-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dxzzl6rC+yYrv6hkOrMSps3jDUlu4tsprPh0z5Q3E6+tibJ3nhPS5bXCgZtPRJat m+4IqC0npa38xOlVAHzlyQ== 0000891618-98-004947.txt : 19981118 0000891618-98-004947.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891618-98-004947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERITAS SOFTWARE CORP CENTRAL INDEX KEY: 0000867666 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942823068 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22712 FILM NUMBER: 98749931 BUSINESS ADDRESS: STREET 1: 1600 PLYMOUTH STREET CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6503358000 MAIL ADDRESS: STREET 1: 1600 PLYMOUTH ST CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (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) DELAWARE 94-2823068 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 VERITAS SOFTWARE CORPORATION INDEX PART I: FINANCIAL INFORMATION
PAGE NO. -------- 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
2 3 PART I: FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS VERITAS SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) 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 ======== ========
See accompanying notes. 3 4 VERITAS SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1998 1997 1998 1997 ------- ------- -------- ------- 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 ======= ======= ======== =======
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 5 VERITAS SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1997 --------- -------- 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
See accompanying notes. 5 6 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- 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 ======= ======= ======= =======
6 7 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:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 1998 1997 1998 1997 ------- ------ ------- ------- 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 ======= ====== ======= =======
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 8 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 9 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 10 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 11 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 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 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:
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 ----- ----- ------------------ 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%
13 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:
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 ---- ---- ------------------ 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%
- --------------- 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 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 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 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 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 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 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.
TARGETED IMPACTED SYSTEMS STATUS COMPLETION ---------------- ------ ----------- 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
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 20 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 21 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 22 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 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 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 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 26 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 27 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 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 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:
EXHIBIT NUMBER - ------- 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)
(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 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 32 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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)
EX-10.14 2 OFFICE BUILDING SUBLEASE DATED FEBRUARY 27, 1998 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 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 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 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 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 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 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 ------------------------------ 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: ------------------------------ 7 EX-10.15 3 OFFICE BUILDING LEASE DATED APRIL 30, 1998 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. 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: 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. 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. 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. 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. 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 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 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. 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. 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 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. 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. 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 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 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 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 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: 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 -------------------------------------- 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] 21 [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
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. 23 [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
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: 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
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%; 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 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 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 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. 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 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. 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. 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. 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 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 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 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. 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. 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 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. 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 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 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. 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. 44 EXHIBIT 3 EASEMENT PARCEL 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. 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 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. 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 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 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 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. 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. EX-27.1 4 FINANCIAL DATA SCHEDULE
5 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. 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 76,689 155,310 43,677 2,090 0 280,757 38,131 17,162 308,293 61,819 100,000 0 0 197,111 0 308,293 45,807 56,545 2,516 41,771 0 0 1,420 16,355 3,762 12,593 0 0 0 12,593 0.27 0.24
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