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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-22712
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2823068
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1600 PLYMOUTH STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 335-8000
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
October 30, 1998 was 47,511,402 shares.
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VERITAS SOFTWARE CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.................................. 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1998 and
1997........................................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997.................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 9
PART II: OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K............................ 30
SIGNATURE............................................................ 31
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 76,689 $ 75,629
Short-term investments.................................... 155,310 115,131
Accounts receivable, net of allowance for doubtful
accounts of $2,090 at September 30, 1998 and $1,597 at
December 31, 1997...................................... 41,587 30,296
Prepaid expenses.......................................... 7,171 4,298
-------- --------
Total current assets........................................ 280,757 225,354
Property and equipment, net................................. 20,969 10,109
Other assets................................................ 6,567 6,417
-------- --------
Total assets...................................... $308,293 $241,880
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,368 $ 1,552
Accrued compensation and benefits......................... 8,442 6,595
Other accrued liabilities................................. 19,660 11,180
Deferred revenue.......................................... 30,349 17,449
-------- --------
Total current liabilities......................... 61,819 36,776
Deferred rent............................................... 805 911
Convertible subordinated notes.............................. 100,000 100,000
Stockholders' equity
Common stock.............................................. 197,111 185,887
Accumulated deficit....................................... (50,877) (81,064)
Deferred compensation..................................... (40) (64)
Accumulated other comprehensive income.................... (525) (566)
-------- --------
Total stockholders' equity........................ 145,669 104,193
-------- --------
Total liabilities and stockholders' equity........ $308,293 $241,880
======== ========
</TABLE>
See accompanying notes.
3
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VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenue:
User license fees................................ $45,807 $24,027 $114,833 $67,719
Services......................................... 10,302 5,612 27,030 13,648
Porting.......................................... 436 1,182 1,877 3,998
------- ------- -------- -------
Total net revenue........................ 56,545 30,821 143,740 85,365
Cost of revenue:
User license fees................................ 2,516 1,142 7,612 2,819
Services......................................... 4,853 2,074 12,425 4,904
Porting.......................................... 474 1,163 2,194 2,770
------- ------- -------- -------
Total cost of revenue.................... 7,843 4,379 22,231 10,493
------- ------- -------- -------
Gross profit....................................... 48,702 26,442 121,509 74,872
Operating expenses:
Selling and marketing............................ 20,406 10,711 50,415 30,328
Research and development......................... 10,859 6,430 27,356 18,736
General and administrative....................... 2,663 1,889 7,075 6,104
Merger related costs............................. -- -- -- 8,490
In-process research and development.............. -- -- 2,250 --
------- ------- -------- -------
Total operating expenses................. 33,928 19,030 87,096 63,658
------- ------- -------- -------
Income from operations............................. 14,774 7,412 34,413 11,214
Interest and other income, net..................... 3,001 907 8,552 2,581
Interest expense................................... (1,420) (4) (4,268) (9)
------- ------- -------- -------
Income before income taxes......................... 16,355 8,315 38,697 13,786
Provision for income taxes......................... 3,762 1,579 8,508 3,315
------- ------- -------- -------
Net income......................................... $12,593 $ 6,736 $ 30,189 $10,471
======= ======= ======== =======
Net income per share -- basic...................... $ 0.27 $ 0.15 $ 0.64 $ 0.23
======= ======= ======== =======
Net income per share -- diluted.................... $ 0.24 $ 0.13 $ 0.59 $ 0.21
======= ======= ======== =======
Shares used in per share calculations -- basic..... 47,229 45,745 46,847 45,486
======= ======= ======== =======
Shares used in per share calculations -- diluted... 52,326 50,152 51,550 49,190
======= ======= ======== =======
</TABLE>
All share and per share data applicable to prior periods has been restated to
give retroactive effect to a 3-for-2 stock split effected on May 20, 1998.
See accompanying notes.
4
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VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 30,189 $ 10,471
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 4,418 2,648
Amortization of bond issuance costs....................... 321 --
Deferred rent............................................. (105) --
In-process research and development....................... 2,250 --
Non-cash merger related costs............................. -- 1,218
Changes in operating assets and liabilities:
Accounts receivable....................................... (10,992) (14,919)
Prepaid expenses.......................................... (2,931) (1,105)
Other assets.............................................. (455) 364
Accounts payable.......................................... 1,866 91
Accrued compensation and benefits......................... 1,758 2,178
Other accrued liabilities................................. 7,472 3,133
Deferred revenue.......................................... 12,842 5,594
--------- --------
Net cash provided by operating activities............ 46,633 9,673
INVESTING ACTIVITIES
Purchases of short-term investments......................... (245,729) (70,051)
Sales of short-term investments............................. 205,634 63,050
Purchase of property and equipment.......................... (15,440) (5,091)
Payments received on note................................... -- 187
Purchase of Windward Technologies, Inc...................... (1,250) --
--------- --------
Net cash used for investing activities............... (56,785) (11,905)
FINANCING ACTIVITIES
Payments of notes payable................................... -- (612)
Payments on notes receivable from stockholders.............. -- 282
Proceeds from issuance of common stock...................... 11,226 4,204
--------- --------
Net cash provided by financing activities............ 11,226 3,874
Effect of exchange rate changes............................. (14) (215)
--------- --------
Net increase in cash and cash equivalents............ 1,060 1,427
Cash and cash equivalents at beginning of period............ 75,629 17,411
--------- --------
Cash and cash equivalents at end of period.................. $ 76,689 $ 18,838
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 2,917 $ --
Cash paid for taxes......................................... $ 4,441 $ 2,143
</TABLE>
See accompanying notes.
5
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VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The results for the interim periods presented are not
necessarily indicative of the results that may be expected for any future
period. The following information should be read in conjunction with the
financial statements and notes thereto included in the VERITAS Software
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
VERITAS Software Corporation, a Delaware corporation ("VERITAS" or the
"Company") acquired OpenVision Technologies, Inc. ("OpenVision") on April 25,
1997 (the "OpenVision Merger"). The OpenVision Merger was accounted for as a
pooling of interests for financial reporting purposes in accordance with
generally accepted accounting principles. The Company's consolidated financial
statements for prior periods have been restated to include the financial
position, results of operations and cash flows of OpenVision.
2. STOCK SPLIT
All share and per share data applicable to prior periods has been restated
to give retroactive effect to a 3-for-2 stock split effected on May 20, 1998.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. NET INCOME PER SHARE
Basic earnings per share is based upon weighted-average common shares
outstanding. Diluted earnings per share is computed using the weighted-average
common shares outstanding plus any potential dilutive securities. Dilutive
securities of the Company include stock options and convertible debt. The
following table sets forth the computation of basic and diluted net income per
common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income........................................ $12,593 $ 6,736 $30,189 $10,471
======= ======= ======= =======
Denominator:
Denominator for basic net income per
share -- weighted-average shares............... 47,229 45,745 46,847 45,486
Common stock equivalents.......................... 5,097 4,407 4,703 3,704
------- ------- ------- -------
Denominator for diluted net income per share...... 52,326 50,152 51,550 49,190
======= ======= ======= =======
Basic earnings per share............................ $ 0.27 $ 0.15 $ 0.64 $ 0.23
======= ======= ======= =======
Diluted earnings per share.......................... $ 0.24 $ 0.13 $ 0.59 $ 0.21
======= ======= ======= =======
</TABLE>
6
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VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
5. ACCUMULATED OTHER COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no significant
impact on the Company's net income or stockholders' equity. SFAS 130 requires
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income........................................... $12,593 $6,736 $30,189 $10,471
Foreign currency translation adjustments............. 190 (85) 41 (204)
------- ------ ------- -------
Comprehensive income................................. $12,783 $6,651 $30,230 $10,267
======= ====== ======= =======
</TABLE>
6. ACQUISITION OF WINDWARD TECHNOLOGIES, INC.
On May 15, 1998, the Company acquired all of the outstanding stock of
Windward Technologies, Inc. ("Windward"), a company that develops failure
prediction software, for a total cost of $2.5 million. The transaction was
accounted for using purchase accounting. Of the total cost, $2.3 million was
allocated to in-process research and development and was expensed in the second
quarter of 1998 and $0.2 million was allocated to acquired intangibles, which
will be amortized over a five year period. Total cash outflows related to this
purchase through September 30, 1998, were $1.3 million. The Company has agreed
to pay the sole shareholder of Windward certain earn-out payments of up to an
aggregate of $1.2 million over the next two years subject to satisfaction of
certain conditions and has further agreed to pay such shareholder a royalty on
certain future product revenue derived from the products acquired over a five
year period, up to a maximum of $2.5 million. The Consolidated Statements of
Operations include the results of operations of Windward subsequent to the
acquisition date. For the three months and nine months ended September 30, 1998
and 1997 the results of operations of Windward were not material to the Company.
7. SUBSEQUENT EVENTS
On October 5, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Plan") pursuant to which the Company will acquire the
network and storage management group ("NSMG") business of Seagate Software, Inc.
("SSI"), a subsidiary of Seagate Technology, Inc. ("STI"). In connection with
the acquisition of the NSMG business, the Company will become a subsidiary of a
newly-formed Delaware corporation ("Newco"), stockholders of the Company will
convert their shares of Company common stock, and securities convertible into or
exchangeable for such common stock, into common stock or equivalent rights to
acquire common stock of Newco on a 1-for-1 basis. Security holders of the
Company will acquire approximately 60% of the fully-diluted equity of Newco. SSI
and certain holders of options to purchase common stock of SSI will acquire
common stock and rights to acquire common stock of Newco representing
approximately 40% of its fully-diluted equity securities. The transaction is
expected to be completed in February 1999, subject to the approval of the
VERITAS and SSI stockholders, and other regulatory approvals.
On September 1, 1998, VERITAS entered into a Combination Agreement to
acquire TeleBackup Systems Inc., a Canadian corporation ("TeleBackup"). As a
result of the Combination Agreement,
7
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VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
TeleBackup will become a wholly-owned subsidiary of the Company in exchange for
the issuance, to the holders of TeleBackup common shares and TeleBackup options,
of between 1,555,000 and 1,900,000 shares of Newco's common stock depending upon
the trading price of the VERITAS common stock on the Nasdaq National Market
prior to the closing of the transaction. The proposed acquisition is structured
to qualify as a tax-free stock transaction in Canada. The transaction is
expected to close in February 1999, subject to regulatory and stockholder
approval and other customary closing conditions.
If the NSMG acquisition is not consummated, the TeleBackup acquisition will
be accounted for by VERITAS using the pooling of interests method of accounting.
If the NSMG acquisition is consummated, the TeleBackup Combination Agreement
will need to be amended such that the TeleBackup acquisition will be accounted
for under the purchase method of accounting. The acquisition of the NSMG
business will be accounted for as a purchase transaction. Following consummation
of the NSMG and TeleBackup transactions, the Company expects to incur a charge
of approximately $136.0 million per fiscal quarter under the purchase method of
accounting. These charges are primarily related to the amortization of goodwill
and other intangible assets over a four-year period. The Company also expects to
incur charges to operations for a one-time write-off related to in-process
research and development costs in the fiscal quarter in which these transactions
are consummated. These charges are currently estimated to be approximately
$103.4 million. In addition, as a result of the NSMG acquisition, the Company
expects to incur a restructuring charge in the same fiscal quarter that these
transactions are consummated. This one-time restructuring charge relates
primarily to exit costs with respect to duplicate facilities of VERITAS, which
the Company plans to vacate. The Company has not yet been able to reasonably
estimate this restructuring charge. Such costs are in addition to the liability
for the estimated costs to vacate facilities of NSMG, which will become
duplicative upon the closing of the NSMG transaction, which liability will be
assumed by VERITAS and included as a part of the purchase price.
On October 4, 1998, the Board of Directors of VERITAS adopted a Stockholder
Rights Plan, declaring a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.001 per share,
of VERITAS. Each Right entitles the registered holder to purchase from VERITAS
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $0.001 per share, of VERITAS.
8. RECLASSIFICATIONS
Certain amounts in the 1997 Condensed Consolidated Financial Statements
have been reclassified to conform to the 1998 presentation.
8
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, that involve risks and
uncertainties. Such forward-looking statements consist of statements that are
not purely historical, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. There are certain
important factors that could cause actual results to differ materially from
those projected in the forward-looking statements contained in the following
discussion. Among such important factors are: (i) the timing and level of sales
by original equipment manufacturers ("OEMs") of computer systems incorporating
the Company's products and resales by OEMs of the Company's products; (ii) the
Company's timely development and market acceptance of new products and the
impact of competitive products and pricing; (iii) the internal development by
OEMs of their own data storage management solutions for incorporation in their
computer systems in replacement of the Company's products; (iv) the
unpredictability of the timing and level of sales to resellers and direct
end-users; (v) the timely creation and market acceptance of versions of the
Company's products for the Microsoft Windows NT operating system ("Windows NT");
(vi) the timing of the release by Microsoft of the next version of Windows NT
("Windows NT 5.0") and the rate of adoption of Windows NT 5.0 by users; (vii)
the impact of Windows NT and other operating systems on the UNIX market upon
which the Company's current products are dependent; (viii) the uncertainties
associated with conducting business in India, where a subsidiary of the Company
is engaged in research and development activities, including the risks of
adverse changes in local regulations and/or imposition of government controls
and political and economic instability; (ix) the Company's ability to hire,
train and retain research and development, marketing and sales personnel with
appropriate skills in a highly competitive labor market; (x) the Company's
ability to deliver products that are Year 2000 compliant; (xi) the degree to
which customers and potential customers of the Company direct resources to their
own Year 2000 compliance issues, or otherwise defer purchases of enterprise
products and services as a result of Year 2000 compliance concerns; and (xii)
such risks and uncertainties as are detailed from time to time in the Company's
SEC reports and filings, including its Annual Report on Form 10-K for the year
ended December 31, 1997.
The Company's proposal to acquire the Network & Storage Management Group
("NSMG") business of SSI subjects the Company to further risks and
uncertainties, including (i) the potential disruption of the Company's business
that might result from employee and customer uncertainty, or lack of management
focus, following the acquisition, in connection with integrating the operations
of the Company and the NSMG business; (ii) product integration risks due to
overlapping products and technologies; (iii) the possibility that the
acquisition might not be consummated; (iv) the effects of the acquisition on the
Company's stock price, its sales and operating results, its ability to attract
and retain key management, marketing and technical personnel, and the progress
of certain of its development projects; (v) the risk that the announcement of
the NSMG acquisition could result in decisions by customers to defer purchases
of products of the Company or of the NSMG business; (vi) the substantial charges
to be incurred due to the acquisition, primarily in the first and second
quarters of 1999 if the acquisition is consummated in February 1999; (vii) the
risk that redundancy in staffing and infrastructure could reduce efficiency and
increase costs; (viii) the difficulties of managing geographically dispersed
operations and the risk that employees of the NSMG business may not stay with
the combined company; and (ix) the risk that the other benefits sought to be
achieved by the acquisition will not be achieved.
RESULTS OF OPERATIONS
OVERVIEW
VERITAS Software Corporation ("VERITAS" or the "Company") is the leading
independent supplier of enterprise data storage management solutions, providing
advanced storage management software for open system environments. The Company's
products provide performance improvement and reliability enhance-
9
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ment features that are critical for many commercial applications. These products
enable protection against data loss and file corruption, rapid recovery after
disk or system failure, the ability to process large files efficiently and the
ability to manage and back-up large networks of systems without interrupting
users. In addition, the Company's products provide an automated failover between
computer systems organized in clusters sharing disk resources. The Company's
highly scalable products can be used independently, and certain products can be
combined to provide interoperable client/server storage management solutions.
The Company's products offer centralized administration with a high degree of
automation, enabling customers to manage complex, distributed environments
cost-effectively by increasing system administrator productivity and system
availability. The Company also provides a comprehensive range of services to
assist customers in planning and implementing storage management solutions. The
Company markets its products and associated services to OEM and end-user
customers through a combination of direct and indirect sales channels
(resellers, value-added resellers ("VARs"), hardware distributors, application
software vendors and systems integrators). The Company's OEM customers include
Compaq Computer Corporation, Hewlett-Packard Company, Sun Microsystems, Inc.,
Microsoft Corporation, Dell Computer, and Sequent Computer Systems, Inc. The
Company's end-user customers include AT&T Corporation, Lucent Technologies,
Inc., BankAmerica Corporation, Morgan Stanley Dean Witter & Co., BMW, The Boeing
Company, British Telecommunications plc, Chrysler Corporation and Motorola, Inc.
The Company derives its net revenue from user license fees, service fees
and porting fees. The Company's OEM customers either bundle the Company's
products with the OEM products licensed by such OEMs or offer them as options.
Certain OEMs also resell the Company's products. The Company generally receives
a one-time source license fee upon entering into a license agreement with an
OEM, as well as a user license fee each time the OEM licenses a copy of the OEM
products to a customer that incorporates one or more of the Company's products.
The Company's license agreements with its OEM customers generally contain no
minimum sales requirements and there can be no assurance that any OEM will
either commence or continue shipping operating systems incorporating the
Company's products in the future. Moreover, following the execution of new
agreements between the Company and OEM customers and resellers, a significant
period of time may elapse before any revenues to the Company are generated
thereunder due to the development work which the Company must generally
undertake under such agreements and the time needed for the sales and marketing
organizations within such customers and distributors to become familiar with and
gain confidence in the Company's products.
The Company's services revenue consists of fees derived from annual
maintenance agreements, and from consulting and training services. The OEM
maintenance agreements covering VERITAS products provide for technical and
emergency support and minor product upgrades for a fixed annual fee. The
maintenance agreements covering products that are licensed through non-OEM
channels provide for technical support and product upgrades for an annual
service fee based on the number of user licenses purchased and the level of
service subscribed.
Porting fees consist of fees derived from porting and other non-recurring
engineering efforts when the Company ports (i.e., adapts) its storage management
products to an OEM's operating system and when the Company develops certain new
product features or extensions of existing product features at the request of a
customer. In most cases, the Company retains the rights to technology derived
from porting and non-recurring engineering work for licensing to other customers
and therefore generally does such work on a relatively low, and sometimes
negative, margin.
The Company's international sales are generated primarily through its
international sales subsidiaries. International revenue outside the United
States and Canada, most of which is collectible in foreign currencies, accounted
for 21% and 20% of the Company's total revenues for the nine months ended
September 30, 1998 and 1997, respectively. The Company's international revenue
increased 81% from $16.9 million for the nine months ended September 30, 1997 to
$30.6 million for the nine months ended September 30, 1998. Since much of the
Company's international operating expenses are also incurred in local
currencies, the relative impact of exchange rates on net income or loss is
relatively less than the impact on revenues. Although the Company's operating
and pricing strategies take into account changes in exchange rates over time,
the Company's operating results may be significantly affected in the short term
by fluctuations in foreign currency
10
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exchange rates. The Company's international subsidiaries purchase licenses from
the parent company resulting in intercompany receivables and payables. These
receivables and payables are carried on each company's books at the historical
local currency that existed at the time of the transaction. Such receivables and
payables are eliminated for financial statement reporting purposes. Prior to
elimination, the amounts carried in foreign currencies are converted to U.S.
Dollars at the then current rate ("marked to market"). The marked to market
process may give rise to currency gains and losses. Such gains or losses are
recognized on the Company's statement of operations as a component of other
income, net. To date, any such gain or loss has not been material.
The Company believes that its success depends upon continued expansion of
its international operations. The Company currently has sales and service
offices in the United States, Canada, Japan, the United Kingdom, Germany,
France, Sweden and the Netherlands, a development center in India, and resellers
located in North America, Europe, Asia Pacific, South America and the Middle
East. International expansion may require the Company to establish additional
foreign offices, hire additional personnel and recruit additional international
resellers, resulting in the diversion of significant management attention and
the expenditure of financial resources. To the extent that the Company is unable
to effect these additions efficiently, growth in international sales will be
limited, which would have a material adverse effect on the Company's business,
operating results and financial condition. International operations also subject
the Company to a number of risks inherent in developing and selling products
outside the United States, including potential loss of developed technology,
limited protection of intellectual property rights, imposition of government
regulation, imposition of export duties and restrictions, cultural differences
in the conduct of business, and political and economic instability. Furthermore,
certain global markets, including Asia, Russia and Latin America, are currently
undergoing significant economic turmoil which could result in deferral of
purchase of information technology products and services by potential customers
located in such markets, thereby further limiting the Company's ability to
expand international operations.
The Company merged with OpenVision on April 25, 1997. The OpenVision merger
was accounted for as a "pooling of interests" for financial reporting purposes
in accordance with generally accepted accounting principles. The Company's
consolidated financial statements for prior periods have been restated to
include the financial position, results of operations and cash flows of
OpenVision. Accordingly, the following discussion reflects the combined results
of the Company and OpenVision for all periods covered.
On May 15, 1998 the Company acquired all of the outstanding stock of
Windward Technologies, Inc. ("Windward"), a company that develops failure
prediction software, for a total cost of $2.5 million. The transaction was
accounted for using purchase accounting. The Consolidated Statements of
Operations include the results of operations of Windward subsequent to the
acquisition date. For the three months and nine months ended September 30, 1998
and 1997 the results of operations of Windward were not material to the Company.
On September 1, 1998, VERITAS entered into a Combination Agreement to
acquire TeleBackup, a Canadian corporation. As a result of the Combination
Agreement, TeleBackup will become a wholly-owned subsidiary of the Company. The
TeleBackup acquisition has been structured to qualify as a tax-free transaction
for the TeleBackup shareholders. In this regard, a reorganization of capital of
TeleBackup will be effected pursuant to which the TeleBackup shareholders will
exchange each of their TeleBackup common shares for a fraction of a newly
created exchangeable share calculated by application of the exchange ratio set
forth in the Combination Agreement. The exchangeable shares will be exchangeable
for an equivalent number of shares of the Company's common stock and options to
purchase TeleBackup common shares will be converted into options to purchase a
number of shares of VERITAS common stock determined by application of the
exchange ratio. The TeleBackup security holders will receive at least 1,555,000
shares but no more than 1,900,000 shares of the Company's common stock in the
transaction, with the exchange ratio being subject to adjustment within the
aforementioned range based upon the trading price of the Company's common stock
prior to the closing of the transaction. If the Seagate Transaction is
consummated, the obligation to issue shares in connection with the TeleBackup
acquisition will be assumed by a newly formed holding company (described below).
The transaction is expected to close in February 1999, subject to regulatory and
stockholder approval and other customary closing conditions.
11
<PAGE> 12
On October 5, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Plan") with VERITAS Holding Corporation, a Delaware
corporation ("Newco"), Seagate Technology, Inc., a Delaware corporation ("STI"),
Seagate Software, Inc., a Delaware corporation and majority-owned subsidiary of
STI ("SSI") and Seagate Software Network & Storage Management Group, Inc., a
Delaware corporation and wholly owned subsidiary of SSI, which provides for (i)
the merger of a wholly owned subsidiary of Newco with and into VERITAS and the
assumption and conversion of all outstanding VERITAS securities, on a share for
share basis, into Newco securities having identical rights, preferences and
privileges, including convertible debentures of VERITAS which will become
convertible into Common Stock of Newco on the same basis as they are currently
convertible into VERITAS Common Stock (the "Merger"), and (ii) the contribution
by SSI, STI and certain of their subsidiaries to Newco of (a) the outstanding
stock of Seagate Software Network & Storage Management Group, Inc. and certain
other subsidiaries of SSI and STI, and (b) those assets used primarily in the
Network & Storage Management Group ("NSMG") business of SSI, in consideration
for the issuance of shares of Common Stock of Newco to SSI and the offer by
Newco to grant options to purchase Common Stock of Newco to certain SSI
employees who become employees of Newco or its subsidiaries in exchange for
cancellation by such employees of their respective options to purchase Common
Stock of SSI (the "Seagate Transaction"). As part of the Seagate Transaction,
Newco will also assume certain liabilities of the NSMG business.
Upon consummation of the Seagate Transaction, Newco shall issue a number of
shares of Common Stock to SSI equal to approximately 40% of the fully-diluted
Common Stock equivalent equity interests in Newco (assuming conversion of all
convertible securities, including the VERITAS convertible debentures, and
exercise of all assumed options and warrants) less that number of shares of
Newco Common Stock issuable upon exercise of Newco options issued to SSI
employees in exchange for their outstanding options to purchase shares of SSI
Common Stock. Upon consummation of the Merger, the former security holders of
VERITAS will be issued Newco securities representing approximately 60% of the
fully-diluted Common Stock equivalent equity interests in Newco. The
consummation of the Merger and the Seagate Transaction are subject to a number
of conditions, including approval by the stockholders of VERITAS and SSI,
receipt of regulatory approvals and other customary closing conditions.
If the NSMG acquisition is not consummated, the TeleBackup acquisition will
be accounted for by VERITAS using the pooling of interests method of accounting.
If the NSMG acquisition is consummated, the TeleBackup Combination Agreement
will need to be amended such that the TeleBackup acquisition will be accounted
for under the purchase method of accounting. The acquisition of the NSMG
business will be accounted for as a purchase transaction. Following consummation
of the NSMG and TeleBackup transactions, the Company expects to incur a charge
of approximately $136.0 million per fiscal quarter under the purchase method of
accounting. These charges are primarily related to the amortization of goodwill
and other intangible assets over a four-year period. The Company also expects to
incur charges to operations for a one-time write-off related to in-process
research and development costs in the fiscal quarter in which these transactions
are consummated. These charges are currently estimated to be approximately
$103.4 million. In addition, as a result of the NSMG acquisition, the Company
expects to incur a restructuring charge in the same fiscal quarter that these
transactions are consummated. This one-time restructuring charge relates
primarily to exit costs with respect to duplicate facilities of VERITAS, which
the Company plans to vacate. The Company has not yet been able to reasonably
estimate this restructuring charge. Such costs are in addition to the liability
for the estimated costs to vacate facilities of NSMG, which will become
duplicative upon the closing of the NSMG transaction, which liability will be
assumed by VERITAS and included as a part of the purchase price.
The NSMG business is primarily focused on the development, marketing and
sale of Windows NT network and storage management software products that enable
IT professionals within an enterprise to manage distributed network resources
and to secure and protect enterprise data. Such products include features such
as system backup, disaster recovery, migration, replication, automated client
protection, storage resource management, scheduling, event correlation and
desktop management.
12
<PAGE> 13
The following table sets forth the percentage of total revenue represented
by certain line items from the Company's condensed consolidated statement of
operations for the three months ended September 30, 1998 and 1997, respectively,
and the percentage change between the comparable periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
------------------- ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 1998
------------------- ------------------
1998 1997 COMPARED TO 1997
----- ----- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees..................................... 81% 78% 91%
Services.............................................. 18 18 84%
Porting............................................... 1 4 (63)%
--- ---
Total net revenue............................. 100% 100% 83%
=== ===
Cost of revenue:
User license fees..................................... 4% 3% 120%
Services.............................................. 9 7 134%
Porting............................................... 1 4 (59)%
--- ---
Total cost of revenue......................... 14 14 79%
--- ---
Gross profit............................................ 86 86 84%
Operating expenses:
Selling and marketing................................. 36 35 91%
Research and development.............................. 19 21 69%
General and administrative............................ 5 6 41%
--- ---
Total operating expenses...................... 60 62 78%
--- ---
Income from operations.................................. 26 24
Interest and other income, net.......................... 5 3
Interest expense........................................ (2) --
--- ---
Income before income taxes.............................. 29 27
Provision for income taxes.............................. 7 5
--- ---
Net income.............................................. 22% 22%
=== ===
Gross margin:
User license fees..................................... 95% 95%
Services.............................................. 53% 63%
Porting............................................... (9)% 2%
</TABLE>
13
<PAGE> 14
The following table sets forth the percentage of total revenue represented
by certain line items from the Company's condensed consolidated statement of
operations for the nine months ended September 30, 1998 and 1997, respectively,
and the percentage change between the comparable periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
----------------- ------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 1998
----------------- ------------------
1998 1997 COMPARED TO 1997
---- ---- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees..................................... 80% 79% 70%
Services.............................................. 19 16 98%
Porting............................................... 1 5 (53)%
--- ---
Total net revenue............................. 100% 100% 68%
=== ===
Cost of revenue:
User license fees..................................... 5% 3% 170%
Services.............................................. 9 6 153%
Porting............................................... 1 3 (21)%
--- ---
Total cost of revenue......................... 15 12 112%
--- ---
Gross profit............................................ 85 88 62%
Operating expenses:
Selling and marketing................................. 35 36 66%
Research and development.............................. 19 22 46%
General and administrative............................ 5 7 16%
Merger related costs.................................. -- 10 n/m
In-process research and development................... 2 -- n/m
--- ---
Total operating expenses...................... 61 75 37%
--- ---
Income from operations.................................. 24 13
Interest and other income, net.......................... 6 3
Interest expense........................................ (3) --
--- ---
Income before income taxes.............................. 27 16
Provision for income taxes.............................. 6 4
--- ---
Net income.............................................. 21% 12%
=== ===
Gross margin:
User license fees..................................... 93% 96%
Services.............................................. 54% 64%
Porting............................................... (17)% 31%
</TABLE>
- ---------------
n/m = not meaningful
Net Revenue
Total net revenue increased 83% from $30.8 million for the three months
ended September 30, 1997 to $56.5 million for the three months ended September
30, 1998, and increased 68% from $85.4 million for the nine months ended
September 30, 1997 to $143.7 million for the nine months ended September 30,
1998. The Company believes that the percentage increases in total revenue
achieved in these periods are not necessarily indicative of future results. The
Company's revenue is comprised of user license fees, service revenue and porting
fees. Growth in user license fees has been driven primarily by increasing market
acceptance of the Company's products, introduction of new products and a larger
percentage of total license revenue generated through the direct sales channel.
Service revenue is derived primarily from contracts for software maintenance and
technical support and, to a lesser extent, consulting and training services. The
growth in service revenue has been driven primarily by increased sales of
service and support contracts on new license sales and, to a
14
<PAGE> 15
lesser extent, by increasing renewals of these contracts by the Company's
installed base of licensees. The Company also experienced an increase in demand
for consulting and training services. Porting fees are derived from the
Company's funded development efforts that are typically associated with the
Company's agreements with OEMs. User license fees for the three months ended
September 30, 1998 and 1997 comprised 81% and 78% of total net revenue,
respectively. User license fees for the nine months ended September 30, 1998 and
the nine months ended September 30, 1997 were 80% and 79% of total net revenue,
respectively.
User license fees. User license fees increased 91% from $24.0 million for
the three months ended September 30, 1997 to $45.8 million for the three months
ended September 30, 1998. User license fees increased 70% from $67.7 million for
the nine months ended September 30, 1997 to $114.8 million for the nine months
ended September 30, 1998. The increases were primarily due to the continued
growth in market acceptance of the Company's products, a greater volume of large
end-user transactions, increased revenue from OEM resales of unbundled Company
products and, to a lesser extent, the introduction of new products. In
particular, the Company's user license fees from storage products increased by
approximately 79% for the nine months ended September 30, 1998 as compared to
the nine month period ended September 30, 1997, accounting for 93% and 89% of
user license fees in the nine months ended September 30, 1998 and 1997,
respectively.
Service Revenue. Service revenue increased 84% from $5.6 million for the
three months ended September 30, 1997 to $10.3 million for the three months
ended September 30, 1998, and increased 98% from $13.6 million for the nine
months ended September 30, 1997 to $27.0 million for the nine months ended
September 30, 1998, primarily due to increased sales of service and support
contracts on new licenses, renewal of service and support contracts on existing
licenses and an increase in demand for training and consulting services. Sales
of service and support contracts increased 81% and 105% and revenue from
consulting and training services increased 90% and 82% for the three months and
nine months ended September 30, 1998, respectively, compared to the comparable
periods ended September 30, 1997.
Porting Fees. Porting fees decreased 63% from $1.2 million for the three
months ended September 30, 1997, to $0.4 million for the three months ended
September 30, 1998 and decreased 53% from $4.0 million for the nine months ended
September 30, 1997 to $1.9 million for the nine months ended September 30, 1998.
Porting fees paid to the Company in connection with the development efforts of
the Company under its Microsoft agreement, for which revenue is being recognized
under the percentage of completion method, were greater in the three-month and
nine-month periods ended September 30, 1997 than in the comparable periods ended
September 30, 1998.
Cost of Revenue
Cost of user license fees consists primarily of royalties, media, manuals
and distribution costs. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of porting fees consists primarily of
personnel-related costs for development efforts. Gross margin on user license
fees is substantially higher than gross margin on service revenue and porting
fees, reflecting the low materials, packaging and other costs of software
products compared with the relatively high personnel costs associated with
providing maintenance, technical support, consulting, training services and
development efforts. Cost of service revenue also varies based upon the mix of
maintenance, technical support, consulting and training services.
Cost of User License Fees. Cost of user license fees increased 120% from
$1.1 million for the three months ended September 30, 1997 to $2.5 million for
the three months ended September 30, 1998, and increased 170% from $2.8 million
for the nine months ended September 30, 1997 to $7.6 million for the nine months
ended September 30, 1998. The increase is primarily the result of a larger
percentage of license fees being generated from the sale of products with higher
royalty rates. Gross margin on user license fees remained consistent at 95% for
the three months ended September 30, 1997 and 1998 and decreased from 96% for
the nine months ended September 30, 1997 to 93% for the nine months ended
September 30, 1998.
The gross margin on user license fees may vary from period to period based
on the license revenue mix and certain products having higher royalty rates than
other products. The Company may experience
15
<PAGE> 16
improvements in gross margins as compared to the three and nine months ended
September 30, 1998 but does not expect significant improvements in gross margin
on user license fees.
Cost of Service Revenue. Cost of service revenue increased 134% from $2.1
million for the three months ended September 30, 1997 to $ 4.9 million for the
three months ended September 30, 1998, and increased 153% from $4.9 million for
the nine months ended September 30, 1997 to $12.4 million for the nine months
ended September 30, 1998. Gross margin on service revenue decreased from 63% for
the three months ended September 30, 1997 to 53% for the three months ended
September 30, 1998 and decreased from 64% for the nine months ended September
30, 1997 to 54% for the nine months ended September 30, 1998. The decreases in
gross margin were primarily due to personnel additions in both the Company's
support organization, to provide maintenance and other services, and in the
Company's training and consulting organization to expand the Company's existing
infrastructure to meet the increased demand for such services.
Cost of Porting Fees. Cost of porting fees decreased to $0.5 million for
the three months ended September 30, 1998 compared to $1.2 million for the same
period of 1997, and decreased to $2.2 million for the nine months ended
September 30, 1998 compared to $2.8 million for the same period in 1997. Gross
margin on porting fees decreased from 2% for the three months ended September
30, 1997 to a negative gross margin of 9% for the three months ended September
30, 1998 and decreased from 31% for the nine months ended September 30, 1997 to
a negative 17% for the nine months ended September 30, 1998. The negative gross
margin for the three and nine month periods ended September 30, 1998 resulted
from the Company's devotion of technical resources to funded porting activities
in excess of the amounts chargeable to the customer. From time to time, the
Company incurs a negative gross margin on porting fees due to the relatively
high personnel costs associated with such development efforts.
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with the Company's sales and marketing efforts. Selling and marketing
expenses increased 91% from $10.7 million for the three months ended September
30, 1997 to $20.4 million for the three months ended September 30, 1998, and
increased 66% from $30.3 million for the nine months ended September 30, 1997 to
$50.4 million for the nine months ended September 30, 1998. Selling and
marketing expenses as a percentage of total net revenue remained relatively
consistent at 35% to 36% for both the three and nine month periods ending
September 30, 1997 and 1998. The increase in absolute dollars is primarily
attributable to increased sales and marketing staffing and, to a lesser extent,
increased costs associated with certain marketing programs. The Company intends
to continue to expand its global sales and marketing infrastructure and
accordingly, the Company expects its selling and marketing expenses to increase
in absolute dollars but not change significantly as a percentage of revenue in
the future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
engineering related costs. Research and development expenses increased 69% from
$6.4 million for the three months ended September 30, 1997 to $10.9 million for
the three months ended September 30, 1998, and increased 46% from $18.7 million
for the nine months ended September 30, 1997 to $27.4 million for the nine
months ended September 30, 1998. The increase was due primarily to increased
staffing levels. As a percentage of total net revenue, research and development
expenses decreased from 21% for the three months ended September 30, 1997 to 19%
for the three months ended September 30, 1998, and decreased from 22% for the
nine months ended September 30, 1997 to 19% for the nine month period ended
September 30, 1998. The Company believes that a significant level of research
and development investment is required to remain competitive and expects such
expenses will continue to increase in absolute dollars in future periods.
Research and development expenses can be expected to fluctuate from time to time
to the extent that the Company makes periodic incremental investments in
research and development and the Company's level of revenue fluctuates.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
41% from $1.9 million for the three months ended September 30, 1997 to $2.7
million for
16
<PAGE> 17
the three months ended September 30, 1998, and increased 16% from $6.1 million
for the nine months ended September 30, 1997 to $7.1 million for the nine months
ended September 30, 1998. The increases in the three and nine month periods were
primarily due to additional personnel costs and other expenses associated with
the Company enhancing its infrastructure to support expansion of its operations.
General and administrative expenses as a percentage of total net revenue
decreased between the three month periods from 6% to 5%, and decreased between
the nine month periods from 7% to 5%. General and administrative expenses are
expected to increase in future periods to the extent the Company expands its
operations.
In-Process Research and Development. On May 15, 1998 the Company acquired
all of the outstanding stock of Windward Technologies, Inc. ("Windward"), a
company that develops failure prediction software, for a total cost of $2.5
million. The transaction was accounted for using purchase accounting. Of the
total cost, $2.3 million was allocated to in-process research and development
and was expensed in the second quarter of 1998 and $0.2 million was allocated to
acquired intangibles which is being amortized over a five year period. Total
cash outflows as of September 30, 1998 related to this purchase were $1.3
million. The Company agreed to pay the sole shareholder of Windward certain
earn-out payments of up to an aggregate of $1.2 million over the next two years
subject to satisfaction of certain conditions and to pay such shareholder a
royalty on certain future product revenue derived from the products acquired
over a five year period, up to a maximum of $2.5 million. The Consolidated
Statements of Operations include the results of operations of Windward
subsequent to the acquisition date. For the three months and nine months ended
September 30, 1998 and 1997 the results of operations of Windward were not
material to the Company.
Interest and Other Income, Net. Interest and other income, net increased
from $0.9 million for the three months ended September 30, 1997 to $3.0 million
for the three months ended September 30, 1998, and increased from $2.6 million
for the nine months ended September 30, 1997 to $8.6 million for the nine months
ended September 30, 1998. The increase was due primarily to increased amounts of
interest income attributable to the higher level of funds available for
investment.
Interest Expense. Interest expense for both the three and nine month
periods ended September 30, 1998 consists primarily of interest accrued under
the Convertible Subordinated Notes issued by the Company in October 1997.
Interest expense for both the three and nine month periods ended September 30,
1997 were insignificant.
Provision for Income Taxes. The Company had an effective tax rate of 22%
and 24% for the nine month periods ended September 30, 1998 and 1997,
respectively. The Company's effective tax rate is lower than the combined
federal and state statutory rates primarily due to the utilization of federal
net operating loss carry forwards, offset by the impact of non-deductible
merger-related costs and in-process research and development, as well as foreign
taxes.
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amount of
assets and liabilities for financial reporting and the amounts used for income
taxes. The realization of the Company's net deferred tax assets, which relate
primarily to net operating loss and tax credit carryforwards and temporary
differences, is dependent on generating sufficient taxable income in future
periods. Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset will be realized. The amount of
the net deferred tax assets considered realizable, however, could be reduced or
increased in the near term if estimates of future taxable income are changed.
Management intends to evaluate the realizability of the net deferred tax assets
on a quarterly basis to assess the need for the valuation allowance.
New Accounting Pronouncements. In September 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement No. 131, "Disclosures About Segments of An Enterprise and
Related Information" (SFAS 131). SFAS 130 established rules for reporting and
displaying comprehensive income. SFAS 131 will require the Company to use the
"management approach" in disclosing segment information. Both statements are
effective for the Company during fiscal 1998. The adoption of SFAS 130 or SFAS
131 did not have a material impact on the
17
<PAGE> 18
Company's results of operations, cash flows or financial position in the three
month and nine month periods ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments totaled
$232.0 million at September 30, 1998, and represented 75% of total assets. Cash
and cash equivalents are highly liquid with original maturities of ninety days
or less. Short-term investments consist mainly of investment grade commercial
paper. At September 30, 1998, the Company had $100.8 million of long-term
obligations and stockholders' equity was approximately $145.7 million.
Net cash provided from operating activities was $46.6 and $9.7 million in
the nine months ended September 30, 1998 and 1997, respectively. For the nine
months ended September 30, 1998 and 1997 cash provided by operating activities
resulted primarily from net income and increases in accounts payable, accrued
liabilities and deferred revenue balances. These sources of cash were offset
somewhat by uses of cash in connection with an increase in balances of accounts
receivable and prepaid expenses.
The Company's investing activities used cash of $56.8 million in the nine
months ended September 30, 1998 primarily due to the net increase in short-term
investments of $40.1 million and capital expenditures of $15.4 million. In
addition, the Company used $1.3 million of cash for the purchase of Windward in
May 1998. The Company's investing activities used cash of $11.9 million in the
nine months ended September 30, 1997 primarily due to the net increase in
short-term investments of $7.0 million and by capital expenditures of $5.1
million.
Financing activities provided cash of $11.2 million in the nine months
ended September 30, 1998, arising primarily from the issuance of common stock
under the Company's employee stock plans. In the nine months ended September 30,
1997, financing activities provided cash of $3.9 million, which was also
primarily due to the issuance of common stock under the Company's employee stock
plans, partially offset by the payments of notes payable.
In October 1997, the Company issued $100.0 million of 5.25% Convertible
Subordinated Notes due 2004 (the "Notes"), for which the Company received net
proceeds of $97.5 million. The Notes provide for semi-annual interest payments
each May 1 and November 1, commencing on May 1, 1998. The Notes are convertible
into shares of the Company's Common Stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion price of $43.00 per share, subject to adjustment in certain events.
On or after November 5, 2002, the Notes will be redeemable over the period of
time until maturity at the option of the Company at declining premiums to par.
The debt issuance costs are being amortized over the term of the Notes using the
interest method. No interest payments associated with this debt were made during
the three months ended September 30, 1998.
The Company is in the process of acquiring the NSMG business and
TeleBackup. The Company expects that its security holders will own 60% of the
fully-diluted equity of Newco after acquiring the NSMG business, and that SSI
and certain SSI option holders will own 40% of the fully-diluted equity
securities of Newco. In addition, the Company or Newco will issue between 1.6
million and 1.9 million shares of common stock, depending on the closing prices
of the Company's common stock on the Nasdaq National Market prior to the closing
of the TeleBackup transaction, in exchange for TeleBackup becoming a subsidiary
of the Company. Both acquisitions are subject to regulatory and stockholder
approval and other customary closing conditions. The acquisitions are expected
to close in February 1999.
The Company believes that its current cash, cash equivalents and short-term
investment balances and cash flow from operations, if any, will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next 12 months. Thereafter, the Company may require additional funds
to support its working capital requirements or for other purposes and may seek
to raise such additional funds through public or private equity financing or
from other sources. There can be no assurance that additional financing will be
available at all or that if available, such financing will be obtainable on
terms favorable to the Company.
18
<PAGE> 19
YEAR 2000 COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. Many
currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures, generation of
erroneous data or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such Year 2000 requirements. The Year 2000 problem is pervasive and complex.
Significant uncertainty exists in the software industry concerning the potential
impact of Year 2000 problems. The Company is assessing the potential overall
impact of the impending century change on the Company's business, financial
condition and results of operations.
STATE OF READINESS
Based on the Company's assessment to date, the Company believes the current
versions of its software products and services are "Year 2000 compliant" -- that
is, they are capable of adequately distinguishing twenty-first century dates
from twentieth century dates. New products are being designed to be Year 2000
compliant. Although the Company's products have undergone, or will undergo, the
Company's normal quality testing procedures, there can, however, be no assurance
that the Company's products will contain all necessary date code changes.
Furthermore, use of the Company's products in connection with other products
which are not Year 2000 compliant, including non-compliant hardware, software
and firmware may result in the inaccurate exchange of dates and result in
performance problems or system failure. In addition, OEM derivative versions of
older VERITAS products may not be Year 2000 compliant. Any failure of the
Company's products to perform, including system malfunctions associated with the
onset of year 2000, could result in claims against the Company. However, success
of the Company's Year 2000 compliance efforts may depend on the success of its
customers in dealing with the Year 2000 issue.
Although the Company has not been a party to any litigation or arbitration
proceeding to date that involves Year 2000 compliance issues with its products
or services, there can be no assurance that the Company will not in the future
be required to defend its products or services in such proceedings, or to
negotiate resolutions of claims based on Year 2000 issues. The costs of
defending and resolving Year 2000-related disputes, regardless of the merits of
such disputes, and any liability of the Company for Year 2000-related damages,
including consequential damages, could have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, the Company believes that purchasing patterns of customers and
potential customers of the Company may be affected by Year 2000 compliance
issues as organizations expend significant resources to correct their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funding available to such entities for other information technology
purchases, such as those products and services offered by the Company.
Furthermore, customers and potential customers may defer information technology
purchases generally until early in the next millennium to avoid Year 2000
compliance problems. Any such deferral of purchases by the Company's customers
or potential customers could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's business depends on numerous systems that could potentially
be impacted by Year 2000 related problems. Those systems include, among others:
hardware and software systems used by the Company to deliver products and
services to its customers (including software supplied by third parties);
communications networks such as the wide area network and local area networks
upon which the Company depends to communicate product orders to its
manufacturing and distribution operations and to develop products; the
19
<PAGE> 20
internal systems of the Company's customers and suppliers; software products
sold to customers; the hardware and software systems used internally by the
Company in the management of its business; and non-information technology
systems and services used by the Company in the management of its business, such
as power, telephone systems and building systems.
The Company is currently in the process of evaluating its information
technology infrastructure in order to identify and modify any products, services
or systems that are not Year 2000 compliant. Based on its initial analysis of
the systems potentially impacted by conducting business in the twenty-first
century, the Company is applying a phased approach to making such systems, and
accordingly, the Company's operations, ready for the year 2000. Beyond awareness
of the issues and scope of systems involved, the phases of activities in process
include: an assessment of specific underlying computer systems, programs and
hardware; renovation or replacement of Year 2000 non-compliant technology;
validation and testing of critical systems certified by third-party suppliers to
be Year 2000 compliant; and implementation of Year 2000 compliant systems. The
table below describes the status and timing of such phased activities.
<TABLE>
<CAPTION>
TARGETED
IMPACTED SYSTEMS STATUS COMPLETION
---------------- ------ -----------
<S> <C> <C>
Software products sold to customers Software products tested and Q3 1998
available
for customers (completed)
Hardware and software systems used Assessment in process Q4 1998
to deliver products and services
Communication networks used to carry Assessment in process Q4 1998
products and provide services
Hardware and software systems used Assessment in process Q4 1998
to manage the Company's business
Hardware and software systems used Validation, testing and remediation Q2 1999
to deliver products and services
Communication networks used to carry Validation, testing and remediation Q2 1999
products and provide services
Hardware and software systems used Validation, testing and remediation Q2 1999
to manage the Company's business
Non-information technology systems Systems upgraded or replaced as Q3 1999
and services appropriate, testing and
implementation
</TABLE>
Extensive Year 2000 testing will be conducted on all systems considered
critical to the Company. To date, the Company has not encountered any material
problems in this regard with its computer systems or any other equipment that
might be subject to such problems. In the event that any of the Company's
significant suppliers or customers does not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected. This could result in system failures or generation of erroneous
information and could cause significant disruption to business activities. The
Company is reviewing what further actions are required to make all software
systems used internally Year 2000 compliant as well as actions needed to
mitigate vulnerability to problems with suppliers and other third parties'
systems. Such actions include a review of vendor contracts and formal
communication with suppliers to request certification that products are Year
2000 compliant.
COSTS TO ADDRESS YEAR 2000 ISSUES
The total cost of these Year 2000 compliance activities has not been, and
is not anticipated to be, material to the Company's business, results of
operations and financial condition. These costs and the timing in which the
Company plans to complete its Year 2000 modification and testing processes are
based on management's estimates. However, there can be no assurance that the
Company will timely identify and remedy all significant Year 2000 problems, that
remediation efforts will not involve significant time and expense, or that
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<PAGE> 21
such problems will not have a material adverse effect on the Company's business,
results of operations and financial condition.
CONTINGENCY PLANS
The Company does not presently have a contingency plan for handling Year
2000 problems that are not detected and corrected prior to their occurrence. Any
failure of the Company to address any unforeseen Year 2000 issue could adversely
affect the Company's business, financial condition and results of operations.
RISKS FROM CONVERSION TO SINGLE EUROPEAN CURRENCY
On January 1, 1999, certain member states of the European Economic
Community will fix their respective currencies to a new currency, commonly known
as the Euro. During the three years beginning on January 1, 1999, business in
these countries will be conducted both in the existing national currency, such
as the French Franc or the Deutsche Mark, as well as the Euro. Companies
operating in or conducting business in these countries will need to ensure that
their financial and other software systems are capable of processing
transactions and properly handling the existing currencies and the Euro. The
Company is still assessing the impact that the introduction and use of the Euro
will have on the Company's internal systems. The Company does not presently
expect that introduction and use of the Euro will materially affect the
Company's business. However, if the Company encounters unexpected difficulties,
the Company's business could be adversely affected.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on Form 10-Q, the
following factors should be considered carefully in evaluating the Company and
its business.
Acquisition of NSMG Business. The acquisition of the NSMG business could
adversely affect the Company's business, financial condition and results of
operations, in the near term at least, as a result of a number of factors,
including: (i) the potential disruption of the Company's business that might
result from employee and customer uncertainty, or lack of management focus,
following the acquisition, in connection with integrating the operations of the
Company and the NSMG business, (ii) the possibility that the acquisition might
not be consummated; (iii) the effects of the acquisition on the Company's stock
price, its sales and operating results, its ability to attract and retain key
management, marketing and technical personnel and the progress of certain of its
development projects; and (iv) the risk that the announcement of the acquisition
could result in decisions by customers to defer purchases of products of the
Company or of the NSMG business.
Integration of NSMG and TeleBackup Business Operations. Assuming that the
acquisitions of the NSMG business and TeleBackup are completed, as to which
there can be no assurance, the achievement by the Company of the anticipated
benefits and synergies associated with such acquisitions will depend in part
upon whether the integration of the NSMG business and TeleBackup Business with
the Company's operations is effected in a timely, efficient and effective
manner. There can be no assurances that this will occur. The integration process
will require dedication of management resources which will temporarily distract
them from attention to the day-to day business of the Company. Among other
things, integration of the product offerings of NSMG and TeleBackup with those
of the Company will be necessary. This integration will involve consolidation of
products with duplicative functionality, coordination of research and
development activities, and convergence of their respective technologies.
Technology convergence will be complicated in certain cases by the lack of a
common technology architecture. Significant attention to the integration of the
management teams of the Company and NSMG, and the coordination of sales,
marketing and business development efforts, will also be required. Furthermore,
the different and overlapping administrative functions, systems and procedures
across the three businesses will have to be integrated and streamlined. The
difficulties of integration may be increased by a variety of other factors,
which could include: (i) conflicts that may arise with respect to the OEM and
direct sales distribution model of the Company compared to the NSMG retail and
distribution model which is dependent on the efforts of third party distributors
and resellers; (ii) the need
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<PAGE> 22
to maintain the brand recognition of certain key NSMG products, while migrating
customer identification of such brands to VERITAS; (iii) the need to coordinate
geographically dispersed operations and to manage duplicative facilities in
particular states and foreign countries; and (iv) differences between the
corporate cultures of the Company and SSI. The integration process may cause an
interruption of, or a loss of momentum in, the activities of the businesses of
NSMG, TeleBackup and the Company and may adversely affect the revenues and
results of operations of the Company, at least in the near term. Furthermore,
the integration process could have a material adverse effect on employee morale
and on the ability of the Company to retain the key management, technical and
sales and marketing personnel who are critical to the Company's future
operations and success. In addition, the announcement and consummation of the
acquisition could cause customers or potential customers to delay or cancel
orders for products as a result of uncertainty over the integration and
continued support of the combined Company's products. Failure to integrate the
Company's operations with those of NSMG and TeleBackup would have a material
adverse effect on the Company's business, operating results and financial
condition.
Fluctuating Operating Results. The Company's operating results have
fluctuated in the past, and may fluctuate significantly in the future. Factors
that may cause fluctuations in operating results include:
(i) the timing and level of sales through OEMs of the Company's
products;
(ii) a significant increase in dependence upon sales of product
through direct and indirect non-OEM sales channels, which tend to be
completed later in the Company's fiscal quarters and are more unpredictable
than OEM sales;
(iii) expenditures related to investment in new products and
distribution channels, including hiring additional sales and marketing
personnel, and promotional expenses; and
(iv) the timing and extent of sales and marketing organizations within
OEM customers and resellers becoming familiar with and endorsing the
Company's products for resale.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to:
(i) integration of the Company's business with the NSMG business and
TeleBackup's business;
(ii) OEM development and introduction of new operating system upgrades
that may require significant technical efforts by the Company to modify
existing products or develop new products;
(iii) introduction or enhancement of products by the Company or its
competitors;
(iv) technological changes in data storage and networking technology;
(v) the ability of the Company to develop, introduce and market new
products in a timely manner, including products for Windows NT and storage
area networking;
(vi) quality control of products sold;
(vii) the relative growth of the Windows NT and Unix markets;
(viii) customer order deferrals for any reason, in particular as a
result of Year 2000 compliance concerns or new product announcements by the
Company or its competitors;
(ix) foreign currency exchange rates;
(x) pricing policies and distribution terms;
(xi) the timing of revenue recognition for sales of software products
and services;
(xii) acquisition costs; and
(xiii) general economic conditions.
The Company's operating results are highly sensitive to the timing of
larger orders. Orders typically range from a few thousand dollars to over a
million dollars. Revenue is difficult to forecast because the client/server
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<PAGE> 23
systems management software market is an emerging market that is highly
fragmented and subject to rapid change. The sale of the Company's products also
typically involves a significant technical evaluation and commitment of capital
and other resources, with the delays frequently associated with customers'
internal procedures, including delays to approve large capital expenditures, to
engineer deployment of new technologies within their networks, and to test and
accept new technologies that affect key operations. For these and other reasons,
the sales cycle associated with the Company's products is typically lengthy,
generally lasting three to nine months, is subject to a number of significant
risks, including customers' budgetary constraints and internal acceptance
reviews, that are beyond the Company's control, and varies substantially from
transaction to transaction. Because of the lengthy sales cycle and the large
size of certain transactions, if orders forecasted for a specific transaction
for a particular quarter are not realized in that quarter, the Company's
operating results for that quarter could be materially adversely affected.
The Company typically recognizes a significant portion of its direct sales
license revenue in the last two weeks of a quarter. The Company's expense levels
are based, in part, on its expectations as to future revenue and to a large
extent are fixed in the short term. The Company will not be able to adjust
expenses in the short term to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall of revenue in relation to the Company's
expectations or any material delay of customer orders would have an immediate
adverse effect on its business, operating results and financial condition. As a
result of all of the foregoing factors, the Company believes that
period-to-period comparisons of the Company's results of operations are not and
will not necessarily be meaningful and should not be relied upon as any
indication of future performance. Furthermore, it is possible that in future
quarters the Company's operating results may not meet or exceed the expectations
of public market analysts and investors. In such event, the price of the
Company's Common Stock would be materially adversely affected in a manner
unrelated to the Company's long-term operating performance.
In addition, the integration of the businesses of the Company, NSMG and
TeleBackup will be costly, which will directly affect quarterly operating
results, and may indirectly affect operating results if certain risks associated
with the integration process come to fruition.
Management of Growth; Dependence on Key Personnel. The Company has grown
significantly in recent periods and expects to continue to grow significantly in
the future. As a result of the acquisition of the NSMG business and the
TeleBackup acquisition, the Company is likely to at least double the number of
its employees. Such growth is likely to significantly strain the Company's
management control systems and resources (including decision support,
accounting, e-mail and management information systems). With such future growth,
the Company will be required to continue to improve its financial and management
controls, reporting systems and procedures, to expand, train and manage its
employee work force, and to secure additional facilities. There can be no
assurance that the Company will be able to manage such growth effectively. Any
failure to do so could have a material adverse effect on its business, operating
results and financial condition. Competition for qualified sales, technical and
other personnel is intense, particularly in the San Francisco Bay Area where the
Company's headquarters are located, and there can be no assurance that the
Company will be able to attract, assimilate or retain additional highly
qualified employees in the future. If the Company is unable to hire and retain
such personnel, particularly those in key positions, its business, operating
results and financial condition would be materially and adversely affected. The
Company's future success also depends in significant part upon the continued
service of its key technical, sales and senior management personnel. The loss of
the services of one or more of these key employees could have a material adverse
effect on its business, operating results and financial condition. Additions of
new personnel and departures of existing personnel, particularly in key
positions, can be disruptive and can result in departures of other existing
personnel, which could have a material adverse effect on the Company's business,
operating results and financial condition.
Distribution Channels. A significant portion of the Company's net revenues
are derived from user license fees received from computer OEMs that incorporate
the Company's storage management software products into their operating systems.
The Company has no control over the shipping dates or volumes of systems shipped
by its OEM customers, and there can be no assurance that any OEMs will ship
operating systems incorporating the Company's products in the future.
Furthermore, the Company's license agreements with its
23
<PAGE> 24
OEM customers generally do not require the OEMs to recommend or offer the
Company's products exclusively, have no minimum sales requirements and may be
terminated by the OEMs without cause. Such OEM customers could choose to develop
their own storage management solutions internally and incorporate those products
into their systems in lieu of the Company's products. If some or all of the
Company's OEM customers were to discontinue selling the Company's products, the
Company's business would be materially adversely affected.
The Company's strategic relationships with HP, Sun Microsystems, Dell,
Compaq Computer and Microsoft reflect a strategy for OEM product distribution
involving the bundling by OEMs of certain functional subsets or "lite" versions
of the Company's products with OEM computer systems or operating systems,
cooperative direct selling of full versions of such products by the Company and
the OEMs, and the direct sale by the Company of added value products to the OEM
installed base of customers. There can be no assurance that the Company will be
able to deliver its products to such OEMs in a timely manner despite the
dedication of significant engineering and other resources to the development of
such products. Any such failure could result in the Company having expended
significant resources with little or no return on its investment, which could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that this distribution strategy
will achieve the desired propagation of the Company's technology in the market
place, or result in sufficient revenues to the OEMs to induce them to actively
market the Company's products to their customers. This could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the simultaneous sales efforts of such
OEMs and the Company will not create certain channel conflicts. Furthermore,
failure of the Company to timely develop and achieve market acceptance of new
products for sale to the OEM installed customer base could lead to a significant
loss of potential revenue to the Company.
In connection with the Company's agreement with Microsoft, there can be no
assurance that Microsoft will use the Company's products in any future version
of Windows NT, or that the Company will realize any expected benefits even if
such products are used in any future version of Windows NT. If the Company's
products are not available in a timely fashion, if Microsoft does not use these
products in Windows NT, or if the Company does not receive any benefits for the
use of its products in Windows NT, the Company's business, operating results and
financial condition could be materially adversely affected. The release by
Microsoft of Windows NT 5.0 has been significantly delayed. Upon the ultimate
release of Windows NT 5.0, if the rate of adoption by users is slow, the Company
may not be in a position to market add-on products to the Windows NT installed
customer base, thereby resulting in possible delays in, or loss of, revenue to
the Company. Moreover, the Company would have lost certain opportunities as a
result of the diversion of resources to this agreement. Under this agreement,
Microsoft is also permitted to develop enhancements to and derivative products
from the Company's products that are embedded in certain Windows NT releases,
and would retain ownership of any such enhancements or derivative products.
There can be no assurance that Microsoft will not develop any such enhancements
or derivative products and, as a result, compete with the Company in this area.
The Company's direct sales force is marketing and selling the Company's
products in competition with indirect sellers of its products, such as OEMs and
resellers. This practice could adversely affect the Company's relations with
OEMs and resellers, and result in their being less willing to market the
Company's products aggressively. There can be no assurance that the sales and
marketing efforts of Company's direct sales force will not result in a decline
in indirect sales as a result of actual or potential competition between the
Company's direct sales force and such indirect sellers, which can have a
material adverse effect on the Company's business, operating results and
financial condition.
Future Acquisitions. The Company has made several acquisitions in the past.
In addition, the Company is in the process of acquiring the NSMG business and
TeleBackup. Acquisitions of companies, divisions of companies or products entail
numerous risks, including difficulty in successfully integrating and
assimilating acquired operations, diversion of management's attention and loss
of key employees of acquired companies. Difficulties can arise with respect to
the integration of product offerings and employees of acquired companies,
including conflicts that may arise with respect to distribution strategies,
coordination of geographically separated organizations, differences in corporate
culture and integration of personnel with disparate business
24
<PAGE> 25
backgrounds. The integration and assimilation process can cause an interruption
of, or a loss of momentum in, the activities of the Company's business. Failure
to accomplish the effective integration of the Company's operations with those
of an acquired company could adversely affect the revenues and operating results
of the Company. Products acquired by the Company in the past have required
significant additional development, such as restructuring software code to
support larger scale environments, porting products to additional operating
system platforms, regression testing and improving network and device support,
before they could be marketed and some failed to generate revenue for the
Company. No assurance can be given that the Company will not incur similar
problems in future acquisitions. Any such problems could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, future acquisitions by the Company may result in dilutive issuance of
equity securities, the incurrence of additional debt, large one-time write-offs
and the creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
Revenue Concentration. A substantial majority of the Company's revenues
have been, and in future periods will be, derived from storage management
products. Storage management products accounted for 91% and 89% of the Company's
license revenue in the three months ended September 30, 1998 and 1997, and 93%
and 89% for the nine months ended September 30, 1998 and 1997, respectively. In
particular, the Company's Volume Manager, File System and Net Backup products
account for a substantial majority of storage management product revenues. The
Company expects that these storage management products will continue to account
for a substantial majority of the Company's revenues in future periods. Such
products have a fixed life cycle that is difficult to estimate. The introduction
of products embodying new technologies, the emergence of new industry standards,
or changes in customer requirements could accelerate such products becoming
obsolete. As a result, the Company's success depends upon its ability to
continue to enhance these products, respond to changing customer requirements
and develop and introduce in a timely manner new products that achieve market
acceptance.
The allocation of greater levels of sales, service and support resources to
storage management products could adversely affect the Company's ability to
continue enhancing and supporting its other product lines. Any failure by the
Company to enhance and support its other product lines could result in adverse
customer reactions and the loss of an existing revenue base, and could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's future financial performance will depend in large part on
continued growth in the number of companies adopting storage management
solutions for their client/server computing environments. There can be no
assurance that the market for storage management software and services will
continue to grow. If the storage management software and services market fails
to grow or grows more slowly than the Company currently anticipates, or in the
event of a decline in unit price or demand for the Company's storage management
products, as a result of competition, technological change or other factors, the
Company's business, operating results and financial condition would be
materially and adversely affected. The Company's financial performance may, in
the future, experience substantial fluctuations as a consequence of such
industry patterns, general economic conditions affecting the timing of orders,
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
Uncertainty in Porting Products to New Operating Systems and Expansion into
Windows NT Market. Certain of the Company's products operate primarily on
certain versions of the UNIX operating system. Product development activities
are being directed towards developing new products for the UNIX operating
system, developing enhancements to the Company's current products and porting
new products and enhancements to other versions of the UNIX operating system.
The Company has also made and intends to continue to make substantial
investments in creating Windows NT versions of its products, and the Company's
future success will depend on its ability to successfully accomplish this.
The process of porting existing products and product enhancements to, and
developing new products for, new operating systems requires substantial capital
investment, the devotion of substantial employee resources
25
<PAGE> 26
and the cooperation of the owners of the operating systems to which the products
are being ported or developed. For example, the added focus on porting and
development work for the Windows NT market has required, and will require, the
Company to hire additional personnel with expertise in the Windows NT
environment and to devote its engineering resources to these projects.
Furthermore, operating system owners have no obligation to assist in these
porting or development efforts, and may instead choose to enter into agreements
with other third-party software developers or internally develop their own
products. In particular, the failure to receive a source code license to certain
portions of the operating system, either from the operating system owner or a
licensee thereof, would prevent the Company from porting its products to or
developing products for such operating system. In this regard, the Company
relies on a source code license from Microsoft with respect to the Company's
Windows NT development projects. Such license is renewable on an annual basis
but Microsoft is under no obligation to agree to such renewal. If the Microsoft
license is not renewed, the Company's efforts to create Windows NT versions of
operating system-level products would be severely hampered. There can be no
assurance that the Company's current or future porting efforts will be
successful or, even if successful, that the operating system to which the
Company elects to port, or for which it elects to develop products, will achieve
or maintain market acceptance. The failure of the Company to port its products
to new operating systems or to select those operating systems that achieve and
maintain market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's agreement with Microsoft requires the Company to develop a
functional subset of the VERITAS Volume Manager product to be ported to and
embedded in Windows NT. The agreement also requires the Company to develop a
disk management graphical user interface designed specifically for Windows NT.
Microsoft is obligated to fund a significant portion of the development expenses
for this product. The Company is currently recognizing revenue under the
development contract with Microsoft on a percentage of completion basis
consistent with its policy for revenue recognition for other similar agreements.
The payment terms in the Microsoft agreement do not directly correlate to the
timing of development efforts and therefore revenue of $0.5 million has been
recognized in advance of contract billings as of September 30, 1998. The failure
of the Company to complete the product in sufficient time for inclusion in
Windows NT 5.0 may result in a significant delay in the product being embedded
in Windows NT, and could ultimately result in Microsoft electing to omit the
Company's product from Windows NT altogether, which could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Microsoft relationship will require the Company's
marketing and sales departments to deal in higher volume markets and will
require the Company to service the growing needs of the Windows NT channel and
customer base. The Company's experience in these higher volume markets is
limited.
Intense Competition. The markets in which the Company competes are
intensely competitive and rapidly changing. The Company encounters competition
in the storage management market from internal development groups of current and
prospective OEM customers, which have the resources and capability to develop
their own storage management solutions. Among the OEMs which have included
storage management capabilities in their operating systems are Sun Microsystems
for its Solaris system, Compaq for its Digital UNIX system, HP for its HP-UX
system and Microsoft for Windows NT. The Company also encounters competition
from other third party software vendors and hardware companies offering products
that incorporate certain of the features provided by the Company's products, and
from disk controller and disk subsystem manufacturers which have included or may
include similar features.
As a result of the Company's expansion with associated higher visibility in
certain markets, the Company faces new competitors and new competitive factors.
In particular, the Company's competitors include: (i) hardware and software
vendors that offer a management platform or framework to support vendor-created
and third-party systems management applications; (ii) vendors that provide
systems management software for the mainframe environment who are migrating
their products to the client/server environment; (iii) vendors that provide
"point" products that address specific problems and offer specific
functionality; and (iv) vendors that provide integrated and interoperable
solutions. Specific competitors that the Company has encountered or expects to
encounter as competitors include the Cheyenne division of Computer Associates
International, Inc., the ADSTAR Distributed Storage Manager division of
International Business Machines Corporation
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<PAGE> 27
("IBM"), Legato Systems, Inc. and EMC Corporation. Many such competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger installed customer
base, than the Company. The Company expects that the market for storage
management software, which historically has been large and fragmented, will
become more consolidated with larger companies being better positioned to
compete in such environment in the long term. As the open systems management
software market develops, a number of companies with greater resources than the
Company could attempt to increase their presence in this market by acquiring or
forming strategic alliances with competitors or business partners of the
Company.
The Company's success will depend significantly on its ability to adapt to
these new competing forces, to develop more advanced products more rapidly and
less expensively than its competitors, and to educate potential customers as to
the benefits of licensing the Company's products rather than developing their
own products. The Company's future and existing competitors could introduce
products with superior features, scalability and functionality at lower prices
than the Company's products and could also bundle existing or new products with
other more established products in order to compete with the Company. In
addition, because there are relatively low barriers of entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would result in the Company's business, operating results and financial
condition being materially and adversely affected.
Risk of Software Defects; Product Liability. Software products as complex
as those to be 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 has in the past released products
with defects, discovered software errors in certain of its new products after
introduction and experienced delayed or lost revenue during the period required
to correct these errors. The Company has regularly introduced, and the Company
intends to continue to introduce, new products and enhancements to existing
products. Despite testing by the Company and by current and potential customers,
there can be no assurance that defects and errors will not be found in existing
products or in new products, versions or enhancements after commencement of
commercial shipments. Any such defects and errors could result in adverse
customer reactions, negative publicity regarding the Company and its products,
harm to the Company's reputation, loss of or delay in market acceptance or
require expensive product changes, any of which could have a material adverse
effect upon the Company's business, operating results and financial condition.
The Company derives a significant amount of revenue from products licensed
pursuant to "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. The
Company's products are generally used to manage data critical to organizations,
and, as a result, the sale and support of products by the Company may entail the
risk of product liability claims. Although the Company maintains errors and
omissions product liability insurance, such insurance may not adequately
compensate the Company for losses relating to such claims and a successful
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for the Company's products is intensely competitive,
highly fragmented and characterized by rapid technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies, the emergence of new
industry standards or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner new products that achieve market acceptance and keep pace with
technological developments and emerging industry standards. Customer
requirements include, but are not limited to, product operability and support
across distributed and changing heterogeneous hardware platforms, operating
systems, relational databases and networks. For example, as the
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<PAGE> 28
Company's customers start to utilize Windows NT or other emerging operating
platforms, it will become necessary for the Company to enhance its products to
operate on such platforms in order to meet these customers' requirements. There
can be no assurance that the Company's products will achieve market acceptance
or will adequately address the changing needs of the marketplace or that the
Company will be successful in developing and marketing enhancements to its
existing products, or new products incorporating new technology, on a timely
basis. The Company has in the past experienced delays in product development,
and there can be no assurance that the Company will not experience further
delays in connection with its current product development or future development
activities. There can be no assurance that the Company will have the resources
necessary to perform its obligations under its development agreements in a
timely and efficient manner or that its development efforts will be successful.
If the Company is unable to develop and introduce new products or enhancements
to existing products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. Because the
Company has limited resources, it must restrict its product development efforts
to a relatively small number of products and operating systems. There can be no
assurance that these efforts will be successful or, even if successful, that any
resulting product or operating system will achieve market acceptance.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends upon its proprietary technology. The Company relies on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect its proprietary
rights. The Company presently has no patents although it has filed several
patent applications. As part of its confidentiality procedures, the Company
generally enters into non-disclosure agreements with its employees, distributors
and 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. 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. In selling its products, the Company relies in part on
"shrink wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, 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, including any patent that may be issued, 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 its other intellectual property rights.
The Company is not aware that any of its products infringe 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 expects that software product developers will
increasingly be subject to such claims 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 and
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, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for 22% and 21% of the
Company's total revenues for the three and nine month periods ended September
30, 1998 and 16% and 20% for the three and nine month periods ending September
30, 1997, respectively. The Company believes that its future success depends
upon continued expansion of its international operations. The Company currently
has sales and service offices in the United States, Canada, Japan, the United
Kingdom, Germany, France, Sweden and the Netherlands and has a product
development group in India. The Company also has resellers in North America,
Europe, Asia Pacific, South America and the Middle East. International expansion
may require the Company to establish additional
28
<PAGE> 29
foreign offices, hire additional personnel and recruit additional international
resellers. This may require significant management attention and financial
resources and could adversely affect the Company's operating margins. To the
extent the Company is unable to effect these additions efficiently and in a
timely manner, its growth, if any, in international sales will be limited, and
its business, operating results and financial condition could be materially and
adversely affected. There can be no assurance that the Company will be able to
maintain or increase international market demand for its products. Furthermore,
certain global markets, including Asia, Russia and Latin America, are currently
undergoing significant economic turmoil which could result in deferral of
purchase of information technology products and services by potential customers
located in such markets, thereby further limiting the Company's ability to
expand international operations.
As of September 30, 1998, the Company had 48 engineers employed by its
subsidiary located in Pune, India, who perform certain product development work.
These international operations subject the Company to a number of risks inherent
in developing products outside of the United States, including the potential
loss of developed technology, imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
Furthermore, if the Company were required to discontinue its product development
efforts in India, it would incur significantly higher operating expenses as a
result of having to perform such development work in the United States.
From time to time, the Company may engage in exchange rate hedging
activities. Such activities have been insignificant to date. There can be no
assurance that any hedging techniques implemented by the Company will be
successful.
The Company's international business also involves a number of additional
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 Company's third fiscal quarter,
unexpected changes in regulatory requirements and royalty and withholding taxes
that restrict the repatriation of earnings, tariffs and other trade barriers,
and the burden of complying with a wide variety of foreign laws. The Company's
international sales are generated primarily through its international sales
subsidiaries and are denominated in local currency, creating a risk of foreign
currency translation gains and losses. To the extent profit is generated or
losses are incurred in foreign countries, the Company's effective income tax
rate may be materially and adversely affected. In some markets, localization of
the Company's products is essential to achieve market penetration. The Company
may incur substantial costs and experience delays in localizing its products,
and there can be no assurance that any localized product will ever generate
significant revenue. There can be no assurance that any of the factors described
herein will not have a material adverse effect on the Company's future
international sales and operations and, consequently, its business, operating
results and financial condition.
Significant Leverage; Debt Service. In connection with the sale of 5.25%
Convertible Subordinated Notes due 2004 (the "Notes"), the Company incurred
$100.0 million aggregate principal amount of indebtedness which resulted in a
ratio of long-term debt to total capitalization at September 30, 1998 of
approximately 41%. As a result of this additional indebtedness, the Company's
principal and interest payment obligations will increase substantially. The
degree to which the Company will be leveraged could materially and adversely
affect the Company's ability to obtain financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. The Company's ability to meet its debt
service obligations will be dependent upon the Company's future performance,
which will be subject to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.
The Company will require substantial amounts of cash to fund scheduled
payments of principal and interest on its indebtedness, including the Notes,
future capital expenditures and any increased working capital requirements. If
the Company is unable to meet its cash requirements out of cash flow from
operations, there can be no assurance that it will be able to obtain alternative
financing. In the absence of such financing, the Company's ability to respond to
changing business and economic conditions, to make future acquisitions, to
absorb adverse operating results or to fund capital expenditures or increased
working capital requirements may
29
<PAGE> 30
be adversely affected. If the Company does not generate sufficient increases in
cash flow from operations to repay the Notes at maturity, it could attempt to
refinance the Notes; however, no assurance can be given that such a refinancing
would be available on terms acceptable to the Company, if at all. Any failure by
the Company to satisfy its obligations with respect to the Notes at maturity
(with respect to payments of principal) or prior thereto (with respect to
payments of interest or required repurchases) would constitute a default under
the Indenture and could cause a default under agreements governing other
indebtedness, if any, of the Company.
Volatility of Stock Price. The market price for the Company's Common Stock
is highly volatile. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations, new products,
acquisitions or dispositions, new customer relationships or new strategic
relationships by the Company or its competitors, changes in prices of the
Company's or its competitors' products and services, changes in product mix, or
changes in revenue and revenue growth rates for the Company. Statements or
changes in opinions, ratings, or earnings estimates made by brokerage firms or
industry analysts relating to the markets in which the Company does business, or
relating to the Company specifically, have resulted, and could in the future
result, in an immediate and adverse effect on the market price of the Company's
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations, which have particularly affected the
market price for the securities of many high-technology companies and that often
have been unrelated or disproportionate to the operating performance of these
companies. These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may adversely affect the
market price of the Company's Common Stock.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.14 Office building sublease dated 2/27/98, by and between the
Registrant and Space Systems/Loral, Inc.
10.15 Office building lease dated 4/30/98, by and between the
Registrant and Ryan Companies US, Inc.
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
(b)REPORTS ON FORM 8-K
No current Reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 1998.
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 12, 1998.
VERITAS SOFTWARE CORPORATION
/s/ KENNETH E. LONCHAR
--------------------------------------
Kenneth E. Lonchar
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
31
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.14 Office building sublease dated 2/27/98, by and between the
Registrant and Space
Systems/Loral, Inc.
10.15 Office building lease dated 4/30/98, by and between the
Registrant and Ryan
Companies US, Inc.
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
<PAGE> 1
EXHIBIT 10.14
STANDARD SUBLEASE
1. PARTIES. This Sublease, dated, for reference purposes only, February 27,
1998, is made by and between Space Systems/Loral, Inc., a Delaware
corporation, located at 3825 Fabian Way, MS Z-02, Palo Alto, California
94303 (herein called "Sublessor") and Veritas Software Corporation, a
Delaware corporation, located at 1600 Plymouth Street, Mountain View,
California 94043 (herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental and upon all of the
conditions set forth herein, that certain office space consisting of the
entire first floor (except for the front lobby, which is shared) (the
"Premises") of a free-standing 2-story building (the "Building") located
at 1098 Alta Road, Mountain View, California. Sublessee shall have the
right in common with Sublessor or other occupants of the Building to
utilize the front lobby and staircases for ingress and egress to and from
their respective premises in the Building. Sublessee's rentable floor
space, including its share of the lobby, is 28,297 square feet. Sublessee
shall have the right in common with Sublessor or other occupants of the
Building to use its pro rata share of the parking spaces servicing the
Building.
3. TERM.
3.1 Term. The term of this Sublease shall commence May 1, 1998 and end on
September 30, 2001 unless sooner terminated pursuant to any provision
hereof.
3.2 Delay in Commencement. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to
Sublessee on said date, Sublessor shall not be subject to any liability
therefore, nor shall such failure affect the validity of this Sublease or
the obligations of Sublessee hereunder or extend the term hereof, but in
such case Sublessee shall not be obligated to pay rent until possession of
the Premises is tendered to Sublessee, provided, however, that if
Sublessor shall not have delivered possession of the Premises within
thirty (30) days from said commencement date, Sublessee may, at
Sublessee's option, by notice in writing to Sublessor within fifteen (15)
days thereafter, cancel this Sublease, in which event the parties shall be
relieved of all liability hereunder, except that Sublessor shall return
all funds theretofore deposited by Sublessee, to Sublessee.
4. BASE RENT. Sublessee shall pay to Sublessor as base rent for the Premises
equal monthly payments, in advance, on the 1st day of each month equal to
$84,891.00 per month for the first year of the term; $86,305.85 per month
for the second year of the term; $87,720.70 per month for the third year
of the term; and $89,135.55 per month for the remainder of the term.
Sublessee shall pay Sublessor upon the execution hereof $28,297.00 as rent
for the first month of the Sublease term, which represents $84,891.00 less
a credit of $56,594.00 as an allowance towards its consultant's fee. Rent
for any period during the term hereof which is less than one (1) month
shall be a pro-rata portion of the monthly installment. Rent shall be
payable, without demand, reduction or offset, except as set forth in the
Master Lease (as hereinafter defined), in lawful money of the United
States to Sublessor, at the address stated herein or to such other persons
or at such other places as Sublessor may designate in writing.
In addition to the Base Rent, Sublessee shall pay Additional Rent in
accordance with the provisions of Paragraph 2.2 of the Addendum to this
Sublease.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
thereof $84,891.00 as security for the Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision
of this Sublease, Sublessor may use, apply or retain all or any portion of
said deposit for the payment of any rent or other charge in reason of
Sublessee's default, or to compensate Sublessor for any loss or damage
which Sublessor may suffer thereby. If Sublessor so uses or applies all or
any portion of said deposit Sublessee shall, within ten (10) business days
after written demand therefore, deposit
1
<PAGE> 2
cash with Sublessor in an amount sufficient to restore said deposit to the
full amount hereinabove stated and Sublessee's failure to do so shall be a
material breach of this Sublease. Sublessor shall not be required to keep
said deposit separate from its general accounts. Upon expiration or sooner
termination of this Sublease, said deposit or so much thereof as has not
therefore been applied by Sublessor, shall be returned, without payment of
interest or other increment for its use to Sublessee (or at Sublessee's
option to the last assignees, if any, of Sublessee's interest hereunder)
at the expiration of the term thereof, and after Sublessee has vacated the
Premises. No trust relationship is created herein between Sublessor and
Sublessee with respect to said Security Deposit.
6. USE.
6.1 Use. The Premises shall be used and occupied only for purposes
permitted under the Master Lease and for no other purposes.
6.2 Compliance with Law.
A) Sublessee acknowledges and agrees that it is accepting the Premises
in its AS-IS condition without representation or warranty as to the
condition thereof or compliance with applicable laws and codes (including
the Americans with Disabilities Act). Sublessee acknowledges that it has
been given adequate opportunity to inspect, and has inspected, the Premises
to determine its condition and its compliance with applicable laws and
codes.
B) Sublessee shall, at Sublessee's expense, comply promptly with all
applicable statutes, ordinances, rules, regulations, orders, restriction of
record, and requirements in effect during the term or any part of the term
thereof regulating the use by Sublessee of the Premises. Sublessee shall
not use or permit the use of the Premises in any manner that will tend to
create waste or nuisance or, if there shall be more than one tenant of the
building containing the Premises, which shall tend to disturb such other
tenants.
6.3 Condition of Premises. Sublessee hereby accepts the Premises in their
condition existing as of the date of the execution hereof, subject to all
applicable zoning, municipal, county and state laws, ordinances, and
regulations governing and regulating the use of the Premises, and accepts
this Sublease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Sublessee acknowledges that neither
Sublessor nor Sublessor's agents have made any representations or warranty
as to the suitability of the Premises for the Sublessee's business.
7. MASTER LEASE.
7.1 Sublessor is the lessee of the Premises by virtue of that certain
Lease Agreement made the 31st day of July, 1996, between John Arrillaga,
Trustee, or his successor trustee, UTA dated 7/20/77 (Arrillaga Family
Trust) as amended, and Richard T. Peery, Trustee, or his successor
Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust), as
amended, as Landlord (herein collectively referred to as the "Master
Lessor") and Sublessor, as Tenant, a copy of which is attached hereto
marked Exhibit 1 (herein referred to as the "Master Lease").
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 All of the terms and conditions of the Master Lease are incorporated
herein as terms and conditions of this Sublease, with reference therein to
"Lessor" and "Lessee" to be deemed to mean and refer to, respectively,
Sublessor and Sublessee herein, and with reference therein to the term
"Premises" to be deemed to mean and refer to the Premises as defined in
Section 2 hereof; provided, however, that the following provisions of the
Master Lease shall be excluded from this Sublease, or, as described below
modified: Paragraph 2, 3, 4A, 4D, 4E, 4F, 4G, 5, 7 (to the extent
inconsistent with the express provisions hereof), 10 (this provision shall
be modified for purposes of this Sublease to provide that Sublessee shall
be required to maintain such liability insurance in an amount not less
than $2 million per occurrence, and such insurance shall name both the
Master Lessor and the Sublessor as additional insured), 39, 46, 47, 49, 50
(to the extent of 46.2%
2
<PAGE> 3
of the additional rent payable thereunder) and 51. Paragraph 44 is
excluded to the extent of the requirement that the Master Lessor agrees
that the language at the end thereof in quotes is not to be contained in
this Sublease; otherwise such language is hereby incorporated by
reference, but Sublessor agrees not to exercise the right referred to
therein to voluntarily elect to terminate the Master Lease except if such
right is exercised pursuant to Paragraph 21 or 22 of the Master Lease or
this Sublease, whereupon the term of this Sublease shall also terminate on
such sooner date.
7.4 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including
reasonable attorneys' fees, arising out of Sublessee's failure to comply
with or perform Sublessee's obligations under this Sublease.
7.5 Sublessor agrees to maintain the Master Lease during the entire term
of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor pursuant to Paragraphs 21
or 22 of the Master Lease or arising out of the failure of Sublessee to
perform any of its obligations under this Sublease.
7.6 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that, to its knowledge, no default exists on the part
of any party to the Master Lease.
7.7 To the extent that the Master Lease provides that the Master Lessor
shall provide services, utilities, insurance, maintenance or repairs,
Sublessee shall seek recourse first from Master Lessor. If Master Lessor
shall not promptly take action requested by Sublessee, Sublessee may then
notify Sublessor of such failure and Sublessor shall promptly attempt to
enforce Sublessor's rights under the Master Lease for the benefit of
Sublessee, provided, however, it shall not be required to incur any
out-of-pocket expenses therefore, unless reimbursed by Sublessee.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject, however, to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a default
shall occur in the performance of Sublessor's Obligations under the Master
Lease, that Sublessor may receive, collect and enjoy the rents accruing
under this Sublease. However, if Sublessor shall default in the performance
of its obligations to Master Lessor, then Master Lessor may, at its option,
receive and collect, directly from Sublessee, all rent owing and to be owed
under this Sublease. Master Lessor shall not, by reason of this assignment
of the Sublease nor by reason of the collection of the rents from the
Sublessee, be deemed liable to Sublessee for any failure of the Sublessor
to perform its obligations hereunder.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a
default exists in the performance of Sublessor's obligations under the
Master Lease, to pay to Master Lessor the rents due and to become due
under Sublease. Sublessor agrees that Sublessee shall have the right to
rely upon any such statement and request from Master Lessor, and that
Sublessee shall pay such rents to Master Lessor without any obligation or
right to inquire as to whether such default exists and notwithstanding any
notice from or claim from Sublessor to the contrary and Sublessor shall
have no right or claim against Sublessee for any such rents to be paid by
Sublessee.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within thirty (30) days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this
Subletting.
3
<PAGE> 4
9.2 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or alter the
primary liability of Sublessor to pay the rent and perform and comply with
all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any one else
liable under the Master Lease shall not be deemed a waiver by Master Lessor
of any provisions of the Master Lease.
(c) The consent of this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master Lease, Master
Lessor may proceed directly against Sublessor, any guarantors or any one
else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity
liable thereon to Master Lessor.
(e) In the event that Sublessor shall default in its obligations under the
Master Lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event
Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of
this Sublease, but Master Lessor shall not be liable for any prepaid rents
nor any security deposit paid by Sublessee unless actually paid to Master
Lessor,nor shall Master Lessor be liable for any other defaults of the
Sublessor under the Sublease. In the event that Master Lessor requires
Sublessee to attorn to Master Lessor pursuant to this subparagraph 9.2(e),
Master Lessor shall provide Sublessee with a non-disturbance agreement
reasonably satisfactory to Sublessee.
9.3 The signatures of the Master Lessor at the end of this document shall
constitute its consent to the terms of this Sublease.
9.4 Master Lessor acknowledges, that to Master Lessor's knowledge, no
default presently exists under the Master Lease of obligations to be
performed by Sublessor and that the Master Lease is in full force and
effect.
10. BROKER'S FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to Grubb &
Ellis, a licensed real estate broker (herein called "Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker.
10.2 Sublessee represents and warrants to Sublessor that it dealt with no
broker other than Broker and that its dealings with E.& Y. Kenneth
Laventhal Real Estate Group is as consultant at its sole cost and expense
(except for credit referred to in Paragraph 4 hereof.)
11. ATTORNEYS' FEES. If any party brings action to enforce the terms hereof to
declare rights hereunder, the prevailing party in any such action, on trial
and appeal, shall be entitled to his reasonable attorney's fees to be paid
by the losing party as fixed by the Court. The provision of this paragraph
shall inure to the benefit of the Broker named herein who seeks to enforce
a right hereunder.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this sublease as of the
date below.
SUBLESSOR: SPACE SYSTEMS/LORAL, INC.
By: /s/ STEPHEN L. JACKSON
------------------------------
Stephen L. Jackson
Its: Vice President, Administration
------------------------------
Date:
------------------------------
SUBLESSEE: VERITAS SOFTWARE CORPORATION
By: /s/ JAY A. JONES
------------------------------
JAY A. JONES
VICE PRESIDENT AND
Its: GENERAL COUNSEL
------------------------------
Date: 3/4/98
------------------------------
MASTER LESSOR: ARRILLAGA FAMILY TRUST AND
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By:
------------------------------
Its:
------------------------------
Date:
------------------------------
5
<PAGE> 6
ADDENDUM TO STANDARD SUBLEASE
BETWEEN SPACE SYSTEMS/LORAL, INC., SUBLESSOR
AND VERITAS SOFTWARE CORPORATION, INC., SUBLESSEE
COVERING PREMISES AT 1098 ALTA ROAD, MOUNTAIN VIEW, CALIFORNIA
("SUBLEASE")
The following provisions are incorporated as provisions of the Sublease, and in
the event of any conflict between the provisions of the Sublease and this
Addendum, the provisions of this Addendum shall govern and control.
1. SUBLEASEE'S MAINTENANCE AND REPAIR OBLIGATIONS. Subject to Sublessee's
obligation to pay its share of "Designated Expenses" referred to in
Paragraph 2 of this Addendum, Sublessor shall fulfill the maintenance and
repair obligations set forth as Lessee's obligations in the Master Lease.
Notwithstanding the foregoing, Sublessee shall be responsible for the
maintenance within the Premises of interior improvements, finishes,
lighting facilities, plate glass and all improvements that Sublessee makes
to the Premises and for any repairs to the Premises necessitated by
Sublessee's negligence or misuse.
2. ADDITIONAL RENT PAYABLE BY SUBLESSEE
2.1 Definitions. The following definitions shall be applicable to this
section:
2.1.1 "Designated Expenses" means all expenses incurred by Sublessor,
whether or not paid directly by Sublessor or reimbursed to Master
Lessor, for the Premises and all other parts of the Building
(including the front lobby on the first floor of the Building, parking
and access areas and landscaping) for (i) all additional charges for
expenses and taxes payable pursuant to Paragraph 4D and 4E of the
Master Lease; (ii) electric, water, gas, and other utilities and
services (such as janitorial, gardening and security services), except
that Sublessee shall (a) pay directly to the utility companies the
charges for water, gas and electricity which are separately metered
for the Premises and (b) contract and pay for its own trash removal;
(iii) maintenance, repair, and replacement costs incurred pursuant to
the Master Lease; and (iv) Sublessor's Premises improvement
depreciation and management fee.
2.1.2 "Sublessee's Share of the Designated Expenses" means 46.2%.
2.2 As Additional Rent hereunder, Sublessee shall pay Sublessor, without
reduction or offset, Sublessee's Share of the Designated Expenses on
the first day of each month of the term of this Sublease. Sublessee's
Share of Designated Expenses shall be deemed to be $14,937 per month.
Within (90) days after the end of each calendar year during the term
of this Sublease, Sublessor shall calculate the Sublessee's Share of
the Designated Expenses for such calendar year and provide notice
thereof to Sublessee and Sublessor's Share of Designated Expenses
shall be adjusted as required by said notice with appropriate credits
or additional payments. Sublessee shall have the right to audit
Sublessor's records with respect to the calculation of Sublessee's
Share of Designated Expenses, provided that it elects in writing to do
so within ninety (90) days of its receipt of Sublessor's notice and
concludes such audit within thirty (30) days after such election
notice.
3. SUBLESSOR'S OBLIGATIONS. If, notwithstanding Sublessor's reasonable
efforts, Sublessee's use of the Premises is substantially impaired due to Master
Lessor's failure to perform any obligation of the Master Lessor under the Master
Lease, upon written request from Sublessee, Sublessor shall assign (to the
extent allowed under the Master Lease) Sublessor's rights under the Master Lease
to the extent necessary to permit Sublessee to institute legal proceedings
against Master Lessor to obtain performance of such obligation.
4. SURRENDER OF THE PREMISES. Subject to the Sublessee's repair and
maintenance obligations, Sublessee's removal and with respect to alterations,
additions, improvements and installations on the Premises shall apply only to
such work performed by Sublessee.
6
<PAGE> 7
5. SIGNAGE. Sublessee shall be entitled to install exterior signage subject
to the approval of Sublessor, Master Lessor and the City of Mountain View. Such
signage may be limited to Sublessee placing its name on the existing monument
sign.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the
date below.
SUBLESSOR: SPACE SYSTEMS/LORAL, INC.
By: /s/ STEPHEN L. JACKSON
------------------------------
Stephen L. Jackson
Its: Vice President, Administration
------------------------------
Date:
------------------------------
SUBLESSEE: VERITAS SOFTWARE CORPORATION
By: /s/ JAY A. JONES
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JAY A. JONES
VICE PRESIDENT AND
Its: GENERAL COUNSEL
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Date: 3/4/98
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MASTER LESSOR: ARRILLAGA FAMILY TRUST AND
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By:
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Its:
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Date:
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7
<PAGE> 1
EXHIBIT 10.15
LEASE AGREEMENT
This LEASE AGREEMENT, made as of this 30th day of April, 1998, between Ryan
Companies US, Inc., a Minnesota corporation ("Landlord"), and VERITAS Software
Corporation, a Delaware corporation ("Tenant");
WITNESSETH, THAT
1. PREMISES: Landlord, subject to the terms and conditions hereof, hereby leases
to Tenant certain premises ("Premises") consisting of the building to be built
at _________________________, Centre Pointe Drive, Roseville, Minnesota
("Building"), the land underlying and contiguous thereto and all improvements
thereon ("Project"). The legal description of the land is attached hereto as
Exhibit A-1. A schematic depiction of the Project is attached hereto as Exhibit
A-2.
2.1 TERM: Tenant takes the Premises from Landlord, upon the terms and conditions
herein contained for the term ("Term") of ten (10) years and zero (0) months
commencing on the date upon which a) construction which is the responsibility of
Landlord (including all leasehold improvements under Section 8.1) is
substantially complete and ready for Tenant's occupancy, with only minor
punchlist items, such as minor paint touch-up, replacement of damaged ceiling
tile, and the like, b) a Certificate of Occupancy for the Premises is issued by
the City of Roseville and terminating on the last day of the one hundred
twentieth full calendar month following commencement unless sooner terminated as
herein provided. Landlord has represented to Tenant that the Building and the
Premises will be complete, subject only to delay permitted under Section 29, on
October 1, 1998. If the Term has not commenced by December 1, 1998, (and with
Tenant having had at least two (2) weeks early access pursuant to Section 8.2
prior thereto) then Tenant may, at its election, delay the commencement of the
Term to any date thereafter which is prior to January 15, 1999. No Base Rent or
Additional Rent shall accrue prior to October 1, 1998, regardless of whether or
not the Term has commenced.
2.2. OPTION TO EXTEND: Tenant shall have the option to extend the Term of this
Lease with respect to the entire Premises for two (2) additional terms of five
(5) years, each, (collectively, the "Extended Terms", and individually, an
"Extended Term"). Each Extended Term shall be upon the same terms as provided in
this Lease for the Term, except for the Base Rent which shall be as set forth in
Section 1.3 of Exhibit C for each Extended Term. Landlord shall, not less than
twelve (12) months before the end of the then Term, give notice to Tenant of
Tenant's upcoming extension option and of Landlord's best estimate of the Market
Rent for the Extended Term covered thereby. Tenant shall exercise its option by
giving notice of such exercise to Landlord, not less than the later of thirty
(30) days after receipt of Landlord's notice of the option and estimate of
Market Rent or twelve (12) months prior to the end of the Term, or the then
current Extended Term, as the case may be. Should Tenant fail to exercise any
option to extend the term of this Lease within the time provided in this
Section, all of Tenant's rights to further extend the term hereof shall expire.
<PAGE> 2
3.1 MONTHLY BASE RENT: Tenant agrees to pay to Landlord during the Term a
monthly Base Rent ("Base Rent") as specified on Exhibit C hereto payable on the
first day of each month in advance, without deduction or setoff of any kind,
except as specifically authorized herein, to Landlord and delivered to
Landlord's managing agent , Ryan Properties, Inc., 700 International Centre, 900
Second Avenue South, Minneapolis, Minnesota 55402, or at such other place as may
from time to time be designated by Landlord.
4. USE: Tenant may use the Premises for any lawful business use. Landlord
represents and warrants that the Project is zoned B-4 Retail office , which does
not include outdoor storage but does permit as permitted uses, without necessity
of any conditional, special or other use permit and without variance of other
special authorization, the uses contemplated by Tenant for the Premises, which
are office, laboratory, equipment testing, and storage.
5. OPERATING COSTS: Tenant shall, for the entire Term, pay to Landlord as an
item of additional rent, without any setoff or deduction therefrom, except as
expressly provided, costs ("Operating Costs") which Landlord may incur in
maintaining and operating the Project during each calendar year of the Term.
"Operating Costs" are defined to include all reasonable expenses and costs (but
not specific costs which are separately billed to and paid by Tenant) which the
Landlord shall pay or become obligated to pay because of or in connection with
the operation and maintenance of the Project, including but not limited to all
real estate taxes and annual installments of special assessments payable in such
calendar year with respect to the Project; costs of any contest of such taxes,
including reasonable attorney's fees; management fees, insurance premiums,
utility costs, security costs, costs of wages, maintenance costs (relating to
the Project including sidewalks, landscaping and parking or service areas,
common areas, service contracts, equipment and supplies) which for federal tax
purposes may be expensed rather than capitalized, all in accordance with
Generally Accepted Accounting Principles, consistently applied but exclusive of
leasing commissions, depreciation, costs of leasehold improvements and all costs
of a capital nature except as provided in the next sentence and payments of
principal and interest on any mortgages, deeds of trusts, or other security
devices covering the Project. Operating Costs shall also include the yearly
amortization of capital costs incurred by the Landlord for improvements to the
Project required to comply with any change after the commencement date in the
laws, rules or regulations of any governmental authority having jurisdiction,
or, but only with Tenant's consent in its absolute discretion, for purposes of
reducing Operating Costs (other than by replacement of worn out and obsolete
equipment or building components, which shall in any event be excluded from
Operating Costs), which costs shall be amortized over the useful life of such
improvements as reasonably estimated by the Landlord, but in no event shall the
annual amortization be in excess of the savings. The management fee shall be
$0.55 per rentable square foot for the first twelve (12) months on the Term, and
shall not increase more than three percent (3%) per year during the remainder of
the Term, but in any event such increase shall not result in a fee in excess of
competitive market fees.
The following shall be excluded from Operating Costs:
<PAGE> 3
A. Landlord's costs and obligations under Section 7.D;
B. Costs directly or indirectly resulting from or relating to
(including repairs, restoration, security measures, emergency or
temporary services, inspection and, during the period of such
repair or restoration, any increase in operating expenses
resulting from) fire, windstorm or other casualty or damage or
destruction from any other cause, whether or not insured or
insurable;
C. Costs of correcting defects in, or inadequacy of, the design or
construction of the Building or the materials used in the
construction of the Building or in the Building equipment or
appurtenances thereto, except that, for the purposes of this
paragraph, conditions resulting from ordinary wear and tear and
use shall not be deemed defects;
D. Amounts which would otherwise be included in Operating Costs
which are payable to affiliates of Landlord, for services on or
to the Building or the Project to the extent that the costs of
such services exceed average competitive costs for such services
rendered by persons or entities of similar skill, competence and
experience, other than an affiliate of Landlord.
E. Financing and refinancing costs, interest or debt or
amortization payments on any mortgage or mortgages, and rental
under any ground or underlying leases or lease, together with
all costs incidental thereto;
F. Costs of Landlord's general corporate overhead and general
administrative expenses (including costs and expenses paid to
third parties to collect rents, prepare tax returns and
accounting reports and obtain financing);
G. Rentals and other related costs, if any, incurred in leasing air
conditioning, security, or other building operation or
management systems, elevators or other equipment of facilities
which, if purchased and owned by Landlord, would ordinarily be
considered to be of a capital nature;
H. Costs resulting from the negligence or misconduct of Landlord or
its employees, agents or contractors;
I. Costs in any manner associated with hazardous materials and
substances (as described in Section 17.1), except that routine
fees for disposal of building standard fluorescent lamps and
similar items may be included in Operating Costs;
J. Travel, entertainment and related expenses incurred by Landlord
or its personnel.
<PAGE> 4
As soon as reasonably practicable prior to the Commencement Date and the
commencement of each calendar year during the Term, Landlord shall, with input
and direction from Tenant, determine an estimate of, and budget for, Operating
Costs for the ensuing calendar year. All levels of service, operation and
maintenance, to the extent controllable, shall be determined from time to time
by Tenant in its discretion, but at all times consistent with similar Projects.
The budget, as initially established for any year, shall be adjusted to reflect
Tenant's determinations as to such levels. No expenditure in excess of any line
item in the budget (or which will, with reasonably anticipated expenses, cause
such excess) shall be made without Tenant's consent and an adjustment to the
budget, except in case of emergency where Landlord may take reasonable necessary
action without such prior authorization. Tenant shall pay, as additional rent
hereunder together with each installment of Base Rent, one-twelfth (1/12th) of
estimated Operating Costs less real estate taxes and installments of special
assessments. Real estate taxes and installments of special assessments shall be
due on or before the later of (a) ten (10) days after receipt of Landlord's
invoice or (b) twenty (20) days prior to the last date such taxes and
installments of special assessments are due without penalty. As soon as
reasonably practicable after the end of each calendar year during the Term and
in any event within 120 days, Landlord shall furnish to Tenant a statement of
the actual Operating Costs for the previous calendar year, and within thirty
(30) days thereafter Tenant shall pay to Landlord, or Landlord shall credit to
the next rent payments due Landlord from Tenant, as the case may be, any
difference between the actual Operating Costs and the estimated Operating Costs
paid by Tenant. Operating Costs for the years in which this Lease commences and
terminates shall be prorated by multiplying the actual Operating Costs by a
fraction the numerator of which is the number of days of that year of the Term
and the denominator of which is 365.
For a period of three (3) years following Tenant's receipt of Landlord's
statement of actual Operating Costs, Landlord shall keep available for Tenant's
inspection and/or audit complete books and records relating to Operating Costs.
During this period Tenant may copy, inspect and/or audit Landlord's Operating
Costs books and records upon reasonable notice to Landlord. The audit must be
performed during regular business hours in the offices where Landlord maintains
its accounting records. No subtenant will have the right to audit under this
provision. An assignee may have the right to audit as provided herein, however,
such right shall only apply to the assignee's term pursuant to the Lease. In the
event a discrepancy of five percent (5%) or more is found in favor of Tenant,
Landlord shall pay the cost of such audit. If the audit discloses an overcharge
by Landlord, Landlord shall reimburse Tenant for such overcharge within twenty
(20) days, unless Landlord disputes the result of the audit.
6. ADDITIONAL TAXES: Tenant shall pay as additional rent to Landlord, together
with each installment of Base Rent, the amount of any gross receipts tax, sales
tax or similar tax (but excluding therefrom any income, estate, inheritance,
corporate or franchise tax), payable by Landlord, on or measured by the receipt
of Base Rent and adjustments thereto. If any such tax is a progressive tax with
higher tax rates on higher receipts, then Tenant shall only pay the amount of
tax that would be payable if the Base Rent payable by Tenant were the only
amount subject to such tax.
<PAGE> 5
7. OBLIGATIONS OF LANDLORD: Landlord agrees that Tenant shall quietly enjoy the
Premises in accord with the provisions hereof, subject only to Section 18.
Landlord shall:
A. Furnish heat and air conditioning to provide an environment that
in Tenant's reasonable judgment is comfortable for occupancy of
the Premises for Tenant's business operations and in accordance
with any applicable regulations.
B. Provide passenger elevator service at all times.
C. Provide janitorial service in and about the Premises as
determined by Tenant in is reasonable judgment.
D. Keep the structure of the Building, and all structural
components thereof, including without limitation, footings,
foundations, columns, exterior walls, interior weight bearing
walls, floor and ceiling slabs, and roof (and all elements of
the roof, whether structural or non-structural), in good repair,
ordinary wear and tear excepted, and make all necessary or
appropriate replacements thereto, all at Landlord's sole cost
and without inclusion in Operating Costs.
E. Provide water for process, drinking, lavatory and toilet
purposes drawn through fixtures installed by Landlord.
F. Provide electricity to the Premises for lighting and operation
of small business office equipment (but not equipment using
amounts of power in excess of that for which the Premises are
presently designed and rated).
G. Landlord shall, consistent with the budget approved by Tenant,
operate, maintain and manage the Project, including grounds and
parking areas in a manner mutually satisfactory to Landlord and
Tenant or as reasonably requested by Tenant. All such
maintenance which is provided by Landlord shall be provided as
reasonably necessary for the comfortable use and occupancy of
the Premises during Tenant's business hours, upon the condition
that the Landlord shall not be liable for damages for failure to
do so due to causes beyond its control.
H. Maintain in full force and effect during the term hereof, a
policy of all-risk insurance, insuring the improvements for
their full replacement value.
<PAGE> 6
It is understood that Landlord does not warrant that any of the services and
utilities referred to above will be free from interruption from causes beyond
the reasonable control of Landlord. Such interruption of service or utilities
shall never be deemed an eviction or disturbance of Tenant's use and possession
of the Premises or any part thereof or render Landlord liable to Tenant for
damages by abatement of rent or otherwise or relieve Tenant from performance of
Tenant's obligations under this Lease, provided Landlord uses all reasonable
efforts to restore such services and utilities as soon as possible.
Following the transfer of Landlord's interest in the Project, other than a
transfer for security purposes only, to an entity which is not controlled by
Ryan Companies US, Inc., its parent, subsidiary or affiliate, or to an entity
which is not controlled by the principals of Ryan, its parent, subsidiary or
affiliates, Tenant may at any time during the Term, upon at least sixty (60)
days prior notice, elect to assume the obligation of Landlord to operate,
maintain and manage the Project (other than the obligations of Landlord under
Sections 7D, 12 and 13 and for capital improvements that may be included in
Operating Costs, which Landlord shall retain), in which event Operating Costs
shall be prorated as of the date Tenant assumes such obligations and Landlord
shall not thereafter be entitled to any management fee.
8.1. LEASEHOLD IMPROVEMENTS: Landlord shall make and install or provide for the
installation of leasehold improvements in accordance with the plans,
specifications, terms and conditions set forth in Exhibit C. Except as
specifically provided for in this Lease, Landlord shall have no obligation to
repair, improve, redecorate or remodel the Premises.
All contractors and subcontractors performing work at the Premises during the
initial build-out of the Building, whether for Landlord or Tenant, must be
recognized and approved by the AFL-CIO Building Trades Council having
jurisdiction and each such contractor or subcontractor must be bound by and a
signatory to an applicable bargaining agreement and observe area standards for
wages and other terms and conditions of employment, including fringe benefits;
provided, however, that this requirement does not apply to or affect any
maintenance or similar type of workers performing services at the Premises or
employees of Tenant after the Premises are complete.
Landlord shall make a commercially reasonable effort to enter into a Project
Labor Agreement for the Project with the AFL-CIO Building Trades Council having
jurisdiction.
8.2. EARLY ACCESS: Tenant and its vendors shall have early access to the
Premises at least two (2) weeks prior to the commencement of the Term to install
its equipment, telephone and data lines prior to completion of its move-in and
occupancy of the Premises in coordination with Landlord's work and schedule for
completion of the Building provided, however, that, without limiting the
foregoing, Landlord shall cooperate in all reasonable respects with Tenant in
the installation of its equipment.
<PAGE> 7
9. COVENANTS OF TENANT: Tenant agrees that it shall:
A. Observe such rules and regulations as from time to time may be
put in effect by Landlord for the general safety of Tenant and
the Building, subject, however, to Tenant's approval of such
rules and regulations, which approval shall not be unreasonably
withheld.
B. Give Landlord access to the Premises at all reasonable times,
accompanied by Tenant, without change or diminution of rent or
interference with Tenant's business, to enable Landlord to
examine the same and to make such repairs, additions and
alterations as Landlord may deem advisable, and during the nine
(9) months prior to the expiration of the Term, to exhibit the
Premises to prospective tenants and to place upon the door or in
the windows of the Premises any usual or ordinary "For Lease"
signs. Tenant may deny Landlord access to certain areas
reasonably designated by Tenant, from time to time, by reason of
security, confidentiality or function.
C. Pay as part of Operating Costs for all replacement electric
lamps, starters and ballasts used in the Premises.
D. Upon the termination of this Lease in any manner whatsoever,
remove Tenant's personal property and such of its equipment and
trade fixtures as it desires and those of any other person
claiming under Tenant, and quit and deliver up the Premises to
Landlord peaceably and quietly in as good order and condition as
the same are now in or hereafter may be put in by Landlord or
Tenant, reasonable use and wear thereof and repairs which are
Landlord's obligation and damage by fire or other casualty
excepted. Goods and effects not removed by Tenant at the
termination of this Lease, however terminated, shall be
considered abandoned and Landlord may dispose of the same as it
deems expedient. Tenant shall not be required to repair damage
(other than damage to the exterior of the Building or structural
damage) to the Premises caused by removal of such items provided
that it uses reasonable means to remove the same.
F. Not assign this Lease or sublet all or any part of the Premises
voluntarily, involuntarily or by operation of law, without first
obtaining Landlord's written consent thereto. Landlord shall,
within ten (10) days of its receipt of Tenant's request, approve
or reject the assignment or sublease and, if rejected, Landlord
shall specify its reason(s) for withholding approval. Landlord's
failure to respond within ten (10) days shall be deemed
approval. Landlord's consent will not be withheld provided that
(i) the occupancy of any such
<PAGE> 8
assignee or sublessee is not inconsistent with the character of
the Building; (ii) such assignee (but not any sublessee) shall
assume in writing the performance of the covenants and
obligations of Tenant hereunder which arise after the effective
date of the assignment; (iii) a fully executed copy of any such
assignment or sublease shall be immediately delivered to
Landlord and (iv) in the case of an assignment (but not
sublease), the assignee is reasonably creditworthy given the
financial obligations imposed by this Lease, but the making of
such assignment or sublease shall not be deemed to release
Tenant from the payment and performance of any of its
obligations under this Lease. Notwithstanding the foregoing,
Landlord's consent shall not be required for any assignment or
sublease made in connection with any merger, consolidation, or
sale of all or substantially all of the assets of Tenant which
are related to the business or division then operating at the
Premises or to any affiliate of Tenant. In the event of an
assignment, Landlord agrees to release Tenant from its
obligations under this Lease if the net worth and net operating
income of the assignee is reasonably sufficient, in Landlord's
reasonable business judgment, to meet the obligations of the
Tenant under this Lease.
G. Tenant may, at its sole expense (except as provided for in
Exhibits C and D), erect exterior signage not in excess of that
permitted by applicable code and regulation for the Premises.
H. Not do any act which may make void or voidable any insurance on
the Premises or the Building, or which may render an increased
or extra premium payable for any insurance deemed necessary or
advisable by Landlord, provided, however, that upon notice from
Landlord, Tenant may elect to pay such additional cost.
I. Not make any structural alterations or additions to the Premises
without obtaining the prior written approval of the Landlord
thereto, and all alterations, additions or improvements
(including carpeting or other floor covering which has been
glued or otherwise affixed to the floor) which may be made by
either of the parties hereto upon the Premises, shall be the
property of Landlord, and shall remain upon and be surrendered
with the Premises, as a part thereof, at the termination of this
Lease. Office furniture, trade fixtures and equipment shall be
the property of Tenant and may be removed by Tenant and the
termination of this Lease.
J. Except for the initial construction which is the obligation of
Landlord under Section 8.1 and Exhibits C and D, keep the
Premises and the Project free from any mechanics',
materialmen's, contractors' or other liens arising from, or any
claims for damages growing out of, any work performed, materials
furnished or obligations incurred by
<PAGE> 9
or on behalf of Tenant. Provided, however, that Tenant shall
have the right to contest any such lien, in which event such
lien shall not be considered a default under this Lease until
the existence of the lien has been finally adjudicated and all
appeal periods have expired. Tenant shall indemnify and hold
harmless Landlord from and against any such lien, or claim or
action thereon, reimburse Landlord promptly upon demand therefor
by Landlord for costs of suit and reasonable attorneys' fees
incurred by Landlord in connection with any such lien, claim or
action, and, upon written request of Landlord if Landlord
reasonably deems itself insecure with the prospect for payment
by Tenant, provide Landlord with a bond, letter of credit, cash
deposit or other reasonable security in an amount necessary to
obtain a release of the Premises or the Project from such lien
if the lien claimant ultimately prevails.
K. Tenant shall, at its own expense, comply with the requirements,
as to Tenant's particular use, of insurance underwriters and
insurance rating bureaus and governmental authorities having
jurisdiction, provided that Landlord shall be responsible for
assuring that the initial construction of the improvements
comply with the foregoing requirements.
L. Maintain in full force and effect during the term hereof, a
policy of public liability insurance under which Landlord is
named as additional insured. The minimum limits of liability of
such insurance shall be $1,000,000.00 combined single limit as
to bodily injury and property damage. Tenant agrees to deliver a
certificate of insurance evidencing such coverage to Landlord.
Such policy shall contain a provision requiring thirty (30) days
written notice to Landlord before cancellation of the policy can
be effected.
10. AMERICANS WITH DISABILITIES ACT: The parties agree that the liabilities and
obligations of Landlord and Tenant under that certain federal statute commonly
known as the Americans With Disabilities Act as well as the regulations and
accessibility guidelines promulgated thereunder as each of the foregoing is
supplemented or amended from time to time (collectively, the "ADA") shall be
apportioned as follows:
A. If any of the common areas of the Project, including, but not limited
to, exterior and interior routes of ingress and egress, off-street
parking and all rules and regulations applicable to the Premises, the
Building or the Project, fails to comply with the ADA, or if the
Building and the Premises as initially constructed does not conform to
the requirements of the ADA in effect at the time of substantial
completion thereof, then in any such case such nonconformity shall be
promptly made to comply by Landlord at its sole expense. Landlord shall
also cause its manager of the Building and the Project (the "Manager")
to comply with the ADA in its operation of the Building and the Project.
<PAGE> 10
B. From and after the commencement date of the Lease, Tenant covenants and
agrees to conduct its operations within the Premises in compliance with
the ADA. If any of the Premises fails to comply with the ADA (other than
by reason of a change in the ADA after the substantial completion of the
Premises, which shall be the responsibility of Landlord), such
nonconformity shall be promptly make to comply by Tenant. In the event
that Tenant elects to undertake any alterations to, for or within the
Premises, excluding initial build-out work, Tenant agrees to cause such
alterations to be performed in compliance with the ADA.
11. PARKING AND DRIVES: Tenant, its employees, and invitees shall have the
exclusive right to use the driveways and parking lots, except that the driveway
area designated on Exhibit B as "Shared Driveway" shall be for access to the
land and the parcel which is located Southerly of the land. Tenant, may, at its
own expense, designate parking spaces as being for visitors of Tenant. Any
changes, additions or deletions to such signage shall be at Tenant's expense.
Tenant further agrees not to use, or permit the use by its employees, the
parking areas for the long term storage of automobiles or other vehicles without
the written consent of Landlord. Landlord represents and warrants that the Site
Plan attached as Exhibit B shows parking sufficient to satisfy a parking ratio
of 4.5 spaces per 1000 square feet of rentable area in the Building with an area
designated on the Site Plan as "Future Parking" which is available to add
sufficient spaces to satisfy a parking ratio of five spaces per 1000 square feet
of area, all in accordance with applicable legal requirements. Landlord shall
not make any changes to the Site Plan or the improvements depicted thereon
without the approval of Tenant in its absolute discretion.
12. CASUALTY LOSS: If the Building is damaged in part or whole from any cause
and the Building can be substantially repaired and restored within the Repair
Period (as defined below) from the date of the damage using standard working
methods and procedures, Landlord shall at its expense promptly and diligently
repair and restore the Building, including all leasehold improvements, to
substantially the same condition as existed before the damage. This repair and
restoration shall be made within the Repair Period unless the delay is due to
causes beyond Landlord's reasonable control. As soon as reasonably possible and
in any event within thirty (30) days after the damage, Landlord shall notify
Tenant in writing of the number of days required for the completion of repairs
from the date of the damage, including a date certain for the completion thereof
(the "Repair Completion Date"). If the Repair Completion Date is more than 120
days, but less than 365 days, from the date of damage, Tenant may, at its
election made by giving written notice thereof to Landlord within ten (10) days
after receipt of Landlord's notice, extend the time for completion of repair
through the Repair Completion Date. As used herein, the "Repair Period" means
the period commencing with the date of damage and ending on the Repair
Completion Date unless, in any case where the Repair Completion Date is more
than 120 days after the date of the damage, Tenant does not elect, or does not
have the right to elect, as provided above to extend the time permitted for
repair beyond said 120 day period, in which event the Repair Period shall end
120 days after the date of the damage.
<PAGE> 11
If the Building cannot be repaired and restored within the Repair Period, then
either party may, within ten (10) days after the determination of the Repair
Period as provided above, cancel the Lease by giving notice to the other party.
If Landlord does not commence repairs within 30 days after the damage or
continue to prosecute such repair continuously with reasonable diligence, or if
the Building is not repaired and restored within the Repair Period, then Tenant
may cancel the Lease at any time thereafter and prior to completion of the
repair. Tenant shall not be able to cancel this Lease if its willful misconduct
caused the damage unless Landlord is not promptly and diligently repairing and
restoring the Premises.
The Base Rent and Additional Rent shall abate to the extent fair and equitable
and the abatement shall include any period that Tenant is unable to occupy or
use the Building, or its occupancy or use is materially adversely affected by
reason of any casualty or cause, whether or not the Premises are "untenantable"
and whether or not the Premises themselves are damaged. The abatement shall
consider the nature and extent of interference to Tenant's ability to conduct
business in the Premises and the need for access and essential services. The
abatement shall continue from the date the damage occurred until thirty (30)
business days after Landlord completes the repairs and restoration, or until
Tenant again uses the Premises or the part rendered unusable, whichever is
first.
Notwithstanding anything else in Section 13, Landlord is not obligated to repair
or restore damage to Tenant's trade fixtures, furniture, equipment, or other
personal property.
If the Lease is in the last twelve (12) months of its Term when material damage
to the Building occurs, then Landlord may cancel this Lease unless Tenant makes
one of the following elections and gives notice thereof within ten (10) days
after receipt of notice of such cancellation from Landlord: 1) elects to extend
the Term of the Lease for the next available Extended Term, if any, or 2) elects
to continue its occupancy for the balance of the Term without requiring Landlord
to repair the damage. Material is defined as costing more than 25% of the
replacement cost of the Building. To cancel, Landlord must give notice to Tenant
within ten (10) days after the Landlord knows of the damage. The notice must
specify the cancellation date, which shall be at least thirty (30) but not more
than sixty (60) days after the date notice is given.
13. CONDEMNATION: If the entire Premises is taken by eminent domain or
transferred under threat of such taking, this Lease shall automatically
terminate as of the date of taking. If a portion of the Premises, or any portion
of the Building or common area, including parking, or good and sufficient access
thereto, is taken by eminent domain and it is unfeasible, in Tenant's reasonable
judgment, for Tenant to continue to operate its business in the portion of the
Premises remaining, Tenant shall have the right to terminate this Lease as of
the date of taking by giving written notice thereof to Landlord within ninety
(90) days after date of taking. If Landlord or Tenant does not elect to
terminate this Lease, Landlord shall, at its expense, restore the Premises,
including any improvements or other changes made therein by Tenant, to as near
the condition which existed immediately prior to the date of taking as
reasonably possible, and to the extent that the Premises or the Project ,
including the common areas and access thereto or the use thereof
<PAGE> 12
by Tenant is adversely affected, the rent shall equitably abate. All damages
awarded for a taking under the power of eminent domain shall belong to and be
the exclusive property of Landlord, whether such damages be awarded as
compensation for diminution in value of the leasehold estate hereby created or
to the fee of the Premises; provided, however, that Landlord shall not be
entitled to any separate award made to Tenant for the value and cost of its
personal property and fixtures or for relocation benefits.
14.1 DELAY IN POSSESSION: Landlord has not and shall not grant to any third
party the right to possess or occupy the Project. If the Term has not commenced
pursuant to Section 2.1 by October 1, 1998, due to the possession or occupancy
thereof by any person not lawfully entitled thereto, or because construction has
not yet been completed, or by reason of any building operations, repair or
remodeling to be done by Landlord, Landlord shall use due diligence to complete
such construction, building operations, repair or remodeling and to deliver
possession of the Premises to Tenant. The Landlord, using such due diligence,
shall not be liable for failure to obtain possession of the Premises for Tenant
or to timely complete such construction, building operations, repair or
remodeling, and the rental and other charges payable by Tenant hereunder shall
be abated until the Premises shall, on Landlord's part, be ready for occupancy
by Tenant, this Lease remaining in all other respects in full force and effect.
14.2 If the Term has not commenced, pursuant to Section 2.1 by November 1, 1998,
due to the possession or occupancy thereof by any person not lawfully entitled
thereto, or because construction has not yet been completed, or by reason of any
building operations, repair or remodeling to be done by Landlord, Landlord shall
use due diligence to complete such construction, building operations, repair or
remodeling and to deliver possession of the Premises to Tenant. Landlord, using
such due diligence, shall be liable only for an amount equal to one day's Base
Rent and Operating Costs for each day of delay, such amount to be credited to
the Base Rent and Operating Costs first due under the terms of this Lease.
Subject to Section 14.3 and such use of due diligence, such credit shall be
Tenant's sole remedy for Landlord's failure to obtain possession of the Premises
for Tenant on or before March 31, 1999, this Lease remaining in all other
respects in full force and effect. Such day for day credit shall apply from and
after November 1, 1998 regardless of the cause for delay in commencement of the
Term and shall include the period during which Tenant elects to delay the
commencement of the Term pursuant to Section 2.1 even if the Term would have,
but for such election, commenced during such period.
14.3 If the Term has not commenced by March 31, 1999, ( and regardless of
whether such delay is permitted under Section 29), Tenant may, in addition to
any other rights or remedies, at its election upon notice given to Landlord,
terminate this Lease at any time thereafter but prior to substantial completion
and commencement of the Term of this Lease. If Tenant terminates this Lease
pursuant to this Section 14.3 and, but for the delays permitted under Section
29, the Premises could have been completed prior to March 31, 1999, Landlord
shall be liable to Tenant for damages.
<PAGE> 13
14.4 As used in the preceding Sections of this Article 14, the phrase "using due
diligence" means having used due diligence from the date hereof through the date
in question and thereafter continuing to use due diligence to complete the
Landlord's obligations within the time required.
15. LIABILITY AND INDEMNITY: Save for its negligence and that of its agents,
Landlord shall not be responsible or liable to Tenant for any loss or damage (i)
that may be occasioned by or through the acts or omissions of persons occupying
any part of the Building or any persons transacting any business in or about the
Building or persons present in or about the Building for any other purpose or
(ii) for any loss or damage resulting to Tenant or its property from burst,
stopping or leaking water, sewer, sprinkler or steam pipes or plumbing fixtures
or from any failure of or defect in any electric line, circuit or facility.
Subject to Section 16, Tenant shall defend, indemnify and save Landlord harmless
from and against all liabilities, damages, claims, costs, charges, judgments and
expenses, including, but not limited to, reasonable attorneys' fees, which may
be imposed upon or incurred or paid by or asserted against Landlord, the
Premises or any interest therein or in the Building by reason of or in
connection with any negligent or tortious act on the part of Tenant or any of
its agents, contractors, servants, employees, licensees or invitees, any
accident, injury, death or damage to any person or property occurring in, the
Premises or any part thereof, provided, however, that nothing contained in this
paragraph shall be deemed to require Tenant to indemnify Landlord with respect
to any negligence or tortious act or omission committed by Landlord or its
agents or any other tenant, occupant, licensee or invitee, or to any extent
prohibited by law.
Subject to Section 16, Landlord shall defend, indemnify and save Tenant harmless
from and against all liabilities, damages, claims, costs, charges, judgments and
expenses, including, but not limited to, reasonable attorneys' fees, which may
be imposed upon or incurred or paid by or asserted against Tenant, the Premises
or any interest therein or in the Building by reason of or in connection with
any negligent or tortious act on the part of Landlord or any of its agents,
contractors, servants, employees, licensees or invitees, any accident, injury,
death or damage to any person or property occurring in, the Premises or any part
thereof, provided, however, that nothing contained in this paragraph shall be
deemed to require Landlord to indemnify Tenant with respect to any negligence or
tortious act or omission committed by Tenant or its agents or any other tenant,
occupant, licensee or invitee, or to any extent prohibited by law.
16. MUTUAL RELEASE/WAIVER OF SUBROGATION: Each of Landlord and Tenant hereby
releases the other from any and all liability or responsibility to the other or
anyone claiming through or under them by way of subrogation or otherwise for any
loss or damage to property caused by any of the all risk casualties insurable
under an all risk property insurance policy, even if such casualty shall have
been caused by the fault or negligence of the other party, or anyone for whom
such party may be responsible.
Landlord shall maintain at all times from and after the date hereof and through
the Term commercial general liability insurance in the amount of not less than
$1,000,000 on a combined single limit basis and name the Tenant as an additional
named insured thereon.
<PAGE> 14
17.1 HAZARDOUS SUBSTANCES: Tenant shall use all reasonable efforts to not
(either with or without negligence) cause or permit the escape, disposal or
release of any biologically or chemically active or other hazardous substances
or materials. Tenant shall not allow the storage or use of such substances or
materials in any manner in violation of law or materially below the accepted
standards prevailing in the industry for the storage and use of such substances
or materials, nor allow to be brought into the Project any such materials or
substances except to use in the ordinary course of Tenant's business. After
written notice from Landlord requesting the identity of such substances or
materials, Tenant shall provide Landlord with a list of the same. Without
limitation, hazardous substances and materials shall include those described in
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601 et. seq., and applicable state or local laws
and the regulations adopted under these acts. If any lender or governmental
agency shall ever require testing to ascertain whether or not there has been any
release of hazardous materials, then the reasonable costs thereof shall be
reimbursed by Tenant to Landlord upon demand as additional charges if such
requirement applies to the Premises and Tenant has caused the release. In
addition, Tenant shall certify on a reasonable basis from time to time at
Landlord's request concerning Tenant's best knowledge and belief regarding the
presence of hazardous substances or materials brought by Tenant on to the
Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere
provided in this Lease from any release of hazardous materials on the Premises
(but only if brought by Tenant or permitted by Tenant to be brought) occurring
while Tenant is in possession, or on adjoining land if caused by Tenant or
persons acting under Tenant. The within covenants shall survive the expiration
or earlier termination of the Term.
In all events, Landlord shall indemnify Tenant in the manner elsewhere provided
in this Lease from any release of hazardous materials on the Premises now
existing in, on, under or about the Premises or incorporated in the Project or
caused or permitted by Landlord, or on adjoining land if caused by Landlord or
persons acting under Landlord. The within covenants shall survive the expiration
or earlier termination of the Term.
17.2 To the best of Landlord's knowledge, there does not exist any toxic or
hazardous waste or material, or any pollutant or any substance regulated by any
environmental law in, under or above the Project or the Expansion Landlord (as
defined in Section 4.1 of Exhibit C) or any part thereof.
18. DEFAULT: Tenant hereby agrees that in case Tenant shall default in making
its payments hereunder or any of them or in performing any of the other
agreements, terms and conditions of this Lease and such default continues for
five days after written notice thereof as to the payment of Base Rent and
regular monthly installments of fixed estimates of operating costs (a "Monetary
Default") or thirty (30) days (or such longer period as Tenant, acting
diligently, may reasonably require) after written notice thereof as to all other
defaults, then, in any such event, Landlord, in addition to all other rights and
remedies available to Landlord by law or by other provisions hereof, may after
five days written notice, with due process, re-enter immediately into the
Premises and remove all
<PAGE> 15
persons and property therefrom, and, at Landlord's option, annul and cancel this
Lease as to all future rights of Tenant and Tenant hereby expressly waives the
service of any notice in writing of intention to re-enter as aforesaid. Tenant
further agrees that in case of any such termination Tenant will indemnify the
Landlord against all loss of rents and other damage which Landlord incurs by
reason of such termination, including, but not being limited to, costs of
restoring and repairing the Premises as required by this Lease, costs of renting
the Premises to another tenant, loss or diminution of rents and other damage
which Landlord may incur by reason of such termination, and all reasonable
attorney's fees and expenses incurred in enforcing any of the terms of the
Lease. Neither acceptance of rent by Landlord, with or without knowledge of
breach, nor failure of Landlord to take action on account of any breach hereof
or to enforce its rights hereunder shall be deemed a waiver of any breach, and
absent written notice or consent, said breach shall be a continuing one.
19. NOTICES: All bills, statements, notices or communications which Landlord may
desire or be required to give to Tenant shall be deemed sufficiently given or
rendered if in writing and sent by registered or certified mail, or sent by a
nationally recognized overnight courier service addressed to Tenant at corporate
headquarters: VERITAS Software, 1600 Plymouth Street, Mountain View CA 94043
and, from and after the date Tenant occupies and commences business operations
at the Premises and until further notice from Tenant, at the Premises and the
time of rendition thereof of the giving of such notice or communication shall be
deemed to be the time when the same is deposited in the mail or with such
overnight courier as herein provided. Any notice by Tenant to Landlord must be
served by registered or certified mail, or sent by a nationally recognized
overnight courier service addressed to Landlord at the address where the last
previous rental hereunder was payable, or in case of subsequent change upon
notice given, to the latest address furnished. Either Landlord or Tenant may,
upon ten (10) days prior written notice to the other as herein provided, change
its address for notices under this Lease.
20. HOLDING OVER: Should Tenant continue to occupy the Premises after expiration
or termination for any reason of the Term or any renewal or renewals thereof
such tenancy shall be from month to month and in no event from year to year or
for any longer term, and shall be on all the terms and conditions hereof
applicable to a month to month tenancy except that Base Rent shall equal one
hundred percent (100%) if in the initial term and one hundred twenty-five
percent (125%) if in an Extended Term of the Base Rent payable at the time of
such expiration or termination. In addition, Tenant shall continue to pay
Operating Costs. Nothing in this Section 20, however, shall prevent Landlord
from removing Tenant forthwith and seeking all remedies available to Landlord in
law or equity.
21. SUBORDINATION: Subject to the non-disturbance provided for below, the rights
of Tenant shall be and are subject and subordinate at all times to the lien of
any first mortgage now or hereafter in force against the Project, and Tenant
shall, within twenty days (20) after request, execute such further instruments
subordinating this Lease to the lien of any such mortgage as shall be requested
by Landlord, which shall include
<PAGE> 16
agreement by Tenant to attorn to the holder of such mortgage, covenant of
nondisturbance of Tenant's occupancy by such holder in the event that such
holder, its successors or assigns, succeeds to the interest of Landlord and such
holder consent to the application of insurance proceeds to restoration of
casualty loss damage, subject to such reasonable conditions as such holder may
impose. All such instruments shall be in form and substance satisfactory to
Landlord and Tenant, both acting reasonably.
22. ESTOPPEL CERTIFICATE: Tenant and Landlord shall each at any time and from
time to time, upon not less than ten (10) days prior written notice from the
other, execute, acknowledge and deliver to the other and any other parties
designated by the other, a statement in writing certifying (a) that this Lease
is in full force and effect and is unmodified (or, if modified, stating the
nature of such modification), (b) the date to which the rental and other charges
payable hereunder have been paid in advance, if any, and (c) that there are, to
such party's actual knowledge, no uncured defaults on the part of the other
hereunder (or specifying such defaults if any are claimed). Any such statement
may be furnished to and relied upon by any prospective purchaser or
encumbrancer, assignee or sublessee of all or any portion of the Project.
23. SERVICE CHARGE: Tenant agrees to pay interest at the per annum rate equal to
two percent (2%) plus the prime rate announced as such from time to time in the
Wall Street Journal under the section "Money Rates" of any payment of monthly
Base Rent or additional charge payable by Tenant hereunder which is not paid
within five (5) days from the date due.
24. BINDING EFFECT: The work "Tenant", wherever used in this Lease, shall be
construed to mean tenants in all cases where there is more than one tenant, and
the necessary grammatical changes required to make the provisions hereof apply
to corporations, partnerships or individuals, men or women, shall in all cases
be assumed as though in each case fully expressed. Each provision hereof shall
extend to and shall, as the case may require, bind and inure to the benefit of
Landlord and Tenant and their respective heirs, legal representatives,
successors and assigns.
25. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or transfers
of Landlord's interest in the Premises or the Project, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer, provided that the transferee assumes this Lease
and agrees to pay and perform the obligations of Landlord which accrue
thereafter.
26. LIMITATION OF LIABILITY: In the event that Landlord is ever adjudged by any
court to be liable to Tenant in damages, Tenant specifically agrees to look
solely to Landlord for the recovery of any judgment from Landlord, it being
agreed that if Landlord is a partnership, its partners whether general or
limited, or if Landlord is a corporation, its directors, officers, or
shareholders, shall never be personally liable for any judgment. The provision
contained in the foregoing sentence is not intended to, and shall not, limit any
right that Tenant might otherwise have to obtain injunctive relief against
<PAGE> 17
Landlord or Landlord's successor in interest, or to maintain any other action
not involving the personal liability of Landlord (or if Landlord is a
partnership, its partners whether general or limited, or if Landlord is a
corporation, requiring its directors, officers or shareholders to respond in
monetary damages from assets other than Landlord's in the Building) or to
maintain any suit or action in connection with enforcement or collection of
amounts which may become owing or payable under or on account of insurance
maintained by Landlord.
27. ADDITIONAL RENT AMOUNTS: Any amounts in addition to Base Rent payable to
Landlord by Tenant hereunder, including without limitation amounts payable
pursuant to Sections 5, 9K, 15, 17.1 and Exhibit C, and hereof ("Additional
Rent") shall be an obligation of Tenant hereunder and all such Additional Rent
shall be due and payable within twenty (20) days after receipt of written demand
thereof, accompanied by reasonable substantiation in case of amounts which are
not fixed under this Lease.
28. INCORPORATION OF EXHIBITS: The following exhibits to this Lease are hereby
incorporated by reference for all purposes as fully set forth at length herein:
Exhibit A-1 Legal Description
Exhibit A-2 Schematic Depiction
Exhibit B Site Plan
Exhibit C Additional Terms and Conditions
Exhibit D Outline Plans and Specifications
Exhibit E Construction Schedule
Exhibit F Elevation Plan
29. FORCE MAJEURE: All of the obligations of Landlord and of Tenant under this
Lease are subject to and shall be postponed for a period equal to any delay or
suspension resulting from fire, strikes, acts of God, and other causes beyond
the control of the party delayed in its performance hereunder this Lease
remaining in all other respects in full force and effect and the Term not
thereby extended. Landlord shall, with respect to the initial construction of
the Building and the Premises (including all leasehold improvements), notify
Tenant within five (5) days after Landlord or its general contractor actually
knows of the commencement of a cause beyond its control which will constitute a
permitted postponement of the time for performance of its obligations under this
Section, failing which such cause shall not constitute an excused delay under
this Section. With respect to any delay not caused by Tenant in such initial
construction of the Building and Premises (including all leasehold improvements)
otherwise excused under this Section, the period of postponement allowed
Landlord shall not exceed one day for each day that the cause of delay exists
and Landlord in any event shall, at its sole cost and expense, exercise its best
effort to make up for any such delay, including by working overtime.
30. BROKERS: Landlord acknowledges and agrees that it is obligated to pay a
brokerage fee to Tobin Real Estate Company in the amount of $181,364.00 and to
CB Commercial Real Estate in the amount of $90,682.00, payable one-half on the
first
<PAGE> 18
construction draw made by Landlord and the second-half payable upon occupancy by
Tenant.
31. GENERAL: The submission of this Lease for examination does not constitute
the reservation of or an option for the Premises, and this Lease becomes
effective only upon execution and delivery hereof by Landlord and Tenant. This
Lease does not create the relationship of principal and agent or of partnership,
joint venture or any association between Landlord and Tenant, the sole
relationship between Landlord and Tenant being that of lessor and lessee. No
waiver of any default of Tenant hereunder shall be implied from any omission by
Landlord to take any action on account of such default if such default persists
or is repeated, and no express waiver shall affect any default other than the
default specified in the express waiver and that only for the time and to the
extent therein stated. The topical headings of the several paragraphs and
clauses are for convenience only and do not define, limit or construe the
contents of such paragraphs or clauses. All preliminary negotiations are merged
into and incorporated in this Lease. This Lease can only be modified or amended
by an agreement in writing signed by the parties hereto, their successors or
assigns. All provisions hereof shall be binding upon the heirs, successors and
assigns of each party hereto.
Tenant may exercise and continue to exercise all of its rights under this Lease
upon the occurrence and during the continuance of any default under this Lease
up to the point of termination of this Lease, including but not limited to the
Right of First Refusal and the options to extend the Term.
Whenever the consent or approval of the Landlord or Tenant is required by this
Lease, such consent or approval shall not be unreasonably withheld or delayed.
Time is of the essence under this Lease.
32. SEVERABILITY: The invalidity of any provision, clause or phrase herein
contained shall not serve to render the balance of this Lease ineffective or
void and the same shall be construed as if such had not been herein set forth.
33. ADDITIONAL PROVISIONS:
A. If Tenant shall pay any Base Rent, Additional Rent or any other
amount under protest and later shall be deemed to have not owed
all or some part of the amount paid under protest, then Tenant
may recover the same from Landlord or offset against
installments of Base Rent, Additional Rent and other amounts
payable by Tenant hereunder the amount paid under protest and
determined not to have been owed, together with interest thereon
from and after the date of payment under protest to the date of
recovery or offset at the rate of interest equal to two percent
(2%) plus the prime rate announced as such from time to time in
the Wall Street Journal under the section "Money Rates".
B. Landlord represents and warrants to Tenant that:
<PAGE> 19
a) Landlord has good title to the Project and the Expansion
Land free and clear of any encumbrances that materially
affects Tenant's rights or obligations under this Lease.
b) Landlord has full power, right and authority to execute
and perform this Lease and all corporate action
necessary so to do has been duly taken.
If requested by Tenant, Landlord and Tenant shall enter into a short form
memorandum of lease in form and substance reasonably acceptable to Landlord and
Tenant for the purpose of reflecting on the record title to the Project and the
Expansion Land, Tenant's leasehold estate and other rights under this Lease.
IN WITNESS WHEREOF, the respective parties hereto have caused this Lease to be
executed the day and year first above written.
LANDLORD:
RYAN COMPANIES US, INC.
BY: /s/ KENT M. CARLSON
--------------------------------------
Its: Vice President
--------------------------------------
TENANT:
VERITAS SOFTWARE CORPORATION
BY: /s/ JAY A. JONES
--------------------------------------
Its: VICE PRESIDENT AND GENERAL COUNSEL
--------------------------------------
<PAGE> 20
EXHIBIT A-1
LEGAL DESCRIPTION:
Southerly Parcel of Lot 3 and Northerly Parcel of Lot 4
That part of Lot 3, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly of the
following described line: Commencing at the northeast corner of said Lot 3;
thence South 30 degrees 00 minutes 00 seconds East, assumed bearing, 171.23
feet along the easterly line of said Lot 3; thence southerly 143.99 feet along
said east line of Lot 3 on a tangential curve concave to the west with a radius
of 275.00 feet and with a central angle of 30 degrees 00 minutes 00 seconds;
thence on a bearing of South 90.00 feet tangent to said curve along said east
line of Lot 3 to the point of beginning of the line to be described; thence on
a bearing West 408.50 feet to a point on the west line of Lot 3 and said line
there terminating.
ALSO
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly and
northeasterly of a line described as follows: Commencing at the northwest
corner of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 98.78 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 194.99 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 89.36 feet to the easterly line of said Lot 4 and
said line there terminating.
CERTIFICATE OF SURVEY
FOR:
RYAN
COMPANIES
US, INC.
EXHIBIT B-1
Combination for
new Lot
[MAP]
<PAGE> 21
<TABLE>
<S> <C>
[LOGO] WESTWOOD I hereby certify that this Plan was prepared by me
Westwood Professional Services, Inc. or under my direct supervision and that I am a
104 Marty Dr. Suite 3 duly registered PROFESSIONAL LAND SURVEYOR under
Buffalo, MN 55313 the laws of the State of Minnesota.
612 882-2567
/s/ SCOTT A. GYLAM
-----------------------------------
Scott A. Gylam, L.S.
Minnesota Reg. No. 23002 Date 4/20/98
----------
Revised legal 4/20/98
</TABLE>
<PAGE> 22
OPTION PIECE
EXHIBIT A-3
CERTIFICATE OF SURVEY FOR:
RYAN COMPANIES US, INC.
EXHIBIT C-1
Combination for New Lot
[MAP]
LEGAL DESCRIPTION
Southerly Parcel of Lot 4 and Northerly Parcel of Lot 5
- -------------------------------------------------------
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly and
southwesterly of a line described as follows: Commencing at the northwest
corner of said Lot 4, thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 98.78 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 194.88 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 99.36 feet to the easterly line of said Lot 4 and
said line there terminating.
ALSO
That part of Lot 5, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly of a line
described as follows: Commencing at the most northerly northwest corner of said
Lot 5; thence South 00 degrees 00 minutes 00 seconds West, assumed bearing,
along a west line of said Lot 5 a distance of 56.35 feet to the beginning of the
line to be described; thence North 90 degrees 00 minutes 00 seconds East a
distance of 271.80 feet to the northeasterly line of said Lot 5 and said line
there terminating.
<PAGE> 23
<TABLE>
<S> <C>
[LOGO] WESTWOOD I hereby certify that this Plan was prepared by me
Westwood Professional Services, Inc. or under my direct supervision and that I am a
104 Marty Dr. Suite 3 duly registered PROFESSIONAL LAND SURVEYOR under
Buffalo, MN 55313 the laws of the State of Minnesota.
612 882-2567
/s/ SCOTT A. GYLAM
-----------------------------------
Scott A. Gylam, L.S.
Minnesota Reg. No. 23002 Date 4/20/98
----------
Revised legal 4/20/98
</TABLE>
<PAGE> 24
EXHIBIT C
ADDITIONAL TERMS AND CONDITIONS
For the purpose of this Exhibit C, Landlord and Tenant agree as follows:
1. DEFINITIONS:
A) "Total Project Cost" shall mean the sum of the following costs:
<TABLE>
<S> <C>
a) Land, at a fixed cost of $747,533.00
b) Actual Construction Costs of the Landlord's Work, at a
cost not to exceed $3,443,135.00
c) Actual Construction Costs of Leasehold
Improvements, at a cost budgeted to be $2,048,013.00
d) Legal counsel for Landlord and Lender, at a fixed cost
of $35,000.00
e) Title Expenses, including mortgage registration tax,
title insurance, title disbursement fee, closing,
recording and miscellaneous costs, at a fixed cost of $41,736.00
f) Financing fee, including interim and permanent financing
and commitment fee, at a fixed cost of $115,992.00
g) Marketing, including functions and travel, at a fixed
cost of $7,500.00
h) Interim Interest, at a fixed cost of $168,152.00
i) Survey costs, including boundary, plat process and
as-built lender, at a fixed cost of $15,000.00
j) Miscellaneous costs, including appraisal, environmental,
inspecting architect, park dedication, interim real
estate taxes and moving allowance (which Landlord hereby
agrees to pay Tenant in the amount of $120,910.00,
one-half upon execution and one-half upon $155,410.00
occupancy), at a fixed cost of
k) Leasing, development and design fee (which Landlord
hereby agrees to pay at Tenant's option to Tenant or
Tenant's designee in the amount of $26,000.00, payable
upon execution, at a fixed cost of $373,007.00
l) Project contingency, at a fixed cost of $40,000.00
TOTAL PROJECT COSTS $7,190,478.00
</TABLE>
The above stated Actual Construction Costs of the Landlord's
Work and Actual Construction Costs of the Leasehold Improvements
already include the following fees: Contingency - 3%; Design Fee
- 3%;
<PAGE> 25
Contractor's Fee - 3%; Overhead - 3%, in each case as a
percentage of Actual Construction Costs, exclusive of all such
percentage fees. Any savings in the 3% contingency shall benefit
Tenant 70% and Landlord 30%.
Subject only to the Leasehold Improvement Cost, said
$7,190,478.00 is the absolute, guaranteed maximum Total Project
Costs and shall not be increased for any reason; if the Actual
Construction Costs of the Landlord's Work are less than
$3,443,135.00, then the Total Project Costs shall be reduced by
Seventy Percent (70%) of such savings.
B) ACTUAL CONSTRUCTION COSTS: The term Actual Construction Costs
shall mean costs necessarily incurred by Landlord in the proper
performance of the work described in Exhibit D. Such work
consists of the Landlord's Work (as defined in Section 3.1
below) and the Leasehold Improvements (as defined in Section
3.4(a) below). The Actual Construction Costs of the Landlord's
Work and the Leasehold Improvements shall be determined without
duplication; all Actual Construction Costs in respect of
coordination of the Landlord's Work with the Leasehold
Improvements shall be included in the Actual Construction Costs
of the Landlord's Work. In the event of any ambiguity, conflict
or inconsistency between the Landlord's Work or the Leasehold
Improvements or as to the allocation of the Actual Construction
Costs thereof, the same shall be deemed part of the Landlord's
Work and included in the Actual Construction Costs thereof. All
so-called "general conditions" to the extent permitted to be
included in Actual Construction Costs shall be included in the
Actual Construction Costs for the Landlord's Work. Such costs
shall be at rates not higher than the standard paid at the place
of the Property except with prior consent of Tenant. The Actual
Construction Costs shall include only the following items.
(a) Landlord's Labor Costs.
(i) Wages of construction workers directly employed by
Landlord to perform the construction of the Landlord's
Work and Leasehold Improvements at the site or at
off-site workshops. Landlord will not self perform any
of the construction without written approval for such
self performed work by the Tenant except for general
conditions, all rough carpentry work and installation of
all wood doors, hollow metal doors and related hardware.
(ii) Wages or salaries of Landlord's supervisory and
administrative personnel when stationed at the Property.
(iii) INTENTIONALLY DELETED
<PAGE> 26
(iv) Wages and salaries of Landlord's supervisory or
administrative personnel engaged, at factories,
workshops or on the road, in expediting the production
or transportation of materials or equipment required for
the Landlord's Work and Leasehold Improvements, but only
for that portion of their time required for the
Landlord's Work and Leasehold Improvements.
(v) Costs paid or incurred by Landlord for taxes,
insurance, contributions, assessments and benefits
required by law or collective bargaining agreements and,
for personnel not covered by such agreements, customary
benefits such as sick leave, transportation costs,
medical and health benefits, holidays, vacations and
pensions, provided such costs are based on wages and
salaries included in the Actual Construction Costs as
provided above. The cost of Landlord's contributions for
F.I.C.A. taxes, state unemployment taxes, federal
unemployment taxes, worker's compensation insurance and
general liability insurance shall be an amount equal to
39% the employee's taxable wages. Such amount shall only
apply to Landlord's field labor force and does not apply
to its project management or design personnel.
(b) Subcontract Costs. Payments made by Landlord to
subcontractors in accordance with the requirements of the
subcontracts.
(c) Costs of Materials and Equipment Incorporated in the
Completed Construction.
(i) Costs, including transportation, of materials and
equipment incorporated or to be incorporated in the
completed construction.
(ii) Costs of materials described in the preceding
Clause 1(c)(i) in excess of those actually installed but
required to provide reasonable allowance for waste and
for spoilage. Unused excess materials, if any, shall be
handed over to Tenant at the completion of the
Landlord's Work and Leasehold Improvements or, at
Tenant's option, shall be sold by Landlord. Amounts
realized, if any, from such sales shall be credited to
Tenant as a deduction from the Actual Construction
Costs.
(d) Costs of Other Materials and Equipment, Temporary Facilities
and Related Items
(i) Costs, including transportation, installation,
maintenance, dismantling and removal of materials,
supplies, temporary facilities, machinery, equipment,
and hand tools not customarily owned by the construction
workers, which are provided by Landlord at the site
<PAGE> 27
and fully consumed in the performance of the
Improvements; and cost less salvage value on such items
if not fully consumed, whether sold to others or
retained by Landlord. Cost for items previously used by
Landlord shall mean fair market value.
(ii) Rental charges for temporary facilities, machinery,
equipment, and hand tools not customarily owned by the
construction workers, which are provided by Landlord at
the site, whether rented from Landlord or others, and
costs of transportation, installation, minor repairs and
replacements, dismantling and removal thereof. Rates and
quantities for equipment rental shall be per a rental
rate schedule reasonably approved by Tenant.
(iii) Costs of removal of debris from the site.
(iv) Costs of telegrams and long-distance telephone
calls, postage and parcel delivery charges, telephone
service at the site and reasonable petty cash expenses
of the site office.
(v) Costs of temporary utilities (such as electricity,
gas, sewer, water and other such items) utilized to
construct the Property.
(vi) That portion of the reasonable travel and
subsistence expenses of Landlord's personnel incurred
while traveling in discharge of duties connected with
the Improvements.
(e) Miscellaneous Costs
(i) Premiums for insurance and bonds.
(ii) Sales, use, gross receipts or similar taxes imposed
by a governmental authority which are related to the
Improvements and for which Landlord is liable.
(iii) Fees and assessments for the building permit and
for other permits, licenses and inspections.
(iv) Fees of testing laboratories for tests and
inspections.
(v) Royalties and license fees paid for the use of a
particular design, process or product required by
Tenant; the cost of defending suits or claims for
infringement of patent rights arising from such
requirements; payments made in accordance with legal
judgments against Landlord resulting from such suits or
claims and payments of settlements made with Tenant's
consent; provided, however, that such costs of legal
defenses, judgment and settlements shall not be
<PAGE> 28
included in the calculation of the Actual Construction
Costs, and provided that such royalties, fees and costs
are not otherwise excluded.
(vi) Deposits lost for causes other than Landlord's
fault or negligence.
(vii) Legal and paralegal costs incurred by Landlord in
resolving subcontractor disputes that are not the result
of Landlord's negligence.
(viii) Any deductibles paid by Landlord as a result of
casualty losses.
(ix) Other costs incurred in the performance of the
Landlord's Work and Leasehold Improvements if and to the
extent approved in writing by Tenant in its sole
discretion.
(f) Emergencies. The Actual Construction Costs shall also
include costs which are incurred by Landlord in taking action to
prevent threatened damage, injury or loss in case of an
emergency affecting the safety of persons or property.
(g) Design, Engineering and Other Professional Services
(i) Costs incurred by Landlord to provide engineering,
soil investigation and other professional services that
are not performed by Landlord's design personnel.
(ii) Costs of travel, housing and subsistence of design
professionals.
(iii) Costs of reproduction of any drawings,
specification or submittal.
C) COSTS NOT TO BE REIMBURSED: The Actual Construction Costs shall not
include:
(i) Salaries and other compensation of Landlord's
personnel stationed at Landlord's principal office or
offices other than the site office, except as
specifically provided in Paragraph 1(g).
(ii) Expenses of Landlord's principal office and offices
other than the site office.
<PAGE> 29
(iii) Overhead and general expenses, except as may be
expressly included herein.
(iv) Landlord's capital expenses, including interest on
Landlord's capital employed for the Improvements.
(v) Rental costs of machinery and equipment, except as
specifically provided in Clause 1(d)(ii).
(vi) Any cost not specifically and expressly described
under Actual Construction Costs.
2.1. BASE RENT: For the period from the Commencement Date through the
sixtieth full calendar month of the Term, Monthly Base Rent shall be
one-twelfth of the sum of:
a) 10.11% of the Total Project Cost, exclusive of the Actual
Construction Costs of Leasehold Improvements Cost;
b) 15.727% of the Actual Construction Costs Leasehold Improvements
Cost;
c) $15,113.75
2.2. For the period from the sixty-first month through the one-hundred
twentieth month of the Term, Monthly Base Rent shall be 115% of the
Monthly Base Rent for the sixtieth month.
2.3. For each of the Extended Terms, if applicable, Monthly Base Rent shall
be an amount equal to 90% of Market Rent.
2.4. MARKET RENT. The term "Market Rent" means the rent per square foot that
a willing landlord would accept and a willing tenant would pay, neither
being under any compulsion or unusual consideration, for space
comparable to the portion of the Building and for a term equivalent to
the term for which the Market Rent is then being determined hereunder
and for a lease which is "net" to the same extent as, and otherwise
consistent with, this Lease, and taking into account all relevant
considerations, including transactions in comparable buildings in the
Northern Minneapolis Suburban corridor, all tenant or landlord
concessions, costs and allowances, such as (but without limitation)
leasehold improvement allowance, free rent and leasing commissions,
including reduction in such rental rate to take into account that Tenant
will not receive any allowance or concession.
In the event Landlord and Tenant are unable to agree on Market Rent
within twenty (20) days of Tenant's exercise of any extension option,
then the Market Rent shall be determined by arbitration in accordance
with the Commercial Arbitration
<PAGE> 30
Rules of the American Arbitration Association. Within forty-five (45)
days after appointment, the arbitrator shall determine the current
Market Rent. The cost of the arbitration shall be borne equally by
Landlord and Tenant.
Within twenty (20) days after receipt by Tenant of the written
determination of Market Rent by arbitration, Tenant may, by written
notice to Landlord, rescind its exercise of the extension option in
question, provided that, if exercise of the rescission right is less
than twelve (12) months before the end of the then Term, the Term shall
be deemed extended at the Base Rent then in effect for a period of
twelve (12) months after the date of such exercise of rescission. The
determination and award by the arbitrator shall be final and binding on
Landlord and Tenant.
3.1. CONSTRUCTION BY LANDLORD: Landlord shall, at its sole cost and expense,
construct the Building and other improvements, including all common area
improvements and landscaping contemplated by the Outline Specifications
attached to the Lease as Exhibit D ("Landlord's Work"). Landlord's Work
includes all design, engineering, labor and material referenced in,
reasonably inferable from or otherwise necessary to complete the
improvements contemplated by the Outline Specifications and as the same
are extended in the Final Plans and Specifications, with exterior design
and finish consistent with the elevations attached as Exhibit F. The
Landlord's Work shall be performed in a good and workmanlike manner,
consistent with best practices in the industry and in compliance with
all applicable legal requirements. All of the provisions of Section 3.4
shall apply as well to the Landlord's Work, whether or not expressly so
stated in Section 3.4.
3.2. ADJUSTMENTS AND CREDITS: Any adjustment to the contract price under the
Outline Specifications shall be borne by Landlord and shall not increase
the cost to Tenant, provided that any discretionary change order issued
by Tenant pursuant to Section 3.4.(f) below which result in an increase
in the cost of Landlord's Work shall be at Tenant's cost to the extent
provided in Section 3.4.(f) below.
3.3. TENANT APPROVAL: Landlord shall consult with Tenant during the
preparation of, and shall submit to Tenant for its approval, the final
plans and specifications for the Landlord's Work and the Leasehold
Improvements, which approval shall not be unreasonably withheld.
3.4. LEASEHOLD IMPROVEMENTS:
(a) Landlord shall construct and complete all of the work set forth
in the plans and specifications prepared by Landlord and
approved by Tenant (the "Leasehold Improvements"). Landlord
shall at all times provide knowledgeable personnel to perform
its duties with respect to such construction, and acknowledges
and accepts the position of trust and confidence which it holds
with respect to Tenant in respect thereof.
<PAGE> 31
Landlord shall be responsible for all aspects of the Leasehold
Improvements, other than as specifically directed by Tenant in
writing, necessary for the complete construction thereof, ready
to turn over to Tenant on a "turnkey basis"; for coordination of
plans prepared by or on behalf of Tenant with the base building
and Landlord's Work; processing and documenting change orders
requested by Tenant; securing all necessary approvals and
authorizations, including but not limited to building permits
for Leasehold Improvements; securing competitive bids;
negotiation of all construction contracts; monitoring and
inspecting the work and the progress thereof to the extent being
performed by others; and preparation of a "punch list" of
incomplete or defective work, including as required under any
construction contract or this Lease.
(b) Landlord (or an affiliate of Landlord) will act as general
contractor for the Leasehold Improvements. Such work shall be
performed at a cost not to exceed the competitive cost thereof.
(c) The portion of the Leasehold Improvements not to be performed by
Landlord's own forces shall be bid separately from Landlord's
Work and shall be fixed price contract, unless otherwise agreed
by Tenant. Except for discretionary changes in the Leasehold
Improvements which are requested in writing by Tenant and
documented by a written change order executed by Tenant setting
forth the net cost to Tenant of such change (excluding changes
requested by Tenant due to defective or inadequate construction
or other deficiencies not the fault of Tenant), the cost to
Tenant for the Leasehold Improvements shall not exceed the
accepted bid price thereof.
(d) Landlord shall submit to Tenant for Tenant's reasonable approval
a bid list of at least three qualified subcontractors to perform
each division of the Leasehold Improvements. Tenant shall have
the right to submit and add qualified contractors to such bid
list, subject to Landlord's reasonable approval. Landlord shall
be responsible to solicit a minimum of three bids for the work
in such format and in accordance with such bid requirements and
specifications as may be reasonably approved by Tenant,
including without limitation the itemization of the entire or
designated portions of each bid. Landlord shall be responsible
to review and tabulate the bids, to consult with Tenant
regarding the bids, and shall recommend to Tenant, for Tenant's
approval, the lowest and best bid to be selected. Tenant may
require all bids to be rejected or may, with or without making
changes to the Leasehold Improvements in order to reduce the
cost thereof, negotiate, or direct Landlord to negotiate, with
one or more of such in order to achieve an acceptable price for
the Leasehold Improvements.
<PAGE> 32
(e) All construction contracts entered into by Landlord for the
Leasehold Improvements shall have warranties which are
reasonably acceptable to Tenant and shall not provide for
liquidated damages or other penalty or specific monetary failure
to complete, or any bonus for completion of, the Landlord's Work
or the Leasehold Improvements by a particular time. Any premium
cost included in any construction contract for the Leasehold
Improvements above the cost to perform the work without overtime
and in the ordinary course shall be borne by Landlord.
(f) Tenant may from time to time require changes in the Landlord's
Work and the Leasehold Improvements by submitting a written
change order therefor to Landlord. No change order shall (a)
increase the Actual Construction Cost to Tenant or the
guaranteed maximum cost or (b) extend the time by which any of
such work shall be substantially completed unless Landlord
states in such change order, in the case of (a) the net increase
in Actual Construction Costs to Tenant and provides an
explanation thereof in reasonable detail and, in the case of (b)
the delay in substantial completion directly attributable to
such delay, provided that (i) no such statement shall be binding
on Tenant unless Tenant specifically accepts such statement in
such change order and (ii) there shall be no increase in Actual
Construction Costs to Tenant and no extension of the time for
completion of any such work to the extent the change order is
not discretionary, such as a change order which directs the
correction of defective or inadequate construction or other
deficiencies (including but not limited to failure to comply
with applicable legal requirements) not the fault of Tenant.
(g) Landlord shall permit Tenant's space planner, architects and
other consultants to inspect the Premises and Landlord's Work
and the Leasehold Improvements at all reasonable times after the
date hereof. No inspection by Tenant or any such person, and no
approval or failure to reject any of the Landlord's Work or the
Leasehold Improvements, shall waive or release the obligation of
Landlord to construct and deliver the Premises with the
Landlord's Work and the Leasehold Improvements completed in
accordance with the requirements of this Lease, including as the
same may be changed pursuant to change orders made in accordance
with this Lease.
(h) Upon receipt by Landlord of any application for payment from any
contractors engaged by Landlord, or any communication, whether
oral or written, from such contractors, inspecting architects or
engineers, governmental authorities which may have a material
effect on the Landlord's Work or the Leasehold Improvements
(including but not limited to any deficiency or irregularity
with respect thereto), Landlord shall provide copies of such
application or written communication to Tenant and otherwise
advise Tenant of the substance of any such oral communication.
<PAGE> 33
(i) Landlord shall make and retain for a period of four (4) years,
complete books and records, with substantiating evidence of
costs, application for payment and the like, in respect of the
Landlord's Work and Leasehold Improvements.
3.5. SCHEDULE FOR SUBMISSIONS, APPROVALS, ETC.: Attached hereto as Exhibit E
is a construction schedule for the design, bidding and construction of
the Project and the Leasehold Improvements. Additionally, 1) Tenant
shall deliver to Landlord Design Development plans for Leasehold
Improvements by May 26, 1998; 2) Landlord shall deliver to Tenant the
HVAC system plan and Leasehold Improvement Construction plan to Tenant
by May 31, 1998; 3) Tenant shall approve (or detail in writing its
reasonable objections to) the HVAC system plan and the Leasehold
Improvement Construction plan by June 6, 1998. Landlord and Tenant shall
each perform their respective responsibilities consistent with such
schedule. If Tenant fails to perform its responsibilities within the
time provided, and to give approvals in a timely fashion consistent with
such schedule, then, except to the extent any such failure is
attributable to the fault of Landlord, the time for performance by
Landlord shall be extended by one (1) day for each day by which such
failure by Tenant continues, but in any event only if and to the extent
Landlord is actually delayed by such failure.
4.1. OPTION TO EXPAND: Ryan Companies US, Inc., ("Ryan"), subject to the
terms and conditions hereof, hereby grants to Tenant the exclusive
option ("Expansion Option") to lease certain premises ("Expansion
Premises") to be built on land ("Expansion Land") adjacent to the
Project as illustrated on the Site Plan attached as Exhibit B. Landlord
hereby represents and warrants that a two story building of not less
than 45,000 square feet, with surface parking for not less than 225 cars
is permissible as a matter of right and without variance, or conditional
or other use permit under applicable zoning regulations and building
codes in effect as of the date of this Lease that such building may be
used for the same purposes permitted under this Lease and that there is
sufficient area available on the Expansion Land, and the configuration
of the Expansion Land is such that, such building, parking and related
improvements can be constructed on the Expansion Land in compliance with
zoning regulations and building codes consistent with the requirements
of this Lease. The legal description of the Expansion Land is attached
hereto as Exhibit A-3.
Ryan hereby agrees that, prior to the termination of, or exercise of
(and completion of its obligations in respect of) the Expansion Option,
it shall not transfer its interest in the Project, other than a transfer
(1) for security purposes only or (2) to an entity controlled by it or
(3) to an entity controlled by its principals and that such transferree
shall remain controlled by or under common control with Ryan, with such
control continuing, and the Project shall at all such times be under
such
<PAGE> 34
common control with the Expansion Land. No such transfer shall release
Ryan from any obligation under this Article 4, which shall remain
directly and primarily liable therefore and shall not be discharged by
any matter that would, but for this provision, release a party in the
position of, or comparable to, a surety. Without limiting the foregoing,
Ryan hereby guarantees, absolutely and unconditionally, the full and
timely payment and performance of this Article 4 by any such transferee.
Except as otherwise expressly provided herein, the obligations of
Landlord under this Article 4 shall be the personal, independent
obligations of Ryan and shall not be binding upon any future owner of
the interest of Landlord hereunder. Any failure by Ryan to perform its
obligations under this Article 4 shall not constitute a default by
Landlord under this Lease or entitle Tenant to terminate this Lease or
withhold or offset against Rent. Notwithstanding the foregoing or any
other provisions of this Lease, the obligations of Ryan under this
Article 4 shall be binding upon Ryan and any future owner of the
Expansion Land, and their respective successors and assigns. Landlord
agrees to permit the Expansion Premises to be laid out in coordination
with the improvements on the Premises so that the same may be used as an
integrated project by Tenant, and to permit connecting walkways
(including an enclosed walkway), provided that (a) the same are approved
by Landlord, which approval shall not be unreasonably withheld or
delayed and (b) Landlord may condition its approval on the removal of
connecting walkways from the Premises upon the expiration or sooner
termination of this Lease.
4.2. TERM OF OPTION: The Expansion Option shall expire on the last day of the
forty-eighth month of the Term of this Lease, unless sooner terminated
as provided herein.
4.3. CONSIDERATION: Tenant may, at its election, pay to Ryan, as
consideration for continuation after the twenty-fourth month of the
Expansion Option, on or before the later of (a) ten (10) days after
receipt of Ryan's invoice accompanied by a notice stating the Expansion
Option under this Lease will terminate if the invoice is not paid within
said ten (10) day period, or (b) the first day of each of the
twenty-fifth month and thirty-seventh months of the Term the sum of One
Hundred Seventy Five Thousand and no/100 Dollars ($175,000.00). Tenant
to pay to Ryan, as additional consideration on or before the later of
(a) ten (10) days after receipt of Ryan's invoice or (b) twenty (20)
days prior to the last date such taxes and installments of special
assessments, on a due and payable basis, are due without penalty, the
amount of real estate taxes and installments of special assessments
allocable to the Expansion Land for the period from the twenty-fifth
month through the forty-eighth month of the Term. Notwithstanding the
foregoing, (1) no amount shall be payable under this Section if Tenant
exercises the Expansion Option on or before the end of the twenty-fourth
(24th) month of the Term, (2) each $175,000 amount paid by Tenant under
this Section shall be prorated as of the date the Expansion Option is
exercised, based on a period of 365 days and the
<PAGE> 35
number of days elapsed from the date the payment is due to but excluding
the date the Expansion Option is exercised, and (3) any real estate
taxes and installments of special assessments prorated and allocable (on
a due and payable basis) to the period commencing with exercise of the
option shall be included in Total Project Costs (clause j. of the
definition thereof) for the Expansion Building and paid by Ryan, not
Tenant.
Tenant hereby agrees that in the event Tenant shall not make the
payments under this Section and such failure continues for five days
after written notice or if this Lease shall otherwise terminate and
Landlord shall recover possession whether or not based on default, and
such default shall not be cured as provided for in the Lease, this
Expansion Option shall terminate without further action on the part of
Ryan. If this Lease is terminated on any basis other than Tenant's
default, any payment made by Tenant under the first paragraph of this
Section 4.3 which was due and payable within twelve (12) months of such
termination shall be refunded to Tenant. If this Lease is terminated for
Landlord's default or if Ryan defaults in its obligations under this
Article 4, then all amounts paid by Tenant under this Article 4 shall
immediately be refunded to Tenant with interest from the date paid by
Tenant at the rate specified in Section 23 of this Lease.
4.4. Tenant shall exercise the Expansion Option by written notice to Ryan
given at any time prior to expiration of the Expansion Option, provided
that Landlord shall have up to one (1) year after exercise of the
Expansion Option to complete construction and cause the commencement
date of such lease to occur. Tenant shall in such notice of exercise
state the approximate square footage of the expansion building (which
shall not be less than 45,000 square feet and not more than 60,000
square feet) and shall also, but not as a condition of such exercise
notice, state the date of its desired occupancy of Expansion Premises.
The actual building size shall be as so stated by Tenant unless (a) such
size cannot legally be constructed on the Expansion Land, but if such
size is 45,000 square feet only if the same cannot be constructed by
reason of a change in applicable legal requirements after the date
hereof, or (b) if the stated size is less than 60,000 square feet, such
greater size as Ryan may elect up to a maximum of 60,000 square feet,
but only to the extent that the same may be constructed (i) without
variance, or conditional or special use or other permit that would delay
commencement of construction, and (ii) a parking ratio of 5 spaces per
1,000 square feet of building area is provided on the basis of surface
parking only all of which shall be located on the Expansion Land. No
more than sixty (60) days following receipt of Tenant's notice, Ryan
shall deliver to Tenant, in reasonable detail, a statement setting forth
Ryan's estimate of (m) the costs and schedule to construct the Expansion
Premises in a manner equivalent in quality, materials and workmanship to
the construction of the Premises and (n) the Base Rent, with an
explanation in reasonable detail of the basis for such estimates,
including the amounts comprising the Total Project Costs as set forth in
Section 1A (with supporting detailed information) of this Exhibit C and
the financing upon which the debt service constant is based. The debt
service
<PAGE> 36
constant shall be mutually acceptable to Landlord and Tenant, and shall
be based on a loan which shall provide for no less than a 25 year
amortization schedule, a loan to value ratio no greater than 80%, no
less than a five year term, no more than a one percent fee, and be
non-recourse. No more than thirty (30) days following receipt of Ryan's
estimate, Tenant shall notify Ryan in writing of its acceptance or
rejection of Ryan's estimate. If Tenant rejects Ryan's estimate, then
Ryan and Tenant shall consult with each other to try to resolve the
difference, which may include, and Ryan agrees to accept, reasonable
alternate financing provided or arranged by Tenant.
4.5. Upon acceptance of Ryan's estimate, Ryan and Tenant shall enter into a
new Lease for the Expansion Premises upon the same terms and conditions
as contained in this Lease and with Base Rent calculated in the same
manner as Base Rent for the Premises, except that the constant applied
to the Total Project Cost shall be equal to the debt service constant
plus 70 basis points.
5. ADDITIONAL OPTION TO EXTEND: Upon execution of the lease for the
Expansion Premises and the determination of initial term thereof
pursuant to the provisions thereof, Tenant shall have the option to
extend the initial Term of this Lease with respect to the entire
Premises for the period from the last day of the initial Term of this
Lease to the last day of the initial Term of the lease for the Expansion
Premises with the effect that Tenant shall retain the two-five year
options provided in Section 2.2. Such term shall be upon the same terms
as provided in this Lease for the Term, except for the Base Rent which
shall be as set forth in Section 2.3 of Exhibit C. Landlord shall, not
less than twelve (12) months before the end of the then Term, give
notice to Tenant of Tenant's upcoming extension option and of Landlord's
best estimate of the Market Rent for the Extended Term covered thereby.
Tenant shall exercise its option by giving notice of such exercise to
Landlord, not less than the later of thirty (30) days after receipt of
Landlord's notice of the option and estimate of Market Rent or twelve
(12) months prior to the end of the Term, or the then current Extended
Term, as the case may be. Such exercise is subject to rescission as
provided in Section 2.4 of Exhibit C. Tenant's exercise or failure to
exercise this option to extend the term of this Lease within the time
provided in this Section shall not affect Tenant's rights under Section
2.2 of the Lease.
<PAGE> 37
OPTION AGREEMENT
----------------
THIS AGREEMENT is made and entered into this 30th day of April, 1998, by
and between RYAN COMPANIES US, INC., a Minnesota corporation ("Owner"), and
VERITAS SOFTWARE CORPORATION, a Delaware corporation ("Tenant").
RECITALS
--------
A. Owner and Tenant have entered into a Lease Agreement of even date
herewith (the "Lease"). Pursuant to said Lease, Owner has granted to Tenant an
option to have Owner construct a building upon the land described in Exhibit A
attached hereto (the "Land") and lease such Land and building from Owner (the
"Expansion Option").
B. If Tenant exercises the Expansion Option and Owner fails or refuses to
perform its obligations under the Lease with respect thereto (an "Expansion
Option Default"), then Owner is willing to sell the Land to Tenant.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the Lease, Owner and Tenant agree as
follows:
1. If, but only if, an Expansion Option Default occurs and is not cured
within thirty (30) days after written notice thereof by Tenant to Owner or by
Owner to Tenant, then Tenant shall have the right and option to purchase the
Land at any time within ninety (90) days after the expiration of such 30-day
period, but in no event later than July, 1, 2003 (the "Option Period").
2. The total purchase price to be paid by Tenant for the Land shall be
the sum of $4.25 times the number of square feet in the land. Tenant may
exercise its option to purchase the Land by paying such purchase price to Owner
prior to the expiration of the Option Period, whereupon Owner shall convey the
Land to Tenant by warranty deed, with State Deed Tax paid thereon, free and
clear of all liens and encumbrances except easements, restrictions and
reservations which are of record on the date hereof, real estate taxes and
special assessments which are not delinquent and a Declaration of Common
Driveway Easement in the form of Exhibit B attached hereto. Real estate taxes
which are payable during the year in which the conveyance occurs shall be
prorated as of the date thereof. Owner shall pay all special assessments which
are levied or pending as of the date hereof.
3. Time is of the essence hereof. At such time as either (a) an
Expansion Option Default can not longer arise, or (b) the Option Period has
expired and Tenant has failed to exercise its option hereunder to purchase the
Land, Tenant shall upon the request of Owner acknowledge the termination of this
Agreement by written agreement in recordable form. It is agreed that an
Expansion Option Default cannot occur if Owner and Tenant enter into a lease for
the Land and Owner commences construction of a building thereon pursuant to said
lease.
<PAGE> 38
IN TESTIMONY WHEREOF, Owner and Tenant have caused this Agreement to be
duly executed as of the date first above written.
RYAN COMPANIES US, INC.
By /s/ KENT M. CARLSON
-------------------------------------
Its Vice President
VERITAS SOFTWARE CORPORATION
By /s/ JAY A. JONES
-------------------------------------
Vice President and General Counsel
STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 4th day of May,
1998, by Kent M. Carlson the Vice President of RYAN COMPANIES US, INC., a
Minnesota corporation, on behalf of said corporation.
/s/ JACQUELYN UMPHRESS
[SEAL] ----------------------------------------
Notary Public
STATE OF CALIFORNIA )
)ss.
COUNTY OF SANTA CLARA)
The foregoing instrument was acknowledged before me this 1 day of May,
1998, by JAY A. JONES the VP & General Counsel of VERITAS SOFTWARE CORPORATION,
a Delaware corporation, on behalf of said corporation.
/s/ ROSA ELIZABETH CARRETERO
[SEAL] ----------------------------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Dennis Burratti, Esq.
Ryan Companies US, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3387
2
<PAGE> 39
EXHIBIT A
THE LAND
That part of Lot 4, Block 1, CENTRE POINT BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly and
southwesterly of a line described as follows: Commencing at the northwest
corner of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 98.78 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 194.99 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 89.36 feet to the easterly line of said Lot 4 and
said line there terminating.
ALSO
That part of Lot 5, BLOCK 1, CENTRE POINT BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly of a line
described as follows: Commencing at the most northerly northwest corner of said
Lot 5; thence South 00 degrees 00 minutes 00 seconds West, assumed bearing,
along the west line of said Lot 5 a distance of 56.35 feet to the beginning of
the line to be described; thence North 90 degrees 00 minutes 00 seconds East a
distance of 271.60 feet to the northeasterly line of said Lot 5 and said line
there terminating.
<PAGE> 40
EXHIBIT B
DECLARATION OF COMMON DRIVEWAY EASEMENT
THIS DECLARATION is made this 4th day of May, 1998, by RYAN COMPANIES US,
INC., a Minnesota corporation ("Ryan").
RECITALS
A. Ryan is the owner of the premises described in Exhibit 1 attached
hereto ("Parcel 1"), and is also the owner of the adjoining premises described
in Exhibit 2 attached hereto ("Parcel 2").
B. Ryan desires to create an easement for common driveway purposes over
and across that portion of Parcel 1 and Parcel 2 which is described in Exhibit
3 attached hereto (the "Easement Parcel").
NOW, THEREFORE, Ryan does hereby declare as follows:
1. An easement for vehicular ingress and egress is hereby established
over, upon and across the Easement Parcel, which easement shall be for the
benefit of the owners and tenants of Parcel 1 and Parcel 2 and their invitees.
2. The owner of Parcel 1 shall keep and maintain the Easement Parcel in
good condition and state of repair, and shall cause snow to be removed
therefrom within a reasonable time. The owner of Parcel 2 shall, within 30 days
after receipt of an invoice therefor, reimburse the owner of Parcel 1 for 50%
of all costs incurred for such maintenance. Amounts not paid when due shall
bear interest at the rate of 8% per annum, and the owner of Parcel 2 shall also
bear all costs of collection, including attorneys' fees.
3. The easements and covenants herein contained shall run with the land
and be binding upon all future owners of Parcel 1 and Parcel 2.
IN WITNESS WHEREOF, Ryan has caused this Declaration to be duly executed
as of the date first above written.
RYAN COMPANIES US, INC.
By KENT M. CARLSON
------------------------
Its Vice President
<PAGE> 41
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 4th day of May,
1998, by Kent M. Carlson the Vice President of RYAN COMPANIES US, INC., a
Minnesota corporation, on behalf of said corporation.
[SEAL]
JACQUELYN UMPHRESS
NOTARY PUBLIC - MINNESOTA /s/ JACQUELYN UMPHRESS
My Comsn. Expires Jan. 31, 2000 ----------------------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Dennis Buratti, Esq.
Ryan Companies US, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3387
<PAGE> 42
EXHIBIT 1
---------
PARCEL 1
That part of Lot 3, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly of the
following described line: Commencing at the northeast corner of said Lot 3;
thence South 30 degrees 00 minutes 00 seconds East, assumed bearing, 171.23
feet along the easterly line of said Lot 3; thence southerly 143.99 feet along
said east line of Lot 3 on a tangential curve concave to the west with a radius
of 275.00 feet and with a central angle of 30 degrees 00 minutes 00 seconds;
thence on a bearing of South 90.00 feet tangent to said curve along said east
line of Lot 3 to the point of beginning of the line to be described; thence on
a bearing West 408.50 feet to a point on the west line of Lot 3 and said line
there terminating.
ALSO
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly and
northeasterly of a line described as follows: Commencing at the northwest corner
of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West, assumed
bearing, along the west line of said Lot 4 a distance of 98.78 feet to the point
of beginning of the line to be described, thence North 90 degrees 00 minutes 00
seconds East a distance of 194.99 feet; thence South 45 degrees 00 minutes 00
seconds East a distance of 89.36 feet to the easterly line of said Lot 4 and
said line there terminating.
<PAGE> 43
EXHIBIT 2
PARCEL 2
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly and
southwesterly of a line described as follows: Commencing at the northwest
corner of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 98.78 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 194.99 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 89.36 feet to the easterly line of said Lot 4 and
said line there terminating.
ALSO
That part of Lot 5, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly of a line
described as follows: Commencing at the most northerly northwest corner of said
Lot 5; thence South 00 degrees 00 minutes 00 seconds West, assumed bearing,
along a west line of said Lot 5 a distance of 56.35 feet to the beginning of
the line to be described; thence North 90 degrees 00 minutes 00 seconds East a
distance of 271.60 feet to the northeasterly line of said Lot 5 and said line
there terminating.
<PAGE> 44
EXHIBIT 3
EASEMENT PARCEL
<PAGE> 45
OPTION AGREEMENT
THIS AGREEMENT is made and entered into this 3rd day of June, 1998, by and
between RYAN COMPANIES US, INC., a Minnesota corporation ("Owner"), and VERITAS
SOFTWARE CORPORATION, a Delaware corporation ("Tenant").
RECITALS
A. Owner and Tenant have entered into a Lease Agreement dated April 30,
1998, as amended by a First Amendment to Lease Agreement dated June 1, 1998
(together, the "Lease"). Pursuant to said Lease, Owner has granted to Tenant an
option to have Owner construct a building upon the land described in Exhibit A
attached hereto (the "Land") and lease such Land and building from Owner (the
"Expansion Option").
B. If Tenant exercises the Expansion Option and Owner fails or refuses
to perform its obligations under the Lease with respect thereto (an "Expansion
Option Default"), then Owner is willing to sell the Land to Tenant.
AGREEMENT
NOW, THEREFORE, in consideration of the Lease, Owner and Tenant agree as
follows:
1. If, but only if, an Expansion Option Default occurs and is not cured
within thirty (30) days after written notice thereof by Tenant to Owner or by
Owner to Tenant, then Tenant shall have the right and option to purchase the
land at any time within ninety (90) days after the expiration of such 30-day
period, but in no event later than July 1, 2003 (the "Option Period").
2. The total purchase price to be paid by Tenant for the Land shall be
the sum of $550,100. Tenant may exercise its option to purchase the Land by
paying such purchase price to Owner prior to the expiration of the Option
Period, whereupon Owner shall convey the Land to Tenant by warranty deed, with
State Deed Tax paid thereon, free and clear of all liens and encumbrances
except easements, restrictions and reservations which are of record on the date
hereof, real estate taxes and special assessments which are not delinquent and
a Declaration of Common Driveway Easement in the form of Exhibit B attached
hereto. Real estate taxes which are payable during the year in which the
conveyance occurs shall be prorated as of the date thereof. Owner shall pay all
special assessments which have been levied as of the date hereof.
3. Time is of the essence hereof. At such time as either (a) an
Expansion Option Default can no longer arise, or (b) the Option Period has
expired and Tenant has failed to exercise its option hereunder to purchase the
Land, Tenant shall upon the request of Owner acknowledge the termination of
this Agreement by written agreement in recordable form. Any failure or refusal
by Tenant to do so within 30 days after written request by Owner shall
constitute a default by Tenant under the Lease. It is agreed that an Expansion
Option Default cannot occur if Owner and Tenant enter into a lease for the Land
and Owner commences construction of a building thereon pursuant to said lease.
4. This Agreement supersedes and replaces in its entirety the Option
Agreement between Owner and Tenant dated April 30, 1998, which prior Option
Agreement is of no further force or effect.
<PAGE> 46
IN TESTIMONY WHEREOF, Owner and Tenant have caused this Agreement to be
duly executed as of the date first above written.
RYAN COMPANIES US, INC.
By /s/ DENNIS BURATTI
-----------------------------
Its Vice President
VERITAS SOFTWARE CORPORATION
By /s/ JAY A JONES
-----------------------------
Its JAY A. JONES
VICE PRESIDENT AND
GENERAL COUNSEL
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 3 day of June,
1998, by Dennis Buratti the Vice President of RYAN COMPANIES US, INC., a
Minnesota corporation, on behalf of said corporation.
/s/ JUDY A. HERMANSON
---------------------------------
Notary Public
[SEAL]
JUDY A. HERMANSON
NOTARY PUBLIC - MINNESOTA
HENNEPIN COUNTY
My Commission Expires Jan. 31, 2000
STATE OF ______________ )
) ss.
COUNTY OF _____________ )
The foregoing instrument was acknowledged before me this ____ day of
_________, 1998, by ___________________________ the ___________________________
of VERITAS SOFTWARE CORPORATION, a Delaware corporation, on behalf of said
corporation.
---------------------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Dennis Buratti, Esq.
Ryan Companies US, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3387
2
<PAGE> 47
EXHIBIT A
THE LAND
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly and
southwesterly of a line described as follows: Commencing at the northwest
corner of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 89.34 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 188.87 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 99.58 feet to the easterly line of said Lot 4 and
said line there terminating.
ALSO
That part of Lot 5, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly of a line
described as follows: Commencing at the most northerly northwest corner of said
Lot 5; thence South 00 degrees 00 minutes 00 seconds West, assumed bearing,
along a west line of said Lot 5 a distance of 46.92 feet to the beginning of
the line to be described; thence North 90 degrees 00 minutes 00 seconds East a
distance of 265.37 feet to the northeasterly line of said Lot 5 and said line
there terminating.
<PAGE> 48
EXHIBIT B
DECLARATION OF COMMON DRIVEWAY EASEMENT
THIS DECLARATION is made this ______ day of __________________, 1998, by
RYAN COMPANIES US, INC., a Minnesota corporation ("Ryan").
RECITALS
A. Ryan is the owner of the premises described in Exhibit 1 attached
hereto ("Parcel 1"), and is also the owner of the adjoining premises described
in Exhibit 2 attached hereto ("Parcel 2").
B. Ryan desires to create an easement for common driveway purposes over
and across that portion of Parcel 1 and Parcel 2 which is described in Exhibit 3
attached hereto (the "Easement Parcel").
NOW, THEREFORE, Ryan does hereby declare as follows:
1. An easement for vehicular ingress and egress is hereby established
over, upon and across the Easement Parcel, which easement shall be for the
benefit of the owners and tenants of Parcel 1 and Parcel 2 and their invitees.
2. The owner of Parcel 1 shall keep and maintain the Easement Parcel in
good condition and state of repair, and shall cause snow to be removed
therefrom within a reasonable time. The owner of Parcel 2 shall, within 30 days
after receipt of an invoice therefor, reimburse the owner of Parcel 1 for 50%
of all costs incurred for such maintenance; provided, however, that the owner
of Parcel 2 shall not be responsible for such share of maintenance costs which
are incurred prior to the completion of construction of a building on Parcel 2.
Amounts not paid when due shall bear interest at the rate of 8% per annum, and
the owner of Parcel 2 shall also bear all costs of collection, including
attorneys' fees.
3. The easements and covenants herein contained shall run with the land
and be binding upon all future owners of Parcel 1 and Parcel 2. Owners shall be
responsible only for the obligations which arise hereunder during the periods
of their ownership.
IN WITNESS WHEREOF, Ryan has caused this Declaration to be duly executed
as of the date first above written.
RYAN COMPANIES US, INC.
By _____________________________________
Its Vice President
<PAGE> 49
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
__________, 1998, by ______________________ the ______________________ of RYAN
COMPANIES US, INC., a Minnesota corporation, on behalf of said corporation.
_______________________________________
Notary Public
Subordination by Mortgagees
The undersigned, being the holder of the Mortgage on Parcel 2 which is
recorded in the office of the Ramsey County Recorder as Document No. 2994228,
hereby agrees that the lien of said Mortgage shall be subordinate to the
easements and covenants contained in the foregoing Declaration.
CENTURY BANK NATIONAL ASSOCIATION
By _____________________________________
Its _________________________________
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
__________, 1998, by ______________________ the ______________________ of
CENTURY BANK NATIONAL ASSOCIATION, a national banking association, on behalf of
said national banking association.
_______________________________________
Notary Public
2
<PAGE> 50
The undersigned, being the holder of the Mortgages on Parcel 1 and Parcel
2 which are recorded in the office of the Ramsey County Recorder as Document
Nos. 2994225 and 2994226, hereby agrees that the liens of said Mortgages shall
be subordinate to the easements and covenants contained in the foregoing
Declaration.
CITY OF ROSEVILLE, MINNESOTA
By: ____________________________________
Its Mayor
[SEAL]
And: ___________________________________
Its City Manager
STATE OF MINNESOTA )
) ss.
COUNTY OF RAMSEY )
The foregoing instrument was acknowledged before me this __ day of
__________, 1998, by ______________________ the Mayor, and _____________________
the City Manager of the CITY OF ROSEVILLE, MINNESOTA, a municipal corporation,
on behalf of said municipal corporation.
_______________________________________
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Dennis Buratti, Esq.
Ryan Companies US, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3387
3
<PAGE> 51
EXHIBIT 2
PARCEL 2
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying southerly and
southwesterly of a line described as follows: Commencing at the northwest
corner of said Lot 4; thence South 00 degrees 00 minutes 00 seconds West,
assumed bearing, along the west line of said Lot 4 a distance of 89.34 feet to
the beginning of the line to be described; thence North 90 degrees 00 minutes
00 seconds East a distance of 188.87 feet; thence South 45 degrees 00 minutes
00 seconds East a distance of 99.58 feet to the easterly line of said Lot 4 and
said line there terminating.
ALSO
----
That part of Lot 5, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, lying northerly of a line
described as follows: Commencing at the most northerly northwest corner of said
Lot 5; thence South 00 degrees 00 minutes 00 seconds West, assumed bearing,
along a west line of said Lot 5 a distance of 46.92 feet to the beginning of
the line to be described; thence North 90 degrees 00 minutes 00 seconds East a
distance of 265.37 feet to the northeasterly line of said Lot 5 and said line
there terminating.
<PAGE> 52
EXHIBIT 3
EASEMENT PARCEL
That part of Lot 4, Block 1, CENTRE POINTE BUSINESS PARK, according to the
recorded plat thereof, Ramsey County, Minnesota, described as follows:
Commencing at the Northwest corner of said Lot 4; thence South 00 degrees 00
minutes 00 seconds West, assumed bearing, along the West line of said Lot 4 a
distance of 89.34 feet; thence North 90 degrees 00 minutes 00 seconds East a
distance of 13.50 feet to the actual point of beginning; thence North 00 degrees
00 minutes 00 seconds East a distance of 18.42 feet; thence North 90 degrees 00
minutes 00 seconds East a distance of 181.93 feet to the Northeasterly line of
said Lot 4; thence South 45 degrees 00 minutes 00 seconds East a distance of
102.69 feet to the Easterly line of said Lot 4; thence Southerly along said
Easterly line along a non-tangential curve concave to the East having a central
angle of 06 degrees 14 minutes 52 seconds and a radius of 325.00 feet for an arc
distance of 35.44 feet; thence North 45 degrees 00 minutes 00 seconds West, not
tangent to said curve, a distance of 88.90 feet; thence Westerly along a
tangential curve concave to the South having a central angle of 45 degrees 00
minutes 00 seconds and a radius of 28.50 feet for an arc distance of 22.38 feet;
thence South 90 degrees 00 minutes 00 seconds West, tangent to said curve, a
distance of 155.51 feet to its intersection with a line which bears South 00
degrees 00 minutes 00 seconds West from the point of beginning; thence North 00
degrees 00 minutes 00 seconds East a distance of 14.58 feet to the point of the
beginning.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 76,689
<SECURITIES> 155,310
<RECEIVABLES> 43,677
<ALLOWANCES> 2,090
<INVENTORY> 0
<CURRENT-ASSETS> 280,757
<PP&E> 38,131
<DEPRECIATION> 17,162
<TOTAL-ASSETS> 308,293
<CURRENT-LIABILITIES> 61,819
<BONDS> 100,000
0
0
<COMMON> 197,111
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 308,293
<SALES> 45,807
<TOTAL-REVENUES> 56,545
<CGS> 2,516
<TOTAL-COSTS> 41,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,420
<INCOME-PRETAX> 16,355
<INCOME-TAX> 3,762
<INCOME-CONTINUING> 12,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 12,593
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.24
</TABLE>
