163 Cathedral Ventures Ltd.
10.11(A) Separation Agreement and Release dated July 29, 1998 between Seagate
Technology, Inc. and Alan F. Shugart
13.1+ Holistic Systems Ltd. (now Seagate Software Information Management
Group Limited) Statements
of Consolidated Profits and Cash Flows and Related Notes Year Ended
31 March 1996
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 57)
27.1 Financial Data Schedule
</TABLE>
- --------
* Confidential treatment has been requested for a portion of this exhibit
pursuant to a request for confidential treatment filed with the Securities
and Exchange Commission. Omitted portions have been filed separately with
the Commission.
+ Incorporated by reference to exhibits filed in response to Item 15(a),
"Exhibits" to the Registrant's Registration Statement on Form 10 as filed
with the Securities and Exchange Commission on October 3, 1997 as amended
on December 11, 1997.
(A) Incorporated by reference to exhibits filed in connection with Seagate
Technology's Annual Report on Form 10-K for the fiscal year ended July 3,
1998 as filed with the Securities and Exchange Commission on August 21,
1998
<PAGE>
EXHIBIT 10.7.1
INTERCOMPANY
------------
REVOLVING LOAN AGREEMENT
------------------------
This INTERCOMPANY REVOLVING LOAN AGREEMENT ("Loan Agreement"), dated as of
--------------
July 4, 1998, is entered into by and between:
(1) Seagate Technology, Inc. ("Lender"); and
------
(2) Seagate Software, Inc., and its subsidiaries and affiliates
("Borrower").
--------
In consideration of the covenants, conditions and agreements set forth herein,
the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Advance" shall have the meaning given in Section 2.1 of the Loan
-------
Agreement.
1.2 "Average Net Receivable" shall have the meaning given in section 3.1
-----------------------
of the Loan Agreement.
1.3 "Business Day" shall mean any day on which commercial banks are not
------------
authorized or required to close in San Francisco, California.
1.4 "Commitment" shall mean an amount equal to $60,000,000.00.
----------
1.5 "Default" shall mean any event or circumstance not yet constituting an
-------
Event of Default but which, with the giving of any notice or the lapse of any
period of time or both, would become an Event of Default.
1.6 "Event of Default" shall have the meaning given to that term in
----------------
Section 6.1.
1.7 "GAAP" shall mean generally accepted accounting principles and
----
practices as promulgated by the Financial Accounting Standards Board and as in
effect in the United States of America from time to time, consistently applied.
Unless otherwise indicated in this Loan Agreement, all accounting terms used in
this Loan Agreement shall be construed, and all accounting and financial
computations hereunder or thereunder shall be computed, in accordance with GAAP.
1.8 "Governmental Authority" shall mean any domestic or foreign national,
----------------------
state or local government, any political subdivision thereof, any department,
agency, authority or bureau of any of the foregoing, or any other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
1.9 "Indebtedness" of any Person shall mean and include the aggregate
------------
amount of, without duplication (a) all obligations of such Person for borrowed
money, (b) all obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments, (c) all obligations of such Person to
1
<PAGE>
pay the deferred purchase price of property or services (other than accounts
payable incurred in the ordinary course of business determined in accordance
with generally accepted accounting principles), (d) all obligations under
capital leases of such Person, (e) all obligations or liabilities of others
secured by a lien on any asset of such Person, whether or not such obligation or
liability is assumed, (f) all guaranties of such Person of the obligations of
another Person; (g) all obligations created or arising under any conditional
sale or other title retention agreement with respect to property acquired by
such Person (even if the rights and remedies of the seller or lender under such
agreement upon an event of default are limited to repossession or sale of such
property), (h) net exposure under any interest rate swap, currency swap,
forward, cap, floor or other similar contract that is not entered to in
connection with a bona fide hedging operation that provides offsetting benefits
to such Person, which agreements shall be marked to market on a current basis,
(i) all reimbursement and other payment obligations, contingent or otherwise, in
respect of letters of credit.
1.10 "Interest Income" shall have the meaning given in section 3.1 of the
---------------
Loan Agreement.
1.11 "LIBOR Rate" shall mean the rate per annum, calculated to the nearest
-----------
.01%, at which U.S. dollar deposits are offered in the London interbank market
for one month periods as quoted by Bloomberg Financial Services. All
computations of such interest shall be based on a year of 360 days and actual
days elapsed. Such LIBOR Rate shall remain in effect until it is adjusted on
the first Business Day of the following fiscal month.
1.12 "Loan Agreement" shall have the meaning set forth in the opening
--------------
paragraph of this document.
1.13 "Loan Documents" shall mean and include this Loan Agreement and any
--------------
other documents, instruments and agreements delivered to Lender in connection
with this Loan Agreement.
1.14 "Obligations" shall mean and include all Advances, debts,
-----------
liabilities, and financial obligations, howsoever arising, owed by Borrower to
Lender of every kind and description (whether or not evidenced by any note or
instrument), direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising pursuant to the terms of any of the Loan
Documents, including, without limitation, all interest, fees, charges, expenses,
reasonable attorneys' fees (and expenses) and accountants' fees (and expenses)
chargeable to Borrower or payable by Borrower hereunder or thereunder.
1.15 "Person" shall mean and include an individual, a partnership, a
------
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a Governmental Authority.
1.16 "Termination Date" shall mean the second anniversary of the date of
----------------
this Loan Agreement.
ARTICLE 2
ADVANCES
2.1 Terms. Subject to the terms and conditions of this Loan Agreement,
-----
Lender agrees to advance to Borrower from time to time and until the Termination
Date, and continuing thereafter by mutual consent, such sums as Borrower may
request (the "Advances") but which shall not exceed, in
2
<PAGE>
the aggregate principal amount at any one time outstanding, the Commitment.
Advances shall be made in lawful currency of the United States of America and
shall be made during the fiscal month from immediately available funds. Subject
to the terms and conditions hereof, Borrower may borrow pursuant to this Section
2.1, prepay the Advances and reborrow pursuant to this Section 2.1.
2.2 Payment of Principal upon Maturity. If not paid earlier, the
----------------------------------
outstanding principal balance of all Advances shall be due and payable to the
Lender on the Termination Date.
2.3 Interest Payments. Interest shall be payable by and accrue to the
-----------------
Borrower at the beginning of each fiscal month based on a formula that takes
into account the average of the Borrower's net payable balance with the Lender
at the end of the prior two fiscal months. Interest charged in respect to the
calculation is at the rate of the LIBOR Rate in effect plus two per cent. All
computations of such interest shall be based on a year of 360 days and actual
days elapsed for each day on which any principal balance is outstanding under
the terms of the Loan Agreement.
2.4 Interest Payments. Interest accruing in the fiscal month of the
-----------------
Termination Date shall be payable and accrue to the Borrower on the Termination
Date.
2.5 Other Payment Terms.
-------------------
(a) Place and Manner. Borrower shall make all payments due to Lender
hereunder in lawful money of the United States and in same day or immediately
available funds.
(b) Date. Whenever any payment due hereunder shall fall due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day, and such extension of time shall be included in the computation of interest
or fees, as the case may be.
(c) Default Rate. From and after the occurrence of an Event of Default and
during the continuance thereof, Borrower shall pay interest on all Obligations
not paid when due, from the date due thereof until such amounts are paid in full
at a per annum rate equal to the three (3) percentage points in excess of the
rate otherwise applicable to Advances. All computations of such interest shall
be based on a year of 360 days and actual days elapsed.
2.6 Loan Account. The Obligations of Borrower to Lender hereunder shall be
------------
evidenced by one or more accounts or records maintained by Lender in the
ordinary course of business. The accounts or records maintained by Lender shall
be presumptive evidence of the amount of such Obligations, and the interest and
principal payments thereon. Any failure so to record or any error in so doing
shall not, however, limit, increase or otherwise affect the obligation of
Borrower hereunder to pay any amount owning hereunder.
ARTICLE 3
INTEREST INCOME
3.1 Terms. Subject to the terms and conditions of this Loan Agreement, a
-----
Borrower's "average net receivable" exists when the average of the Borrower's
net payable balance with the Lender at the end of the prior two fiscal months
results in a net receivable position. Lender agrees to compensate Borrower
("interest income") when an average net receivable exists. Interest Income
shall
3
<PAGE>
be paid in lawful currency of the United States of America and shall be
cumulated as of the last day of the fiscal month.
3.2 Interest Payments. Interest shall be payable and accrue to the Lender
-----------------
at the beginning of each fiscal month for any month in which an average net
receivable exists. Interest earned in respect to the calculation is at the rate
of the Lender's monthly in-house portfolio yield as calculated by the Borrower
no later than the twentieth day of the following month. All computations of
such interest shall be based on the average net receivable balance on actual
days lapsed.
3.3 Payment of Net Receivable Accrued Interest The Borrower has the
------------------------------------------
option to convert the month-end receivable balance to a cash deposit in the name
of the Borrower at its sole discretion.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BORROWER
To induce Lender to enter into this Loan Agreement and to make Advances
hereunder, Borrower represents and warrants to Lender as follows:
4.1 Due Incorporation, Qualification, etc. Borrower is a corporation duly
--------------------------------------
organized, validly existing and in good standing under the laws of its state of
incorporation.
4.2 Authority. The execution, delivery and performance by Borrower of
---------
each Loan Document to be executed by Borrower and the consummation of the
transactions contemplated thereby (i) are within the power of Borrower and (ii)
have been duly authorized by all necessary actions on the part of Borrower.
4.3 Enforceability. Each Loan Document executed, or to be executed, by
--------------
Borrower has been, or will be, duly executed and delivered by Borrower and
constitutes, or will constitute, a legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms, except as
limited by bankruptcy, insolvency or other laws of general application relating
to or affecting the enforcement of creditors' rights generally and general
principles of equity.
ARTICLE 5
CONDITIONS TO MAKING ADVANCES
Lender's obligation to make the initial Advance and each subsequent Advance
is subject to the prior satisfaction or waiver of all the conditions set forth
in this Article 5.
5.1 Principal Loan Documents. Borrower shall have duly executed and
------------------------
delivered to Lender: (a) the Loan Agreement; and (b) such other documents,
instruments and agreements as Lender may reasonably request.
5.2 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by Borrower in Article 4 hereof shall be true and correct as of
the date on which each Advance is made and after giving effect to the making of
the Advance. The submission by Borrower to Lender of a request for an Advance
shall be deemed to be a certification by the Borrower that as of the date of
borrowing, the representations and warranties made by Borrower in Article 5
hereof are true and correct.
4
<PAGE>
5.3 No Event of Default or Default. No Event of Default or Default has
------------------------------
occurred or is continuing.
5.4 Total Outstanding Advances. The total aggregate principal amount of
--------------------------
outstanding Advances does not exceed the Commitment.
ARTICLE 6
EVENTS OF DEFAULT
6.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Loan Agreement and the Note:
(a) Failure to Pay. Borrower shall fail to pay (i) the principal amount of
all outstanding Advances on the Termination Date hereunder; (ii) any interest,
Obligation or other payment required under the terms of this Loan Agreement or
any other Loan Document on the date due and such failure shall continue for five
(5) Business Days after Borrower's receipt of Lender's written notice thereof to
Borrower; or (iii) any Indebtedness (excluding Obligations) owed by Borrower to
Lender on the date due and such failure shall continue for five (5) Business
Days after Borrower's receipt of Lender's written notice thereof to Borrower; or
(b) Breaches of Covenants. Borrower shall fail to observe or perform any
other covenant, obligation, condition or agreement contained in this Loan
Agreement or any other Loan Document and (i) such failure shall continue for ten
(10) Business Days after Borrower's receipt of Lender's written notice thereof
to Borrower, or (ii) if such failure is not curable within such ten (10)
Business Day period, but is reasonably capable of cure within thirty (30)
Business Days, either (A) such failure shall continue for thirty (30) Business
Days after Borrower's receipt of Lender's written notice thereof to Borrower or
(B) Borrower shall not have commenced a cure in a manner reasonably satisfactory
to Lender within the initial ten (10) Business Day period following receipt of
notice; or
(c) Representations and Warranties. Any representation, warranty,
certificate, or other statement (financial or otherwise) made or furnished by or
on behalf of Borrower to Lender in writing in connection with any of the Loan
Documents, or as an inducement to Lender to enter into this Loan Agreement,
shall be false, incorrect, incomplete or misleading in any material respect when
made or furnished; or
(d) Voluntary Bankruptcy or Insolvency Proceedings. Borrower shall (i)
apply for or consent to the appointment of a receiver, trustee, liquidation or
custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated in full or in part, (v) become
insolvent (as such term is defined in 11 U.S.C. (S)101 (32), as amended from
time to time), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or
5
<PAGE>
(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the
appointment of a receiver, trustee, liquidator or custodian of Borrower or of
all or a substantial part of the property thereof, or an involuntary case or
other proceedings seeking liquidation, reorganization or other relief with
respect to Borrower or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
sixty (60) calendar days of commencement.
6.2 Rights of Lender upon Default.
-----------------------------
(a) Acceleration. Upon the occurrence or existence of any Event of Default
described in Sections 6.1(d) and 6.1(e), automatically and without notice or, at
the option of Lender, upon the occurrence of any other Event of Default, all
outstanding Obligations payable by Borrower hereunder shall become immediately
due and payable, without presentment, demand, protest or any other notice of any
kind, all of which are hereby expressly waived, anything contained herein or in
the other Loan Documents to the contrary notwithstanding.
(b) Cumulative Rights, etc. The rights, powers and remedies of Lender under
this Loan Agreement shall be in addition to all rights, powers and remedies
given to Lender by virtue of any applicable law, rule or regulation of any
Governmental Authority, any transaction contemplated thereby or any other
agreement, all of which rights, powers, and remedies shall be cumulative and may
be exercised successively or concurrently without impairing Lender's rights
hereunder.
ARTICLE 7
MISCELLANEOUS
7.1 Notices. Except as otherwise provided herein, all notices, requests,
-------
demands, consents, instructions or other communications to or upon Lender or
Borrower under this Agreement or the other Loan Documents shall be in writing
and telecopied, mailed or delivered to each party at its telecopier number or
address set forth below (or to such other telecopier number or address for any
party as indicated in any notice given by that party to the other party). All
such notices and communications shall be effective (a) when sent by Federal
Express or other overnight service of recognized standing, on the Business Day
following the deposit with such service; (b) when mailed by registered or
certified mail, first class postage prepaid and addressed as aforesaid through
the United States Postal Service, upon receipt; (c) when delivered by hand, upon
delivery; and (d) when telecopied, upon confirmation of receipt; provided,
--------
however, that any notice delivered to Lender under Article 2 shall not be
- -------
effective until received by Lender.
LENDER: Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95066
Attention: David Nelson
BORROWER: Seagate Software, Inc., and its subsidiaries and affiliates
915 Disc Drive
Scotts Valley, California 95066
6
<PAGE>
Attention: Ellen Chamberlain
7.2 Waivers; Amendments. Any term, covenant, agreement or condition of
-------------------
this Loan Agreement or any other Loan Document may be amended or waived if such
amendment or waiver is in writing and is signed by Borrower and Lender. No
failure or delay by Lender in exercising any right hereunder shall operate as a
waiver thereof or of any other right nor shall any single or partial exercise of
any such right preclude any other further exercise thereof or of any other
right. A waiver or consent given hereunder shall be effective only if in
writing and in the specific instance and for the specific purpose for which
given.
7.3 Successors and Assigns. This Loan Agreement and the other Loan
----------------------
Documents shall be binding upon and inure to the benefit of Borrower, Lender and
their respective successors and permitted assigns, except that Borrower may not
assign or transfer (and any such attempted assignment or transfer shall be void)
any of its rights or obligations under any Loan Document without the prior
written consent of Lender.
7.4 Set-off. In addition to any rights and remedies of Lender provided by
-------
law, Lender shall have the right, without prior notice to Borrower, any such
notice being expressly waived by Borrower to the extent permitted by applicable
law, upon the occurrence and during the continuance of a Default or an Event of
Default, to set-off and apply against any Indebtedness, whether matured or
unmatured, of Borrower to Lender (including, without limitation, the
Obligations), any amount owing from Lender to Borrower. The aforesaid right of
set-off may be exercised by Lender against Borrower or against any trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
receiver or execution, judgment or attachment creditor of Borrower or against
anyone else claiming through or against Borrower or such trustee in bankruptcy,
debtor-in-possession, assignee for the benefit of creditors, receiver, or
execution, judgment or attachment creditor, notwithstanding the fact that such
right of set-off shall not have been exercised by Lender prior to the occurrence
of a Default or an Event of Default. Lender agrees promptly to notify Borrower
after any such set-off and application made by Lender, provided that the failure
--------
to give such notice shall not affect the validity of such set-off and
application.
7.5 No Third Party Rights. Nothing expressed in or to be implied from
---------------------
this Agreement or any other Loan Document is intended to give, or shall be
construed to give, any Person, other than the parties hereto and thereto and
their permitted successors and assigns, any benefit or legal or equitable right,
remedy or claim under or by virtue of this Agreement or any other Loan Document.
7.6 Partial Invalidity. If at any time any provision of this Loan
------------------
Agreement or any of the Loan Documents is or becomes illegal, invalid or
unenforceable in any respect under the law of any jurisdiction, neither the
legality, validity or enforceability of the remaining provisions of the Loan
Agreement or such other Loan Documents, nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction, shall
in any way be affected or impaired thereby.
7.7 Governing Law. This Loan Agreement and each of the other Loan
-------------
Documents shall be governed by and construed in accordance with the laws of the
State of California without reference to conflicts of law rules.
7.8 Construction. Each of this Loan Agreement and the other Loan
------------
Documents is the result of negotiations among, and has been reviewed by,
Borrower, Lender and their respective counsel. Accordingly, this Loan Agreement
and the other Loan Documents shall be deemed to be the
7
<PAGE>
product of all parties hereto, and no ambiguity shall be construed in favor of
or against Borrower or Lender.
7.9 Entire Agreement. This Loan Agreement and the other Loan Documents,
----------------
taken together, constitute and contain the entire agreement of Borrower and
Lender with respect to the subject matter hereby and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
among the parties, whether written or oral, respecting the subject matter
hereof.
IN WITNESS WHEREOF, the parties have executed this Loan Agreement as of the
date first set forth above.
BORROWER:
SEAGATE SOFTWARE, INC., AND ITS
SUBSIDIARIES AFFILIATES
By: /s/ Ellen E. Chamberlain
--------------------------------
Name: Ellen E. Chamberlain
Title: Senior Vice President & Chief
Financial Officer
LENDER:
SEAGATE TECHNOLOGY, INC.
By: /s/ Charles C. Pope
--------------------------------
Name: Charles C. Pope
Title: Senior Vice President & Chief
Financial Officer
8
<PAGE>
EXHIBIT 10.10
Land Title Act
Form C
(Section 219.81)
Province of
British Columbia
GENERAL INSTRUMENT PART 1 (This area for Land Title Office use)
- -------------------------------------------------------------------------------
1. APPLICATION: (Name, address, phone number and signature of applicant,
applicant's solicitor or agent)
-------------------------------------------
Signature of Solicitor or Agent
- -------------------------------------------------------------------------------
2. PARCEL IDENTIFIER(S) AND LEGAL DESCRIPTION(S) OF LAND:
(PID) (LEGAL DESCRIPTION)
008-075-158 Lot A Block 68 District Lot 541
Plan 21357
- -------------------------------------------------------------------------------
3. NATURE OF INTEREST:
DESCRIPTION DOCUMENT REFERENCE PERSON ENTITLED TO INTEREST
(page and paragraph)
Lease with right of Entire Instrument TRANSFEREE
renewal Pages 4 - 41, inclusive
- -------------------------------------------------------------------------------
4. TERMS: Part 2 of this instrument consists of (select one only)
(a) Filed Standard Charge Terms [ ] D.F. Number
(b) Express Charge Terms [ X ] Annexed as Part 2
(c) Release [ ] There is no Part 2 of this
instrument
A selection of (a) includes any additional or modified terms referred to in
item 7 or in a schedule annexed to this instrument. If (c) is selected, the
charge described in item 3 is released or discharged as a charge on the land
described in item 2.
- -------------------------------------------------------------------------------
5. TRANSFEROR(S):
NO. 163 CATHEDRAL VENTURES LTD., (Inc. No. 522262)
- -------------------------------------------------------------------------------
6. TRANSFEREE(S): (including postal address(es) and postal code(s))
SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP, INC. (Inc. No. 0285351)
c/o 840 Cambie Street, Vancouver, British Columbia, V6B 4J2
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
7. ADDITIONAL OR MODIFIED TERMS:
N/A
- -------------------------------------------------------------------------------
8. EXECUTION(S): This instrument creates, assigns, modifies, enlarges,
discharges or governs the priority of the interest(s) described in item 3 and
the Transferor(s) and every other signatory agree to be bound by this
instrument, and acknowledge(s) receipt of a true copy of the filed standard
charge terms, if any.
Officer Signature(s) Execution Date Party(ies) Signature(s)
---------
/s/ Lesley Charkow Y M D NO. 163 CATHEDRAL VENTURES LTD.
--------------------- --------- by its authorized signatory(ies):
Name: 97 11 13
LESLEY CHARKOW /s/ Riccardo Nardelli
BIRNE & PAROLIN ----------------------------------
1110 Cathedral Place Name: RICCARDO NARDELLI
925 W. Georgia Street
Vancouver, B.C. VBC 3L2
(804) 888-1133
---------------------------------
Name:
-------------------- SEAGATE SOFTWARE INFORMATION
Name: MANAGEMENT GROUP, INC.
by its authorized signatory(ies):
/s/ Ellen Chamberlain
---------------------------------
Name: ELLEN CHAMBERLAIN
---------------------------------
Name:
Your signature constitutes a representation that you are a solicitor, notary
public or other person authorized by the Evidence Act, R.S.B.C. 1979, c. 116,
to take affidavits for use in British Columbia and certifies the matters set
out in Part 5 of the Land Title Act as they pertain to the execution of this
instrument. If space insufficient, enter "SEE SCHEDULE" and attach schedule
in Form E.
<PAGE>
TERMS OF INSTRUMENT - PART 2
LEASE
THIS LEASE made as of the 1st day of November, 1997.
AMONG:
NO. 163 CATHEDRAL VENTURES LTD., c/o Suite 200 -
1122 Mainland Street, Vancouver, British Columbia, V6B 5L1
(hereinafter collectively called the "Landlord")
OF THE FIRST PART
AND:
SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP, INC.
c/o 840 Cambie Street, Vancouver, British Columbia, V6B 4J2
(hereinafter called the "Tenant")
OF THE SECOND PART
AND:
SEAGATE TECHNOLOGY, INC. of 4575 Scotts Valley Drive,
P.O. Box 66360, Scotts Valley, California, 95067-0360
(hereinafter called the "Guarantor")
OF THE THIRD PART
IN CONSIDERATION of the rents, covenants and agreements herein reserved and
contained and by the parties to be respectively paid, observed and performed,
the parties hereby agree as follows:
<PAGE>
ARTICLE 1.
DEFINITIONS
1.a In this Lease the following expressions shall have the meaning ascribed
thereto in this Section unless the context otherwise requires:
(i) "Additional Rent" means all sums of money to be paid by the Tenant
to the Landlord pursuant to this Lease save and except Basic Rent;
(ii) "Article" means an Article in this Lease and includes all Sections
therein;
(iii) "Basic Rent" means:
(1) the sum of $5.75 per square foot of the Rentable Area of the
Leased Premises per annum in respect of the basement of the
Building; and
(2) the sum of $15.74 per square foot of the Rentable Area of
the Leased Premises per annum in respect of the main through
fifth floors of the Building;
(iv) "Building" means, collectively, the building, improvements and
structures situated on the Lands and all alterations and additions
thereto or replacements thereof;
(v) "Business Taxes" means all taxes, licence fees, rates, charges,
duties and assessments imposed or levied by any lawful authority
covering any period during the Term and relating to or in respect
of the business or businesses or uses carried on therein or
relating to or in respect of improvements, fixtures, machinery,
chattels or equipment brought onto the Leased Premises by the
Tenant or being the property of the Tenant, or relating to or in
respect of improvements to the Leased Premises built, made or
installed by the Tenant or at the Tenant's request, or being any
special or additional taxes, licence fees, rates, charges, duties
and assessments which the Tenant or any sublessee or licensee of
the Tenant shall elect or cause to have the Leased Premises or any
part thereof assessed or charged with, whether any such taxes,
licence fees, rates, charges, duties and assessments are payable
in law by the Tenant or by the Landlord;
(vi) "Commencement Date" means:
(1) February 1, 1998, with respect to the basement, main, fourth
and fifth floors of the Building and 8,036 square feet of
the third floor of the Building comprising a total square
footage of 70,491 square feet; and
(2) June 1, 1998, with respect to the second floor of the
Building and 9,525 square feet of the third floor of the
Building comprising a total square
<PAGE>
footage of 27,086 square feet,
subject to Section 2.2 herein;
(vii) "Environmental Laws" means any statutes, laws, regulations,
orders, bylaws, standards, guidelines, permits, and other lawful
requirements of any governmental authority having jurisdiction
over the Leased Premises now or hereafter in force relating in any
way to the environment, health, occupational health and safety, or
transportation of dangerous goods, including the principles of
common law and equity;
(viii) "First Base Year" means the first 365-day period of the Term in
which the Tenant is in actual occupation of greater than 85% of
the Rentable Area of the Leased Premises;
(ix) "Fixturing Commencement Date" means:
(1) November 1, 1997, with respect to the basement, main, fourth
and fifth floors of the Building and 8,036 square feet of
the third floor of the Building; and
(2) April 1, 1998, with respect to the second floor of the
Building and 9,525 square feet of the third floor of the
Building,
subject to Section 2.2 herein;
(x) "GST" means any and all taxes, levies, duties and assessments
imposed on the Tenant, the Landlord or both of them, or which the
Landlord is obliged to collect from the Tenant, with respect to:
(1) any or all amounts payable by the Tenant pursuant to this
Lease, including Basic Rent and Additional Rent; and
(2) this Lease or services or goods supplied or provided or
deemed to have been supplied or provided by the Landlord in
accordance with the terms of this Lease or the consideration
for such goods and services,
whether in each case characterized as goods and services tax,
sales tax, multi-stage tax, value added tax, consumption tax or
any other tax;
(xi) "Hazardous Substance" or "Hazardous Substances" means any
pollutants, contaminants, deleterious substances, underground or
above-ground tanks,
<PAGE>
asbestos materials, hazardous, corrosive, or toxic substances,
special waste or waste of any kind, or any other substance which
is now or hereafter prohibited, controlled or regulated under
Environmental Laws;
(xii) "Landlord's Work" means the improvements and renovations to the
Buildings to be provided by the Landlord as described in Schedule
"A" hereto;
(xiii) "Lands" means those lands and premises situate in the City of
Vancouver having a civic address at 840 - 848 Cambie Street and
legally described as:
Parcel Identifier: 008-075-158
Lot A
Block 68
District Lot 541
Plan 21357;
(xiv) "Leased Premises" means the Building situate on the Lands;
(xv) "Offer to Lease" means that certain offer to lease made by the
Tenant on July 17, 1997 and accepted by the Landlord on July 30,
1997;
(xvi) "Operating Expenses" means, subject to the exclusions and
deductions set out below, the total, without duplication, of the
costs, expenses, fees, rentals, disbursements, and outlays (in
this definition referred to collectively as "costs") of every kind
paid, payable, or incurred by or on behalf of the Landlord on an
accrual basis consistent with generally accepted accounting
principles and fully chargeable in the calendar year in which they
were incurred (except as expressly set out below) in accordance
with generally accepted accounting principles in the maintenance,
repair, operation, administration and management of the Building.
Without limiting the generality of the foregoing, Operating
Expenses shall include:
(1) all salaries, wages, fringe benefits, severance pay, and
termination payments paid to or for all personnel, including
without limitation, building superintendents, supervisory
personnel and managers, and all costs of obtaining or
dismissing such personnel, to the extent that they are
employed by the Landlord (or a person with whom it does not
deal at arm's length) in connection with the maintenance,
repair, operation, administration, or management of the
Building or any part of it, and amounts paid to
professionals and independent contractors, for any services
provided in connection with the maintenance, repair,
operation, administration, or management of the Building or
any part of it;
<PAGE>
(2) costs of providing any of the following services requested
by the Tenant: security (including after-hours security),
landscaping, window cleaning, waste collection, disposal and
recycling, and snow removal services, and the costs of
machinery, supplies, tools, equipment, and materials used in
connection with the operation, administration, or management
of the Building or any rentals thereof;
(3) costs of providing electric light and power, fuel, water,
steam, gas, sewage disposal, and other utilities, and costs
of replacing building-standard electric light fixtures,
ballasts, tubes, starters, lamps, light bulbs, and controls
and repairing and replacing air conditioning and heating and
ventilation systems;
(4) costs of all insurance which the Landlord is obligated or
permitted to obtain under this Lease;
(5) sales, goods and services, and excise or other taxes on
goods and services provided by or on behalf of the Landlord
in connection with the maintenance, repair, operation,
administration, or management of the Building net of input
tax credits, refunds, or rebates (to the extent the Landlord
receives and utilizes same);
(6) costs of repairs, alterations to the Building, and
replacements to non-structural components of the Building
required to comply with applicable laws or the requirements
of the Landlord's insurers, excluding costs associated with
the foundation, building systems, structural elements, roof
and roof membrane, external glazing, structural sub-floors,
columns and beams and the structural purchase of bearing
walls and roofs. Reimbursable capital expenditures for
replacement items that are required to be made to the
Building by the Landlord in excess of $5,000 per occurrence
shall be amortized over the term of the useful life of such
replacement items, and the Tenant shall only be responsible
for an amount equal to the amortization of such expenditures
that coincides with the remainder of the Term or renewal
term, as the case may be;
(7) depreciation (excluding depreciation on the costs of
original components of the electrical, mechanical, and other
systems installed as part of the original construction of
the Building) of the costs of machinery, equipment,
facilities, furniture, furnishings, systems, and property,
including without limitation, air conditioning and heating
and ventilation systems (in this paragraph called
"machinery") installed in or used in
<PAGE>
connection with the Building (except to the extent that the
costs are charged fully in the fiscal period in which they
are incurred) or amortized in accordance with paragraph
(vii):
(a) if a principal purpose of such machinery is to conserve
energy, reduce the cost of other items included in
Operating Cost, or comply with applicable laws or
requirements of the Landlord's insurers which become
effective or are imposed after substantial completion
of the Building, or such machinery is used for normal
maintenance of the Building, or
(b) if, as in the case of the electrical, mechanical, and
other systems, such machinery by its nature requires
periodic or substantial replacement;
in the case of each item of machinery to be amortized over
the term of the useful life of such replacement items, and
the Tenant shall only be responsible for amount equal to the
amortization of such expenditures that coincides with the
remainder of the Term or renewal term, as the case may be;
(8) management fees or management agent fees and administrative
charges of a management company, if any, for the Building or
any part of it or, if the Landlord chooses to manage the
Building or any part of it through itself or through a
company or other person with whom it does not deal at arm's
length, a management fee to the Landlord in an amount
comparable to that which would be charged by a first-class
real estate management company for management of similar
buildings in the City of Vancouver, provided that during the
initial Term management fees or management agent fees shall
be the lesser of actual cost or $0.50 per square foot of the
Rentable Area of the Leased Premises and during any renewal
term this $0.50 per square foot rate will be subject to
annual increases in accordance with the Consumer Price Index
for the City of Vancouver during such renewal term;
excluding therefrom the following (except as specifically included
above):
(9) interest on debt, capital retirement of debt and debt
service costs;
(10) any taxes on the income or profits of the Landlord to the
extent they are not imposed in lieu of Taxes;
<PAGE>
(11) any costs incurred by the Landlord under Sections 3.3 and
3.4;
(12) any costs associated with repairing any and all construction
defects as they relate to the base building finishes, the
Landlord's Work outlined in Schedule "A" and the work
outlined in Schedule "C";
(13) any costs associated with all maintenance and repair of
structural elements of the Building and common areas;
(14) any costs of all external glazing;
(15) any costs of the Landlord in attempting to lease premises in
the Building;
(16) any costs associated with the Landlord's ownership of the
Building as distinguished from the costs of operating the
Building including, accounting and legal matters, costs of
defending any lawsuits, and costs of selling or financing
the Landlord's interest in the Building;
(17) any fines penalties and interest thereon; and
(18) any costs in connection with the clean-up or removal of
Hazardous Substances which were released or placed upon the
Lands or Building prior to the Commencement Date,
and deducting therefrom the following:
(19) net insurance proceeds received by the Landlord to the
extent (but only to the extent) that such proceeds reimburse
the Landlord for costs which have been charged as Operating
Expenses; and
(20) net recoveries by the Landlord in respect of warranties or
guarantees relating to the construction of the Building to
the extent (but only to the extent) that the repair costs in
respect of the work covered by such warranties or guarantees
have been charged as Operating Expenses,
(xvii) "Operating Year" means the 365-day period, commencing on the first
day of the First Base Year and ending on the 365th day thereafter,
provided that the last operating period shall terminate to
coincide with the date of expiration of the Term or any renewal
term;
(xviii) "Parties" means the parties to this Lease and Party means a party
to this Lease;
(xix) "Person" includes a corporation, partnership or party, and the
personal or other
<PAGE>
legal representatives of such Person to whom the context can apply
at law;
(xx) "Prime Rate" means the rate of interest per annum established from
time to time by the Landlord's bank as the reference rate of
interest to determine interest rates it will charge on Canadian
dollar loans;
(xxi) "Rent" means Basic Rent and Additional Rent;
(xxii) "Rentable Area of the Leased Premises" means the area determined
by the Landlord's architect or land surveyor according to the
method specified for calculation of "Useable Area" of office
buildings by the Building Owners and Managers Association
International, for single tenant buildings, in effect as at the
date of execution of this Lease. For greater certainty this shall
include without limitation all hallways, walkways, lobbies,
elevators, service areas and stairways and has been determined as
17,519 square feet for the basement and 80,058 square feet for the
main through fifth floors;
(xxiii) "Section" means a section in this Lease and includes all
subsections;
(xxiv) "Taxes" mean all taxes, rates and assessments whether general or
specially levied or assessed by any lawful governmental authority
covering any period during the Term, in respect of the Leased
Premises and immovable accessories and improvements thereto, and
shall include any other taxes payable by the Landlord or the
Tenant which are imposed in substitution of the foregoing taxes,
rates and assessments, but not taxes on the Landlord's income,
including GST, the whole as finally determined for each applicable
period of time as a result of an assessment, appeal or judicial
review and shall include any legal fees or appraiser's fees
incurred by the Landlord in respect of such final determination
thereof (including legal and other professional fees reasonably
incurred by the Landlord in contesting, resisting, or appealing
any Taxes;
(xxv) "Tenant Improvement Allowance" means the sums payable by the
Landlord to the Tenant to fixture the Leased Premises which will
include the following items:
(1) all interior improvements and remodelling, including a new
main reception area, open workstation areas, private hard
wall offices, conference rooms, coffee/kitchenettes with hot
and cold running water with sink, cabinetry, etc.,
additional hard wall offices and laboratories, signage,
telecom and data cabling costs, certain and specific
demolition and reconstruction, new carpeting, doors, and
hardware throughout the Leased Premises, wall coverings,
painting, and patching;
<PAGE>
(2) subject to the provisions herein, any use/occupancy permit,
certificate or other formal permission documentation
necessary from the City of Vancouver for the Tenant's
occupancy of the Leased Premises; and
(3) costs of any design, architectural, engineering, mechanical,
electrical, mechanical, electrical and other miscellaneous
working drawings,
which sums shall not exceed $20.00 per square foot of the Rentable
Area of the first to fifth floors of the Building, inclusive, and
$4.00 per square foot of the
<PAGE>
Rentable Area of the basement of the Building. For greater
certainty, the Tenant Improvement Allowance shall be:
Square footage Rate Allowance
17,519 sq.ft. $4.00/sq.ft. $70,076.00
80,058 sq.ft. $20.00/sq.ft. $1,601,160.00;
TOTAL: $1,671,236.00
To the extent that the amount of the Tenant Improvement Allowance
exceeds the cost of the improvements, such extra amount will be
applied to the first Rent payment due under this Lease.
(xxvi) "Tenant's Work" means the improvements and renovations to the
Buildings to be carried out by the Tenant in accordance with
Schedule "B" hereto;
(xxvii) "Term" means in respect of each applicable portion of the
Building, that period commencing on the applicable Commencement
Date and ending on January 31, 2005; and
(xxviii) "Unavoidable Delay" means a delay in performance of an act or
compliance with a covenant caused by fire, strike, lock-out,
inability to procure material, restrictive laws or governmental
regulations or other cause of any kind beyond the reasonable
control of the party obligated to perform or comply, excepting a
delay caused by lack of funds or other financial reason.
ARTICLE 2.
DEMISE, GRANTS AND FINANCIAL MATTERS
2.a The Landlord hereby demises and leases to the Tenant the Leased Premises
for the Term and the Tenant hereby leases from the Landlord the Leased Premises
for the Term, unless earlier terminated as hereinafter provided, and otherwise
on the terms, covenants and conditions herein set forth. Provided that, during
the period from the Fixturing Commencement Date to the Commencement Date, the
Tenant shall be entitled to enter onto the Leased Premises for the purposes of
carrying out the Tenant's business provided it complies with all of its
obligations hereunder (for greater certainty no Rent will be payable until the
Commencement Date) .
2.b Notwithstanding Section 2.1 herein:
(i) if the Landlord and the Tenant, acting reasonably, agree that the
Landlord's Work required to be completed by November 1, 1997 has
not been completed
<PAGE>
by that date and the basement, main, fourth and fifth floors of
the Building and 8,036 square feet of the third floor of the
Building have not otherwise been delivered to the Tenant in vacant
and gutted condition, other than by reason of delays caused by the
Tenant or Unavoidable Delay, then the Tenant shall have the right,
exercisable by 12:00 p.m. on October 31, 1997 to terminate this
Lease and the Tenant shall have no further obligations under the
Offer to Lease or this Lease;
(ii) if the Landlord is unable to deliver the second floor of the
Building and 9,525 square feet of the third floor of the Building
to the Tenant in vacant and gutted condition on April 1, 1998,
other than by reason of delays not caused by the Tenant or
Unavoidable Delay, then the Fixturing Commencement Date for that
portion of the Leased Premises, shall not commence until the date
that the Landlord delivers that portion of the Leased Premises to
the Tenant in vacant and gutted condition, without penalty or cost
to the Tenant, and the Landlord shall pay to the Tenant an amount
equal to $1.00 per square foot of the Rentable Area of that
portion of the Leased Premises not yet delivered from time to time
for each month until that portion of the Leased Premises is
delivered to the Tenant in vacant and gutted condition and the
Commencement Date for that portion of the Leased Premises shall be
extended accordingly but in no event shall the expiry date of this
Lease be extended. Such amounts may be offset by the Tenant
against Basic Rent payable for that portion of the Leased Premises
for the third month of the Term;
(iii) immediately upon delivery of any portion of the Leased Premises to
the Tenant in vacant and gutted condition, the Tenant shall
provide a written certificate to the Landlord certifying that the
Landlord has fulfilled its obligation to deliver to the Tenant
that portion of the Leased Premises in vacant and gutted condition
and accepting that portion of the Leased Premises as so delivered;
(iv) if any of the Landlord's Work is not completed by the dates set
out in Schedule "A" or if any of the Building renovations are not
completed by the dates set out in Section 3.4, by reason of delays
not caused by the Tenant or Unavoidable Delay, then the Tenant
shall give written notice of the same to the Landlord and, upon
confirmation that the Landlord is in receipt of such notice, the
Tenant shall then be entitled to complete the Landlord's Work and
the Building renovations at a reasonable cost and the Landlord
shall reimburse the Tenant for its out-of-pocket costs in
completing the Landlord's Work within ten (10) business days of
receipt by the Landlord of evidence satisfactory to the Landlord,
acting reasonably, of the actual out-of-pocket costs incurred and
paid by the Tenant for completing the Landlord's Work and the
Building renovations.
<PAGE>
In the event the Landlord and the Tenant are unable to agree as to any matters
set out in Section 2.2 above, then either party may notify the other, by written
notice (the "Notice"), of a desire to resolve the dispute by mediation and a
meeting will be held promptly between the parties, attended by individuals with
decision-making authority regarding the dispute, to attempt in good faith to
negotiate a resolution of the dispute. If, within fourteen (14) days after such
meeting or such further period as is agreeable to the parties, the parties have
not succeeded in negotiating a resolution of the dispute, they agree to submit
the dispute to mediation. The parties will jointly appoint a mutually
acceptable mediator, seeking assistance from the British Columbia International
Commercial Arbitration Centre, if they have been unable to agree upon such
appointment within twenty (20) days following the conclusion of the negotiation
period. If the parties are not successful in resolving the dispute through
mediation, or if the mediation has not commenced within thirty (30) days
following the delivery of the Notice, then the parties agree that the dispute
will be settled by arbitration pursuant to the Commercial Arbitration Act of
British Columbia, as amended from time to time, or any like statute in effect
from time to time and the decision of such arbitrator(s) shall be final and
binding upon the parties. The costs of any mediation or arbitration hereunder
shall be borne equally by the parties. Costs will not include costs incurred by
a party for representation by counsel.
2.c The Landlord shall pay to the Tenant the Tenant Improvement Allowance upon
receipt of the Tenant's paid invoices therefor.
2.d The Tenant will pay to the Landlord Basic Rent for the Term in consecutive
monthly instalments on the first day of each and every month during the Term as
provided in Section 2.11 herein. Notwithstanding the foregoing, the Tenant
shall not be responsible for the payment of Rent for the period from the
Fixturing Commencement Date to the Commencement Date provided that the Tenant
shall be entitled to have access to the Leased Premises for the purposes of
completing its improvements thereto and carrying on the Tenant's business and
shall otherwise be bound by all of the obligations on the part of the Tenant
contained in this Lease.
2.e The Landlord acknowledges that the Tenant has paid to the Landlord's agent,
Colliers Macaulay Nicolls, the sum of $166,287.00, as a security deposit, to be
held by the Landlord's agent in trust until the Commencement Date and thereafter
paid to the Landlord and applied on account of the first two months Basic Rent
payable hereunder. All accrued interest on the security deposit shall be
payable to the Tenant.
2.f The Landlord shall pay to the Tenant a moving allowance of $0.50 per square
foot of the Rentable Area of the Leased Premises upon the Tenant taking
possession of the Leased Premises for the purposes of carry on business
therefrom but no later than the Commencement Date.
<PAGE>
2.g Except as otherwise expressly provided herein, this Lease is to be a
completely net lease for the Landlord so that the Landlord shall incur no cost
with respect to the Leased Premises or the use, operation or occupation thereof
during the Term.
2.h The Tenant covenants with the Landlord to:
(i) subject to Section 2.12, pay all of the Taxes and Business Taxes
promptly when the same are due and if assessed or levied upon the
Landlord or in the case of the Landlord determining Taxes, within
five (5) business days after receiving notice thereof from the
Landlord;
(ii) pay all Operating Expenses in accordance with Section 2.11 below
provided that in each Operating Year of the Term, commencing the
First Base Year, and all renewal terms, the Tenant shall not be
obliged to pay Operating Expenses in excess of the "Capped Amount"
for such Operating Year as set out in Section 2.9 below;
(iii) pay for all utilities and services provided to the Leased Premises,
including electricity, water, gas, telephone and communications, to
the extent the same are not included in Operating Expenses;
(iv) pay GST as required by lawful authority and otherwise within five
(5) business days after receiving notice thereof from the Landlord;
and
(v) pay the Landlord all Additional Rent (if any) within five (5)
business days after receiving notice thereof from the Landlord.
2.i In respect of each Operating Year of the Term, commencing the First Base
Year, the Tenant shall be obliged to pay all Operating Expenses up to the
corresponding "Capped Amount" set out below:
Operating Year Capped Amount
First Base Year Actual Operating Expenses chargeable to the
Tenant (the "First Base Year Amount")
2nd Operating Year The First Base Year Amount x 1.03 ("1st Cap")
3rd Operating Year 1st Cap x 1.03 ("2nd Cap")
4th Operating Year 2nd Cap x 1.03 ("3rd Cap")
<PAGE>
5th Operating Year 3rd Cap x 1.03 ("4th Cap")
6th Operating Year 4th Cap x 1.03 ("5th Cap")
7th Operating Year 5th Cap x 1.03,
with the Capped Amount for each Operating Year in any renewal term being
calculated in the same manner. For greater certainty, the Operating Expenses
payable by the Tenant to the Landlord during the First Base Year, shall be the
actual Operating Expenses chargeable to the Tenant.
2.j Subject to Section 2.9 above, the amount of Operating Expenses which the
Tenant is to pay may be estimated by the Landlord for each calendar year or such
other fiscal period or portion thereof as the Landlord may determine. The
Tenant agrees to pay to the Landlord the amount of such estimate in monthly
instalments in advance in amounts and during the period specified by the
Landlord on the dates and at the times for payment of Basic Rent as provided for
in this Lease. The Landlord may submit to the Tenant at any time during a
period a re-estimate of the amount of Operating Expenses payable by the Tenant
and a revised monthly instalment amount. Within 120 days of the end of the
fiscal period for which such estimated payments have been made, the Landlord
will make a final determination of Operating Expenses for such fiscal period and
shall deliver to the Tenant an audited statement certified by a chartered
accountant practicing in the Province of British Columbia setting out in
reasonable detail the actual amount payable by the Tenant in respect of such
period. The cost of preparing such audited statement shall be borne by the
Tenant. If necessary an adjustment shall be made between the parties and any
money owing by or to one party shall be paid or credited within 30 days of such
notice. The Tenant shall, at its option, be permitted to review such audited
statement with the Landlord's auditor upon providing 14 days prior notice to the
Landlord.
2.k The Tenant covenants that all payments by the Tenant to the Landlord of
whatsoever nature required or contemplated by this Lease shall be:
(i) paid by cheque or bank draft payable to the Landlord in lawful
currency of Canada;
(ii) made when due hereunder, without prior demand, without any setoff,
compensation or deduction whatsoever, at the address of the Landlord
set out on page 1 of this Lease, or at such other place as the
Landlord may designate in writing from time to time to the Tenant;
(iii) applied towards amounts then outstanding hereunder, in such manner
as the Landlord may see fit; and
<PAGE>
(iv) deemed to be Rent, in partial consideration for which this Lease has
been entered into, and shall be payable and recoverable as rent,
such that the Landlord shall have all applicable rights and remedies
against the Tenant for default in making any such payment which may
not be expressly designated as Rent as the Landlord has for default
in payment of Rent.
2.l The Landlord agrees that the Tenant may, at its own cost, contest any
Taxes and appeal any assessments with respect thereto, provided that all
penalties, interest and other costs arising out of such action are to be paid
for by the Tenant.
ARTICLE 3.
USE, REPAIRS, ALTERATIONS, FIXTURES
3.a The Tenant covenants that it shall only use the Leased Premises for office
and storage use only in connection with general administrative and field support
purposes associated with any software and computer engineering or development
company, and any other legally permitted use compatible with office buildings of
comparable quality.
3.b The Landlord agrees to provide the Tenant with access to lighting,
electrical, elevator usage, parking, building security and heating, ventilation
and air conditioning seven (7) days per week twenty-four (24) hours per day.
3.c Subject to Section 2.2 above, the Landlord shall be obliged to complete
the Landlord's Work by the dates set out in Schedule "A" and to deliver the
applicable Leased Premises by the applicable Fixturing Commencement Date, as
same may be extended pursuant to the terms hereof, in vacant and gutted
condition with the pre-existing air conditioning, heating, ventilation,
mechanical, plumbing and electrical/lighting systems (including ballasts and
bulbs), all pre-existing fixtures, ceiling tiles and suspension system for the
ceiling, elevators, enclosed plumbing systems and the washroom facilities in
proper working order. The Landlord shall complete the Building renovations set
out in Schedule "C" by the later of February 1, 1998 and 60 days after receipt
by the Landlord from the Tenant of final specifications and drawings, as
required. The Landlord agrees to work with the Tenant to incorporate the
Tenant's image into the overall design of the Building renovations. The Tenant
agrees that the use of the Leased Premises and all appurtenances thereto is at
the sole risk of the Tenant without any recourse against the Landlord. Provided
however that, the Landlord warrants to the Tenant that:
(i) the Landlord shall be solely responsible, at its own cost, to remedy
all defects in workmanship and materials in respect of the air
conditioning, heating, ventilation, mechanical and
electrical/lighting systems (except for ballasts and bulbs), pre-
existing fixtures, ceiling tiles and suspension system for the
ceiling, elevators, enclosed plumbing systems and washroom
facilities, which manifest
<PAGE>
during the first 2 years of the Term;
(ii) to its knowledge the interior of the Building complies with all
applicable building codes in effect as at the date of the Offer to
Lease, including compliance with the provisions thereof for Barrier
Free Access;
(iii) the Building, including the basement, is sprinklered for fire
safety;
(iv) the Building was seismically upgraded in 1987 and meets all seismic
codes as they apply to office use as at 1987;
(v) a certificate of occupancy for office use for the first through
fifth floors of the Building and storage use for the basement of the
Building may be obtained from the City of Vancouver without further
seismic upgrades regardless of the leasehold improvements installed
by either the Tenant or the Landlord to the first through fifth
floors of the Building. Should the Tenant convert all or a portion
of the basement of the Building for office use purposes during the
Term or any renewal thereof, any seismic upgrades required shall be
made at the sole cost and expense of the Landlord; and
(vi) should the Landlord be responsible for constructing any leasehold
improvements, on the Tenant's behalf, to the interior of the
Building, a certificate of occupancy may be obtained by the City of
Vancouver for such improvements.
3.d The Landlord shall not be obliged to maintain, make repairs, installations
or alterations in or to the Leased Premises save and except as provided herein,
and except for the following obligations which will be undertaken at the sole
cost of the Landlord:
(i) subject to Section 3.6 herein, maintenance of and repairs to the
structural elements of the Building including, foundations,
structural sub-floors, columns and beams and the structural portions
of bearing walls and roofs and the roof membrane of the Building or
any part thereof;
(ii) completion of washroom area in the basement of the Building;
(iii) installation of lighting to the exterior of the Building adjacent to
the parking area prior to the Commencement Date; and
(iv) construction of a rooftop deck in accordance with applicable
building code requirements and with one access point from each of
the northern and southern portions of the Building with required
finishes, all in cooperation with the Tenant prior to the
Commencement Date; and
<PAGE>
(v) all external glazing; and
(vi) repair of any and all defects in workmanship and materials related
to the base building finishes.
All such work will be undertaken and completed by the Landlord within the time
period required by this Lease.
3.e Save and except as expressly permitted herein and subject to Schedule "B"
herein, the Tenant shall not carry out any alterations, installations or
renovations to the Leased Premises without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld or delayed and, the
Tenant or its contractor shall be solely responsible for securing any and all
occupancy certificates required for any improvements to the Leased Premises
which are carried out by a third party general contractor on behalf of the
Tenant. Notwithstanding the foregoing, the Tenant shall be entitled to make any
non-material alterations, installations or renovations to the Leased Premises
without the consent of the Landlord provided the Tenant gives written notice to
the Landlord that such work will be performed.
3.f Subject to complying with all applicable laws, bylaws and regulations, the
Tenant, at its sole cost, shall be entitled to place satellite transmission,
receiving or other equipment related to the conduct of its business on the roof
of the Building at any time during the Term and any renewal term, subject to the
Landlord's prior written approval of the location of the same, which approval
shall not be unreasonably withheld or delayed. No Rent shall be payable by the
Tenant to the Landlord with respect to such use of the roof. The Landlord shall
have the right, at any time during the Term upon giving notice of the same to
the Tenant, and acting reasonably, to relocate such equipment at the Landlord's
cost. The Tenant shall be solely responsible for the cost of any direct increase
in Operating Expenses for the Building attributable to the maintenance and use
of such equipment; such costs shall be deemed to be payable by the Tenant to the
Landlord as Additional Rent and such costs shall not be included in the annual
cap on increases in Operating Expenses set out herein.
3.g The Landlord shall provide to the Tenant, during the Term, exclusive use of
sixteen (16) parking spaces on a month to month basis at no charge to the
Tenant. The parking spaces are located immediately behind the Building and
situate upon lands which are leased by the Landlord from the City of Vancouver
on a month to month basis. The Landlord shall use its best efforts to comply
with the terms of its lease with the City of Vancouver during the Term, however
should the City terminate its lease with the Landlord prior to the expiry of the
Term, the Landlord's obligations under this Section 3.7 shall cease and be of no
further force and effect.
<PAGE>
3.h The Tenant shall keep the Leased Premises in good repair throughout the
Term, reasonable wear and tear excepted, and shall give to the Landlord
immediate notice of any material defect in water, gas or other pipes or
fixtures, heating apparatus, machinery, telephone, electric or other wires or
fixtures.
3.i If the Tenant refuses or neglects to repair properly as required hereunder
and to the reasonable satisfaction of the Landlord within ten days of written
notice from the Landlord and with no notice in the event of emergency, the
Landlord may make such repairs without liability to the Tenant (excepting the
Landlord's negligence) for any loss or damage that may accrue to the Tenant's
fixtures or other property or to the Tenant's business by reason thereof, and
upon completion thereof, the Tenant shall pay to the Landlord, as Additional
Rent, the Landlord's actual reasonable costs in the circumstances plus ten
percent (10%) for making such repairs, forthwith upon presentation of a bill
therefor.
3.j The Tenant shall erect, place, use or keep in or upon the Leased Premises
only such awnings, projections, signs, advertisements as are first approved in
writing by the Landlord not to be unreasonably withheld or delayed, and upon the
expiration or sooner determination of the Term will remove the same at the
request of the Landlord. Provided however that the Landlord agrees to provide
sole building signage for the Tenant, including lobby and floor directory
signage, in locations which are mutually acceptable to the Landlord and the
Tenant, acting reasonably and all such signage, with the exception of signage
displaying the address of the Building, shall be paid for from the Tenant
Improvement Allowance and shall be subject to the approval of the City of
Vancouver and such other applicable municipal authorities.
3.k The Tenant shall have the right to name the Building "Seagate Software
Building" or such other name as the Tenant shall choose in keeping with its
corporate identity.
3.l The Tenant shall not bring into or upon the Leased Premises any safe,
motor, machinery or other heavy articles without the prior written consent of
the Landlord such consent not to be unreasonably withheld or delayed and shall
immediately make good any damage done to any part of the Building or Leased
Premises by bringing in or taking away such articles.
3.m The Tenant shall provide receptacles for refuse and rubbish of all
kinds, shall attend to the removal of the same from the Leased Premises at
regular intervals, shall not keep or leave any boxes, packing material or
rubbish of any kind in or near the Leased Premises or any passages connected
with the Leased Premises and shall keep clean and free from any rubbish, ice or
snow all walks, passages, yards and alleys adjacent to the Leased Premises.
3.n The Tenant shall not do or omit to do or permit to be done anything upon or
in respect of the Leased Premises, the doing or omission of which (as the case
may be) may
<PAGE>
increase the hazard of fire or liability of any kind or which may increase the
premium or invalidate the policy of any insurance required to be maintained
hereunder. The cost of any increase in any policy of insurance required to be
maintained by the Landlord hereunder attributable to the Tenant shall be the
sole responsibility of the Tenant and the Tenant shall pay to the Landlord, as
Additional Rent, the amount by which such insurance premiums shall be so
increased.
3.o At the expiration of the Term or any renewal thereof, and only if the
Tenant is not in material default under any of the terms of this Lease, the
Tenant shall have the right, but not the obligation, to remove from the Leased
Premises any leasehold improvements which were installed with the approval of
the Landlord. The Tenant shall in such removal do no damage to the Leased
Premises or in such case shall immediately make good any damage which may be
occasioned to the Leased Premises and restore the same to such condition as
required by the provisions of this Lease. Written notice must be given by the
Tenant to the Landlord of the items which the Tenant is electing to remove upon
the expiry of the Term or any renewal thereof and such removal must be completed
within thirty (30) business days of the expiry of the Term or any renewal
thereof.
3.p Notwithstanding anything else provided herein, the Landlord shall have the
right at all reasonable times and from time to time, to enter the Leased
Premises upon reasonable notice to the Tenant identifying the nature and scope
of the work to be performed, except in cases of an emergency or perceived
emergency when no notice shall be required to be given to the Tenant, for the
purposes of making such inspections, repairs, alterations, and improvements as
the Landlord may be required to make by law and for purposes of the Landlord
carrying out its obligations hereunder without compensation or responsibility to
the Tenant and for such purposes, if necessary, to enter into, pass through,
work upon and attach scaffolds and other temporary structures to the Leased
Premises. Provided that the Landlord shall use reasonable efforts in exercising
its rights under this Section so as to minimize any interference with the
Tenant's business and use of the Leased Premises, the Tenant shall not have any
right to object to nor any right to any claim of damages or any reduction or
abatement of Rent in respect of the exercise of any of the Landlord's rights
under this Section. It is further understood that the exercise by the Landlord
of its rights under this Section shall not be deemed to be a breach of any
covenant of quiet enjoyment or any other covenant contained in this Lease.
<PAGE>
ARTICLE 4.
LIENS
4.a The Tenant covenants to keep the Leased Premises free and clear of any and
all builders', materialmen's, workmens's and other liens and claims of any kind
whatsoever, to at all times promptly and fully pay and discharge any and all
claims upon which any such lien is or could be based to the extent such claims
are proper, and to save and hold the Landlord and the Leased Premises harmless
of and from any and all such liens and claims of liens and suits or other
proceedings pertaining thereto unless directly or indirectly caused by or
attributable to the Landlord unless the Landlord is retained by the Tenant to
complete its leasehold improvements.
4.b The Tenant shall give notice to its contractors, subcontractors,
materialmen, and workmen that services or materials are provided to the Tenant
at its request and for its sole benefit and that the Landlord has not requested
the improvements and will not be responsible for them. The Tenant covenants and
agrees to post and keep posted notices pursuant to the provisions of the
Builders' Lien Act of British Columbia or any legislation in substitution
therefor.
4.c The Tenant hereby covenants and agrees to execute and deliver to the
Landlord priority agreements in a form satisfactory to each of the Landlord and
the Tenant, acting reasonably, giving priority to the Landlord over the Tenant's
lenders who require a security interest in fixtures or goods installed at the
Leased Premises.
ARTICLE 5.
ASSIGNMENT AND SUBLETTING
5.a Except as permitted herein, the Tenant shall not, without the prior consent
of the Landlord such consent not to be unreasonably withheld or delayed, assign
this Lease or any interest herein, sublet all or any part of the Leased
Premises, permit the use or occupancy of the Leased Premises by any Person other
than the Tenant, or hypothecate this Lease or any interest herein, except as
expressly permitted herein. The Parties agree that:
(i) any assignment or subletting or sharing of occupancy shall not
release the Tenant and Guarantor from the performance of each and
every of the Tenant's and Guarantor's obligations and covenants as
contained in this Lease and the Tenant and Guarantor shall provide
the Landlord with a copy of every such assignment, subletting or
parting with or sharing of possession, duly executed by all parties
thereto, at the time of the request for the Landlord's consent
thereto;
(ii) where the Landlord has consented to a subletting or sharing of
occupancy, in accordance with this Article 5, and the Rent payable by
the sublessee or occupant to the Tenant is greater than that payable
by the Tenant to the Landlord hereunder, then the Tenant shall pay to
the Landlord, as Additional Rent, one-half of the difference between
the rent payable by the sublessee or occupant to
<PAGE>
the Tenant and the Rent payable by the Tenant to the Landlord
hereunder after deducting lease commission, advertising and re-
fixturing expenses associated with the sublease; and
(iii) every assignment or sublease or tenancy or occupancy agreement shall
contain a covenant by the assignee, sublessee, tenant or occupier, as
the case may be, directly with the Landlord, to observe and perform all
of the covenants and agreements contained in this Lease on the part of
the Tenant to be observed and performed, including without limitation,
a covenant not to further assign or sublet or part with or share the
possession of the Leased Premises or any part thereof at any time
without such covenant and consent as aforesaid.
Provided however that:
(iv) any change or transfer in ownership of the rights granted under this
Lease by amalgamation, merger, wind-up or corporate reorganization; or
(v) the assignment, sublease or sharing of occupancy of all or a portion of
the Leased Premises by a subsidiary, affiliate or successor of the
Tenant (as defined in the Canada Business Corporations Act)
shall not be deemed to be an assignment or sublease pursuant to the
provisions of this Article 5.
ARTICLE 6.
SUBORDINATION, ATTORNMENT, REGISTRATION, AND CERTIFICATES
6.a The rights of the Landlord under this Lease may be mortgaged, charged,
transferred, or assigned to a purchaser or purchasers, or to a mortgagee or
trustee for bond holders, and in the event of a sale or of default by the
Landlord under any mortgage, trust deed, or trust indenture and the purchaser,
mortgagee, or trustee, as the case may be, duly entering into possession of the
Leased Premises, the Tenant agrees to attorn to and become the tenant of such
purchaser or purchasers, mortgagee, or trustee under the terms of this Lease
subject to Section 6.3.
6.b If required by any mortgagee or the holder of any trust deed or trust
indenture, this Lease and all rights of the Tenant hereunder shall be subject
and subordinate to all mortgages, trust deeds, or trust indentures hereafter
existing which may hereafter affect the Building and to all renewals,
modifications, consolidations, replacements, and extensions thereof; provided
that the Tenant, whenever required by any mortgagee (including any trustee under
a trust deed or trust indenture), shall attorn to such mortgagee as the tenant
upon all of the terms of this Lease, subject to Section 6.3. The Tenant agrees
to execute and deliver
<PAGE>
promptly whenever requested by the Landlord or by such mortgagee an instrument
of subordination or attornment, as the case may be, as may be required of it,
and if the Tenant fails to do so within seven days after receiving the
instrument, the Tenant hereby irrevocably and conclusively authorizes the
Landlord to complete, execute, and deliver the instrument for, on behalf of, in
the name of, and as agent of, the Tenant.
6.c The Tenant will not be required to attorn to a purchaser, mortgagee or
trustee unless such third party enters into a non-disturbance agreement with the
Tenant in a form satisfactory to the Tenant, acting reasonably.
6.d The Landlord agrees to provide this Lease to the Tenant in registrable
form with registration to be at the cost of the Tenant. The Tenant shall
provide to the Landlord a priority agreement in favour of its lenders in a form
satisfactory to each of the Tenant and the Landlord, acting reasonably.
6.e The Tenant agrees with the Landlord that the Tenant shall promptly
whenever requested by the Landlord from time to time execute and deliver to the
Landlord and, if required by the Landlord, to any mortgagee (including any
trustee under a trust deed or trust indenture) or prospective purchaser (as
designated by the Landlord) a certificate in writing as to the status of this
Lease at that time, including as to whether it is in full force and effect, is
modified or unmodified, confirming the rental payable hereunder and the state of
the accounts between the Landlord and Tenant, the existence or non-existence of
defaults, and any other matters pertaining to this Lease as to which the
Landlord shall request a certificate. If the Tenant fails to do so within seven
days after the Tenant receives the form of certificate, the Tenant hereby
irrevocably and conclusively authorizes the Landlord to complete, execute, and
deliver the certificate for, on behalf of, in the name of, and as agent of, the
Tenant.
6.f In the event of the sale by the Landlord of the Building or a portion
thereof containing the Leased Premises or the assignment by the Landlord of this
Lease or any interest of the Landlord hereunder, and to the extent that such
purchaser or assignee has assumed the covenants and obligations of the Landlord
hereunder, the Landlord shall, without further written agreement, be freed and
relieved of liability upon such covenants and obligations.
ARTICLE 7.
INSURANCE/LIABILITY
7.a The Landlord shall take out and keep in force during the Term, all risk
property loss insurance in respect of fire and such other perils as are from
time to time defined in the usual extended coverage endorsement covering the
Building but in any event for the full replacement cost thereof and such other
insurance as the Landlord shall deem necessary and, within five (5) days of
receiving the invoice for the same, the Tenant shall pay to the Landlord, as
Additional Rent, the Landlord's costs for such insurance.
<PAGE>
7.b The Tenant shall at it sole cost and expense take out and keep in force
during the Term:
(i) all risk property loss insurance in respect of fire and such other
perils as are from time to time defined in the usual extended
coverage endorsement covering the Tenant's trade fixtures and the
furniture and equipment of the Tenant and all leasehold improvements
of the Tenant on, in or at the Leased Premises;
(ii) general public liability insurance under a commercial form, including
tenant's legal liability, contractual liability and non-automobile
liability, against claims for personal and/or bodily injury and for
death and/or damage to property, upon or about the Leased Premises,
such insurance to afford protection for a minimum of Two Million
($2,000,000.00) Dollars per occurrence;
(iii) business interruption insurance; and
(iv) such other insurance as may be or may become customary for tenants of
property to carry in respect of loss of or damage to similar
properties or the carrying on of business therein or the making of
repairs or alterations thereto or liability arising therefrom and/or
for damage or injury to person or persons.
7.c All insurance required to be maintained by the Tenant hereunder shall
be in amounts and on terms satisfactory to the Landlord, acting reasonably.
Such insurance shall be evidenced by certificates delivered to the Landlord,
upon request, and shall provide that such insurers shall provide to the Landlord
thirty (30) days prior written notice of cancellation or material alteration of
any such policies. Each policy shall name the Landlord as an additional insured
except for coverage for the Tenant's trade fixtures and furnishings and
equipment, but including coverage for leasehold improvements in respect of the
Landlord's insurable interest therein, shall contain a waiver of subrogation for
property claims against the Landlord and those for whom it is responsible in
law, shall protect and indemnify both the Landlord and the Tenant and shall
contain a cross-liability clause in respect of the Landlord and the Tenant.
Each policy written on behalf of the Tenant shall provide that where a loss
occurs and there has been a breach of a condition relating to matter happening
before the loss, which breach would otherwise disentitle the insured to recover
if the insured establishes that the loss was not caused or contributed to by any
breach of a condition, any such act or breach of a condition of the policy by
way of the parties insured thereby shall not prevent recovery by any party
thereby insured who is innocent of such act or breach.
7.d The Tenant shall furnish to the Landlord certificates or, if required
by the Landlord, certified copies of the policies (signed by the insurers) of
insurance from time to time required to be effected by the Tenant and evidence
acceptable to the Landlord of their
<PAGE>
continuation in force.
7.e The Landlord, its agents, servants and employees shall not be liable or
responsible in any way for:
(i) any personal or consequential injury of any nature whatsoever that
may be suffered or sustained by the Tenant or any employee, agent or
invitee of the Tenant or any other person who may be upon the Leased
Premises; or
(ii) any loss of or damage or injury, howsoever caused, to any property
belonging to the Tenant or any employee, agent or invitee of the
Tenant or any other person who may be upon the Leased Premises while
such property is on the Leased Premises; or
(iii) any defect in, other than structural and/or Landlord's Work outlined
in Schedule A subject to the time limitations described in Section
3.3(a), or change of conditions affecting the Leased Premises,
unless caused by the negligence or wilful act of the Landlord or any person for
whom the Landlord is at law responsible.
7.f Save for the negligence or wilful acts of the Landlord, its employees
and those persons authorized by the Landlord to be on the Leased Premises, the
Tenant shall indemnify, defend and save harmless the Landlord against all
actions, suits, claims, damages, costs and liabilities arising out of or as a
result of:
(i) any breach, violation, or non-performance of the terms, covenants
and obligations on the part of the Tenant set out in this Lease;
(ii) any damage to the Leased Premises occasioned by the use of the
Leased Premises by the Tenant, its servants, agents, employees or
contractors; or
(iii) any injury to or death of any person resulting from the use of the
Leased Premises by the Tenant, its servants, agents, employees or
contractors.
7.g Save for the negligence or wilful acts of the Tenant, its employees and
those persons authorized by the Tenant to be on the Leased Premises, the
Landlord shall indemnify, defend and save harmless the Tenant against all
actions, suits, claims, damages, costs and liabilities arising out of or as a
result of:
(i) any breach, violation, or non-performance of the terms, covenants
and obligations on the part of the Landlord set out in this Lease;
<PAGE>
(ii) any damage to the Leased Premises occasioned by the use of the
Leased Premises by the Landlord for the limited purposes permitted
herein, its servants, agents, employees or contractors;
(iii) any injury to or death of any person resulting from the use of the
Leased Premises by the Landlord for the limited purposes permitted
herein, its servants, agents, employees or contractors; or
(iv) any construction defects for which the Landlord is responsible
(subject to the time limitations expressed herein).
7.h The Tenant shall:
(i) not use or permit to be used all or any part of the Leased Premises
for the sale, storage, manufacture, disposal, use, or any other
dealing with any Hazardous Substances, without the prior written
consent of the Landlord, which may be unreasonably withheld;
(ii) strictly comply, and cause any person for whom it is in law
responsible to comply, with all Environmental Laws regarding the use
and occupancy of the Leased Premises;
(iii) promptly provide to the Landlord a copy of any environmental site
assessment, audit, or report relating to the Leased Premises
conducted by or for the Tenant at any time;
(iv) promptly notify the Landlord in writing of any release of a
Hazardous Substance or Hazardous Substances or any other occurrence
or condition at the Leased Premises which would contaminate the
Leased Premises or subject the Landlord or the Tenant to any fines,
penalties, orders, investigations, or proceedings under
Environmental Laws;
(v) on the expiry or earlier termination of this Lease, or at any time
if requested by the Landlord or required by any governmental
authority pursuant to Environmental Laws, remove from the Leased
Premises all Hazardous Substances and remediate any contamination of
the Leased Premises or any adjacent property resulting from
Hazardous Substances, in either case brought onto, used at, or
released from the Leased Premises by the Tenant or any person for
whom it is in law responsible. The Tenant shall perform these
obligations promptly at its own cost and in accordance with
Environmental Laws. All such Hazardous Substances shall remain the
property of the Tenant, notwithstanding any rule of law or other
provision of this Lease to the contrary and
<PAGE>
notwithstanding the degree of their affixation to the Leased
Premises;
(vi) indemnify the Landlord and its directors, officers, employees,
agents, successors, and assigns from any and all liabilities,
actions, damages, claims, losses, costs, fines, penalties, and
expenses whatsoever (including all legal and consultants' fees and
expenses and the cost of remediation of the Leased Premises) arising
from or in connection with:
(1) any breach of or non-compliance with the provisions of this
paragraph by the Tenant; or
(2) any release or alleged release of any Hazardous Substance or
Hazardous Substances at or from the Leased Premises during the
Term or any renewal thereof related to or as a result of the
use and occupation of the Leased Premises or any act or
omission of the Tenant or any person for whom it is in law
responsible.
The obligations of the Tenant under this Section 7.8 shall survive the
expiry or earlier termination of this Lease.
7.i The Landlord represents and warrants to the Tenant, to the best of its
knowledge without having made due inquiry, that the Leased Premises and the
Lands do not contain Hazardous Substances, and:
(i) have not been used for the sale, storage, manufacture, disposal,
use, or any other dealing with any Hazardous Substances;
(ii) comply in material respects with all applicable federal, provincial
and municipal environmental, health and safety statutes and
regulations; and
(iii) do not contain PCB's, urea formaldehyde or asbestos.
The Landlord shall indemnify the Tenant and its directors, officers, employees,
agents, successors, and assigns from any and all liabilities, actions, damages,
claims, losses, costs, fines, penalties, and expenses whatsoever (including all
legal and consultants' fees and expenses and the cost of remediation of the
Leased Premises) arising from or in connection any breach of the representations
and warranties contained in this paragraph and from the release or placement of
any Hazardous Substances on the Lands prior to the Commencement Date. The
obligations of the Landlord under this Section 7.9 shall survive the expiry or
earlier termination of this Lease.
ARTICLE 8.
<PAGE>
DAMAGE AND DESTRUCTION
8.a Subject to Section 8.2, if during the Term, the Leased Premises or any
improvements or part thereof shall be damaged or destroyed by fire or other
casualty, the damage to the Leased Premises or the said improvements shall be
repaired or replaced by the Landlord with reasonable diligence at its sole cost
and expense, provided that the Tenant shall not have any right to any reduction
or abatement of Rent in respect of the Tenant's carrying out its obligations
under this Section.
8.b If the Leased Premises are damaged or destroyed by any cause
whatsoever, and if, in the opinion of the Landlord's independent professional
architect or engineer, acting reasonably, the Leased Premises cannot be rebuilt
or made fit for the purposes of the Tenant within one hundred and eighty (180)
days of the damage or destruction, (such assessment to be made and delivered to
the Tenant within thirty (30) days) of such damage or destruction, then either
the Landlord or the Tenant may, at its option, determine this Lease by giving to
the other party, within ninety (90) days of such damage or destruction, notice
of termination, and thereupon all Rent and any other payments for which the
Tenant is liable under this Lease shall be apportioned and paid to the date of
such damage and the Tenant shall immediately deliver up possession of the Leased
Premises to the Landlord.
ARTICLE 9.
DEFAULT
9.a If the Tenant:
(i) fails or neglects to make any payment due to the Landlord or any other
person hereunder within five (5) business days after the Landlord
gives written notice that the payment is overdue; or
(ii) fails or neglects to cure any default of any of the other terms,
covenants, agreements or conditions herein on its part to be observed,
kept or performed, within ten (10) business days after the Landlord
gives written notice of such default,
then in each such event, the Landlord may, by written notice to the Tenant,
forthwith terminate this Lease without entry upon the Leased Premises, and all
rights and interests of the Tenant under this Lease and all rights of any
persons claiming by, through or under the Tenant, shall thereupon cease and all
Rent then due shall forthwith become due and be payable to the Landlord.
9.b Notwithstanding the ten (10) business day time period set out in
Subsection 9.1(b):
<PAGE>
(i) whenever the health or safety of any person or property whether on or
off the Leased Premises is in jeopardy or the Landlord's or Tenant's
interest in the Leased Premises or any portion thereof is in jeopardy
or made liable to any lien or charge, the Landlord may in the notice
of default given pursuant to Subsection 9.1(b) require that the
default be cured within any period less than ten (10) business days
and in such case Subsection 9.1(b) shall be deemed to refer to such
shorter period; and
(ii) if a default in respect of which notice is given pursuant to
Subsection 9.1(b) cannot with due diligence be cured within ten (10)
business days or such shorter period as the Landlord may have
specified in the notice (the onus of proving the same being upon the
Tenant), and the Tenant:
(1) within five (5) business days after receipt of such notice,
notifies the Landlord of such inability and of the schedule for
curing the default which the Tenant proposes to follow,
including an estimated completion date;
(2) immediately commences and diligently carries out to completion
all acts necessary to cure such default; and
(3) keeps the Landlord informed of each delay anticipated or
experienced by the Tenant which is likely to further delay the
cure of such default,
then the Landlord shall refrain from exercising its rights under
Section 9.1 in respect of such default.
9.c The Tenant covenants that if:
(i) any proceedings under the Bankruptcy Act of Canada or any other
statute of similar purport be commenced against the Tenant or an
assignee of the Lease; or
(ii) the Tenant or any assignee of the Lease is adjudged insolvent or
makes an assignment for the benefit of its creditors or otherwise
takes the benefit of any statute for the benefit of insolvent
debtors; or
(iii) a writ of attachment or execution is levied on the leasehold estate
hereby created or any property of the Tenant or any assignee of the
Lease upon the Leased Premises and is not released or satisfied
within fourteen (14) days thereafter; or
(iv) a receiver, receiver-manager, trustee, sequestrator or liquidator is
appointed in
<PAGE>
any proceeding or action with authority to take possession or
control of the leasehold interest of the Tenant or any assignee of
the Lease, the Leased Premises or any portion thereof or the
business conducted thereon by the Tenant or any assignee of the
Lease, and such appointee is not discharged within a period of
thirty (30) days after its appointment; or
(v) any sale, transfer, assignment, sublease or parting of possession
occurs which is contrary to Article 5 herein; or
(vi) any resolution is passed or other step taken for the winding-up,
liquidation or other termination of the corporate existence of the
Tenant,
then each such event shall be deemed to constitute a breach of this Lease by the
Tenant and shall, at the election of the Landlord, by written notice, but
without entry or other action by the Landlord, entitle the Landlord to terminate
this Lease immediately upon the sending of such notice and all rights and
interests of the Tenant under this Lease and all rights of any persons claiming
by, through or under the Tenant, shall thereupon cease and the full amount of
the current months' and next ensuing three (3) months' Rent shall forthwith
become due and be payable to the Landlord.
ARTICLE 10.
TERMINATION, REMEDIES, ETC.
10.a When this Lease expires, is terminated or forfeited or when a surrender
of this Lease is accepted, the Tenant shall immediately:
(i) execute and deliver to the Landlord a deed or other document in form
satisfactory to the Landlord, acting reasonably, conveying and
surrendering to the Landlord all right, title and interests of the
Tenant to the Leased Premises and all other improvements thereon; and
(ii) re-deliver to the Landlord vacant possession of the Leased Premises in
a neat and clean condition, in accordance with the terms outlined in
Section 3.15, with improvements not required to be removed therefrom,
in the same condition in which they are required to be maintained
hereunder,
and the Landlord, without further notice to the Tenant, shall have the right to
immediately enter the Leased Premises and take possession thereof with or
without process of law, to remove all personal property therefrom and all
persons occupying the Leased Premises or to use all necessary force therefor,
and in all respects to take the actual, full and exclusive possession of the
Leased Premises as of the Landlord's original estate, without incurring any
liability to the Tenant or to any person occupying or using the Leased Premises
for any damage
<PAGE>
caused or sustained by reason of such termination, forfeiture, surrender, entry,
removal, use or taking, subject to Section 3.15.
10.b Notwithstanding termination or forfeiture of this Lease, the Tenant
shall be liable to the Landlord for the amount of Additional Rent, Taxes and
other charges and interest thereon payable by the Tenant for the balance of the
Term as if such termination or forfeiture had not occurred, less the actual
payments on account of such charges and interest hereafter received by the
Landlord and applicable to the balance of the Term following deduction by the
Landlord of costs of re-entry, making the Leased Premises leasable and renting
the same and the Landlord shall make commercially reasonable efforts to mitigate
the losses.
10.c The Tenant expressly waives service of any notice of intention of the
Landlord to re-enter the Leased Premises following termination, forfeiture or
surrender or to institute proceedings for repossession thereof.
10.d Should the Landlord terminate this Lease, the Landlord may make such
alterations and repairs as may be necessary in order to relet the Leased
Premises and may relet, as agent of the Tenant, the Leased Premises or any part
thereof for such term or terms (which may be for a term extending beyond the
Term of this Lease) and at such rent and upon such other terms and conditions as
the Landlord in its sole and reasonable discretion may deem advisable. Upon
each such reletting all rent received by the Landlord from such reletting for
the unexpired portion of the Term shall be applied:
(i) first, to the payment of any indebtedness other than Additional Rent
due hereunder from the Tenant to the Landlord;
(ii) second, to the payment of any costs and expenses of such reletting,
including brokerage fees and solicitor's fees and of costs of such
alterations and repairs;
(iii) third, to the payment of Additional Rent due and unpaid hereunder;
and
(iv) the residue, if any, shall be held by the Landlord and applied in
payment of future Additional Rent as the same may become due and
payable hereunder.
If such payments received from such reletting during any month are less than
that to be paid during that month by the Tenant hereunder, the Tenant shall pay
such deficiency to the Landlord. Such deficiency shall be calculated and paid
monthly. No such re-entry or taking possession of the Leased Premises by the
Landlord shall be construed as an election on its part to terminate this Lease
unless a written notice of such intention is given to the Tenant.
Notwithstanding any such reletting without termination, the Landlord may at any
time thereafter elect to terminate this Lease for such previous breach.
<PAGE>
10.e Without prejudice to any other remedy of the Landlord, any money
payable by the Tenant to the Landlord hereunder, including Additional Rent,
shall be paid together with interest at two (2%) percent per annum above the
Prime Rate of interest thereon calculated daily and compounded monthly from the
date the said money becomes payable by the Tenant to the Landlord as Additional
Rent until paid and shall be collectible as rent.
10.f If the Landlord shall consider it desirable to retain the services of a
lawyer or any other person reasonably necessary for the purpose of assisting the
Landlord in enforcing any of its rights hereunder in the event of default on the
part of the Tenant, it shall be entitled to collect from the Tenant the cost of
all such services as if the same were Additional Rent.
10.g If the Tenant fails to observe or perform any of its covenants or
obligations hereunder, then notwithstanding that the Landlord may have given the
Tenant notice of such default or that the Tenant may be purporting to cure such
default, the Landlord may, but shall not be required to, cure the default and
may enter upon the Leased Premises for such purpose. The Landlord shall not be
liable or in any way responsible for any loss, expense, inconvenience, annoyance
or damage resulting to the Tenant or any other person on account thereof. No
action taken by the Landlord pursuant to this Section 10.7 shall be, or be
construed to be, a termination of the Lease, a waiver of any default by the
Tenant, or as a waiver of any other rights of the Landlord hereunder. Provided
that if the Landlord shall suffer or incur any damage, loss or expense by reason
of any failure of the Tenant to observe or perform any of its covenants or
obligations hereunder, then the Landlord shall have the right to collect the
cost or amount of any such damage, loss or expense from the Tenant as Additional
Rent, payable as provided herein.
10.h The remedies of the Landlord set forth in this Lease are in addition to
those permitted or conferred by law and the Landlord may exercise all of its
rights and adopt all such remedies separately or cumulatively as it sees fit.
No such remedy shall be deemed to be exclusive of any other remedy or to
preclude exercise of any right.
10.i If the Landlord, being entitled so to do, levies distress against the
goods and chattels of the Tenant, such force as may be deemed necessary for the
purpose and for gaining admission to the Leased Premises may be used without the
Landlord being liable for any action in respect thereof or for any loss or
damage occasioned thereby and the Tenant hereby expressly releases the Landlord,
its employees and agents from all action, proceedings, claims or demands
whatsoever for or on account or in respect of any such forcible entry or any
loss or damage sustained by the Tenant in connection therewith.
10.j If the Tenant does not exercise the Option to Renew provided in Article
12 below and notifies the Landlord in writing, at least 6 months prior to the
end of the Term, or renewal term, as the case may be, of the date that the
Tenant shall vacate the Leased Premises, then the Landlord shall allow the
Tenant to continue to occupy the Leased Premises for a
<PAGE>
period of up to six (6) months after the expiry of the Term or renewal term, as
the case may be and the tenancy thereby created shall be deemed to be a monthly
tenancy at a monthly rent equal to 115% of the Basic Rent payable during the
last month of the Term or renewal term, as the case may be and the Tenant shall
vacate the Leased Premises on the date specified in such notice. If the Tenant
does not so notify the Landlord, as aforesaid, then, subject to the provisions
of this Lease, the Tenant shall vacate the Leased Premises at the expiration of
the Term or renewal term, as the case may be.
10.k The Landlord, its servants, agents, contractors and representatives
shall be entitled at all reasonable times upon 24 hours notice to enter upon the
Leased Premises for any of the following purposes:
(i) inspecting same;
(ii) inspecting the performance by the Tenant of the terms, covenants,
agreements and conditions of this Lease;
(iii) carrying out any obligations of the Tenant which the Tenant has
failed to observe or perform under this Lease;
(iv) posting and keeping posted thereon notices of non-responsibility for
any construction, alteration or repair thereof, as required or
permitted by any law;
(v) exhibiting the Leased Premises to prospective lessees or purchasers;
or
(vi) any other reasonable purpose.
10.l The Tenant shall allow notices "To Let" to be put and remain on the
Leased Premises in a conspicuous position during the six (6) months prior to the
expiry of the Lease only if the Tenant does not exercise its option(s) to renew
or in the event that the Tenant exercises its reduction option as provided in
Section 13.1 of this Lease during the Term or renewal term, as the case may be,
and shall allow prospective lessees or purchasers to enter and inspect the
Leased Premises during the said period with 24 hours notice. The Landlord
agrees that any such notices will be immediately removed from the Leased
Premises after the Landlord enters into a binding commitment to lease with a
third party.
ARTICLE 11.
NOTICE
11.a Any notice to be given under this Lease must be given in writing and
will be sufficiently given by delivering to the Landlord or the Guarantor at the
address written on page 1 of this Lease or to the Tenant if addressed to the
Tenant by registered mail. Any such notice
<PAGE>
will be deemed to have been given or made on the date on which it was delivered.
Any Party may change its address for service from time to time by notice in
accordance with the foregoing.
ARTICLE 12.
OPTION TO RENEW
12.a If the Tenant is not in material default under any of the terms of the
Lease, the Tenant, upon giving written notice to the Landlord not later than six
(6) months prior to the end of the Term, shall have the right to renew this
Lease for two (2) further terms of five (5) years each upon the same terms and
conditions as contained in this Lease, save and except:
(i) the calculation of the Rentable Area of the Leased Premises should any
part of the Leased Premises be surrendered during the Term or renewal
term, as the case may be, in accordance with Article 13 herein or
expanded;
(ii) Basic Rent and any further right of renewal.
The Basic Rent payable during such renewal term shall be at the then current
market rental rates for comparable unimproved Leased Premises, or failing
agreement by the Parties on such market rental rate within sixty (60) days prior
to the expiry of the Term, by arbitration pursuant to the Commercial Arbitration
Act of British Columbia, as amended from time to time, or any like statute in
effect from time to time and the decision of such arbitrator(s) shall be final
and binding upon the Parties. The cost of such arbitration shall be borne
equally by the Parties.
ARTICLE 13.
OPTION TO REDUCE
13.a At any time from and after the commencement of the sixth year of the
Term, the Tenant, upon giving at least six (6) months prior written notice to
the Landlord, shall have the right to reduce the Leased Premises by surrendering
unto the Landlord the fourth and fifth floors of the Building, provided that:
(i) the Tenant shall be responsible for all costs and expenses associated
with converting the Building from single tenant occupancy to multi-
tenant occupancy as required by the City of Vancouver, including
without limitation, providing elevator access and a lobby;
(ii) the Tenant shall be required to repay, in full immediately upon the
date of surrender, the unamortized Tenant Improvement Allowance
attributable to the
<PAGE>
area so surrendered (calculated using a discount rate of 8%) together
with a penalty of $81,258 plus 3 months' Operating Expenses
attributable to the area so surrendered; and
(iii) the Tenant shall execute and deliver to the Landlord all such
amendments to this Lease and further documents to reflect the
surrender contemplated by this Article 13 and the amendment of this
Lease to reflect the multi-tenant occupancy of the Building.
ARTICLE 14.
GUARANTY
--------
14.a In consideration of the Landlord leasing the Leased Premises to the
Tenant and the sum of $1.00 now paid by the Landlord to the Guarantor and other
good and valuable consideration (the receipt and sufficiency of which is hereby
acknowledged by the Guarantor), the Guarantor unconditionally agrees to and
covenants with the Landlord to guarantee to the Landlord the full and prompt
payment of all sums, including but not limited to, Rent, Additional Rent and any
and all other sums and charges payable by the Tenant to the Landlord under the
Lease, and the full performance and observance of all of the covenants, terms,
conditions and agreements therein provided to be performed and observed by the
Tenant.
ARTICLE 15.
INTERPRETATION/GENERAL
15.a In the event the Landlord sells, transfers or assigns its interest in
the Leased Premises or any part thereof to a bona fide third party at arm's
length, then so long as the purchaser, transferee or assignee agrees with the
Tenant to assume, observe and perform all of the covenants, conditions and
agreements on the part of the Landlord to be observed and performed in this
Lease in respect of all or the part of the Lands so affected, the Landlord shall
no longer have any duties, covenants and obligations under this Lease and
consequently shall not be liable to the Tenant for the performance of any such
duties, covenants and obligations.
15.b If the Leased Premises or any part thereof are expropriated or
condemned at any time during the Term, the Landlord shall have no liability to
the Tenant for the Landlord's inability to fulfil any of its covenants herein,
but in each such event the Landlord and the Tenant may seek compensation
separately from the expropriating authority and shall co-operate in seeking such
compensation, and if a joint award of compensation is made it shall be divided
as agreed between the Landlord and the tenant and failing agreement either party
may refer to matter to arbitration.
15.c Time is expressly declared to be of the essence of this Lease and of
each and every term, covenant, agreement, condition and provision hereof and
observance and performance thereof.
<PAGE>
15.d This Lease is made in accordance with the laws of the Province of
British Columbia and is to be construed and interpreted in accordance therewith.
Any action or proceeding arising concerning this Lease may (and if against the
Landlord, shall) be brought in the courts of the said Province and each of the
parties hereto submits and attorns to the jurisdiction of the Province of
British Columbia.
15.e The Tenant shall observe, abide by and comply with all federal,
provincial, municipal (and all other competent authorities) statutes, laws,
orders, regulations, by-laws, directions, rules and requirements, respecting the
use and occupation of the Leased Premises and the making of any repairs,
replacements, alterations, additions, changes or improvements on the Leased
Premises and shall observe, carry out and comply with any lawful order,
direction, request, requirement and/or notice of authority, commission,
department or officer or any insurance company carrying insurance on the Leased
Premises and to comply with any restrictions or covenants registered against the
title to the Leased Premises.
15.f The Article and Section headings in this Lease are for convenience only
and are not to be considered in the construction of this Lease or as in any way
limiting or amplifying the provisions hereof.
15.g All the obligations on the part of each of the Parties shall be
construed and read as if such obligations are covenants notwithstanding that the
term covenant is not used.
15.h The language in all parts of this Lease shall in all cases be construed
as a whole and not strictly for nor against either the Landlord or the Tenant.
15.i Whenever the context so requires, the neuter gender shall include the
masculine and the feminine, and the singular number shall include the plural,
and vice versa.
15.j No condoning, excusing or overlooking by the Landlord of any default,
breach or non-observance by the Tenant at any time or times in respect of any of
the Tenant's covenants and agreements as contained in this Lease and no
acceptance of Additional Rent or other monies payable by the terms of the Lease
by Tenant to the Landlord subsequent to any breach or default hereunder by the
Tenant of any of Tenant's covenants and agreements as contained in this Lease,
shall be taken to operate as a waiver or in any way defeat or affect the rights
of the Landlord under this Lease with respect to such breach or default and the
failure of Landlord from time to time to insist upon strict performance by
Tenant of the Tenant's agreements, terms, covenants and conditions contained in
this Lease shall not be deemed a waiver of any rights or remedies that the
Landlord may have.
15.k If any term, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be held or rendered
invalid, void unenforceable or
<PAGE>
illegal, it or its application shall be considered separate and severable from
this Lease to such extent and the remainder of this Lease, or the application of
such term, covenant or condition to persons or circumstances other than those as
to which it is held invalid, void, or unenforceable or illegal, shall not be
affected thereby and each terms, covenant or condition of this Lease shall be
valid and enforceable to the fullest extent permitted by law.
15.l Each of the Parties agrees to do all acts and sign such documents as
may be requested by any of the other Parties in order to give effect to the
terms and intentions expressed in this Lease.
15.m This Lease and the Schedules attached hereto and forming a part hereof
and the Offer to Lease which forms a part hereof, set forth all the covenants,
promises, agreements, conditions and understandings between the Landlord and the
Tenant concerning the Leased Premises and there are no covenants, promises,
agreements conditions or understandings, either oral or written, between them
other than which are herein set forth. Except as herein otherwise provided, no
subsequent alteration, amendment, change or addition to this Lease shall be
binding upon the Landlord or the Tenant unless in writing and signed by each of
them.
15.n This Lease shall enure to the benefit of and be binding upon and apply
to the successors and assigns of the Landlord and the successors, permitted
assigns, and permitted subtenants of the Tenant.
IN WITNESS WHEREOF the Landlord and the Tenant have executed this Lease
on Part 1 of the Form C - General Instrument attached hereto and the Guarantor
has executed this Lease in the space provided below.
SEAGATE TECHNOLOGY, INC.
Per: __________________________________________
Authorized Signatory
<PAGE>
SCHEDULE "A"
LANDLORD'S WORK
The Landlord shall provide, at its expense, to a building standard consistent
with professional office building by the times set out below:
1. Temporary services such as power, heat, water from the Fixturing
Commencement Date to the Commencement Date.
2. 24-hour security - by November 1, 1997.
24-hour security system - by February 1, 1998.
3. Sanitary facilities in existing locations - within 60 days of receipt by
the Landlord from the Tenant of final specifications and drawings.
4. The use of a designated elevator and supervision and co-ordination by the
Landlord and/or its consultants during the execution of the Tenant's Work.
5. T-Bar ceilings
- Pursuant to the Tenant's rights herein, the Tenant has approved the
removal of the T-Bar ceilings on the second to fifth floors and the 840
Cambie Street (north building) of the main floor - this is complete.
- No T-Bar system will be provided in the basement.
- T-Bar ceiling on the 848 Cambie Street section (south building) of the
main floor will be completed within 60 days of receipt by the Landlord
of written instructions from the Tenant.
6. Window coverings to be vertical venetian blinds (colour to be selected by
the Tenant) uniform throughout the Leased Premises - 60 days from the date
that the Tenant provides final requirements.
7. Smooth floors ready for floor coverings - by November 1, 1997 excluding the
basement. The smooth floors for the basement will be provided within 60
days of the execution of this Lease.
8. Electrical light fixtures to the Building standard. For the area of the
Premises where the T-Bar has been removed, the Landlord will provide the
Tenant with the Building standard light fixtures which were removed due to
the Tenant's decision to remove the
<PAGE>
T-Bar ceiling. Reinstallation of these fixtures will be at the cost of the
Tenant. For the area of the Premises where the T-Bar ceiling remains, Plans
to be submitted to the Landlord by the Tenant - to be completed by the
completion date of the Tenant's Improvements provided that final
specifications are provided to the Landlord at least 60 days prior to that
date.
9. Electrical panel and supply system ready for the Tenant's wiring - by
November 1, 1997.
10. Heating Ventilation and Air Conditioning system to the Leased Premises to
meet general design criterion for commercial buildings as established by
ASHRAE. For greater certainty, for the Leased Premises the capacity
requirement has been established at 1.75 tons per 1,000 square feet. The
distribution of the system will be at the cost of the Tenant. To be
completed within 60 days from receipt by the Landlord of final plans from
the Tenant.
11. Automatic sprinkler system to suit the layout after the Tenant's
improvements are in place. 60 days from when final plans are submitted to
the Landlord by the Tenant.
12. Tenant's name on directory in the Building lobby - 60 days from when
specifications are submitted to the Landlord by the Tenant.
13. Additional finished openings between the two buildings as requested by the
Tenant subject to Landlord approval and structural limitations, such
approval not to be unreasonably withheld - by November 1, 1997 unless
subsequent plans require additional finished openings are required in which
case this work will be done 60 days from when final plans are submitted to
the Landlord by the Tenant.
14. The conversion of one of the freight elevators to a passenger elevator - by
January 15, 1998.
15. Rooftop deck. The Landlord agrees to cooperate with the Tenant to provide
two access points including required finishes with one access point from
each of the northern and southern portions of the Building - to be
completed 60 days after the issuance of a building permit for construction
of the deck.
16. Selective demolition of existing leasehold improvements as requested by the
Tenant - by November 1, 1997.
<PAGE>
SCHEDULE "B"
TENANT'S WORK
1. The Tenant covenants and agrees with the Landlord that, for the purpose of
carrying out construction:
(a) save and except as provided in this Lease, the Landlord shall not be
obliged to allow the Tenant access to the Leased Premises until the
Tenant has submitted to the Landlord all necessary plans and drawings,
as may be required by the Landlord in its sole discretion, acting
reasonably, outlining the proposed Tenant's improvements and the
Landlord has provided the Tenant with its written approval of the
proposed Tenant's improvements such approval not to be unreasonably
withheld or delayed; and
(b) without limiting any other provision of this Lease, the Tenant will
construct the proposed Tenant's improvements in a first-class manner,
with reasonable diligence to completion and all improvements,
alterations, replacements or substitutions shall meet the requirements
of all applicable municipal, provincial, federal, and other
governmental authorities and of the fire insurance underwriters and
shall have all improvements approved by the Landlord, in writing.
2. The Landlord shall respond to the Tenant's request for approval of the
Tenant's improvements within three (3) business days of receipt of complete
design plans and drawings from the Tenant in accordance with this Schedule "B".
<PAGE>
SCHEDULE "C"
DESCRIPTION OF PLANNED RENOVATIONS
GENERAL COMMENTS ON THE BUILDING:
Ceiling Heights: Basement: approx. 7,500 square foot base high ceilings
(approx. 12' height)
Main Floor: approx. 11' ceiling height
4th Floor: approx. 10' ceiling height
5th Floor: approx. 11'
Floor Plates: approx. 17,600 square feet including washrooms, common areas
5th Floor is approx. 10,000 square feet
Heating, Ventilation
Air Conditioning: each floor has its own heat pumps providing floor by floor
control
Available Space: Today: 65,000 square feet
August, 1998-2001 26,000 square feet (upon 3 months notice)
Power: Building has a great deal of power (exact specs can be supplied upon
request)
Fibre Optics: now supplied to the Building
RENOVATION PLANS:
Paint bricks outside
Install glass on main floor area facing Cambie
Install canopy on main floor area facing Cambie
Install prominent entrance doors off Cambie streetfront for the Leased Premises
Repaint stucco on rear of Building
Put on new roof
Demolish existing leasehold improvements if desired by the Tenant
Remove drywall from wooden columns and covered up brick walls
Sandblast wooden columns and covered up brick walls
Install roof deck
Install skylights on top floor
Redo bathrooms on all floors
Install bathrooms on all floors
<PAGE>
Install bathrooms on basement level
Install glazing at the rear on the main and basement levels, but limited to a
level of work that would not cause a seismic upgrade
Existing T-bar ceiling will stay and currently hidden wooden ceiling beams will
remain hidden below the T-bar because exposing the ceiling would require
completely new heating, ventilation and air conditioning systems, sprinklers,
electrical system (dramatically increasing rental rates) and sandblasting the
ceiling is impractical with Safeway Canada Ltd. occupying the 26,000 square feet
of the Building presently occupied by it. The exposed brick walls and wooden
columns will provide a "funky" Yaletown style Building despite the T-bar
ceiling. Should the Tenant elect to make modifications to the existing T-bar
ceiling, such changes and any related building requirements necessitates by such
change shall be at Tenant's sole cost and expense.
<PAGE>
EXHIBIT 21.1
SEAGATE SOFTWARE, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ------------------ -------------
<S> <C>
Seagate Software Network & Storage Management Group, Inc. Delaware
Seagate Software Pty. Limited Australia
Seagate Software S.A. France
Seagate Software Limited United Kingdom
Seagate Software GmbH Germany
Seagate Software Information Management Group Ltd. United Kingdom
Seagate Software Information Management Group AB Sweden
Seagate Software Information Management Group BV Holland
Seagate Software (Hong Kong) Limited Hong Kong
Nippon Seagate Software KK. Japan
Seagate Software Information Management Group GmbH Germany
Seagate Software Pte. Ltd. Singapore
Seagate Software Information Management Group (US), Inc. Colorado
Seagate Software International Holdings Ltd. Cayman Islands BWI
Seagate Software GmbH Switzerland
Seagate Software Storage Management Group, Inc. Delaware
Seagate Software Information Management Group (Canada), Inc. British Columbia
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1996 Stock Option Plan of Seagate Software, Inc. of our
report dated July 17, 1998, with respect to the consolidated financial
statements and schedule of Seagate Software, Inc. included in the Annual Report
on Form 10-K for the year ended July 3, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
September 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JULY 3, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTHS ENDED JULY 3, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> JUL-03-1998
<CASH> 15,130
<SECURITIES> 0
<RECEIVABLES> 48,200
<ALLOWANCES> (1,636)
<INVENTORY> 1,117
<CURRENT-ASSETS> 65,285
<PP&E> 40,423
<DEPRECIATION> (23,547)
<TOTAL-ASSETS> 136,040
<CURRENT-LIABILITIES> 76,028
<BONDS> 0
0
55
<COMMON> 0
<OTHER-SE> 54,094
<TOTAL-LIABILITY-AND-EQUITY> 136,040
<SALES> 293,226
<TOTAL-REVENUES> 293,226
<CGS> 50,460
<TOTAL-COSTS> 50,460
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<INCOME-PRETAX> 6,895
<INCOME-TAX> 15,385
<INCOME-CONTINUING> (8,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,490)
<EPS-PRIMARY> (51.59)
<EPS-DILUTED> (51.59)
</TABLE>
