-----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, IvVjkm/qjXmAdQu5VK11A/TwtWxP/HqZ2cj/IDcO1cZcBvihsNyXSZPTz4XfirfS AO18/BpZrLHfPuPivYKBnQ== 0000891618-99-001231.txt : 19990331 0000891618-99-001231.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891618-99-001231 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K405 SEC ACT: SEC FILE NUMBER: 000-22712 FILM NUMBER: 99577262 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-K405 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1600 PLYMOUTH STREET MOUNTAIN VIEW, CALIFORNIA 94043 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 335-8000 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 28, 1999, 47,924,510 shares of registrant's common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of February 28, 1999 was approximately $2,833,634,700. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive proxy statement, to be delivered to stockholders in connection with the Registrant's Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE NO. -------- PART 1 Item 1. Business.................................................... 3 Item 2. Properties.................................................. 17 Item 3. Legal Proceedings........................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5. Market for the Registrant's Common Equity and Related 18 Stockholder Matters....................................... Item 6. Selected Financial Data..................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition 20 and Results of Operations................................. Item 7A. Quantitative and Qualitative Disclosures About Market 41 Risk...................................................... Item 8. Financial Statements and Supplementary Data................. 43 Item 9. Changes in and Disagreements with Accountants on Accounting 44 and Financial Disclosure.................................. PART III Item 10. Directors and Executive Officers of the Registrant.......... 44 Item 11. Executive Compensation...................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and 44 Management................................................ Item 13. Certain Relationships and Related Transactions.............. 44 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 45 8-K....................................................... Signatures.......................................................... 48 Financial Statements................................................ 49 Financial Statement Schedules....................................... 73 Exhibits............................................................ 74
2 3 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933, that involve risks and uncertainties. These forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future. All these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Some of the factors could cause actual results to differ from those projected in these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report, and those detailed from time to time in our reports and filings with the Securities and Exchange Commission, that attempt to advise interested parties of the risks and factors that may affect our business. BUSINESS OF VERITAS OVERVIEW VERITAS is the leading independent supplier of enterprise data storage management solutions, providing advanced storage management software for open system environments. VERITAS' products provide performance improvement and reliability enhancement 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 data distributed on large networks of systems without interrupting users. In addition, VERITAS' products provide an automated failover between computer systems organized in clusters sharing disk resources. VERITAS' highly scalable products can be used independently, and certain products can be combined to provide interoperable client/server storage management solutions. Some of VERITAS' 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. VERITAS also provides a comprehensive range of services to assist customers in planning and implementing storage management solutions. VERITAS markets its products and associated services to original equipment manufacturers and end-user customers through a combination of direct sales and indirect sales channels such as resellers, value-added resellers, hardware distributors, application software vendors and systems integrators). VERITAS' original equipment manufacturer customers include Digital Equipment Corporation, Hewlett-Packard, Sun Microsystems, Microsoft, Sequent Computer Systems and Tandem Computers. VERITAS' end-user customers include AT&T, Bank of America, BMW, Boeing, British Telecommunications, Chrysler Corporation, Lucent Technologies, Oracle Corporation and Motorola. The widespread deployment of mission-critical client-server applications, coupled with the explosion of corporate data, is quickly exceeding the ability of current computing architectures to efficiently handle availability, scalability and manageability issues. A new storage-centric architecture, called storage area networking, or SAN, is emerging to address these issues. A variety of other key industry vendors in the platform, storage, communications, switch and applications areas have recognized this emerging trend. In a storage area network computing environment, large centralized data stores, accessible by 3 4 all attached host computers across a high speed, "storage area" network, extend the "any to any" connectivity of local area network architectures to storage resources. Any data on the network, in any location, is accessible, through multiple paths, to any nodes, applications and users on the network. The ubiquitous data access provided by the storage area network "any to any" connectivity can offer significant improvements in availability, scalability and manageability over traditional "point to point" storage architectures. The benefits of storage area networking are as follows: - Lower cost of availability. In storage area networking architecture, all nodes share physical access to all storage. This allows a single node to function as a high availability "failover" server to a much larger number of servers than is possible in traditional networks. When the switch fabric is redundant, which it is in many cases, a storage area network provides a significantly improved environment for clustering that can extend to tens of nodes. Clustering significantly lowers the hardware costs associated with high availability, allowing customers to use high availability for many applications not cost-justifiable in current two to four node cluster configurations. This will lead to significant improvement in the availability of an enterprise's data and applications. - Easy, modular scalability of server and storage resources. The fiber channel architecture of a storage area network supports ubiquitous access between all servers and all storage resources in the network, even while new servers, disk arrays and tape subsystems are added. Customers can add server and storage resources on-line without disrupting data access. - Improved administrative productivity through centralized storage management. A centralized pool of storage can be managed much more efficiently from a single management interface. Common administrative tasks such as volume and file system management, backup and restore, hierarchical storage management, replication and off-site data vaulting all can be centrally managed. This lowers the costs of storage management on a per unit basis, and significantly increases the span of control of existing administrators. The ability to leverage the channel speeds offered by a storage area network can dramatically shorten backup and restore windows compared with local area network-based backup and restore. - High performance data access. There is a much wider access to data at channel speeds rather than SCSI speeds. This allows more nodes to gain at least an order of magnitude faster access to more storage resources. Superior high performance is of particular interest in application environments that depend on bulk data transfer, such as imaging and decision support. PRODUCTS VERITAS has developed and is integrating a family of innovative solutions for end-to-end management of on-line, near-line and off-line resources for the storage and management of enterprise-wide data. VERITAS' product line encompasses products for: - on-line file and disk management; - off-line backup and hierarchical storage management; - centralized and automated data management in heterogeneous computing environments; 4 5 - event management; - performance management; and - components that include availability enhancing features such as multiserver failover to achieve fault tolerance and remote site replication to accomplish rapid recovery in the event of a site disaster. VERITAS has also developed application-specific customized packages that provide storage management for major application environments such as the Sun Microsystems NFS, Oracle and SAP, as well as for web servers. Storage foundation products VERITAS File System. The VERITAS File System enables fast system recovery, generally within seconds, from operating system failure or disruption. It also allows on-line performance tuning, file system defragmentation, file system reconfiguration and file system back-up to be conducted without interrupting users' access to files. Through the application of advanced journaling technology, the VERITAS File System is designed to ensure that metadata, or information describing the location, size and attributes of files, is maintained in a consistent and correct state in the event of system failure or disruption. In addition, the VERITAS File System incorporates advanced extent-based file space allocation algorithms that can accelerate file access rates, thereby providing enhanced system performance. Extent-based algorithms are particularly critical in applications that require access to large, clustered or sequentially accessed files. VERITAS Volume Manager. The VERITAS Volume Manager provides protection against data loss due to disk failure, permits the acceleration of system performance by allowing files to be spread across multiple disks and allows the system administrator to reconfigure data locations without interrupting users. The technology incorporated into the VERITAS Volume Manager provides a virtual software layer on top of the underlying physical disks connected to the system. Among the features that the VERITAS Volume Manager provides are: - spanning, which allows segments of user data to span multiple physical disks and thereby overcome physical disk size limitations, - mirroring, which allows for duplication of data on separate disks for uninterrupted operations after disk failure, - striping or interleaving data storage across multiple disks to increase performance by providing multiple input/output data access points, and - Raid-5, or striping with the addition of redundant data for uninterrupted operations after disk failure. Accelerator for NFS. The Accelerator for NFS is an extension to the VERITAS File System and enhances performance of the Sun Microsystems NFS. The Accelerator takes information that would have been logged in the VERITAS File System intent logs and uses a single log on a separate device. Multiple file system logs can be consolidated and accessed sequentially on one or many of these accelerator volumes, removing the head movement latency costs associated with writing file system intent logs. VERITAS SmartSync. VERITAS SmartSync was jointly developed with Oracle and is licensed as a product option of the VERITAS Volume Manager. This product allows Oracle redo logs to drive resynchronization of VERITAS Volume Manager mirrors to cut 5 6 down mirror resynchronization time to less than a minute as opposed to hours. Resynchronization takes as long as the redo log replay. This functionality works with Oracle 7.3.2 and later versions. VERITAS Quick I/O Database Accelerator. VERITAS Quick I/O Database Accelerator allows databases to run on a VERITAS file system at the same speed as on a raw device. The database views the file system as a raw device and the system administrator sees it as a file system. Therefore, an administrator can get the speed of a raw device with the manageability of a file system. VERITAS Clustered Volume Manager. Added as an extension to VERITAS Volume Manager for parallel applications such as the Oracle Parallel Server, the VERITAS Clustered Volume Manager offers the same functionality as the VERITAS Volume Manager in a cluster of systems that can all read and update the same data concurrently. The VERITAS Clustered Volume Manager ensures atomic, or all or none, configuration updates and error event notification to all participating servers. This provides consistent data and configuration updates, even in the event of a system failure. For example, in the event of an Oracle Parallel Server mirrored disk failure, all participating servers must automatically "see" the failure. Without the VERITAS Clustered Volume Manager, there is a chance that the error would only be seen by one server, resulting in the Oracle Parallel Server delivering incorrect data. VERITAS Clustered File System. VERITAS Clustered File System extends VERITAS base File System, and increases disk performance by allowing shared access to file systems residing on a pool of shared disk arrays. VERITAS Editions. VERITAS Editions, formerly referred to as VERITAS ServerSuite, are integrated suites of products, providing customers with complete data storage management are solutions optimized for specific server environments including the Sun Microsystems NFS, Web servers and database servers. VERITAS Editions include VERITAS Database Edition for Oracle, VERITAS Edition for SAP, VERITAS Edition for NFS and VERITAS Edition for Web. VERITAS Editions provides increased performance and availability on commodity servers. Storage application products VERITAS NetBackup. VERITAS NetBackup reduces the workload for systems administrators of heterogeneous platforms by providing easily configured centralized backup scheduling, user-directed backups and restores, automated distribution and installation of client software over the network, and easy configuration of clients. NetBackup has a database extension that provides comprehensive on-line and hot database backup for Oracle, Sybase and Informix databases that can be acquired and deployed by customers on an as-needed basis. VERITAS HSM. VERITAS HSM automatically moves data between file systems and storage devices supporting most disk, tape, optical and robotics devices. VERITAS HSM is a server-based, policy-driven migration tool that works in conjunction with VERITAS NetBackup. VERITAS HSM has an enterprise extension that provides a simple, cost-effective means to transparently migrate, purge and cache files between file systems on various platforms. VERITAS Media Librarian. VERITAS Media Librarian operates and manages all types of removable media volumes, devices and repositories. It provides a secure way to share robotic libraries and media among multiple simultaneous applications. VERITAS 6 7 Media Librarian provides a simple interface to access and monitor removable media in a heterogeneous network of servers and clients that eliminates the need to deal with media types, device drivers and location information. VERITAS Media Librarian provides protection against data loss, enhances data accessibility and availability and reduces storage management costs, in a scalable and cost-effective manner. VERITAS Storage Manager. VERITAS Storage Manager provides a single, centralized interface to monitor and manage storage systems across a large, heterogeneous, distributed network. This network can consist of hundreds of computers running a variety of UNIX and Windows NT operating systems. It allows policy-based management -- allowing the administrator to set up policies for business that are automatically monitored and, if necessary, actions are automatically executed to fix a breach of policy. VERITAS Storage Manager integrates with storage applications to enable real-time and historical event and performance monitoring, allowing a standardized view across the entire storage environment regardless of platform. Integration with VERITAS' industry leading on-line, off-line and near-line storage management products allows the storage environment to be automatically managed from a single centralized console, minimizing application downtime and optimizing data and application availability. VERITAS Volume Optimizer. VERITAS Volume Optimizer, an add-on product for VERITAS Storage Manager, provides proactive, system-wide configuration analysis and recommends changes to storage layouts for optimizing system performance and reliability. This product can detect performance issues and make recommendations enabling reconfiguration to alleviate such problems. VERITAS Storage LookOut. VERITAS Storage LookOut, a storage application product, identifies and notifies administrators of potential hardware failures before they can cause outages or disrupt operations. Using proven statistical algorithms, Storage LookOut has been designed and tested to deliver highly accurate fault detection and failure prediction. With VERITAS Storage LookOut, administrators proactively manage data availability. In addition, VERITAS Storage LookOut is a much more cost-effective solution than the traditional fault tolerant hardware options. High availability and clustering products VERITAS Storage Replicator for Volume Manager. VERITAS Storage Replicator for Volume Manager allows synchronous or asynchronous protocols, which support replicated volumes across multiple servers, with all changes reflected and available for use at all participating sites. It allows administrators to tailor replication configurations to meet the requirements of specific sites and data types. VERITAS Storage Replicator for Volume Manager can replicate any data type, providing the flexibility to mirror entire servers or specific application data. Through replication, application data can be sent from one primary site to multiple secondary sites. Or, for more demanding disaster recovery environments data can be replicated from many primary sites to a single secondary location where data could then be warehoused. Although VERITAS Storage Replicator for Volume Manager is targeted primarily for use in disaster recovery configurations, it can also be used to address a wide range of data distribution needs. Those include off-site backups, data vaulting, and data migration. VERITAS Storage Replicator for File Systems. VERITAS Storage Replicator for File Systems is a robust, flexible, general purpose, data replication tool designed for use in enterprise environments. Through a transport layer independent replication mechanism, designated file systems can be replicated to multiple locations -- local or remote. Storage 7 8 Replicator manages file systems in parallel, either locally across several file systems, remotely using standard NFS-mounted file systems, or both. Based on a read-one-write-all replication protocol, Storage Replicator ensures that writes to a replicated file system from any participating server are reliably replicated to all servers. Local concurrency control is managed by the underlying file system. Storage Replicator also tracks the status of participating servers for fault management purposes. Replication is continuous and all updates are immediately reflected and available for use in active file systems across all servers. VERITAS FirstWatch. VERITAS FirstWatch adds high availability capabilities to open system servers, making it possible to provide highly reliable network services to users of client/server applications, including Sun Microsystems' NFS file service and databases. VERITAS FirstWatch automates the failover of services to designated backup systems when systems and subsystems fail or become unavailable. VERITAS Cluster Server. VERITAS Cluster Server, a high availability and clustering product, is a comprehensive storage area networking-ready application availability management solution, designed to minimize planned and unplanned downtime. It is equally applicable in simple shared disk or storage area networking configurations of up to 32 nodes, and compatible with single node, parallel and distributed applications. VERITAS Cluster Server supports cascading and multi-directional application failover. Also, application services can be manually migrated to alternate nodes for maintenance purposes. VERITAS Cluster Server provides continuous availability for the critical application environments required to maintain smooth business operations. New products VERITAS announced a new product that is expected to become available in mid 1999. Together with VERITAS Storage LookOut and VERITAS Cluster Server, this product is part of an integrated suite which utilizes a centralized and automated management interface to bring automated event, performance, configuration and capacity management solutions to enterprise storage configurations: VERITAS Storage Planner. VERITAS Storage Planner, a storage application product, another add-on product for VERITAS Storage Manager, is a predictive storage resource analysis tool, which assists system administrators with capacity planning for future storage needs. The product analyzes data gathered by VERITAS Storage Manager to determine how quickly storage objects are reaching capacity, and makes recommendations when additional storage objects are needed. VERITAS' new products may not be released on the anticipated schedule. It is possible that they may not achieve market acceptance or adequately address the changing needs of the marketplace on a timely basis, despite the dedication of significant engineering resources to the development of the products. Any such failure could result in VERITAS having little or no return on its investment of significant resources which could adversely affect VERITAS' business. SERVICES VERITAS' customer service and support organization provides customers with maintenance, technical support, consulting and training services. VERITAS believes that providing a high level of customer service and technical support is critical to customer satisfaction and VERITAS' success. Most of VERITAS' customers currently have support agreements with VERITAS which typically provide for fixed fee, renewable annual 8 9 maintenance consisting of technical and emergency support as well as minor product upgrades free of charge. VERITAS' service group provides the following services: Maintenance and technical support. VERITAS offers seven day-a-week, 24-hour telephone support as well as electronic mail and fax customer support. Additional customer support is provided by some of VERITAS' value-added resellers, system integrators and original equipment manufacturers. Initial product license fees do not cover maintenance. Consulting. VERITAS believes that most customers need assistance before product selection and not just for the implementation of purchased products. Therefore, VERITAS offers strategy and analysis consulting services for planning the management and control of client/server computing in their specific environment. In addition, VERITAS offers services to assist customers with product implementation. As part of its broad range of services, VERITAS believes it offers particular expertise in analyzing network security threats and security policy integrity. Training. VERITAS has a worldwide customer education and training organization which offers training that enables the customer to better utilize VERITAS' products, reduces the need for technical support and provides the customer with a means to optimize their personnel investment by allowing their technical staff access to high quality, comprehensive instruction. The focus of this organization is aligned with VERITAS' strategy to offer end-to-end storage management solutions by providing instruction from highly-experienced training professionals either at the customer's location or at one of VERITAS' multi-platform classrooms. Porting. VERITAS ports, or adapts new and existing storage management products to customer operating systems at the request of a customer. This may involve the development of certain new product versions or features or extensions of existing products to be ported to and embedded in the customer's operating system. MARKETING, SALES AND DISTRIBUTION VERITAS markets its products and associated services through original equipment manufacturers and a combination of other distribution channels such as direct sales, resellers, value-added resellers, hardware distributors, application software vendors and systems integrators. Original equipment manufacturers incorporate the products into their operating systems on a bundled basis or license them to third parties as an optional product. In most cases, VERITAS receives a user license fee for each copy sublicensed by the original equipment manufacturer to third parties. Agreement with Microsoft In August 1996, VERITAS entered into a development and license agreement with Microsoft under which VERITAS agreed to develop a version of its Volume Manager product, which Microsoft has called Logical Disk Manager, to be ported to and embedded in version 5.0 of Microsoft's Windows NT operating system. VERITAS believes that this will establish an installed customer base on the Windows NT platform to which VERITAS can offer its products. VERITAS will not receive royalties with respect to sales by Microsoft of the embedded product. VERITAS products may not become available for use in, and Microsoft is not required to use VERITAS products in future versions of Windows NT. Therefore it is possible that VERITAS will not realize any expected benefits from the inclusion of this embedded product in future versions of Windows NT. 9 10 Agreement with Sun Microsystems In January 1997, VERITAS entered into a development, license and distribution agreement with Sun Microsystems which provided a new distribution channel for VERITAS products. VERITAS has developed a specialized, integrated version of VERITAS Volume Manager that is bundled with the Solaris operating system. The agreement also provides for the license of full versions of certain VERITAS products and add-on modules to Sun Microsystems for bundling with certain Sun Microsystems products. In connection with the merger with OpenVision, VERITAS assumed an OpenVision development, license and distribution agreement with Sun Microsystems, under which Sun Microsystems was granted a limited exclusive license with respect to VERITAS NetBackup and VERITAS HSM and to certain enhancements to and extensions of those products. In August 1998, this development, license and distribution agreement was canceled and replaced with an amendment to the VERITAS development, license and distribution agreement that granted a non-exclusive, except for several named resellers for which Sun Microsystems retained exclusive distribution rights, license to distribute and sub-license NetBackup, VERITAS HSM and all of the VERITAS Editions. VERITAS may not be able to deliver its products to Sun Microsystems in a timely manner despite the dedication of significant resources to the development of the products. Also, the simultaneous sales efforts of Sun Microsystems and VERITAS with respect to VERITAS' products could create certain channel conflicts. Agreement with Hewlett-Packard In November 1997, VERITAS entered into a marketing, engineering and distribution agreement with Hewlett-Packard under which Hewlett-Packard will offer certain components of the lite versions, or a functional subset of the VERITAS Volume Manager, VERITAS Clustered Volume Manager, VERITAS NetBackup and VERITAS File System with the HP-UX operating system. VERITAS will not receive royalties with respect to the lite version of the VERITAS File System embedded in the HP-UX operating system. Hewlett-Packard will become a reseller of VERITAS with respect to certain VERITAS products, including full feature versions of the above named products, and VERITAS will offer full feature products and value-added products to the HP-UX installed customer base. VERITAS may not be able to deliver its products to Hewlett-Packard in a timely manner. Also, it is possible that VERITAS deliverables and Hewlett-Packard deliverables under the agreement may not be synchronized in a timely and successful manner and that Hewlett-Packard may not be an effective reseller of VERITAS' products. The simultaneous sales efforts of Hewlett-Packard and VERITAS with respect to VERITAS' products could create certain channel conflicts. Sales, marketing and support organization During 1998, VERITAS continued to build its sales, marketing and customer support organization with a focus on delivery of its products to resellers, integrators and end users. As of December 31, 1998, VERITAS' U.S. sales, marketing and consulting force consisted of 360 employees, including 71 pre-sales engineers that provide technical sales assistance. VERITAS has sales subsidiaries in Canada, Japan, the United Kingdom, Germany, France, Sweden, the Netherlands and Australia. The international sales force of VERITAS, as of December 31, 1998, consisted of 112 persons located in Europe and North America and 13 persons located in Asia and the Pacific Rim. VERITAS also had approximately 140 resellers as of December 31, 1998 located in North America, Europe, Asia Pacific, South America and the Middle East. 10 11 VERITAS expects to increase the number of its sales, marketing and customer support employees in the future in order to expand its direct sales efforts to resellers and end users. VERITAS may not have the necessary resources to accomplish this. It is also possible that it will not be able to establish and expand these new distribution channels successfully or complete the integration of its sales and marketing efforts successfully. VERITAS expects to hire additional sales employees in all regions in 1999. Competition for qualified sales, technical and other personnel is intense, and VERITAS may not be able to attract, assimilate or retain additional highly qualified employees in the future. VERITAS also may not be able to manage its growth effectively. COMPETITION The markets in which VERITAS competes are intensely competitive and rapidly changing. VERITAS' principal competition in the storage foundation products area consists of internal development groups of current and prospective original equipment manufacturer customers, which have the resources and capability to develop their own storage management solutions. Among the original equipment manufacturers which have competing storage management products are: - Sun Microsystems for its Solaris system; - Digital Equipment Corporation for its Digital UNIX system; - IBM for its AIX system; and - Microsoft for Windows NT. VERITAS also encounters competition from other third party software vendors and hardware companies offering products that incorporate certain of the features provided by VERITAS' products, and from disk controller and disk subsystem manufacturers which have included or may include similar features. VERITAS' primary competitors in the storage application products area that VERITAS has encountered or expects to encounter include: - the Cheyenne division of Computer Associates, for its ARCserve product; - EMC, for its Enterprise Data Manager product; - International Business Machines Corporation, for its ADSTAR Distributed Storage Manager product; - Intelliguard, for its BudTool product; - Spectralogic, for its Alexandria Network Librarian product; - StorageTek, for its REELbackup product; - Hewlett-Packard, for its Omniback product; and - Legato Systems, for its NetWorker and GEMS products. Many of VERITAS' competitors have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger installed customer base, than VERITAS. VERITAS 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 an environment in the long term. As the storage management software market develops, a number of companies with greater resources than VERITAS could attempt to increase 11 12 their presence in this market by acquiring or forming strategic alliances with competitors or business partners of VERITAS. VERITAS' main competitors in the high availability and clustering product area include the Qualix Group, Inc., which is being acquired by Legato for its Qualix HA product, Sun, for its Sun Cluster product, and Hewlett-Packard, for its HP-ServiceGuard product. VERITAS' success will depend significantly on its ability to adapt to these 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 VERITAS' products rather than developing their own products. VERITAS' future and existing competitors could introduce products with superior features, scalability and functionality at lower prices than VERITAS' products and could also bundle existing or new products with other more established products in order to compete with VERITAS. In addition, because there are relatively low barriers to entry for the software market, VERITAS 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 VERITAS' business. VERITAS may not be able to compete successfully against current and future competitors, and the failure to do so would result in VERITAS' business being materially and adversely affected. RESEARCH AND DEVELOPMENT VERITAS' core storage management and high availability products primarily operate with certain versions of the UNIX operating system as well as Windows NT, offering many features that are critical for commercial applications. VERITAS' development efforts have been directed towards developing new products for the UNIX operating system, developing new features and functionality for existing products, integrating products in the existing product line and porting new and existing products to new operating systems such as Windows NT. Current development initiatives. Currently, VERITAS' major research and development initiatives include: - Additional integration of the full family of storage management products, including further integration of VERITAS Storage Manager, VERITAS Volume Manager, VERITAS File System and NetBackup; - Development of new intelligent-level storage products; - Porting of UNIX products to Windows NT; and - Development of storage area network products. Each of these initiatives involves technical and competitive challenges and VERITAS may not be able to successfully overcome these challenges. Development work under Microsoft and Sun Microsystems agreements VERITAS' agreement with Microsoft provides for the development by VERITAS of a version of its Volume Manager product, which Microsoft has called Logical Disk Manager, to be ported to and embedded in version 5.0 of Windows NT. The agreement also requires VERITAS to develop a disk management graphical user interface designed specifically for Windows NT. Microsoft is providing funding for a significant portion of the development expenses for this product payable in quarterly increments. In order to perform 12 13 under the agreement, VERITAS has hired additional personnel with expertise in the Windows NT operating system environment and is devoting substantial capital investment and resources to successfully complete this project. VERITAS' agreements with Sun Microsystems and HP also involve development obligations of VERITAS. VERITAS is required to commit significant staffing to its projects with these original equipment manufacturers. VERITAS may not have the resources necessary to perform its obligations under its agreements with these original equipment manufacturers. It is also possible that its development efforts will not be as successful as planned. Size and location of research and development group As of December 31, 1998, VERITAS' research and development staff consisted of 290 employees located at VERITAS' Mountain View, California headquarters and at VERITAS' facilities in Roseville, Minnesota and Cambridge, Massachusetts. In addition, VERITAS' subsidiary in Pune, India employed a research and development staff of approximately 48 people. Research and development expenditures Research and development expenses were $40.2 million in 1998, $25.2 million in 1997 and $18.5 million in 1996. These amounts exclude $0.6 million in 1998 and $2.2 million in 1996 for in-process research and development charges in connection with acquisitions. VERITAS believes that technical leadership is essential to its success and expects that it will continue to commit substantial resources to research and development. VERITAS' future success will depend in large part on its ability to enhance existing products, respond to changing customer requirements and develop and introduce in a timely manner new products that keep pace with technological developments and emerging industry standards. VERITAS continues to make substantial investments in undisclosed new products, which may or may not be successful. These research and development efforts may not be successfully completed and therefore, future products may not be available on a timely basis or achieve market acceptance. Need to hire research and development personnel VERITAS must hire additional research and development personnel for timely completion of new products, including the adaptation of its products to Windows NT and performance of obligations to key original equipment manufacturer partners. The market for these personnel is very competitive and there can be no assurance that they can be hired on a timely basis. VERITAS will often consider acquiring and purchasing technology to achieve certain of its objectives. VERITAS may not be able to accomplish this successfully. Effect of technological advances From time to time, VERITAS or its competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of VERITAS' existing products. Announcements of currently planned or other new products could cause customers to defer purchasing existing products of VERITAS. VERITAS has from time to time in the past experienced delays of up to several months due to the complex nature of software developed by VERITAS and other software developers for whose systems or applications VERITAS offers products. VERITAS could experience 13 14 delays in connection with its current or future product development activities. Any such delays could have a material adverse effect on VERITAS' business. PROPRIETARY RIGHTS Measures VERITAS takes to protect its intellectual property We regard certain features of our internal operations, software and documentation as proprietary and rely on contract, copyright, patent, trademark and trade secret laws, confidentiality procedures and other measures to protect our proprietary information. We currently hold no patents applicable to our current business, although we have filed several applications for patents, and existing copyright and trade secret laws afford only limited protection. As part of its confidentiality procedures, VERITAS 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. These licenses are generally non-transferable and have a perpetual term. Infringement risks VERITAS may sometimes make source code available for certain of VERITAS' products. The provision of source code may increase the likelihood of misappropriation or other misuse of VERITAS' intellectual property. VERITAS also licenses some of its products pursuant to shrink wrap license agreements that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect VERITAS' proprietary rights to the same extent as do the laws of the United States. VERITAS' protection of its proprietary rights may not be adequate. It is also possible that VERITAS' competitors could independently develop similar technology. Litigation risks We are not aware that our products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, from time to time, VERITAS receives notices from third parties asserting that VERITAS has infringed their patents or other intellectual property rights. VERITAS may find it necessary or desirable in the future to obtain licenses from third parties relating to one or more of its products or relating to current or future technologies. Third parties could assert infringement claims against VERITAS in the future with respect to current or future products. Any assertion could require VERITAS to enter into royalty arrangements or result in costly litigation. As the number of software products in the industry increases and the functionality of these products further overlap, VERITAS believes that software developers may become increasingly subject to infringement claims. Any claims, with or without merit, can be time consuming and expensive to defend. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use VERITAS' products or technology without authorization, or to develop similar technology independently. Policing unauthorized use of VERITAS' products is difficult and, although VERITAS is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. 14 15 Trademarks VERITAS, the VERITAS logo and FirstWatch are registered trademarks of VERITAS. VERITAS Volume Manager, VERITAS File System, VERITAS NetBackup, VERITAS HSM, VERITAS Clustered File System, VERITAS Clustered Volume Manager, VERITAS Cluster Server, VERITAS Media Librarian, VERITAS Storage Manager, VERITAS Storage Replicator for Volume Manager, VERITAS Storage Replicator for File Systems, VERITAS Volume Optimizer, VERITAS Storage Planner and VERITAS Storage LookOut are trademarks of VERITAS. EMPLOYEES As of December 31, 1998, VERITAS had 945 full-time employees, including 338 in research and development, 534 in sales, marketing, consulting and customer support and 73 in finance and administrative services. VERITAS and its employees are not parties to any collective bargaining agreement, and VERITAS believes that its relations with its employees are good. VERITAS believes that its future success will depend in part upon the continued service of its key employees and on its continued ability to hire and retain qualified personnel. VERITAS may not be able to retain its key employees and it may not be successful in attracting and retaining sufficient numbers of qualified personnel to conduct its business in the future. EXECUTIVE OFFICERS The following table sets forth information with respect to persons who serve as executive officers of the Company.
NAME AGE POSITIONS ---- --- --------- Mark Leslie............. 53 President, Chief Executive Officer and Co-Chairman of the Board Geoffrey W. Squire...... 52 Executive Vice President and Co-Chairman of the Board Fred van den Bosch...... 52 Executive Vice President, Engineering and Director Kenneth E. Lonchar...... 41 Senior Vice President, Finance and Chief Financial Officer Peter J. Levine......... 38 Senior Vice President, Strategic Operations Paul A. Sallaberry...... 43 Senior Vice President, Worldwide Sales Jay A. Jones............ 44 Vice President, General Counsel and Secretary
Mr. Leslie has served as President and Chief Executive Officer of VERITAS since 1990 and as a director of VERITAS since 1988. Prior to 1990, he was the principal and owner of Leslie Consulting, a management consulting firm, and President and Chief Executive Officer of Rugged Digital Systems, Inc., a computer manufacturer. Mr. Leslie is also Chairman of the Board of Directors of Versant Object Technology Corporation, an object-oriented database software company. Mr. Squire has been Co-Chairman of the Board of Directors and Executive Vice President of VERITAS since April 1997, when VERITAS merged with OpenVision. Mr. Squire became a director of OpenVision in January 1994 and was appointed Chief Executive Officer of OpenVision in July 1995. From January 1994 to November 1994, Mr. Squire was Executive Vice President and Chief Executive Officer of International Operations and from November 1994 to June 1995 he was President and Chief Operating Officer of OpenVision. Prior to that time, Mr. Squire worked at Oracle Corporation most recently as a member of Oracle's Executive Committee as Chief Executive, International Operations. Mr. Squire has sat on the Council of the U.K. Computing Services and Software Association since 1990. In 1995, Mr. Squire was elected as the founding 15 16 President of the European Information Services Association. Mr. Squire also serves as a director of Industri-Mathematik International Corp. Mr. van den Bosch has served as Executive Vice President, Engineering of VERITAS since July 1997. Mr. van den Bosch served as Senior Vice President, Engineering of VERITAS from January 1991 to July 1997 and was appointed as a director of VERITAS in February 1996. From 1970 until 1990, he served in various positions with Philips Information Systems, including Director of Technology. Mr. Lonchar has served as Senior Vice President, Finance and Chief Financial Officer of VERITAS since January 1999. Mr. Lonchar became Vice President, Finance and Chief Financial Officer in April 1997 and served as Vice President, Finance until February 1999. Mr. Lonchar was Chief Financial Officer and Senior Vice President of OpenVision from December 1995 until the merger in April 1997. Prior to joining OpenVision, Mr. Lonchar was Vice President, Finance and Administration and Chief Financial Officer of Microtec Research, Inc., a publicly-traded software company. Mr. Lonchar is a certified public accountant. Mr. Levine has served as Senior Vice President, Strategic Operations of VERITAS since January 1999, after serving as Senior Vice President, OEM Sales from December 1997 to December 1998. Mr. Levine served as Vice President, OEM Sales of VERITAS from December 1995 to December 1997. From January 1995 to November 1995, Mr. Levine was Director of Marketing of VERITAS. From July 1992 to December 1994, Mr. Levine was an OEM Sales Representative at the Company. Prior to 1992, Mr. Levine held several software engineering and consulting at MIT's Project Athena, the Open Software Foundation and Apollo Computer. Mr. Sallaberry has served as Senior Vice President, Worldwide Sales of VERITAS since July 1997. Mr. Sallaberry served as Vice President, North American Sales of VERITAS from April 1997 to July 1997. Mr. Sallaberry was OpenVision's Senior Vice President of Sales from October 1992 until June 1994. Mr. Sallaberry rejoined OpenVision in February 1995 as Senior Vice President of North American Operations. From 1989 through 1992, he served in various positions at Oracle Corporation, most recently as Vice President, Vertical Sales Division. Mr. Jones has served as Vice President, General Counsel and Secretary of VERITAS since April 1997. Mr. Jones joined OpenVision as General Counsel in March 1993 and was appointed Vice President, General Counsel and Secretary in July 1994 and served in those capacities until the merger in April 1997. Prior to March 1993, Mr. Jones served in various management positions at Oracle Corporation and Word Star International Incorporated, a word processing software company. Mr. Jones is a member of the California Bar Association. 16 17 ITEM 2. PROPERTIES The VERITAS executive offices are located in Mountain View, California. Principal facilities are also located in Mountain View, California. Major portions of the Company's facilities are occupied under leases that expire at various times through 2012. The following is a summary of square footage of premises leased by VERITAS as of December 31, 1998, excluding 24 small sales offices.
APPROXIMATE SQUARE LOCATION FOOTAGE -------- ----------- North America California................................................ 206,572 Georgia................................................... 2,501 Illinois.................................................. 10,027 Massachusetts............................................. 26,272 Minnesota................................................. 62,420 New Jersey................................................ 8,397 New York.................................................. 4,560 Virginia.................................................. 4,825 Washington................................................ 4,119 Canada.................................................... 5,870 ------- Total North America.................................... 335,563 ------- Europe England................................................... 21,975 Germany................................................... 17,578 France.................................................... 3,014 ------- Total Europe........................................... 42,567 ------- Asia India..................................................... 15,486 Japan..................................................... 3,995 ------- Total Asia............................................. 19,481 ------- Total............................................. 397,611 =======
ITEM 3. LEGAL PROCEEDINGS From time to time, VERITAS is involved in legal proceedings and litigation arising in the ordinary course of business. VERITAS is not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on VERITAS' business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 17 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The common stock of VERITAS has been traded on the Nasdaq National Market under the symbol "VRTS" since our initial public offering in December 1993. The following table sets forth the high and low sales price per share of common stock for the periods indicated. All prices have been adjusted to reflect stock splits. Such prices represent prices between dealers, do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
HIGH LOW ------ ------ Fiscal 1997 First Quarter.................................. $25.33 $11.89 Second Quarter................................. 24.06 10.11 Third Quarter.................................. 33.67 21.94 Fourth Quarter................................. 35.92 23.00 Fiscal 1998 First Quarter.................................. $40.17 $26.08 Second Quarter................................. 43.67 33.50 Third Quarter.................................. 60.25 41.38 Fourth Quarter................................. 65.00 23.75
As of February 28, 1999, there were approximately 370 holders of record of our common stock. Brokers and other institutions hold many of such shares on behalf of stockholders. VERITAS estimates the total number of stockholders represented by these record holders to be approximately 10,000. DIVIDEND POLICY VERITAS has never declared or paid a cash dividend on its capital stock. We currently anticipate that we will retain future earnings, if any, to fund development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. SALES OF UNREGISTERED SECURITIES In October 1997, VERITAS issued and sold 5.25% Convertible Subordinated Notes due 2004 (the Notes) amounting to $100 million in aggregate principal amount to UBS Securities LLC in reliance upon Section 4(2) of the Securities Act of 1933 for resale by the initial purchaser to qualified institutional buyers within the United States in reliance upon Rule 144A promulgated under the Securities Act, and to non-U.S. persons outside the United States in reliance upon Regulation S promulgated under the Securities Act. The initial purchase price for the Notes was $100 million less the initial purchaser's discount of 2.5%, or $2.5 million of the principal amount purchased. The notes are convertible into shares of VERITAS common stock at any time prior to the close of business on the maturity of the notes on November 1, 2004, 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 VERITAS at declining premiums to par. The debt issuance costs are being amortized over the term of the Notes using the interest method. 18 19 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data are derived from VERITAS' consolidated financial statements. The results of operations for the fiscal years ended December 31, 1996, 1995 and 1994 combine the pre-merger historical results of operations of VERITAS with the pre-merger twelve months ended December 31, 1996 and 1995 and for the fiscal year ended June 30, 1995 of OpenVision, respectively. As a result, the operating results of OpenVision for the six months ended June 30, 1995, including revenue of $11.2 million and a net loss of $5.7 million are included in the consolidated statement of operations data for both fiscal 1995 and 1994. Share and per share data applicable to prior periods has been restated to give retroactive effect to a 3-for-2 stock split in the form of a stock dividend effected in May 1998. This data should be read in conjunction with the consolidated financial statements and notes thereto, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total net revenue............... $210,865 $121,125 $ 72,746 $ 47,826 $ 33,575 Merger-related costs............ -- 8,490 -- -- -- In-process research and development................... 600 -- 2,200 -- -- Income (loss) from operations... 53,668 20,076 11,858 1,193 (15,212) Net income (loss)............... 51,648 22,749 12,129 2,371 (15,274) Net income (loss) per share -- basic......................... $ 1.10 $ 0.50 $ 0.28 $ 0.06 $ (0.38) Net income (loss) per share -- diluted....................... $ 1.00 $ 0.46 $ 0.26 $ 0.06 $ (0.38) Number of shares used in computing per share amounts -- basic......................... 47,013 45,622 43,026 40,353 39,829 Number of shares used in computing per share amounts -- diluted....................... 51,671 49,493 46,496 43,062 39,829
AS OF DECEMBER 31, ------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital................. $198,842 $188,578 $ 67,413 $ 23,451 $ 14,690 Total assets.................... 349,117 241,880 94,524 48,100 36,830 Long-term obligations........... 100,773 100,911 1,468 6,205 6,366 Accumulated deficit............. (29,416) (81,064) (103,813) (115,942) (124,064) Stockholders' equity............ 169,854 104,193 74,955 23,602 14,052
19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As indicated in Item 1 above, this Form 10-K contains certain forward-looking statements that involve numerous risks and uncertainties which are described throughout this Form 10-K. Such forward-looking statements consist of statements that are not purely historical, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. The actual results that VERITAS achieves may differ materially from those anticipated by any forward looking statements due to risks and uncertainties such as those described below under "Factors That May Affect Future Results." OVERVIEW VERITAS is the leading independent supplier of enterprise data storage management solutions, providing advanced storage management software for open system environments. Our products provide performance improvement and reliability enhancement 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 backup large networks of systems without interrupting users. In addition, VERITAS' products provide an automated failover between computer systems organized in clusters sharing disk resources. VERITAS' highly scalable products can be used independently, and certain products can be combined to provide interoperable client/server storage management solutions. VERITAS' 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. VERITAS also provides a comprehensive range of services to assist customers in planning and implementing storage management solutions. VERITAS markets its products and associated services to OEM and end-user customers through a combination of direct sales and indirect sales channels. These indirect sales channels include resellers, VARs, hardware distributors, application software vendors and systems integrators. VERITAS derives its user license fee revenue from shipments of its software programs to end-user customers through direct sales channels, indirect sales channels and OEM customers. VERITAS' OEM customers either bundle VERITAS' products with the OEM products licensed by such OEMs or offer them as options. Certain OEMs may also resell VERITAS' products. VERITAS receives a user license fee each time the OEM licenses a copy of the OEM products to a customer that incorporates one or more of VERITAS' products. VERITAS' 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 VERITAS' products in the future. Moreover, following the execution of new agreements between VERITAS and OEM customers and resellers, a significant period of time may elapse before any revenues to VERITAS are generated thereunder due to the development work which VERITAS 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 VERITAS' products. Approximately 26%, 29% and 36% of VERITAS' net revenue was generated from OEM business during 1998, 1997 and 1996, respectively. 20 21 VERITAS' services revenue consists of fees derived from annual maintenance agreements, from consulting and training services and from porting fees. The OEM maintenance agreements covering VERITAS products provide for technical and emergency support and minor unspecified product upgrades for a fixed annual fee. The maintenance agreements covering products that are licensed through non-OEM channels provide for technical support and unspecified product upgrades for an annual service fee based on the number of user licenses purchased and the level of service subscribed. Porting fees consist of fees derived from porting and other non-recurring engineering efforts when VERITAS ports, or adapts, its storage management products to an OEM's operating system and when VERITAS develops certain new product features or extensions of existing product features at the request of a customer. In most cases, VERITAS 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. VERITAS has made, and intends to continue to make, a substantial investment in porting its products to new operating systems, including Windows NT. The success of the Windows NT product development may be dependent on receipt of development funding from third parties, including Microsoft, and failure to receive such funding could hamper VERITAS' efforts to timely expand its products into the Windows NT market. The porting and development process requires substantial capital investment and the devotion of substantial employee resources to such effort and the added focus on Windows NT development has required, and will continue to require, VERITAS to hire additional personnel. Under an agreement with Microsoft, VERITAS has committed to develop a functional subset of the VERITAS Volume Manager product that will be ported to and embedded in Windows NT. The agreement also requires VERITAS to develop a disk management graphical user interface designed specifically for Windows NT. Microsoft has provided VERITAS with significant funding towards such development effort. VERITAS recognizes 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 recognition does not directly correlate to contract billings. VERITAS recognized revenue related to the Microsoft agreement of approximately $0.8 million in 1998, $3.7 million in 1997 and $0.5 million in 1996, and incurred costs of $0.7 million in 1998, $2.4 million in 1997, and $0.2 million in 1996. Payments received from Microsoft were $2.0 million in 1998, $2.8 million in 1997, and $0.2 million in 1996. The Microsoft relationship requires VERITAS to expand its marketing and sales operations to deal with higher volume markets in which VERITAS has limited experience. See "Factors That May Affect Future Results -- VERITAS plans to port products to new operating system and we face uncertainties in porting products and developing new products" and "-- We will be distributing our products through multiple distribution channels, each of which is subject to risks." VERITAS' 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%, 19% and 28% of the Company's total revenue in 1998, 1997 and 1996, respectively. VERITAS' international revenue increased 93% to $44.4 million in 1998 from $23.0 million in 1997, and 11% from $20.7 million in 1996. Since much of VERITAS' 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 VERITAS' operating and pricing strategies take 21 22 into account changes in exchange rates over time, VERITAS' operating results may be significantly affected in the short term by fluctuations in foreign currency exchange rates. VERITAS' 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 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, or "marked to market." The marked to market process may give rise to currency gains and losses. Such gains or losses are recognized on VERITAS' statement of operations as a component of other income, net. To date, such gains or losses have not been material. VERITAS believes that its success depends upon continued expansion of its international operations. VERITAS currently has sales and service offices in the United States, Canada, Japan, the United Kingdom, Germany, France, Sweden, Switzerland 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 VERITAS 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 VERITAS is unable to effect these additions efficiently, growth in international sales will be limited, which would have a material adverse effect on VERITAS' business, operating results and financial condition. International operations also subject VERITAS' 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 VERITAS' ability to expand international operations. See "Factors That May Affect Future Results -- Expanding our international sales depends on economic stability in regions that recently have been unstable." On April 1, 1996, VERITAS acquired all of the outstanding capital stock of Advanced Computing Systems Company (ACSC), a company which had developed technology for the operation and management of removable media volumes, devices and repositories, for a total cost of approximately $3.5 million. Of the total charge, $2.2 million was allocated to in-process research and development which was expensed in the second quarter of 1996 and approximately $1.3 million was allocated to acquired intangibles that were originally amortized and then fully written off in the second quarter of 1997. The write-off was part of the OpenVision merger-related costs, as the ACSC product line became redundant upon consummation of the OpenVision merger. VERITAS merged with OpenVision on April 25, 1997. The OpenVision merger was accounted for as a "pooling of interests" for financial reporting purposes. As a result of the OpenVision merger, VERITAS incurred charges to operations of $8.5 million during the second quarter of 1997, consisting of approximately $4.2 million for transaction fees and professional services, $1.9 million for contract terminations and asset write-offs and $2.4 million for other costs incident to the OpenVision merger. Of the total charge, $1.2 million resulted from the write-down of redundant assets and facilities, 22 23 primarily consisting of intangible assets related to a prior acquisition which became redundant as a result of OpenVision having a similar product line, and $7.3 million involved cash outflows. On May 15, 1998, VERITAS acquired all of the outstanding stock of Windward Technologies, Inc., a company that develops failure prediction software, for a total cost of $2.5 million. Of the total cost, $0.6 million was allocated to in-process research and development and $1.9 million was allocated to acquired intangibles, which will be amortized over a five year period. 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. On September 1, 1998, VERITAS entered into a Combination Agreement to acquire TeleBackup Systems Inc., a Canadian corporation. TeleBackup designs, develops and markets software solutions for local and remote backup and recovery of electronic information stored on networked, remote and mobile personal computers. As a result of the Combination Agreement, TeleBackup will become a wholly-owned subsidiary of VERITAS and a reorganization of capital of TeleBackup will occur 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 VERITAS' common stock. 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 (less the number of shares reserved for outstanding TeleBackup options) but no more than 1,900,000 shares of VERITAS' common stock in the transaction, with the exchange ratio being subject to adjustment within the aforementioned range based upon the trading price of VERITAS' common stock prior to the closing of the transaction. If the Seagate Transaction discussed below is consummated, the obligation to issue shares in connection with the TeleBackup acquisition will be assumed by a newly formed holding company as described below. The transaction is expected to close in April 1999, subject to regulatory and stockholder approval and other customary closing conditions. On October 5, 1998, VERITAS entered into an Agreement and Plan of Reorganization (the Plan) with VERITAS Holding Corporation, a Delaware corporation (New VERITAS), 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. (NSMG), a Delaware corporation and wholly owned subsidiary of SSI, which provides for (i) the merger of a wholly owned subsidiary of New VERITAS with and into VERITAS and the assumption and conversion of all outstanding securities of VERITAS, on a share for share basis, into New VERITAS securities having identical rights, preferences and privileges, including convertible debentures of VERITAS which will become convertible into common stock of New VERITAS 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 New VERITAS of (a) the outstanding stock of Seagate Software Network & Storage Management Group, Inc. and (b) those assets used primarily in the Network & Storage Management Group business of SSI, in consideration for the issuance of shares of common stock of New VERITAS to SSI and the offer by New VERITAS to grant options to purchase common stock of New VERITAS to certain SSI employees who become employees of New VERITAS or its subsidiaries in exchange for cancellation by 23 24 such employees of their respective options to purchase common stock of SSI (the Seagate Transaction or the NSMG combination). As part of the Seagate Transaction, New VERITAS will also assume certain liabilities of the NSMG business. Upon consummation of the Seagate Transaction, New VERITAS 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 New VERITAS, assuming conversion of all convertible securities, including VERITAS' convertible debentures, and exercise of all assumed options and warrants, less that number of shares of New VERITAS common stock issuable upon exercise of New VERITAS 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 New VERITAS securities representing approximately 60% of the fully-diluted common stock equivalent equity interests in New VERITAS. 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. The TeleBackup acquisition will be accounted for by VERITAS using the purchase method of accounting. The acquisition of the NSMG business will also be accounted for as a purchase transaction. Following consummation of the NSMG and TeleBackup transactions, VERITAS currently expects to incur charges of approximately $209.0 million per fiscal quarter primarily related to the amortization of acquired goodwill and other intangibles over a four-year period, based on the closing price of VERITAS common stock on March 29, 1999. VERITAS also expects to incur charges to operations for a one-time write-off related to acquired in-process research and development costs in the fiscal quarter in which these transactions are consummated. These charges are currently estimated to be approximately $104.5 million. Such amounts are preliminary and are subject to change upon the final determination of the purchase price of both NSMG and TeleBackup at the time of closing of each transaction. In addition, as a result of the NSMG acquisition, VERITAS 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 VERITAS plans to vacate. VERITAS estimates this restructuring charge to be in the range of $9.0 million to $13.0 million. 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. All share and per share data applicable to prior periods has been restated to give retroactive effect to the 3-for-2 stock split effected on May 20, 1998. 24 25 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in VERITAS' statements of operations expressed as a percentage of total revenue.
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- Net revenue: User license fees....................................... 80% 79% 81% Services................................................ 20 21 19 --- --- --- Total net revenue.................................... 100 100 100 Cost of revenue: User license fees....................................... 4 4 4 Services................................................ 10 10 6 --- --- --- Total cost of revenue:............................... 14 14 10 --- --- --- Gross profit.............................................. 86 86 90 Operating expenses: Selling and marketing................................... 36 35 36 Research and development................................ 19 21 25 General and administrative.............................. 5 7 9 Merger-related costs.................................... -- 7 -- In-processes research and development................... -- -- 3 --- --- --- Total operating expenses............................. 60 70 73 --- --- --- Income from operations.................................... 26 16 17 Interest and other income, net............................ 6 4 4 Interest expense.......................................... (3) (1) -- --- --- --- Income before income taxes................................ 29 19 21 Provision for income taxes................................ 4 1 3 --- --- --- Net income................................................ 25% 18% 18% === === ===
Net Revenue VERITAS' total net revenue increased 74% to $210.9 million in 1998 from $121.1 million in 1997, when it increased 67% from $72.7 million in 1996. VERITAS believes that the percentage increases in total revenue achieved in these periods are not necessarily indicative of future results. VERITAS' revenue is comprised of user license fees and service revenue. Growth in user license fees has been driven primarily by increasing market acceptance of VERITAS' 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 services, training services and porting fees. The growth in service revenue has been driven primarily by increased sales of service and support contracts on new license sales and, to a lesser extent, by increasing renewals of these contracts by VERITAS' installed base of licensees. VERITAS also experienced an increase in demand for consulting and training services. Porting fees are derived from VERITAS' funded development efforts that are typically associated with VERITAS' agreements with OEMs. User License Fees. User license fees increased 75% to $167.7 million in 1998 from $95.7 million in 1997, when it increased 62% from $59.2 million in 1996. The increases in both 1998 and 1997 were primarily the result of continued growth in market acceptance of 25 26 VERITAS' software products, a greater volume of large end-user transactions, increased revenue from OEM resales of bundled and unbundled VERITAS products and the introduction of new products. In particular, VERITAS' user license fees from storage products increased by approximately 72% in 1998 from 1997, and accounted for 88%, 89% and 79% of user license fees in 1998, 1997 and 1996, respectively. User license fee growth in 1998 and 1997 also included increases in direct sales and sales from other non-OEM distributors. Service Revenue. Service revenue increased 70% to $43.2 million in 1998, from $25.4 million in 1997, when it increased 88% from $13.5 million in 1996. The increases in both 1998 and 1997 were primarily due to increased sales of service and support contracts on new licenses, renewal of service and support contracts on existing licenses and, to a lesser extent in 1997, an increase in demand for consulting and training services. 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, and development efforts in porting. Gross margin on user license fees is substantially higher than gross margin on service revenue, reflecting the low materials, packaging and other costs of software products compared with the relatively high personnel costs associated with providing maintenance, technical support, consulting, training services and development efforts. Cost of service revenue also varies based upon the mix of maintenance, technical support, consulting and training services. Cost of User License Fees. Cost of user license fees increased 86% to $8.8 million in 1998 from $4.7 million in 1997, and increased 57% in 1997 from $3.0 million in 1996. The increases are 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 constant at 95% in each of the three years ended December 31, 1998, 1997 and 1996. 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. VERITAS does not expect improvements in gross margin on user license fees. Cost of Service Revenue. Cost of service revenue increased 76% to $20.7 million in 1998 from $11.7 million in 1997, and increased 164% in 1997 from $4.4 million in 1996. Gross margin on service revenue was 52%, 54% and 67% in 1998, 1997 and 1996, respectively. The decreases in gross margin were primarily due to personnel additions in our customer support and training and consulting organizations, in anticipation of increased demand for such services. In addition, VERITAS devoted technical resources to fund porting activities in excess of the amounts chargeable to customers. Operating Expenses Selling and Marketing. Selling and marketing expenses consist primarily of salaries, related benefits, commissions, consultant fees and other costs associated with VERITAS' sales and marketing efforts. Selling and marketing expenses increased 78% to $76.4 million in 1998 from $42.9 million in 1997, and increased 65% in 1997 from $26.0 million in 1996. Selling and marketing expenses as a percentage of total net revenue remained relatively consistent at 36%, 35% and 36% in 1998, 1997 and 1996, respectively. The increase in absolute dollars is primarily attributable to increased sales and marketing staffing and, to a lesser extent, increased costs associated with new marketing programs. VERITAS intends 26 27 to continue to expand its global sales and marketing infrastructure, and accordingly, VERITAS 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 60% to $40.2 million in 1998 from $25.2 million in 1997, and increased 36% in 1997 from $18.5 million in 1996. The increase was due primarily to increased staffing levels. As a percentage of total net revenue, research and development expenses decreased to 19% in 1998 from 21% in 1997 and 25% in 1996. VERITAS 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, although such expenses may continue to decline as a percentage of total net revenue to the extent revenue increases. Research and development expenses can be expected to fluctuate from time to time to the extent that VERITAS makes periodic incremental investments in research and development and VERITAS' 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 31% to $10.5 million in 1998 from $8.0 million in 1997, and increased 19% in 1997 from $6.7 million in 1996. General and administrative expenses as a percentage of revenue were 5%, 7% and 9% in 1998, 1997 and 1996, respectively. The increases in absolute dollars in 1998 and 1997 were primarily due to additional personnel costs and other expenses associated with VERITAS enhancing its infrastructure to support expansion of its operations. General and administrative expenses are expected to increase in future periods in absolute dollars to the extent VERITAS expands its operations. Merger-Related Costs. As a result of the OpenVision merger, VERITAS incurred charges to operations of $8.5 million in the second quarter of 1997, consisting of approximately $4.2 million for transaction fees and professional services, $1.9 million for contract terminations and asset write-offs and $2.4 million for other costs incident to the OpenVision merger. Of the total charge, $1.2 million resulted from the write-down of redundant assets and facilities, primarily consisting of intangible assets related to a prior acquisition which were redundant as a result of OpenVision having a similar product line, and $7.3 million involved cash outflows for banking, legal and accounting fees and other direct costs and payments in connection with the elimination of duplicative facilities. The remaining unpaid amount of $0.2 million at December 31, 1998 related primarily to ongoing lease payments for vacated facilities through the termination of the lease or the estimated date which such facilities will be subleased. In-Process Research and Development. On April 1, 1996, VERITAS acquired all of the outstanding capital stock of ACSC for a total cost of approximately $3.5 million. Of the total cost, $2.2 million was allocated to in-process research and development and expensed in the second quarter of 1996. Approximately $1.3 million was allocated to intangible assets that originally were amortized and then fully written off in the second quarter of 1997 as part of the OpenVision merger-related costs, since the ACSC product line became redundant upon the OpenVision merger. On May 15, 1998, VERITAS acquired all of the outstanding stock of Windward for a total cost of $2.5 million. The transaction was accounted for using purchase accounting. Of the total cost, $0.6 million was allocated to in-process research and development and $1.9 million was allocated to acquired intangibles 27 28 which is being amortized over a five year period. Total cash outflows in 1998 related to this purchase were $1.3 million. VERITAS 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 (which it was probable would be met) and the amount was accrued at the acquisition date. VERITAS also agreed to pay that 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. Interest and Other Income, Net. Interest and other income, net increased to $11.8 million in 1998 from $4.9 million in 1997, and $2.8 million in 1996. The increases were due primarily to increased amounts of interest income attributable to the higher level of funds available for investment. Foreign exchange transaction gains and losses which are included in other income, net, have not had a significant effect on VERITAS' results of operations. Interest Expense. Interest expense increased to $5.7 million in 1998 from $1.2 million in 1997, and $0.3 million in 1996. Interest expense in 1998 and 1997 consists primarily of interest accrued under the Convertible Subordinated Notes issued by VERITAS in October 1997. Interest expense in 1996 was insignificant. Income Taxes. VERITAS had effective tax rates of 14%, 4% and 15% in 1998, 1997 and 1996, respectively. VERITAS' effective tax rate is lower than the combined federal and state statutory rates primarily due to the utilization of federal net operating loss carryforwards and other credit carryforwards, offset by the impact of state and foreign taxes. VERITAS accounts for its income taxes under Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under SFAS No. 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 VERITAS' net deferred tax assets, which relate primarily to net operating loss 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 June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. VERITAS will be required to implement SFAS No. 133 for its fiscal year ending December 31, 2000. VERITAS' exchange rate hedging activities have been insignificant to date and VERITAS does not believe that the impact of SFAS No. 133 will be material to its financial position, results of operations or cash flows. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires that entities 28 29 capitalize certain costs related to internal-use software once certain criteria have been met. VERITAS will be required to implement SOP 98-1 for its fiscal year ending December 31, 1999 and does not believe that the impact of SOP 98-1 will be material to VERITAS' financial position, results of operations and cash flows. In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-9 amends SOP 97-2 "Software Revenue Recognition" to require recognition of revenue using the "residual method" when certain criteria are met. VERITAS will be required to implement these provisions of SOP 98-9 for its fiscal year ending December 31, 2000. Effective in December 1998, SOP 98-9 also amends SOP 98-4 (an earlier amendment to SOP 97-2) to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4. VERITAS does not believe the impact of SOP 98-9 will be material to VERITAS' financial position, results of operations and cash flows. LIQUIDITY AND CAPITAL RESOURCES VERITAS' cash, cash equivalents and short-term investments totaled $211.1 million at December 31, 1998 and represented 60% 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, market auction preferreds and other medium-term notes. At December 31, 1998, VERITAS had $100.8 million of long-term obligations and stockholders' equity was approximately $169.9 million. Net cash provided from operating activities was $62.8 million, $26.8 million and $14.4 million in 1998, 1997 and 1996, respectively. Increases in 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, reflecting VERITAS' overall growth. VERITAS' investing activities used cash of $13.4 million in 1998 primarily due to capital expenditures of $23.4 million. In addition, VERITAS used $1.3 million of cash for the purchase of Windward in May 1998. VERITAS' investing activities used cash of $71.1 million in 1997 primarily for net purchases of short-term investments of $65.0 million, and capital expenditures of $6.2 million. VERITAS' investing activities used cash of $31.4 million in 1996 and consisted primarily of $22.7 million of net purchases of short-term investments, $5.5 million used for capital expenditures and $3.5 million used for the purchase of ACSC. Financing activities provided cash of $14.0 million in 1998, arising primarily from the issuance of common stock under VERITAS' employee stock plans. Financing activities provided cash of $102.9 million in 1997, primarily from the net proceeds of $97.5 million from the issuance of the Notes and issuance of common stock of $5.8 million under VERITAS' employee stock plans, partially offset by the payment against the note payable. In 1996, financing activities provided cash of $31.0 million that reflects the net proceeds of $36.4 million from OpenVision's May 1996 initial public stock offering and issuance of common stock of $2.7 million under VERITAS' employee stock plans, partially offset by the payments made against notes payable. In October 1997, VERITAS issued $100.0 million of 5.25% Convertible Subordinated Notes due 2004 (the Notes), for which VERITAS received net proceeds of $97.5 million. The Notes provide for semi-annual interest payments each May 1 and November 1, 29 30 commencing on May 1, 1998. The Notes are convertible into shares of VERITAS' 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 VERITAS at declining premiums to par. The debt issuance costs are being amortized over the term of the Notes using the interest method. The issuance of the Notes resulted in a ratio of long-term debt to total capitalization at December 31, 1998 of approximately 37%. As a result of this additional indebtedness, VERITAS' principal and interest payment obligations have increased substantially. The degree to which VERITAS will be leveraged could materially and adversely affect VERITAS' ability to obtain financing for working capital, acquisitions or other purposes and could make it more vulnerable to industry downturns and competitive pressures. VERITAS 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 VERITAS 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. VERITAS is in the process of acquiring the NSMG business and TeleBackup. VERITAS expects that its security holders will own 60% of the fully-diluted equity of New VERITAS after acquiring the NSMG business, and that SSI and certain SSI option holders will own 40% of the fully-diluted equity securities of New VERITAS. In addition, VERITAS or New VERITAS will issue between 1.5 million and 1.9 million shares of common stock, depending on the closing prices of VERITAS' common stock on the Nasdaq National Market prior to the closing of the TeleBackup transaction, in exchange for TeleBackup becoming a subsidiary of VERITAS. Both acquisitions are subject to regulatory and stockholder approval and other customary closing conditions. The acquisitions are expected to close in April 1999. VERITAS believes that its current cash, cash equivalents and short-term investment balances and cash flow from operations will be sufficient to meet VERITAS' working capital and capital expenditure requirements for at least the next 12 months. Thereafter, VERITAS 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 VERITAS. YEAR 2000 COMPLIANCE BACKGROUND OF YEAR 2000 ISSUES We are aware of the issues associated with the programming code in existing computer systems as the millennium 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 30 31 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. We are assessing the potential overall impact of the impending century change on our business, financial condition and results of operations. STATE OF READINESS Based on our assessment to date, we believe 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 and tested to be Year 2000 compliant. Although our products have undergone, or will undergo, our normal quality testing procedures, there can, however, be no assurance that our products will contain all necessary date code changes. Furthermore, use of our 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 our products to perform, including system malfunctions associated with the onset of year 2000, could result in claims against us. However, success of our Year 2000 compliance efforts may depend on the success of its customers in dealing with the Year 2000 issue, as we have formally notified all customers of the Year 2000 readiness of its products. Although we have 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 we 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 we have for Year 2000 related damages, including consequential damages, could harm on our business. In addition, we believe that purchasing patterns of customers and potential customers 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 us. 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 our customers or potential customers could harm our business. Our 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 us to deliver products and services to our customers (including software supplied by third parties); communications networks such as the wide area network and local area networks upon which we depend to communicate product orders to our manufacturing and distribution operations and to develop products; the internal systems of VERITAS' customers and suppliers; software products sold to customers; the hardware and software systems used internally by our in the management of our business; and non-information technology systems and services used by us in the management of our business, such as power, telephone systems and building systems. 31 32 We are currently in the process of evaluating our information technology infrastructure in order to identify and modify any products, services or systems, including hardware, software and firmware, that are not Year 2000 compliant. Based on our initial analysis of the systems potentially impacted by conducting business in the twenty-first century, we are is applying a phased approach to making such systems, and accordingly, our 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 available Q3 1998 for customers (completed) Communication networks used to carry Assessment inventory completed Q4 1998 products and provide services (completed) Hardware and software systems used to Assessment inventory completed Q4 1998 manage our business (completed) Hardware and software systems used to Assessment completed Q1 1999 deliver products and services (completed) Hardware and software systems used to Validation, testing and remediation in Q2 1999 deliver products and services process (including desktops) Communication networks used to carry Validation, testing and remediation in Q2 1999 products and provide services process Hardware and software systems used to Validation, testing and remediation Q2/Q3 1999 manage our business Non-information technology systems and Systems upgraded or replaced as Q3 1999 services appropriate, testing and implementation
Extensive Year 2000 testing will be conducted on all systems considered critical to us. To date, we have not encountered any material problems in this regard with our computer systems or any other equipment that might be subject to such problems. In the event that any of our significant suppliers or customers does not successfully and timely achieve Year 2000 compliance, our business or operations could be harmed. This could result in system failures or generation of erroneous information and could cause significant disruption to business activities. We are 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. Costs to Address Year 2000 issues The total cost of our Year 2000 compliance activities has not been, and is not anticipated to be, material to our business, results of operations and financial condition. We estimate specific Year 2000 expenses to date to be not more than $0.3 million and do not expect total costs of the compliance activities to exceed $0.7 million. These costs and the timing in which we plan to complete our Year 2000 modification and testing processes are based on our estimates. However, there can be no assurance that we will timely identify and remedy all significant Year 2000 problems, that remediation efforts will not involve significant time and expense, or that such problems will not harm our business. 32 33 CONTINGENCY PLANS We do not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Any failure of VERITAS to address any unforeseen Year 2000 issue could harm our business. Full contingency plans are scheduled for completion by September 1, 1999. FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to other information in this Annual Report on Form 10-K, the following factors should be considered carefully in evaluating VERITAS and its business. The acquisition of the NSMG business is risky. VERITAS' proposal to acquire the Seagate Software Network & Storage Management Group, or NSMG, business subjects VERITAS to further risks and uncertainties that could harm our business, financial condition and results of operations, in the near term at least, as a result of a number of factors, including: - the potential disruption of our business that might result from employee and customer uncertainty, or lack of management focus, following the acquisition, in connection with integrating the operations of VERITAS and the NSMG business, - the possibility that the acquisition might not be consummated; - the effects of the acquisition on our stock price, our sales and operating results, our ability to attract and retain key management, marketing and technical personnel and the progress of certain of its development projects; and - the risk that the announcement of the acquisition could result in decisions by customers to defer purchases of our products or those of the NSMG business. We might fail to integrate the businesses of VERITAS, the Network & Storage Management Group and TeleBackup Product line integration will be difficult. If we complete the acquisitions of the NSMG business and TeleBackup, which is not assured, New VERITAS will need to integrate three independent businesses. One key issue will be the integration of the product offerings of the Network & Storage Management Group business and TeleBackup with those of VERITAS. This product line integration will involve consolidation of products with duplicative functionality, coordination of research and development activities, and convergence of the technologies supporting the various products. For example, VERITAS' NetBackup product and the Network & Storage Management Group's Seagate Backup Exec product share many features and functions, and the Network & Storage Management Group's Seagate Client Exec product is very similar to TeleBackup's TSInfoPro. Technology convergence will be particularly difficult because the products of VERITAS and the Network & Storage Management Group business lack a common technology architecture. In particular, the Network & Storage Management Group products were not designed for the degree of scalability that VERITAS' products were designed for, nor for use on the variety of operating systems. Further, we have no experience with product and technology integration on the scale contemplated by the NSMG combination. 33 34 Other business integration issues could arise. Other problems inherent in integrating the businesses of VERITAS, the Network & Storage Management Group business and TeleBackup include: - maintaining brand recognition for key products of the Network & Storage Management Group business products, such as Seagate Backup Exec, and of the TeleBackup product, TSInfoPro, while migrating customer identification of the brands to New VERITAS; - resolving channel conflicts that may arise between the original equipment manufacturer and direct sales distribution channels of VERITAS and the retail channels of the Network & Storage Management Group business; - coordinating, integrating and streamlining geographically dispersed operations, such as engineering facilities in: Mountain View, California; San Luis Obispo, California; Roseville, Minnesota; Heathrow, Florida; Durham, North Carolina; Tacoma Park, Maryland; Boulder, Colorado; Boston, Massachusetts; Cambridge, Massachusetts; Bellevue, Washington; Calgary, Alberta; and Pune, India; - coping with customers' uncertainty about continued support for duplicative New VERITAS products. The integration will be expensive and is likely to interrupt our business activities. Any of these risks could harm New VERITAS' revenues and results of operations. Management and employee integration issues could arise. Potential management and employee integration problems include: - resolving differences between the corporate cultures of VERITAS and the Network & Storage Management Group business; and - integrating the management teams of all three companies successfully. New VERITAS will incur significant accounting charges in connection with the combinations that will reduce its earnings immediately and in the future The significant costs of integration associated with the combinations increases the risk that we will not realize the anticipated benefits. Because New VERITAS will account for the NSMG combination and the TeleBackup combination as purchases, we expect to incur non-cash charges of approximately $104.5 million to our income statements, related to the write-off of in-process research and development. We also will record goodwill and other intangible assets of approximately $3,343.4 million. This amount will be amortized over four years, and will result in charges to operations of approximately $209.0 million per quarter, based upon the closing price of VERITAS common stock as of March 29, 1999. Such amounts are preliminary and are subject to change upon the final determination of the purchase price of both NSMG and TeleBackup at the time of closing of each transaction. In addition, we expect to incur a restructuring charge upon closing, currently expected in the first half of 1999, in the range of $9.0 million to $13.0 million, primarily related to costs for duplicate facilities of VERITAS which New VERITAS plans to vacate. These costs are in addition to the liability for the estimated costs to New VERITAS to vacate facilities of the Network & Storage Management Group business which will become duplicative upon the completion of the NSMG combination. 34 35 Our operating results may fluctuate significantly as a result of factors outside our control, which could adversely affect our stock price Fluctuations in our net income are likely to affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance. In addition, the number of factors that could affect our results makes an investment in VERITAS more risky than many other investments. Our revenue in any quarter will depend substantially on orders we receive and ship in that quarter. In addition, we typically receive a significant portion of orders in any quarter during the last two weeks of the quarter, and we cannot predict whether those orders will be placed, fulfilled and shipped in that period. If we have lower revenues than we expect, we probably will not be able to reduce our operating expenses quickly in response. Therefore, any significant shortfall of revenue or delay of customer orders could have an immediate adverse effect on our operating results in that quarter. The operating results of VERITAS have fluctuated in the past, and are likely to fluctuate significantly in the future. Factors that could affect our operating results include: - timing and magnitude of sales through original equipment manufacturers; - the unpredictability of the timing and level of sales to resellers and our direct sales force, which tend to generate sales later in our quarters than original equipment manufacturer sales; - timing and magnitude of large orders; - timing and amount of our marketing, sales and product development expenses; - cost and time required to develop new software products; - the introduction, timing and market acceptance of new products; - our ability to deliver products that are Year 2000 compliant; - the degree to which our customers and potential customers direct resources to their own Year 2000 compliance issues, or otherwise delay purchases of enterprise products and services as a result of Year 2000 compliance concerns; - timing of revenue recognition for sales of software products and services; - changes in data storage and networking technology or introduction of new operating system upgrades by original equipment manufacturers, which could require us to modify our products or develop new products; - relative growth rates of the Windows NT and UNIX markets; - timing of Microsoft's release of the next version of Windows NT, or Windows 2000, and the rate of adoption of Windows 2000 by users; - uncertainties associated with conducting business in India, where one of our subsidiaries is engaged in research and development activities; - pricing policies and distribution terms; and - the timing and magnitude of acquisitions. 35 36 We will depend on large orders with lengthy sales cycles for a significant portion of our revenues Customer orders can range in value from a few thousand to over a million dollars. The length of time between initial contact with a potential customer and sale of a product, or our sales cycle, outside the retail channel is typically complex and lengthy, so it can last from three to nine months. These direct sales also represent our largest orders. Therefore, our revenues for a period are likely to be affected by the timing of larger orders, which makes those revenues difficult to predict. Our revenues for a quarter could be reduced if large orders forecasted for a certain quarter are delayed or are not realized. The cycle factors that could delay or defer an order, include: - time needed for technical evaluations of our software by customers; - customer budget restrictions; - customer internal review and testing procedures; and - engineering work needed to integrate our software with the customers' systems. We will face many difficulties in managing a larger company VERITAS has recently grown rapidly. We expect VERITAS to continue to grow, so you should bear in mind that the larger company will create new challenges for our existing management. If we fail to meet those challenges the value of your investment may decline. This growth is likely to strain our management control systems and resources, including decision support, accounting and management information systems. We will need to continue to improve our financial and management controls and our reporting systems and procedures to manage our employees and to obtain additional facilities. VERITAS will need to hire and retain many new sales and engineering personnel, which is difficult VERITAS faces personnel needs that are more challenging than those facing most companies. VERITAS will need to hire many additional sales and engineering personnel. Competition for individuals with these skills is intense, particularly in many of the areas where VERITAS will seek to hire those persons. Additions of new personnel and departures of existing personnel can be disruptive to our business and can result in the departure of other employees. We will also remain dependent on the continued service of our key personnel. Even though VERITAS intends to enter into employment agreements with key management personnel, these agreements cannot prevent the departure of those employees. We do not have key person life insurance covering any of our personnel, nor do we currently intend to obtain any of this insurance. We will be distributing our products through multiple distribution channels, each of which is subject to risks Direct sales. We depend on our direct sales force to sell our products. This also involves a number of risks, including: - long sales cycles for direct sales; - our need to hire, train, retain and motivate our sales force; and - the length of time it takes our new sales representatives to become productive. Original equipment manufacturers. A portion of our revenues are expected to come from original equipment manufacturers that incorporate our storage management software into systems they sell. We will have no control over the shipping dates or volumes of 36 37 systems the original equipment manufacturers ship. They have no obligation to ship systems incorporating our software. They do not have to recommend or offer our software products exclusively or at all, and have no minimum sales requirements. They can terminate our relationship at any time. These original equipment manufacturers could choose to develop their own storage management products internally and incorporate those products into their systems in lieu of our products. Our business could be harmed if some or all of our current original equipment manufacturers discontinued selling New VERITAS' products. Development agreements for original equipment manufacturers. We have important original equipment manufacturer agreements with Hewlett-Packard, Sun Microsystems, Microsoft, Dell, Seagate Technology and Compaq Computer. Under these agreements we develop "lite" versions of our products to be included in these original equipment manufacturers' systems software and products. Developing products for these original equipment manufacturers causes us to divert significant resources from other activities which are also important to our business. If these "lite versions" do not result in substantial revenue, our business could be adversely affected. VERITAS' distribution channels could conflict with one another We have many different distribution channels. Our original equipment manufacturers, resellers and direct sales force may target similar sales opportunities, which could lead to inefficient allocation of sales resources. We may also try to sell full versions of the products to customers of the original equipment manufacturers for whom we have developed "lite" versions of our products. This would result in us marketing similar products to end-users. These overlapping sales efforts could also adversely affect our relationships with our original equipment manufacturers and other sales channels and result in them being less willing to market our products aggressively. If our indirect sales decline, we would need to accelerate our investments in alternative distribution channels. We may not be able to do this in a timely manner, or at all. Risks relating to our development agreements with Microsoft We have important agreements with Microsoft under which we develop software for its Windows operating system. However, if we do not develop these products in time for the release of Microsoft's Windows NT 5.0, or Windows 2000, operating system, Microsoft will not include them in this operating system. Even if we do develop these products on time, Microsoft is not obligated under the agreements to include them in this operating system. If for any reason our software is not included in Windows 2000 we will lose our expected opportunity to market additional products to the Windows NT installed customer base, as well as suffer negative publicity. In addition, we would lose the investment we have made in developing products for inclusion in Windows 2000. Risks of delay of release of Windows 2000. Microsoft is not required to release Windows 2000 on any particular date. Therefore, if the release of this operating system is delayed, it will be more difficult for us to market and sell our products to Windows NT users. Microsoft could develop competing products Microsoft can also develop enhancements to and derivative products from our software products that are embedded in Windows NT products. If Microsoft developed any enhancements or derivative products, or its own base products with equivalent functionality, Microsoft could choose to compete with us. 37 38 Sales of a small number of product lines will make up a substantial portion of our revenues We expect to derive a substantial majority of our revenue from a limited number of software products and expects to continue to do so for the foreseeable future. For example, in 1998 VERITAS derived approximately 87.4% of its license revenue from storage management products, which include Volume Manager, File System and NetBackup. If many customers do not purchase these products as a result of competition, technological change or other factors, our revenues would decrease. Our products have relatively short life cycles Our software products have a limited life cycle and it is difficult to estimate when they will become obsolete. This makes it difficult for us to forecast revenue and makes VERITAS risky. If we do not develop and introduce new products before our existing products have completed their life cycles, we would not be able to sustain our level of sales. In addition, to succeed, many customers must adopt our new products early in the product's life cycle. Therefore, if we do not attract sufficient customers early in a product's life, we may not realize the amount of revenues we anticipated for the product. We cannot be sure that we will continue to be successful in marketing our key products. We derive significant revenues from only a few customers Sales to a small number of customers generate a disproportionate amount of our revenue. For example, in 1998 we derived 12% of our revenue from sales to Sun Microsystems. If Sun Microsystems or any other significant customer were to reduce its purchases from us, our revenues and therefore our business would be harmed unless we were to increase sales to other customers substantially. We do not have a contract with Sun Microsystems or any other customer that requires the customer to purchase any specified number of software licenses from us. Therefore, we cannot be sure that these customers will continue to purchase our products at current levels. VERITAS plans to port products to new operating systems and we face uncertainties in porting products and developing new products Certain of VERITAS' products operate primarily on certain versions of the UNIX computer operating system. VERITAS is redesigning, or porting, certain of its software products to operate on the Windows NT operating system. VERITAS is also developing new products for UNIX as well as for Windows NT. We may not be able to accomplish any of this work quickly or cost-effectively. These activities require substantial capital investment, substantial employee resources and the cooperation of the owners of the operating systems to or for which the products are being ported or developed. For example, VERITAS' porting and development work for the Windows NT market has required it to hire additional personnel with Windows NT expertise and to devote engineering resources to these projects. Operating system owners have no obligation to assist in these porting or development efforts. In particular, we must obtain from them a source code license to certain portions of the operating system software, in order to port our products to or develop products for that operating system. If they do not grant us a license or if they do not renew our license, we would not be able to expand our product line easily into other areas. For example, we rely on a source code license from Microsoft with respect to our Windows NT development projects. Microsoft is under no obligation to renew the source code license, which is subject to annual renewal. 38 39 We face intense competition on several fronts VERITAS faces a wide variety of tough competitors. Our principal competitors include: - internal development groups within original equipment manufacturers that provide storage management functions with their systems, such as Sun Microsystems for its Solaris System, Compaq for its Digital UNIX, IBM for its AIX System and Microsoft for its Windows NT; - other software vendors and hardware companies that offer products with some of our products' features, such as controller and disk subsystem manufacturers; - hardware and software vendors that offer storage application products, such as the Cheyenne division of Computer Associates, for its ARCserve product; EMC, for its Enterprise Data Manager product; IBM, for its ADSTAR Distributed Storage Manager product; Intelliguard, for its BudTool product; Spectralogic, for its Alexandria Network Librarian product; StorageTek, for its REELbackup product; Hewlett-Packard, for its Omniback product; and Legato Systems, for its NetWorker and GEMS products; and - hardware and software vendors that offer high availability and clustering products, such as Fulltime Software, Inc., formerly known as Qualix Group Inc., for its Qualix HA product; Sun Microsystems, for its Sun Cluster product; and Hewlett-Packard, for its HP-ServiceGuard product. Many of our competitors have substantially greater financial and technical resources than VERITAS and may attempt to increase their presence in the storage management market by acquiring or forming strategic alliances with other competitors or business partners. Expanding our international sales depends on economic stability in regions that recently have been unstable We plan to expand in overseas markets, such as Asia, Russia and Latin America, that have recently experienced significant economic turmoil. Continued turmoil could adversely affect our plans to increase sales in these regions. Economic recession could also affect our ability to maintain or increase sales in these or other regions in the future. Our concern is that recession could lead to: - restrictions on government spending imposed by the International Monetary Fund; - customers' reduced access to working capital to fund software purchases; - higher interest rates; and - reduced bank lending or other sources of financing for customers and potential customers. Any of these factors could cause foreign customers to not purchase our products. Our foreign-based operations and sales create special problems that could hurt our results We will have significant offshore operations, including development facilities, sales personnel and customer support operations. For example, as of December 31, 1998, VERITAS had approximately 48 engineers located in Pune, India, performing product 39 40 development work. These offshore operations are subject to certain inherent risks, including: - potential loss of developed technology through piracy, misappropriation, or more lax laws regarding intellectual property protection; - imposition of governmental controls, including trade restrictions; - fluctuations in currency exchange rates and economic instability; - longer payment cycles for sales in foreign countries; - difficulties in staffing and managing the offshore operations; - seasonal reductions in business activity in the summer months in Europe and other countries; and - political unrest, particularly in areas in which we have facilities. In addition, our international sales will be denominated in local currency, creating risk of foreign currency translation gains and losses that could affect our financial results. If we generate profits or losses in foreign countries, our effective income tax rate could also be affected. The currency instability in Asia and other foreign financial markets may make our products more expensive than products sold by other vendors that are priced in one of the affected currencies. Therefore, foreign customers may choose not to purchase our products. VERITAS has a significant amount of debt VERITAS sold $100.0 million principal amount of 5 1/4% convertible subordinated notes in October 1997. The annual interest payments will be $5.25 million which VERITAS expects to fund from its cash flow from operations. As of December 31, 1998, the ratio of VERITAS' long term debt to total capitalization was 37%. VERITAS will need substantial amounts of cash to fund interest payments and to repay the principal amount of debt when it matures, while at the same time funding capital expenditures and other working capital needs. While VERITAS' cash flow has been sufficient to fund such interest payments to date, if VERITAS cannot meet its cash requirements from the cash generated by its business, it may not be able to respond to changing business or economic conditions adequately, make acquisitions or otherwise fund its business. If VERITAS does not have sufficient cash to repay this debt when it matures, it may not be able to refinance this debt on reasonable terms or at all. This debt could be declared immediately due and payable if it does not make timely payments on this debt. VERITAS' acquisition strategy involves risks VERITAS plans to pursue a strategy of growth through acquisition. VERITAS has grown aggressively through acquisitions in the past and expects to pursue acquisitions in the future. Acquisitions involve a number of special risks and challenges, including: - our management's attention may be diverted, particularly in the case of multiple concurrent acquisitions; - we must integrate the target's operations and employees with our existing business; - we may have difficulty incorporating technology into our existing product lines; - key employees may leave; and 40 41 - we may have difficulty presenting a unified corporate image. In the past, we have lost certain employees of acquired companies whom we desired to retain. In some cases, the integration of the operations of acquired companies took longer than initially anticipated. In addition, if the employees of target companies remain geographically dispersed from our existing staff, we may not realize some or all of the anticipated economies of scale. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE RATE SENSITIVITY VERITAS does not use derivative financial instruments for speculative purposes. VERITAS engages in exchange rate hedging from time to time but such activity has been insignificant to date and VERITAS does not hold or issue foreign exchange contracts for trading purposes. VERITAS' international sales are generated primarily through its international sales subsidiaries. Most international revenue outside the United States and Canada is collectible in foreign currencies. Since much of our international operating expenses are also incurred in local currencies, the impact of exchange rates on net income or loss is relatively less than the impact on revenues. Although VERITAS' operating and pricing strategies take into account changes in exchange rates over time, VERITAS' operating results may be significantly affected in the short term by fluctuations in foreign currency exchange rates. VERITAS' 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 or "marked to market". The marked to market process may give rise to currency gains and losses. Such gains or losses are recognized on VERITAS' statement of operations as a component of other income, net. To date, any such gains or losses have not been material. VERITAS does not believe its total exposure to be significant. INTEREST RATE SENSITIVITY VERITAS' exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt obligations. The primary objective of VERITAS' investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. VERITAS' portfolio includes money markets funds, commercial paper, market auction preferreds, government agency notes and medium-term notes. The diversity of the portfolio helps VERITAS to achieve its investment objective. As of December 31, 1998, VERITAS' entire portfolio will mature in one year or less and approximately 54% of our investment portfolio matures less than 90 days from the date of purchase. Long-term debt of $100.0 million consists of 5.25% Convertible Subordinated Notes (the Notes) due 2004. The interest rate on these notes is fixed and the Notes provide for semi-annual interest payments of approximately $2.6 million each May 1 and November 1. The Notes are convertible into VERITAS' common stock at any time prior to the close of business on the maturity date, unless previously redeemed or repurchased, subject to adjustment in certain events. 41 42 The following table presents the amounts of VERITAS' cash equivalents, investments and debt that may be subject to interest rate risk and the average and fixed interest rates as of December 31, 1998 by year of maturity:
2000 AND FAIR VALUE 1999 THEREAFTER TOTAL TOTAL -------- ---------- -------- ---------- (IN THOUSANDS) Cash equivalents and short-term investments...... $204,072 -- $204,072 $204,072 Average interest rate......... 5.38% -- 5.38% 5.38% Long-term investments......... $ 8,496 $ 23,429 $ 31,925 $ 31,925 Average interest rate......... 5.75% 5.34% 5.45% 5.45% Long-term debt................ -- $100,000 $100,000 $139,099 Fixed interest rate........... -- 5.25% 5.25% 5.25%
42 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANNUAL FINANCIAL STATEMENTS VERITAS' financial statements required by this item are submitted as a separate section of the Form 10-K. See Item 14(a)(1) for a listing of financial statements provided in the section titled "Financial Statements." SELECTED QUARTERLY RESULTS OF OPERATIONS The following selected quarterly data should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K. This information has been derived from unaudited consolidated financial statements of VERITAS that, in the opinion of management, reflect all recurring adjustments necessary to fairly present this information when read in conjunction with VERITAS' Consolidated Financial Statements and Notes thereto appearing in the section titled "Financial Statements." The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period. Share and per share data applicable to prior periods have been restated to give retroactive effect to a 3-for-2 stock split in the form of a stock dividend effected in May 1998.
FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL 1998 Total net revenue.............. $39,082 $48,113 $56,545 $67,125 $210,865 Gross profit................... 32,616 40,191 48,702 59,895 181,404 Income before income taxes..... 11,103 11,239 16,355 21,092 59,789 Net income..................... 9,055 8,541 12,593 21,459 51,648 Net income per share -- basic........................ $ 0.19 $ 0.18 $ 0.27 $ 0.45 $ 1.10 Net income per share -- diluted...................... $ 0.18 $ 0.17 $ 0.24 $ 0.41 $ 1.00 Number of shares used in computing per share amounts -- basic..................... 46,434 46,862 47,229 47,517 47,013 Number of shares used in computing per share amounts -- diluted................... 50,950 51,354 52,326 52,042 51,671 FISCAL 1997 Total net revenue.............. $25,610 $28,934 $30,821 $35,760 $121,125 Gross profit................... 22,840 25,590 26,442 29,808 104,680 Income (loss) before income taxes........................ 6,484 (1,013) 8,315 9,973 23,759 Net income (loss).............. 5,417 (1,682) 6,736 12,278 22,749 Net income (loss) per share -- basic........................ $ 0.12 $ (0.04) $ 0.15 $ 0.27 $ 0.50 Net income (loss) per share -- diluted...................... $ 0.11 $ (0.04) $ 0.13 $ 0.24 $ 0.46 Number of shares used in computing per share amounts -- basic............. 45,220 45,492 45,745 45,974 45,622 Number of shares used in computing per share amounts -- diluted........... 48,609 45,492 50,152 50,501 49,493
43 44 VERITAS' operating results have fluctuated in the past, and may fluctuate significantly in the future, depending on a number of factors, including the timing and magnitude of sales of VERITAS products through original equipment manufacturers, investment in new products and new distribution channels, the timing and level of sales to resellers and direct end-users, the introduction, timing and market acceptance of new products, the timing of license fee payments and receipt of funding for porting, and other factors. For further background on fluctuating operating results, see "Factors That May Affect Future Results -- Our operating results may fluctuate significantly as a result of factors outside our control, which could adversely affect our stock price." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information with respect to directors may be found in the section captioned "Election of Directors" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 1999 Annual Meeting of Stockholders. Such information is incorporated herein by reference. EXECUTIVE OFFICERS Information with respect to executive officers may be found in Item 1. Business. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item may be found in the section captioned "Executive Compensation" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 1999 Annual Meeting of Stockholders. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the section captioned "Security Ownership of Certain Beneficial Owners and Management" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 1999 Annual Meeting of Stockholders. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item may be found in the section captioned "Certain Relationships and Related Transactions" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 1999 Annual Meeting of Stockholders. Such information is incorporated herein by reference. 44 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS The following are included in item 8 and are filed as part of this Annual Report on Form 10-K: - Consolidated Balance Sheets as of December 31, 1998 and 1997 - Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements - Report of Ernst & Young LLP, Independent Auditors 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedule for the years ended December 31, 1998, 1997 and 1996 should be read in conjunction with the consolidated financial statements of VERITAS Software Corporation filed as part of this Annual Report on Form 10-K: - Schedule II -- Valuation and Qualifying Accounts and Reserves Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto. 3. EXHIBITS
INCORPORATED BY REFERENCE EXHIBIT -------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH ------- ------------------- ----- ---- ------- -------- 2.01 Agreement and Plan of Reorganization 8-K 10/05/98 2.01 dated as of October 5, 1998 by and among VERITAS Holding Corporation, Veritas Software Corporation, Seagate Technology, Inc., Seagate Software, Inc. and Seagate Software Network & Storage Management Group, Inc. 3.01 Registrant's Certificate of S-4 03/24/97 3.01 Incorporation 3.02 Registrant's Bylaws S-4 03/24/97 3.02
45 46
INCORPORATED BY REFERENCE EXHIBIT -------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH ------- ------------------- ----- ---- ------- -------- 4.01 Rights Agreement dated October 5, 1998 8-K 10/04/98 4.01 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the Form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 13, 1998). 4.02 Nomination Agreement between the 10-Q 06/30/97 4.02 Registrant and Warburg, Pincus Investors, L.P. dated April 25, 1997 4.03 Indenture dated as of October 1, 1997 10-Q 09/30/97 4.03 between the Registrant and State Street Bank and Trust Company of California, N.A. 4.04 Registration Rights Agreement dated as 10-Q 09/30/97 4.07 of October 1, 1997 between the Registrant and UBS Securities LLC 10.01 Registrant's 1993 Equity Incentive S-4 03/24/97 10.03 Plan, as amended 10.02 Registrant's 1993 Directors Stock S-4 03/24/97 10.04 Option Plan, as amended 10.03 Registrant's 1993 Employee Stock S-4 03/24/97 10.05 Purchase Plan, as amended 10.04 OpenVision Technologies, Inc. 1996 S-4 03/24/97 10.19 Employee Stock Purchase Plan, as amended 10.05 Registrant's 1997 Chief Executive 10-K 12/31/97 10.05 Officer Compensation Plan* 10.06 Registrant's 1997 Executive Officer 10-K 12/31/97 10.06 Compensation Plan* 10.07 Key Employee Agreement between S-4 03/24/97 10.18 Registrant, VERITAS California, and Jay A. Jones* 10.08 Key Employee Agreement between the 10-K 12/31/97 10.08 Registrant, VERITAS California and Geoffrey W. Squire* 10.09 Key Employee Agreement between the 10-K 12/31/97 10.09 Registrant, VERITAS California and Kenneth E. Lonchar* 10.10 Key Employee Agreement between the 10-K 12/31/97 10.10 Registrant, VERITAS California and Paul A. Sallaberry*
46 47
INCORPORATED BY REFERENCE EXHIBIT -------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH ------- ------------------- ----- ---- ------- -------- 10.11 Office Building Lease, dated September 10-K 12/31/94 10.09 2, 1994, as amended, by and between the Registrant and John Arriliaga and Richard T. Peery regarding property located in Mountain View, California 10.12 Amendment No 1. to Office Building 10-K 12/31/97 10.12 Lease dated May 28, 1997 by and between the Registrant and John Arriliaga and Richard T. Peery 10.13 Agreement dated November 7, 1996 S-4 03/24/97 10.12 between VERITAS Software India Pvt. Ltd. and Talwalkar & Talwalkar and Mr. Rajendra Dattatraya Pathak, Mrs. Kamal Trimbak Nighojkar, Mrs. Bakul Prabhakar Pathak, Mrs. Nalini Manohar Saraf, Mr. Narhar Vaman Pandit, Mr. Madhav Narhar Pandit, Ms. Madhavi Damodar Thite, and Ms. Medha Narhar Pandit relating to the development of certain premises in Pune, India 10.14 Office Building Sublease dated 2/27/98, 10-Q 09/30/98 10.14 by and between the Registrant and Space Systems/Loral, Inc. 10.15 Office Building Lease dated 4/30/98, by 10-Q 09/30/98 10.14 and between the Registrant and Ryan Companies US, Inc. 10.16 Amendment No 1. to Office Building X Lease dated 4/30/98 by and between the Registrant and Ryan Companies US, Inc. 10.17 Office Building Sublease dated X 12/31/98, by and between the Registrant and Silicon Graphics, Inc. 21.01 Subsidiaries of the Registrant X 23.01 Consent of Ernst & Young LLP, X Independent Auditors 27.01 Financial Data Schedule (EDGAR only) X
- --------------- * Management contract, compensatory plan or arrangement. (b) REPORTS ON FORM 8-K - Form 8-K dated October 4, 1998 Item 5, regarding the adoption of Stockholder Rights Plan. - Form 8-K dated October 5, 1998 Item 5, regarding the NSMG combination, under which VERITAS will combine with the Network & Storage Management Group business of Seagate Software. 47 48 SIGNATURES 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, in the City of Mountain View, State of California, on the 29th day of March 1999. VERITAS Software Corporation Registrant /s/ KENNETH E. LONCHAR ---------------------------------- Kenneth E. Lonchar Senior Vice President, Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: /s/ MARK LESLIE President, Chief March 29, 1999 - ----------------------------------------------------- Executive Officer and Mark Leslie Co-Chairman of the Board PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ KENNETH E. LONCHAR Senior Vice March 29, 1999 - ----------------------------------------------------- President, Finance Kenneth E. Lonchar and Chief Financial Officer ADDITIONAL DIRECTORS: /s/ GEOFFREY W. SQUIRE Co-Chairman of the March 29, 1999 - ----------------------------------------------------- Board Geoffrey W. Squire /s/ FRED VAN DEN BOSCH Director March 29, 1999 - ----------------------------------------------------- Fred van den Bosch /s/ STEVEN BROOKS Director March 29, 1999 - ----------------------------------------------------- Steven Brooks /s/ WILLIAM JANEWAY Director March 29, 1999 - ----------------------------------------------------- William Janeway /s/ ROEL PIEPER Director March 29, 1999 - ----------------------------------------------------- Roel Pieper Director March , 1999 - ----------------------------------------------------- Joseph Rizzi
48 49 FINANCIAL STATEMENTS As required under Item 8. Financial Statements and Supplementary Data, the consolidated financial statements of the Company are provided in this separate section. The consolidated financial statements included in this section are as follows:
FINANCIAL STATEMENT DESCRIPTION PAGE ------------------------------- ---- Consolidated Balance Sheets As of December 31, 1998 and 1997.......................... 50 Consolidated Statements of Operations Years Ended December 31, 1998, 1997 and 1996.............. 51 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996.............. 52 Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996.............. 53 Notes to Consolidated Financial Statements.................. 54 Report of Ernst & Young LLP, Independent Auditors........... 72
49 50 VERITAS SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, -------------------- 1998 1997 -------- -------- Current assets: Cash and cash equivalents.............................. $139,086 $ 75,629 Short-term investments................................. 72,040 115,131 Accounts receivable, net of allowance for doubtful accounts of $2,572 and $1,597, respectively......... 52,697 30,296 Prepaid expenses....................................... 13,509 4,298 -------- -------- Total current assets........................... 277,332 225,354 Long-term investments.................................... 31,925 -- Property and equipment, net.............................. 26,518 10,109 Other assets............................................. 13,342 6,417 -------- -------- $349,117 $241,880 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................... $ 4,958 $ 1,552 Accrued compensation and benefits...................... 11,267 6,595 Other accrued liabilities.............................. 11,196 8,407 Income taxes payable................................... 13,424 2,773 Deferred revenue....................................... 37,645 17,449 -------- -------- Total current liabilities...................... 78,490 36,776 Deferred rent............................................ 773 911 Convertible subordinated notes........................... 100,000 100,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value: 10,000 shares authorized: none issued and outstanding....................................... -- -- Common stock, $.001 par value: 75,000 shares authorized; 47,629 and 46,127 shares issued and outstanding at December 31, 1998 and 1997.............................................. 48 46 Additional paid-in capital............................. 199,810 185,841 Accumulated deficit.................................... (29,416) (81,064) Deferred compensation.................................. (32) (64) Accumulated other comprehensive loss................... (556) (566) -------- -------- Total stockholders' equity..................... 169,854 104,193 -------- -------- $349,117 $241,880 ======== ========
See accompanying notes to consolidated financial statements. 50 51 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 -------- -------- ------- Net revenue: User license fees............................ $167,703 $ 95,714 $59,223 Services..................................... 43,162 25,411 13,523 -------- -------- ------- Total net revenue.................... 210,865 121,125 72,746 Cost of revenue: User license fees............................ 8,798 4,731 3,020 Services..................................... 20,663 11,714 4,442 -------- -------- ------- Total cost of revenue................ 29,461 16,445 7,462 -------- -------- ------- Gross profit................................... 181,404 104,680 65,284 Operating expenses: Selling and marketing........................ 76,392 42,868 25,998 Research and development..................... 40,239 25,219 18,480 General and administrative................... 10,505 8,027 6,748 Merger-related costs......................... -- 8,490 -- In-process research and development.......... 600 -- 2,200 -------- -------- ------- Total operating expenses............. 127,736 84,604 53,426 -------- -------- ------- Income from operations......................... 53,668 20,076 11,858 Interest and other income, net................. 11,821 4,889 2,785 Interest expense............................... (5,700) (1,206) (343) -------- -------- ------- Income before income taxes..................... 59,789 23,759 14,300 Provision for income taxes..................... 8,141 1,010 2,171 -------- -------- ------- Net income..................................... $ 51,648 $ 22,749 $12,129 ======== ======== ======= Net income per share -- basic.................. $ 1.10 $ 0.50 $ 0.28 ======== ======== ======= Net income per share -- diluted................ $ 1.00 $ 0.46 $ 0.26 ======== ======== ======= Number of shares used in computing per share amounts -- basic............................. 47,013 45,622 43,026 ======== ======== ======= Number of shares used in computing per share amounts -- diluted........................... 51,671 49,493 46,496 ======== ======== =======
See accompanying notes to consolidated financial statements. 51 52 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE --------------- --------------- PAID-IN ACCUMULATED FROM DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS COMPENSATION ------ ------ ------ ------ ---------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1995 9,384 $ 120 32,304 $32 $140,153 $(115,942) $(527) $(129) Comprehensive income Net income................... -- -- -- -- -- 12,129 -- -- Foreign currency translation adjustment................. -- -- -- -- -- -- -- -- Comprehensive income -- -- -- -- -- -- -- -- Conversion of preferred stock to common stock.............. (9,384) (120) 9,384 9 117 -- -- -- Issuance of common stock....... -- -- 2,267 2 36,437 -- -- -- Exercise of stock options and warrants..................... -- -- 663 1 1,091 -- -- -- Issuance of common stock under employee stock purchase plan......................... -- -- 421 1 1,567 -- -- -- Payments on notes receivable from stockholders............ -- -- -- -- -- -- 245 -- Amortization of deferred compensation................. -- -- -- -- -- -- -- 32 ------ ------ ------ --- -------- --------- ----- ----- BALANCE AT DECEMBER 31, 1996 -- -- 45,039 45 179,365 (103,813) (282) (97) Comprehensive income Net income................... -- -- -- -- -- 22,749 -- -- Foreign currency translation adjustment................. -- -- -- -- -- -- -- -- Comprehensive income......... -- -- -- -- -- -- -- -- Exercise of stock options...... -- -- 833 1 3,269 -- -- -- Issuance of common stock under employee stock purchase plan......................... -- -- 255 -- 2,507 -- -- -- Payments on notes receivable from stockholders............ -- -- -- -- -- -- 282 -- Amortization of deferred compensation................. -- -- -- -- -- -- -- 33 Tax benefit related to stock options...................... -- -- -- -- 700 -- -- -- ------ ------ ------ --- -------- --------- ----- ----- BALANCE AT DECEMBER 31, 1997 -- -- 46,127 46 185,841 (81,064) -- (64) Comprehensive income Net income................... -- -- -- -- -- 51,648 -- -- Foreign currency translation adjustment................. -- -- -- -- -- -- -- -- Comprehensive income......... -- -- -- -- -- -- -- -- Exercise of stock options...... -- -- 1,233 1 10,402 -- -- -- Issuance of common stock under employee stock purchase plan......................... -- -- 269 1 3,567 -- -- -- Amortization of deferred compensation................. -- -- -- -- -- -- -- 32 ------ ------ ------ --- -------- --------- ----- ----- Balance at December 31, 1998 -- $ -- 47,629 $48 $199,810 $ (29,416) $ -- $ (32) ====== ====== ====== === ======== ========= ===== ===== ACCUMULATED OTHER COMPREHENSIVE TOTAL INCOME STOCKHOLDERS' (LOSS) EQUITY ------------- ------------- BALANCE AT DECEMBER 31, 1995 $(105) $ 23,602 Comprehensive income Net income................... -- 12,129 Foreign currency translation adjustment................. (158) (158) -------- Comprehensive income -- 11,971 Conversion of preferred stock to common stock.............. -- 6 Issuance of common stock....... -- 36,439 Exercise of stock options and warrants..................... -- 1,092 Issuance of common stock under employee stock purchase plan......................... -- 1,568 Payments on notes receivable from stockholders............ -- 245 Amortization of deferred compensation................. -- 32 ----- -------- BALANCE AT DECEMBER 31, 1996 (263) 74,955 Comprehensive income Net income................... -- 22,749 Foreign currency translation adjustment................. (303) (303) -------- Comprehensive income......... -- 22,446 Exercise of stock options...... -- 3,270 Issuance of common stock under employee stock purchase plan......................... -- 2,507 Payments on notes receivable from stockholders............ -- 282 Amortization of deferred compensation................. -- 33 Tax benefit related to stock options...................... -- 700 ----- -------- BALANCE AT DECEMBER 31, 1997 (566) 104,193 Comprehensive income Net income................... -- 51,648 Foreign currency translation adjustment................. 10 10 -------- Comprehensive income......... -- 51,658 Exercise of stock options...... -- 10,403 Issuance of common stock under employee stock purchase plan......................... -- 3,568 Amortization of deferred compensation................. -- 32 ----- -------- Balance at December 31, 1998 $(556) $169,854 ===== ========
See accompanying notes to consolidated financial statements. 52 53 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- --------- -------- Cash flows from operating activities: Net income.................................... $ 51,648 $ 22,749 $ 12,129 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 7,056 3,116 3,672 Amortization of bond issuance costs........ 428 91 -- Deferred rent.............................. (138) (94) 411 In-process research and development........ 600 -- 2,200 Benefit from deferred income taxes......... (8,000) (4,200) -- Non-cash merger-related costs.............. -- 1,218 -- Changes in operating assets and liabilities: Accounts receivable...................... (22,127) (14,601) (5,966) Prepaid expenses and other assets........ (8,136) (267) (1,001) Accounts payable and accrued liabilities........................... 21,299 9,438 1,840 Deferred revenue......................... 20,167 9,370 1,084 --------- --------- -------- Net cash provided by operating activities....... 62,797 26,820 14,369 Cash flows from investing activities: Purchases of investments...................... (284,819) (144,907) (69,761) Investment maturities......................... 296,048 79,921 47,025 Payment received on note...................... -- 108 282 Purchase of property and equipment............ (23,424) (6,181) (5,469) Purchase of Windward Technologies, Inc........ (1,250) -- -- Purchase of ACSC.............................. -- -- (3,450) --------- --------- -------- Net cash used for investing activities.......... (13,445) (71,059) (31,373) Financing activities: Repayment of short-term borrowings............ -- -- (2,061) Proceeds from issuance of common stock........ 13,971 5,777 39,105 Net proceeds from issuance of convertible debt....................................... -- 97,500 -- Principal payments under capital lease obligations................................ -- -- (116) Payments of notes payable..................... -- (612) (6,153) Payments on notes receivable from stockholders............................... -- 282 245 --------- --------- -------- Net cash provided by financing activities....... 13,971 102,947 31,020 Effect of exchange rate changes................. 134 (490) (132) --------- --------- -------- Net increase in cash and cash equivalents....... 63,457 58,218 13,884 Cash and cash equivalents at beginning of year.......................................... 75,629 17,411 3,527 --------- --------- -------- Cash and cash equivalents at end of year........ $ 139,086 $ 75,629 $ 17,411 ========= ========= ======== Supplemental disclosures: Cash paid for interest........................ $ 5,521 $ -- $ 1,289 ========= ========= ======== Cash paid for income taxes.................... $ 6,245 $ 1,703 $ 1,341 ========= ========= ======== Conversion of preferred stock to common stock...................................... $ -- $ -- $ 71,806 ========= ========= ========
See accompanying notes to consolidated financial statements. 53 54 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES VERITAS Software Corporation, a Delaware corporation (the Company) develops, markets and supports enterprise data storage management solutions, providing advanced storage management software for open system environments. The Company's products provide performance improvement and reliability enhancement features that are critical for many commercial applications. These products provide 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 backup 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 sales and indirect sales channels. These indirect sales channels include resellers, VARs, hardware distributors, application software vendors and systems integrators. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. As more fully described in Note 2, the Company merged with OpenVision Technologies, Inc. (OpenVision) in April 1997 in a pooling of interests transaction. Nothing in these financial statements have been restated from that previously presented as a result of the OpenVision merger. 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents include cash and highly liquid investments with maturities of less than ninety days when purchased. The Company invests its excess cash in diversified instruments maintained primarily in U.S. financial institutions in an effort to preserve principal and to maintain safety and liquidity. The Company has determined its short-term investments are held to maturity under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", (SFAS No. 115) and accordingly such amounts are recorded at amortized cost. At December 31, 1998, amortized cost 54 55 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) approximated fair value for all cash equivalents and short-term investments. To date, there have been no significant realized or unrealized gains or losses on the short-term investments. The cost of securities sold is based on the specific identification method. Long-Term Investments Investments with original maturities greater than one year from date of purchase are classified as long-term. The Company accounts for its long-term investments in accordance with SFAS No. 115 and these investments are classified as held to maturity as of the balance sheet date. At December 31, 1998, amortized cost approximated fair value for all long-term investments and, to date, there have been no significant realized or unrealized gains or losses on the Company's long-term investments. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease, if shorter. The estimated useful lives of furniture and equipment and computer equipment is generally three to five years. The Company also depreciates a building located in India over fifteen years. Depreciation and amortization of property and equipment charged to costs and expenses was approximately $6.9 million, $3.1 million and $3.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Revenue Recognition In October of 1997 the Accounting Standards Executive Committee issued Statement of Position (SOP) 97-2, as amended by SOP 98-4 and SOP 98-9, "Software Revenue Recognition". These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2, as amended by SOP 98-4 was effective for revenue recognized under software license and service arrangements beginning January 1, 1998. The Company derives revenue from software licenses and customer support and other services. Service revenue includes contracts for software maintenance and technical support, consulting, training, and porting fees. In software arrangements that include rights to multiple software products and/or services, the Company allocates the total arrangement fee among each of the deliverables based on the relative fair value of each of the deliverables, determined based on vendor-specific objective evidence of fair value. The Company recognizes revenue from licensing of software products to an end user upon delivery of the software product to the customer, unless the fee is not fixed or determinable, or collectibility is not considered probable. For licensing of the Company's software to OEMs, revenue is not recognized until the software is sold by the OEM to an end-user customer. The Company considers all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to 55 56 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) be fixed or determinable. If collectibility is not considered probable, revenue is recognized when the fee is collected. Customer support revenue is recognized on a straight-line basis over the period that the support is provided. Other software service arrangements are evaluated to determine whether those services are essential to the functionality of the other elements of the arrangement. When software services are considered essential, revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. The Company generally considers software services essential unless the software is paid for before the services commence and the services are limited to training or nominal installation. Revenue is recognized using contract accounting for arrangements involving customization or modification of the software or where software services are considered essential to the functionality of the software. Revenue from these software arrangements is recognized using the percentage-of-completion method with progress-to-completion measured using labor cost inputs. Software Development Costs Under Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," certain software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model, which is typically demonstrated by initial beta shipment. The period between the achievement of technological feasibility and the general release of the Company's products has been of short duration. As of December 31, 1998 such capitalizable software development costs were insignificant and all software development costs have been charged to research and development expense in the accompanying consolidated financial statements of operations. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in debt securities and trade receivables. The Company primarily invests its excess cash in commercial paper rated A-1/P-1, market auction preferreds, government agency notes, medium-term notes, certificates of deposit with approved financial institutions, and other specific money market instruments of similar liquidity and credit quality. The Company is exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent recorded on the balance sheet. The Company generally does not require collateral. The Company maintains allowances for credit losses, and such losses have been within management's expectations. For the year ended December 31, 1998, one customer accounted for approximately 12% or $25.8 million of the Company's revenue. For the years ended December 31, 1997 and 1996 no customer accounted for greater than 10% of revenues. 56 57 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income Per Share The Company calculates net income per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive common shares consist of employee stock options using the treasury stock method. Accounting for Stock-Based Compensation The Company accounts for employee stock based compensation in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Pro forma net income and net income per share disclosures required by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation", are included in Note 8. Translation of Foreign Currencies Assets and liabilities of certain foreign subsidiaries, whose functional currency is the local currency, are translated at year-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as a separate component of stockholder's equity. Certain other transaction gains or losses, which have not been material, are reported in results of operations. Impairment of Long-Lived Assets When an event or change in circumstance indicates that the carrying amount of property and equipment or other long-lived assets may not be recoverable, the Company reviews the asset for impairment. The Company determines recoverability by comparing the carrying amount of the asset to net future discounted cash flows that the asset is expected to generate. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the asset. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company will be required to implement SFAS No. 133 for its fiscal year ending December 31, 2000. The Company's exchange rate hedging activities have been insignificant to date and the Company does not believe the impact of SFAS No. 133 will be material to its financial position, results of operations or cash flows. 57 58 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company will be required to implement SOP 98-1 for its fiscal year ending December 31, 1999 and does not believe that the impact of SOP 98-1 will be material to the Company's financial position, results of operations and cash flows. In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-9 amends SOP 97-2 "Software Revenue Recognition" to require recognition of revenue using the "residual method" when certain criteria are met. The Company will be required to implement these provisions of SOP 98-9 for its fiscal year ending December 31, 2000. Effective in December 1998, SOP 98-9 also amended SOP 98-4 (an earlier amendment to SOP 97-2) to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4. The Company does not believe the impact of SOP 98-9 will be material to the Company's financial position, results of operations and cash flows. NOTE 2. BUSINESS COMBINATIONS On May 15, 1998, the Company acquired all of the outstanding stock of Windward for a total cost of $2.5 million. The transaction was accounted for using purchase accounting. Of the total cost, $0.6 million was allocated to in-process research and development and $1.9 million was allocated to acquired intangibles, which will be amortized over a five year period. Total cash outflows related to this purchase through December 31, 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 a two year period, subject to satisfaction of certain conditions (which it was probable would be met) and the amount was accrued at the acquisition date. VERITAS also agreed to pay that 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. The results of operations of Windward were not material to the Company's results of operations for 1998 or 1997. Accordingly, pro forma information has not been presented. Effective April 25, 1997, the Company merged with OpenVision, a publicly-held company that provided storage management applications and services for client/server computing environments. This transaction was accounted for as a pooling of interests. Approximately 9.8 million shares of the Company's common stock were issued in the OpenVision merger and the Company reserved approximately 1.4 million shares of its common stock for issuance pursuant to the assumption of outstanding options, warrants and other rights to purchase OpenVision common stock. 58 59 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. BUSINESS COMBINATIONS (CONTINUED) The following information shows revenue and net income of the separate companies during the periods preceding the merger (in thousands):
1997 1996 -------- ------- Net revenue: VERITAS................................. $ 12,454 $36,090 OpenVision.............................. 13,156 36,656 Combined company........................ 95,515 -- -------- ------- $121,125 $72,746 ======== ======= Net income: VERITAS................................. $ 3,752 $ 9,768 OpenVision.............................. 1,665 2,361 Combined company........................ 17,332 -- -------- ------- $ 22,749 $12,129 ======== =======
Note: April 1, 1997 was used as an approximation of the effective date of the Merger. As a result of the OpenVision merger, the Company incurred charges to operations of $8.5 million during the second quarter of 1997, consisting of approximately $4.2 million for transaction fees and professional services, $1.9 million for contract terminations and asset write-offs and $2.4 million for other costs incident to the merger. Of the total charge, $1.2 million resulted from the write-down of redundant assets and facilities, primarily consisting of intangible assets related to a prior acquisition which became redundant as a result of OpenVision having a similar product line, and $7.3 million involved cash outflows for banking, legal and accounting fees and other direct costs and payments in connection with the elimination of duplicative facilities. The remaining unpaid amount of $0.2 million at December 31, 1998 related primarily to ongoing lease payments for vacated facilities through the termination of the lease on the estimated date when such facilities will be subleased. On April 1, 1996, the Company acquired all of the outstanding stock of ACSC for a total cost of approximately $3.5 million. Of the total charge, $2.2 million was allocated to in-process research and development which was expensed in the second quarter of 1996 and approximately $1.3 million was allocated to acquired intangibles that were originally amortized and then fully written off in the second quarter of 1997. The write-off was part of the OpenVision merger-related costs, as the ACSC product line became redundant upon consummation of the OpenVision merger. 59 60 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS Cash, cash equivalents and short-term investments consist of the following (in thousands):
YEARS ENDED DECEMBER 31, -------------------- 1998 1997 -------- -------- Cash and cash equivalents: Cash................................... $ 6,893 $ 7,817 Money market funds..................... 172 2,717 Commercial paper....................... 132,021 65,095 -------- -------- Cash and cash equivalents................ 139,086 75,629 -------- -------- Short-term investments: Commercial paper....................... 1,357 50,640 Market auction preferreds.............. 20,659 19,061 Government agency notes................ -- 19,748 Short-term corporate notes............. 50,024 25,682 -------- -------- Short-term investments................... 72,040 115,131 -------- -------- Cash, cash equivalents and short-term investments............................ $211,126 $190,760 ======== ========
Long-term investments consist of the following (in thousands):
YEARS ENDED DECEMBER 31, -------------------- 1998 1997 -------- -------- Long-term investments: Government agency notes................ $ 9,497 $ -- Medium-term corporate notes............ 22,428 -- -------- -------- Long-term investments.................... $ 31,925 $ -- ======== ========
60 61 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- Furniture and equipment................ $ 6,962 $ 2,758 Computer equipment..................... 34,251 18,624 Building............................... 1,008 -- Leasehold improvements................. 3,765 1,384 --------- --------- 45,986 22,766 Less -- accumulated depreciation and amortization......................... (19,468) (12,657) --------- --------- Property and equipment, net............ $ 26,518 $ 10,109 ========= =========
NOTE 5. CONVERTIBLE SUBORDINATED NOTES In October 1997, the Company issued $100.0 million aggregate principal amount 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 of approximately $2.6 million each May 1 and November 1, commencing on May 1, 1998. The Notes are convertible into 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 as interest expense ratably over the term of the Notes. The fair value of the notes as of December 31, 1998 was $139.1 million, and is calculated using the conversion price of $43.00 per share on the principal amount of the notes and the closing price of the Company's stock. 61 62 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. COMMITMENTS AND CONTINGENCIES The Company currently has operating leases for its facilities through October 31, 2012. Rental expense under operating leases was approximately $6.1 million, $4.3 million and $3.0 million for the years ended December 31, 1998, 1997, and 1996, respectively. In addition to the basic rent, the Company is responsible for all taxes, insurance and utilities related to the facilities. The approximate minimum lease payments as of December 31, 1998 are as follows (in thousands): 1999.......................................... $10,019 2000.......................................... 9,644 2001.......................................... 8,324 2002.......................................... 5,785 2003.......................................... 5,136 Thereafter.................................... 17,318 ------- Minimum lease payments........................ $56,226 =======
In the ordinary course of business, various lawsuits and claims have been filed against the Company. While the outcome of these matters is currently not determinable, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 7. BENEFIT PLANS The Company has adopted a retirement savings plan (the VERITAS Software 401(k) Plan), qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all United States employees. Under the plan employees may contribute up to 20% of their pretax salary, subject to certain limitations. Employees are eligible to participate beginning the first day of the calendar quarter following their date of hire. The Company matches approximately 25% of the employee contributions up to $1,200 per year and contributed approximately $0.6 million in 1998, $0.3 million in 1997 and $0.1 million in 1996. The Company also has a retirement savings plan that was assumed under the merger with OpenVision (the OpenVision Employee Investment Plan), which will terminate in 1999. Employees no longer contribute to the OpenVision plan and the remaining balances will be transferred to the Company's plan upon termination. 62 63 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCK COMPENSATION PLANS At December 31, 1998, the Company had three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Since the exercise price of options granted under such plans is generally equal to the market value on the date of grant, no compensation cost has been recognized for grants under its stock option plans and stock purchase plans. If compensation cost for the Company's stock-based compensation plans had been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
1998 1997 1996 ------- ------- ------- Net income As reported.................... $51,648 $22,749 $12,129 Pro forma...................... $32,102 $12,358 $ 7,669 Basic earnings per share As reported.................... $ 1.10 $ 0.50 $ 0.28 Pro forma...................... $ 0.68 $ 0.27 $ 0.18 Diluted earnings per share As reported.................... $ 1.00 $ 0.46 $ 0.26 Pro forma...................... $ 0.64 $ 0.26 $ 0.17
Because the method of accounting prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Stock Option Plans The Company has two stock option plans. The Company's 1993 Equity Incentive Plan (the 1993 Plan) provides for the issuance of either incentive or nonstatutory stock options to employees and consultants of the Company. The options generally are granted at the fair market value of the Company's common stock at the date of grant, expire ten years from the date of grant, vest over a four-year period and are exercisable immediately upon vesting. The Company has reserved 9,225,000 shares of common stock for issuance under the 1993 Plan. The Company has also reserved 562,500 shares for issuance under the Company's 1993 Director's Stock Option Plan (the Director's Plan). Generally options expire ten years from date of grant, vest over the term of each directors board membership and are exercisable immediately upon vesting. As of December 31, 1998, 3,703,469 shares were available for future grant under the plans. The Company's 1991 Executive Stock Option Plan and 1985 Employee Stock Option Plan were terminated, and no further options may be granted under these plans. Options previously granted under the 1991 and 1985 plans will continue to be administered under such plans, and any options that expire or become unexercisable for any reason without having been exercised in full shall be available for issuance under the 1993 Plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for 63 64 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCK COMPENSATION PLANS (CONTINUED): grants in 1998, 1997 and 1996: risk-free interest rates averaging 5.15% in 1998, 6.19% in 1997 and 5.99% in 1996; a dividend yield of 0.0% for all years; a weighted-average expected life of 5 years for all years; and a volatility factor of the expected market price of the Company's common stock of 0.65 for 1998, 0.60 for 1997 and 0.65 for 1996. A summary of the status of the Company's stock option plans (including the options assumed in the Merger) as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below (number of shares in thousands):
1998 1997 1996 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year... 7,689 $12.85 5,737 $ 7.13 3,586 $ 2.98 Granted............... 2,327 $43.90 3,193 $21.05 3,019 $11.26 Exercised............. (1,233) $ 8.45 (772) $ 4.15 (444) $ 2.29 Forfeited............. (572) $18.13 (469) $13.21 (424) $ 6.41 ------- ------ ------ ------ ------ ------ Outstanding at end of year................ 8,211 $21.94 7,689 $12.85 5,737 $ 7.13 ======= ====== ====== ====== ====== ====== Options exercisable at year end............ 3,378 2,559 1,707 Weighted-average fair value of options granted during the year................ $ 25.87 $12.11 $ 7.05
The following table summarizes information about stock options outstanding at December 31, 1998 (number of shares in thousands):
OPTIONS OUTSTANDING ------------------------------------------ OPTIONS EXERCISABLE WEIGHTED- --------------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE --------------- -------------- ----------- --------- -------------- --------- $ 0.06 - $ 1.33 760 5.17 $ 0.93 719 $ 0.95 $ 1.42 - $ 7.48 679 6.28 $ 5.99 552 $ 5.79 $ 7.56 - $13.63 2,309 7.41 $10.84 1,148 $10.74 $13.78 - $29.67 2,117 8.46 $22.74 714 $22.37 $29.83 - $49.69 1,430 9.28 $37.96 204 $36.70 $50.12 - $62.37 916 9.67 $52.37 41 $51.02 ----- ---- ------ ----- ------ $ 0.06 - $62.37 8,211 7.96 $21.94 3,378 $12.37 ===== ==== ====== ===== ======
64 65 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCK COMPENSATION PLANS (CONTINUED): EMPLOYEE STOCK PURCHASE PLANS Under the terms of the Merger with OpenVision, the Company assumed the OpenVision Employee Stock Purchase Plan (the 1996 Purchase Plan). Upon consummation of the Merger, each 1996 Purchase Plan option was converted into a right to purchase shares of the Company's common stock. No new offering periods will be commenced under the 1996 Purchase Plan, and the 1996 Purchase Plan was terminated on October 31, 1998. Under the Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan), the Company is authorized to issue up to 2,250,000 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the 1993 Purchase Plan, employees can choose to have up to 10% of their wages withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the subscription date fair market value and the purchase date fair market value. Substantially all of the eligible employees have participated in the either the 1993 Purchase Plan or the 1996 Purchase Plan in 1998, 1997 and 1996. Under the 1993 Purchase Plan, the Company issued 169,905, 99,614, and 229,445 shares to employees in 1998, 1997 and 1996, respectively. Under the 1996 Purchase Plan, the Company issued 98,917, 70,489 and 51,223 shares to employees in 1998, 1997 and 1996, respectively. In accordance with APB 25, the Company does not recognize compensation cost related to employee purchase rights under the Plan. To comply with the pro forma reporting requirements of SFAS No. 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes option-pricing model with the following assumptions for these rights granted in 1998, 1997 and 1996: a dividend yield of 0.0% for all years; an expected life ranging up to 2 years for all years; an expected volatility factor of 0.65 in 1998, 0.60 in 1997 and 0.65 in 1996; and risk-free interest rates ranging from 5.14% to 5.39% in 1998, from 5.27% to 5.84% in 1997 and from 4.81% to 6.01% in 1996. The weighted average fair value of the purchase rights granted in 1998, 1997 and 1996 was $14.16, $13.90 and $6.88, respectively. NOTE 9. STOCKHOLDERS' EQUITY On October 4, 1998, the Board of Directors of the Company 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. The rights are initially attached to the Company's common stock and will not trade separately. If a person or group acquires 20 percent or more of the Company's common stock, or announces an intention to make a tender offer for the Company's common stock the consummation of which would result in acquiring 20 percent or more of the Company's common stock, then the rights will be distributed and will then trade separately from the common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, of the Company. The rights expire October 5, 2008, unless the expiration date is extended or unless the rights are earlier redeemed or exchanged by the Company. 65 66 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED) Share and per share amounts applicable to prior periods in the consolidated financial statements have been restated to reflect a 3-for-2 stock split in the form of a stock dividend executed by the Company in May 1998. The Company is authorized to issue up to 10,000,000 shares of undesignated preferred stock. No such preferred shares have been issued to date. Total common shares reserved for issuance at December 31, 1998 under all stock compensation plans are 12,037,500 shares (see Note 8). NOTE 10. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------- ------- ------ Federal -- current.............................. $11,858 $ 539 $ 366 -- deferred............................. (8,075) (3,500) -- State -- current.............................. 2,514 1,939 1,119 -- deferred............................. 75 (700) -- Foreign................................... 1,769 2,732 686 ------- ------- ------ Total................................ $ 8,141 $ 1,010 $2,171 ======= ======= ======
The provision for income taxes differs from the amount computed by applying the federal statutory rate as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- Federal tax at statutory rate.............. 35.0% 35.0% 35.0% Benefit of loss carryforwards.............. (9.3) (35.9) (35.0) State taxes................................ 4.2 5.4 5.3 Foreign taxes.............................. 3.0 9.4 3.0 Change in valuation allowance.............. (13.4) (17.7) -- Merger-related costs....................... -- 6.5 -- In-process research and development charge................................... -- -- 5.2 Alternative minimum tax, net............... -- 2.3 2.7 Tax credits................................ (7.1) -- -- Other...................................... 1.2 (0.7) (1.0) ----- ----- ----- Total............................ 13.6% 4.3% 15.2% ===== ===== =====
66 67 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets are as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Net operating loss carryforwards.............. $ 23,276 $ 22,499 $ 28,566 Reserves and accruals not currently deductible.................................. 6,146 2,205 2,984 Acquired intangibles.......................... 1,895 2,114 5,400 Tax credit carryforwards...................... -- 2,246 1,385 Other......................................... 1,655 887 994 -------- -------- -------- Total............................... 32,972 29,951 39,329 Valuation allowance........................... (20,772) (25,751) (39,329) -------- -------- -------- Net deferred tax assets....................... $ 12,200 $ 4,200 $ -- ======== ======== ========
The valuation allowance decreased by approximately $5.0, $13.6 and $3.9 million in 1998, 1997 and 1996, respectively. As of December 31, 1998 approximately $11.6 million of the valuation allowance reflected above relates to the tax benefits of stock option deductions which will be credited to equity when realized. As of December 31, 1998, the Company had federal tax loss carryforwards of approximately $63.0 million which will expire in 2007 through 2011, if not utilized. Because of the change in ownership provisions of the Internal Revenue Code, a substantial portion of the Company's net operating loss carryforwards may be subject to annual limitations. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. Management has determined based on the Company's history of prior earnings, its expectations for the future and the extended period over which the benefits of certain deferred tax assets will be realized, as well as the limitations on its ability to utilize certain net operating loss carryforwards, that a substantial valuation allowance continues to be necessary. The realization of the Company's net deferred tax assets, which relate primarily to net operating loss 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 assets will be realized. 67 68 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Numerator: Net income............................. $51,648 $22,749 $12,129 ======= ======= ======= Denominator: Weighted average shares................ 47,013 45,622 40,680 Shares related to Staff Accounting Bulletin No. 98: Convertible preferred stock......... -- -- 2,346 ------- ------- ------- Denominator for basic earnings per share............................... 47,013 45,622 43,026 Common stock equivalents............... 4,658 3,871 3,470 ------- ------- ------- Denominator for diluted earnings per share............................... 51,671 49,493 46,496 ======= ======= ======= Basic earnings per share................. $ 1.10 $ 0.50 $ 0.28 ======= ======= ======= Diluted earnings per share............... $ 1.00 $ 0.46 $ 0.26 ======= ======= =======
Common stock equivalents used in the determination of the denominator of diluted earnings per share does not include 2,325,581 shares issuable upon conversion of the 5.25% Convertible Subordinated Notes, as their effect would be anti-dilutive for all periods presented (see Note 5). NOTE 12. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 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 No. 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:
YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Net income............................... $51,648 $22,749 $12,129 Foreign currency translation adjustments............................ 10 (303) (158) ------- ------- ------- Comprehensive income..................... $51,658 $22,446 $11,971 ======= ======= =======
NOTE 13. SIGNIFICANT DEVELOPMENT AND LICENSE AGREEMENTS In August of 1996 the Company entered into a development and license agreement with Microsoft pursuant to which Microsoft would pay the Company up to $5.0 million to 68 69 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. SIGNIFICANT DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED): develop a version of its Volume Manager product to be ported and embedded in Windows NT 5.0. The Company's development efforts under this agreement are on a "best efforts" basis, and there is no obligation for the Company to repay amounts received under the agreement if the development effort is not successful. Accordingly, Microsoft bears the risk of the development effort and will own the resulting technology and/or products developed under the agreement. Under the terms of the agreement, the Company is allowed to market any developed add-on products to the Windows NT installed customer base in exchange for paying Microsoft a royalty fee, the aggregate of which is not to exceed $5.0 million. Such royalties become payable if the Company is successful in its development effort. The Company is accounting for this arrangement in accordance with Statement of Financial Accounting Standards No. 68, "Research and Development Arrangements" (SFAS No. 68) using the percentage of completion method. Amounts earned by the Company under the agreement are recorded as service revenue while costs incurred to complete the development efforts are recorded as cost of service revenue in the accompanying Statements of Operations. The Company recognized revenue under this agreement of approximately $0.8 million in 1998, $3.7 million in 1997 and $0.5 million in 1996, and incurred costs of $0.7 million in 1998, $2.4 million in 1997, and $0.2 million in 1996. Payments received from Microsoft during 1998, 1997 and 1996 were $2.0 million, $2.8 million and $0.2 million, respectively. In January 1997 the Company entered into a cross-license and development arrangement with Sun Microsystems whereby each party granted the other a royalty-based license to bundle or resell substantially all then-available products of both companies. Under this arrangement, 5% of each royalty dollar received by the Company is to be set aside to fund future "best efforts", non-recurring engineering services to be performed by the Company at the direction of Sun. Under these NRE projects, the scope of which is mutually agreed to by both parties, Sun bears the risk of the development effort. In accordance with SFAS No. 68 the Company has recognized a liability equal to 5% of each royalty dollar received from Sun under this arrangement. As of December 31, 1998 there was no liability to Sun. The liability to Sun as of December 31, 1997 was $174,000. NOTE 14. SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), in fiscal 1998. SFAS No. 131 supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise" and establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance. The Company operates in one segment, storage management solutions. The Company's products and services are sold throughout the world, through direct, OEM, reseller and distributor channels. The Company's chief operating decision maker, the chief executive officer, evaluates the performance of the Company based upon stand-alone revenue of product channels and the geographic regions of the segment and does not 69 70 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14. SEGMENT INFORMATION (CONTINUED) receive discrete financial information about asset allocation, expense allocation or profitability from the Company's storage products or services. Geographic information (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 -------- -------- ------- User license fees(1): United States........................ $121,910 $ 67,888 $44,286 Europe(2)............................ 33,172 12,971 10,696 Other(3)............................. 12,621 14,855 4,241 -------- -------- ------- Total........................ $167,703 $ 95,714 $59,223 ======== ======== ======= Services (1): United States........................ $ 34,759 $ 20,463 $10,195 Europe(2)............................ 7,869 4,865 3,186 Other(3)............................. 534 83 142 -------- -------- ------- Total........................ $ 43,162 $ 25,411 $13,523 ======== ======== ======= Total net revenue...................... $210,865 $121,125 $72,746 ======== ======== =======
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- ------- ------- Long-lived assets(4): United States......................... $ 25,202 $ 9,412 $ 6,268 Europe(2)............................. 3,644 1,114 633 Other(3).............................. 380 67 96 -------- ------- ------- Total......................... $ 29,226 $10,593 $ 6,997 ======== ======= =======
- --------------- (1) License and Service revenues are attributed to geographic regions based on location of customers. (2) Europe includes the Middle East and Africa. (3) Other includes Canada and the Asia Pacific region. (4) Long-lived assets include all long-term assets except those specifically excluded under SFAS No. 131, such as deferred income taxes and financial instruments. Reconciliation to total assets reported:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- ------- ------- Total long-lived assets................. $ 29,226 $10,593 $ 6,997 Other assets, including current......... 319,891 231,287 87,527 -------- ------- ------- Total consolidated assets..... $349,117 $241,880 $94,524 ======== ======= =======
One customer represents approximately 12% or $25.8 million of the Company's net revenues in 1998. 70 71 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. RELATED PARTY TRANSACTIONS In fiscal 1998 the Company paid $0.8 million in service fees relating to the potential acquisition of NSMG to Donaldson, Lufkin & Jenrette (DLJ), a company affiliated with a director of the Company during 1998. The Company had no outstanding receivable or payable balance with DLJ at December 31, 1998. NOTE 16. POTENTIAL ACQUISITIONS On October 5, 1998, the Company entered into an Agreement and Plan of Reorganization pursuant to which the Company will acquire the Network and Storage Management Group business of Seagate Software, Inc. (SSI), a subsidiary of Seagate Technology, Inc.. Security holders of the Company will acquire approximately 60% of the fully-diluted equity of the combined company. SSI and certain holders of options to purchase common stock of SSI will acquire common stock and rights to acquire common stock representing approximately 40% of the combined company's fully-diluted equity securities. The transaction is expected to be completed in April 1999, subject to the approval of the VERITAS and SSI stockholders, and other regulatory approvals. On September 1, 1998, the Company entered into a Combination Agreement to acquire TeleBackup Systems Inc., a Canadian corporation. As a result of the Combination Agreement, 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 the Company's common stock or its economic equivalent, such number of shares, depending upon the trading price of the Company's 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 April 1999, subject to regulatory and stockholder approval and other customary closing conditions. The NSMG and TeleBackup acquisitions will be accounted for by the Company using the purchase method of accounting. Following consummation of the NSMG and TeleBackup transactions, the Company currently expects to incur a charge of approximately $209.0 million per fiscal quarter primarily related to the amortization of goodwill and other intangible assets over a four-year period, based upon the closing price of VERITAS common stock as of March 29, 1999. 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 $104.5 million. Such amounts are preliminary and are subject to change upon the final determination of the purchase price of both NSMG and TeleBackup at the time of closing of each transaction. 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 the Company, which the Company plans to vacate. The Company estimates this restructuring charge to be in the range of $9.0 to $13.0 million. 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 the Company and included as a part of the purchase price. 71 72 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Stockholders and Board of Directors VERITAS Software Corporation We have audited the accompanying consolidated balance sheets of VERITAS Software Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VERITAS Software Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP San Jose, California January 27, 1999 72 73 VERITAS SOFTWARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO BALANCE AT BEGINNING OPERATING END OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR ---------- ---------- ------------- ---------- (IN THOUSANDS) Allowance for doubtful accounts: Year ended December 31, 1998..................... $1,597 $1,032 $57 $2,572 Year ended December 31, 1997..................... $ 697 $ 900 $-- $1,597 Year ended December 31, 1996..................... $ 807 $ (75) $35 $ 697
- --------------- (1) Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance. 73 74 EXHIBITS As required by Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K, the exhibits filed as part of this report are provided on this separate section. The exhibits included in this section are as follows:
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.16 Amendment No 1. to Office Building Lease dated 4/30/98 by and between the Registrant and Ryan Companies US, Inc. 10.17 Office Building Sublease dated 12/31/98, by and between the Registrant and Silicon Graphics, Inc. 21.01 Subsidiaries of the Registrant 23.01 Consent of Ernst & Young LLP, Independent Auditors 27.01 Financial Data Schedule (EDGAR only)
74 EX-10.16 2 AMENDMENT NO.1 TO OFFICE BUILDING LEASE 1 Exhibit 10.16 FIRST AMENDMENT TO LEASE This First Amendment to Lease, dated as of 11/3, 1998 (First Amendment), between Ryan Companies US, Inc., (Landlord) and Veritas Software Corporation (Tenant). WITNESSETH, that: WHEREAS, Landlord and Tenant have entered into a Lease dated April 30, 1998 and Option Agreement dated April 30, 1998 (collectively, the "Lease"), for approximately 62,420 square feet of area, whereby Landlord has leased to Tenant certain premises located in Centre Pointe Business Park, in the City of Roseville, County of Ramsey, State of Minnesota, consisting of the Premises, as such Premises are defined in the Lease; and NOW, THEREFORE, Landlord and Tenant desire and intend hereby to amend the Lease as specifically hereinafter set forth and provided: 1. SECTION 2.1.: Term of the Lease shall commence on October 16, 1998 and expire on October 31, 2008. 2. SECTION 3.1.: Monthly Base Rent shall be Seventy Four Thousand Three Hundred Seventy Two and 00/100 Dollars ($74,372.00) commencing October 16, 1998 through October 31, 2003; Eighty Five Thousand Five Hundred Twenty Seven and 80/100 Dollars ($85,527.80) commencing November 1, 2003 through October 31, 2008. EXCEPT as expressly amended or supplemented herein, the Lease shall remain and continue in full force and effect in all respects. IN WITNESS WHEREOF, the Lease Amendment is hereby executed and delivered effective as of the date and year first above written. LANDLORD: RYAN COMPANIES US, INC. BY: ---------------------------- ITS: --------------------------- TENANT: VERITAS SOFTWARE CORPORATION BY: /s/ JAY A. JONES ---------------------------- JAY A. JONES ITS: VICE PRESIDENT AND GENERAL COUNSEL --------------------------- 2 [RYAN COMPANIES US, INC. LETTERHEAD] - -------------------------------------------------------------------------------- TRANSMITTAL - -------------------------------------------------------------------------------- TO VERITAS SOFTWARE DATE October 19, 1998 1600 PLYMOUTH STREET MOUNTAIN VIEW, CA 94043 RE VERITAS -- CENTRE POINTE III ROSEVILLE, MN ATTN JAY JONES JOB NO 1025-002 - -------------------------------------------------------------------------------- WE ARE SENDING YOU [X] ATTACHED [ ] UNDER SEPARATE COVER VIA UPS Ground [ ] Shop Drawings [ ] For Approval [ ] Plans/Prints [ ] For Your Use [ ] Samples [ ] Approved as Noted [ ] Specifications [ ] Approved as Submitted [ ] Change Order [ ] Revise and Resubmit [ ] Copy of Letter [ ] For Field Use [ ] Permit Applications [ ] For Review and Response/Comments [ ] Other____________ [ ] For Bids Due_ [X] Certificate of Substantial Completion [X] For Signature
COPIES DATE NO. DESCRIPTION - -------------------------------------------------------------------------------- 3 Certificate of Substantial Completion (3 Originals)
- -------------------------------------------------------------------------------- COMMENTS Jay, please see the attached documents. Please sign all three copies, keep one for your records, and return the other two originals for our records. If you have any questions, please feel free to contact me. Thank you. - -------------------------------------------------------------------------------- COPIES TO: - -------------------------------------------------------------------------------- cc --------------------------------- SIGNED Kari Poldoski 349-0592 --------------------------------- ----------------------------------- IF ENCLOSURES ARE NOT AS NOTED, KINDLY NOTIFY US AT ONCE - -------------------------------------------------------------------------------- 3 RYAN COMPANIES US, INC. CERTIFICATE OF SUBSTANTIAL COMPLETION PROJECT OWNER Name VERITAS Software Name VERITAS Software -------------------------- -------------------------- Address 2955 Centre Pointe Drive Address 2955 Centre Pointe Drive -------------------------- -------------------------- Roseville, Minnesota 55113 Roseville, Minnesota 55113 -------------------------- -------------------------- ARCHITECT MISC. INFORMATION Name Ryan Companies US, Inc. Project Number 1025-000 -------------------------- ------------------ Address 900 2nd Avenue South, #700 Date of Issuance October 9, 1998 -------------------------- ------------------ Minneapolis, MN 55439 Contract Date April 30, 1998 -------------------------- ------------------ DATE OF SUBSTANTIAL COMPLETION October 9, 1998 --------------- DEFINITION OF SUBSTANTIAL COMPLETION - The Date of Substantial Completion is the date certified by the Architect when construction is sufficiently complete, in accordance with the requirements of the Contract, so the Owner can occupy or utilize the Project for the use for which it is intended, as expressed in the Contract. Unless otherwise provided in the Contract, the Date of Substantial Completion is the date on which the Project warranty commences. WORK REMAINING TO BE COMPLETED - A list of items to be completed (the "punchlist") is attached hereto. Owner and Design/Builder acknowledge that this Work is incomplete and that Design/Builder will diligently work to complete it as soon as possible. The failure to include any uncompleted items or defective Work on the attached punchlist shall in no way alter the responsibility of the Design/Builder to complete all Work in accordance with the requirements of the Contract. OWNER RESPONSIBILITIES - Unless provided otherwise in the Contract, the Owner will assume responsibility for the following items as of the Date of Substantial Completion: 1. All property and casualty insurance for the Project. 2. Security for the Project. 3. All permanent utilities (electricity, gas, water, sewer, telephone, etc.) 4. Operation and maintenance of the Project. VERITAS Software /s/ [Signature Illegible] 10/ - -------------------------- -------------------------- -------------------- Owner By Date Ryan Companies US, Inc. /s/ [Signature Illegible] 10/16/98 - -------------------------- -------------------------- -------------------- Architect By Date Ryan Companies US, Inc. /s/ [Signature Illegible] 10-19-98 - -------------------------- -------------------------- -------------------- Design/Builder By Date 4 PROJECT COST SUMMARY - -------------------------------------------------------------------------------- Base Shell $3,443,135 Base TI's $2,048,013 Land $ 747,533 Soft Cost $$ $ 951,797 ---------- TOTAL $7,190,478
Additional Tenant Improvement changes per September 25th Summary attached. BASE CHANGES: $524,072
ADDED CHANGES PER 9-29-98 LETTER: Canyon Lights $55,419 Wire Molds & Cabletray $36,890 Add Closet $ 3,000 ------- $95,309
Additional Tenant Improvements Total $619,381
FUNDING SOURCE: Parson's Electric direct bill for wire mold & cabletray $ 36,890 Holey allowance from Tenant Improvements $ 23,000 Second half moving allowance $ 60,910 Ryan added tenant improvement allowance $124,840 Add Ryan equity $100,000 Veritas cash payment - October 15, 1998 $273,741 -------- TOTAL $619,381
5 RENT
- ------------------------------------------------------------------------- RENT Base Building Shell $3,443,135 Land $ 747,533 Soft Costs $ 951,797 ---------- $5,142,465 @ 10.11% = $519,903 TI's Base Building Shell $2,048,013 1st Extra $ 124,840 2nd Extra $ 100,000 ---------- $2,272,853 @ 15.727% = $ 57,452 PLUS RESERVE $ 15,113.75 TOTAL ANNUAL RENT $892,468 PER MONTH $ 74,372 1.19/SQ FT MO. 14.28/SQ FT YR.
EX-10.17 3 OFFICE BUILDING SUBLEASE DATED 12/31/98 1 EXHIBIT 10.17 SUBLEASE AGREEMENT EFFECTIVE DATE: December 31, 1998 ARTICLE 1: FUNDAMENTAL SUBLEASE PROVISIONS. Article 1.1 PARTIES: Sublessor: SILICON GRAPHICS, INC., a Delaware corporation Sublessee: VERITAS SOFTWARE CORPORATION, a Delaware corporation MASTER LEASE: Sublessor, as tenant, is leasing from Master Lessor (as described below), as landlord, approximately 92,400 square feet of space located at 900 Alta Avenue, Mountain View, CA 94043 (the "Premises") upon the terms and conditions of that certain Lease Agreement dated March 16, 1995, as amended by Amendment No. 1 to Lease dated December 8, 1995 (collectively, the "Master Lease"). A copy of the Master Lease is attached hereto as Exhibit A. Article 1.2 MASTER LESSOR. John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SEPARATE PROPERTY 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. Article 1.3 SUBLEASE PREMISES: The Sublease Premises consists of the entirety of the Premises and contains approximately 92,400 square feet (the "Sublease Premises"). Article 1.4 SUBLEASE TERM: The Sublease Term shall commence on the Commencement Date and end on the Termination Date, unless terminated earlier pursuant to the terms of this Sublease. Article 1.5 COMMENCEMENT DATE: March 1, 1999 Article 1.6 TERMINATION DATE: August 15, 2005, subject to earlier termination on August 31, 2002 pursuant Article 19.9.1 below. Article 1.7 RENTAL COMMENCEMENT DATE: March 1, 1999 Article 1.8 MINIMUM MONTHLY RENT: 3/1/99 - 8/31/02 $231,000.00 ($2.50/sq.ft./month NNN) 9/1/02 - 8/31/05 100% of fair market rental as determined pursuant to Article 19.9.2 below. 1 2 Article 1.9 PREPAID RENT: $231,000.00 Article 1.10 SECURITY DEPOSIT: $231,000.00 Article 1.11 PERMITTED USE: General office and research and development and such other uses permitted under the Master Lease. Article 1.12 ADDRESSES FOR NOTICES: Master Lessor: Sublessor: SILICON GRAPHICS, INC. 2011 N. Shoreline Blvd. Mountain View, CA 94043-1389 Attn: Manager, Corporate Real Estate M/S 720 With copy to: SILICON GRAPHICS, INC. 2011 N. Shoreline Blvd. Mountain View, CA 94043-1389 Attn: Legal Services M/S 710 Sublessee: Veritas Software Corporation 1600 Plymouth Street Mountain View, CA 94043 Attn: General Counsel Article 1.13 SUBLESSOR'S BROKER: Cornish and Carey Commercial Article 1.14 SUBLESSEE'S BROKER: E&Y Kenneth Leventhal Company Article 1.15 EXHIBITS AND ADDENDA: The following exhibits and any addenda are annexed to this Sublease: Exhibit A - Master Lease Each reference in this Sublease Agreement ("Sublease") to any provision in Article 1 shall be construed to incorporate all of the terms of each such provision. In the event of any conflict between this Article 1 and the balance of the Sublease, the balance of the Sublease shall control. 2 3 ARTICLE 2: SUBLEASE PREMISES. Article 2.1 SUBLEASE. Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the Sublease Term, at the Rent and upon the terms and conditions hereinafter set forth, the Sublease Premises. Sublessee acknowledges that the area of the Sublease Premises as specified in Article 1 is an estimate and that Sublessor does not warrant the exact area of the Sublease Premises. By taking possession of the Sublease Premises, Sublessee accepts the area of the Sublease Premises as that specified in Article 1. Article 2.2 CONDITION OF THE SUBLEASE PREMISES. Sublessee shall accept possession of the Sublease Premises on the Commencement Date in its "as-is, where-is" condition. Sublessor shall have no obligation to Sublessee to construct any tenant improvements or provide Sublessee with any tenant improvement allowance under this Sublease. Sublessee acknowledges that except as expressly stated in this Sublease, (i) Sublessor makes no warranties or representations regarding the physical condition of the Sublease Premises; (ii) Sublessee has had an opportunity to inspect the Sublease Premises, including the roof and structural components of the building; the electrical, plumbing, HVAC, and other building systems serving the Sublease Premises; and the environmental condition of the Sublease Premises and related common areas; and to hire experts to conduct such inspections on its behalf; (iii) Sublessee is leasing the Sublease Premises based on its own inspection of the Sublease Premises and those of its agents, and is not relying on any statements, representations or warranties of Sublessor or its employees, brokers, agents or other representatives regarding the physical condition of the Sublease Premises; and (iv) the Sublease Premises will not include Sublessor's furniture, movable partitions (including power distribution systems servicing movable partitions) and card-key access systems. Sublessee's taking of possession of the Sublease Premises shall constitute conclusive evidence that the Sublease Premises are in good, clean and tenantable condition, subject to Section 19.9.3 below. ARTICLE 3: TERMS OF THE MASTER LEASE. Article 3.1 SUBLEASE SUBORDINATE. This Sublease is subordinate and subject to all of the terms and conditions of the Master Lease. If the Master Lease terminates for any reason whatsoever, this Sublease shall terminate concurrently, and the parties hereto shall be relieved of any liability thereafter accruing under this Sublease. Article 3.2 ASSUMPTION OF OBLIGATIONS. To the extent applicable to the Sublease Premises and Sublessee's use of the Sublease Premises and common areas, Sublessee hereby expressly agrees to comply with, and assumes and agrees to perform and discharge, as and when required by the Master Lease, all duties and obligations to be paid, performed or discharged by Sublessor under the terms, covenants and conditions of the Master Lease from and after the Commencement Date, except as specifically set forth in this Sublease. Sublessee shall not commit or suffer at any time any act or omission that would violate any provision of the Master Lease. So long as Sublessee complies with the terms and conditions, and performs all of its obligations under this Sublease, Sublessor shall not commit any act or omission during the Sublease Term which would lead to the termination of the Master Lease by Master Lessor. Notwithstanding the foregoing, if Sublessee fails to comply with any of its obligations under this Sublease, and does not cure such failure within the applicable cure period following proper notification from Sublessor, then Sublessor shall have no obligation to Sublessee to maintain the Master Lease for Sublessee's benefit. 3 4 Article 3.3 MASTER LESSOR'S OBLIGATIONS. Sublessor shall not be responsible to Sublessee for furnishing any service, maintenance or repairs to the Sublease Premises which are the obligation of the Master Lessor under the Master Lease, it being understood that Sublessee shall look solely to Master Lessor for performance of any such service, maintenance or repairs. However, if Master Lessor shall fail to perform its obligations under the Master Lease, Sublessor, upon receipt of written notice from Sublessee, shall use commercially reasonable efforts to attempt to enforce the obligations of Master Lessor under the Master Lease; provided, however, that Sublessor shall not be required to incur any costs or expenses in connection therewith unless Sublessee agrees to reimburse Sublessor for any such costs and expenses as Additional Rent hereunder. Article 3.4 SUBLESSOR'S RIGHTS AND REMEDIES. In addition to all the rights and remedies provided to Sublessor at law or in equity, (a) if Sublessee fails, within any applicable grace periods provided herein, to perform any act on its part to be performed pursuant to the requirements of the Master Lease or as otherwise required by this Sublease, then Sublessor may, but shall not be obligated to, enter he Sublease Premises to perform such act, and all costs and expenses incurred by Sublessor in doing so shall be deemed Additional Rent payable by Sublessee to Sublessor upon demand; and (b) in the event of any breach by Sublessee of any of its obligations under this Sublease, Sublessor shall have all of the rights with respect to such default which are available to Master Lessor under the Master Lease. Unless otherwise provided in this Sublease, Sublessee shall be in material default of its obligations under this Sublease if (i) Sublessee fails to pay Rent as and when due and such failure is not cured within the time period set forth in the Master Lease, or (ii) Sublessee fails to perform any term, covenant or condition of this Sublease as and when due (except those requiring payment of Rent) and such failure is not cured within the time period set forth in the Master Lease less ten (10) days. ARTICLE 4: SUBLEASE TERM. Article 4.1 COMMENCEMENT AND TERMINATION DATES. The term of this Sublease ("Sublease Term") shall be for the period of time commencing on the commencement date described in Article 1 (the "Commencement Date") and ending on the termination date described in Article 1 or on such earlier date of termination as provided herein (the "Termination Date"). Sublessee shall have no option to extend or renew the Sublease Term. Article 4.2 DELAY IN COMMENCEMENT. If for any reason possession of the Sublease Premises has not been delivered to Sublessee by the scheduled Commencement Date or any other date, Sublessor shall not be liable to Sublessee or any other person or entity for any loss or damage resulting therefrom. In the event of such delay, the Commencement Date shall be delayed until possession of the Sublease Premises is delivered to Sublessee, but the Termination Date shall not be extended. If Sublessor is unable to deliver possession of the Sublease Premises to Sublessee within thirty (30) days after the Commencement Date, then Sublessee may terminate this Sublease by giving written notice to Sublessor at any time after that date, and the parties shall have no further liability thereafter accruing under this Sublease. In the event that this Sublease is terminated pursuant to the terms of this Article 4.2, Sublessor shall return to Sublessee any Prepaid Rent and/or Security Deposit delivered to Sublessor pursuant to the terms hereof. Article 4.3 EARLY OCCUPANCY. If Sublessor permits Sublessee to occupy the Sublease Premises prior to the Rental Commencement Date, such occupancy shall be subject to all of the provisions of this Sublease, except for the payment of Minimum Monthly Rent. Early occupancy of the Sublease Premises shall not advance the Termination Date. Sublessee shall, prior to entering the Sublease Premises, 4 5 deliver to Sublessor certificates of insurance evidencing the policies required of Sublessee under this Sublease. ARTICLE 5: RENT AND ADDITIONAL EXPENSES. Article 5.1 PAYMENT OF RENT. All monies payable by Sublease under this Sublease shall constitute "Rent." All Rent shall be paid in lawful money of the United States, without any deduction or offset, to Sublessor at the address of Sublessor specified in Article 1 or such other place as Sublessor may designate in writing. No payment by Sublessee of a lesser amount than the Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment of Rent be deemed an accord and satisfaction, and Sublessor may accept such check or payment without prejudice to its right to recover the balance of such Rent or to pursue any other remedy. Rent for any partial calendar months at the beginning or end of the Sublease Term shall be prorated based on a thirty (30) day month. Article 5.2 MINIMUM MONTHLY RENT. Sublessee shall pay to Sublessor the sums set forth in Article 1 hereof as Minimum Monthly Rent, in advance, on the first day of each calendar month throughout the Sublease Term, commencing on the Rental Commencement Date. Article 5.3 ADDITIONAL RENT. In addition to Minimum Monthly Rent, Sublessee shall pay to Sublessor from time to time upon demand, the amount of any real property taxes, maintenance, insurance, utilities and other charges attributable to the Sublease Premises and common and outside areas payable by Sublessor under the Master Lease. Sublessee agrees that any and all charges, fees, impositions and payments of any kind whatsoever due or owing by Sublessor under the Master Lease and accruing from and after the Commencement Date (and, with regard to Additional Rent, from and after the Early Occupancy Date) shall be passed through to Sublessee as Additional Rent hereunder; provided, however, that Sublessee shall have no obligation to pay any late fees attributable to Sublessor's failure to timely pay rent under the Master Lease, provided that Sublessee has paid all Rent as and when due under this Sublease. Article 5.4 PREPAID RENT. Concurrently with Sublessee's execution of this Sublease, Sublessee shall pay to Sublessor the sum specified in Article 1 as prepaid Rent, which shall be applied to the installments of Minimum Monthly Rent first coming due under this Sublease. Article 5.5 LATE CHARGE. If Sublessee fails to pay any Rent due hereunder within five (5) days after Sublessor notifies Sublessee that such amount is past due, then Sublessee shall pay Sublessor a late charge equal to five percent (5%) of such delinquent amount as liquidated damages for Sublessee's failure to make timely payment. Any notice given by Sublessor pursuant to Sections 1161 and 1162 of the California Code of Civil Procedure shall be deemed to be concurrent with, and not in addition to, the notice required herein. This provision for a late charge shall not be deemed to grant Sublessee a grace period or extension of time for performance. If any Rent remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Sublessee shall pay to Sublessor interest on the delinquent amount from the end of such thirty (30) day period until paid, at the rate of ten percent (10%) per annum or the maximum rate permitted by law. ARTICLE 6: SECURITY DEPOSIT. Upon execution of this Sublease, Sublessee shall deposit with Sublessor in cash the sum specified in Article 1 hereof as a "Security Deposit." If the Minimum Monthly Rent shall increase during the Sublease Term, then Sublessee shall, on or before the date of such increase, 5 6 pay to Sublessor an amount sufficient to increase the Security Deposit to the amount of the increased Minimum Monthly Rent. The Security Deposit shall be held by Sublessor as security for Sublessee's faithful performance under this Sublease. If Sublessee fails to pay any Rent as and when due under this Sublease or otherwise fails to perform its obligations hereunder, then Sublessor may, at its option and without prejudice to any other remedy which Sublessor may have, apply, use or retain all or any portion of the Security Deposit toward the payment of delinquent Rent or for any loss or damage sustained by Sublessor due to such failure by Sublessee. Sublessee shall upon demand restore the Security Deposit to the original sum deposited. The Security Deposit shall not bear interest nor shall Sublessor be required to keep such sum separate from its general funds. To the extent not otherwise applied by Sublessor as provided herein, the Security Deposit shall be returned to Sublessee within thirty (30) days after the Termination Date. In the event of bankruptcy or other debtor-creditor proceedings filed by or against Sublessee, such Security Deposit shall be deemed to be applied first to the payment of Rent due Sublessor for the period immediately prior to the filing of such proceedings. ARTICLE 7: USE. Article 7.1 USE OF THE SUBLEASE PREMISES. Sublessee shall use the Sublease Premises solely for the purposes specified in Article 1 and otherwise in strict conformance with the requirements of the Master Lease, and for no other purpose whatsoever. Article 7.2 SUITABILITY. Sublessee acknowledges that neither Sublessor nor any agent of Sublessor has made any representation or warranty with respect to the Sublease Premises, the permitted uses that can be made of the Sublease Premises under existing laws, or the suitability of the Sublease Premises for the conduct of Sublessee's business, nor has Sublessor agreed to undertake any modification, alteration or improvement to the Sublease Premises. Article 7.3 ALTERATIONS. Sublessee shall make no alterations, improvements or additions to, in, on or about the Sublease Premises without the prior written consent of both Sublessor and Master Lessor (which consent shall not be unreasonably withheld by Sublessor) and otherwise in strict conformance with the requirements of the Master Lease. Article 7.4 HAZARDOUS MATERIALS. Article 7.4.1 DEFINITIONS. As used herein, the term "Hazardous Material" shall mean any hazardous or toxic substance, material or waste which is or becomes regulated by any state, federal, or local government authority, including all of those materials and substances designated as hazardous or toxic by the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Department of Health Services or the Food and Drug Agency. Without limiting the generality of the foregoing, the term "Hazardous Material" shall include (i) any substance, product, waste or other material of any nature whatsoever which may give rise to liability under any statutory or common law theory based on negligence, trespass, intentional tort, nuisance or strict liability or under any reported decisions of a state or federal court; (ii) gasoline, diesel fuel, or other petroleum hydrocarbons; (iii) polychlorinated biphenyls; (iv) asbestos containing materials; (v) urea formaldehyde foam insulation; and (vi) radon gas. As used herein, the term "Hazardous Material Law" shall mean any statute, law, ordinance, or regulation of any governmental body or agency which regulates the use, storage, generation, discharge, treatment, transportation, release, or disposal of any Hazardous Material. 6 7 Article 7.4.2 USE RESTRICTION. Sublessee shall not cause or permit any Hazardous Material to be used, stored, generated, discharged, treated, transported to or from, released or disposed of in, on, over, through, or about the Sublease Premises, or any other land or improvements in the vicinity of the Sublease Premises, without the prior written consent of Master Lessor and Sublessor, which consent may be withheld in the sole and absolute discretion of Master Lessor and/or Sublessor, except for ordinary office and cleaning supplies. Without limiting the generality of the foregoing, (a) any use, storage, generation, discharge, treatment, transportation, release, or disposal of Hazardous Material by Sublessee shall strictly comply with all applicable Hazardous Material Laws, and (b) if the presence of Hazardous Material on the Sublease Premises caused or permitted by Sublessee or its agents, employees, invitees or contractors results in contamination of the Sublease Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Sublease Premises, Sublessee, at its expense, shall promptly take all actions necessary to return the Sublease Premises to the condition prior to the existence of such Hazardous Material. Article 7.4.3 INDEMNITY. Article 7.4.3.1 Sublessee shall defend, protect, hold harmless and indemnify Sublessor and its agents, employees, contractors, stockholders, officers, directors, successors and assigns with respect to all judgments, claims, damages, actions, losses, penalties, fines, liabilities and other expenses (including, but not limited to, reasonable attorneys', consultants', and expert witnesses' fees) which result from or arise out of the storage, use, generation, discharge, treatment, transportation, release or disposal of Hazardous Material by Sublessee or its agents, employees, contractors, or invitees in, on, over, through, from or about the Sublease Premises. The foregoing obligations shall survive the expiration or earlier termination of this Sublease. Article 7.4.3.2 Sublessor shall defend, protect, hold harmless and indemnify Sublessee and its agents, employees, contractors, stockholders, officers, directors, successors and assigns with respect to all judgments, claims, damages, actions, losses, penalties, fines, liabilities and other expenses (including, but not limited to, reasonable attorneys', consultants', and expert witnesses' fees) which result from or arise out of the storage, use, generation, discharge, treatment, transportation, release or disposal of Hazardous Material by Sublessor or its agents, employees, contractors, or invitees in, on, over, through, from or about the Sublease Premises prior to the Early Occupancy Date. The foregoing obligations shall survive the expiration or earlier termination of this Sublease. ARTICLE 8: SURRENDER. Upon the expiration or earlier termination of this Sublease, Sublessee shall surrender the Sublease Premises in good condition and repair, excepting only ordinary wear and tear and damage by fire, earthquake, act of God or the elements. Sublessee agrees to repair any damage to the Sublease Premises, or the building of which the Sublease Premises are a part, caused by or related to the removal of Sublessee's personal property, fixtures, furniture, equipment or signage, or any improvements, alterations or additions installed by Sublessee which Master Lessor requires Sublessee to remove upon expiration or earlier termination of this Sublease or which Sublessor requires Sublessee to remove upon early termination of the Sublease, including, without limitation, repairing the floor, patching and/or painting the walls and restoring all or any part or parts of the Sublease Premises to the condition and configuration existing as of the Early Occupancy Date, all to the reasonable satisfaction of Sublessor and/or Master Lessor and at Sublessee's sole cost and expense. If Sublessee elects to terminate the Sublease in accordance with Section 19.9.1 below, Sublessor shall notify Sublessee, at least thirty (30) days prior to the Early Termination Date, of any improvements, alterations or additions installed by Sublessee which Sublessor requires Sublessee to remove and the portions of the Sublease Premises to be restored to the condition and 7 8 configuration existing as of the Early Occupancy Date. Sublessee shall indemnify Sublessor against any loss or liability resulting from delay by Sublessee in so surrendering the Sublease Premises, including, without limitation, any claims made by the Master Lessor and/or any succeeding tenant or subtenant founded on such delay. Such indemnity obligation shall survive the expiration or earlier termination of this Sublease. ARTICLE 9: CONSENT. Whenever the consent or approval of Master Lessor is required pursuant to the terms of the Master Lease, for the purposes of this Sublease, Sublessee, in each instance, shall be required to obtain the written consent or approval of both Master Lessor and Sublessor. If Master Lessor refuses to grant its consent or approval, Sublessor may withhold its consent or approval and Sublessee agrees that such action by Sublessor shall be deemed reasonable. ARTICLE 10: INSURANCE. All insurance policies required to be carried by Sublessor under the Master Lease shall be maintained by Sublessee pursuant to the terms of the Master Lease, and shall name Sublessor and Master Lessor (and such other lenders, persons, firms, or corporations as are designated by Sublessor or Master Lessor) as additional insureds by endorsement. All policies shall be written as primary policies with respect to the interests of Master Lessor and Sublessor and such other additional insureds and shall provide that any insurance carried by Master Lessor or Sublessor or such other additional insureds is excess and not contributing insurance with respect to the insurance required hereunder. All policies shall also contain "cross liability" or "severability of interest" provisions and shall insure the performance of the indemnity set forth in Article 14 of this Sublease. Sublessee shall provide Master Lessor and Sublessor with copies or certificates of all policies, including in each instance an endorsement providing that such insurance shall not be canceled or amended except after thirty (30) days prior written notice to Master Lessor and Sublessor. All deductibles, if any, under and such insurance policies shall be subject to the prior reasonable approval of Sublessor, and all certificates delivered to Master Lessor and Sublessor shall specify the limits of the policy and all deductibles thereunder. ARTICLE 11: NOTICES. Article 11.1 NOTICE REQUIREMENTS. All notices, demands, consents, and approvals which may or are required to be given by either party to the other under this Sublease shall be in writing and may be given or made by overnight courier such as Federal Express or by United States registered or certified mail addressed as shown in Article 1. Any notice or demand so given shall be deemed to be delivered or made on the date personal service is effected or, on the next business day if sent by overnight courier, or the same day as given if sent by facsimile transmission and received by 5:00 p.m. Pacific time or on the second business day after the same is deposited in the United States Mail as registered or certified and addressed as above provided with postage thereon fully prepaid. Either party hereto may change its address at any time by giving written notice of such change to the other party in the manner provided herein at least ten (10) business days prior to the date such change is desired to be effective. Article 11.2 NOTICES FROM MASTER LESSOR. Each party shall provide to the other party a copy of any notice or demand received from or delivered to Master Lessor within one business day of receiving or delivering such notice or demand. ARTICLE 12: DAMAGE, DESTRUCTION, CONDEMNATION. To the extent that the Master Lease gives Sublessor any rights following the occurrence of any damage, destruction or condemnation to terminate the Master Lease, to repair or restore the Sublease Premises, to contribute toward such repair or Rev. 12/24/98 8 9 restoration costs to avoid termination, to obtain and utilize insurance or condemnation proceeds to repair or restore the Sublease Premises, or any similar rights, such rights shall be reserved to and exercisable solely by Sublessor, in its sole and absolute discretion, and not by Sublessee. The exercise of any such right by Sublessor shall under no circumstances constitute a default or breach under this Sublease or subject Sublessor to any liability therefor. ARTICLE 13: INSPECTION OF THE SUBLEASE PREMISES. Sublessee shall permit Sublessor and its agents to enter the Sublease Premises at any reasonable time for the purpose of inspecting the same or posting a notice of non-responsibility for alterations, additions or repairs, provided that Sublessor provides at least twenty-four (24) hours prior notice (except in the case of emergency). ARTICLE 14: INDEMNITY; EXEMPTION OF SUBLESSOR FROM LIABILITY. Article 14.1 SUBLESSEE INDEMNITY. Sublessee shall indemnify, defend (with counsel reasonably satisfactory to Sublessor), protect and hold Sublessor harmless from and against any and all claims, demands, actions, suits, proceedings, liabilities, obligations, losses, damages, judgments, costs, expenses (including, but not limited to, reasonable attorneys', consultants' and expert witness fees) arising out of or related (i) Sublessee's use of the Sublease Premises, the conduct of Sublessee's business therein, or any activity, work or thing done, permitted or suffered by Sublessee in or about the Sublease Premises, (ii) a breach by Sublessee in the performance in a timely manner of any obligation of Sublessee to be performed under this Sublease, (iii) a failure by Sublessee to comply with any term, covenant, condition or restriction under the Master Lease, or (iv) the negligence or intentional acts of Sublessee or Sublessee's agents, contractors, employees, subtenants, licensees, or invitees. The foregoing obligations shall survive the expiration or earlier termination of this Sublease. Article 14.2 SUBLESSOR INDEMNITY. Sublessor shall indemnify, defend (with counsel reasonably satisfactory to Sublessee), protect and hold Sublessor harmless from and against any and all claims, demands, actions, suits, proceedings, liabilities, obligations, losses, damages, judgments, costs, expenses (including, but not limited to, reasonable attorneys', consultants' and expert witness fees) arising out of or related to a failure by Sublessor to comply with any term, covenant, condition or restriction under the Master Lease which is not otherwise required to be performed in whole or in part by Sublessee under this Sublease. The foregoing obligations shall survive the expiration or earlier termination of this Sublease. Article 14.3 SUBLESSEE WAIVER. Sublessee, as a material part of the consideration to Sublessor, hereby waives all claims against Sublessor for damage to property or injury to persons in, upon or about the Sublease Premises arising from any cause, except in connection with damage or injury caused solely by the gross negligence or willful misconduct of Sublessor. This waiver shall survive the expiration or earlier termination of this Sublease. Article 14.4 MUTUAL WAIVER OF SUBROGATION. The parties hereby waive any rights of recovery each may have against the other in connection with any loss or damage occasioned to either party's respective property, the Sublease Premises, or its contents, arising from any risk generally covered by fire and extended coverage insurance, irrespective of the cause of such fire or casualty. In addition, the parties each, on behalf of their respective insurance companies, waive any right of subrogation that such insurance company may have against the other party for any such loss or damage, provided that such waiver does not invalidate any such policy. In the event that such waiver would invalidate such policy, the insured party shall promptly notify the other in writing. 9 10 ARTICLE 15: ASSIGNMENT AND SUBLETTING. Sublessee shall not voluntarily or by operation of law assign this Sublease or enter into license or concession agreement, sublet all or any part of the Sublease Premises, or otherwise transfer, mortgage, pledge, hypothecate or encumber all or any part of Sublessee's interest in this Sublease or in the Sublease Premises or any part thereof, without the prior written consent of Master Lessor (pursuant to the terms of the Master Lease) and Sublessor, which consent shall not be unreasonably withheld or delayed by Sublessor. Sublessee shall have no right to sublease less than the entire area of the Sublease Premises, and Sublessee agrees that it shall be reasonable for Sublessor or Master Lessor to withhold its consent to any sublease of a portion of the Sublease Premises. Any attempt to do so without such consent being first had and obtained shall be wholly void and shall constitute a default by Sublessee under this Sublease. Sublessee hereby irrevocably assigns to Sublessor all rent and other sums or consideration in any form, from any such subletting or assignment, and agrees that Sublessor, as assignee and as attorney-in-fact for Sublessee, or a receiver for Sublessee appointed upon Sublessor's application, may collect such rent and other sums and apply the same against amounts owing to Sublessor in the event of Sublessee's default; provided, however, that until the occurrence of any default by Sublessee or Sublessee's assignee or subtenant, Sublessee shall have the right to collect such sums, provided that two-thirds (2/3) of all rent and other charges payable by any such assignee or subtenant in excess of the Rent payable under this Sublease ("excess rent") shall belong to Sublessor and be paid to Sublessor within thirty (30) days following Sublessee's receipt thereof; provided, however, that Sublessee shall first be entitled to recover from such excess rent the amount of all reasonable leasing commissions paid to third parties not affiliated with Sublessee in connection with said assignment or subletting. ARTICLE 16: DELIVERY OF DOCUMENTS. Sublessee shall execute and deliver any document or other instrument reasonably required by Master Lessor pursuant to the Master Lease within five (5) days following receipt of a written request from Master Lessor or Sublessor. Failure to comply with this provision shall constitute a default by Sublessee under this Sublease. ARTICLE 17: HOLDING OVER. Any holding over by Sublessee after the Termination Date, without the prior written consent of Master Lessor and Sublessor, shall not constitute a renewal or extension of this Sublease or give Sublessee any rights in or to the Sublease Premises. Any holding over by Sublessee after the Termination Date, with the prior written consent of Master Lessor and Sublessor, shall be construed as a month-to-month tenancy on the same terms and conditions as specified in this Sublease, except that the Minimum Monthly Rent during such tenancy an amount equal to One Hundred Twenty-five percent (125%) of the most recent Minimum Monthly Rent. Any holding over by Sublessee after the Termination Date, without the prior written consent of both Master Lessor and Sublessor, shall be construed as a tenancy at sufferance (terminable upon notice by Sublessor) on the same terms and conditions as specified in this Sublease, except that Sublessee shall pay to Sublessor as Minimum Monthly Rent during such tenancy an amount equal to Two Hundred Percent (200%) of the most recent Minimum Monthly Rent. ARTICLE 18: OPTIONS. Any right of Sublessor to extend or renew the term of the Master Lease or to expand the Premises (if any) shall be reserved to and exercisable solely by Sublessor, in its sole discretion, and not by Sublessee. ARTICLE 19: GENERAL PROVISIONS. Article 19.1 SEVERABILITY. If any term or provision of this Sublease shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this 10 11 Sublease shall not be affected thereby, and each term and provision of this Sublease shall be valid and enforceable to the fullest extent permitted by law. Article 19.2 ATTORNEYS' FEES; COSTS OF SUIT. If Sublessee or Sublessor shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Sublease, including any suit by Sublessor for the recovery of Rent or possession of the Sublease Premises, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs of suit. Article 19.3 WAIVER. No covenant, term or condition or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed, and any waiver of the breach of any covenant, term or condition shall not be deemed to be a waiver of any other covenant, term or condition. Acceptance by Sublessor of any performance by Sublessee after the time the same shall have become due shall not constitute a waiver by Sublessor of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Sublessor in writing. Article 19.4 BROKERAGE COMMISSIONS. The parties represent and warrant to each other that they have dealt with no brokers, finders, agents or other person in connection with the transaction contemplated hereby to whom a brokerage or other commission or fee may be payable, except for the brokers named in Article 1. Each party shall indemnify, defend and hold the other harmless from any claims arising from any breach by the indemnifying party of the representation and warranty in this Article 19.4. Article 19.5 BINDING EFFECT. Preparation of this Sublease by Sublessor or Sublessor's agent and submission of the same to Sublessee shall not be deemed an offer to lease. This Sublease shall become binding upon Sublessor and Sublessee only when fully executed by Sublessor and Sublessee and approved in writing by Master Lessor. Article 19.6 ENTIRE AGREEMENT. This instrument, along with any exhibits and addenda hereto, constitutes the entire agreement between Sublessor and Sublessee relative to the Sublease Premises. This Sublease may be altered, amended or revoked only by an instrument in writing signed by both Sublessor and Sublessee. There are no oral agreements or representations between the parties affecting this Sublease, and this Sublease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements, representations and understandings, if any, between the parties hereto. Article 19.7 EXECUTION. This Sublease may be executed in one or more counterparts, each of which shall be considered an original counterpart, and all of which together shall constitute one and the same instrument. Each person executing this Sublease represents that the execution of this Sublease has been duly authorized by the party on whose behalf the person is executing this Sublease. Article 19.8 MASTER LESSOR CONSENT. Sublessor's obligations under this Sublease are conditioned upon receipt by Sublessor of Master Lessor's written consent to this Sublease (in form and substance satisfactory to Sublessor) within fifteen (15) days following the Effective Date. Article 19.9 ADDITIONAL PROVISIONS. Article 19.9.1 Early Termination Right. At any time before November 30, 2001 ("Exercise Period"), Sublessee shall have a one time right to terminate the Sublease Term effective as of August 31, 2002 ("Early Termination Date"), provided that Sublessee is not in default under the Sublease on the date of 11 12 exercise or the Early Termination Date. The foregoing right may be exercised by Sublessee only by delivering written notice of termination to Sublessor during the Exercise Period, in which event the Sublease Term shall be deemed to expire on the Early Termination Date but the Sublease shall otherwise remain unmodified and continue in full force and effect. Nothing herein shall be deemed to release Sublessee from any liability or obligations of Sublessee under the Sublease which by their terms survive the expiration or earlier termination of the Sublease Term. Article 19.9.2 Fair Market Rental. For purposes of determining the Minimum Monthly Rent for the Sublease Premises for the Period commencing September 1, 2002 and ending August 31, 2005 ("FMR Period"), the parties shall meet, no earlier than January 1, 2002 nor later than March 1, 2002, and endeavor to agree upon the fair market rental of the Sublease Premises for the FMR Period, including, without limitation, any annual rent escalations applicable during the FMR Period. In determining the fair market rental for the Sublease Premises, the parties shall consider comparable buildings of a similar quality and size with similar improvements located in the counties of Santa Clara and San Mateo, California. If the parties cannot agree upon the fair market rental for the Sublease Premises by March 31, 2002, the parties shall submit the matter to binding appraisal in accordance with the following procedures: On or before April 15, 2002, the parties shall either (a) jointly appoint an appraiser for this purpose or (b) failing joint action, separately designate a disinterested appraiser. The parties shall each pay one-half (1/2) of the fees and expenses of the jointly appointed appraiser or, if the parties separately designate disinterested appraisers, the parties shall pay the fees and expenses of the appraiser so appointed by said party. No person shall be appointed or designated an appraiser unless he or she is an M.A.I. appraiser with at least five (5) years experience in appraising major commercial properties located in the counties of Santa Clara and San Mateo, California. If the two (2) appraisers thus appointed cannot reach agreement on the question presented within thirty (30) days after their appointment, then the appraisers thus appointed shall appoint a third (3rd) disinterested appraiser having like qualifications. If, within thirty (30) days after the third (3rd) appraiser has been chosen, a majority of the appraisers cannot reach agreement on the question presented, then the average of the two (2) closest appraisals shall determine the fair market rental and shall be binding and conclusive upon the parties. Each party shall pay one-half (1/2) of the fees and expenses of the third (3rd) appraiser. If the two (2) appraisers appointed by the parties cannot agree on the appointment of the third (3rd) appraiser, either or both of them shall give notice of such failure to the parties, and if the parties fail to agree upon the selection of such third (3rd) appraiser within ten (10) days after the appraisers appointed by the parties give such notice, then either of the parties, upon notice to the other party, may request such appointment to the presiding judge of the Superior Court of Santa Clara County, California. If for any reason the parties have not determined the fair market rental for the Sublease Premises for the FMR Period on or before August 21, 2002, then Sublessee shall pay to Sublessor, as Minimum Monthly Rent for the month of August, 2002 and each month thereafter until the fair market rental has been determined, an amount equal to the Minimum Monthly Rent payable for the month of August, 2002. Upon such determination, the agreed monthly rental shall be retroactively applied from September 1, 2002. Sublessee shall, within ten (10) days thereafter, make up any accumulated deficiency for all months of the extension period plus interest on each deficiency rental payment calculated from the respective dates thereof at a rate equal to the rate then available on a one-year Certificate of Deposit, compounded annually at the bank in which Sublessor maintains Sublessor's commercial checking account. If Sublessee has paid more than the agreed monthly rental, then Sublessor shall credit Sublease with such accumulated excess (plus interest calculated in the same manner as set forth above for deficient payments) by deducting such excess from the Minimum Monthly Rent next to become due. 12 13 Article 19.9.3 Condition of the Premises. The following shall be added at the end of Article 2.2 of the Sublease: Notwithstanding the foregoing, Sublessor shall deliver the Sublease Premises to Sublessee in broom clean condition, with all plumbing, electrical, HVAC and elevator systems (collectively, "Building System") in good working order and repair. Sublessee shall have a period of thirty (30) days after the Early Occupancy Date to give Sublessor written notice of any required repairs to the Building Systems. If Sublessee gives Sublessor written notice during such thirty (30) day period, Sublessor and Sublessee shall meet and confer to agree upon the extent of any repairs necessary to render the Building Systems in good working order and repair. Thereafter, Sublessor shall ascertain whether the repair of such defect is an obligation of Sublessor or Master Sublessor under the Master Lease. If the repair is the obligation of Sublessor, Sublessor shall, at its expense, promptly make such repair in a commercially reasonable manner; provided, however, that Sublessor shall have no obligation to perform or otherwise remedy any defects or items of disrepair caused by Sublessee or its agents, employees or contractors following the Early Occupancy Date or any code compliance issues related to the Building Systems. If the repair is the obligation of Master Sublessor, the provisions of Article 2.2 of this Sublease shall apply. Failure by Sublessee to give Sublessor written notice of defects in the Building Systems during such thirty (30) day period shall constitute conclusive evidence that the Building Systems are in good working order and repair. In addition, Sublessor shall leave all existing communications wiring within the Sublease Premises, rolled-up at the point of termination and otherwise in its "as-is, where-is" condition. Article 19.9.4 Early Occupancy. Sublessor will permit Sublessee to occupy the Sublease Premises from February 1, 1999 ("Early Occupancy Date") through the Commencement Date for purposes of designing and installing Sublessee's tenant improvements, subject to the terms and conditions of Articles 4.3 and 7.3 above. Article 19.9.5 Security Deposit. Notwithstanding Article 6 to the contrary, Sublessee shall have the right to deposit with Sublessor the Security Deposit in the form of a letter of credit pursuant to the same terms and conditions as are set forth in Section 44 of the Master Lease. Article 19.9.6 Assignment. Notwithstanding Article 15 of this Sublease to the contrary, Sublessee shall have the right to assign or sublet the Sublease Premises without Sublessor's consent pursuant to the same terms and conditions as are set forth in Section 48 of the Master Lease. 13 14 IN WITNESS WHEREOF, the parties hereto have entered into this Sublease as of the Effective Date set forth hereinabove. SUBLESSOR: SUBLESSEE: SILICON GRAPHICS, INC., VERITAS SOFTWARE CORPORATION, a Delaware corporation a Delaware corporation By /s/ [Signature Illegible] By /s/ JAY A. JONES ---------------------------- -------------------------- JAY A. JONES Its VP Facilities Its Vice President and General Counsel 14 15 [LOGO] Silicon Graphics 2011 N. Shoreline Blvd. Computer Systems Mountain View, CA 94043-1389 Telephone (650) 390-5089 FAX (650) 932-0551 January 7, 1999 VIA FACSIMILE Veritas Software Corporation Attn: Jay Jones Re: 900 Alta Avenue, Mountain View CA Dear Jay: Silicon Graphics, Inc. ("SGI"), as sublessor, intends to approve the tenant improvements comprising the hardwall and cubicle offices as shown on certain plans more particularly described as the preliminary schematic layout of 900 Alta for the first floor (dated 1/5/95) and second floor (dated 1/6/99) upon SGI's receipt of the written consent of the Master Lessor to such improvements in accordance with the terms of the Master Lease (which consent shall provide that SGI has no obligation to restore the premises to its existing interior configuration) and acceptable construction plans depicting such improvements as described under the Sublease and Master Lease. Nothing herein will modify the obligations of Veritas under Article 8 of the Sublease. Unless otherwise defined herein, all capitalized terms will have the meanings set forth in the Sublease. SILICON GRAPHICS, INC. By /s/ [Signature Illegible] ---------------------------------- --------- SGI LEGAL Its VP Facilities --------- --------------------------------- 16 [LETTERHEAD] [LOGO] Peery/Arrillaga February 2, 1999 MR. ED MALYSZ SILICON GRAPHICS, INC. 2011 N. Shoreline Blvd. Mountain View, CA 94043 Re: CONSENT TO SUBLEASE TO VERITAS SOFTWARE CORPORATION, A DELAWARE CORPORATION FOR A PERIOD OF SIX YEARS FIVE MONTHS FIFTEEN DAYS, COMMENCING MARCH 1, 1999 AND TERMINATING AUGUST 15, 2005. Gentlemen: This letter is written with regard to your proposed sublease of all of the 92,400 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet Premises") leased by Tenant at 900 Alta Avenue, Mountain View, California, under Lease Agreement dated March 16, 1995 ("Master Lease"), by and between John Arrillaga Survivor's Trust (previously known as the "Arrillaga Family Trust") and Richard T. Peery Separate Property Trust ("Master Landlord"), and Silicon Graphics, Inc., a Delaware corporation ("Tenant"), which Tenant is proposing to sublease to Veritas Software Corporation, a Delaware corporation ("Subtenant") on the terms and conditions set forth in the proposed Sublease dated December 31, 1998, submitted by Tenant to Master Landlord on January 29, 1999 (the "Sublease"). Pursuant to Master Lease Paragraph 16 ("Assignment and Subletting") Master Landlord hereby approves Tenant's subleasing said space to Subtenant, under the Sublease, subject to the following terms and conditions: 1. Master Landlord's Consent shall in no way void or alter any of the terms of the Lease by and between Master Landlord and Tenant, nor shall this Consent alter or diminish in any way Tenant's obligations to Master Landlord. 2. Tenant shall not give Subtenant any rights or privileges in excess of those given Tenant under the terms of the Master Lease. Initial: ---- 17 3. If Subtenant subleases and/or occupies less than one hundred percent of the building, Subtenant shall not have a separate address from the address of the Premises. Therefore, Tenant shall provide Subtenant with internal mail delivery. Tenant and Subtenant shall share (the prorate shares to be determined in a separate agreement between Tenant and Subtenant) the existing signage allocated to Tenant for the Premises. 4. Master Landlord has not reviewed the terms of any agreement between Tenant and Subtenant, and in approving said Sublease, Master Landlord is in no way approving any term, covenant or condition therein contained, and said Sublease is subject and subordinate to all terms, covenants and conditions of the Master Lease. Master Landlord shall not be bound by any agreement other than the terms of the Master Lease between Master Landlord and Tenant. In the event of conflict in the terms, covenants and conditions between the Sublease and Master Lease, the terms, covenants and conditions of the Master Lease shall prevail and take precedence over said Sublease. Master Landlord does not make any warranties or representations as to the condition of the Leased Premises or the terms of the Lease between Master Landlord and Tenant. This Consent to Sublease shall in no event be construed as consent to any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party; and any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party shall require the prior written consent of Master Landlord. Under no circumstances will Master Landlord consent to a sub-sublease or assignment under the Sublease. 5. A. It is agreed by all parties hereto that in the event Master Landlord terminates the Master Lease, pursuant to any right therein contained, said Sublease shall automatically terminate simultaneously with the Master Lease. Notwithstanding anything to the contrary set forth above, Master Landlord, at Master Landlord's sole option and election, may choose to allow Subtenant to remain in possession of the Sublet Premises under said Sublease subject to all terms, covenants and conditions of said Master Lease by giving Subtenant written notice prior to the effective date of termination of said Master Lease, of Master Landlord's election to allow Subtenant to remain in possession of the Sublet Premises in which event Subtenant shall be entitled and obligated to remain in possession of the Sublet Premises under the terms of said Sublease, subject to all terms, covenants and conditions of the Master Lease, including, without limitation to, payment of Basic rent at the greater of: (i) the rate provided for in the Master Lease, or (ii) the rate provided for in the Sublease. Such election by Master Landlord shall not operate as a waiver of any claims Master Landlord may have against Tenant. Following such written notice by Master Landlord Subtenant shall then, as of the effective date of said termination of said Master Lease, be liable to and shall attorn in writing directly to Master Landlord as though said Sublease were executed directly between Master Landlord and Subtenant; provided, however, it is specifically agreed between the parties hereto, that whether Master Landlord elects to allow Subtenant to remain in possession Initial: ------- 18 of the Sublet Premises under the terms of the Sublease, subject to the Master Lease, or allow said Sublease to automatically terminate simultaneously with the Master Lease, Master Landlord shall not, in any event, nor under any circumstances be responsible or liable to Subtenant for (i) the return of any security deposit paid by Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid rental or other monetary consideration paid by Subtenant to Tenant under said Sublease; (ii) any other claim or damage of any kind or nature whatsoever by reason of or in connection with Master Landlord's termination of said Master Lease and/or Sublease; and (iii) any default of Tenant under the Sublease. B. In the event Master Landlord has terminated the Master Lease, and has not elected, in writing prior to the effective date of termination of said Master Lease, to allow Subtenant to remain in the Sublet Premises as set forth above, said Sublease shall terminate co-terminously with the effective termination of the Master Lease automatically, without notice, and Subtenant and/or Tenant, jointly and severally, shall surrender the Sublet Premises to Master Landlord in good condition and repair as of the effective termination of the Master Lease, with Master Landlord having no obligation or liability whatsoever to Subtenant by reason of or in connection with such early termination of the Master Lease. In the event Subtenant and/or Tenant fails to timely surrender the Sublet Premises to Master Landlord in good condition and repair as of the date the Master Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be liable to Master Landlord in such event for all damages, costs, claims, losses, liabilities, fees or expenses sustained by Master Landlord, including, but not limited to, loss of rental income, attorney's fees and court costs resulting from or in connection with Subtenant's failure to timely vacate the Sublet Premises and surrender the Sublet Premises to Master Landlord as of the effective termination date of said Master Lease. C. As a condition to Landlord's consent to the Sublease, by execution of this Consent to Sublease, Subtenant hereby agrees to be bound by the following provision in relation to both Tenant and Master Landlord: If Master Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease Termination Date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Master Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Master Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity to challenge such an early termination of the Sublease, and unconditionally releases and relieves Master Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), Initial: -------- 19 whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor." The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: Initials: --------- --------- Subtenant Tenant 6. In consideration of Master Landlord's consent to the Sublease, Tenant irrevocably assigns to Master Landlord, as security for Tenant's obligations under this Lease, all rent and income payable to Tenant under the Sublease. Therefore, Master Landlord may collect all rent due under the Sublease and apply it towards Tenant's obligations under the Master Lease and Tenant and Subtenant agree to pay same to Master Landlord upon demand without further consent of Tenant and Subtenant required; provided, however, that until the occurrence of a default by Tenant under the Master Lease (after the passage of any applicable cure period), Tenant shall have the right to collect such rent. Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Master Landlord stating that a default exists in the performance of Tenant's obligations under the Master Lease, to pay to Master Landlord the rents due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely on any such statement and request from Master Landlord, and that Subtenant shall pay such rents to Master Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice or claim from Tenant to the contrary. Tenant shall have no right or claim against Subtenant or Master Landlord for any such rents so paid by Subtenant to Master Landlord; provided, however, that any rent so collected by Master Landlord shall be applied against the like obligations of Tenant to Master Landlord. It is further agreed between the parties hereto that neither Tenant's assignment of such rent and income, nor Master Landlord's acceptance of any payment of rental or other sum due by Subtenant to Tenant under said sublease, whether payable directly to Master Landlord or endorsed to Master Landlord by Tenant, shall in any way nor in any event be construed as creating a direct contractual relationship between Master Initial ------------ 20 Landlord and Subtenant, unless the Parties expressly so agree in writing and such acceptance shall be deemed to be an accommodation by Master Landlord to, and for the convenience of, Tenant and Subtenant. Any direct contractual agreement between Master Landlord and Subtenant must be in writing. 7. Pursuant to the provisions of Paragraph 16 entitled "Assignment and Subletting" of the Master Lease, Master Landlord hereby requires Tenant to pay to Master Landlord, as Additional Rent, fifty percent (50%) of all Rents and/or additional consideration received by Tenant from said Sublease in excess of the Rent payable to Master Landlord in said Lease during the Sublease Term (hereinafter referred to as "Excess Rent"); provided, however, that for sharing such Excess Rent, Tenant shall first be entitled to recover from such Excess Rent the amount of all reasonable leasing commissions paid to third parties not affiliated with Tenant in order to obtain the sublease. Tenant and Subtenant acknowledge that any Excess Rent is owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due under said Sublease. Tenant and Subtenant represent and warrant to Master Landlord that: (1) the information to be completed and provided by Tenant and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration to be Paid by Subtenant" accurately represents amounts to be paid by Subtenant under said Sublease; (2) no additional consideration is due Tenant under said Sublease, other than the additional consideration (if any) identified on Exhibit B; and (3) no changes in the terms and/or conditions of said Sublease shall be made without Master Landlord's prior written approval. 8. Paragraph 6 ("Second Option to Extend Lease for Five (5) Years") of Amendment No. 1 dated December 8, 1995 of the Master Lease provides that said Option to Extend Lease may not be assigned by Tenant; therefore, through this document, Master Landlord, Tenant and Subtenant agree that said Option Right is terminated and no longer in effect. 9. This Consent is conditional upon Master Landlord's receipt of Master Landlord's reasonable costs and attorney's fees, to which Master Landlord is entitled under Paragraph 16 of the Master Lease. Tenant shall pay such fees and costs to Landlord, pursuant to the invoice provided to Tenant by Landlord with this Consent, upon execution of this Consent by Tenant and subtenant. 10. This Consent to Sublease shall only be considered effective, and Master Landlord's consent to the Sublease given, when (i) Landlord receives payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any) under the Master Lease. Please execute this letter in the space provided below, obtain the signature of Subtenant, and return all copies to our office no later than February 16, 1999. IN THE EVENT TENANT FAILS TO RETURN THE FULLY EXECUTED DOCUMENTS TO LANDLORD BY FEBRUARY 16, 1999, THIS CONSENT SHALL BE AUTOMATICALLY RESCINDED, IN WHICH EVENT, TENANT SHALL BE REQUIRED TO RESUBMIT ITS REQUEST IN THE EVENT TENANT DESIRES TO GO FORWARD WITH SAID SUBLEASE. A fully executed Initial: -------- 21 copy will be returned to you after execution by the Master Landlord. Very truly yours, PEERY/ARRILLAGA By /s/ JOHN ARRILLAGA -------------------------- John Arrillaga THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to the terms and conditions of this Consent to Sublease. TENANT: SUBTENANT: SILICON GRAPHICS, INC. VERITAS SOFTWARE CORPORATION a Delaware corporation a Delaware corporation By /s/ RAY JOHNSON By /s/ JAY A. JONES ----------------------------- ----------------------------- Print Name RAY JOHNSON Print Name JAY A. JONES -------------------- -------------------- Title VP Facilities VICE PRESIDENT AND ------------------------- Title GENERAL COUNSEL ------------------------- 22 EXHIBIT A [FLOOR PLAN] [ALTA-PLYMOUTH OFFICE COMPLEX] EXHIBIT B TO LEASE AGREEMENT DATED MARCH 16, 1995 BY AND BETWEEN JOHN ARRILLAGA AND RICHARD T. PEERY SEPARATE PROPERTY TRUSTS, AS LANDLORD, AND SILICON GRAPHICS, INC., A DELAWARE CORPORATION, AS TENANT. (Page 1 of 2) 23 EXHIBIT B TO "CONSENT TO SUBLEASE" SUMMARY OF AMOUNTS/CONSIDERATION TO BE PAID BY SUBTENANT
PERIOD* BASIC RENT R.E. TAXES PROP. INS. UTILITIES LANDSCAPE MISCELLANEOUS BY MONTH TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF ======== == ============ == ============= == ================ == =============== == ================ == ================= == - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- SEE SCHEDULE ATTACHED PAID PER THE MASTER LEASE - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS TOTAL CHARGE PER PERIOD TOTAL PSF TOTAL PSF ================= == ====================== - ----------------------------------------------- - ----------------------------------------------- - ----------------------------------------------- - ----------------------------------------------- - ----------------------------------------------- - ----------------------------------------------- - -----------------------------------------------
IF ADDITIONAL SPACE IS NEEDED, PLEASE DUPLICATE AND ATTACH *IF PAYMENTS ARE REQUIRED OTHER THAN MONTHLY, PLEASE INCLUDE THESE PAYMENTS AS WELL. **IF SUBLEASE RENT PAID INCLUDES MISCELLANEOUS EXPENSES, PLEASE IDENTIFY THE $ AMOUNT /PSF OF THE TOTAL RENT PAYMENT ALLOCATED TO BASIC RENT AND EACH ADDITIONAL EXPENSE ITEM. IS ANY ADDITIONAL CONSIDERATION (MONETARY AND/OR SERVICES) DUE UNDER THE SUBLEASE? YES NO X --- --- IF "YES", IDENTIFY TYPE CONSIDERATION AND DOLLAR VALUE ASSIGNED TO SAID CONSIDERATION: Type: Value: $ --------------------- ---------- Type: Value: $ --------------------- ---------- Type: Value: $ --------------------- ---------- Type: Value: $ --------------------- ---------- Type: Value: $ --------------------- ---------- IF ADDITIONAL SPACE IS NEEDED, PLEASE DUPLICATE AND ATTACH TENANT SUBTENANT SILICON GRAPHICS, INC. VERITAS SOFTWARE CORPORATION By: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE] ----------------------- ------------------------- Printed: Printed: ------------------ -------------------- Title: Title: -------------------- --------------------- 24 900 ALTA AVENUE, MOUNTAIN VIEW SCHEDULE OF BONUS RENT 1/13/99
RENT SCHEDULE: Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 - ------------------------------------------------------------------------------------------------------------------------- Veritas Rent to SGI 0 231,000 231,000 231,000 231,000 231,000 231,000 231,000 SGI Rent to Peery/Arrillaga 175,560 175,560 175,560 175,560 175,560 175,560 175,560 180,180 --------------------------------------------------------------------------------------------- Excess Over P/A Base Rent -175,560 55,440 55,440 55,440 55,440 55,440 55,440 50,820 Total Rent REceived from Veritas 9,586,500 total Rent Paid Per SGI Lease 7,787,010 --------- BONUS RENT 1,799,490 Less Commission @ $5.50 per foot 508,200 --------- Bonus Net of Commission 1,291,290 50% to Peery Arrillaga 645,645 50% to SGI 645,645
CASH FLOW: Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 - ------------------------------------------------------------------------------------------------------------------------- Veritas Rent to SGI 0 231,000 231,000 231,000 231,000 231,000 231,000 231,000 SGI Rent to Peery/Arrillaga -175,560 -175,560 -175,560 -175,560 -175,560 -175,560 -175,560 -180,180 --------------------------------------------------------------------------------------------- Excess Over P/A Base Rent -175,560 55,440 55,440 55,440 55,440 55,440 55,440 50,820 Commission -508,200 --------- Cash Flow After Commission -683,760 Recovery to SGI of Negative Cash Flow 55,440 55,440 55,440 55,440 55,440 55,440 50,820 Bonus Rent 0 0 0 0 0 0 0 50% to Peery/Arrillaga 0 0 0 0 0 0 0 50% to SGI 0 0 0 0 0 0 0
NOTE: Veritas has early access to commence improvements, but will not commence rent payments until 3/1/99. NOTE: If early termination right is not exercised, additional bonus rent schedule will be calculated from 9/1/02 through August 31, 2005. 25
Oct-99 Nov-99 Dec-99 Jan-99 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 - ----------------------------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 180,180 180,180 180,180 180,180 180,180 180,180 180,180 180,180 180,180 180,180 180,180 184,800 - ----------------------------------------------------------------------------------------------------------------------------------- 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 46,200
Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 - ----------------------------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -180,180 -184,800 - ----------------------------------------------------------------------------------------------------------------------------------- 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 50,820 46,200 50,820 50,820 50,820 50,820 50,820 46,200 0 0 0 0 0 0 0 0 0 0 0 4,620 50,820 50,820 50,820 50,820 50,820 46,200 0 0 0 0 0 2,310 25,410 25,410 25,410 25,410 25,410 23,100 0 0 0 0 0 2,310 25,410 25,410 25,410 25,410 25,410 23,100
26
Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 - ----------------------------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 184,800 184,800 184,800 184,800 184,800 184,800 184,800 184,800 184,800 184,800 184,800 189,420 - ----------------------------------------------------------------------------------------------------------------------------------- 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 41,580
Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 - ----------------------------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -184,800 -189,420 - ----------------------------------------------------------------------------------------------------------------------------------- 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 41,580 0 0 0 0 0 0 0 0 0 0 0 0 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 46,200 41,580 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 20,790 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 23,100 20,790
27
Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 15-Aug-02 TOTAL - ----------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 115,500 9,586,500 189,420 189,420 189,420 189,420 189,420 189,420 189,420 189,420 189,420 189,420 94,710 7,787,010 - ----------------------------------------------------------------------------------------------------------------- 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 20,790 1,799,490 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 TOTAL - ---------------------------------------------------------------------------------------------------------------- 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 231,000 115,500 9,586,500 -189,420 -189,420 -189,420 -189,420 -189,420 -189,420 -189,420 -189,420 -189,420 -189,420 -94,710 -7,787,010 - ---------------------------------------------------------------------------------------------------------------- 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 20,790 1,799,490 0 0 0 0 0 0 0 0 0 0 0 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 41,580 20,790 1,799,490 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 10,395 645,645 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 20,790 10,395 645,645
EX-21.01 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.01 VERITAS SOFTWARE CORPORATION SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF SUBSIDIARY LEGAL NAME INCORPORATION --------------------- --------------- North America: VERITAS Software Corporation.............................. Delaware VERITAS Software Corporation.............................. Canada Europe: VERITAS Software Corporation (UK) Ltd..................... United Kingdom VERITAS Software Benelux B.V.............................. Netherlands VERITAS Software S.A...................................... France VERITAS Software Vertriebs Gmbh........................... Germany VRTS Software Corporation Sweden AB....................... Sweden VERITAS Software GmbH..................................... Switzerland VERITAS Software India Pvt. Ltd........................... India Other: VERITAS Software Japan K.K................................ Japan VERITAS Software Corporation.............................. Hong Kong OpenVision Australia Pty. Ltd. ........................... Australia
All subsidiaries of the registrant are wholly owned and do business under their legal names. EX-23.01 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-74712, 33-83858, 33-07795 and 333-25927) pertaining to the 1985 Stock Option Plan, 1991 Executive Stock Option Plan, 1993 Equity Incentive Plan, 1993 Directors Stock Option Plan and 1993 Employee Stock Purchase Plan of VERITAS Software Corporation of our report dated January 27, 1999, with respect to the consolidated financial statements and schedule of VERITAS Software Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP San Jose, California March 26, 1999 EX-27.01 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 139,086 72,040 55,269 2,572 0 277,332 45,986 19,468 349,117 78,490 100,000 0 0 199,858 0 349,117 167,703 210,865 29,461 157,197 0 0 5,700 59,789 8,141 51,648 0 0 0 51,648 1.10 1.00 For Purposes of This Exhibit, Primary Means Basic
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