-----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, KkbsWXOKNYyonZUSAhlOtTnMSOZEyLzxjS60uqYwZwXsTQEVrasnGAh6trqc2a/h LhZyXCsfB7UyJ+YO5nGWhQ== 0000891618-99-003519.txt : 19990809 0000891618-99-003519.hdr.sgml : 19990809 ACCESSION NUMBER: 0000891618-99-003519 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERITAS SOFTWARE CORP /DE/ CENTRAL INDEX KEY: 0001084408 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770507675 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-83777 FILM NUMBER: 99678959 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 FORMER COMPANY: FORMER CONFORMED NAME: VERITAS HOLDING CORP DATE OF NAME CHANGE: 19990416 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999 REGISTRATION NO. 333-83777 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ VERITAS SOFTWARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 77-0507675 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
1600 PLYMOUTH STREET MOUNTAIN VIEW, CALIFORNIA 94043 (650) 335-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MARK LESLIE CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD 1600 PLYMOUTH STREET MOUNTAIN VIEW, CALIFORNIA 94043 (650) 335-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO GORDON K. DAVIDSON, ESQ. DANIEL G. KELLY, JR., ESQ. LARRY W. SONSINI, ESQ. HORACE L. NASH, ESQ. DAVIS POLK & WARDWELL JULIA REIGEL, ESQ. DAVID MICHAELS, ESQ. 450 LEXINGTON AVENUE WILSON SONSINI GOODRICH & ROSATI FENWICK & WEST LLP NEW YORK, NEW YORK 10017 650 PAGE MILL ROAD TWO PALO ALTO SQUARE (212) 450-4000 PALO ALTO, CA 94306 PALO ALTO, CALIFORNIA 94306 (650) 493-9300 (650) 494-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SHARES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED SHARE PRICE(3) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- Common stock, $0.001 par value per share(1)............................. 13,800,000(2) $57.50(3) $793,500,000 $220,593(4) - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Each share of common stock includes associated preferred share purchase rights. (2) Includes an over-allotment option of 1,800,000. (3) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the amount of the registration fee. The proposed maximum offering price per share is based on the average of the high and low prices for a share reported on the Nasdaq National Market on July 21, 1999. (4) A fee of $220,593 was previously paid by the Registrant in connection with the filing of this Registration Statement on July 27, 1999. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued August 6, 1999 12,000,000 Shares [VERITAS LOGO] COMMON STOCK ------------------------- THE SELLING STOCKHOLDERS ARE OFFERING 12,000,000 SHARES OF COMMON STOCK OF VERITAS SOFTWARE CORPORATION. WE WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF OUR COMMON STOCK IN THIS OFFERING. ------------------------- CONCURRENT WITH THIS OFFERING OF COMMON STOCK, WE ARE CONDUCTING A SEPARATE OFFERING OF CONVERTIBLE SUBORDINATED NOTES WITH AN AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF $662,000,000. THIS OFFERING OF OUR COMMON STOCK IS NOT CONDITIONED ON THE COMPLETION OF THE OFFERING OF OUR NOTES. ------------------------- OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "VRTS." ON AUGUST 5, 1999, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $55 5/16 PER SHARE. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS. ------------------------- PRICE $ A SHARE -------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND SELLING PUBLIC COMMISSIONS STOCKHOLDERS ----------- ------------- ------------ Per Share............................................ $ $ $ Total................................................ $ $ $
------------------------- The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Selling stockholders have granted the underwriters the right to purchase up to an additional 1,800,000 shares of our common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 1999. ------------------------- MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE SG COWEN , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 8 Forward-Looking Statements.................................. 16 Use of Proceeds............................................. 16 Common Stock Price Range.................................... 17 Dividend Policy............................................. 17 Capitalization.............................................. 18 Selected Financial Data..................................... 19 VERITAS Summary Unaudited Pro Forma Combined Condensed Financial Data............................................ 22 VERITAS Unaudited Comparative Per Share Data................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Old VERITAS Quantitative and Qualitative Disclosures about Market Risk............................................... 63 Business.................................................... 64 Management.................................................. 78 Related Party Transactions.................................. 86 Principal Stockholders...................................... 88 Selling Stockholders........................................ 90 Description of Capital Stock................................ 92 Underwriters................................................ 100 Shares Eligible for Future Sale............................. 102 Legal Matters............................................... 102 Experts..................................................... 102 Where You Can Find More Information......................... 103 Index to Financial Statements............................... F-1
------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in the prospectus. We are offering to sell the common stock and seeking offers to buy the common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Until , 1999, all dealers that buy, sell or trade the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Unless otherwise noted, all information in this prospectus relating to outstanding shares of VERITAS common stock or options to purchase VERITAS common stock is based upon information as of July 15, 1999 and reflects the two-for-one stock split paid as a stock dividend in July 1999. 2 4 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. VERITAS VERITAS designs, develops and markets software products that help large organizations rapidly and reliably access, manage, store and restore important information stored on their networked computer systems. 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 back up data distributed on large networks of systems without interrupting users. In addition, our products provide an automated fail over between computer systems organized in clusters sharing disk resources. Our highly scalable products can be used independently, and certain products can be combined to provide interoperable client/server storage management solutions. Some of our 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. We also provide a comprehensive range of services to assist customers in planning and implementing storage management solutions. We market our 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. Our original equipment manufacturer customers include Compaq, Dell, Hewlett-Packard, Sun Microsystems, Microsoft, Sequent Computer Systems and EMC Corporation. Our end-user customers include AT&T, Bank of America, BMW, Boeing, British Telecommunications, Daimler-Chrysler Corporation, Lucent Technologies, Oracle Corporation and Motorola. VERITAS is the successor to the business previously operated by VERITAS Software Corporation which we refer to as "Old VERITAS," now known as VERITAS Operating Corporation. On May 28, 1999 VERITAS acquired the Network & Storage Management Group business of Seagate Software, Inc., which we refer to as "NSMG." On June 1, 1999, VERITAS acquired TeleBackup Systems, Inc., which we refer to as "TeleBackup." Pursuant to the rules of the SEC, we have included in this prospectus the historical financial statements of Old VERITAS, NSMG and TeleBackup for periods ending on and prior to March 31, 1999. Unless expressly stated or the context otherwise requires, the terms "we," "our," "us," "the Company" and "VERITAS" refer to VERITAS as the successor to the businesses of Old VERITAS, NSMG and TeleBackup. We incorporated in Delaware on October 2, 1998 under the name VERITAS Holding Corporation. Our address is 1600 Plymouth Street, Mountain View, California 94043, and our telephone number is (650) 335-8000. 3 5 RECENT DEVELOPMENTS Our reported revenue for the three months ended June 30, 1999, including one month of operating results for NSMG and TeleBackup, was $114.6 million, compared with Old VERITAS' revenue of $48.1 million for the same period in 1998. This was a 138% increase from revenue reported for the three months ended June 30, 1998, including a 143% increase in license revenue from the comparable quarter in 1998. The revenue growth was driven primarily by increasing market acceptance of VERITAS' products, a larger percentage of total license revenue generated through the direct sales channel and the acquisition of NSMG in the three months ended June 30, 1999. Service revenue grew by 118% and resulted primarily from increased sales of service and support contracts on new license sales and, to a lesser extent, from increased renewals of these contracts by our installed base of licensees. We also experienced an increase in demand for consulting and training services. For the three months ended June 30, 1999, we had a net loss of $162.3 million, or $1.33 per share, compared with Old VERITAS' net income of $8.5 million, or $0.08 per share on a diluted basis, for the three months ended June 30, 1998. Included in the net loss for the three months ended June 30, 1999 were one-time charges of $103.1 million for the write-off of in-process research and development and $11.0 million for merger and restructuring costs. Also included in the results for the three months ended June 30, 1999 was purchase accounting amortization of $76.6 million. The following table sets forth selected financial data of Old VERITAS for the five quarters ended March 31, 1999 and VERITAS for the quarter ended June 30, 1999:
THREE MONTHS ENDED ---------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1998 1999 1999 --------- -------- ------------- ------------ --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) AS REPORTED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total net revenue................. $ 39,082 $ 48,113 $ 56,545 $ 67,125 $ 71,904 $ 114,648 Amortization of developed technology...................... -- -- -- -- -- 5,006 Amortization of goodwill and other intangibles..................... -- -- -- -- -- 71,557 Merger-related costs.............. -- -- -- -- -- 11,000 In-process research and development..................... -- 2,250 -- (1,650) -- 103,100 Income (loss) from operations..... 9,838 9,801 14,774 19,255 19,494 (159,340) Net income (loss)................. 9,055 8,541 12,593 21,459 13,583 (162,329) Net income (loss) per share -- basic(1)........................ $ 0.10 $ 0.09 $ 0.13 $ 0.23 $ 0.14 $ (1.33) Net income (loss) per share -- diluted(1)...................... $ 0.09 $ 0.08 $ 0.12 $ 0.21 $ 0.13 $ (1.33) Number of shares used in computing per share amounts -- basic(1)... 92,868 93,724 94,458 95,034 95,644 122,430 Number of shares used in computing per share amounts -- diluted(1)........... 101,900 102,708 104,652 104,084 106,272 122,430
AS OF ---------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1998 1999 1999 --------- -------- ------------- ------------ --------- ---------- (IN THOUSANDS) AS REPORTED CONSOLIDATED BALANCE SHEET DATA: Working capital................... $197,979 $204,967 $218,938 $198,842 $196,180 $ 161,325 Total assets...................... 258,883 278,382 308,293 349,117 374,876 4,058,408 Long-term obligations............. 100,872 100,839 100,805 100,773 100,733 100,739 Accumulated deficit............... (72,009) (63,468) (50,877) (29,416) (15,833) (178,162) Stockholders' equity.............. 117,482 128,512 145,669 169,854 190,255 3,595,184
- ------------------------- (1) Share and per share data applicable to prior periods have been restated to give retroactive effect to a 2-for-1 stock split in the form of a stock dividend effected in July 1999. 4 6 SUMMARY FINANCIAL DATA The following historical financial information is derived from the audited consolidated financial statements of Old VERITAS for 1996 through 1998, audited financial statements of TeleBackup for 1996 through 1998, audited combined financial statements of the NSMG business for fiscal years 1996 through 1998, and the unaudited financial statements of Old VERITAS, TeleBackup and the NSMG business for the interim periods presented, all included elsewhere in this prospectus. The following unaudited pro forma financial data is derived from the VERITAS unaudited pro forma combined statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 included elsewhere in this prospectus. SUMMARY HISTORICAL FINANCIAL DATA OF OLD VERITAS AND PRO FORMA FINANCIAL DATA OF VERITAS
OLD VERITAS VERITAS OLD VERITAS VERITAS HISTORICAL PRO FORMA HISTORICAL PRO FORMA ------------------- ------------ ----------------------------- ------------ THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31, ENDED ----------------------------- DECEMBER 31, ------------------- MARCH 31, 1996 1997 1998 1998 1998 1999 1999 ------- -------- -------- ------------ -------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total net revenue........................ $72,746 $121,125 $210,865 $ 409,998 $ 39,082 $ 71,904 $ 134,729 Income (loss) from operations............ 11,858 20,076 53,668 (826,950) 9,838 19,494 (190,234) Net income (loss)........................ 12,129 22,749 51,648 (800,397) 9,055 13,583 (194,653) Net income (loss) per share -- basic..... $ 0.14 $ 0.25 $ 0.55 $ (4.82) $ 0.10 $ 0.14 $ (1.16) Net income (loss) per share -- diluted... $ 0.13 $ 0.23 $ 0.50 $ (4.82) $ 0.09 $ 0.13 $ (1.16) Number of shares used in computing per share amounts -- basic............. 86,052 91,244 94,026 166,216 92,868 95,644 167,834 Number of shares used in computing per share amounts -- diluted........... 92,992 98,986 103,342 166,216 101,900 106,272 167,834
AS OF MARCH 31, 1999 ---------------------- ACTUAL PRO FORMA -------- ---------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $196,180 $ 172,651 Total assets................................................ 374,876 4,099,870 Long-term obligations....................................... 100,733 100,913 Accumulated deficit......................................... (15,833) (130,533) Stockholders' equity........................................ 190,255 3,633,508
SUMMARY HISTORICAL FINANCIAL DATA OF THE NSMG BUSINESS
NINE MONTHS YEAR ENDED ENDED ------------------------------- ------------------- JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2, 1996 1997 1998 1998 1999 --------- -------- -------- -------- -------- (IN THOUSANDS) COMBINED STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ 116,742 $141,502 $175,046 $131,539 $170,225 Income (loss) from operations............................... (102,655) (41,208) 9,430 9,248 43,076 Net income (loss)........................................... (94,596) (33,200) 2,856 2,669 25,280
AS OF APRIL 2, 1999 ------------- COMBINED BALANCE SHEET DATA: Total assets................................................ $115,270 Group equity................................................ 63,611
5 7 SUMMARY HISTORICAL FINANCIAL DATA OF TELEBACKUP
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------- ------------------ 1996 1997 1998 1998 1999 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Canadian GAAP Revenue.................................................... C$ 252 C$ 486 C$ 3,423 C$ 708 C$1,237 Net loss................................................... (1,141) (1,870) (1,570) (200) (517) Net loss per share -- basic and fully diluted.............. C$ (0.18) C$ (0.25) C$ (0.17) C$(0.02) C$(0.05) Number of shares used in computing per share amounts -- basic and fully diluted....................... 6,288 7,385 9,347 8,043 11,362
AS OF MARCH 31, 1999 -------------------- (IN THOUSANDS) BALANCE SHEET DATA: Canadian GAAP Working capital............................................. C$ 3,483 Total assets................................................ 7,678 Long-term obligations....................................... 271 Accumulated deficit......................................... (5,151) Shareholders' equity (deficiency)........................... 4,021
For a summary of the principal differences between U.S. and Canadian generally accepted accounting principles, see Note 13 in the consolidated financial statements of TeleBackup included in this prospectus. PRO FORMA FINANCIAL DATA -- EXCLUDING PURCHASE ACCOUNTING ADJUSTMENTS On a pro forma basis, which includes the operating results of NSMG and TeleBackup for the three months ended June 30, 1999, we had revenue of $155.7 million. This represents an increase of 70% from the pro forma revenue of $91.6 million for the three months ended June 30, 1998, and an increase of 16% from the pro forma revenue of $134.7 million for the three months ended March 31, 1999. Excluding nonrecurring charges of $114.1 million and purchase accounting amortization of $76.6 million and related adjustments for income taxes, pro forma net income increased to $29.2 million for the three months ended June 30, 1999. This represents an increase of 102% over the pro forma net income for the three months ended June 30, 1998, and an 8% increase over the pro forma net income of $27.0 million for the three months ended March 31, 1999. After giving effect to the issuance of shares in the NSMG and the TeleBackup combinations to all periods, pro forma net income per share on a diluted basis for the three months ended June 30, 1999 was $0.16. This represents a 100% increase from pro forma net income per share of $0.08 for the same period last year, and a 7% increase from pro forma net income per share of $0.15 for the three months ended March 31, 1999. 6 8 The following pro forma statement of operations data is intended to present VERITAS' operating results for each of the six quarters in the period ended June 30, 1999, excluding purchase accounting adjustments but including the results of NSMG and TeleBackup and assuming the companies had been combined at the beginning of the periods presented. These purchase accounting adjustments would have included, on a pre-tax basis, amortization of developed technology of approximately $15.0 million per quarter and amortization of goodwill and intangibles of approximately $214.7 million per quarter. These adjustments would have also included, on a pre-tax basis, approximately $103.1 million of in-process research and development charges and approximately $11.0 million of merger and restructuring costs during the three months ended June 30, 1999.
THREE MONTHS ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1998 1999 1999 --------- -------- ------------- ------------ --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total net revenue................... $ 87,308 $ 91,620 $105,078 $125,992 $134,729 $155,738 Income from operations.............. 21,454 21,602 25,618 35,713 40,508 43,912 Net income.......................... 14,224 14,498 17,116 23,896 26,969 29,228 Net income per share -- basic....... $ 0.09 $ 0.09 $ 0.10 $ 0.14 $ 0.16 $ 0.17 Net income per share -- diluted..... $ 0.08 $ 0.08 $ 0.09 $ 0.13 $ 0.15 $ 0.16 Number of shares used in computing per share amounts -- basic........ 165,057 165,913 166,647 167,224 167,834 168,932 Number of shares used in computing per share amounts -- diluted...... 179,080 179,937 181,880 181,312 183,500 184,113
THE OFFERING Common stock offered...................... 12,000,000 shares Common stock outstanding after this offering................................ 169,706,808 shares Nasdaq symbol............................. VRTS Concurrent offering....................... We are offering for sale through another prospectus convertible subordinated notes with an aggregate principal amount at maturity of $662,000,000 (excluding the over-allotment option).
7 9 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before investing in VERITAS. Investing in our securities involves a high degree of risk. Any of the following factors could harm our business and could result in a partial or complete loss of your investment. WE MAY FAIL TO INTEGRATE OUR BUSINESS WITH THE BUSINESSES OF NSMG AND TELEBACKUP Product line integration will be difficult. We recently acquired the NSMG business of Seagate Software, Inc. and TeleBackup and must integrate these independent businesses with our own. If we fail to integrate these businesses, our business and our quarterly and annual results of operations may be adversely affected. One key issue will be the integration of our products with those of NSMG and TeleBackup. This product line integration will involve consolidating products with duplicative functionality, coordinating research and development activities, and converging the technologies supporting the various products. For example, Old VERITAS' NetBackup product and NSMG's Backup Exec product share many features and functions, and NSMG's Client Exec product is very similar to TeleBackup's TSInfoPro. Technology convergence will be particularly difficult because Old VERITAS' products and NSMG's products lack a common technology architecture. In particular, NSMG products were not designed for the degree of scalability that Old VERITAS' products were designed for, nor for use on a variety of operating systems. Further, we have no experience with product and technology integration on the scale that resulted from the NSMG and TeleBackup combinations. Other business integration issues, if not satisfactorily resolved, could have a material negative impact on our business. Other problems inherent in integrating Old VERITAS' business with the businesses of NSMG and TeleBackup include: - maintaining brand recognition for key products formerly associated with NSMG, such as Backup Exec, and TeleBackup, such as TSInfoPro, while migrating customer identification of these brands to VERITAS; - resolving channel conflicts that may arise between the original equipment manufacturer and direct sales distribution channels of Old VERITAS and the retail channels acquired in the NSMG combination; - coordinating, integrating and streamlining geographically dispersed operations, such as engineering facilities in California, Minnesota, Florida, North Carolina, Maryland, Colorado, Massachusetts, Washington, Canada and India; and - coping with customers' uncertainty about continued support for duplicative products. The integration will be expensive and is likely to interrupt our ordinary business activities. Any of these risks could harm our revenues and results of operations. Management and employee integration issues, if not satisfactorily resolved, could have a material negative impact on our business. Potential management and employee integration problems include: - resolving differences between the corporate cultures of Old VERITAS and the NSMG business and TeleBackup; and - integrating the management teams of all three companies successfully. For example, Terence Cunningham, our President and Chief Operating Officer, who joined VERITAS from NSMG, recently resigned. 8 10 WE WILL INCUR SIGNIFICANT ACCOUNTING CHARGES IN CONNECTION WITH THE NSMG AND TELEBACKUP COMBINATIONS THAT WILL REDUCE OUR EARNINGS IMMEDIATELY AND IN THE FUTURE The significant costs of integration associated with the NSMG and TeleBackup combinations increase the risk that we will not realize the anticipated benefits. Because we accounted for the NSMG combination and the TeleBackup combination as purchases, we recorded non-cash charges of $103.1 million in our statements of operations in the three months ended June 30, 1999, related to the write-off of in-process research and development. We also recorded goodwill and other intangible assets of approximately $3,678.5 million. This amount will be amortized over four years, and will result in charges to operations of approximately $229.7 million per quarter. We also recorded a restructuring charge in the three months ended June 30, 1999 of $11.0 million related primarily to costs for duplicative facilities of Old VERITAS which we plan to vacate. These costs are in addition to the liability for the estimated costs to vacate duplicative facilities of the NSMG business. WE HAVE A SIGNIFICANT AMOUNT OF DEBT WHICH WE MAY BE UNABLE TO SERVICE OR REPAY In connection with the sale of the notes in our concurrent offering, we will incur $662.0 million of indebtedness ($761.3 million if the over-allotment option is exercised in full) which will result in our having as of March 31, 1999, a ratio of long-term debt to total capitalization of approximately 17% (19% if the over-allotment option we granted the underwriters in our concurrent note offering is exercised in full). We sold $100.0 million in aggregate principal amount of 5.25% convertible subordinated notes due 2004 in October 1997. The annual interest payments on our outstanding notes are $5.3 million. The annual interest payments on the notes offered in the concurrent offering is expected to be $ million, which we expect to fund from cash flow from operations. We will need to generate substantial amounts of cash from our operations to fund interest payments and to repay the principal amount of debt when it matures, while at the same time funding capital expenditures and our other working capital needs. If we do not have sufficient cash to repay our debts as they become due, we may be unable to refinance our debt on reasonable terms or at all. For example, the notes we are offering concurrently could be declared immediately due and payable if we do not make timely payments. While our cash flow has been sufficient to fund interest payments to date, if we cannot meet our debt obligations from the cash generated by our business, we may not be able to develop and sell new products, respond to changing business or economic conditions adequately, make acquisitions or otherwise fund our business. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A RESULT OF FACTORS OUTSIDE OUR CONTROL, WHICH COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DECLINE Fluctuations in our operating results are likely to affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance. The more likely it is that market prices of our common stock will fluctuate, the riskier is your decision to acquire our common stock. In addition, the number of factors that could affect our operating results makes an investment in our common stock riskier than many other investments. Our revenues 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 in revenues or delay of customer orders could have an immediate adverse effect on our operating results in that quarter. 9 11 The operating results of Old VERITAS, as well as the operating results of NSMG and TeleBackup, have fluctuated in the past, and our operating results are likely to fluctuate significantly in the future. Factors that could affect our operating results include: - the timing and magnitude of sales through original equipment manufacturers; - the unpredictability of the timing and level of sales to large distributors in the retail channel and our direct sales force, which tend to generate sales later in our quarters than original equipment manufacturer sales; - the timing and magnitude of large orders; - the timing and amount of our marketing, sales and product development expenses; - the 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 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; - the relative growth rates of the Windows NT and UNIX markets; - the rate of adoption of Microsoft's release of the next version of Windows NT, or Windows 2000, by users; - pricing policies and distribution terms; and - the timing and magnitude of acquisitions. WE DEPEND ON LARGE ORDERS WITH LENGTHY SALES CYCLES FOR A SIGNIFICANT PORTION OF OUR REVENUES Our revenues for a quarter could fluctuate significantly based on whether a large order is closed near the end of a quarter or delayed. Customer orders can range in value from a few thousand to a few 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. 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 FACE MANY NEW DIFFICULTIES MANAGING A LARGER COMPANY The NSMG and TeleBackup combinations have created new challenges for our management. If we fail to meet those challenges, our business and quarterly and annual results of operations may be harmed and the value of your investment may decline. Old VERITAS grew rapidly before the NSMG and TeleBackup combinations. After these combinations, our workforce is approximately twice the size of Old VERITAS' workforce, and we still need to hire additional sales, engineering, service and administrative personnel. This growth is likely to strain our management control systems and resources, including decision support, accounting, management information systems and facilities. We must 10 12 continue to improve our financial and management controls and our reporting systems and procedures to manage our employees and to obtain additional facilities. WE MAY BE UNABLE TO HIRE AND RETAIN NEEDED SALES AND ENGINEERING PERSONNEL Our personnel needs are more acute than those facing most companies. As a result of the NSMG and TeleBackup combinations, we must hire many additional sales, engineering, service and administrative personnel. If we are unable to hire and retain these employees, our business and quarterly and annual results of operations will be adversely affected. Competition for people with the skills we require is intense. Additions of new personnel and departures of existing personnel may disrupt our business and may result in the departure of other employees. We also depend on the continued service of our key personnel. Even though we have entered into employment agreements with key management personnel, these agreements cannot prevent their departure. For example, Terence Cunningham, our President and Chief Operating Officer, who joined VERITAS from NSMG, resigned effective August 30, 1999. 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 DISTRIBUTE OUR PRODUCTS THROUGH MULTIPLE DISTRIBUTION CHANNELS, EACH OF WHICH IS SUBJECT TO RISKS Historically, Old VERITAS sold products through original equipment manufacturers and through direct sales. As a result of the NSMG and TeleBackup combinations, however, we also have a retail distribution channel as well. If we fail to manage our distribution channels successfully, our business and quarterly and annual results of operations may be materially and adversely affected. Retail distribution. Certain software products of the former NSMG business are sold primarily in the retail channel. Our management faces different challenges than it faces in selling most of our other products. For example: - the VERITAS brand does not have the same level of recognition in the retail channel; - retail distribution typically involves shorter product life cycles; and - the retail channel has higher risks of product returns, higher marketing expenses and less predictable market demand. Moreover, our retail distributors have no obligation to continue selling the products previously sold by NSMG and TeleBackup and may terminate our relationship at any time. Direct sales. We also depend on our direct sales force to sell our products. This involves a number of risks, including: - longer 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 revenue is expected to come from original equipment manufacturers that incorporate our storage management software into systems they sell. We have no control over the shipping dates or volumes of systems the original equipment manufacturers ship and they have no obligation to ship systems incorporating our software. They also have no obligation to recommend or offer our software products exclusively or at all. They have no minimum sales requirements and can terminate our relationship at any time. These original equipment manufacturers also could choose to develop their own storage management products internally and incorporate those products into their systems in lieu of our products. Finally, the original equipment manufacturers that we do business with compete with one another. To the extent that one of our of original equipment manufacturer customers views the products we have developed for another original equipment manufac- 11 13 turer as competing with its products, it may decide to stop doing business with us, which could harm our business. 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 revenues, our revenue could be adversely affected. OUR DISTRIBUTION CHANNELS COULD CONFLICT WITH ONE ANOTHER We have many different distribution channels. If we cannot use these distribution channels efficiently, our business and quarterly and annual results of operations may be materially and adversely affected. Our original equipment manufacturers, resellers and direct sales force might 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. OUR DEVELOPMENT AGREEMENTS WITH MICROSOFT COULD CAUSE US TO LOSE CUSTOMERS 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 our products 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. 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 develops any enhancements or derivative products, or enhances its own base products with equivalent functionality, Microsoft could choose to compete with us. SALES OF A SMALL NUMBER OF PRODUCT LINES MAKE UP A SUBSTANTIAL PORTION OF OUR REVENUE For the foreseeable future, we expect to derive a substantial majority of our revenue from a limited number of software products. If many customers do not purchase these products as a result of competition, technological change or other factors, our revenue would decrease and our business and quarterly and annual results of operations would be materially and adversely affected. In the year ended December 31, 1998, Old VERITAS derived approximately 87.4% of its license revenue from storage management products, and the NSMG business derived 87.9% of its revenue from its Backup Exec product. In the three months ended March 31, 1999, Old VERITAS derived approximately 75.5% of its license revenue from storage management products and the NSMG business derived 90.2% from its 12 14 Backup Exec product. Also, Old VERITAS' NetBackup product and NSMG's Backup Exec product perform some overlapping functions. Customers may select one product over the other, resulting in reduced revenue for the product not selected. Therefore, we may not receive the same aggregate level of revenue from these products as we have received in the past. 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 your investment more risky. If we do not develop and introduce new products before our existing products have completed their life cycles, we will not be able to sustain our level of sales. In addition, to succeed, many customers must adopt our new products early in each 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 revenue 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 the year ended December 31, 1998, Old VERITAS derived 12% of its revenue from sales to Sun Microsystems and the NSMG business derived 28% of its revenue from sales to Ingram Micro Inc. In the three months ended March 31, 1999 Old VERITAS derived 12% of its revenue from sales to Sun Microsystems and the NSMG business derived 24% of its revenue from sales to Ingram Micro Inc. If Sun Microsystems or Ingram Micro, or any other significant customer, were to reduce its purchases from us, our revenue 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, Ingram Micro 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. WE FACE UNCERTAINTIES PORTING PRODUCTS TO NEW OPERATING SYSTEMS AND DEVELOPING NEW PRODUCTS Some of our products operate primarily on the UNIX computer operating system. We are currently redesigning, or porting, these products to operate on the Windows NT operating system. We are also developing new products for UNIX and for Windows NT. TeleBackup's products operate on the Sun Solaris version of UNIX, the Windows and Windows NT operating systems. We intend to port the TeleBackup products to other UNIX operating systems and subsequent releases of 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. Our porting and development work for the Windows NT market has required us to hire additional personnel with Windows NT expertise and to devote engineering resources to these projects. We must obtain from operating system owners a source code license to certain portions of the operating system software to port some of our products to or develop products for the operating system. Operating system owners have no obligation to assist in these porting or development efforts. 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. 13 15 THE MARKET FOR TSINFOPRO IS UNPROVEN TeleBackup's primary product, TSInfoPro, which is designed to back up data for remote PC users, represents new technology that has no proven market. A market may not develop for this product or similarly unproven products in the future. This could harm our business because our investment in TeleBackup, and any additional development and marketing costs, would be lost, and any expected revenue opportunities would not materialize. WE FACE INTENSE COMPETITION ON SEVERAL FRONTS We face a variety of tough competitors, principal among which are: - internal development groups within original equipment manufacturers that provide storage management functions to support their systems; - 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; - hardware and software vendors that offer high availability and clustering products; and - software vendors focused on remote backup technologies and electronic data vaulting services. Many of our competitors have substantially greater financial and technical resources than we do and may attempt to increase their presence in the storage management market by acquiring or forming strategic alliances with other competitors or business partners. POTENTIAL YEAR 2000 RISKS MAY ADVERSELY AFFECT OUR BUSINESS We are in the process of conducting an extensive review of our products and services and of our internal business systems and infrastructure to identify potential Year 2000 problems and are implementing remedial action to address those problems. While we do not expect to encounter any problems that would be material to our business or to incur significant costs in fixing Year 2000 problems, if we do not identify and remedy these problems in a timely and efficient manner, we could experience substantial disruptions to our operations. Failure to achieve Year 2000 readiness of our systems or products could lead to loss of existing and potential customers and subsequent costly litigation claims against us. Factors outside our control, such as loss of water and power, telecommunications systems, banking systems and transportation systems, could also cause substantial business disruption. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Old VERITAS -- Year 2000 Compliance" and "-- NSMG -- Year 2000 Readiness" for detailed information on our Year 2000 readiness. EXPANDING OUR INTERNATIONAL SALES DEPENDS ON ECONOMIC STABILITY IN REGIONS THAT RECENTLY HAVE BEEN UNSTABLE An investment in our common stock is riskier than an investment in many other companies because we plan to expand in overseas markets such as Asia, Russia and Latin America that have experienced significant economic turmoil in recent years. 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 in these markets 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. 14 16 Any of these factors could cause foreign customers to substantially reduce their purchase of our products. OUR FOREIGN-BASED OPERATIONS AND SALES CREATE SPECIAL PROBLEMS THAT COULD HURT OUR RESULTS An investment in our common stock is riskier than an investment in most businesses because we have significant offshore operations, including development facilities, sales personnel and customer support operations. For example, as of July 15, 1999, we had approximately 141 engineers located in Pune, India, performing product 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 are denominated in local currency, creating risk of foreign currency translation gains and losses that could harm our financial results. If we generate profits or losses in foreign countries, our effective income tax rate could also be harmed. The currency instability in Asia and other financial markets may make our products more expensive than products sold by other vendors that are priced in one of the affected currencies. Therefore, customers in these markets may choose not to purchase our products. OUR GROWTH STRATEGY IS RISKIER THAN OTHERS BECAUSE IT IS BASED UPON ACQUISITIONS OF OTHER BUSINESSES An investment in our common stock is riskier than investments in other companies because we plan to continue to pursue our strategy of growth through acquisition. We have grown aggressively through acquisitions in the past and expect to pursue acquisitions in the future. Acquisitions involve a number of special risks and challenges, including: - diversion of management attention, particularly in the case of multiple concurrent acquisitions; - integration of the acquired company's operations and employees with an existing business; - incorporation of technology into existing product lines; - loss of key employees; and - presentation of 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. THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY The market price of our common stock has fluctuated in the past and is likely to continue to fluctuate. In addition, the securities markets, particularly with respect to technology stocks, have experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. 15 17 FORWARD-LOOKING STATEMENTS An investment in our common stock involves a high degree of risk. In addition to the other information contained in this prospectus, you should carefully consider the foregoing risk factors before investing in our common stock. All statements, trend analyses and other information contained in this prospectus regarding markets for our products and services and net revenue, gross margin and anticipated expense levels, and any statements that contain the words "anticipate," "believe," "plan," "estimate," "expect," "intend" or other similar expressions, constitute forward-looking statements. These forward- looking statements are subject to business and economic risks, and our actual results of operations may differ materially from those contained in the forward-looking statements. The cautionary statements made in this prospectus apply to all forward-looking statements wherever they appear in this prospectus. USE OF PROCEEDS We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. 16 18 COMMON STOCK PRICE RANGE Our common stock is listed on the Nasdaq National Market under the symbol "VRTS." The table below shows the range of reported last sale prices on the Nasdaq National Market for our common stock for the periods indicated. All amounts have been adjusted to reflect the two-for-one stock split paid in the form of a stock dividend in July 1999.
COMMON STOCK PRICE --------------- HIGH LOW ------ ------ Year ended December 31, 1997 First Quarter............................................. $12.67 $ 5.95 Second Quarter............................................ 12.03 5.06 Third Quarter............................................. 16.84 10.97 Fourth Quarter............................................ 17.96 11.50 Year ended December 31, 1998 First Quarter............................................. $20.09 $13.04 Second Quarter............................................ 21.84 16.75 Third Quarter............................................. 30.13 20.19 Fourth Quarter............................................ 32.50 11.88 Year ended December 31, 1999 First Quarter............................................. $44.75 $29.00 Second Quarter............................................ 49.88 30.50 Third Quarter (through July 30, 1999)..................... 63.44 46.44
On August 5, 1999, the last reported sale price of our common stock on the Nasdaq National Market was $55 5/16. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. Old VERITAS also did not pay any cash dividends to their stockholders. We may incur indebtedness in the future that may prohibit or effectively restrict the payment of dividends. 17 19 CAPITALIZATION The following table sets forth as of March 31, 1999 Old VERITAS' unaudited capitalization on an actual basis and VERITAS' capitalization on a pro forma combined basis to give effect to the completion of the NSMG and TeleBackup acquisitions. In addition, the following table sets forth VERITAS' pro forma capitalization as further adjusted to assume the completion of the concurrent note offering after deducting underwriting discounts and commissions and other offering expenses.
AS OF MARCH 31, 1999 ------------------------------------- PRO FORMA PRO FORMA ACTUAL COMBINED AS ADJUSTED -------- ---------- ----------- (IN THOUSANDS) Cash and cash equivalents........................... $111,324 $ 158,993 $ 644,243 ======== ========== ========== Long-term obligations............................... $ 733 $ 913 $ 913 5 1/4% convertible subordinated notes due 2004.... 100,000 100,000 100,000 % convertible subordinated notes due 2006....... -- -- 662,000 Stockholders' equity: Preferred stock, par value $.001 per share; 10,000 shares authorized, none issued and outstanding.................................... -- -- -- Common stock, $.001 par value per share, 500,000 shares authorized, 96,185 issued and outstanding -- actual; 168,363 issued and outstanding -- pro forma combined and as adjusted....................................... 206,911 3,764,864 3,764,864 Accumulated deficit............................... (15,833) (130,533) (130,533) Accumulated other comprehensive income (loss)..... (823) (823) (823) -------- ---------- ---------- Total stockholders' equity..................... 190,255 3,633,508 3,633,508 -------- ---------- ---------- Total capitalization......................... $290,988 $3,734,421 $4,396,421 ======== ========== ==========
18 20 SELECTED FINANCIAL DATA The following financial information is derived from the audited consolidated financial statements of Old VERITAS for 1994 through 1998, audited financial statements of TeleBackup for 1995 through 1998, audited combined financial statements of the NSMG business for the fiscal years 1996 through 1998, unaudited combined financial statements of the NSMG business for the fiscal years 1994 and 1995, and the unaudited financial statements of Old VERITAS, TeleBackup and the NSMG business for the interim periods presented. The interim financial data reflects all adjustments, consisting only of normal recurring adjustments, which are considered necessary to present fairly the financial information for these periods. The information is only a summary and you should read it in conjunction with each company's historical financial statements and related notes included in this prospectus. The results of operations for any interim period are not necessarily indicative of results for a full fiscal year, and historical results are not necessarily indicative of future results. UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Old VERITAS and the NSMG business reported their quarterly and annual results of operations using methods required by generally accepted accounting principles in the United States. TeleBackup reported quarterly and annual results of operations using methods required by generally accepted accounting principles in Canada. United States and Canadian generally accepted accounting principles are not materially different with respect to TeleBackup's financial statements. For a summary of the principal differences between U.S. and Canadian generally accepted accounting principles, see Note 13 in the consolidated financial statements of TeleBackup included in this prospectus. Old VERITAS had never declared or paid cash dividends on its common stock. We currently anticipate that we will retain future earnings to fund development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. OLD VERITAS HISTORICAL FINANCIAL STATEMENTS The audited consolidated financial statements and notes of Old VERITAS as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998 and the unaudited consolidated financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 are included in this prospectus. NETWORK & STORAGE MANAGEMENT GROUP BUSINESS COMBINED FINANCIAL STATEMENTS The audited combined financial statements and notes of the NSMG business as of June 27, 1997 and July 3, 1998, and for the three years in the period ended July 3, 1998 and the unaudited combined financial statements as of April 2, 1999 and for the nine months ended April 3, 1998 and April 2, 1999, are included in this prospectus. The NSMG business was an operating division of Seagate Software, Inc. and had no formal capital structure, so its per share information is not provided. TELEBACKUP FINANCIAL STATEMENTS The audited financial statements and notes of TeleBackup as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998 and the unaudited financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and March 31, 1999 are included in this prospectus. 19 21 FINANCIAL STATEMENTS NOT INCLUDED IN THIS PROSPECTUS The selected historical financial data for Old VERITAS as of December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 were derived from audited consolidated financial statements not included or incorporated by reference in this prospectus. The selected historical financial data for the NSMG business as of and for the fiscal years ended July 1, 1994 and June 30, 1995 were derived from unaudited combined financial statements not included in this prospectus. The selected historical financial data for TeleBackup as of December 31, 1995 and 1996, and for the period from May 5, 1995 (inception) through December 31, 1995 have been derived from audited financial statements not included in this prospectus. SELECTED HISTORICAL FINANCIAL DATA OF OLD VERITAS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 -------- ------- ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total net revenue.......................... $ 33,575 $47,826 $72,746 $121,125 $210,865 $ 39,082 $ 71,904 Merger-related costs....................... -- -- -- 8,490 -- -- -- In-process research and development........ -- -- 2,200 -- 600 -- -- Income (loss) from operations.............. (15,212) 1,193 11,858 20,076 53,668 9,838 19,494 Net income (loss).......................... (15,274) 2,371 12,129 22,749 51,648 9,055 13,583 Net income (loss) per share -- basic....... $ (0.19) $ 0.03 $ 0.14 $ 0.25 $ 0.55 $ 0.10 $ 0.14 Net income (loss) per share -- diluted..... $ (0.19) $ 0.03 $ 0.13 $ 0.23 $ 0.50 $ 0.09 $ 0.13 Number of shares used in computing per share amounts -- basic............... 79,658 80,706 86,052 91,244 94,026 92,868 95,644 Number of shares used in computing per share amounts -- diluted............. 79,658 86,124 92,992 98,986 103,342 101,900 106,272
AS OF DECEMBER 31, AS OF ------------------------------------------------------- MARCH 31, 1994 1995 1996 1997 1998 1999 --------- --------- --------- -------- -------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital................................. $ 14,690 $ 23,451 $ 67,413 $188,578 $198,842 $196,180 Total assets.................................... 36,830 48,100 94,524 241,880 349,117 374,876 Long-term obligations........................... 6,366 6,205 1,468 100,911 100,773 100,733 Accumulated deficit............................. (124,064) (115,942) (103,813) (81,064) (29,416) (15,833) Stockholders' equity............................ 14,052 23,602 74,955 104,193 169,854 190,255
YEAR ENDED DECEMBER 31, THREE MONTHS ------------------------------------ ENDED MARCH 31, 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- --------------- OTHER FINANCIAL DATA: Ratio of earnings to fixed charges....................... -- 2.3x 13.1x 13.0x 9.9x 13.4x
Earnings consist of income (loss) before provision for income taxes plus fixed charges. Fixed charges consist of interest charges, amortization of bond issuance costs related to indebtedness, and that portion of rental expense representative of interest. During the year ended December 31, 1994, there was a deficiency of earnings to cover fixed charges of approximately $15.1 million. 20 22 SELECTED HISTORICAL FINANCIAL DATA OF THE NSMG BUSINESS
NINE YEAR ENDED MONTHS ENDED ----------------------------------------------------- ------------------- JULY 1, JUNE 30, JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2, 1994 1995 1996 1997 1998 1998 1999 -------- -------- --------- -------- -------- -------- -------- (IN THOUSANDS) COMBINED STATEMENT OF OPERATIONS DATA: Revenues....................................... $ 24,866 $ 81,325 $ 116,742 $141,502 $175,046 $131,539 $170,225 Gross profit................................... 18,187 59,837 89,397 109,390 151,711 112,373 156,697 In-process research and development............ -- 73,177 61,066 -- 6,800 -- -- Write-down of goodwill, developed technology and intangibles.............................. -- -- 2,157 13,091 1,900 1,900 -- Restructuring costs............................ -- -- 9,502 2,524 -- -- -- Income (loss) from operations.................. (12,270) (82,958) (102,655) (41,208) 9,430 9,248 43,076 Net income (loss).............................. (7,356) (85,132) (94,596) (33,200) 2,856 2,669 25,280
AS OF ------------------------------------------------------------- JULY 1, JUNE 30, JUNE 28, JUNE 27, JULY 3, APRIL 2, 1994 1995 1996 1997 1998 1999 ------- -------- -------- -------- ------- -------- (IN THOUSANDS) COMBINED BALANCE SHEET DATA: Total assets................................................ $13,089 $96,725 $137,600 $94,087 $74,721 $115,270 Group equity................................................ 6,950 44,919 64,315 34,601 38,033 63,611
SELECTED HISTORICAL FINANCIAL DATA OF TELEBACKUP
PERIOD FROM MAY 5, 1995 THREE MONTHS (INCEPTION) ENDED THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------ ----------------- 1995 1996 1997 1998 1998 1999 ------------ -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Canadian GAAP Revenue............................................... C $ -- C $ 252 C $ 486 C$ 3,423 C $ 708 C$1,237 Net loss.............................................. (53) (1,141) (1,870) (1,570) (200) (517) Net loss per share -- basic and fully diluted......... C$(0.01) C$ (0.18) C$ (0.25) C$ (0.17) C$(0.02) C$(0.05) Number of shares used in computing per share amounts -- basic and fully diluted.................. 5,475 6,288 7,385 9,347 8,043 11,362
AS OF DECEMBER 31, AS OF -------------------------------------- MARCH 31, 1995 1996 1997 1998 1999 ----- -------- -------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Canadian GAAP Working capital............................................. C$ 35 C $ 979 C$ 1,568 C$ 3,693 C$ 3,483 Total assets................................................ 194 1,311 3,270 7,699 7,678 Long-term obligations....................................... -- 350 3,004 302 271 Accumulated deficit......................................... (53) (1,194) (3,064) (4,634) (5,151) Shareholders' equity (deficiency)........................... 120 835 (2) 4,252 4,021
21 23 VERITAS SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA We are providing the following summary unaudited pro forma financial data to give you a better picture of what the results of operations and financial position of the combined businesses of Old VERITAS, the NSMG business and TeleBackup might have looked like had the NSMG combination and the TeleBackup combination occurred at an earlier date. This information is provided for illustrative purposes only and does not show what the results of operations or financial position of VERITAS would have been if the NSMG combination and the TeleBackup combination actually occurred on the dates assumed. In addition, this information does not indicate what VERITAS' future consolidated operating results or consolidated financial position will be. Both the NSMG combination and the TeleBackup combination closed during the second quarter of 1999. HOW THE PRO FORMA FINANCIAL DATA WAS PREPARED We derived this data from the VERITAS unaudited pro forma combined condensed statements of operations for the year ended December 31, 1998 and three months ended March 31, 1999 and the VERITAS unaudited pro forma combined condensed balance sheet as of March 31, 1999. These statements give effect to the NSMG combination and the TeleBackup combination accounted for using the purchase method of accounting. The pro forma combined condensed statements of operations for the year ended December 31, 1998 and March 31, 1999 assumes the NSMG combination and the TeleBackup combination took place on January 1, 1998. The pro forma combined condensed balance sheet assumes the NSMG combination and the TeleBackup combination took place on March 31, 1999. THESE PRO FORMA FINANCIAL STATEMENTS HAVE BEEN BASED ON ASSUMPTIONS We prepared these statements on the basis of assumptions described in the notes, including assumptions relating to the allocation of the amount of consideration paid for the assets and liabilities of the NSMG business and TeleBackup based upon preliminary estimates of their fair values. The actual allocation of the amount of consideration paid may differ from those assumptions after valuations and other procedures to be performed have taken place. CHARGES RESULTING FROM THE COMBINATIONS VERITAS recorded charges to operations during the three months ended June 30, 1999 related to in-process research and development of $101.2 million as a result of the NSMG combination and $1.9 million as a result of the TeleBackup combination. In addition, VERITAS recorded a restructuring charge in the three months ended June 30, 1999 of $11.0 million, primarily related to exit costs with respect to duplicate facilities of Old VERITAS that VERITAS plans to vacate. These costs are in addition to the liability for the estimated costs to vacate duplicative facilities of the NSMG business, which liability was assumed by VERITAS and included as a part of the purchase price. The VERITAS unaudited pro forma combined condensed balance sheet includes the effect of these charges. However, the VERITAS unaudited pro forma combined condensed statements of operations do not reflect these charges because they are non-recurring. YOU SHOULD READ THESE SUMMARY PRO FORMA FINANCIAL STATEMENTS WITH THE HISTORICAL FINANCIAL STATEMENTS The VERITAS summary unaudited pro forma combined condensed financial data should be read in conjunction with the VERITAS unaudited pro forma combined condensed financial statements and the related notes, which begin at page F-26. They should also be read in conjunction with the audited financial statements of Old VERITAS which begin at Page F-3 of this prospectus, the financial statements of the NSMG business, which begin at page F-42 of this prospectus, and the financial 22 24 statements of TeleBackup which begin at page F-74 of this prospectus. The VERITAS summary unaudited pro forma combined condensed financial data are not necessarily indicative of what the actual results of operations and financial position would have been had the NSMG combination and the TeleBackup combination taken place on January 1, 1998 or March 31, 1999, and do not indicate VERITAS' future results of operations or financial position.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1998 MARCH 31, 1999 ------------------ --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) VERITAS UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA: Total net revenue....................................... $ 409,998 $ 134,729 Loss from operations.................................... (826,950) (190,234) Net loss................................................ (800,397) (194,653) Net loss per share -- basic............................. $ (4.82) $ (1.16) Net loss per share -- diluted........................... (4.82) (1.16) Number of shares used in computing per share amounts -- basic...................................... 166,216 167,834 Number of shares used in computing per share amounts -- diluted............................................... 166,216 167,834
AS OF MARCH 31, 1999 -------------- (IN THOUSANDS) VERITAS UNAUDITED PRO FORMA BALANCE SHEET DATA: Working capital............................................. $ 172,651 Total assets................................................ 4,099,870 Long-term obligations....................................... 100,913 Accumulated deficit......................................... (130,533) Stockholders' equity........................................ 3,633,508
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1998 MARCH 31, 1999 ------------------ -------------- (IN THOUSANDS) VERITAS UNAUDITED OTHER PRO FORMA DATA: Deficiency of earnings to fixed charges................ $ (820,711) $ (187,430)
The pro forma deficiency of earnings to fixed charges was computed based on amounts reflected in the VERITAS Unaudited Pro Forma Combined Condensed Statement of Operations for the periods indicated. 23 25 VERITAS UNAUDITED COMPARATIVE PER SHARE DATA The following tables present certain unaudited historical and unaudited pro forma per share data that reflect the completion of the NSMG combination and the TeleBackup combination. This data should be read in conjunction with the VERITAS unaudited pro forma combined condensed financial statements, and the historical financial statements of Old VERITAS, the NSMG business and TeleBackup included elsewhere in this document. VERITAS unaudited pro forma combined condensed per share data does not necessarily indicate the operating results that would have been achieved had the NSMG combination and the TeleBackup combination occurred at the beginning of the periods presented, and do not indicate future results of operations or financial position. The NSMG business was an operating division of Seagate Software and had no formal capital structure. Therefore, historical per share information for the NSMG business is not presented. The following options and other potential common securities, based upon the options outstanding as of the periods presented and closing price of Old VERITAS common stock as of the effective time, have not been included in the computation of pro forma diluted net loss per share because their effect would be antidilutive.
AS OF AS OF DECEMBER 31, MARCH 31, 1998 1999 ------------ --------- POTENTIAL COMMON SECURITIES: (IN THOUSANDS) Old VERITAS options outstanding............................. 16,422 16,254 Options issued in connection with the NSMG combination...... 6,864 6,856 Options issued in connection with the TeleBackup combination............................................... 156 103 Common stock issuable upon conversion of VERITAS' 5.25% convertible notes......................................... 4,651 4,651 ------ ------ 28,093 27,864 ====== ======
CALCULATION OF BOOK VALUE PER SHARE AMOUNTS The pro forma book value per share is computed by dividing pro forma stockholders' equity by the pro forma number of shares outstanding at the end of each period for which the computation is made. For purposes of computing the book value per share of Old VERITAS as of December 31, 1998, book value of $169.9 million was divided by actual shares outstanding of 95,257,484. For purposes of computing the book value of Old VERITAS as of March 31, 1999, book value of $190.3 million was divided by actual shares outstanding of 96,184,862. For purposes of computing the book value per share of TeleBackup as of December 31, 1998, book value of C$4.3 million was divided by the actual shares outstanding of 11,158,745. For purposes of computing the book value of TeleBackup as of March 31, 1999, book value of C$4.0 million was divided by actual shares outstanding of 11,363,445. For purposes of computing the pro forma book value per share of VERITAS as of December 31, 1998, pro forma net book value of $3,613.4 million was divided by pro forma actual shares outstanding of 167,447,484. For purposes of computing the pro forma book value of VERITAS as of March 31, 1999, pro forma book value of $3,633.5 million was divided by pro forma actual shares outstanding of 168,374,862. 24 26 CALCULATION OF TELEBACKUP EQUIVALENT PRO FORMA PER SHARE AMOUNTS The TeleBackup equivalent pro forma per share amounts are computed by multiplying the VERITAS pro forma combined per share amounts by the exchange ratio of 0.26466 shares of VERITAS common stock for each TeleBackup common share.
THREE MONTHS YEAR ENDED ENDED AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 ----------------- -------------- OLD VERITAS HISTORICAL: Basic net income per share............................ $0.55 $0.14 Diluted net income per share.......................... $0.50 $0.13 Book value per share.................................. $1.78 $1.98
THREE MONTHS YEAR ENDED ENDED AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 ----------------- -------------- TELEBACKUP HISTORICAL: Basic and fully diluted net loss per share............ C$(0.17) C$(0.05) Book value per share.................................. C$ 0.38 C$ 0.35
THREE MONTHS YEAR ENDED ENDED AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 ----------------- -------------- VERITAS PRO FORMA COMBINED: Basic net loss per share.............................. $(4.82) $(1.16) Diluted net loss per share............................ $(4.82) $(1.16) Book value per share.................................. $21.58 $21.58 Equivalent pro forma basic and fully diluted net loss per TeleBackup share................................ $(1.27) $(0.31) Equivalent pro forma book value per TeleBackup share............................................... $ 5.71 $ 5.71
25 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the Financial Statements of Old VERITAS, the NSMG business and TeleBackup and accompanying notes, each which appear elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect the plans, estimates and beliefs of each of Old VERITAS, the NSMG business and TeleBackup. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." 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 back up data distributed on large networks of systems without interrupting users. In addition, our products provide an automated fail over between computer systems organized in clusters sharing disk resources. Our highly scalable products can be used independently, and certain products can be combined to provide interoperable client/server storage management solutions. Some of our 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. We also provide a comprehensive range of services to assist customers in planning and implementing storage management solutions. We market our products and associated services to original equipment manufacturers and end-user customers through a combination of direct sales and indirect sales channels. These indirect sales channels include resellers, value added resellers, hardware distributors, application software vendors and systems integrators. In connection with the NSMG combination, in consideration for the contribution and transfer of contributed stock and assets by Seagate Technology, Inc., which we refer to as "STI" and Seagate Software, Inc., which we refer to as "SSI," and their respective subsidiaries, we issued to SSI 69,148,208 shares of our common stock and issued options to purchase 6,945,048 shares of our common stock to our employees who are former NSMG employees. We accounted for the NSMG and TeleBackup acquisitions using the purchase method of accounting. We expect to incur charges of $229.7 million per quarter primarily related to the amortization of acquired goodwill and other intangibles over a four-year period. We recorded charges to operations of $103.1 million in the three months ended June 30, 1999, for a one-time write-off related to acquired in-process research and development costs. In addition, we recorded a restructuring charge of $11.0 million in the three months ended June 30, 1999 as a result of the NSMG combination. This one-time restructuring charge relates primarily to exit costs with respect to duplicative facilities of Old VERITAS, which we plan to vacate. These costs are in addition to the liability for the costs to vacate duplicative facilities of the NSMG business, which liability we assumed and included as a part of the purchase price. Pursuant to the rules of the SEC, the following discussion has been separated into two parts to discuss Old VERITAS and the NSMG business without giving effect to the NSMG combination. The TeleBackup combination is not reflected in either of the following analyses. OLD VERITAS The terms "we," "our," "us," and "VERITAS," when used in the section captioned "-- OLD VERITAS" refer to VERITAS Software Corporation, a Delaware corporation now known as VERITAS 26 28 Operating Corporation, and which is now a wholly-owned subsidiary of VERITAS Software Corporation, formerly known as VERITAS Holding Corporation. OVERVIEW We derive our user license fee revenue from shipments of our software programs to end-user customers through direct sales channels, indirect sales channels and original equipment manufacturer customers. Our original equipment manufacturer customers either bundle our products with the original equipment manufacturer products they license or offer them as options. Certain original equipment manufacturers may also resell our products. We receive a user license fee each time the original equipment manufacturer licenses a copy of the original equipment manufacturer's products to a customer that incorporates one or more of our products. Our license agreements with original equipment manufacturer customers generally contain no minimum sales requirements and we cannot assure you that any original equipment manufacturer will either commence or continue shipping operating systems incorporating our products in the future. Moreover, following the execution of new agreements between us and original equipment manufacturer customers and resellers, a significant period of time may elapse before any revenues are generated due to the development work which we 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 our products. Our services revenue consists of fees derived from annual maintenance agreements, from consulting and training services and from porting fees. The original equipment manufacturer maintenance agreements covering our 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 channels other than through original equipment manufacturer 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 we port, or adapt, our storage management products to an original equipment manufacturer's operating system and when we develop new product features or extensions of existing product features at the request of a customer. In most cases, we retain the rights to technology derived from porting and non-recurring engineering work for licensing to other customers and therefore generally do such work on a relatively low, and sometimes negative, margin. We have made, and intend to continue to make, a substantial investment in porting our 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 our efforts to timely expand our 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, us to hire additional personnel. Under an agreement with Microsoft, we have committed to develop a functional subset of our Volume Manager product that will be ported to and embedded in Windows NT. The agreement also requires us to develop a disk management graphical user interface designed specifically for Windows NT. Microsoft has provided us with significant funding towards such development effort. We recognize revenue under the development contract with Microsoft on a percentage-of-completion basis consistent with our policy for revenue recognition for other similar agreements. The payment terms in the Microsoft agreement do not directly correlate to the timing of development efforts and therefore revenue recognition does not directly correlate to contract billings. The Microsoft relationship requires us to expand our marketing and sales operations to deal with higher volume markets in which we have limited experience. See "Risk Factors -- We face uncertainties porting products to new operating systems and developing new products" and "-- We distribute our products through multiple distribution channels, each of which is subject to risks." 27 29 Our international sales are generated primarily through our international sales subsidiaries. International revenue outside the United States and Canada, most of which is collectible in foreign currencies, accounted for 18% of our total revenues for the three months ended March 31, 1999 and 22% of total revenues for the three months ended March 31, 1998. Our international revenue increased 56% from $8.4 million for the three months ended March 31, 1998 to $13.1 million for the three months ended March 31, 1999. Since much of our 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 our operating and pricing strategies take into account changes in exchange rates over time, our operating results may be significantly affected in the short term by fluctuations in foreign currency exchange rates. Our 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 our statement of operations as a component of other income, net. To date, such gains or losses have not been material. We believe that our success depends upon continued expansion of our international operations. We currently have sales and service offices 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 us 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 we are unable to effect these additions efficiently, growth in international sales will be limited, which would have a material adverse effect on our business, operating results and financial condition. International operations also subject us to a number of risks inherent in developing and selling products outside the United States, including potential loss of developed technology, limited protection of intellectual property rights, imposition of government regulation, imposition of export duties and restrictions, cultural differences in the conduct of business, and political and economic instability. Furthermore, 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 our ability to expand international operations. See "Risk Factors -- Expanding our international sales depends on economic stability in regions that recently have been unstable." On February 3, 1999, we completed the acquisition of OpenVision Australia Pty. Ltd., a company principally engaged in reselling our software products and services throughout Australia and New Zealand, for a total cost of approximately $300,000 in cash. The business combination has been accounted for as a purchase and the purchase price allocated to the fair value of specific net tangible and intangible assets acquired. On February 8, 1999, we completed the acquisition of the Pune, India operations of Frontier Software Development (India) Private Limited, a company principally engaged in the development of customized software, for a total cost of approximately $2.4 million. Of this amount, we paid $1.3 million in cash and agreed to pay Frontier certain earn-out payments totaling $1.1 million over the next two years. The business combination has been accounted for as a purchase and the purchase price, including the $1.1 million of earn-out payments, allocated to the fair value of specific net tangible and intangible assets acquired. 28 30 RESULTS OF OPERATIONS The following table sets forth the percentage of total revenue represented by certain line items from our condensed consolidated statement of operations for the years 1996, 1997 and 1998, the three months ended March 31, 1998 and March 31, 1999 and the percentage changes between the three months ended March 31, 1999 and the three months ended March 31, 1998:
PERIOD-TO-PERIOD CHANGE THREE MONTHS THREE MONTHS YEARS ENDED ENDED ENDED DECEMBER 31, MARCH 31, MARCH 31, 1999 ------------------ ------------- COMPARED TO 1996 1997 1998 1998 1999 1998 ---- ---- ---- ----- ----- ---------------- Net revenue: User license fees...................... 81% 79% 80% 79% 78% 82% Services............................... 19 21 20 21 22 92% --- --- --- --- --- Total net revenue.............. 100 100 100 100 100 84% --- --- --- --- --- Cost of revenue: User license fees...................... 4 4 4 5 3 (1)% Services............................... 6 10 10 12 9 45% --- --- --- --- --- Total cost of revenue.......... 10 14 14 17 12 31% --- --- --- --- --- Gross profit............................. 90 86 86 83 88 94% Operating expenses: Selling and marketing.................. 36 35 36 33 37 105% Research and development............... 25 21 19 19 19 83% General and administrative............. 9 7 5 6 5 52% Merger-related costs................... -- 7 -- -- -- -- In-process research and development.... 3 -- -- -- -- -- --- --- --- --- --- Total operating expenses....... 73 70 60 58 61 93% --- --- --- --- --- Income from operations................... 17 16 26 25 27 Interest and other income, net........... 4 4 6 7 4 Interest expense......................... -- (1) (3) (4) (2) --- --- --- --- --- Income before income taxes............... 21 19 29 28 29 Provision for income taxes............... 3 1 4 5 10 --- --- --- --- --- Net income............................... 18% 18% 25% 23% 19% === === === === ===
THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998 Net Revenue Total net revenue increased 84% from $39.1 million for the three months ended March 31, 1998 to $71.9 million for the three months ended March 31, 1999. VERITAS believes that the percentage increase in total revenue achieved in this period is 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 29 31 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 original equipment manufacturers. User license fees were 78% of total net revenue for the three months ended March 31, 1999, and 79% of total net revenue for the three months ended March 31, 1998. User License Fees. User license fees increased 82% from $30.7 million for the three months ended March 31, 1998 to $55.8 million for the three months ended March 31, 1999. The increase was primarily the result of continued growth in market acceptance of VERITAS' software products, a greater volume of large end-user transactions, increased revenue from original equipment manufacturer 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 57% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998, and accounted for 75% of user license fees in the three months ended March 31, 1999 and 87% of user license fees in the three months ended March 31, 1998. Service Revenue. Service revenue increased 92% from $8.4 million for the three months ended March 31, 1998 to $16.1 million for the three months ended March 31, 1999. The increase was 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, 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 remained relatively constant at $2.0 million for each of the three month periods ended March 31, 1999 and March 31, 1998. Gross margin on user license fees increased from 94% for the three months ended March 31, 1998 to 96% for the three months ended March 31, 1999. The gross margin on user license fees may vary from period to period based on the license revenue mix and certain products having higher royalty rates than other products. VERITAS does not expect significant improvements in gross margin on user license fees. Cost of Service Revenue. Cost of service revenue increased 45% from $4.5 million for the three months ended March 31, 1998 to $6.5 million for the three months ended March 31, 1999. Gross margin on service revenue increased from 46% for the three months ended March 31, 1998 to 60% for the three months ended March 31, 1999. The increase in absolute dollars was primarily due to personnel additions in our customer support and training and consulting organizations, in anticipation of increased demand for such services. The improvement in gross margin in the three months ended March 31, 1999 compared to the three months ended March 31, 1998 was a result of increased productivity and higher service revenue growth due to a larger installed customer base paying support revenue. 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 105% from $13.1 million for the three months ended March 31, 1998 to $26.8 million for the three months ended March 31, 1999. Selling and marketing 30 32 expenses as a percentage of total net revenue increased from 33% for the three months ended March 31, 1998 to 37% for the three months ended March 31, 1999. The increase was primarily the result of higher personnel and related costs associated with increased staffing. VERITAS intends 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 to 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 83% from $7.5 million for the three months ended March 31, 1998 to $13.8 million for the three months ended March 31, 1999. The increase was due primarily to increased staffing levels. As a percentage of total net revenue, research and development expenses remained consistent at 19% for the three months ended March 31, 1999 and 1998. 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 decline slightly 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 52% from $2.2 million for the three months ended March 31, 1998 to $3.3 million for the three months ended March 31, 1999. General and administrative expenses as a percentage of revenue declined from 6% to 5%. The increase in absolute dollars was 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 absolute dollars, but not to change significantly as a percentage of revenue in the future, as VERITAS expands its operations. Interest and Other Income, Net. Interest and other income, net increased 13% from $2.7 million for the three months ended March 31, 1998 to $3.0 million for the three months ended March 31, 1999. The increase was 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 material effect on VERITAS' results of operations. Interest Expense. Interest expense remained consistent at $1.4 million for the three months ended March 31, 1999 and 1998. Interest expense consists primarily of interest accrued under the 5.25% convertible subordinated notes issued by VERITAS in October 1997. Income Taxes. VERITAS had effective tax rates of 36% for the three months ended March 31, 1999 and 18% for the three months ended March 31, 1998. VERITAS' 1998 effective tax rate was 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' effective tax rate for the three months ended March 31, 1999 was higher than the effective tax rate for the three months ended March 31, 1998 primarily due to a lower benefit being derived from net operating loss carryforwards in 1999 relative to a higher level of pre-tax income. 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 31 33 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, 2001. VERITAS' foreign currency 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 capitalize certain costs related to internal-use software once certain criteria have been met. VERITAS has adopted SOP 98-1 as of January 1, 1999. The impact of adopting SOP 98-1 was not material, nor is SOP 98-1 expected to have a material impact on 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. FISCAL YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Net Revenue 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 original equipment manufacturers. User License Fees. User license fees increased 75% to $167.7 million in 1998 from $95.7 million in 1997, when they 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 VERITAS' software products, a greater volume of large end-user transactions, increased revenue from original equipment manufacturer 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 32 34 license fee growth in 1998 and 1997 also included increases in direct sales and sales from distributors other than original equipment manufacturers. 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 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 33 35 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 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 34 36 5.25% 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. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and short-term investments totaled $211.1 million and $208.5 million at December 31, 1998 and March 31, 1999, and represented 60% and 56% of total assets, respectively. 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 and March 31, 1999, we had $100.8 million and $100.7 million of long-term obligations, and stockholders' equity was approximately $169.9 million and $190.3 million, respectively. Net cash provided by operating activities was $62.8 million, $26.8 million and $14.4 million in 1998, 1997 and 1996, respectively, and $15.2 million in the three months ended March 31, 1999, compared to $15.3 million in the three months ended March 31, 1998. 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 our overall growth. For the three months ended March 31, 1999, cash provided by operating activities resulted primarily from net income, an increase in deferred revenue, and a reduction in accounts receivable offset somewhat by an increase in prepaid expenses. For the three months ended March 31, 1998, cash provided by operating activities increased primarily as a result of higher net income, increases in accrued liabilities and deferred revenue balances and reductions in prepaid expenses and accounts receivable. Our investing activities used cash of $49.8 million in the three months ended March 31, 1999 primarily due to the net increase in short-term and long-term investments of $41.1 million and capital expenditures of $8.6 million. Our investing activities used cash of $28.0 million in the three months ended March 31, 1998 due to the net increase in short-term investments of $23.3 million and capital expenditures of $4.7 million. Our investing activities used cash of $13.4 million in 1998 primarily due to capital expenditures of $23.4 million. In addition, we used $1.3 million of cash for the purchase of Windward in May 1998. Our 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. Our 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. 35 37 Financing activities provided cash of $7.1 million in the three months ended March 31, 1999, and $4.3 million in the three months ended March 31, 1998 from the issuance of common stock under our employee stock plans. Financing activities provided cash of $14.0 million in 1998, also arising primarily from the issuance of common stock under our employee stock plans. Financing activities provided cash of $102.9 million in 1997, primarily from the net proceeds of $97.5 million from the issuance of the 5.25% convertible subordinated notes due 2004 and issuance of common stock of $5.8 million under our 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 our employee stock plans, partially offset by the payments made against notes payable. In October 1997, we issued $100.0 million of 5.25% notes, for which we received net proceeds of $97.5 million. The 5.25% notes provide for semi-annual interest payments each May 1 and November 1, commencing on May 1, 1998. The 5.25% notes are convertible into shares of our common stock at any time prior to the close of business on the maturity date, unless previously redeemed or repurchased, at a conversion price of $21.50 per share, subject to adjustment in certain events. On or after November 5, 2002, the 5.25% notes will be redeemable over the period of time until maturity at our option at declining premiums to par. The debt issuance costs are being amortized over the term of the 5.25% notes using the interest method. Following the consummation of the offering of the notes, we will have a ratio of long-term debt to total capitalization at March 31, 1999 of approximately 17% (19% if the over-allotment option is exercised in full). As a result of this additional indebtedness, our principal and interest payment obligations will increase substantially. The degree to which we will be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. We will require substantial amounts of cash to fund scheduled payments of principal and interest on our indebtedness, including the notes, future capital expenditures and any increased working capital requirements. If we are unable to meet our cash requirements out of cash flow from operations, we cannot assure you that we will be able to obtain alternative financing. During the first quarter of 1999, we signed a letter of intent to enter into an agreement to lease real estate to be built by the lessor. In a separate agreement, we were retained by the lessor as its agent for the construction of the facility. The leases for land and improvements will be classified as operating leases. The various agreements provide for minimum lease payments which begin, generally, upon completion of construction, which is expected to be June 2001, as well as certain residual value guarantees. Predevelopment costs incurred by us were approximately $1.4 million through March 31, 1999, and were subsequently reimbursed by the lessor. We believe that our current cash, cash equivalents and short-term investment balances and cash flow from operations will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next twelve months. However, we may require additional funds to support our working capital requirements for other purposes and may seek to raise such additional funds through public or private equity financing or from other sources. We cannot assure you that additional financing will be available at all or that if available, we will be able to obtain it on terms favorable to us. 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 were developed using two digits rather than four to determine the applicable year. For example, computer 36 38 programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This error could result in system failures, generation of erroneous data or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with such Year 2000 requirements. The Year 2000 problem is pervasive and complex. Significant uncertainty exists in the software industry concerning the potential impact of Year 2000 problems. 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 our software products and services are "Year 2000 ready" -- 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 ready. 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 ready, 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, original equipment manufacturer derivative versions of older VERITAS products may not be Year 2000 ready. 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 our customers in dealing with the Year 2000 issue, as we have formally notified all customers of the extent of the Year 2000 readiness of our products. Although we have not been a party to any litigation or arbitration proceeding to date that involves Year 2000 compliance issues with our products or services, there can be no assurance that we will not in the future be required to defend our 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 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 our customers and suppliers; software products sold to customers; the hardware and software systems used internally by us 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. 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 37 39 are not Year 2000 ready. Based on our initial analysis of the systems potentially impacted by conducting business in the twenty-first century, we are 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 ready; and implementation of Year 2000 ready 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 Completed for customers Communication networks used to carry Assessment inventory completed Completed products and provide services Hardware and software systems used to Assessment inventory completed Completed manage our business Hardware and software systems used to Assessment completed Completed deliver products and services Hardware and software systems used to Validation, testing and remediation in Q3 1999 deliver products and provide process services (including desktops) Communication networks used to carry Validation, testing and remediation in Q3 1999 products and provide services process Non-information technology systems and Systems upgraded or replaced as Q3 1999 services appropriate, testing and implementation Hardware and software systems used to Validation, testing and remediation Q4 1999 manage our business
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 adversely affected. 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 ready 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 $0.5 million and do not expect total costs of the compliance activities to exceed $1.0 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, we cannot assure you 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. 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. If we fail to address any unforeseen Year 2000 issue our business could be harmed. Full contingency plans are scheduled for completion by September 1, 1999. 38 40 NSMG OVERVIEW The NSMG business, sometimes referred to in this prospectus as the Network & Storage Management Group, develops and markets software products and provides related services enabling information technology professionals to manage distributed network resources and to secure and protect enterprise data. The Network & Storage Management Group operates in a single industry segment. Its products offer features such as system backup, disaster recovery, migration, replication, automated client protection, storage resource management, scheduling, event correlation and desktop management. VERITAS acquired the Network & Storage Management Group on May 28, 1999. Before then, the Network & Storage Management Group was an operating division of Seagate Software, which is a majority-owned and consolidated subsidiary of Seagate Technology. Seagate Technology is a data technology company that provides products for storing, managing and accessing digital information on computer systems. The Network & Storage Management Group was headquartered in Scotts Valley, California and had 17 offices and operations in seven countries worldwide. Neither Seagate Software nor Seagate Technology has updated the following discussion from April 2, 1999 and has no obligation to do so in this prospectus. In accordance with the rules of the SEC, VERITAS has not updated this historical discussion. The statements of operations discussed below include all revenues and costs attributable to the Network & Storage Management Group, including allocations of certain corporate administration, finance, and management costs. These costs were proportionately allocated to the Network & Storage Management Group based on time studies and detailed inquiries performed with Seagate Software's corporate marketing and general and administrative departmental managers. In addition, some of Seagate Software's operations were shared locations involving activities of the Network & Storage Management Group and to other businesses of Seagate Software. Costs incurred in shared locations are allocated among the Seagate Software businesses based on identification of the costs as relating to the specific businesses. Where specific identification is not possible, the costs are allocated between the Network & Storage Management Group and other businesses of Seagate Software using methodologies that management believes are reasonable. Transactions and balances between entities and locations within the Network & Storage Management Group itself have been eliminated. From August 1994 to June 1996, Seagate Technology acquired seven software companies that were engaged in developing and marketing network and/or storage management software products. In addition, in February 1996, Seagate Technology merged with Conner Peripherals, Inc. in a transaction accounted for as a pooling of interests. In connection with the merger, Seagate Technology purchased the outstanding minority interests in Conner's storage management software operations under Arcada Software, Inc. for $85.1 million, which resulted in allocations to goodwill and other intangibles of $47.4 million, a write-off of in-process research and development of $43.9 million and a deferred tax liability of $6.2 million. In June 1998, the Network & Storage Management Group acquired Eastman Software Storage Management Group, Inc., a subsidiary of Eastman Kodak Company, for $10.0 million in cash, which resulted in allocations to goodwill and other intangibles of $3.2 million and a write-off of in-process research and development of $6.8 million. The accompanying financial statements present the combined results of operations of the acquired companies from the dates of acquisition. The Network & Storage Management Group operated and reported financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998 ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996 ended on June 28, 1996. Fiscal 1998 was comprised of 53 weeks and fiscal years 1997 and 1996 were comprised of 52 weeks. 39 41 Arcada, which was acquired by the Network & Storage Management Group pursuant to Seagate Technology's merger with Conner, had a fiscal year that ended on the Saturday closest to December 31. Accordingly, Arcada's statement of operations for the year ended December 30, 1995 has been combined with the Network & Storage Management Group's statement of operations for the year ended June 30, 1995. In order to conform Arcada's fiscal year end to the Network & Storage Management Group's fiscal year end, the Network & Storage Management Group's combined statement of operations for the year ended June 28, 1996 includes six months, July 1, 1995 through December 31, 1995, for Arcada which are also included in the Network & Storage Management Group's combined statement of operations for the year ended June 30, 1995. Arcada's duplicated results for the period from July 1, 1995 to December 30, 1995 includes revenues of $37.7 million, operating expenses of $29.3 million, and a net loss of $80,000. BUSINESS COMBINATIONS VALUATION METHODOLOGY In accordance with the provisions of Accounting Principles Board Opinion 16, all identifiable assets, including identifiable intangible assets, were assigned a portion of the cost of the acquired enterprise (purchase price) on the basis of their respective fair values. This included the portion of the purchase price properly attributed to incomplete research and development projects that should be expensed according to the requirements of Interpretation 4 of Statement of Financial Accounting Standard No. 2. Intangible assets were identified through: - analysis of the acquisition agreement; - consideration of the Network & Storage Management Group's intentions for future use of the acquired assets; and - analysis of data available concerning the business's products, technologies, markets, historical financial performance, estimates of future performance and the assumptions underlying those estimates. The economic and competitive environment in which the Network & Storage Management Group and the company to be acquired operate was also considered in the valuation analysis. Specifically, purchased research and development was identified and valued through extensive interviews and discussions with the Network & Storage Management Group and the company to be acquired's management and the analysis of data provided by the company to be acquired concerning the company to be acquired's developmental products, their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The Income Approach, which includes an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each purchased research and development project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. ARCADA SOFTWARE, INC. Overview As of the acquisition date, Arcada had spent a significant amount of money on research and development related to the re-development efforts to add features and utilities to the Desktop, NetWare and Windows NT products such as disk grooming, hierarchical storage management, upgraded graphical user interfaces, file and server replication, and server mirroring in order to continue to meet increasingly complex user needs. 40 42 In accordance with Statement of Financial Accounting Standards No. 86, paragraph 38, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," "the cost of software purchased to be integrated with another product or process will be capitalized only if technological feasibility was established for the software component and if all research and development activities for the other components of the product or process were completed at the time of the purchase." Although Seagate Software purchased existing products from Arcada, since the majority of the original underlying code and base technology for the NetWare and Windows NT product families was completed in the 1990 time frame, the technologies, as of the date of valuation, were undergoing significant re-development. Assumptions Revenue. Future revenue estimates were generated for the following product families: - Desktop; - NetWare; and - Windows NT. Aggregate revenue for Arcada products was estimated to be approximately $94 million for the ten and one-half months ending December 31, 1996. Revenues were estimated to increase to approximately $161 million and $234 million for calendar years 1997 and 1998 when most of the in-process projects were expected to be complete and shipped. Thereafter, revenue was estimated to increase at rates ranging from 35% to 40% for calendar years 1999 through 2002. Revenue estimates were based on: - aggregate revenue growth rates for the business as a whole; - individual product revenues; - growth rates for the storage management software market; - the aggregate size of the storage management software market; - anticipated product development and introduction schedules; - product sales cycles; and - the estimated life of a product's underlying technology. The estimated product development cycle of the new products ranged from 12 to 18 months. Actual revenues for calendar years 1997 and 1998 were less than those estimated. Operating expenses. Operating expenses used in the valuation analysis of Arcada included: - cost of goods sold; - general and administrative expense; - selling and marketing expense; and - research and development expense. In developing future expense estimates, an evaluation of both Seagate Software and Arcada's overall business model, specific product results, including both historical and expected direct expense levels, as appropriate, and an assessment of general industry metrics was conducted. Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue, for the developed and in-process technologies ranged from approximately 5% to 30% for Desktop, 10% for NetWare and 5% for Windows NT. The Network & Storage Management Group's cost of goods sold was 23% for fiscal 1996, 23% for fiscal 1997 and 13% for fiscal 1998. 41 43 General and administrative expense. General and administrative expense, expressed as a percentage of revenue, for the developed and in-process technologies ranged from 12% in calendar 1996 to 8% in calendar 1998 and beyond. Selling and marketing expense. Selling and marketing expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be 30% throughout the estimation period. Research and development expense. Research and development expense consists of the costs associated with activities undertaken to correct errors or keep products updated with current information, also referred to as "maintenance" research and development. Maintenance research and development includes all activities undertaken after a product is available for general release to customers to correct errors or keep the product updated with current information. These activities include routine changes and additions. The maintenance research and development expense was estimated to be 5% of revenue for the developed technologies and 3% of revenue for the in-process technologies throughout the estimation period. In addition, as of the date of acquisition, the Network & Storage Management Group management anticipated the costs to complete the Desktop, NetWare, and Windows NT technologies at approximately $6.8 million, $4.5 million and $7.5 million, respectively. Since the acquisition date, all projects originally acquired from Arcada were commercially released prior to the end of the fourth quarter of fiscal 1997. Effective tax rate. The effective tax rate utilized in the analysis of developed and in-process technologies was 38%, which reflects Seagate's combined federal and state statutory income tax rates, exclusive of non-recurring charges at the time of the acquisition and estimated for future years. Discount rate. The discount rates selected for Arcada's developed and in-process technologies were 15% and 17.5%, respectively. In the selection of the appropriate discount rates, consideration was given to (1) the weighted average cost of capital, approximately 13% to 15% at the date of acquisition of its parent, Seagate Technology, Inc. and (2) the weighted average return on assets, approximately 18%. The discount rate utilized for the in-process technology was determined to be higher than Seagate Technology's weighted average cost of capital due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than Seagate Technology's weighted average cost of capital, management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. EASTMAN SOFTWARE STORAGE MANAGEMENT GROUP Overview Eastman Software Storage Management Group's two primary products are OPEN/stor for Windows NT and AvailHSM for NetWare. By integrating Eastman's product line, the Network & Storage Management Group will be able to convert their Storage Migrator product into a stand-alone hierarchical storage management application for Windows NT environments. As of the date of acquisition, the Network & Storage Management Group abandoned the AvailHSM product and technology due to dated features and functionality; the valuation analysis did not include a fair value for the AvailHSM product. As for OPEN/stor at the date of acquisition, the Network & Storage Management Group planned to phase out the product over the following 12 to 15 months. The Network & Storage Management Group's purpose for the acquisition was for the next generation technologies that were underway at Eastman, referenced by project names Sakkara and Phoenix. These projects were complete re-writes of Eastman's prior generation technology that would allow the product to be sold stand-alone upon completion. 42 44 In accordance with Statement of Financial Accounting Standards No. 86, paragraph 38, "the cost of software purchased to be integrated with another product or process will be capitalized only if technological feasibility was established for the software component and if all research and development activities for the other components of the product or process were completed at the time of the purchase." Although the Network & Storage Management Group purchased existing products from Eastman, the existing products did not operate on a stand-alone basis. Therefore, as mentioned above, all of the original underlying code and base technology for the next generation products were in the process of being completely re-written as date of valuation. Assumptions Revenue. Future revenue estimates were generated for the following technologies: - OPEN/stor; - Sakkara; and - Phoenix. Aggregate revenue for existing Eastman products was estimated to be approximately $167,000 for the one month ending June 30, 1998. Revenues were estimated to increase to approximately $3.9 million and $7.1 million for fiscal years 1999 and 2000 when most of the in-process projects were expected to be complete and shipping. Thereafter, revenue was estimated to increase at rates ranging from 20% to 30% for fiscal years 2001 through 2006. Revenue estimates were based on: - aggregate revenue growth rates for the business as a whole; - individual product revenues; - growth rates for the storage management software market; - the aggregate size of the storage management software market; - anticipated product development and introduction schedules; - product sales cycles; and - the estimated life of a product's underlying technology. Operating expenses. Operating expenses used in the valuation analysis of Eastman included: - cost of goods sold; - general and administrative expenses; - selling and marketing expense; and - research and development expense. In developing future expense estimates, an evaluation of both the Network & Storage Management Group and Eastman's overall business model, specific product results, including both historical and expected direct expense levels as appropriate, and an assessment of general industry metrics was conducted. Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be approximately 5% throughout the estimation period. The Network & Storage Management Group's cost of goods sold was 23% for fiscal 1996 and 1997. General and administrative expense. General and administrative expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be approximately 10% throughout the estimation period. Selling and marketing expense. Selling and marketing expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be 27% throughout the estimation period. 43 45 Research and development expense. Research and development expense consists of the costs associated with activities undertaken to correct errors or keep products updated with current information, also referred to as "maintenance" research and development. Maintenance research and development includes all activities undertaken after a product is available for general release to customers to correct errors or keep the product updated with current information. These activities include routine changes and additions. The maintenance research and development expense was estimated to be 5% of revenue for the developed and in-process technologies throughout the estimation period. In addition, as of the date of acquisition, the Network & Storage Management Group's management anticipated the costs to complete the in-process technologies at approximately $1.8 million. Effective tax rate. The effective tax rate utilized in the analysis of developed and in-process technologies was 38%, which reflects the Network & Storage Management Group's combined federal and state statutory income tax rates, exclusive of non-recurring charges at the time of the acquisition and estimated for future years. Discount rate. The discount rates selected for Eastman's developed and in-process technologies were 15% and 20%, respectively. In the selection of the appropriate discount rates, consideration was given to (1) the weighted average cost of capital, approximately 15% at the date of acquisition and (2) the weighted average return on assets, approximately 18%. The discount rate utilized for the in-process technology was determined to be higher than the Network & Storage Management Group's weighted average cost of capital due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than the Network & Storage Management Group's weighted average cost of capital, management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. CALYPSO SOFTWARE SYSTEMS, INC. Calypso was a software developer in the enterprise network/system management market. Calypso provided software which was designed to enable companies to automate the management of their distributed applications. At the date of acquisition, Calypso had two main products: Maestro Vision and Atrium Extendible Management System for Spectrum. Both existing products, as of the acquisition date, were planned to be phased out over the following 24 months. Calypso, at the acquisition date, was in the process of developing the next generation Atrium Extendible Management System product that was to be sold stand-alone. Both Maestro and Atrium Extendible Management System for Spectrum were originally designed for use only on certain system platforms, Cabletron and Spectrum, respectively. However, Atrium Extendible Management System, stand-alone, would allow systems managers on any system platform to distribute software; monitor central processing units, memory, and operating system administration; manage applications, file systems, and print services; and perform UNIX and NT system administration. As of the date of acquisition, Calypso had undergone or was in the process of undergoing the re-write of code in C++, adding navigator capabilities, developing web server and browser interoperability, developing CORBA interoperability, and developing Network OLE/COM interoperability for Atrium Extendible Management System, stand-alone. The estimated cost to complete, at the date of acquisition, was approximately $750,000. These in-process research and development projects were successfully completed prior to a restructuring of operations in the third quarter of fiscal 1997. As a result of this restructuring and a change in Seagate Software's strategic direction, in the first quarter of fiscal 1998 Seagate Software disposed of all the developed and in-process technologies originally acquired from Calypso. 44 46 ONDEMAND SOFTWARE, INC. OnDemand developed and marketed electronic software distribution products for network management in the client/server environment. OnDemand's flagship product was WinINSTALL. As of the date of acquisition, OnDemand was in the process of developing the next generation of WinINSTALL Version 6.0. A significant feature of Version 6.0 which is not available by any competitive product, was a rollback with clone capability, which would allow the user to selectively return a PC to a previous state upon installation failure or upon user demand. In order for WinINSTALL Version 6.0 to become a commercially viable product, OnDemand, as of the valuation date, had undergone or was in the process of undergoing significant development efforts, including: - developing rollback facilities, including clone capability; - expanding global editor to be included in the WinINSTALL registry file; - improving WinINSTALL Remote to ease package generation and distribution; - adding a feature that would allow optional electronic mail notification on installation failure and on installation refusals due to license limitations; and - expanding copy options and interactive install displays, adding substitution variables and allowing version control of backup files. As of the date of acquisition, Seagate Software management anticipated the costs to complete WinINSTALL Version 6.0 at approximately $920,000. Since the acquisition date, the acquired in-process research and development from OnDemand has been completed and the related products were released during fiscal 1997. 45 47 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, line items in the Network & Storage Management Group's statements of operations expressed as a percentage of total revenue.
FISCAL YEAR ENDED NINE MONTHS ENDED ------------------------------- -------------------- JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2, 1996 1997 1998 1998 1999 -------- -------- ------- -------- -------- Revenues: Licensing.............................. 88% 93% 91% 91% 92% Licensing from Seagate Technology...... 8 3 3 3 3 Maintenance, support and other......... 4 4 6 6 5 --- --- --- --- --- Total revenues.................... 100 100 100 100 100 Cost of revenues: Licensing.............................. 11 8 8 9 5 Licensing from Seagate Technology...... 3 1 * * * Maintenance, support and other......... * 1 1 1 2 Amortization of developed technologies........................ 9 12 4 5 1 --- --- --- --- --- Total cost of revenues............ 23 22 13 15 8 --- --- --- --- --- Gross profit............................. 77 78 87 85 92 Operating expenses: Sales and marketing.................... 48 48 39 39 37 Research and development............... 28 24 18 18 16 General and administrative............. 17 18 13 13 9 In-process research and development.... 52 * 4 -- -- Amortization of goodwill and other intangibles......................... 11 14 7 8 5 Restructuring costs.................... 8 2 * -- -- --- --- --- --- --- Total operating expenses.......... 164 106 81 78 67 --- --- --- --- --- Income (loss) from operations............ (87) (28) 6 7 25 Interest expense....................... (1) (2) (1) (1) * Other, net............................. * * * * 1 --- --- --- --- --- Interest and other, net............. (1) (2) (1) (1) 1 --- --- --- --- --- Income (loss) before income taxes........ (88) (30) 5 6 26 Benefit from (provision for) income taxes.................................. 8 7 (3) (4) (11) --- --- --- --- --- Net income (loss)........................ (80)% (23)% 2% 2% 15% === === === === ===
- ------------------------- * Less than 1% RESTATEMENT OF FINANCIAL STATEMENTS The Network & Storage Management Group had previously allocated a portion of goodwill to developed technology and evaluated the impairment of goodwill based on the revenues from the related software. Using this method, the Network & Storage Management Group recorded write-downs and write-offs of goodwill in fiscal 1997 in the amount of $10.3 million. The Network & Storage Management Group has re-evaluated its methodology and determined that goodwill should not be allocated to developed technology under Accounting Principles Board Opinion 17, "Intangible Assets." As a result, the Network & Storage Management Group subsequently made adjustments to decrease the amounts of goodwill previously written-down and written-off from $10.3 million to $6.2 million in fiscal 1997. The 46 48 additional goodwill of $4.1 million is being amortized over the remaining estimated useful lives of approximately 5 years. The effect of this adjustment on previously reported combined financial statements as of and for the years ended July 3, 1998 and June 27, 1997 is as follows (in thousands):
AS REPORTED AS RESTATED --------------------- --------------------- AS OF AND FOR AS OF AND FOR THE YEARS ENDED THE YEARS ENDED --------------------- --------------------- JUNE 27, JULY 3, JUNE 27, JULY 3, 1997 1998 1997 1998 --------- --------- --------- --------- Amortization of goodwill..................... $ 23,987 $ 12,456 $ 20,250 $ 13,236 Income (loss) from operations................ (44,945) 10,210 (41,208) 9,430 Net income (loss)............................ (36,937) 3,636 (33,200) 2,856 Goodwill and other intangible assets, net.... 52,480 38,374 56,217 41,331 Accumulated deficit.......................... (227,146) (223,510) (223,409) (220,553)
The effect of this adjustment on previously reported combined financial statements as of and for the nine months ended April 3, 1998 is as follows (in thousands):
AS REPORTED AS RESTATED ----------------- ----------------- AS OF AND FOR THE AS OF AND FOR THE NINE MONTHS ENDED NINE MONTHS ENDED ----------------- ----------------- APRIL 3, 1998 APRIL 3, 1998 ----------------- ----------------- (UNAUDITED) (UNAUDITED) ----------------- ----------------- Amortization of goodwill........................... $ 10,071 $ 10,656 Income from operations............................. 9,833 9,248 Net income......................................... 3,254 2,669 Goodwill and other intangible assets, net.......... 36,014 39,168 Accumulated deficit................................ (223,892) (220,741)
NINE MONTHS ENDED APRIL 3, 1998 VERSUS NINE MONTHS ENDED APRIL 2, 1999 Revenues The Network & Storage Management Group's revenues are primarily derived from the sale of product licenses, software maintenance, technical support, training and consulting. The Network & Storage Management Group recognizes license revenues in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition." Revenues from software license agreements are recognized at the time of product delivery. Service revenues from customer maintenance fees for ongoing customer support and product updates are recognized ratably over the maintenance term, which is typically 12 months. Service revenues from training and consulting are recognized when such services are performed. Total revenues increased 29% from $131.5 million in the nine months ended April 3, 1998 to $170.2 million in the nine months ended April 2, 1999. License revenues, excluding license revenues from Seagate Technology, grew 30% from $120.1 million in the nine months ended April 3, 1998 to $156.1 million in the nine months ended April 2, 1999 due primarily to increased sales of Seagate Backup Exec, the Network & Storage Management Group's leading storage management product featuring backup and restore solutions for Microsoft's Windows NT Server and Windows NT workstation operating systems. 47 49 Indirect revenues, which include distribution and original equipment manufacturer sales, increased 33% from $117.4 million in the nine months ended April 3, 1998 to $ 155.8 million in the nine months ended April 3, 1999. Direct revenues, which include corporate licensing and other direct sales to users, increased 2% from $14.1 million in the nine months ended April 3, 1998 to $14.5 million in the nine months ended April 2, 1999. Revenues increased 21% within the Americas from $88.2 million in the nine months ended April 3, 1998 to $106.9 million in the nine months ended April 2, 1999. Revenues grew internationally 46% from $43.4 million in the nine months ended April 3, 1998 to $63.3 million in the nine months ended April 2, 1999 due in part to the Network & Storage Management Group's continued expansion of its European distribution channel. Revenues from Seagate Technology increased 23% from $4.2 million in the nine months ended April 3, 1998 to $5.1 million in the nine months ended April 2, 1999 primarily due to increased sales of Backup Exec for Windows NT to Seagate Technology's original equipment manufacturer tape drive operations. Total maintenance, support and other revenues grew 23% from $7.3 million in the nine months ended April 3, 1998 to $9.0 million in the nine months ended April 2, 1999 primarily due to increases in the sales of maintenance agreements and training and consulting services resulting from a larger installed customer base. Cost of revenues The cost of revenues consists of amortization of acquired developed technology, royalties, product packaging, documentation, duplication, production and the cost of maintenance, technical support and consulting services. Acquired developed technology is amortized based on the greater of the straight-line method over its estimated useful life, 30 to 48 months or the ratio of current revenues to the total of current and anticipated future revenues. The total cost of revenues decreased 29% from $19.2 million in the nine months ended April 3, 1998 to $13.5 million in the nine months ended April 2, 1999. Cost of license revenues decreased from $11.0 million in the nine months ended April 3, 1998 to $8.2 million in the nine months ended April 2, 1999 and represented 9% and 5% of related license revenues, respectively. The cost of license revenues from Seagate Technology decreased from $402,000 in the nine months ended April 3, 1998 to $329,000 in the nine months ended April 2, 1999 and represented 10% and 6% of related license revenues, respectively. Both declines were due primarily to reductions in product packaging and documentation costs resulting from a shift in mix to CD-ROMs from disks and increased sales of higher-margin server products. The cost of maintenance, support and other revenues increased from $1.4 million in the nine months ended April 3, 1998 to $2.6 million in the nine months ended April 2, 1999 and represented 19% and 29% of related service revenues, respectively. The increase was primarily due to expansion of the Network & Storage Management Group's professional services workforce necessary to support the growth in training and consulting revenues. The amortization of developed technology decreased from $6.4 million in the nine months ended April 3, 1998 to $2.4 million in the nine months ended April 2, 1999 representing 5% and 1% of total revenues, respectively. This decrease was primarily due to decreases in amortization expense based on lower levels of intangible assets because certain assets have become fully amortized. 48 50 Sales and marketing Sales and marketing expenses consist primarily of personnel-related expenses, advertising, sales and marketing promotions and customer technical support costs. Sales and marketing expenses increased from $51.4 million in the nine months ended April 3, 1998 to $63.6 million in the nine months ended April 2, 1999 and represented 39% and 37% of total revenues, respectively. The increase in terms of absolute dollars was primarily due to increases in advertising, promotion and technical support costs in Europe and other international regions necessary to support the related revenue growth. Research and development Research and development expenses consist primarily of personnel-related expenses, depreciation of development equipment and facilities and occupancy costs. In accordance with Statement of Financial Accounting Standards No. 86, software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. The establishment of technological feasibility of the Network & Storage Management Group's products and general release of such software has substantially coincided. As a result, software development costs qualifying for capitalization have been insignificant. Research and development expenses increased from $24.0 million in the nine months ended April 3, 1998 to $26.7 million in the nine months ended April 2, 1999 and represented 18% and 16% of total revenues, respectively. The increase was primarily due to increases in personnel and related expenses and the acquisition of development activities associated with the purchase of Eastman Software Storage Management Group, Inc. General and administrative General and administrative expenses consist primarily of personnel-related expenses for finance, legal, information technology, human resources, general management, fixed asset write-downs and outside services. General and administrative expenses decreased from $17.1 million in the nine months ended April 3, 1998 to $15.6 million in the nine months ended April 2, 1999 and represented 13% and 9% of total revenues, respectively. The decrease was primarily due to decreased information technology related expenses, partially offset by increases in other general and administrative expenses necessary to support the Network & Storage Management Group's growth. Amortization of goodwill and other intangibles Goodwill represents the excess of the purchase price of acquired companies over the estimated fair values of the tangible and intangible net assets acquired. Goodwill is amortized on a straight-line basis over periods up to seven years. Other intangible assets consist of acquired trademarks, assembled workforces, distribution networks, developed technology, customer base, and covenants not to compete. Amortization of other intangibles, other than acquired developed technology, is provided based on the straight-line method over the respective useful lives of the assets ranging from one to five years. The amortization of goodwill and other intangibles decreased from $10.7 million in the nine months ended April 3, 1998 to $7.7 million in the nine months ended April 2, 1999. This amortization represented 8% of total revenues in the nine months ended April 3, 1998 and 5% of total revenues in the nine months ended April 2, 1999. The decrease was primarily due to decreases in amortization expense based on lower levels of intangible assets and write-downs and write-offs of the carrying value of goodwill and other intangible assets of approximately $1.9 million during the quarter ended January 2, 1998, based on asset values for the assembled work forces and associated goodwill that had become impaired. 49 51 Interest and other, net Total interest and other, net increased from a net expense of $744,000 in the nine months ended April 3, 1998 to a net income of $1.4 million in the nine months ended April 2, 1999. This total interest and other, net represented 1% of total revenues in the nine months ended April 3, 1998 and 1% of total revenues in the nine months ended April 2, 1999. The increase in interest income and other, net was primarily due to lower interest expense on a lower level of outstanding borrowings from Seagate Technology. Income taxes The Network & Storage Management Group expects its annual effective tax rate on anticipated operating income for the 1999 fiscal year to approximate 43%. The projected effective tax rate exceeds the U.S. statutory rate primarily due to the amortization of goodwill which is not deductible for tax purposes, and foreign taxes on certain earnings generated in higher tax rate jurisdictions. This expected annual effective tax rate of 43% has been used to record the provision for income taxes for the nine month period ended April 2, 1999 compared with a 69% effective tax rate used to record the provision for income taxes for the comparable year-ago period. The effective tax rate used to record the provision for the income taxes for the nine month period ended April 3, 1998 was based on the expected annual effective tax rate applicable to anticipated fiscal 1998 operating income as adjusted for amortization of nondeductible goodwill. Prior to its acquisition by VERITAS, the Network & Storage Management Group was included in the consolidated federal and certain combined and consolidated state and foreign income tax returns of Seagate Technology. Seagate Technology and the Network & Storage Management Group were parties to a tax allocation agreement. Under the tax allocation agreement, Network & Storage Management Group's ability to recognize the tax benefits of certain net operating loss carryforwards and foreign and domestic tax credits was impacted by Seagate Technology's operating income during the periods that NSMG was included in Seagate Technology's consolidated federal and other tax returns. FISCAL YEAR ENDED JUNE 27, 1997 VERSUS FISCAL YEAR ENDED JULY 3, 1998 Revenues Total revenues increased 24% from $141.5 million in fiscal 1997 to $175.0 million in fiscal 1998. License revenues, excluding license revenues from Seagate Technology, grew 23% from $130.7 million in fiscal 1997 to $160.2 million in fiscal 1998 due primarily to increased sales of Seagate Backup Exec, the Network & Storage Management Group's leading storage management product featuring backup and restore solutions for Microsoft's Windows NT Server and Windows NT workstation operating systems. The Network & Storage Management Group continued to expand both its indirect and direct sales channels. Indirect revenues, which include distribution and original equipment manufacturer sales, increased 25% from $124.8 million in fiscal 1997 to $156.3 million in fiscal 1998 while direct revenues, which include corporate licensing and other direct sales to users, increased 12% from $16.7 million in fiscal 1997 to $18.7 million in fiscal 1998. Revenues increased within the Americas 13% from $102.2 million in fiscal 1997 to $115.3 million in fiscal 1998. Revenues grew internationally 52% from $39.3 million in fiscal 1997 to $59.7 million in fiscal 1998 due in part to the Network & Storage Management Group's continued expansion of its European distribution channel. 50 52 Revenues from Seagate Technology increased 3% from $4.9 million in fiscal 1997 to $5.0 million in fiscal 1998 primarily due to increased sales of Backup Exec for Windows NT to Seagate Technology's original equipment manufacturer tape drive operations. Total maintenance, support and other revenues grew 66% from $5.9 million in fiscal 1997 to $9.8 million in fiscal 1998 primarily due to increases in the sales of maintenance agreements and training and consulting services resulting from a larger installed customer base. During fiscal 1998, the Network & Storage Management Group generated export revenues from the United States of approximately $57.8 million. Expenses from the Network & Storage Management Group's sales offices outside of the U.S. were approximately $20.1 million as remeasured to the U.S. dollar from foreign currencies. The principal currency for the sales offices is the British pound. The Network & Storage Management Group believes that its exposure to foreign currency fluctuations is not material and does not engage in foreign currency hedging programs. Cost of revenues The total cost of revenues decreased from $32.1 million in fiscal 1997 to $23.3 million in fiscal 1998. The cost of license revenues increased from $11.8 million in fiscal 1997 to $13.7 million in fiscal 1998 and remained consistent at 9% of related license revenues during both fiscal years. The cost of license revenues from Seagate Technology decreased from $1.8 million in fiscal 1997 to $411,000 in fiscal 1998 and represented 37% and 8% of related license revenues, respectively. The decrease was due primarily to reductions in product packaging and documentation costs resulting from a shift in mix to CD-ROMs from disks and increased sales of higher-margin server products. The cost of maintenance, support and other revenues increased from $789,000 in fiscal 1997 to $2.1 million in fiscal 1998 and represented 13% and 21% of related service revenues, respectively. This increase was primarily due to expansion of the Network & Storage Management Group's professional services workforce necessary to support the growth in training and consulting revenues. The lower service revenue margins in 1998 were primarily due to increased spending for additional personnel and new facilities to support higher levels of customer support services, such as training, consulting and preferred technical support. The amortization of developed technology decreased from $17.7 million in fiscal 1997 to $7.1 million in fiscal 1998 and represented 12% and 4% of total revenues, respectively. The decrease was primarily due to higher write-downs in fiscal 1997 of certain developed technologies amounting to approximately $6.9 million as a result of asset values that had become impaired based on reductions in estimated future cash flows and decreases in amortization expense based on lower levels of intangible assets. In 1997 the unamortized software costs were reviewed under the guidance of Statement of Financial Accounting Standards No. 86 for potential impairment. The Network & Storage Management Group compared the net realizable value on a product by product basis to the unamortized costs. Impairments were caused by a number of factors including the Network & Storage Management Group's decision to stop selling products or technologies such as DOS, new acquisitions, or new product designs. Additionally in 1997, the Network & Storage Management Group incurred a write-off to expected net realizable value related to the decision to close down and sell one of its acquisitions, Calypso Software Systems, Inc. The Network and Storage Management Group is not currently generating revenue from any products for which the related developed technology has been impaired. The write-downs of inventory to net realizable value in fiscal 1998 were the result of new product introductions and, in the second quarter of fiscal 1998, the consolidation of the Network & Storage Management Group's fulfillment warehouses to a single outsourcing partner. As a result of the change in 51 53 strategy to move to a single outsourcing partner, the Network & Storage Management Group was required contractually to purchase components from some of its terminated vendors. This inventory was reviewed in conjunction the new outsourcing partner and the components that were excess or obsolete were written down. The inventory write-down in fiscal 1997 related to Sytron products for which the decision was made in 1997 to no longer market these products. Sales and marketing Sales and marketing expenses increased slightly from $68.2 million in fiscal 1997 to $68.3 million in fiscal 1998. These expenses represented 48% of total revenues in fiscal 1997 and 39% of total revenues in fiscal 1998. The slight increase was primarily due to increases in advertising, promotion and technical support costs necessary to support revenue growth. These increases were partially offset by reductions in workforce in fiscal 1997 due to facility consolidations. Research and development Research and development expenses decreased from $33.6 million in fiscal 1997 to $31.7 million in fiscal 1998. These expenses represented 24% of total revenues in fiscal 1997 and 18% of total revenues in fiscal 1998. The decrease was primarily due to facility consolidations and reductions in workforce in fiscal 1997. General and administrative General and administrative expenses decreased from $26.0 million in fiscal 1997 to $22.3 million in fiscal 1998. These expenses represented 18% of total revenues in fiscal 1997 and 13% of total revenues in fiscal 1998. The decrease was primarily due to decreases in personnel-related expenses from facility consolidations and reductions in workforce in fiscal 1997 and decreased legal costs. Write-off of in-process research and development During fiscal 1998, $6.8 million of in-process research and development was written off in connection with the purchase of Eastman Software Storage Management Group, Inc. Amortization of goodwill and other intangibles The amortization of goodwill and other intangibles decreased from $20.3 million in fiscal 1997 to $13.2 million in fiscal 1998. This amortization represented 14% of total revenues in fiscal 1997 and 8% of total revenues in fiscal 1998. The decrease was primarily due to decreases in amortization expense based on lower levels of intangible assets and write-downs and write-offs of the carrying value of goodwill and other intangible assets of approximately $6.2 million in fiscal 1997 versus $1.9 million in fiscal 1998 as a result of asset values that had become impaired. Long-lived assets other than developed technology, including associated goodwill, are assessed for impairment under the guidance of Statement of Financial Accounting Standards Board No. 121 (SFAS 121), and any write-offs or write-downs are included in amortization of goodwill and other intangibles. Goodwill not under the scope of SFAS 121 is assessed for impairment under the guidance of Accounting Principles Board No. 17, and any write-offs or write-downs are also included in amortization of goodwill and other intangibles. Developed technology is assessed for impairment under the guidance of Statement of Financial Accounting Standards Board No. 86, and any related write-offs or write-downs are included in costs of revenues. During fiscal 1997 and 1998, the Network & Storage Management 52 54 Group recorded impairment charges for write-offs and write-downs of acquired intangible assets and goodwill, exclusive of amounts relating to developed technology as follows: In 1997, the Network & Storage Management Group determined that it would abandon and discontinue selling substantially all of the current and future products and technologies obtained in the 1994 acquisition of Palindrome Corporation in favor of selling and supporting the current and future products and technologies obtained in the 1996 acquisition of Arcada Holdings, Inc. Additionally, in 1997, the Network & Storage Management Group decided to close down and sell Calypso Software Systems, Inc. and to abandon and discontinue sales of the developed and future DOS products and technologies acquired from Frye Computer Systems, Inc. In connection with these determinations, the Network & Storage Management Group recorded impairment charges to write-off and write-down goodwill amounting to approximately $6.2 million. In 1998, the Network & Storage Management Group assessed the recoverability of long-lived assets and as a result wrote-off assembled workforce and related goodwill amounting to $1.9 million for Network Computing, Inc., Netlabs, Inc. and Creative Interaction Technologies, Inc. Restructuring Restructuring charges were $2.5 million in fiscal 1997 and none in fiscal 1998. See management's discussion and analysis of restructuring costs for the fiscal year ended June 28, 1996 versus fiscal year ended June 27, 1997. Interest and other, net Total interest and other, net decreased from a net expense of $2.6 million in fiscal 1997 to a net expense of $713,000 in fiscal 1998, representing 2% and 1% of total revenues, respectively. The decrease in interest and other, net was primarily due to lower interest expense on a lower level of average outstanding borrowings from Seagate Technology. Income taxes The Network & Storage Management Group recorded a $10.6 million benefit from income taxes at an effective rate of 24% for fiscal 1997 compared with a $5.9 million provision for income taxes at an effective rate of 67% in fiscal 1998. The effective rate used to record the provision for income taxes in fiscal 1998 was greater than the statutory rate primarily due to foreign taxes in excess of the U.S. statutory tax rate, state income taxes, and goodwill amortization for certain acquisitions that was not deductible for tax purposes. The effective rate used to record the benefit from income taxes in fiscal 1997 was less than the statutory rate primarily due to increases in the valuation allowance for deferred tax assets and goodwill amortization for certain acquisitions that were not deductible for tax purposes. FISCAL YEAR ENDED JUNE 28, 1996 VERSUS FISCAL YEAR ENDED JUNE 27, 1997 Revenues Total revenues increased 21% from $116.7 million in fiscal 1996 to $141.5 million in fiscal 1997. License revenues, excluding license revenues from Seagate Technology, increased 28% from $102.3 million in fiscal 1996 to $130.7 million in fiscal 1997. The increase in licensing revenues was due in part to growth in the market for storage management software products and related services, expansion of the Network & Storage Management Group's European distribution channels and increased sales of Seagate Backup Exec for Windows NT. 53 55 Total maintenance, support and other revenues increased from $4.5 million in fiscal 1996 to $5.9 million in fiscal 1997. The increase in maintenance, support and other revenues was due in part to higher training and consulting revenues resulting from a larger customer base. Additionally, the fiscal 1997 results included a full year of operations for the fiscal 1996 acquisition of OnDemand Software, Inc., which resulted in increases in licensing revenues of approximately $6.8 million in fiscal 1997 as compared with fiscal 1996. During fiscal 1997, the Network & Storage Management Group generated export revenues from the United States of approximately $40.7 million. Expenses from the Network & Storage Management Group's sales offices outside of the U.S. were approximately $15.7 million as remeasured in the U.S. dollar from foreign currencies, principally the British pound. The Network & Storage Management Group believes that its exposure to foreign currency fluctuations is not material and does not engage in foreign currency hedging programs. Cost of revenues The total cost of revenues increased from $27.3 million in fiscal 1996 to $32.1 million in fiscal 1997 and represented 23% of total revenues in fiscal 1996 and 22% of total revenues in fiscal 1997. The majority of the increase in absolute dollars was due to an increase in the amortization of acquired developed technology due to a higher level of intangible assets. Additionally, in fiscal 1997 the Network & Storage Management Group wrote-off and wrote-down certain developed technologies amounting to approximately $6.9 million as a result of asset values that had become impaired based on the Network & Storage Management Group's phasing out of certain products. In 1997 the unamortized software costs were reviewed under the guidance of Statement of Financial Accounting Standards No. 86 for potential impairment. The Network & Storage Management Group business compared the net realizable value on a product by product basis to the unamortized costs including goodwill. Impairments were caused by a number of factors including the Network & Storage Management Group's decision to stop selling products or technologies such as DOS, new acquisitions, or new product designs. Additionally in 1997, the Network & Storage Management Group incurred a write-off related to the decision to close down and sell one of its acquisitions, Calypso Software Systems, Inc. The write-off was to the expected net realizable value. The Network and Storage Management Group is not currently generating revenue from any products for which the related developed technology has been impaired. The inventory write-down in fiscal 1997 related to Sytron products for which the decision was made in 1997 to no longer market these products. Sales and marketing Sales and marketing costs increased from $55.9 million in fiscal 1996 to $68.2 million in fiscal 1997 and represented 48% of total revenues in both periods. The increase in absolute dollars was due to increased personnel, advertising and promotion costs necessary to support revenue growth and the expansion of the Network & Storage Management Group's European distribution channel. Additionally, the fiscal 1997 results included a full year of operations for the Network & Storage Management Group's fiscal 1996 acquisitions compared with a partial year of operations in fiscal 1996. Research and development Research and development expenses increased from $32.5 million in fiscal 1996 to $33.6 million in fiscal 1997. These expenses represented 28% of total revenues in fiscal 1996 and 24% total revenues in fiscal 1997. The increase in absolute dollars was primarily due to increases in new product development and localization costs, partially offset by facility consolidations and reductions in workforce. Additionally, 54 56 the fiscal 1997 results included a full year of operations for the Network & Storage Management Group's fiscal 1996 acquisitions compared with a partial year of operations in fiscal 1996. General and administrative General and administrative expenses increased from $20.0 million in fiscal 1996 to $26.0 million in fiscal 1997. These expenses represented 17% of total revenues in fiscal 1996 and 18% of total revenues in fiscal 1997. The increase in absolute dollars was primarily due to increases in corporate administrative expenses, information systems and legal costs necessary to support the Network & Storage Management Group's growth. Additionally, the fiscal 1997 results included a full year of operations for the Network & Storage Management Group's fiscal 1996 acquisitions compared with a partial year of operations in fiscal 1996. Write-off of in-process research and development During fiscal 1996, total write-offs of in-process research and development were $61.1 million as a result of the Network & Storage Management Group's fiscal 1996 acquisitions. Amortization of goodwill and other intangibles Amortization of goodwill and other intangibles increased from $13.0 million in fiscal 1996 to $20.3 million in fiscal 1997. This amortization represented 11% of total revenues in fiscal 1996 and 14% of total revenues in fiscal 1997. The increase in absolute dollars was primarily due to increased amortization expense on a higher level of intangible assets and write-downs and write-offs of the carrying value of goodwill and other intangible assets of approximately $6.2 million as a result of asset values that had become impaired. Long-lived assets other than developed technology, including associated goodwill, are assessed for impairment under the guidance of Statement of Financial Accounting Standards Board No. 121 (SFAS 121), and any write-offs or write-downs are included in amortization of goodwill and other intangibles. Goodwill not within the scope of SFAS 121 is assessed for impairment under the guidance of Accounting Principals Board No. 17, and any write-downs or write-offs are also included in amortization of goodwill and other intangibles. Developed technology is assessed for impairment under the guidance of Statement of Financial Accounting Standards Board No. 86, and any related write-offs or write-downs are included in costs of revenues. During 1997 and 1996, the Network & Storage Management Group recorded impairment charges for write-offs and write-downs of acquired intangible assets and goodwill, exclusive of amounts relating to developed technology as follows: In 1996, Mr. Frye, the former owner of Frye Computer Systems, Inc., a 1995 acquisition, left the Network & Storage Management Group. With his departure, the Network & Storage Management Group decided to release Mr. Frye from his remaining non-compete period and to not use the Frye name trademark in future periods. As a result, the remaining carrying value of the intangible assets relating to the covenant not to compete and the trademark, and associated goodwill, totaling $2.2 million were written-off in their entirety. In 1997, the Network & Storage Management Group determined that it would abandon and discontinue selling substantially all of the current and future products and technologies obtained from the 1994 acquisition of Palindrome Corporation in favor of selling and supporting the current and future products and technologies obtained from the 1996 acquisition of Arcada Holdings, Inc. Additionally, in 1997, the Network & Storage Management Group decided to close down and sell Calypso Software Systems, Inc. and to abandon and discontinue sales of the developed and future products and technologies acquired from Frye Computer Systems, Inc. In connection with these determinations, the Network & Storage Management Group recorded write-offs and write-downs of goodwill amounting to approximately $6.2 million. 55 57 Restructuring Fiscal 1996 charges. Restructuring charges were $9.5 million in fiscal 1996 and $2.5 million in fiscal 1997. The 1996 restructuring charges pertain to the acquisition of Arcada Holdings, Inc. in February 1996. As a result of the acquisition, the Network & Storage Management Group business had obtained duplicate technologies and product lines in data protection and storage management software as those assets acquired in the Palindrome Corporation acquisition in fiscal 1995. The Network & Storage Management Group determined that it would be beneficial to consolidate the world-wide sales, marketing, research and development, technical support and other operations and administrative functions of its network and storage management business. A restructuring plan was approved by the Seagate Software board of directors in March 1996 and the plan resulted in facility closures and staff reductions of 43 at the Arcada facilities in Westboro, Massachusetts, the United Kingdom and France, as well as staff reductions of 69 at the former Palindrome facility in Naperville, Illinois. In addition, because Arcada had a better industry reputation and superior products to those of Palindrome, the Network & Storage Management Group's plan and strategy going forward was to focus on the technologies and products acquired from Arcada. The revenue relating to products acquired from Palindrome for fiscal 1996 was $15.9 million and the net operating loss relating to products acquired from Palindrome for fiscal 1996 was $2.1 million. For fiscal 1997, the revenue relating to products acquired from Palindrome was $3.3 million and the net operating loss relating to products acquired from Palindrome for fiscal 1997 was $3.7 million. The non-cash restructuring charges included amounts for abandonment of the Palindrome trademarks, impairment of the capitalized workforce intangible assets pertaining to the acquisition of Palindrome because of the planned layoff of personnel, write-off of a duplicate trade show booth, and write-off of obsolete Palindrome marketing materials. Cash restructuring charges included amounts for severance and benefits to terminated Palindrome employees, costs for facilities lease termination, other contract cancellation fees, and merger related costs incurred by Arcada in the acquisition of the Arcada minority pooling of interests by Seagate Technology. Fiscal 1997 charges. The fiscal 1997 restructuring charges netted to $2.5 million, comprised of a $3.4 million restructuring charge that included the closure of the Network & Storage Management Group's facility located in Cupertino, California. This facility closure resulted in cash charges for severance and benefits for 69 employee terminations and non-cash charges for excess facilities and the write-down of equipment. In addition, the $3.4 million included amounts related to the decision, after concluding a sale was no longer viable, to no longer pursue the technologies acquired in the fiscal 1996 acquisition of Calypso Software Systems, Inc. and to shut down its operations. This decision resulted in cash charges for severance and benefits for 35 employee terminations and non-cash charges for the write off of certain remaining intangible assets of Calypso. The revenue and net operating loss relating to products acquired from Calypso for fiscal 1996 was $444,000 and $53,000, respectively. For fiscal 1997, the revenue and net operating loss relating to products acquired from Calypso was $640,000 and $47,000, respectively. The restructuring charges recorded in fiscal 1997 were reduced by $957,000 for the reversal of amounts pertaining to the fiscal 1996 restructuring charges as a result of a higher than planned number of voluntary employee terminations without severance benefits prior to the facility shutdown and completion of other aspects of the restructuring plan at less than the originally estimated cost, net of an increase in the accrual for facilities lease payments due to changes in estimates of the costs to terminate leases after facilities closure. 56 58 A summary of Network & Storage Management Group business restructuring activities for the past three years is provided below in thousands:
SEVERANCE CONTRACT LEGAL AND AND EMPLOYEE CANCELLATION ACCOUNTING BENEFITS FACILITIES EQUIPMENT INVENTORY INTANGIBLES FEES FEES ------------ ---------- --------- --------- ----------- ------------ ---------- 1996 restructuring charges.................... $1,554 $1,571 $ 1,018 $ 300 $ 4,312 $ 67 $ 525 Cash charges................ (518) -- -- -- -- -- (568) Non-cash charges............ -- (121) (116) -- (4,052) -- -- ------ ------ ------- ----- ------- ---- ----- Reserve balances, June 28, 1996....................... 1,036 1,450 902 300 260 67 (43) 1997 restructuring charges.................... 770 505 728 -- 1,378 -- -- Cash charges................ (975) (915) -- -- -- -- -- Non-cash charges............ -- (72) (44) -- (1,378) -- -- Adjustments and reclassifications.......... (351) 267 (172) (300) (260) (67) 43 ------ ------ ------- ----- ------- ---- ----- Reserve balances, June 27, 1997....................... 480 1,235 1,414 -- -- -- -- Cash charges................ (373) (519) (9) -- -- -- -- Non-cash charges............ -- -- (1,045) -- -- -- -- Adjustments and reclassifications.......... (107) 467 (360) -- -- -- -- ------ ------ ------- ----- ------- ---- ----- Reserve balances, July 3, 1998....................... -- 1,183 -- -- -- -- -- Cash charges (unaudited).... -- (375) -- -- -- -- -- ------ ------ ------- ----- ------- ---- ----- Reserve balances, April 2, 1999 (unaudited)................ $ -- $ 808 $ -- $ -- $ -- $ -- $ -- ====== ====== ======= ===== ======= ==== ===== OTHER EXPENSES TOTAL -------- ------- 1996 restructuring charges.................... $ 155 $ 9,502 Cash charges................ -- (1,086) Non-cash charges............ (138) (4,427) ----- ------- Reserve balances, June 28, 1996....................... 17 3,989 1997 restructuring charges.................... 100 3,481 Cash charges................ -- (1,890) Non-cash charges............ -- (1,494) Adjustments and reclassifications.......... (117) (957) ----- ------- Reserve balances, June 27, 1997....................... -- 3,129 Cash charges................ -- (901) Non-cash charges............ -- (1,045) Adjustments and reclassifications.......... -- -- ----- ------- Reserve balances, July 3, 1998....................... -- 1,183 Cash charges (unaudited).... -- (375) ----- ------- Reserve balances, April 2, 1999 (unaudited)................ $ -- $ 808 ===== =======
The Network & Storage Management Group's remaining restructuring reserves at April 2, 1999 pertain to continuing lease payments on facilities that were closed and abandoned as a result of the Palindrome restructuring. The Network & Storage Management Group has been unable to sublease these facilities and anticipates that the remaining restructuring reserves will be utilized over the period through lease termination in fiscal 2002. The fiscal 1996 restructuring reserve of $9,502,000 was for the following specific items: Severance and employee benefits ($1,554,000) -- Severance and employee benefits included amounts for consolidation of operations and termination of employees at the Arcada facilities in Westboro, Massachusetts, the United Kingdom and France, as well as at the former Palindrome facility in Naperville, Illinois. Excess facilities ($1,571,000) -- This accrual was designed to provide for rent termination costs and rent expense for facilities located in Naperville, Westboro, the United Kingdom and France that are to be closed as a result of the restructuring actions. Equipment ($1,018,000) -- This amount is a reserve for equipment at the Naperville, Westboro, the United Kingdom and France facilities. It consists of computer equipment, furniture and fixtures and software at these facilities that will not be used after the locations are closed. All of the equipment provided for in this reserve has been abandoned. Inventory ($300,000) -- This consists of obsolete packaging material that will no longer be used and original equipment manufacturer inventory of $80,000 that will no longer be sold. Intangibles ($4,312,000) -- This writedown consists of Palindrome intangible assets of $3,534,000, $390,000 of developed technology related to Atlas and $388,000 of goodwill related to the Sytron acquisition. The Palindrome intangible assets were further broken down into trademark of $1,000,000, workforce of $1,188,000, distribution network of $69,000 and goodwill of $1,277,000. The Network & Storage Management Group decided to pursue the Arcada brand name and trademark and abandon the 57 59 Palindrome trademark. As a result, Network & Storage Management Group business determined that it would lay off substantially all of the 121 employees of Palindrome located at the Naperville facility. At the time of original purchase, Network & Storage Management Group business proportionally allocated goodwill to long-lived intangible assets based upon the original purchase price. The amounts of goodwill included in the restructuring reserve relate to the remaining unamortized goodwill associated with the intangible assets written off. Contract cancellation ($67,000) -- This $67,000 item is a canceled contract for outsourced Technical Support with a vendor used by Palindrome. Legal/Accounting fees ($525,000) -- This $525,000 represents an estimate of the legal and accounting fees that were to be incurred by Arcada from the acquisition of Arcada stock by Seagate Technology. Other ($155,000) -- This represents a trade show booth valued at $100,000 that is redundant and $55,000 for obsolete marketing materials. The above assets were not impaired in a prior period because their impairment arose specifically from the restructuring actions taken as a result of the acquisition of the minority interest in Arcada in the third quarter of fiscal 1996. Prior to the acquisition, Palindrome products were marketed and sold as part of the Seagate Software portfolio. In fiscal 1997, Seagate Software recorded an additional restructuring reserve of $3.5 million that resulted primarily from the plan to shutdown Manchester operations and the decision to try to sell the Calypso technology and a separate decision to consolidate the Network & Storage Management Group operations which resulted in the shutdown of the NSMG's facility in Cupertino, California which are as follows. Severance and employee benefits ($770,000) -- Severance and employee benefits included amounts for the shutdown and termination of employees at the Cupertino, California facility due to a consolidation of operations and the shutdown and termination of employees at the Calypso facility in Manchester, New Hampshire due to a decision to no longer pursue the Calypso products and technologies. Excess facilities ($505,000) -- This accrual was designed to provide for rent termination costs and rent expense for facilities closures in Manchester, New Hampshire and Cupertino, California. Equipment ($728,000) -- This reserve is for equipment in the Manchester and Cupertino facilities that would not be used after the shutdowns. It consisted of largely of computer equipment but also included amounts for furniture and fixtures and software. All of the equipment provided for in this reserve has been abandoned. Intangibles ($1,378,000) -- This asset consisted of Calypso related intangibles first capitalized upon the acquisition of Calypso in fiscal 1996. The amounts written down included net developed technology of $1,086,000 and assembled workforce of $292,000. These assets were written off based on management's plan to sell Calypso and its products and technologies. Other ($100,000) -- This represents miscellaneous additional costs related to the Manchester Calypso shutdown. The above assets were not impaired in a period prior to recording the restructuring reserves because their impairment arose specifically from the business decision and plan in the fourth quarter of fiscal 1997 to close the Manchester Calypso facility and abandon that technology and the additional decision to consolidate operations of the company and close the Cupertino facility. 58 60 Interest and other, net Total interest and other, net increased from a net expense of $705,000 in fiscal 1996 to a net expense of $2.6 million in fiscal 1997 and represented 1% and 2% of total revenues, respectively. The increase in interest and other, net was primarily due to higher interest expense on a higher level of outstanding borrowings from Seagate Technology. Income taxes The Network & Storage Management Group recorded a $8.8 million benefit from income taxes at an effective rate of 8% for fiscal 1996 compared with a $10.6 million benefit from income taxes at an effective rate of 24% in fiscal 1997. The effective rate used to record the benefit from income taxes in each fiscal year was less than the statutory rate primarily from increases in the valuation allowance for deferred tax assets, goodwill amortization, and charges in fiscal 1996 for in-process research and development for certain acquisitions that were not deductible for tax purposes. BALANCE SHEET DISCUSSION The Network & Storage Management Group's total cash was $4.9 million as of July 3, 1998 and $2.0 million as of April 2, 1999. The decrease in cash was primarily due to the Network & Storage Management Group's participation in the consolidated cash management program of Seagate Technology and the differences reflect the timing of the transfer of cash to the parent company. The accounts receivable balance was $16.0 million on July 3, 1998 and $23.1 million as of April 2, 1999. The increase in accounts receivable was primarily due to increased sales and an increase in days sales outstanding. The loan receivable from Seagate Technology and affiliates was $0 as of July 3, 1998 and $42.1 million as of April 2, 1999. The increase in the loan receivable is due to the Network & Storage Management Group's participation in the consolidated cash management program of Seagate Technology and the difference in the loan balance reflects the timing of the transfer of cash to the parent company. The other current assets balance was $480,000 as of July 3, 1998 and $3.3 million as of April 2, 1999. This increase was primarily due to prepaid costs associated with the NSMG combination with VERITAS. The goodwill and other intangibles balance for the Network & Storage Management Group was $41.3 million as of July 3, 1998 and $31.6 million as of April 2, 1999. The decrease was due to ongoing goodwill and intangible amortization. The Network & Storage Management Group's loan payable to Seagate Technology and affiliates was $10.6 million as of July 3, 1998 and $0 as of April 2, 1999. The decrease in the loan payable was due primarily to the Network & Storage Management Group's participation in the consolidated cash management program of Seagate Technology and the differences in the loan payable reflects the timing of the transfer of cash to the parent company. Accrued employee compensation was $8.0 million as of July 3, 1998 and $10.1 million as of April 2, 1999. The increase is primarily due to increases in payroll costs associated with increased headcount. Headcount increased from 959 employees as of July 3, 1998 to 1,060 employees as of April 2, 1999. Accrued expenses were $7.1 million as of July 3, 1998 and $9.5 million as of April 2, 1999. The increase is primarily due to accruals for expenses incurred as a result of the NSMG combination with VERITAS. Accrued income taxes were $1.3 million as of July 3, 1998 and $18.8 million as of April 2, 1999, respectively. The increase was primarily due to accrued income taxes on increased domestic and foreign earnings and the timing of the settlement of the intercompany tax liability with Seagate Technology, the parent company. LIQUIDITY AND CAPITAL RESOURCES The Network & Storage Management Group's total cash was $4.9 million and $2.0 million as of July 3, 1998 and April 2, 1999, respectively. The decrease in cash was primarily due to loan repayments to Seagate Technology of $161.5 million offset by additional borrowings from Seagate Technology of 59 61 $108.8 million and purchases of equipment, leasehold improvements and intangible assets, partially offset by cash provided by operating activities. The Network & Storage Management Group's cash is maintained in highly liquid operating accounts and primarily consists of bank deposits. The Network & Storage Management Group's operations were financed by cash flows from operating activities and borrowings from Seagate Technology. Prior to the NSMG combination, such borrowings were available to Seagate Software under a revolving loan agreement between Seagate Software and Seagate Technology. Under the loan agreement, the Network & Storage Management Group was in a net receivable position of $42.1 million as of April 2, 1999. During the nine months ended April 2, 1999, the Network & Storage Management Group made investments totaling approximately $7.7 million for new office facilities, leasehold improvements, computers, furniture and office equipment. YEAR 2000 READINESS This section on the Year 2000 issue is as of April 2, 1999. It has not been updated by Seagate Software, Seagate Technology or VERITAS. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. The Network & Storage Management Group considers a product to be Year 2000 ready if the product's performance and functionality are unaffected by processing of dates prior to, during and after the year 2000, but only if all products, for example hardware, firmware, and software used with the products properly exchange accurate date data with it. The Network & Storage Management Group's products The Network & Storage Management Group's products are used in numerous operating environments. The Network & Storage Management Group has assessed its products to determine whether or not they are Year 2000 ready. Although the Network & Storage Management Group believes certain of its software products are Year 2000 ready, it has determined that certain of its software products are not and will not be Year 2000 ready. Products that are not Year 2000 ready are not material to the Network & Storage Management Group's business, financial condition or results of operations. The inability of one or more of its products to properly manage and manipulate dates related to the year 2000 could result in a material adverse effect on its business, financial condition or results of operations, including increased warranty costs, customer satisfaction issues and potential lawsuits. The Network & Storage Management Group is taking measures to inform customers that those products are not and will not be Year 2000 ready. To assist customers in evaluating their Year 2000 issues, the Network & Storage Management Group has developed a list of those products that are Year 2000 ready as stand-alone products. The Network & Storage Management Group anticipates that substantial litigation may be brought against vendors, including the Network & Storage Management Group, of all software components of systems in which another vendor's component products are unable to properly manage data related to the Year 2000. The Network & Storage Management Group's customer agreements typically contain provisions designed to limit the Network & Storage Management Group's liability for such claims. As a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions, it is possible that these measures will not provide the Network & Storage Management Group with protection from liability claims. If any such claims are brought against the Network & Storage Management Group, 60 62 regardless of their merit, the Network & Storage Management Group's business, financial condition and results of operations could be materially adversely affected from factors that include increased warranty costs, customer satisfaction issues and the costs of potential lawsuits. The Network & Storage Management Group's systems The Network & Storage Management Group has also initiated a comprehensive program to address Year 2000 readiness in its internal systems and in those of its customers and suppliers. The Network & Storage Management Group's program has been designed to address its most critical internal systems first and to gather information regarding the Year 2000 compliance of products supplied to the Network & Storage Management Group and into which its products are integrated. The scope of the Network & Storage Management Group's internal Year 2000 readiness project includes information technology, non-information technology and embedded technology for all critical systems, and includes all offices worldwide, critical vendors, suppliers, customers and partners. The Network & Storage Management Group currently expects to be Year 2000 ready before December 31, 1999. The Network & Storage Management Group is approaching Year 2000 readiness in five stages: inventory, assessment, testing, remediation and contingency planning. Anticipated dates of completion are as follows:
ANTICIPATED DATE OF COMPLETION AS OF APRIL 2, 1999 ------------------- 1. Inventory Complete 2. Assessment Complete 3. Testing Complete 4. Remediation September 30, 1999 5. Contingency Planning September 30, 1999
These activities are intended to encompass all major categories of systems in use by the Network & Storage Management Group, including operations, technical support, engineering, sales, finance and human resources. To date, the Network & Storage Management Group has not incurred material costs related to assessment and remediation of Year 2000 readiness. The Network & Storage Management Group is still in the process of conducting its Year 2000 audit. The Network & Storage Management Group currently estimates the costs of internal Year 2000 issues will be less than $3.0 million. However, if the costs of the future remediation exceed such amount, then the costs required to address the Year 2000 issue could have a material adverse effect on the Network & Storage Management Group's business, financial condition or results of operations. The Network & Storage Management Group's material third party relationships include relationships with fulfillment houses, banks, payroll services vendors, utilities, distribution partners and key customers. These relationships have been examined, and the Network & Storage Management Group is now assessing the risks relating to these relationships. The Network & Storage Management Group believes that certain of these relationships are of significant importance to its future operations. The Network & Storage Management Group has contacted its significant suppliers and has received assurances of Year 2000 compliance from a number of those contacted. However, most of the Network & Storage Management Group's suppliers are under no contractual obligation to provide such information to the Network & Storage Management Group. The Network & Storage Management Group does not currently have reason to believe that any such third parties have significant internal Year 2000 problems that will not remediated. However, in the event any such third parties were to have an unremediated Year 2000 problem, it could have a material adverse effect on The Network & Storage Management Group's business, financial condition or results of operations. 61 63 Customer Purchasing Patterns The Network & Storage Management Group believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct or patch their current software systems for Year 2000 readiness or defer purchases of new systems to avoid encountering additional unforeseen Year 2000 problems. Additional short-term expenditures for remediation of existing Year 2000 problems may result in reduced funds being available to purchase products such as those offered by the Network & Storage Management Group, which could have a material adverse effect on the Network & Storage Management Group's business, operating results or financial condition. The Network & Storage Management Group believes that a most likely worst case Year 2000 scenario would result in significant disruptions of its business, including the possible loss of power and disruption of transportation system. The Network & Storage Management Group believes that no effective contingency planning for such disruption is possible. The Network & Storage Management Group also believes that additional elements of the most likely worst case Year 2000 scenario include the loss of fulfillment services, banking services, and/or distribution services. Although discussions of contingency planning for these problems has begun, no contingency plan is yet in place. The Network & Storage Management Group currently expects to complete contingency planning by September 30, 1999. The Network & Storage Management Group could experience material adverse effects on its business if it fails to successfully implement a contingency plan. Those material adverse effects could include delays in the delivery or sale of products. 62 64 OLD VERITAS QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE RATE SENSITIVITY We do not use derivative financial instruments for speculative purposes. We engage in exchange rate hedging from time to time but such activity has been insignificant to date and we do not hold or issue foreign exchange contracts for trading purposes. Our international sales are generated primarily through our 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 our operating and pricing strategies take into account changes in exchange rates over time, our operating results may be significantly affected in the short term by fluctuations in foreign currency exchange rates. Our 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 our statement of operations as a component of other income, net. To date, any such gains or losses have not been material. We do not believe that our total exposure is significant. INTEREST RATE SENSITIVITY Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt obligations. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our portfolio includes money markets funds, commercial paper, market auction preferreds, government agency notes and medium-term notes. The diversity of our portfolio helps us achieve our investment objective. As of March 31, 1999, approximately 91% of our entire portfolio will mature in one year or less and approximately 41% 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 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 our 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. The following table presents the amounts of our cash equivalents, investments and debt that may be subject to interest rate risk and the average and fixed interest rates as of March 31, 1999 by year of maturity:
2000 AND FAIR VALUE 1999 THEREAFTER TOTAL TOTAL -------- ---------- -------- ---------- (DOLLAR AMOUNTS EXPRESSED IN THOUSANDS) Cash equivalents and short-term investments.............................. $194,330 -- $194,330 $194,330 Average interest rate...................... 5.04% -- 5.04% 5.04% Long-term investments...................... $ 499 $ 47,360 $ 47,859 $ 47,859 Average interest rate...................... 5.86% 5.20% 5.21% 5.21% Long-term debt............................. -- $100,000 $100,000 $187,791 Fixed interest rate........................ -- 5.25% 5.25% 5.25%
63 65 BUSINESS This section contains forward-looking statements, including but not limited to statements with respect to future events and our plans and objectives. 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 back up data distributed on large networks of systems without interrupting users. In addition, our products provide an automated fail over between computer systems organized in clusters sharing disk resources. Our highly scalable products can be used independently, and certain products can be combined to provide interoperable client/server storage management solutions. Some of our 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. We also provide a comprehensive range of services to assist customers in planning and implementing storage management solutions. We market our 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. Our original equipment manufacturer customers include Compaq, Dell, Hewlett-Packard, Sun Microsystems, Microsoft, Sequent Computer Systems and EMC Corporation. Our end-user customers include AT&T, Bank of America, BMW, Boeing, British Telecommunications, Daimler-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 all attached host computers across a high speed, "storage area" network, extend the "any to any" connectivity of local area network architectures to storage sources. 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 fibre channel architecture of a storage area network supports ubiquitous access between all servers and all storage resources in 64 66 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. OLD VERITAS PRODUCTS Old VERITAS developed and we are 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. Our 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; 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. We have 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. This product 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. This product 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 65 67 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. VERITAS Accelerator for NFS. This product 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. This product 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 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. This product 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. This product 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 and 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. 66 68 Storage Application Products VERITAS NetBackup. This product 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 Global Data Manager. This product provides centralized management of multiple and/or distributed NetBackup and Backup Exec storage domains. This facilitates consistent policy management and monitoring of those domains. VERITAS HSM. This product 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. This product 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 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 Volume Optimizer. This product, 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. This product, a storage application product, identifies and notifies administrators of potential hardware failures before they can cause outages or disrupt operations. 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. This product 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. This product is a robust, flexible, general purpose, data replication tool designed for use in enterprise environments. Through a transport layer independent 67 69 replication mechanism, designated file systems can be replicated to multiple locations, local or remote. Storage 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. This product 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' NFSfile 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. This product, 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 We 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. This product, 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. Our 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 cause us to receive little or no return on our investment of significant resources which could adversely affect our business. NSMG PRODUCTS As a result of the NSMG combination, we now also offer a breadth of network and storage management products, featuring: VERITAS Backup Exec Desktop Editions. This product provides complete plug-and-play backup and restore functions for desktop users running Microsoft Windows NT Workstation, Windows 98, Windows 95, Windows 3.x and DOS. VERITAS Backup Exec Server and Enterprise Editions. This product provides a backup and restore solution for server and network users running Novell NetWare, Microsoft Windows NT LANs and workstations. 68 70 VERITAS Backup Exec Storage Migrator. This product facilitates the proactive management of inactive data by migrating it from on-line storage such as disk drives, to near-line devices such as optical drives, or to archival storage resources such as tape devices, over user-defined periods of time through a multi-tier hierarchical storage management application delivering enterprise functionality to client/server environments. VERITAS Client Exec. This product protects critical client data on workstations and laptops. Users receive automatic, regular and transparent protection of their critical data, and administrators have the flexibility to control which users are protected, what type of data is protected and when the protection should occur. VERITAS Desktop Management Suite. This product provides a fully integrated suite of software solutions including network inventory, software distribution, remote control, network backup and software metering. VERITAS ExecView. This product provides an integrated cross-platform storage management console for enterprise networks using Microsoft Windows NT and Novell NetWare. Users can manage both Backup Exec for NetWare and Backup Exec for Windows NT servers from a single console. VERITAS Manage Exec. This product centralizes enterprise administration by providing information technology professionals with a unique view of servers worldwide and real-time problem analysis through a proactive server health monitoring, alerting and reporting solution. VERITAS NerveCenter. This product provides an enterprise-event automation solution for Windows NT and UNIX environments. VERITAS WinINSTALL. This product provides a script-free, automated software distribution tool for 16- and 32-bit applications. VERITAS also has relationships with Microsoft that include a license that allows Microsoft to bundle NSMG products with selected Microsoft products. Additionally, NSMG developed the backup utility for Microsoft Windows 98 and is developing the system disaster recovery and backup utilities for Windows NT 5.0. NSMG has also licensed to Microsoft the hierarchical storage management technology to be included in Windows NT Server 5.0. TELEBACKUP PRODUCTS As a result of the TeleBackup combination, we now also market software technology that enables the automated backup and recovery of electronic information created and stored on networked, remote and mobile personal computer-based computer systems. The TSInfoPRO technology that we acquired was designed to provide automated online backup, storage and disaster recovery of information on mobile personal computers such as laptops or notebooks, and remote units, such as remote offices and telecommuting work sites, via wide area network, local area network or dial-up communications infrastructure. We market these products through distribution partners, who re-brand the product under their own trade names, as well as through value-added resellers. TSInfoPRO EDV. This product is licensed to electronic data vaulting service providers such as telephone and cable companies and Internet service providers, who, on an out-sourced service basis, provide remote backup and recovery services to personal computer users. The service provider establishes a safe, offsite storage vault location at which the backup server farm and archived data are stored and managed. Remote and mobile personal computer users subscribe to a service offering and can back up their computer systems to that service provider over their transmission medium of choice, such as telephone lines or the Internet, through the TSInfoPro EDV technology. TSInfoPRO Corporate. This product was introduced in early 1998 and is targeted for implementation on a wide range of server repository engines, including SunSolaris, Windows NT and SCO Unix, 69 71 within the data center of enterprise customers. The Corporate product can be used to back up and recover personal computer units on the organization's local area network or wide area network, as well as remote and mobile users connecting by dial-up communications infrastructure. These remote and mobile units can be supported over the Internet or the organization's own intranet. TSInfoPRO also includes security features such as authentication codes for session validation, user personal identification numbers for file or system restoration, a data scrambling process that acts in a similar capacity to a DES or RSA encryption technique, and the storage of files in a compressed, unreadable format. SERVICES Our customer service and support organization provides customers with maintenance, technical support, consulting and training services. We believe that providing a high level of customer service and technical support is critical to customer satisfaction and our success. Most of our customers currently have support agreements with us which typically provide for fixed fee, renewable annual maintenance consisting of technical and emergency support as well as minor product upgrades free of charge. Our service group provides the following services: Maintenance and technical support We offer seven day-a-week, 24-hour telephone support as well as electronic mail and fax customer support. Additional customer support is provided by some of our value-added resellers, system integrators and original equipment manufacturers. Initial product license fees do not cover maintenance. Consulting We believe that most customers need assistance before product selection and not just for the implementation of purchased products. Therefore, we offer strategy and analysis consulting services for planning the management and control of client/server computing in their specific environment. In addition, we offer services to assist customers with product implementation. As part of our broad range of services, we believe we offer particular expertise in analyzing network security threats and security policy integrity. Training We have a worldwide customer education and training organization which offers training that enables the customer to better utilize our 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 our strategy to offer end-to-end storage management solutions by providing instruction from highly-experienced training professionals either at the customer's location or at one of our multi-platform classrooms. Porting We port, or adapt, 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. VERITAS MARKETING, SALES AND DISTRIBUTION We market our 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 70 72 incorporate the products into their operating systems on a bundled basis or license them to third parties as an optional product. In most cases, we receive a user license fee for each copy sublicensed by the original equipment manufacturer to third parties. VERITAS provides its software products to customers under non-exclusive license agreements, including shrink-wrap licenses for certain products. As is customary in the software industry, in order to protect its intellectual property rights, VERITAS does not sell or transfer title to its software products to customers. VERITAS enters into both object-code only and source-code licenses of its products. Agreement with Microsoft In August 1996, Old VERITAS entered into a development and license agreement with Microsoft under which Old VERITAS agreed to develop a version of our Volume Manager product, which Microsoft has called Logical Disk Manager, to be ported to and embedded in version 5.0 of Microsoft's Windows NT operating system. We believe that this will establish an installed customer base on the Windows NT platform to which we can offer our products. We will not receive royalties with respect to sales by Microsoft of the embedded product. Our products may not become available for use in, and Microsoft is not required to use our products in, future versions of Windows NT. Therefore it is possible that we will not realize any expected benefits from the inclusion of this embedded product in future versions of Windows NT. Agreement with Sun Microsystems In January 1997, Old VERITAS entered into a development, license and distribution agreement with Sun Microsystems which provided a new distribution channel for our products. Old 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, Old 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 our 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. We may not be able to deliver our products to Sun Microsystems in a timely manner despite the dedication of significant resources to the development of the products. Also, simultaneous sales efforts by us and Sun Microsystems with respect to our products could create certain channel conflicts. Agreement with Hewlett-Packard In November 1997, Old 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. We will not receive royalties with respect to the lite version of the VERITAS File System embedded in the HP-UX operating system. Hewlett-Packard will become our reseller with respect to certain of our products, including full feature versions of the above named products, and we will offer full feature products and value-added products to the HP-UX installed customer base. We may not be able to deliver our products to Hewlett-Packard in a timely manner. Also, it is possible that our deliverables and Hewlett-Packard deliverables under the agreement may not be synchronized in a timely and successful manner and that Hewlett-Packard may not be an effective reseller of our products. The simultaneous 71 73 sales efforts by us and Hewlett-Packard with respect to our products could create certain channel conflicts. Sales, Marketing and Support Organization During 1998, Old VERITAS continued to build our sales, marketing and customer support organization with a focus on delivery of our products to resellers, integrators and end users. As of December 31, 1998, Old VERITAS' U.S. sales, marketing and consulting force consisted of 360 employees, including 71 pre-sales engineers that provide technical sales assistance. We have sales subsidiaries in Canada, Japan, the United Kingdom, Germany, France, Sweden, the Netherlands and Australia. As of December 31, 1998, Old VERITAS' international sales force consisted of 112 persons located in Europe and North America and 13 persons located in Asia and the Pacific Rim. Old VERITAS also had approximately 140 resellers as of December 31, 1998 located in North America, Europe, Asia Pacific, South America and the Middle East. We expect to increase the number of our sales, marketing and customer support employees in the future to expand our direct sales efforts to resellers and end users. We may not have the necessary resources to accomplish this. It is also possible that we will not be able to establish and expand these new distribution channels successfully or complete the integration of our sales and marketing efforts successfully. We expect to hire additional sales employees in all regions in 1999. Competition for qualified sales, technical and other personnel is intense, and we may not be able to attract, assimilate or retain additional highly qualified employees in the future. We also may not be able to manage our growth effectively. NSMG SALES AND MARKETING Prior to the NSMG combination, the NSMG business utilized direct sales forces and indirect sales channels, such as distributors and original equipment manufacturers, for sales of its products to end users. Revenue from Ingram Micro Inc. accounted for 17% of the NSMG business total revenues in fiscal 1996, 22% in fiscal 1997, 27% in fiscal 1998 and 28% in the nine months ended April 2, 1999. Revenue from Tech Data, Inc. accounted for 12% of total revenues in fiscal 1998. Indirect revenues, which include sales to distributors and original equipment manufacturers, were 79% of total revenues during fiscal 1996, 88% during fiscal 1997, 89% during fiscal 1998 and 92% during the nine months ended April 2, 1999. Revenues outside of the Americas were 10% during fiscal 1996, 28% during fiscal 1997, 34% during fiscal 1998, and 37% during the nine months ended April 2, 1999. The NSMG business generated export revenues from the United States of approximately $32.5 million during fiscal 1996, $40.7 million during fiscal 1997, $57.8 million during fiscal 1998, and $50.6 million during the nine months ended April 2, 1999. COMPETITION The markets in which we compete are intensely competitive and rapidly changing. Our 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; - Compaq Computer for its UNIX system; - IBM for its AIX system; and - Microsoft for Windows NT. 72 74 We also encounter competition from other third party software vendors and hardware companies offering products that incorporate certain of the features provided by our products, and from disk controller and disk subsystem manufacturers which have included or may include similar features. Our primary competitors in the storage application products area include: - 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; - Sterling Software, for its Alexandria Network Librarian product; - StorageTek, for its REELbackup product; - Hewlett-Packard, for its Omniback product; and - Legato Systems, for its BudTool, NetWorker and GEMS products. Our main competitors in the high availability and clustering product area include Legato Systems, for its FullTime HA Plus and FullTime Clusters, Sun Microsystems, for its Sun Cluster product, and Hewlett-Packard, for its HP-ServiceGuard product. Our competitors in the areas of remote backup technologies and electronic data vaulting services include Connected Corp. in Framingham, Massachusetts, Atrieva in Seattle, Washington, STAC Inc. in San Diego, California, and Core Data in Phoenix, Arizona. These competitors are Windows NT-centric and differ in the degree of system backup and recovery provided to users, with certain companies offering data file set backup and recovery capability only. Many of our competitors have substantially greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition and a larger installed customer base. We expect that the market for storage management software, which 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 us could attempt to increase their presence in this market by acquiring or forming strategic alliances with our competitors or business partners. Our success will depend significantly on our ability to adapt to these competing forces, to develop more advanced products more rapidly and less expensively than our competitors, and to educate potential customers as to the benefits of licensing our products rather than developing their own products. Our future and existing competitors could introduce products with superior features, scalability and functionality at lower prices than our products and could also bundle existing or new products with other more established products in order to compete with us. In addition, because there are relatively low barriers to entry for the software market, we expect additional competition from other established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could materially and adversely affect our business. We may not be able to compete successfully against current and future competitors, and the failure to do so would harm our business. RESEARCH AND DEVELOPMENT Our 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. Our 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. 73 75 Currently, our major research and development initiatives include: - Additional integration of the full family of storage management products, including further integration of VERITAS Volume Manager, VERITAS File System and 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 we may not be able to successfully overcome these challenges. Development Work under Microsoft and Sun Microsystems Agreements Our agreement with Microsoft provides for the development by us of a version of our Volume Manager product, which Microsoft has called Logical Disk Manager, to be ported to and embedded in version 5.0 of Windows NT. The agreement also requires us to develop a disk management graphical user interface designed specifically for Windows NT. Microsoft is providing funding for a significant portion of the development expenses for this product payable in quarterly increments. In order to perform under the agreement, we have hired additional personnel with expertise in the Windows NT operating system environment and are devoting substantial capital investment and resources to successfully complete this project. Our agreements with Sun Microsystems and Hewlett-Packard also impose development obligations on us. We are required to commit significant staffing to our projects with these original equipment manufacturers. We may not have the resources necessary to perform our obligations under these agreements and our development efforts may not be as successful as planned. Size and Location of Research and Development Group As of July 15, 1999, our research and development staff consisted of 664 employees located at our Mountain View, California headquarters and at our facilities in North America. In addition, our subsidiary in Pune, India employed a research and development staff of approximately 141 people. Research and Development Expenditures Old VERITAS had research and development expenses of $13.8 million for the three months ended March 31, 1999, $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. We believe that technical leadership is essential to our success and expect to continue to commit substantial resources to research and development. Our future success will depend in large part on our ability to enhance existing products, respond to changing customer requirements and develop and introduce in a timely manner new products that keep pace with technological developments and emerging industry standards. We continue to make substantial investments in undisclosed new products, which may or may not be successful. 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 We must hire additional research and development personnel for timely completion of new products, including the adaptation of our products to Windows NT and performance of obligations to key original equipment manufacturer partners. The market for these personnel is very competitive and we cannot assure you that we can hire them on a timely basis. We often consider acquiring and purchasing technology to achieve certain of our objectives. We may not be able to accomplish this successfully. 74 76 Effect of Technological Advances From time to time, we or our competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of our existing products. Announcements of currently planned or other new products could cause customers to defer purchasing our existing products. Old VERITAS had from time to time in the past experienced delays of up to several months due to the complex nature of software developed by us and other software developers for whose systems or applications we offer products. We could experience delays in connection with our current or future product development activities. Any such delays could have a material adverse effect on our business. PROPRIETARY RIGHTS Measures We Take to Protect Our 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. Other than the patents acquired in the NSMG and TeleBackup combination as described below, 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 our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners, and license agreements with respect to our software, documentation and other proprietary information. These licenses are generally non-transferable and have a perpetual term. Infringement Risks We occasionally make source code available for certain of our products. The provision of source code may increase the likelihood of misappropriation or other misuse of our intellectual property. We also license some of our products 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 our proprietary rights to the same extent as do the laws of the United States. Thus, protection of our proprietary rights may not be adequate. Our competitors also could develop technology similar to our independently. Litigation Risks We are not aware that our products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, from time to time, we receive notices from third parties asserting that we have infringed their patents or other intellectual property rights. We may find it necessary or desirable in the future to obtain licenses from third parties relating to one or more of our products or relating to current or future technologies. Third parties could assert infringement claims against us in the future with respect to current or future products. Any assertion could require us to enter into royalty arrangements or result in costly litigation. As the number of software products in the industry increases and the functionality of these products further overlap, we believe that software developers may become increasingly subject to infringement claims. 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 our products or technology without authorization, or to develop similar technology independently. Policing unauthorized use of our products is difficult and, although we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. 75 77 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 Replicator for Volume Manager, VERITAS Storage Replicator for File Systems, VERITAS Volume Optimizer, VERITAS Storage Planner and VERITAS Storage LookOut are trademarks of VERITAS. Nerve Center, Ashwin and Backup Exec are registered trademarks of VERITAS. Client Exec, Exec View, Manage Exec and WinINSTALL are trademarks of VERITAS. TSInfoPRO is a registered trademark of VERITAS. TeleBackup, TSInfoPRO EDV, TSInfoPRO Corporate and TSInfoPRO NT Enterprise are trademarks of VERITAS. NSMG PATENTS AND INTELLECTUAL PROPERTY RIGHTS In connection with the NSMG combination, VERITAS acquired three United States patents and other patent applications. Any patents obtained may not provide substantial protection or be of commercial benefit to VERITAS. It is also possible that their validity will be challenged. In connection with its acquisition of TeleBackup, VERITAS acquired rights in one patent application related to TSInfoPRO technology. EMPLOYEES As of July 15, 1999, we had 2,379 full-time employees, including 805 in research and development, 1,334 in sales, marketing, consulting and customer support and 240 in finance and administrative services. We have not entered into any collective bargaining agreement with our employees, and believe that our relations with our employees are good. We believe that our future success will depend in part upon the continued service of our key employees and on our continued ability to hire and retain qualified personnel. We may not be able to retain our key employees and may not be successful in attracting and retaining sufficient numbers of qualified personnel to conduct our business in the future. FACILITIES Our executive offices are located in Mountain View, California. Our principal facilities are located in California and Florida. Major portions of our facilities are occupied under leases that expire at various 76 78 times through 2012. The table below summarizes the square footage of premises leased by us as of July 15, 1999, excluding approximately 34 executive suites.
APPROXIMATE LOCATION SQUARE FOOTAGE -------- -------------- North America California................................................ 260,401 Colorado.................................................. 13,437 Florida................................................... 112,397 Georgia................................................... 11,364 Illinois.................................................. 10,027 Maryland.................................................. 4,685 Massachusetts............................................. 39,020 Minnesota................................................. 62,420 New Jersey................................................ 8,397 New York.................................................. 4,560 North Carolina............................................ 8,836 Virginia.................................................. 12,441 Washington................................................ 20,502 Canada.................................................... 5,870 ------- Total North America.................................... 574,357 Europe England................................................... 65,000 France.................................................... 8,264 Germany................................................... 31,619 ------- Total Europe........................................... 104,883 Asia India..................................................... 33,229 Japan..................................................... 9,462 Australia................................................. 4,500 Malaysia.................................................. 1,760 ------- Total Asia............................................. 48,951 Total.................................................. 728,191
California facilities exclude approximately 44,361 square feet of space subleased to others. Illinois and Florida facilities exclude approximately 17,135 and 5,000 square feet, respectively, of unoccupied space. Facilities in England exclude approximately 8,365 square feet of space subleased to others. We recently entered into a synthetic lease arrangement for the development of a 425,000 square foot campus facility in Mountain View. LEGAL PROCEEDINGS We are not currently subject to any material legal proceedings. We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. 77 79 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table shows the name, age and position of each of our executive officers and directors as of June 30, 1999.
NAME AGE POSITION ---- --- -------- Mark Leslie.............................. 53 Chief Executive Officer and Chairman of the Board Terence R. Cunningham.................... 39 President and Chief Operating Officer, Director (until August 30, 1999) Geoffrey W. Squire....................... 52 Executive Vice-President and Vice-Chairman of the Board Fred van den Bosch....................... 52 Executive Vice President of Engineering, Director Peter J. Levine.......................... 38 Senior Vice President, Strategic Operations Kenneth Lonchar.......................... 41 Senior Vice President, Finance and Chief Financial Officer Paul A. Sallaberry....................... 43 Senior Vice President, Worldwide Sales Jay A. Jones............................. 45 Senior Vice President, Chief Administrative Officer and Secretary Michael Colemere......................... 35 Vice President, Product Marketing Michael Wentz............................ 46 Vice President, Technical Services David Hallmen............................ 35 Vice President, Merger Integration Steven Brooks............................ 47 Director William H. Janeway....................... 56 Director Gregory B. Kerfoot....................... 39 Director Stephen J. Luczo......................... 42 Director Joseph D. Rizzi.......................... 57 Director
Directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified or until their earlier resignation or removal. Executive officers will be chosen by and will serve at the discretion of the Board of Directors. Mr. Leslie is our Chief Executive Officer and Chairman of the Board. Mr. Leslie has served as President and Chief Executive Officer of VERITAS or its predecessors since 1990, and as a director 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 Versant Object Technology Corporation, an object-oriented database software company and serves on the board of directors of Brocade Communications Systems, Inc. Mr. Cunningham has served as our President and Chief Operating Officer and as a director since May 28, 1999. Prior to that date, Mr. Cunningham served as Seagate Software's President and Chief Operating Officer and as President of the Seagate Software Network & Storage Management Group. In May 1994, Mr. Cunningham joined Seagate Technology in connection with its acquisition of Crystal Computer Services, a computer services company founded by Mr. Cunningham in 1984. Mr. Cunningham served as Crystal's President until May 1996, when he was named President of the Storage Management Group. Later in 1996, he was named Executive Vice President and General Manager of the NSMG business. From July 1997 to May 1999, Mr. Cunningham served as President and Chief Operating Officer for Seagate Software as well as Executive Vice President and General 78 80 Manager of the NSMG business. In July 1999, we announced that Mr. Cunningham would be leaving us, and that his resignation would become effective on August 30, 1999. Mr. Squire has served as Executive Vice-President and Vice-Chairman of the Board of VERITAS or its predecessors since April 1997, when VERITAS merged with OpenVision Technologies, Inc. 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 President of the European Information Services Association. Mr. Squire also serves as a director of Industri-Matematik International Corp. Mr. van den Bosch has served as Executive Vice President, Engineering of VERITAS or its predecessors since July 1997 and was appointed as a director in February 1996. Mr. van den Bosch served as our Senior Vice President, Engineering from 1991 to July 1997. From 1970 until 1990, he served in various positions with Philips Information Systems, including Director of Technology. Mr. Levine has served as Senior Vice President of Strategic Operations of VERITAS or its predecessors since January 1999, after serving as Senior Vice President, OEM Sales from December 1997 to December 1998. Mr. Levine served as our Vice President, OEM Sales from December 1995 to December 1997. From January 1995 to November 1995, Mr. Levine was our Director of Marketing. From July 1992 to December 1994, Mr. Levine was an original equipment manufacturer sales representative at VERITAS. Prior to 1992, Mr. Levine held several software engineering and consulting positions at MIT's Project Athena, the Open Software Foundation and Apollo Computer. Mr. Lonchar has served as Chief Financial Officer of VERITAS or its predecessors since April 1997 and as our Senior Vice President, Finance since February 1999. Mr. Lonchar served as our Vice President, Finance from April 1997 until February 1999. Mr. Lonchar was Chief Financial Officer and Senior Vice President of OpenVision Technologies, Inc. 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. Sallaberry has served as Senior Vice President, Worldwide Sales of VERITAS or its predecessors since July 1997. Mr. Sallaberry served as our Vice President, North American Sales 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 Senior Vice President, Chief Administrative Officer of VERITAS since January 1999. Mr. Jones served as our Vice President, General Counsel and Secretary since April 1997. Mr. Jones joined OpenVision Technologies, Inc. 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 WordStar International Incorporated, a word-processing software company. Mr. Jones is a member of the California Bar Association. Mr. Colemere has served as Vice President, Product Marketing of VERITAS since May 28, 1999. From December 1996 until May 28, 1999, Mr. Colemere served as Vice President of Product Management at Seagate Software. Before joining Seagate Software, Mr. Colemere was the Director of 79 81 Strategic Business Development at Cheyenne from April 1994 to December 1996. Prior to his position with Cheyenne, Mr. Colemere also held a range of product management and development management positions with Novell, including Director of Engineering Program Management for Novell's NetWare Products Division. Mr. Wentz has served as Vice President, Technical Services of VERITAS since May 28, 1999. From February 1996 until May 28, 1999, Mr. Wentz served as Vice President of Technical Services for the NSMG business of Seagate Software. He joined Seagate Software in February 1996 as part of its acquisition of Arcada Software, Inc. Mr. Wentz joined Arcada in May of 1994 where he served in a similar capacity as Vice President of Technical Support Services. Prior to joining Arcada, Mr. Wentz served as Director of Technical Support Operations at Samna Corporation and then at Lotus Development Corporation after its acquisition of Samna. Mr. Hallmen has served as Vice President, Merger Integration of VERITAS since May 28, 1999. From February 1996 until May 28, 1999, Mr. Hallmen served as Vice President of business development at Seagate Software. He joined Seagate Software as part of its acquisition of Arcada Software, Inc. Before the acquisition of Arcada Software, Mr. Hallmen was Vice President of marketing for Arcada. Prior to joining Arcada, Mr. Hallmen was Vice President of sales and marketing for Artisoft, Inc., a developer and manufacturer of personal computer network hardware and software. Mr. Brooks has been a director of VERITAS or its predecessors since April 1996. Since February 1999, Mr. Brooks has been General Partner of Broadview Capital Partners, a private equity firm. From September 1997 to February 1999, Mr. Brooks was a managing director of Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking firm. From 1996 to 1997, Mr. Brooks was a private investor and a consultant to technology companies. From 1994 to 1996, Mr. Brooks served as Managing Director and Head of Global Technology Investment Banking at the Union Bank of Switzerland Securities, LLC. Prior to 1994, Mr. Brooks was a private investor and consultant to high-technology firms, and served as Managing Partner of investment banking at Robertson, Stephens & Co., a San Francisco-based investment bank. Mr. Brooks is a director of Paychex, Inc. a national payroll processing and business services company, and QRS, an electronic commerce company. Mr. Janeway has been a director of VERITAS or its predecessors since April, 1997. Mr. Janeway has been a Managing Director of E.M. Warburg Pincus & Co., LLC since 1988. Prior to 1988, he served in a management capacity at F. Eberstadt & Co., Inc. Mr. Janeway is a director of ECsoft Group, PLC, BEA Systems, Inc., Indus International, Inc., Inacom Corp. and Industri-Matematik International Corp. Mr. Kerfoot has been a director of VERITAS since May 28, 1999. In May 1999, Mr. Kerfoot became President and a director of Seagate Software. From May 1996 until May 1999, Mr. Kerfoot served as Seagate Software's Chief Strategic Officer and as President of the Information Management Group. In May 1994, he joined Seagate Technology in connection with its acquisition of Crystal Computer Services, where he had previously served as Director of Research and Development and Chief Architect of Crystal Reports, and continued as Crystal's Director of Research and Development until May 1996, when he was named President of the Information Management Group. Mr. Luczo has been a director of VERITAS since May 28, 1999. Mr. Luczo serves as Chairman of the Board of Directors of Seagate Software and as Chief Executive Officer, President and Director of Seagate Technology. From March 1995 to July 1997, Mr. Luczo served as Seagate Software's Chief Operating Officer. Mr. Luczo joined Seagate Technology in October 1993 as Senior Vice President, Corporate Development and was promoted to Executive Vice President, Corporate Development in March 1995, where he served until September 1997. He was promoted to President and Chief Operating Officer of Seagate Technology in September 1997, and served in the latter capacity until August 1998. In July 1998, Mr. Luczo was promoted to Chief Executive Officer and appointed to the Board of Directors. Before joining Seagate Technology in 1993, Mr. Luczo was Senior Managing Director and co-head of 80 82 the Bear Stearns and Co. Global Technology Group. Mr. Luczo also serves on the boards of directors of Gadzoox Microsystems, Inc. and Dragon Systems, Inc. Mr. Rizzi has been a director of VERITAS or its predecessors since 1987. Prior to that date, he served as a general partner of Matrix Partners, a venture capital firm and as Chief Executive Officer of Elxsi, a computer company. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has the following committees: Audit Committee The audit committee reviews with our independent public accountants and with our internal accounting staff the scope and results of the independent accountants' audit work, our annual financial statements, and our internal accounting and control systems. The audit committee also recommends to the Board the firm of independent public accountants to be selected to audit our accounts and makes further inquiries as it deems necessary or desirable to inform itself as to the conduct of our affairs. Mr. Brooks and Mr. Rizzi are the members of the audit committee. Compensation Committee The compensation committee reviews and makes recommendations to the board regarding the compensation for officers and compensation guidelines for our employees and administers our stock purchase and stock option plans. Mr. Rizzi and Mr. Brooks are the members of the compensation committee. COMPENSATION OF DIRECTORS How Board Members Are Compensated Non-employee directors of VERITAS receive a specified number of stock options under our directors' plan. None of the members of our board of directors has received or will receive any fees for attending board or board committee meetings, other than reimbursement of actual expenses they incur to attend meetings. Grant of Options to Directors The VERITAS 1993 Directors' Stock Option Plan provides that each non-employee director who is first elected or reelected to the board, is granted an option to purchase 54,000 shares of our common stock on the later to occur of (1) the date he or she is first elected or reelected to the board or (2) the date his or her most recent prior option becomes fully vested as to all shares. Each non-employee director will receive a succeeding grant of an option to purchase 13,500 shares of our common stock each year on the anniversary date of the most recent prior option granted to him or her provided the individual is still a member of the board. A non-employee director shall not receive a succeeding grant earlier than the first anniversary of his or her initial grant. Exercisability of Options Options granted under the directors' plan are immediately exercisable. Once exercised, we will have a right to repurchase unvested shares. This repurchase right lapses as the shares vest. Initial grants vest as to 3,375, and succeeding grants vest as to 844, of the shares on the last day of each calendar quarter, provided that the non-employee director attends at least one board meeting during the quarter. If the 81 83 non-employee director attends a meeting that occurs prior to the date the option was granted, he or she will not receive vesting credit with respect to that particular option as a result of attending the meeting. Terms of Options Options have a ten year term and will fully vest as to any shares that remain unvested on the day immediately preceding the tenth anniversary of the date the option is granted. Options cease vesting but remain exercisable if the non-employee director ceases to be a member of the board, so long as he or she continues to provide services to VERITAS as a consultant. Effect of Mergers, Consolidations, Dissolutions or Liquidations In the event of a merger, consolidation, dissolution or liquidation of VERITAS, the sale of substantially all of the assets of VERITAS or any other similar corporate transaction, the vesting of all options granted pursuant to the directors' plan will accelerate and the options will become exercisable in full and will terminate in accordance with termination provisions of the directors' plan. Number of Shares Reserved for Issuance under the Plan An aggregate of 1,125,000 shares of our common stock is reserved for issuance under the directors' plan. In the event that any outstanding option under the directors' plan expires or terminates for any reason, the shares of common stock allocable to the unexercised portion of the option shall be available again for the grant. As of July 15, 1999 options to purchase 347,872 shares were outstanding, 183,692 had been exercised and 593,436 shares were eligible for future grant. Amendment to the Plan On April 15, 1999, the VERITAS board of directors approved an amendment to the directors' plan to provide that, if the number of outstanding shares of common stock is changed as a result of a stock dividend, stock split, reverse stock split, combination or other similar capital change, the board of directors will have discretion to determine whether the number of shares available under the directors' plan, the maximum number of shares that can be granted to a director, the number of shares subject to outstanding options or the other terms of such outstanding options, will be adjusted to reflect the capital change. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth all compensation awarded to, earned by or paid for services rendered to VERITAS in all capacities during 1996, 1997 and 1998 by our chief executive officer and four other most highly compensated executive officers. This information includes the dollar value of base salaries, commissions and bonus awards, the number of shares subject to stock options granted and certain other 82 84 compensation, whether paid or deferred. We do not grant stock appreciation rights and provide no long-term compensation benefits other than stock options. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS --------------------------- ---- -------- -------- ------------ ------------ Mark Leslie........................... 1998 $300,000 $398,765 $ 1,200 247,500 President, Chief 1997 250,000 326,400 1,200 382,496 Executive Officer 1996 230,000 170,800 0 337,500 Geoffrey W. Squire.................... 1998 240,213 236,867 0 82,500 Executive Vice President 1997 169,689 208,875 18,444 0 1996 0 0 0 0 Fred van den Bosch.................... 1998 220,000 219,321 1,200 165,000 Executive Vice President 1997 160,000 140,598 1,200 224,996 of Engineering 1996 145,000 78,082 0 101,250 Paul A. Sallaberry.................... 1998 300,350 99,691 1,200 75,000 Senior Vice President, 1997 284,170 58,485 1,200 157,496 Worldwide Sales 1996 0 0 0 0 Kenneth Lonchar....................... 1998 191,200 179,444 0 45,000 Chief Financial Officer 1997 114,667 133,680 0 44,996 Sr. Vice President, Finance 1996 0 0 0 0
Portions of bonuses for services rendered in fiscal year 1996, 1997 and 1998 were each paid in the following year. Share data has been restated to give retroactive effect to a 2-for-1 stock split in the form of a stock dividend to be effected on July 8, 1999. Mr. Lonchar, Mr. Sallaberry and Mr. Squire joined VERITAS in April 1997 when we merged with OpenVision Technologies, Inc. The compensation amounts include sales commissions paid to Mr. Sallaberry by us in the amount of $118,965 in 1997 and $170,837 in 1998. OPTION GRANTS IN 1998 The following table sets forth further information regarding the individual grants of stock options pursuant to our stock option plans during fiscal 1998 to each of our named officers. The table illustrates the hypothetical gains or "option spreads" that would exist for the options at the end of the ten-year term of the option based on assumed annualized rates of compound stock price appreciation of 5% and 10% from the dates the options were granted to the end of the term. The 5% and 10% assumed rates of annual compound stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. Actual gains, 83 85 if any, on option exercises will depend on the future performance of our common stock and overall market conditions. The potential realizable values shown in this table may never be achieved.
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------- NAME GRANTED FISCAL YEAR (US$/SHR) DATE 5% 10% ---- ---------- ------------ -------------- ---------- --------- --------- Mark Leslie............ 247,500 5.4 19.59 4/14/08 3,048,176 7,724,677 Geoffrey W. Squire..... 82,500 1.8 19.59 4/14/08 1,016,059 2,574,892 Fred van den Bosch..... 165,000 3.6 19.59 4/14/08 2,032,117 5,149,785 Kenneth Lonchar........ 45,000 1.0 19.59 4/14/08 554,214 1,404,487 Paul A. Sallaberry..... 75,000 1.6 19.59 4/14/08 923,690 2,340,811
The exercise price of all stock options was equal to the fair market value of our common stock on the date of grant. Stock options vest over four years at the rate of 1/48 per month, such vesting to accelerate in the event of an acquisition or merger. The options were granted for a term of ten years, subject to earlier termination upon termination of employment. Share and per share data has been restated to give retroactive effect to a 2-for-1 stock split in the form of a stock dividend to be effected in July 1999. AGGREGATE OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning the exercise of stock options during 1998 by each of the named officers, including the aggregate amount of gains on the date of exercise. In addition, the table includes the number of shares covered by both vested and unvested stock options held on December 31, 1998 by each of the named officers. Also reported are values for "in the money" stock options that represent the positive spread between the respective exercise prices of outstanding stock options and the fair market value of the our common stock as of December 31, 1998. The fair market value is determined by the closing price of our common stock on December 31, 1998, which was $29.97 per share.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT SHARES VALUE YEAR-END FISCAL YEAR-END($US) ACQUIRED ON REALIZED -------------------- ----------------------- NAME EXERCISE (US$) VESTED UNVESTED VESTED UNVESTED ---- ----------- --------- -------- --------- ---------- ---------- Mark Leslie........... 59,998 940,623 757,502 674,998 19,043,997 12,459,417 Geoffrey W. Squire.... 172,800 1,948,165 213,790 318,710 5,094,057 6,791,675 Fred van den Bosch.... 0 0 581,602 362,624 15,290,591 6,194,667 Kenneth Lonchar....... 27,412 667,551 23,790 83,074 413,934 1,330,341 Paul A. Sallaberry.... 89,998 1,710,374 167,234 277,322 3,634,233 5,306,142
Share data has been restated to give retroactive effect to a 2-for-1 stock split in the form of a stock dividend to be effected in July 1999. The value realized for option exercises is the aggregate fair market value of our common stock on the date of exercise less the exercise price. The valuations shown above for unexercised in-the-money options are based on the difference between the option exercise price and the fair market value of the stock on December 31, 1998. These values have not been, and may never be, realized. 84 86 EMPLOYMENT AGREEMENTS All of the executive officers of VERITAS entered into employment agreements with VERITAS effective May 28, 1999. Terms of the Agreements Under the employment agreements, these officers will be paid a base salary and will be entitled to receive a performance bonus as determined by the board of directors or the compensation committee. All these employment agreements provide for a term of one year, except for Mark Leslie and Terence Cunningham, which provide for a term of two years. In addition, each employment agreement provides that at the end of its term, the employee shall continue on a month-to-month basis on the terms and conditions in the employment agreement. Severance Provisions Generally, if we terminate one of these employment agreements as a result of an involuntary termination described below, then the affected employee shall be entitled to six months of the employee's base compensation, plus any unpaid quarterly bonuses, and 50% of the employee's target bonus for the fiscal year. In addition, the employee will be entitled to the continued vesting of all stock options and restricted stock held by the employee through the consulting period described below, and the continued exercisability of all stock options for three months following the end of the consulting period. The employee shall also be entitled to continue to receive health, dental and life insurance coverage and shall be retained as a consultant as set forth in the applicable agreement. The employee shall not be entitled to receive severance benefits if the employee's employment terminates by reason of the employee's voluntary resignation, if we terminate the employee's employment after the last day of the employment term or if the termination is for cause as described below, except those under our severance and benefits plans. "Involuntary termination" means: - without employee's consent, the reduction of employee's duties, authority or responsibilities, or the assignment to employee of reduced duties, authority or responsibilities; - a reduction in the employee's base salary; - a reduction in the employee's target bonus opportunity with the result that employee's overall cash compensation package is significantly reduced; - the relocation of employee to a facility or a location more than 30 miles away, without employee's consent; - any termination of employee not for cause; and - any act or set of acts that would, under California case law or statute, constitute a constructive termination of employee. The "consulting period" is a period of twelve months after the date of involuntary termination if the involuntary termination occurs within six months after the effective date of the NSMG combination or nine months after the date of involuntary termination if the involuntary termination is more than six months after the effective date of the NSMG combination. Noncompetition Provisions The employment agreements provide that until the end of the consulting period, the employee will not be owner, consultant, director, or employee of any business which has products which compete directly with our products, or without our authorization. In addition, until one year after the employee's 85 87 termination for any reason, the employee shall not take away any of our employees or cause an employee to leave. RELATED PARTY TRANSACTIONS From January 1, 1998 to the present, there have not been any and there are currently no proposed transactions in which the amount involved exceeded $60,000 to which we or any of our subsidiaries were or are to be a party and in which any executive officer, director, 5% beneficial owner of our common stock or member of the immediate family of them had or will have a direct or indirect material interest and there are no business relationships between us and any entity, of which a director of VERITAS is an executive officer or of which a director of VERITAS owns equity interest in excess of 10%, involving payments for property or services in excess of five percent of our consolidated gross revenues for 1998, except as described above under "Management" and as described below. On May 28, 1999, VERITAS acquired the Network & Storage Management Group business of Seagate Software, Inc. As a result of this transaction, Seagate Software owns approximately 40% of the outstanding common stock of VERITAS and Stephen J. Luczo, who is a director of VERITAS, is Chairman of the board of directors of Seagate Software, and President, Chief Executive Officer and member of the board of directors of Seagate Technology, Inc., and Gregory B. Kerfoot, President and a director of Seagate Software joined our Board of Directors. To implement the transaction, VERITAS entered into the agreements described below with Seagate Software and its parent, Seagate Technology. VERITAS, VERITAS Operating Corporation and Seagate Software entered into a Stockholder Agreement on May 28, 1999 that gives Seagate Software the right to (1) nominate up to two members of the VERITAS board, (2) sell up to 4,000,000 shares of VERITAS common stock in each of the first three full quarters after May 28, 1999 and up to 6,000,000 shares of VERITAS common stock in the fourth full quarter after May 28, 1999 and the right to require VERITAS to register up to 12,000,000 shares of VERITAS common stock during the first four full quarters after May 28, 1999, and (3) for five years maintain its ownership percentage if VERITAS issues stock to third parties in certain transactions. Pursuant to the board nomination rights of Seagate Software, Gregory B. Kerfoot and Stephen J. Luczo are members of the VERITAS board of directors. VERITAS and Seagate Software entered into a registration rights agreement on May 28, 1999 that gives Seagate Software the right to require, once in any nine-month period, VERITAS to register for public resale the shares of the VERITAS stock owned by Seagate Software. VERITAS, VERITAS Operating Corporation and Seagate Software Information Management Group, Inc., a subsidiary of Seagate Software, entered into a three-year Cross-License and OEM Agreement on October 5, 1998 and, on April 16, 1999, amended the agreement. VERITAS, VERITAS Operating Corporation and Seagate Technology entered into a ten-year Development and License Agreement on October 5, 1998. These agreements provide for the development and/or licensing of certain products among the parties and restrictions on the parties' ability to compete with each other or to enter into relationships with competitors of the other party. The royalty fees under these agreements, if any, are to be determined at a later date. VERITAS, VERITAS Operating Corporation, Seagate Technology and Seagate Software entered into a Transition Services and Facilities Use Agreement on May 28, 1999. This agreement sets forth the terms by which VERITAS, Seagate Technology and Seagate Software will continue to share certain facilities and services. The term and payment for the services which VERITAS is receiving are as follows: (1) $56,500 per month for the cost of transitional warehousing, distribution, billing and collection services from Seagate Technology Netherlands, the Netherlands division of Seagate Technology International, a Cayman Islands corporation and wholly owned subsidiary of Seagate Technology, which VERITAS expects to cease using within twelve months; (2) $6,300 per month for the cost of information technology services from Seagate Software, which VERITAS expects to cease using by 86 88 February 2000; and (3) for various shared facilities, between $775 to $1,375 per employee per month for shared facilities in Singapore, Australia and Hong Kong, which facilities VERITAS expects to vacate no later than September 1999, 2,439,423 yen per month for a shared facility in Japan, which VERITAS expects to vacate no later than February 2000, and $15,500 per month for a shared facility in France, which VERITAS expects to vacate no later than September 2003. The term and payment for the services which VERITAS is providing are as follows: $32,100 per month for shared facilities in Florida, California and South Africa, which facilities VERITAS expects to be vacated by Seagate Software no later than March 2000. On July 13, 1999, Terence Cunningham announced his resignation as President, Chief Operating Officer and as a director of VERITAS, effective as of August 30, 1999. In connection with his resignation, we agreed, in addition to the terms and conditions of the employment agreement by and between us and Mr. Cunningham effective as of May 1999, to transfer to Mr. Cunningham rights and title to an automobile and specified items of his office equipment. As a result of his resignation, Mr. Cunningham will receive an aggregate severance payment of $250,000 and will be entitled to the continued vesting of 244,388 options to purchase common stock until May 2001. 87 89 PRINCIPAL STOCKHOLDERS The table below reflects beneficial ownership as of July 15, 1999, determined in accordance with the rules of the Securities and Exchange Commission. To our knowledge, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them subject to community property laws where applicable, unless we indicate otherwise below. We have included in each person's beneficial ownership that person's options to purchase common stock that he or she can exercise within 60 days after July 15, 1999. However, we have not included any other person's options for the purpose of computing percentage ownership.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ----------------------------------- PERCENT OF BENEFICIAL OWNER SHARES OPTIONS TOTAL CLASS ---------------- ---------- --------- ---------- ---------- Seagate Technology, Inc....................... 69,148,208 -- 69,148,008 40.75% Seagate Software, Inc......................... 69,148,208 -- 69,148,208 40.75% Gregory Kerfoot............................... 69,148,208 -- 69,148,208 40.75% Stephen Luczo................................. 69,148,208 -- 69,148,208 40.75% Janus Capital Corporation..................... 10,816,800 -- 10,816,800 6.37% William H. Janeway............................ 4,923,590 -- 4,923,590 2.90% Mark Leslie................................... 1,218,416 902,082 2,120,498 1.24% Geoffrey Squire............................... 560,000 333,505 895,505 * Fred van den Bosch............................ 6,348 694,168 700,516 * Peter Levine.................................. 234,950 54,754 289,704 * Joseph Rizzi.................................. 110,166 129,936 240,102 * Paul Sallaberry............................... 58,052 197,630 255,682 * Terence Cunningham............................ -- 254,476 254,476 * Kenneth Lonchar............................... 87,044 46,064 133,108 * Michael Colemere.............................. -- 77,916 77,916 * Steven Brooks................................. 9,000 67,754 76,754 * Jay Jones..................................... 30,788 32,241 63,029 * Michael Wentz................................. -- 58,383 58,383 * David Hallmen................................. -- 44,385 44,385 * All executive officers and directors as a group (16 persons).......................... 76,386,562 2,895,294 79,281,856 45.93%
- ------------------------- * Less than one percent. Unless otherwise noted, each holder has an address of c/o VERITAS Software Corporation, 1600 Plymouth Street, Mountain View, CA, 94043. Seagate Software is a majority-owned subsidiary of Seagate Technology. Mr. Luczo, a director of VERITAS, is President, Chief Executive Officer and a member of the Board of Directors of Seagate Technology and Chairman of the Board of Directors of Seagate Software. Mr. Kerfoot, a director of VERITAS, is the President and a director of Seagate Software. As such, Mr. Luczo and Mr. Kerfoot may be deemed to have an indirect pecuniary interest within the meaning of Rule 16a-1 under the Exchange Act in an indeterminate portion of the shares beneficially owned by Seagate Software. Mr. Luczo and Mr. Kerfoot each disclaim beneficial ownership of these shares for the purposes of Section 16 of the Securities Exchange Act of 1934 or otherwise. Seagate Technology may be deemed to beneficially own the shares held by Seagate Software. The business address of Mr. Kerfoot and Seagate Software is 915 Disc Drive, Scotts Valley, CA 95066. The business address of Mr. Luczo and Seagate Technology is 920 Disc Drive, Scotts Valley, CA 95067. 88 90 Janus Capital Corporation, an institutional investment manager, holds shares on behalf of various client accounts, and shares voting power and holds sole dispositive power. This information is current as of June 10, 1999. Mr. Janeway, a director of VERITAS, is a managing director and member of E.M. Warburg, Pincus & Co., LLC, or EMW LLC, and a general partner of Warburg, Pincus & Co., or WP. As such, Mr. Janeway may be deemed to have an indirect pecuniary interest within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934 in an indeterminate portion of the 4,817,590 shares beneficially owned by WP and EMW LLC. Mr. Janeway disclaims beneficial ownership of those shares for the purposes of Section 16 of the Exchange Act or otherwise. The business address of Mr. Janeway and of each Warburg, Pincus entity is 466 Lexington Avenue, New York, NY 10017. 89 91 SELLING STOCKHOLDERS The shares the selling stockholders are offering hereby were issued by VERITAS to the selling stockholders pursuant to a registration statement on Form S-4. The following table sets forth information regarding the selling stockholders with respect to the shares that are being offered pursuant to this prospectus. We have obtained this information from the selling stockholders. Except as provided below, none of the selling stockholders has, or within the past three years has had, any position, office or other material relationship with VERITAS or any of its predecessors or affiliates.
MAXIMUM NUMBER SHARES BENEFICIALLY OWNED OF SHARES TO BE SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING OFFERED BY EACH AFTER THE OFFERING ------------------------- SELLING ------------------------- NAME NUMBER PERCENT STOCKHOLDER NUMBER PERCENT ---- ----------- ----------- --------------- ----------- ----------- Seagate Software, Inc.............. 69,148,208 40.75% 10,600,000 58,548,208 36.80% Warburg, Pincus Investors, L.P. ... 4,446,308 2.62 1,400,000 3,046,308 1.81
The percentages of outstanding common stock were calculated based on 169,706,808 shares of common stock outstanding as of July 15, 1999. The table assumes that the underwriters have not exercised their over-allotment option to purchase 1,800,000 shares from the selling stockholders. If the over-allotment option is exercised in full, the number of our shares held by each selling stockholder after the offering will be reduced and the percentages of outstanding common stock owned by each selling stockholder will decline. Unless a selling stockholder's address is provided elsewhere in this section, the business address of each selling stockholder is VERITAS Software Corporation, 1600 Plymouth Street, Mountain View, California 94043. Seagate Software, Inc. Seagate Software's products permit analysis and interpretation of data in order to make business decisions. Seagate Software currently has one operating group, the Information Management Group. Prior to May 28, 1999, Seagate Software also operated its Network & Storage Management Group business, which was contributed to VERITAS on that date in exchange for 69.1 million shares of VERITAS common stock. Former employees of Seagate Software who became employees of VERITAS in connection with contribution of the NSMG business received options to purchase 6.9 million shares of VERITAS common stock in exchange for Seagate Software options terminated as a result of the transaction. Two members of the board of directors of VERITAS, Stephen J. Luczo and Gregory B. Kerfoot, are representatives of Seagate Software. Mr. Luczo is the Chairman of the board of directors of Seagate Software and the President and Chief Executive Officer of Seagate Technology, Inc., Seagate Software's majority stockholder. Mr. Kerfoot is a director of Seagate Software and serves as its President. As such, Mr. Luczo and Mr. Kerfoot may be deemed to have an indirect pecuniary interest within the meaning of Rule 16a-1 under the Exchange Act in an indeterminate portion of the shares beneficially owned by Seagate Software. Mr. Luczo and Mr. Kerfoot each disclaim beneficial ownership of these shares for the purposes of Section 16 of the Securities Exchange Act of 1934 or otherwise. Seagate Technology may be deemed to beneficially own the shares held by Seagate Software. For additional information regarding the relationship between Seagate Software and VERITAS, see "Related Transactions." Headquartered in Scotts Valley, California, Seagate Software has 32 offices and operations in 17 countries worldwide. Seagate Software is a majority-owned and consolidated subsidiary of Seagate Technology. As of July 2, 1999, Seagate Technology held approximately 99% of all outstanding shares of Seagate Software. Current and former employees, directors and consultants of Seagate Software, Seagate Technology and their subsidiaries hold the remaining shares of Seagate Software. Seagate 90 92 Software's principal executive offices are located at 915 Disc Drive, Scotts Valley, California 95066, and its telephone number is (831) 438-6550. Seagate Technology, Inc. Seagate Technology designs, manufactures and markets products for storage, retrieval and management of data on computer systems and other systems that receive, store and transmit data. These products include disc drives and disc drive components, tape drives and software. Seagate Technology designs, manufactures and markets a broad line of rigid disc drives. These products are used in computer systems ranging from desktop personal computers to large, sophisticated enterprise computers. Seagate Technology also designs and markets tape drives ranging in capacity from 8 gigabytes to 200 gigabytes for low cost storage and protection of large volumes of data electronically. Seagate Technology's common stock trades on the New York Stock Exchange under the symbol "SEG." Seagate Technology's principal executive offices are located at 920 Disc Drive, Scotts Valley, California 95066, and its telephone number at that location is (831) 438-6550. Warburg, Pincus Investors, L.P. Warburg, Pincus Investors, L.P., or WPI, is a Delaware limited partnership. The general partner of WPI is Warburg, Pincus & Co., a New York general partnership, or WP, and the manager of WPI is E.M. Warburg, Pincus & Co., LLC, a New York limited liability company or EMW LLC. Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC and may be deemed to control both WP and EMW LLC. The members of EMW LLC are substantially the same as the partners of WP. William Janeway, a director of VERITAS, is a managing director and member of EMW LLC and a general partner of WP. As such, Mr. Janeway may be deemed to have an indirect pecuniary interest within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934 in an indeterminate portion of the shares beneficially owned by Warburg, Pincus. Mr. Janeway disclaims beneficial ownership of those shares for the purposes of Section 16 of the Exchange Act or otherwise. The business address of Mr. Janeway and of each Warburg, Pincus entity is 466 Lexington Avenue, New York, NY 10017. In connection with its acquisition of shares of Old VERITAS in connection with VERITAS' merger with OpenVision Technologies, Inc., Warburg entered into a registration rights agreement and a nomination agreement with Old VERITAS that we assumed. The terms of the registration rights agreement grant Warburg certain rights to register specified shares of our common stock. The terms of the nomination agreement obligate us, in connection with each stockholder solicitation for the election of our board of directors, to nominate two candidates for our board of directors (one of which must not be a partner or employee of Warburg) while Warburg holds more than 15% of our outstanding common stock, and to nominate one candidate for our board of directors while Warburg holds more than 5%, but not more than 15% of our outstanding common stock. The remaining selling stockholders are directors and/or officers of VERITAS. Biographies regarding these persons are located in "Management" and additional information regarding their stock and option information is located in "Principal Stockholders." VERITAS expects to incur expenses of $ in connection with this offering. The selling stockholders will incur any expenses of their own counsel in connection with this offering, but the remaining expenses (other than underwriting discounts and commissions) will be paid by VERITAS. 91 93 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 500,000,000 shares of common stock, 10,000,000 shares of preferred stock and one share of special voting stock. As of July 15, 1999 there were outstanding 169,706,808 shares of common stock held of record by approximately 398 stockholders, options to purchase 24,469,866 shares of common stock and no warrants to purchase shares of common stock. COMMON STOCK The holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and amounts that the board of directors determines, subject to preferences that apply to any outstanding preferred stock at the time. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Stockholders do not have cumulative voting rights. This means that the holders of a majority of the shares voted can elect all of the directors in an election. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of VERITAS, the assets legally available for distribution to stockholders are distributable ratably among the holders of common stock and any participating preferred stock after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be issued upon conversion of the notes and upon exchange of the Exchangeco exchangeable shares will be upon payment for those shares, duly and validly issued, fully paid and nonassessable. SPECIAL VOTING STOCK A single share of special voting stock is authorized for issuance and outstanding. The holder of the voting share is not entitled to receive dividends. The voting share possesses a number of votes equal to the number of outstanding Exchangeco exchangeable shares not owned by us or any entity controlled by us for the election of directors and on all other matters submitted to a vote of our stockholders, except as otherwise required by law or our amended and restated certificate of incorporation. The holders of common stock and the holder of the voting share will vote together as a single class on all matters, except as required by law. The voting share is not entitled to preemptive rights and is not convertible into other securities. Upon liquidation, dissolution or winding-up of VERITAS, the holder of the voting share will not be entitled to receive any assets available for distribution to its stockholders. The voting share will be canceled when the voting share has no votes attached to it because there are no Exchangeco exchangeable shares outstanding not owned by us or an entity controlled by us, and there are no shares of stock, debt, options or other agreements of TeleBackup that could give rise to the issuance of any exchangeable shares to any person. Other than the cancellation described above, the voting share is not subject to any right of redemption. ANTI-TAKEOVER PROVISIONS Charter and bylaw provisions Staggered board. Our board of directors is divided into three classes as nearly equal in size as possible with staggered three-year terms. The classification of the board of directors could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of VERITAS because a majority of the board of directors cannot be elected in any one year. Stockholder Actions. Stockholder actions must be taken at meetings. Any action required or permitted to be taken by the stockholders of VERITAS at an annual meeting or a special meeting of the stockholders may be taken only if it is properly brought before the meeting and may not be taken by written action in lieu of a meeting. 92 94 Limits on ability to call special meetings. The bylaws also provide that special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer or by a majority of the members of the board of directors. Indemnification. Our amended and restated certificate of incorporation and its bylaws provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us. These may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. Delaware anti-takeover law We are subject to the provisions of Delaware's anti-takeover law regulating corporate takeovers. The anti-takeover law prevents certain Delaware corporations, including those whose securities are listed on the Nasdaq National Market, from engaging, under certain circumstances, in a "business combination," which includes a merger or sale of more than 10% of the corporation's assets with any "interested stockholder" for three years following the date that such stockholder became an "interested stockholder." An interested stockholder is a stockholder who owns 15% or more of the corporation's outstanding voting stock. A Delaware corporation may "opt out" of the anti-takeover law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. We have not "opted out" of the provisions of the anti-takeover law. Stockholder rights plan Our board of directors has declared a dividend of one preferred share purchase right for each outstanding share of common stock. The dividend was paid to stockholders of record on June 25, 1999. We will issue one right with each share of common stock that we issue between the record date and the earliest of the distribution date described below, the date the rights are redeemed or the date the rights expire. After the distribution date, we will issue one right with each common share we issue upon the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of other securities (including the TeleBackup exchangeable shares) that were outstanding before the distribution date, until the date the rights are either redeemed or expire. Each right entitles the registered holder to purchase one one-hundredth of a share of Series A junior participating preferred stock at a price of $550.00 per one one-hundredth of a preferred share. The description and terms of the rights are set forth in a rights agreement between us and ChaseMellon Shareholder Services, L.L.C., as rights agent. Exercisability and duration of rights The rights are not exercisable until the distribution date described below. The rights will expire on June 16, 2009, unless the expiration date is extended or unless the rights are earlier redeemed or exchanged, in each case, as described below. Evidence and transfer of rights The rights will be evidenced, with respect to any of the common stock share certificates outstanding as of the record date, by the common stock share certificates with a copy of the summary of rights distributed to stockholders of record on June 25, 1999 attached. Common stock share certificates issued after the record date will contain a notation incorporating the rights agreement by reference, until the distribution date or earlier redemption or expiration of the rights. Until the distribution date, the rights can be transferred only with VERITAS common stock and the transfer of any VERITAS common stock certificates will constitute the transfer of the rights associated with the common stock (even without notation or a copy of the summary of rights). After the distribution date, separate certificates 93 95 representing the rights will be mailed to record holders of VERITAS common stock on the distribution date and the separate certificates alone will evidence the rights. Triggering of rights The rights became exercisable after the lapse of either: - 10 days following a public announcement or disclosure that a person or group of affiliated or associated persons, or an acquiring person, has acquired beneficial ownership of 15% or more of the outstanding shares of our common stock; or - 10 business days, or later date as may be determined by the board prior to the time a person or group becomes an acquiring person, following the announcement of an intention to make a tender offer or exchange offer the consummation of which would result in a person or group becoming an acquiring person. The earlier of those dates is called the distribution date. Seagate Technology, Inc., Seagate Software, Inc. and their subsidiaries are not "acquiring persons" as a result of the NSMG combination, unless Seagate Technology or Seagate Software acquires shares in addition to the 69,148,208 shares of VERITAS common stock issued to Seagate Software in the NSMG combination and unless all other stockholders of VERITAS also acquire additional shares through the event, such as the July 1999 stock dividend. No person or group will be an acquiring person if the board determines in good faith that the person or group who would otherwise be an acquiring person has become one inadvertently, and that person or group promptly takes the actions necessary so that it would no longer be considered an acquiring person. Adjustments for stock splits or other transactions The purchase price payable and the number of preferred shares or other securities or property issuable upon exercise of the rights will be adjusted from time to time to prevent dilution: - in the event of a stock dividend on, or a subdivision, combination or reclassification of, the preferred shares; - upon the grant to holders of the preferred shares of certain rights or warrants to subscribe for or purchase preferred shares at a price, or securities convertible into preferred shares with a conversion price, less than the then current market price of the preferred shares; - upon the distribution to holders of the preferred shares of evidences of indebtedness or assets excluding regular periodic cash dividends, if any, or dividends payable in preferred shares or of subscription rights or warrants other than those referred to above; - in the event of a stock dividend on our common stock payable in shares of common stock prior to the distribution date; or - subdivisions, consolidations or combinations of the shares of common stock occurring, prior to the distribution date. Terms of preferred shares The preferred shares will have the terms described under "-- Preferred stock." Because of the nature of the preferred shares' dividend, liquidation and voting rights, the value of the one one-hundredth interest in a preferred share purchasable upon exercise of each right should approximate the value of one share of common stock. 94 96 Rights could purchase shares of common stock at a discount If any person or group becomes an acquiring person, each holder of a right, other than the acquiring person, will have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the right unless the event causing the person or group to become an acquiring person is a merger, acquisition or other business combination described in the next paragraph. If we do not have a sufficient amount of authorized common stock to satisfy the obligation to issue shares of common stock, we must deliver upon payment of the exercise price of a right an amount of cash or other securities equivalent in value to the shares of common stock issuable upon exercise of a right. In the event that any person or group becomes an acquiring person and (1) we merge into or engage in certain other business combination transactions with an acquiring person, or (2) 50% or more of our consolidated assets or earning power are sold to an acquiring person, each holder of a right, other than the acquiring person, will have the right to receive that number of shares of common stock of the acquiring company which will have a market value of two times the exercise price of the right. At any time after any person becomes an acquiring person and prior to that person or group acquiring 50% or more of the outstanding shares of common stock, the board may exchange the rights, other than rights owned by the acquiring person, at an exchange ratio of one share of common stock, or one one-hundredth of a preferred share per right. Adjustments to the purchase price With certain exceptions, no adjustment in the purchase price will be required until cumulative adjustments require an adjustment of at least 1% in the purchase price. No fractional preferred shares will be issued. However, fractions which are integral multiples of one one-hundredth of a preferred share may, at our election, be evidenced by depositary receipts. In lieu of fractional shares, an adjustment in cash will be made based on the market price of the preferred shares on the last trading day prior to the date of exercise. The board may redeem the rights At any time prior to such time as a person or group becomes an acquiring person, the board of directors may redeem all, but not some, of the rights at a price of $0.001 per right. The redemption of the rights may be made effective at the time, on the basis and with any conditions as the board of directors in its sole discretion may establish. After the period for redemption of the rights has expired, the board may not amend the rights agreement to extend the period for redemption of the rights. The right to exercise the rights terminates immediately when they are redeemed and the only right of the holders of rights after that time will be to receive the redemption price. The board may amend the rights The terms of the rights may be amended by a resolution of the board of directors without the consent of the holders of the rights. However, from and after such time as any person or group becomes an acquiring person, no amendment may adversely affect the interests of the holders of the rights other than an acquiring person. Holders of unexercised rights do not have privileges of a stockholder Until a right is exercised, the holder will have no rights as a stockholder of VERITAS, including, without limitation, the right to vote or to receive dividends. 95 97 Reasons for stockholder rights plan The rights in the stockholder rights plan are designed to protect and maximize the value of the outstanding equity interests in VERITAS in the event of an unsolicited attempt by an acquirer to take over VERITAS, in a manner or on terms not approved by the board of directors. Takeover attempts frequently include coercive tactics to deprive a company's board of directors and its stockholders of any real opportunity to determine the destiny of the company. The rights will be declared in order to deter these types of coercive tactics, which, include a gradual accumulation of shares in the open market of a 15% or greater position to be followed by a merger or a partial or two-tier tender offer that does not treat all stockholders equally. These tactics unfairly pressure stockholders, squeeze them out of their investment without giving them any real choice and deprive them of the full value of their shares. The rights are not intended to prevent a takeover of VERITAS and will not do so. Rather, they are intended to provide the protections of the VERITAS stockholders rights plan. Because the rights may be redeemed by VERITAS, they should not interfere with any merger or business combination approved by the board of directors. Issuance of the rights does not in any way weaken our financial strength or interfere with our business plans. The issuance of the rights themselves has no dilutive effect, will not affect reported earnings per share, should not be taxable to us or to our stockholders and will not change the way in which our shares are presently traded. Our board of directors believes that the rights will represent a sound and reasonable means of addressing the complex issues of corporate policy created by the current takeover environment. However, the rights may have the effect of rendering more difficult or discouraging an acquisition of VERITAS deemed undesirable by the board of directors. The rights may cause substantial dilution to a person or group that attempts to acquire VERITAS on terms or in a manner not approved by our board of directors. PREFERRED STOCK The board is authorized, subject to any limitations prescribed by Delaware law, to issue up to 10,000,000 additional shares of preferred stock. This preferred stock may be issued in one or more series and the board may determine the number of shares to be included in each series. The board may fix the powers, preferences and rights of the shares of each series and any qualifications, limitations or restrictions on any series of preferred stock. The board may also increase or decrease the number of shares of any series but not below the number of shares of such series then outstanding. All of these actions may be taken without vote or action by the stockholders. Of these shares, 2,000,000 shares are designated as the Series A junior participating preferred shares that are reserved for issuance under the rights plan. The rights of the Series A junior participating preferred shares are described below. Terms of preferred shares subject to the stockholder rights plan Dividends. Each preferred share will be entitled to a quarterly dividend payment of 100 times the dividend declared per share of common stock. Voting. Each preferred share will have 100 votes, voting together with the shares of common stock. In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each preferred share will be entitled to receive 100 times the amount received per share of common stock. Liquidation or dissolution. In the event of liquidation, each preferred share will be entitled to a $1.00 preference, and after the holders of the preferred shares will be entitled to an aggregate payment of 100 times the aggregate payment made per share of common stock. Redemption. The preferred shares purchasable upon exercise of the rights, described above, will not be redeemable. 96 98 Anti-takeover effect of undesignated preferred stock With respect to the remaining authorized but undesignated shares of preferred stock, the board of directors may authorize and issue preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. This is because the terms of the preferred stock could conceivably prohibit consummation of any merger, reorganization, sale of substantially all of our assets or other extraordinary corporate transaction without approval of the outstanding shares of preferred stock. Thus, the issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of VERITAS. THE BOARD OF DIRECTORS Number of directors. The number of directors on the board of directors shall be fixed exclusively by the board of directors, subject to the rights of the holders of preferred stock. We currently have ten directors. Adding directors. Newly created directorships or any vacancies in the board of directors may be filled only by a majority vote of the directors then in office or by a sole remaining director, subject to the rights of the holders of any outstanding preferred stock. Removal of directors. Any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of all outstanding shares entitled to vote generally in the election of directors. AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND THE BYLAWS OF VERITAS Our amended and restated certificate of incorporation provides that either the board of directors or the stockholders may adopt, amend or repeal the bylaws. Any adoption, amendment or repeal of the bylaws by the board of directors requires the approval of a majority of the total number of authorized directors regardless of vacancies, or by the whole board. Any adoption, amendment or repeal of the bylaws by the stockholders requires the affirmative vote of at least two-thirds of the affirmative voting power of all outstanding shares entitled to vote generally, voting as a single class. Provisions of the amended and restated certificate of incorporation may be amended or repealed by the stockholders in the manner prescribed by Delaware law. However, the amendment, adoption, or repeal of any provision inconsistent with the provisions relating to the following require the approval of at least two-thirds of the affirmative voting power of all outstanding shares entitled to vote generally, voting as a single class: - the composition of the board of directors; - the amendment of bylaws; - the prohibition of actions of the stockholders written consent; or - the amendment of the amended and restated certificate of incorporation. REGISTRATION RIGHTS WARBURG PINCUS' REGISTRATION RIGHTS Warburg Pincus has the right, on up to two occasions, to require us to register for public resale the securities held by it. The securities to be sold must have an aggregate offering price of at least $5.0 million. We have the right to delay any registration for up to 60 days under various circumstances. In addition, Warburg Pincus has certain "piggyback" registration rights. If we propose to register any of our securities under the Securities Act, Warburg Pincus may require us to include all or a portion of its shares in the registration. This right does not apply to registrations in connection with the issuance 97 99 of debt securities, its employee benefit plans or a merger or reorganization transaction. This piggyback right is subject to the right of the managing underwriter, if any, to limit the number of shares to be included by Warburg Pincus in the registration. Expiration These registration rights will expire at the time that all shares of VERITAS received by Warburg Pincus in the NSMG combination may be resold in a three month period under Rule 144 of the Securities Act. Expenses We will pay all expenses incurred in connection with the above registration, other than the underwriters' and brokers' discounts and commissions and the fees of counsel for Warburg Pincus. SEAGATE SOFTWARE REGISTRATION RIGHTS In connection with the NSMG combination, VERITAS and Seagate Software and Seagate Technology entered into a stockholder agreement limiting the rights of Seagate Software and Seagate Technology to resell and acquire additional shares of VERITAS common stock. VERITAS and Seagate Software also entered into a registration rights agreement pursuant to which VERITAS granted SSI rights to have the resale of the shares of VERITAS common stock it holds registered under the Securities Act. Under the registration rights agreement, until all of the registrable shares could be resold under Rule 144 under the Securities Act, VERITAS will permit Seagate Software to "piggyback" on other registration statements, and to request registration of resales once in any nine-month period. So long as Seagate Software and Seagate Technology collectively own at least 5.0% of VERITAS' outstanding common stock, Seagate Software and Seagate Technology may only sell shares of VERITAS common stock as follows: - no shares in the quarter ending in June, 1999; - 4,000,000 shares in the quarter ending in September, 1999; - 4,000,000 shares in the quarter ending in December, 1999; - 4,000,000 shares in the quarter ending in March, 2000; and - 6,000,000 shares in the quarter ending in June, 2000. They will also have the right to sell up to 12,000,000 shares in an underwritten public offering once in the first year after completion of the NSMG combination, but if they exercise this right, they will be prohibited from selling other shares in the quarter that the offering is completed. They may not transfer, assign, pledge or otherwise dispose of any VERITAS securities for one year after the closing of the NSMG combination except in the manner noted above. After that date, they may not sell their VERITAS stock except: - to VERITAS or to a person or persons that VERITAS has previously approved in writing; - in a bona fide underwritten public offering; - under Rule 144 under the Securities Act; - in other private transactions so long as such private transactions do not result in any single person or group owning 5% or more of the total outstanding voting stock of VERITAS; - in response to a tender offer not opposed by the VERITAS board; 98 100 - in a merger or consolidation approved by the VERITAS board in which VERITAS is acquired; or - in a plan of liquidation that is authorized by the VERITAS board. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services LLC. LISTING Our common stock is quoted on Nasdaq under the trading symbol VRTS. 99 101 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, the U.S. underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and SG Cowen Securities Corporation are acting as U.S. representatives, and the international underwriters named below for whom Morgan Stanley & Co. International Limited, Credit Suisse First Boston (Europe) Limited, Goldman Sachs International, Donaldson, Lufkin & Jenrette International and Societe Generale S.A. are acting as international representatives, have severally agreed to purchase, and the selling stockholders have agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of such underwriters below:
NUMBER OF NAME SHARES ---- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated......................... Credit Suisse First Boston Corporation.................... Goldman, Sachs & Co. ..................................... Donaldson, Lufkin & Jenrette Securities Corporation....... SG Cowen Securities Corporation........................... ---------- Subtotal............................................... ---------- International Underwriters: Morgan Stanley & Co. International Limited................ Credit Suisse First Boston (Europe) Limited............... Goldman Sachs International............................... Donaldson, Lufkin & Jenrette International................ Societe Generale S.A...................................... ---------- Subtotal............................................... ---------- Total............................................. 12,000,000 ==========
The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered hereby (other than those covered by the U.S. underwriters' over-allotment option described below) if any such shares are taken. In the Agreement between U.S. and International Underwriters, sales may be made between U.S. underwriters and international underwriters. The per share price of any shares sold by the underwriters will be the public offering price set forth on the cover page of this prospectus of any number of shares as may be mutually agreed, in United States dollars, less an amount not greater than $ a share. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The selling stockholders have granted to the U.S. underwriters an option, exercisable for 30 days from the date of the underwriting agreement, to purchase up to an aggregate of 1,800,000 additional shares of common stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock. To the extent such option is exercised, each U.S. underwriter will become obligated, subject to certain 100 102 conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. The underwriting agreement provides that VERITAS and the selling stockholders will indemnify the underwriters against certain liabilities under the Securities Act. VERITAS, certain of its directors, executive officers (except as to 600,000 shares of common stock in the aggregate) and other selling stockholders (who, as of July 15, 1999, owned an aggregate of approximately 63 million shares of common stock) have agreed that they will not (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or (b) enter into any swap or other arrangement that transfers to another person, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, for a 90-day period after the date of the final prospectus related to this offering, without the prior written consent of Morgan Stanley & Co. Incorporated, except that VERITAS may, without such consent, (1) issue the common stock offered hereby, (2) grant options or issue stock upon the exercise of outstanding stock options pursuant to VERITAS' stock option plans and (3) take any of the proscribed actions in connection with acquisitions of technologies, businesses or portions thereof. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriters may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the underwriters repurchase previously distributed common stock in transactions to cover underwriters short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Some of the underwriters have engaged in transactions with and performed various investment banking and other services for VERITAS in the past, and may do so from time to time in the future. 101 103 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices from time to time. Upon completion of this offering, and based on shares outstanding at July 15, 1999 VERITAS will have outstanding an aggregate of 169,706,808 shares of common stock, assuming no exercise of outstanding options. Of these shares, 105,926,246 shares, including all of the shares sold in this offering, are freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of VERITAS as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). As a result of certain contractual restrictions described below, 63,786,562 additional shares will be eligible for sale 90 days after the date of the final prospectus related to this offering, with all of such shares subject to the volume limitations and other conditions of Rule 144 described below. The selling stockholders have agreed not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly (or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of), any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 90 days after the date of the underwriting agreement, without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in its sole discretion choose to release a certain number of these shares from such restrictions prior to the expiration of such 90 day period. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year including the holding period of any prior owner except an Affiliate would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of common stock then outstanding (which will equal approximately 1.7 million shares immediately after this offering); or (ii) the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about VERITAS. REGISTRATION RIGHTS Warburg Pincus and Seagate Software have agreed that they will not exercise their rights to require us to register shares of our common stock held by them for resale for a period of 90 days after the date of the underwriting agreement. LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will provide VERITAS with an opinion as to legal matters in connection with the notes and common stock offered by this prospectus. Certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, as set forth in their report. We have included our financial statements and schedule in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. 102 104 Ernst & Young LLP, independent auditors, have audited the combined financial statements of the Network & Storage Management Group at July 3, 1998 and June 27, 1997, and for each of the three years in the period ended July 3, 1998, as set forth in their report. We have included the Network & Storage Management Group's financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The financial statements of TeleBackup at December 31, 1997 and 1998 and for the years in the three year period ended December 31, 1998 have been included in this document in reliance upon the report of KPMG LLP, independent chartered accountants, appearing elsewhere in this document, and upon the authority of that firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 with respect to the notes and common stock offered by us. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement or the exhibits and schedules that are part of the registration statement. For further information with respect to VERITAS and the common stock, please see the registration statement and the exhibits and schedules that are part of the registration statement. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our SEC filings are also available to the public from the SEC's Web site at http://www.sec.gov. We are subject to the information and periodic reporting requirements of the Securities Exchange Act. As required by the Securities Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and the Web site of the SEC referred to above. 103 105 INDEX TO FINANCIAL STATEMENTS VERITAS SOFTWARE CORPORATION -- CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors...... F-2 Consolidated Balance Sheets As of December 31, 1997 and 1998 and March 31, 1999 (unaudited)......................................... F-3 Consolidated Statements of Operations Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (unaudited)........................................... F-4 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1999 (unaudited)....... F-5 Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (unaudited)........................................... F-6 Notes to Consolidated Financial Statements............. F-7 VERITAS SOFTWARE CORPORATION -- UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS Overview............................................... F-26 Pro Forma Combined Condensed Statements of Operations Year Ended December 31, 1998 and Three Months Ended March 31, 1999...................................... F-28 Pro Forma Combined Condensed Balance Sheet As of March 31, 1999................................. F-30 Notes to Pro Forma Combined Condensed Financial Statements............................................ F-31 NETWORK & STORAGE MANAGEMENT GROUP COMBINED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors...... F-41 Combined Balance Sheets As of June 27, 1997, July 3, 1998 and April 2, 1999 (unaudited)......................................... F-42 Combined Statements of Operations Years Ended June 28, 1996, June 27, 1997, July 3, 1998, and Nine Months Ended April 3, 1998, and April 2, 1999 (unaudited)................................. F-43 Combined Statements of Cash Flows Years Ended June 28, 1996, June 27, 1997, July 3, 1998, and Nine Months Ended April 3, 1998, and April 2, 1999 (unaudited)................................. F-44 Combined Statements of Group Equity Years Ended June 28, 1996, June 27, 1997, July 3, 1998 and Nine Months Ended April 2, 1999 (unaudited)......................................... F-45 Notes to Combined Financial Statements................. F-46 TELEBACKUP SYSTEMS INC. Auditors' Report to the Directors...................... F-73 Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)............................ F-74 Statements of Operations and Deficit Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (unaudited)......................................... F-75 Statements of Changes in Financial Position Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (unaudited)......................................... F-76 Notes to Financial Statements.......................... F-77
F-1 106 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 16(b). 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. /s/ ERNST & YOUNG LLP San Jose, California January 27, 1999 F-2 107 VERITAS SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents.............................. $ 75,629 $139,086 $111,324 Short-term investments................................. 115,131 72,040 97,225 Accounts receivable, net of allowance for doubtful accounts of $1,597, $2,572 and $2,800 at December 31, 1997, 1998 and March 31, 1999, respectively..... 30,296 52,697 50,210 Prepaid expenses....................................... 4,298 13,509 21,309 -------- -------- -------- Total current assets.............................. 225,354 277,332 280,068 Long-term investments.................................... -- 31,925 47,859 Property and equipment, net.............................. 10,109 26,518 32,528 Other assets............................................. 6,417 13,342 14,421 -------- -------- -------- $241,880 $349,117 $374,876 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................... $ 1,552 $ 4,958 $ 4,390 Accrued compensation and benefits...................... 6,595 11,267 7,473 Other accrued liabilities.............................. 8,407 11,196 11,488 Income taxes payable................................... 2,773 13,424 17,388 Deferred revenue....................................... 17,449 37,645 43,149 -------- -------- -------- Total current liabilities......................... 36,776 78,490 83,888 Deferred rent............................................ 911 773 733 Convertible subordinated notes........................... 100,000 100,000 100,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value: 10,000 shares authorized: none issued and outstanding......................................... -- -- -- Common stock, $.001 par value: 500,000 shares authorized; 92,255, 95,257 and 96,185 shares issued and outstanding at December 31, 1997 and 1998 and March 31, 1999 respectively............ 46 48 48 Additional paid-in capital............................. 185,841 199,810 206,863 Accumulated deficit.................................... (81,064) (29,416) (15,833) Deferred compensation.................................. (64) (32) (24) Accumulated other comprehensive loss................... (566) (556) (799) -------- -------- -------- Total stockholders' equity........................ 104,193 169,854 190,255 -------- -------- -------- $241,880 $349,117 $374,876 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 108 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------- 1996 1997 1998 1998 1999 ------- -------- -------- -------- -------- (UNAUDITED) Net revenue: User license fees.................... $59,223 $ 95,714 $167,703 $30,689 $55,786 Services............................. 13,523 25,411 43,162 8,393 16,118 ------- -------- -------- ------- ------- Total net revenue............... 72,746 121,125 210,865 39,082 71,904 Cost of revenue: User license fees.................... 3,020 4,731 8,798 1,966 1,955 Services............................. 4,442 11,714 20,663 4,500 6,527 ------- -------- -------- ------- ------- Total cost of revenue........... 7,462 16,445 29,461 6,466 8,482 ------- -------- -------- ------- ------- Gross profit........................... 65,284 104,680 181,404 32,616 63,422 Operating expenses: Selling and marketing................ 25,998 42,868 76,392 13,059 26,823 Research and development............. 18,480 25,219 40,239 7,549 13,816 General and administrative........... 6,748 8,027 10,505 2,170 3,289 Merger-related costs................. -- 8,490 -- -- -- In-process research and development....................... 2,200 -- 600 -- -- ------- -------- -------- ------- ------- Total operating expenses........ 53,426 84,604 127,736 22,778 43,928 ------- -------- -------- ------- ------- Income from operations................. 11,858 20,076 53,668 9,838 19,494 Interest and other income, net......... 2,785 4,889 11,821 2,685 3,031 Interest expense....................... (343) (1,206) (5,700) (1,420) (1,433) ------- -------- -------- ------- ------- Income before income taxes............. 14,300 23,759 59,789 11,103 21,092 Provision for income taxes............. 2,171 1,010 8,141 2,048 7,509 ------- -------- -------- ------- ------- Net income............................. $12,129 $ 22,749 $ 51,648 $ 9,055 $13,583 ======= ======== ======== ======= ======= Net income per share -- basic.......... $ 0.14 $ 0.25 $ 0.55 $ 0.10 $ 0.14 ======= ======== ======== ======= ======= Net income per share -- diluted........ $ 0.13 $ 0.23 $ 0.50 $ 0.09 $ 0.13 ======= ======== ======== ======= ======= Number of shares used in computing per share amounts -- basic............... 86,052 91,244 94,026 92,868 95,644 ======= ======== ======== ======= ======= Number of shares used in computing per share amounts -- diluted............. 92,992 98,986 103,342 101,900 106,272 ======= ======== ======== ======= =======
See accompanying notes to consolidated financial statements. F-4 109 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE --------------- ---------------- PAID-IN ACCUMULATED FROM SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS ------ ------ ------- ------ ---------- ----------- ------------ BALANCE AT DECEMBER 31, 1995............ 9,384 $ 120 64,608 $32 $140,153 $(115,942) $(527) Comprehensive income Net income........................... -- -- -- -- -- 12,129 -- Foreign currency translation adjustment......................... -- -- -- -- -- -- -- Comprehensive income................. -- -- -- -- -- -- -- Conversion of preferred stock to common stock................................ (9,384) (120) 18,768 9 117 -- -- Issuance of common stock............... -- -- 4,534 2 36,437 -- -- Exercise of stock options and warrants............................. -- -- 1,326 1 1,091 -- -- Issuance of common stock under employee stock purchase plan.................. -- -- 842 1 1,567 -- -- Payments on notes receivable from stockholders......................... -- -- -- -- -- -- 245 Amortization of deferred compensation......................... -- -- -- -- -- -- -- ------ ----- ------- --- -------- --------- ----- BALANCE AT DECEMBER 31, 1996............ -- -- 90,078 45 179,365 (103,813) (282) Comprehensive income Net income........................... -- -- -- -- -- 22,749 -- Foreign currency translation adjustment......................... -- -- -- -- -- -- -- Comprehensive income................. -- -- -- -- -- -- -- Exercise of stock options.............. -- -- 1,666 1 3,269 -- -- Issuance of common stock under employee stock purchase plan.................. -- -- 510 -- 2,507 -- -- Payments on notes receivable from stockholders......................... -- -- -- -- -- -- 282 Amortization of deferred compensation......................... -- -- -- -- -- -- -- Tax benefit related to stock options... -- -- -- -- 700 -- -- ------ ----- ------- --- -------- --------- ----- BALANCE AT DECEMBER 31, 1997............ -- -- 92,254 46 185,841 (81,064) -- Comprehensive income Net income........................... -- -- -- -- -- 51,648 -- Foreign currency translation adjustment......................... -- -- -- -- -- -- -- Comprehensive income................. -- -- -- -- -- -- -- Exercise of stock options.............. -- -- 2,466 1 10,402 -- -- Issuance of common stock under employee stock purchase plan.................. -- -- 538 1 3,567 -- -- Amortization of deferred compensation......................... -- -- -- -- -- -- -- ------ ----- ------- --- -------- --------- ----- BALANCE AT DECEMBER 31, 1998............ -- -- 95,258 48 199,810 (29,416) -- Comprehensive income Net income (unaudited)............... -- -- -- -- -- 13,583 -- Foreign currency translation adjustment (unaudited)............. -- -- -- -- -- -- -- Comprehensive income (unaudited)..... -- -- -- -- -- -- -- Exercise of stock options (unaudited).......................... -- -- 760 -- 4,515 -- -- Issuance of common stock under employee stock purchase plan (unaudited)...... -- -- 166 -- 2,538 -- -- Amortization of deferred compensation (unaudited).......................... -- -- -- -- -- -- -- ------ ----- ------- --- -------- --------- ----- BALANCE AT MARCH 31, 1999 (UNAUDITED)... -- $ -- 96,184 $48 $206,863 $ (15,833) $ -- ====== ===== ======= === ======== ========= ===== ACCUMULATED OTHER COMPREHENSIVE TOTAL DEFERRED INCOME STOCKHOLDERS' COMPENSATION (LOSS) EQUITY ------------ ------------- ------------- BALANCE AT DECEMBER 31, 1995............ $(129) $(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 -- 32 ----- ----- -------- BALANCE AT DECEMBER 31, 1996............ (97) (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 -- 33 Tax benefit related to stock options... -- -- 700 ----- ----- -------- BALANCE AT DECEMBER 31, 1997............ (64) (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 -- 32 ----- ----- -------- BALANCE AT DECEMBER 31, 1998............ (32) (556) 169,854 Comprehensive income Net income (unaudited)............... -- -- 13,583 Foreign currency translation adjustment (unaudited)............. -- (243) (243) -------- Comprehensive income (unaudited)..... -- -- 13,340 Exercise of stock options (unaudited).......................... -- -- 4,515 Issuance of common stock under employee stock purchase plan (unaudited)...... -- -- 2,538 Amortization of deferred compensation (unaudited).......................... 8 -- 8 ----- ----- -------- BALANCE AT MARCH 31, 1999 (UNAUDITED)... $ (24) $(799) $190,255 ===== ===== ========
See accompanying notes to consolidated financial statements. F-5 110 VERITAS SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, -------------------------------- -------------------- 1996 1997 1998 1998 1999 -------- --------- --------- --------- -------- (UNAUDITED) Cash flows from operating activities: Net income.................................. $ 12,129 $ 22,749 $ 51,648 $ 9,055 $ 13,583 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 3,672 3,116 7,056 1,171 2,718 Amortization of bond issuance costs....... -- 91 428 107 107 Deferred rent............................. 411 (94) (138) (39) (40) In-process research and development....... 2,200 -- 600 -- -- Benefit from deferred income taxes........ -- (4,200) (8,000) -- -- Non-cash merger-related costs............. -- 1,218 -- -- -- Changes in operating assets and liabilities: Accounts receivable.................... (5,966) (14,601) (22,127) 463 2,487 Prepaid expenses and other assets...... (1,001) (267) (8,136) 781 (9,071) Accounts payable and accrued liabilities.......................... 1,840 9,438 21,299 2,717 (106) Deferred revenue....................... 1,084 9,370 20,167 1,072 5,504 -------- --------- --------- --------- -------- Net cash provided by operating activities..... 14,369 26,820 62,797 15,327 15,182 Cash flows from investing activities: Purchases of investments.................... (69,761) (144,907) (284,819) (105,748) (83,409) Investment maturities....................... 47,025 79,921 296,048 82,474 42,290 Payment received on note.................... 282 108 -- -- -- Purchase of property and equipment.......... (5,469) (6,181) (23,424) (4,691) (8,635) Purchase of Windward Technologies, Inc...... -- -- (1,250) -- -- Purchase of ACSC............................ (3,450) -- -- -- -- -------- --------- --------- --------- -------- Net cash used for investing activities........ (31,373) (71,059) (13,445) (27,965) (49,754) Financing activities: Repayment of short-term borrowings.......... (2,061) -- -- -- -- Proceeds from issuance of common stock...... 39,105 5,777 13,971 4,309 7,053 Net proceeds from issuance of convertible debt...................................... -- 97,500 -- -- -- Principal payments under capital lease obligations............................... (116) -- -- -- -- Payments of notes payable................... (6,153) (612) -- -- -- Payments on notes receivable from stockholders.............................. 245 282 -- -- -- -------- --------- --------- --------- -------- Net cash provided by financing activities..... 31,020 102,947 13,971 4,309 7,053 Effect of exchange rate changes............... (132) (490) 134 3 (243) -------- --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents................................. 13,884 58,218 63,457 (8,326) (27,762) Cash and cash equivalents at beginning of period...................................... 3,527 17,411 75,629 75,629 139,086 -------- --------- --------- --------- -------- Cash and cash equivalents at end of period.... $ 17,411 $ 75,629 $ 139,086 $ 67,303 $111,324 ======== ========= ========= ========= ======== Supplemental disclosures: Cash paid for interest...................... $ 1,289 $ -- $ 5,521 $ -- $ -- ======== ========= ========= ========= ======== Cash paid for income taxes.................. $ 1,341 $ 1,703 $ 6,245 $ 513 $ 3,217 ======== ========= ========= ========= ======== Conversion of preferred stock to common stock..................................... $ 71,806 $ -- $ -- $ -- $ -- ======== ========= ========= ========= ========
See accompanying notes to consolidated financial statements. F-6 111 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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. Interim Financial Information The interim financial information at March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited but, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position and results of operations for the interim periods. The results for the three months ended March 31, 1999 are not necessarily indicative of results for the full year. 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. F-7 112 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 $3.3 million, $3.1 million and $6.9 million for the years ended December 31, 1996, 1997 and 1998, 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 F-8 113 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) normal not to 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, 1996 and 1997 no customer accounted for greater than 10% of revenues. F-9 114 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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, 2001. 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. 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 implemented SOP 98-1 effective January 1, 1999. F-10 115 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The adoption of SOP 98-1 did not have a material impact on the Company's financial statements, and the Company does not believe that the impact of SOP 98-1 will have material effect 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 February 8, 1999, VERITAS completed the acquisition of the Pune, India operations of Frontier Software Development (India) Private Limited, a company principally engaged in the development of customized software, for a total cost of approximately $2.4 million. Of this amount, VERITAS paid $1.3 million in cash and agreed to pay Frontier certain earn-out payments totaling $1.1 million over the next two years. The business combination has been accounted for as a purchase and the purchase price, including the $1.1 million of earn-out payments, allocated to the fair value of specific tangible and intangible assets acquired. On February 3, 1999, VERITAS completed the acquisition of OpenVision Australia Pty. Ltd., a company principally engaged in reselling VERITAS software products and services throughout Australia and New Zealand, for a total cost of approximately $300,000 in cash. The business combination has been accounted for as a purchase and the purchase price allocated to the fair value of specific tangible and intangible assets acquired. 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 29.2 million shares of the Company's common stock were issued in the OpenVision merger and the Company reserved approxi- F-11 116 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 2. BUSINESS COMBINATIONS (CONTINUED) mately 4.4 million shares of its common stock for issuance pursuant to the assumption of outstanding options, warrants and other rights to purchase OpenVision common stock. The following information shows revenue and net income of the separate companies during the periods preceding the merger (in thousands):
1996 1997 ------- -------- Net revenue: VERITAS.......................................... $36,090 $ 12,454 OpenVision....................................... 36,656 13,156 Combined company................................. -- 95,515 ------- -------- $72,746 $121,125 ======= ======== Net income: VERITAS.......................................... $ 9,768 $ 3,752 OpenVision....................................... 2,361 1,665 Combined company................................. -- 17,332 ------- -------- $12,129 $ 22,749 ======= ========
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 or 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. F-12 117 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS Cash, cash equivalents and short-term investments consist of the following (in thousands):
YEARS ENDED DECEMBER 31, -------------------- 1997 1998 -------- -------- Cash and cash equivalents: Cash............................................ $ 7,817 $ 6,893 Money market funds.............................. 2,717 172 Commercial paper................................ 65,095 132,021 -------- -------- Cash and cash equivalents......................... 75,629 139,086 -------- -------- Short-term investments: Commercial paper................................ 50,640 1,357 Market auction preferreds....................... 19,061 20,659 Government agency notes......................... 19,748 -- Short-term corporate notes...................... 25,682 50,024 -------- -------- Short-term investments............................ 115,131 72,040 -------- -------- Cash, cash equivalents and short-term investments..................................... $190,760 $211,126 ======== ========
Long-term investments consist of the following (in thousands):
YEARS ENDED DECEMBER 31, ------------------- 1997 1998 ------- -------- Long-term investments: Government agency notes......................... $ -- $ 9,497 Medium-term corporate notes..................... -- 22,428 ------- -------- Long-term investments............................. $ -- $ 31,925 ======= ========
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, -------------------- 1997 1998 -------- -------- Furniture and equipment........................... $ 2,758 $ 6,962 Computer equipment................................ 18,624 34,251 Building.......................................... -- 1,008 Leasehold improvements............................ 1,384 3,765 -------- -------- 22,766 45,986 Less -- accumulated depreciation and amortization.................................... (12,657) (19,468) -------- -------- Property and equipment, net....................... $ 10,109 $ 26,518 ======== ========
F-13 118 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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 $21.50 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 $21.50 per share on the principal amount of the notes and the closing price of the Company's stock. 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 $3.0 million, $4.3 million and $6.1 million for the years ended December 31, 1996, 1997, and 1998, 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 $0.1 million in 1996, $0.3 million in 1997 and $0.6 million in 1998. 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. F-14 119 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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):
1996 1997 1998 ------- ------- ------- Net income As reported............................. $12,129 $22,749 $51,648 Pro forma............................... $ 7,669 $12,358 $32,102 Basic earnings per share As reported............................. $ 0.14 $ 0.25 $ 0.55 Pro forma............................... $ 0.09 $ 0.14 $ 0.34 Diluted earnings per share As reported............................. $ 0.13 $ 0.23 $ 0.50 Pro forma............................... $ 0.09 $ 0.13 $ 0.32
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 32,000,000 shares of common stock for issuance under the 1993 Plan. The Company has also reserved 1,125,000 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, 20,956,938 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 grants in 1996, 1997 and 1998: risk-free interest rates averaging 5.99% in 1996, 6.19% in 1997 and 5.15% in 1998; a dividend yield of F-15 120 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 8. STOCK COMPENSATION PLANS (CONTINUED) 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 1996, 0.60 for 1997 and 0.65 for 1998. A summary of the status of the Company's stock option plans (including the options assumed in the Merger) as of December 31, 1996, 1997 and 1998 and changes during the years ended on those dates is presented below (number of shares in thousands):
1996 1997 1998 --------------------- --------------------- --------------------- 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.... 7,172 $ 1.49 11,474 $ 3.57 15,378 $ 6.43 Granted................ 6,038 $ 5.63 6,386 $10.53 4,654 $21.95 Exercised.............. (888) $ 1.15 (1,544) $ 2.08 (2,466) $ 4.23 Forfeited.............. (848) $ 3.21 (938) $ 6.61 (1,144) $ 9.07 ------- ------ ------ ------ ------ ------ Outstanding at end of year................. 11,474 $ 3.57 15,378 $ 6.43 16,422 $10.97 ======= ====== ====== ====== ====== ====== Options exercisable at year end............. 3,414 5,118 6,756 Weighted-average fair value of options granted during the year................. $ 3.53 $ 6.06 $12.94
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 - --------------- -------------- ----------- --------- -------------- --------- $ 0.03 - $ 0.67 1,520 5.17 $ 0.47 1,438 $ 0.48 $ 0.71 - $ 3.74 1,358 6.28 $ 3.00 1,104 $ 2.90 $ 3.78 - $ 6.82 4,618 7.41 $ 5.42 2,296 $ 5.37 $ 6.89 - $14.84 4,234 8.46 $11.37 1,428 $11.19 $14.92 - $24.85 2,860 9.28 $18.98 408 $18.35 $25.06 - $31.19 1,832 9.67 $26.19 82 $25.51 ------ ---- ------ ----- ------ $ 0.03 - $31.19 16,422 7.96 $10.97 6,756 $ 6.19 ====== ==== ====== ===== ======
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 F-16 121 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 8. STOCK COMPENSATION PLANS (CONTINUED) 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 4,000,000 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 1996, 1997 and 1998. Under the 1993 Purchase Plan, the Company issued 458,890, 199,228, and 339,810 shares to employees in 1996, 1997 and 1998, respectively. Under the 1996 Purchase Plan, the Company issued 102,446, 140,978 and 197,834 shares to employees in 1996, 1997 and 1998, 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 1996, 1997 and 1998: 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 1996, 0.60 in 1997 and 0.65 in 1998; and risk-free interest rates ranging from 4.81% to 6.01% in 1996, from 5.27% to 5.84% in 1997 and from 5.14% to 5.39% in 1998. The weighted average fair value of the purchase rights granted in 1996, 1997 and 1998 was $6.88, $13.90 and $14.16, 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. 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 37,125,000 shares (see Note 8). F-17 122 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 10. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------ ------- ------- Federal -- current............................... $ 366 $ 539 $11,858 -- deferred.............................. -- (3,500) (8,075) State -- current............................... 1,119 1,939 2,514 -- deferred.............................. -- (700) 75 Foreign.................................... 686 2,732 1,769 ------ ------- ------- Total................................. $2,171 $ 1,010 $ 8,141 ====== ======= =======
The provision for income taxes differs from the amount computed by applying the federal statutory rate as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 1998 ------ ------ ------ Federal tax at statutory rate................... 35.0% 35.0% 35.0% Benefit of loss carryforwards................... (35.0) (35.9) (9.3) State taxes..................................... 5.3 5.4 4.2 Foreign taxes................................... 3.0 9.4 3.0 Change in valuation allowance................... -- (17.7) (13.4) Merger-related costs............................ -- 6.5 -- In-process research and development charge...... 5.2 -- -- Alternative minimum tax, net.................... 2.7 2.3 -- Tax credits..................................... -- -- (7.1) Other........................................... (1.0) (0.7) 1.2 ----- ----- ----- Total......................................... 15.2% 4.3% 13.6% ===== ===== =====
F-18 123 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 10. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets are as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Net operating loss carryforwards $28,566.. $ 22,499 $ 23,276 Reserves and accruals not currently deductible 2,984... 2,205 6,146 Acquired intangibles 5,400... 2,114 1,895 Tax credit carryforwards 1,385... 2,246 -- Other 994..... 887 1,655 -------- -------- -------- Total 39,329.. 29,951 32,972 Valuation allowance.................... (39,329) (25,751) (20,772) -------- -------- -------- Net deferred tax assets................ $ -- $ 4,200 $ 12,200 ======== ======== ========
The valuation allowance decreased by approximately $3.9, $13.6 and $5.0 million in 1996, 1997 and 1998, 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. F-19 124 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 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):
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- -------- -------- -------- Numerator: Net income........................... $12,129 $22,749 $ 51,648 $ 9,055 $ 13,583 ======= ======= ======== ======== ======== Denominator: Weighted average shares.............. 81,360 91,244 94,026 92,868 95,644 Shares related to Staff Accounting Bulletin No. 98 Convertible preferred stock.................... 4,692 -- -- -- -- ------- ------- -------- -------- -------- Denominator for basic earnings per share.............................. 86,052 91,244 94,026 92,868 95,644 Common stock equivalents............. 6,940 7,742 9,316 9,032 10,628 ------- ------- -------- -------- -------- Denominator for diluted earnings per share.............................. 92,992 98,986 103,342 101,900 106,272 ======= ======= ======== ======== ======== Basic earnings per share............... $ 0.14 $ 0.25 $ 0.55 $ 0.10 $ 0.14 ======= ======= ======== ======== ======== Diluted earnings per share............. $ 0.13 $ 0.23 $ 0.50 $ 0.09 $ 0.13 ======= ======= ======== ======== ========
Common stock equivalents used in the determination of the denominator of diluted earnings per share does not include 4,651,163 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:
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- ------- -------- -------- Net income........................... $12,129 $22,749 $51,648 $ 9,055 $13,583 Foreign currency translation adjustments........................ (158) (303) 10 (83) (243) ------- ------- ------- ------- ------- Comprehensive income................. $11,971 $22,446 $51,658 $ 8,972 $13,340 ======= ======= ======= ======= =======
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 develop a version of its F-20 125 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 13. SIGNIFICANT DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED) 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 $0.5 million in 1996, $3.7 million in 1997 and $0.8 million in 1998, and incurred costs of $0.2 million in 1996, $2.4 million in 1997, and $0.7 million in 1998. Payments received from Microsoft during 1996, 1997 and 1998 were $0.2 million, $2.8 million and $2.0 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. The liability to Sun as of December 31, 1997 was $174,000. As of December 31, 1998 there was no liability to Sun. 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 receive discrete financial information about asset allocation, expense allocation or profitability from the Company's storage products or services. F-21 126 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 14. SEGMENT INFORMATION (CONTINUED) Geographic information (in thousands):
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------- ----------------- 1996 1997 1998 1998 1999 ------- -------- -------- ------- ------- (UNAUDITED) User license fees(1): United States.................... $44,286 $ 67,888 $121,910 $22,447 $43,228 Europe(2)........................ 10,696 12,971 33,172 5,416 8,917 Other(3)......................... 4,241 14,855 12,621 2,826 3,641 ------- -------- -------- ------- ------- Total......................... $59,223 $ 95,714 $167,703 $30,689 $55,786 ======= ======== ======== ======= ======= Services(1): United States.................... $10,195 $ 20,463 $ 34,759 $ 6,606 $12,578 Europe(2)........................ 3,186 4,865 7,869 1,663 2,679 Other(3)......................... 142 83 534 124 861 ------- -------- -------- ------- ------- Total......................... $13,523 $ 25,411 $ 43,162 $ 8,393 $16,118 ======= ======== ======== ======= ======= Total net revenue.................. $72,746 $121,125 $210,865 $39,082 $71,904 ======= ======== ======== ======= =======
DECEMBER 31, --------------------------- MARCH 31, 1996 1997 1998 1999 ------- ------- ------- ------------ (UNAUDITED) Long-lived assets(4): United States.......................... $ 6,268 $ 9,412 $25,202 $31,625 Europe(2).............................. 633 1,114 3,644 4,184 Other(3)............................... 96 67 380 578 ------- ------- ------- ------- Total............................... $ 6,997 $10,593 $29,226 $36,387 ======= ======= ======= =======
- ------------------------- (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: F-22 127 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 14. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31, ----------------------------- MARCH 31, 1996 1997 1998 1999 ------- -------- -------- ----------- (UNAUDITED) Total long-lived assets.................. $ 6,997 $ 10,593 $ 29,226 $ 36,387 Other assets, including current.......... 87,527 231,287 319,891 338,489 ------- -------- -------- -------- Total consolidated assets.............. $94,524 $241,880 $349,117 $374,876 ======= ======== ======== ========
One customer represents approximately 12% or $25.8 million of the Company's net revenues in 1998. 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 (NSMG) of Seagate Software, Inc. (SSI), a subsidiary of Seagate Technology, Inc. As part of the Agreement, SSI and certain holders of options to purchase common stock of SSI will receive common stock and rights to acquire common stock representing approximately 40% of the combined company's fully-diluted equity securities. On September 1, 1998, the Company entered into a Combination Agreement to acquire TeleBackup Systems Inc., a Canadian corporation. Upon completion, TeleBackup will become a wholly-owned subsidiary of VERITAS in exchange for the issuance, to the holders of TeleBackup common shares and TeleBackup options, of 3,110,000 shares of our common stock. The acquisition will be structured to qualify as a tax-free stock transaction in Canada. 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 $227.5 million per fiscal quarter primarily related to the amortization of goodwill and other intangible assets over a four-year period. The Company also expects to incur charges to operations for a one-time write-off related to in-process research and development costs in the fiscal quarter in which these transactions are consummated. These charges are currently estimated to be approximately $103.1 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 $8.0 to $11.0 million. Such costs are in addition to the liability for the estimated costs to F-23 128 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 16. POTENTIAL ACQUISITIONS (CONTINUED) 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. NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (in thousands, except per share amounts) FISCAL 1998 Total net revenue................................ $ 39,082 $ 48,113 $ 56,545 $ 67,125 Gross profit..................................... 32,616 40,191 48,702 59,895 Income before income taxes....................... 11,103 11,239 16,355 21,092 Net income....................................... 9,055 8,541 12,593 21,459 Net income per share -- basic.................... $ 0.10 $ 0.09 $ 0.13 $ 0.23 Net income per share -- diluted.................. $ 0.09 $ 0.08 $ 0.12 $ 0.21 Number of shares used in computing per share amounts basic.................................. 92,868 93,724 94,458 95,034 Number of shares used in computing per share amounts diluted................................ 101,900 102,708 104,652 104,084 FISCAL 1997 Total net revenue................................ $ 25,610 $ 28,934 $ 30,821 $ 35,760 Gross profit..................................... 22,840 25,590 26,442 29,808 Income (loss) before income taxes................ 6,484 (1,013) 8,315 9,973 Net income (loss)................................ 5,417 (1,682) 6,736 12,278 Net income (loss) per share -- basic............. $ 0.06 $ (0.02) $ 0.08 $ 0.13 Net income (loss) per share -- diluted........... $ 0.05 $ (0.02) $ 0.07 $ 0.12 Number of shares used in computing per share amounts -- basic............................... 90,440 90,984 91,490 91,948 Number of shares used in computing per share amounts -- diluted............................. 97,218 90,984 100,304 101,002
NOTE 18. SUBSEQUENT EVENTS (UNAUDITED) The acquisition of NSMG was completed on May 28, 1999. Based on the capitalization of VERITAS and Seagate Software as of May 28, 1999 and the average closing price of VERITAS common stock of $45.57 per share for the 5 days before and after June 7, 1999, the measurement date for the transaction, the total purchase price for NSMG was approximately $3.5 billion. The actual purchase price will depend on the capitalization of Seagate Software as of June 7, 1999. F-24 129 VERITAS SOFTWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) NOTE 18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) The acquisition of TeleBackup was completed on June 1, 1999. Based upon the average of the closing price of VERITAS common stock for a few days before and after June 1, 1999 of $44.09, the total purchase price for TeleBackup was approximately $143.1 million. During the first quarter of 1999, VERITAS signed a letter of intent to enter into an agreement to lease real estate to be built by the lessor. In a separate agreement, VERITAS was retained by the lessor as its agent for the construction of the facility. The leases for land and improvements are anticipated to be classified as operating leases. The various agreements provide for minimum lease payments which begin, generally, upon completion of construction, which is expected to be June 2001, as well as certain residual value guarantees. Pre development costs incurred by VERITAS were approximately $1.4 million through March 31, 1999, and were subsequently reimbursed by the lessor. Share and per share amounts applicable to prior periods in the consolidated financial statements have been restated to reflect a 2-for-1 stock split to be effected in the form of a stock dividend to be distributed on July 8, 1999 to shareholders of record as of June 18, 1999. Share amounts reflected in this document have also been adjusted to reflect the following proposals that were approved at the May 27, 1999 special meeting of the Company's stockholders: - To increase the authorized number of shares of common stock from 75,000,000 to 500,000,000. - To amend the 1993 Employee Stock Purchase plan to increase the number of shares reserved for issuance from 2,250,000 to 4,000,000. - To amend the 1993 Equity Incentive Plan to increase the number of shares reserved for issuance from 9,225,000 to 16,000,000. F-25 130 OVERVIEW OF VERITAS SOFTWARE CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements consist of the VERITAS unaudited pro forma combined condensed statement of operations for the year ended December 31, 1998 and three months ended March 31, 1999 and the VERITAS unaudited pro forma combined condensed balance sheet as of March 31, 1999. The VERITAS unaudited pro forma combined condensed financial statements give effect to the NSMG combination and the TeleBackup combination accounted for using the purchase method of accounting. The VERITAS unaudited pro forma combined condensed statements of operations for the year ended December 31, 1998 and three months ended March 31, 1999 assumes the NSMG combination and the TeleBackup combination took place on January 1, 1998. The VERITAS unaudited pro forma combined condensed balance sheet assumes the NSMG combination and the TeleBackup combination took place on March 31, 1999. The VERITAS unaudited pro forma combined condensed statement of operations for the year ended December 31, 1998 combine VERITAS' and TeleBackup's historical results of operations for the year ended December 31, 1998 with the Network & Storage Management Group's twelve months ended January 1, 1999. The VERITAS unaudited pro forma combined condensed statement of operations for the three months ended March 31, 1999 combine VERITAS' and TeleBackup's historical results of operations for the three months ended March 31, 1999 with the Network & Storage Management Group's three months ended April 2, 1999. Basis of presentation The VERITAS unaudited pro forma combined condensed financial statements reflect the NSMG combination and the TeleBackup combination accounted for using the purchase method of accounting and have been prepared on the basis of assumptions described in the notes including assumptions relating to the allocation of the amount of consideration paid, to the assets and liabilities of the Network & Storage Management Group and TeleBackup based upon preliminary estimates of their fair value. The actual allocation of the consideration paid may differ from those assumptions reflected in the VERITAS unaudited pro forma combined condensed financial statements after valuations and other procedures to be performed after the closing of the NSMG combination and the TeleBackup combination are completed. Both the NSMG combination and the TeleBackup combination closed during the second quarter of 1999. Charges for in-process research and development VERITAS recorded charges to income in the second quarter of 1999 related to in-process research and development of $101.2 million as a result of the NSMG combination and $1.9 million as a result of the TeleBackup combination. Restructuring charges In addition, as a result of the NSMG combination, VERITAS recorded a restructuring charge of $11.0 million during the second quarter of 1999, primarily related to exit costs with respect to duplicate facilities of Old VERITAS which VERITAS plans to vacate. These costs are in addition to the liability for the estimated costs to vacate facilities of the Network & Storage Management Group business which will become duplicative upon the closing of the NSMG combination, which liability will be assumed by VERITAS and included as a part of the purchase price. The VERITAS unaudited pro forma combined condensed balance sheet includes the effect of these charges; however, the VERITAS unaudited pro forma combined condensed statements of operations do not reflect these charges since they are non-recurring. These charges will be reflected in VERITAS' consolidated financial statements during the F-26 131 second quarter of 1999, the period in which the NSMG combination and TeleBackup combination were consummated. The VERITAS unaudited pro forma combined condensed financial statements should be read in conjunction with the related notes included in this document and the audited financial statements of VERITAS, the Network & Storage Management Group and TeleBackup, including the notes to each, that are included elsewhere in this document. The VERITAS unaudited pro forma combined condensed financial statements do not necessarily indicate what the actual operating results or financial position would have been had the NSMG combination and the TeleBackup combination taken place on January 1, 1998 or March 31, 1999. They also do not purport to indicate VERITAS' future results of operations or financial position. F-27 132 VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
VERITAS NETWORK & STORAGE VERITAS SOFTWARE MANAGEMENT TELEBACKUP PRO FORMA CORPORATION GROUP SYSTEMS INC. COMBINED YEAR TWELVE MONTHS YEAR YEAR ENDED ENDED ENDED ENDED DECEMBER 31, JANUARY 1, DECEMBER 31, PRO FORMA DECEMBER 31, 1998 1999 1998 ADJUSTMENTS 1998 ------------ ----------------- ------------ ----------- ------------ Net revenue: User license fees........................... $167,703 $188,072 $ 934 $ (934)(15) $ 355,775 Services.................................... 43,162 11,061 1,376 (1,376)(15) 54,223 -------- -------- ------- --------- ---------- Total net revenue......................... 210,865 199,133 2,310 (2,310) 409,998 Cost of revenue: User license fees........................... 8,798 11,981 211 20,990 Services.................................... 20,663 2,917 345 23,925 Amortization of developed technology........ -- 3,985 -- 58,425(6) 64,060 1,650(12) -------- -------- ------- --------- ---------- Total cost of revenue..................... 29,461 18,883 556 60,075 108,975 -------- -------- ------- --------- ---------- Gross profit.................................. 181,404 180,250 1,754 (62,385) 301,023 Operating expenses: Selling and marketing....................... 76,392 75,905 994 153,291 Research and development.................... 40,239 33,677 824 74,740 General and administrative.................. 10,505 21,121 930 32,556 In-process research and development......... 600 6,800 -- 7,400 Amortization of goodwill and other intangibles............................... -- 10,380 -- 815,893(6) 859,986 33,713(12) -------- -------- ------- --------- ---------- Total operating expenses.................. 127,736 147,883 2,748 849,606 1,127,973 -------- -------- ------- --------- ---------- Income (loss) from operations................. 53,668 32,367 (994) (911,991) (826,950) Interest and other income, net................ 11,821 423 -- 12,244 Interest expense.............................. (5,700) (240) (65) (6,005) -------- -------- ------- --------- ---------- Income (loss) before income taxes............. 59,789 32,550 (1,059) (911,991) (820,711) Provision for (benefit from) income taxes..... 8,141 15,121 -- (43,576)(14) (20,314) -------- -------- ------- --------- ---------- Net income (loss)............................. $ 51,648 $ 17,429 $(1,059) $(868,415) $ (800,397) ======== ======== ======= ========= ========== Net income (loss) per share -- basic.......... $ 0.55 $ (4.82) ======== ========== Net income (loss) per share -- diluted........ $ 0.50 $ (4.82) ======== ========== Number of shares used in computing per share amounts -- basic............................ 94,026 72,180 166,216 ======== ========= ========== Number of shares used in computing per share amounts -- diluted.......................... 103,342 62,874 166,216 ======== ========= ==========
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed Financial Statements. F-28 133 VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
VERITAS NETWORK & STORAGE VERITAS SOFTWARE MANAGEMENT TELEBACKUP PRO FORMA CORPORATION GROUP SYSTEMS INC. COMBINED THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED MARCH 31, APRIL 2, MARCH 31, PRO FORMA MARCH 31, 1999 1999 1999 ADJUSTMENTS 1999 ------------ ----------------- ------------ ----------- ------------ Net revenue: User license fees......................... $55,786 $59,780 $ 382 $ (382)(15) $ 115,566 Services.................................. 16,118 3,045 436 (436)(15) 19,163 ------- ------- ----- --------- --------- Total net revenue....................... 71,904 62,825 818 818 134,729 Cost of revenue: User license fees......................... 1,955 3,273 149 5,377 Services.................................. 6,527 865 97 7,489 Amortization of developed technology...... -- 780 -- 14,606(6) 15,799 413(12) ------- ------- ----- --------- --------- Total cost of revenue................... 8,482 4,918 246 15,019 28,665 ------- ------- ----- --------- --------- Gross profit................................ 63,422 57,907 572 (15,837) 106,064 Operating expenses: Selling and marketing..................... 26,823 22,674 304 49,801 Research and development.................. 13,816 8,815 253 22,884 General and administrative................ 3,289 5,111 267 8,667 Amortization of goodwill and other intangibles............................. -- 2,545 -- 203,973(6) 214,946 8,428(12) ------- ------- ----- --------- --------- Total operating expenses................ 43,928 39,145 824 212,401 296,298 ------- ------- ----- --------- --------- Income (loss) from operations............... 19,494 18,762 (252) (228,238) (190,234) Interest and other income, net.............. 3,031 1,173 38 4,242 Interest expense............................ (1,433) -- (5) (1,438) ------- ------- ----- --------- --------- Income (loss) before income taxes........... 21,092 19,935 (219) (228,238) (187,430) Provision for (benefit from) income taxes... 7,509 7,974 -- (8,260)(14) 7,223 ------- ------- ----- --------- --------- Net income (loss)........................... $13,583 $11,961 $(219) $(219,978) $(194,653) ======= ======= ===== ========= ========= Net income (loss) per share -- basic........ $ 0.14 $ (1.16) ======= ========= Net income (loss) per share -- diluted...... $ 0.13 $ (1.16) ======= ========= Number of shares used in computing per share amounts -- basic.......................... 95,644 72,190 167,834 ======= ========= ========= Number of shares used in computing per share amounts -- diluted........................ 106,272 61,562 167,834 ======= ========= =========
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed Financial Statements. F-29 134 VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET (IN THOUSANDS)
VERITAS NETWORK & STORAGE VERITAS SOFTWARE MANAGEMENT TELEBACKUP PRO FORMA CORPORATION GROUP SYSTEMS INC. COMBINED MARCH 31, APRIL 2, MARCH 31, PRO FORMA MARCH 31, 1999 1999 1999 ADJUSTMENTS 1999 ----------- ----------------- ------------ ----------- ---------- ASSETS Current assets: Cash and cash equivalents...................... $111,324 $ 2,024 $ 3,534 $ 42,111(1) $ 158,993 Short-term investments......................... 97,225 -- -- 97,225 Loan receivable -- affiliate................... -- 42,111 (42,111)(1) -- Accounts receivable............................ 50,210 23,090 906 74,206 Other current assets........................... 21,309 3,748 125 (532)(7) 22,650 (2,000)(15) -------- --------- ------- ---------- ---------- Total current assets......................... 280,068 70,973 4,565 (2,532) 353,074 Long-term investments............................ 47,859 -- -- 47,859 Property and equipment, net...................... 32,528 12,733 536 45,797 Goodwill and other intangibles, net.............. -- 31,564 -- (31,564)(1) 3,638,719 3,497,271(1) 141,448(8) Other assets..................................... 14,421 -- -- 14,421 -------- --------- ------- ---------- ---------- Total assets................................. $374,876 $ 115,270 $ 5,101 $3,604,623 $4,099,870 ======== ========= ======= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 4,390 $ 4,754 $ 180 $ -- $ 9,324 Accrued compensation and benefits.............. 7,473 10,107 -- 17,580 Other accrued liabilities...................... 11,488 9,533 83 21,104 Income taxes payable........................... 17,388 18,828 -- 36,216 Accrued acquisition and restructuring costs.... -- -- -- 31,700(3) 48,900 6,200(9) 11,000(16) Deferred revenue............................... 43,149 7,740 1,912 (4,102)(1) 47,299 (1,400)(15) -------- --------- ------- ---------- ---------- Total current liabilities.................... 83,888 50,962 2,175 43,398 180,423 Non-current liabilities: Convertible subordinated notes................. 100,000 -- -- 100,000 Other non-current liabilities.................. 733 -- 180 913 Deferred income taxes.......................... -- 697 -- 181,297(7) 185,026 3,032(13) -------- --------- ------- ---------- ---------- Total non-current liabilities................ 100,733 697 180 184,329 285,939 Stockholders' equity: Common stock................................... 206,911 258,884 6,349 3,162,207(4) 3,764,864 130,513(10) Accumulated deficit............................ (15,833) (195,273) (3,510) 94,073(5) (130,533) 1,610(11) (600)(15) (11,000)(16) Deferred compensation.......................... (24) -- -- (24) Accumulated other comprehensive income (loss)....................................... (799) -- (93) 93(8) (799) -------- --------- ------- ---------- ---------- Total stockholders' equity................... 190,255 63,611 2,746 3,376,896 3,633,508 -------- --------- ------- ---------- ---------- Total liabilities and stockholders' equity... $374,876 $ 115,270 $ 5,101 $3,604,623 $4,099,870 ======== ========= ======= ========== ==========
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed Financial Statements. F-30 135 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRO FORMA PRESENTATION NSMG combination The VERITAS unaudited pro forma combined condensed financial statements reflect the contribution of assets and liabilities of the Network & Storage Management Group and the issuance of 69,148,208 shares of VERITAS common stock which was based on the average closing price of VERITAS common stock of $45.57 per share for 5 days before and after June 7, 1999, the measurement date for the transaction. In addition VERITAS issued options to purchase VERITAS shares, of which 2,942,640 options were vested and 4,002,408 options were unvested. The value of the options to be issued by VERITAS in exchange for the Seagate Software options was determined by estimating their fair value as of May 28, 1999 using the Black-Scholes option pricing model with the following weighted average assumptions: - risk free interest rate of 5.15%; - dividend yield of 0.0%; - expected option life of 0.5 years for vested options; - expected option life of 3.0 years for unvested options; and - volatility factor of the expected market price of VERITAS common stock of 0.65. The NSMG combination will be accounted for under the purchase method of accounting. TeleBackup combination The VERITAS unaudited pro forma combined condensed financial statements also reflect the issuance of 3,041,242 shares for the outstanding equity interest of TeleBackup based on the capitalization of VERITAS and TeleBackup as of June 1, 1999 and the average closing price of VERITAS common stock of $44.09 per share for 5 days before and after June 1, 1999, the closing date of the transaction. In addition, TeleBackup's outstanding options at the closing date were exchanged for options to purchase VERITAS shares. As of June 1, 1999, outstanding options to purchase 259,800 shares of TeleBackup common stock were exchanged for options to purchase 68,759 shares of VERITAS common stock, of which all the options are vested. The value of the options issued by VERITAS in the exchange for the TeleBackup options, was determined by estimating their fair value as of June 1, 1999 using the Black-Scholes option pricing model with the following weighted average assumptions: - risk-free interest rate of 5.15%; - dividend yield of 0.0%; - expected option life of 0.5 years; and - volatility factor of the expected market price of VERITAS common stock of 0.65. The TeleBackup combination will be accounted for under the purchase method of accounting. The VERITAS unaudited pro forma combined condensed financial statements have been prepared on the basis of assumptions relating to the allocation of the amount of consideration paid, to the assets and liabilities of the Network & Storage Management Group business and TeleBackup based on preliminary estimates of their fair value. The actual allocation of the amount such consideration may differ from that reflected in the VERITAS unaudited pro forma combined condensed financial statements after valuations and other procedures to be performed after the closing of the NSMG combination and the TeleBackup combination have been completed. Below is a table of the estimated F-31 136 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) acquisition cost, purchase price allocation and annual amortization of the intangible assets acquired, in thousands: NETWORK & STORAGE MANAGEMENT GROUP BUSINESS
ANNUAL AMORTIZATION AMORTIZATION LIFE OF INTANGIBLES ------------ -------------- Estimated acquisition cost Estimated value of securities to be issued.................................. Common stock............................ 3,151,350 Stock options........................... 269,741 Acquisition costs.......................... 31,700 ---------- Total estimated acquisition cost...... $3,452,791 ========== Purchase price allocation Tangible net assets acquired............... $ 36,149 Intangible assets acquired: Distribution channel/OEM agreements..... 257,200 4 $ 64,300 Developed technology.................... 233,700 4 58,425 Trademark/assembled workforce/other intangibles........................... 37,110 4 9,278 In-process research and development..... 101,200 Goodwill................................ 2,969,261 4 742,315 Deferred tax liabilities................ (181,829) ---------- -------- Total................................. $3,452,791 $874,318 ========== ========
F-32 137 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) TELEBACKUP
ANNUAL AMORTIZATION AMORTIZATION LIFE OF INTANGIBLES ------------ -------------- Estimated acquisition cost Estimated value of securities to be issued............................... Common stock......................... $134,100 Stock options........................ 2,762 Acquisition costs....................... 6,200 -------- Total estimated acquisition cost... $143,062 ======== Purchase price allocation Tangible net assets acquired............ $ 2,746 Intangible assets acquired Distribution channel/OEM agreements......................... 3,100 4 $ 775 Developed technology................. 6,600 4 1,650 Trademark/assembled workforce........ 1,630 4 408 In-process research and development........................ 1,900 Goodwill............................. 130,118 4 32,530 Deferred tax liabilities............. (3,032) -------- ------- Total.............................. $143,062 $35,363 ======== =======
Tangible net assets of the Network & Storage Management Group business acquired principally include cash, accounts receivable, fixed assets and other current assets. Liabilities assumed principally include accounts payable, accrued compensation and other current liabilities. The tangible net assets of TeleBackup acquired principally include cash and fixed assets. Liabilities assumed principally include convertible debentures and other non-current liabilities. To determine the value of the developed technology, the expected future cash flows attributable to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle stage of the technology. The analysis resulted in a valuation for developed technology which had reached technological feasibility and therefore was capitalizable. The developed technology is being amortized on the straight-line basis over its estimated useful life of four years which is expected to exceed the ratio of current revenues to the total of current and anticipated revenues. The value of the distribution channels and original equipment manufacturer agreements was determined by considering, among other factors, the size of the current and potential future customer bases, the quality of existing relationships with customers, the historical costs to develop customer relationships, the expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in transitioning the business relationships from the acquired entity to VERITAS and risks related to the viability of and potential changes to future target markets. The value of trademarks was determined by considering, among other factors, the assumption that in lieu of ownership of a trademark, a company would be willing to pay a royalty in order to exploit the related benefits of such trademark. F-33 138 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) The value of the assembled workforce was derived by estimating the costs to replace the existing employees, including recruiting, hiring, and training costs for each category of employee. The value allocated to projects identified as in-process research and development of the Network & Storage Management Group business and TeleBackup was charged to expense during the second quarter of 1999 but has not been reflected in the VERITAS unaudited pro forma combined condensed statements of operations as it is non-recurring in nature. However, this charge has been reflected in the VERITAS unaudited pro forma combined condensed balance sheet. The write-offs were necessary because the acquired in-process research and development had not yet reached technological feasibility and had no future alternative uses. VERITAS expects that the acquired in-process research and development will be successfully developed, but these products may not achieve commercial viability. The nature of the efforts required to develop the purchased in-process research and development into commercially viable products principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The value of the purchased in-process research and development was determined by estimating the projected net cash flows related to the products, including costs to complete the development of the technology and the future revenues to be earned upon commercialization of the products. These cash flows were then discounted back to their net present value. The projected net cash flows from the projects were based on management's estimates of revenues and operating profits related to the projects. Management's overview of the in-process projects and the estimates for the remaining development efforts are described below: Network & Storage Management Group business products - Seagate Backup Exec for NT -- Backup Exec(TM) for Windows NT offers a compatible backup solution for Windows NT environments. Integrated wizards provide steps through routine operations and a new graphical user interface simplifies management tasks. Intelligent Disaster Recovery(TM) automates data recovery with the only point-in-time rapid recovery system. With its Microsoft common object model-based scaleable architecture, virus detection and cleaning, and agent accelerator technology, total cost of ownership is minimized, performance is maximized and data is secured. Management estimates the completion and release of version 8.0 of this product in November 1999. - Backup Exec for Netware -- Backup Exec for NetWare is the first NetWare 5 compatible data protection solution that offers reliability, high performance and full Netware directory services integration for enterprise-wide data sharing. To minimize total cost of ownership and administration overhead, ExecView provides centralized monitoring and management. Intelligent disaster recovery combined with "working set" backup delivers fast and reliable disaster recovery for every server protected by Backup Exec. Advanced barcode reader and media portal support provides ease-of-use and complete automation to further simplify network administration. Management estimates the completion and release of version 8.1 of this product in September 1999. F-34 139 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) - Storage Migrator(TM) -- Storage Migrator is a multi-tier hierarchical storage management application for Windows NT that delivers enterprise functionality to client/server environments. The product reduces the total cost of ownership by proactively managing inactive data, migrating it from on-line storage, such as disc drives, to near-line devices, such as optical drives, then finally to archival storage resources, such as tape devices over user defined periods of time. This product was released in June 1999. - Desktop Management Suite(TM) -- Desktop Management Suite is a fully integrated suite of software solutions including network inventory, WinLand, software installation, or WinInstall, and software metering, or WinSmart or Desktop Management Suite centralizes the management of distributed network desktops by automating tasks such as inventory, software distribution, application metering, backup and remote control. Desktop Management Suite reduces the total cost of managing network desktops and standardizes the administration of desktops across the enterprise. Seagate has begun development to create a more complete personal computer client management solution with WinInstall and WinLand. Management estimates the completion and release of Desktop Management Suite version 4.0 and WinInstall version 7.0 in December 1999. - Manage Exec(TM) -- Manage Exec is a proactive server health monitoring, alerting and reporting solution that centralizes enterprise administration by providing information technology professionals with a unique view of servers worldwide and real-time problem analysis. Manage Exec is a powerful, simple, scaleable solution for managing the behavior of heterogeneous networks worldwide from one central location. Manage Exec automatically monitors, analyzes and reports on Windows NT and Novell NetWare systems health, establishes profiles of normal server and application behavior and proactively sends alerts when these policies are broken. As a result, problems that once may have resulted in catastrophic failure are now effectively resolved before network users are impacted. To make this product suitable for enterprise sales, Seagate began "enterprization." Management estimates the completion and release of version 6.0 of this product in September 1999. - NerveCenter(TM) -- NerveCenter is a market leading, rules-based event management application designed to ensure high levels of network and application availability. NerveCenter uses graphical network behavior models to filter through voluminous network messages, identify critical problems and automatically launch appropriate corrective actions. NerveCenter is the first end-to-end event management solution across network devices, applications and UNIX, Windows NT systems. Version 3.7 was under development at the Network & Storage Management Group which would provide a basis for a storage area network management solution. Management estimates the completion and release of version 3.7 in September 1999. - Policy Exec(TM) version 1.0 -- Policy Exec is a policy management system that creates policies according to goals, completely automates storage management tasks, and provides fault isolation and automated corrective action. Management estimates the completion and release of this product in October 1999. - Replication Exec(TM) -- Replication Exec provides real time data protection for NT servers, back-up staging, rapid recovery, disaster protection bandwidth throttling, and intelligent data distribution. Replication Exec delivers the most flexible and intelligent data replication for Windows NT environments. It can efficiently and automatically duplicate files or file systems at any number of locations for complete data protection or information distribution. Replication F-35 140 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) Exec offers centralized management, high replication performance, minimal system overhead, both real-time and schedule-based replication, and selectable bandwidth usage. Replicate remote data to a central site for centralized backup, offload backup from production servers for 24x7 operations, or distribute information to any number of servers on the local area network or wide area network from a central site. In August 1998, the Network & Storage Management Group business released the first version of this product. However, this version does not have sufficient features to serve the enterprise customer. A next release version 2.0 was under development at the Network & Storage Management Group business to add these required features. Management estimates the completion and release of version 2.0 of this product in December 1999. TeleBackup was founded in 1995 to further the development of remote backup technology. TeleBackup is an information technology company that is developing dynamic software that allows corporations and end-users to backup their data remotely. TeleBackup's software initiates all backups automatically with no required intervention by the user. It also safeguards against disaster by storing the data at an offsite location. TeleBackup's unique features make the process of backing up large amounts of data significantly faster than any other known technology using standard modems. TeleBackup products - TSInfoPro 2.05 -- TSInfoPro is a new system for eliminating data loss designed to support Microsoft Windows 98. Features include enhanced compact disc disaster recovery, improved querying, open file manger, and encryption. Management estimates the completion and release of this product in August 1999. - TSInfoPro 3.00 -- An improved system for eliminating data loss with a graphical user interface. Features include increased bandwidth, redesigned client and server interfaces, file processing, and administrative applications. Significant development efforts were begun and TeleBackup including, creating a larger bandwith, a major redesign of the graphical user interface and changing 90% of the server to be available for NT. Management estimates the completion and release of this product in April 2000. Some of the potential risks involved in completing the development for the TeleBackup releases include, but are not limited to the following. The user interface development could be expensive due to the options and technologies needed in identifying the target customer. In addition, the hierarchical storage management and NetBackup will likely need some more modification to run or work well together. The server product is not quite available for NT, but is expected to be soon, and the admin. station for NT is in the beginning phase of several phases. Research and development effort The Network & Storage Management Group business estimates approximately $6.0 million to complete the development of the identified in-process projects that are being acquired by VERITAS. TeleBackup estimates approximately $630,000 to complete the development of the identified in-process F-36 141 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRO FORMA PRESENTATION (CONTINUED) projects that are being acquired. The Network & Storage Management Group's and TeleBackup's research and development expenditure forecasts include, but are not limited to: - technology coding; - feasibility tests; - platform integration; and - alpha and beta testing. Due to the fact that the transactions have only recently been consummated, the calculations are preliminary. Therefore, more information will be forthcoming as the analysis is completed of the in-process research and development acquired at the Network & Storage Management Group and TeleBackup. Factors that could affect analysis. The following factors have the potential to affect analysis: - the effect of the uncertainty surrounding the successful development of the in-process research and development products is one of the many factors that comprise the selected discount rate; - there is risk associated with the revenue of all of the identified in-process research and development projects. The expected benefit from the in-process research and development projects is expected to occur at the release dates for each of the projects discussed previously; and - if any of the estimates for release dates, product life cycle, or product revenue are different, then there may be an impact on the future results of the company. Goodwill is determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. 2. PRO FORMA NET LOSS PER SHARE The VERITAS unaudited pro forma combined condensed statements of operations have been prepared as if the NSMG combination and the TeleBackup combination had occurred at the beginning of the periods presented. The pro forma basic and diluted net loss per share are based on the weighted average number of shares of VERITAS common stock outstanding during each period and the number of shares of VERITAS common stock to be issued in connection with the NSMG combination and the TeleBackup combination. The following options and other potential common securities, based upon the options outstanding as of the periods presented and closing price of VERITAS common stock as of the F-37 142 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 2. PRO FORMA NET LOSS PER SHARE (CONTINUED) effective time, have not been included in the computation of pro forma diluted net loss per share because their effect would be antidilutive.
AS OF AS OF DECEMBER 31, MARCH 31, POTENTIAL COMMON SECURITIES 1998 1999 --------------------------- ------------ --------- (IN THOUSANDS) VERITAS options outstanding................................. 16,422 16,254 Options to be issued in connection with the NSMG combination............................................... 6,864 6,856 Options to be issued in connection with the TeleBackup combination............................................... 156 103 Common stock issuable upon conversion of VERITAS' 5.25% convertible notes......................................... 4,651 4,651 ------ ------ 28,093 27,864 ====== ======
3. CONVERSION OF TELEBACKUP TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND US$ The financial statements for TeleBackup which were prepared in accordance with Canadian generally accepted accounting principles have been conformed to U.S. generally accepted accounting principles for purposes of including them in the VERITAS unaudited pro forma combined condensed financial statements. None of the adjustments necessary to conform the TeleBackup financial statements to U.S. generally accepted accounting principles were material to either the historical financial statements of TeleBackup or the VERITAS unaudited pro forma combined condensed financial statements. The balance sheet and statements of operations for TeleBackup were translated to U.S. dollars using average exchange rates for the VERITAS unaudited pro forma combined condensed statements of operations and period-end and historical exchange rates for the VERITAS unaudited pro forma combined condensed balance sheet, as applicable. 4. PRO FORMA ADJUSTMENTS The VERITAS unaudited pro forma combined condensed financial statements give effect to the following pro forma adjustments: (1) To state the assets and liabilities of the Network Storage & Management Group business at their fair values. (2) To reclassify certain customer support costs of the Network & Storage Management Group business to cost of revenues to conform to VERITAS' presentation. (3) To reflect the accrual of acquisition costs arising from the NSMG combination, estimated to be approximately $31.7 million consisting of: - $20.0 million of direct transaction costs, consisting primarily of financial advisory services, legal, accounting and government filing fees; - $8.2 million for operating lease commitments on sales and administrative facilities of the Network & Storage Management Group business that become duplicative and will be vacated. The costs accrued represent operating lease obligations from the date the facilities are expected to be vacated through the end of the lease term, net of any anticipated sublease payments. VERITAS expects that all duplicate facilities will be vacated within F-38 143 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 4. PRO FORMA ADJUSTMENTS (CONTINUED) one year after consummation of the NSMG combination. The operating leases on these duplicate facilities have various termination dates through 2012; and - $3.5 million for liabilities related to involuntary employee termination benefits to be paid to Network & Storage Management Group business employees whose positions are redundant with current VERITAS positions and relocations of Network & Storage Management Group business employees whose function is being relocated to support a centralized infrastructure. The involuntary terminations and relocation benefits relate to employees across all functional organizations. VERITAS expects that a plan will be finalized in the quarter following the consummation of the NSMG combination and initial execution of this plan will begin in the second quarter of 1999. VERITAS also expects the plan to be fully implemented within one year from the consummation of the NSMG combination. (4) To reflect the elimination of the Network & Storage Management Group's contributed capital of $258.9 million and the issuance of VERITAS common stock and stock options of $3,421.1 million in connection with the NSMG combination. (5) To reflect the elimination of the Network & Storage Management Group's accumulated deficit of $195.3 million and the write-off of in-process research and development $101.2 million. (6) To reflect amortization of goodwill, distribution channel/original equipment manufacturer agreements, developed technology and trademark/assembled workforce/other intangibles related to the NSMG combination. (7) To reflect the net tax effect of book/tax basis differences in the acquired intangibles, excluding goodwill and in-process research and development. Deferred tax assets have been recognized based on the projected reversal of taxable temporary differences and have been netted against deferred tax liabilities for purposes of allocating the purchase price related to the NSMG combination. (8) To state the assets and liabilities of TeleBackup at their fair values. (9) To reflect the accrual of acquisition costs arising from the TeleBackup combination, estimated to be approximately $6.2 million consisting of: - $5.5 million of direct transaction costs, consisting primarily of financial advisory services, legal, accounting and government filing fees; - $600,000 for liabilities related to involuntary employee termination benefits to be paid to TeleBackup employees whose positions are redundant with current VERITAS employee positions and relocations of TeleBackup employees whose function is being relocated to support a centralized infrastructure. The involuntary terminations and relocation benefits relate to engineering and administrative employees; and - $100,000 for operating lease commitments on facilities of TeleBackup that will be vacated. The costs accrued represent operating lease obligations from the date the facilities are expected to be vacated through the end of the lease term in 2000, net of any anticipated sublease payments. VERITAS expects that all duplicate facilities will be vacated within one year after consummation of the Telebackup combination. F-39 144 NOTES TO VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 4. PRO FORMA ADJUSTMENTS (CONTINUED) VERITAS expects that the plan will be finalized in the quarter following the consummation of the TeleBackup combination and initial execution of the plan will begin in the second quarter of 1999. VERITAS also expects that the plan will be fully implemented within one year from the consummation of the TeleBackup combination. (10) To reflect the elimination of the TeleBackup's common stock of $6.3 million and the issuance of New VERITAS common stock and stock options of $136.9 million in connection with the TeleBackup combination. (11) To reflect the elimination of the TeleBackup's accumulated deficit of $3.5 million and the write-off of in-process research and development of $1.9 million. (12) To reflect amortization of goodwill, distribution channel/original equipment manufacturer agreements, developed technology, and trademark/assembled workforce related to the TeleBackup combination. (13) To reflect the net tax effect of book/tax basis differences in the acquired intangibles, excluding goodwill and in-process research and development. Deferred tax assets have been recognized based on the projected reversal of taxable temporary differences have been netted against deferred tax liabilities for purposes of allocating the purchase price related to the TeleBackup combination. (14) To reflect tax benefits for VERITAS based upon pro forma losses incurred. (15) To eliminate the effect of the intercompany transactions between VERITAS and TeleBackup. (16) To reflect the accrual for restructuring costs to be incurred as a result of the NSMG combination of $11.0 million. The $11.0 million includes $10.0 million for costs to exit duplicate facilities of VERITAS which VERITAS plans to vacate and $1.0 million for liabilities related to involuntary employee termination benefits to be paid to VERITAS employees. F-40 145 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Seagate Software, Inc. We have audited the accompanying combined balance sheets of the Network & Storage Management Group, a division of Seagate Software, Inc., as of July 3, 1998 and June 27, 1997, and the related combined statements of operations, group equity and cash flows for each of the three years in the period ended July 3, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Network & Storage Management Group at July 3, 1998 and June 27, 1997, and the combined results of its operations and its cash flows for each of the three years in the period ended July 3, 1998, in conformity with generally accepted accounting principles. As discussed more fully in the Summary of Significant Accounting Policies footnote, the Network & Storage Management Group has modified the methods used to assess impairment of goodwill and, accordingly, has restated the consolidated financial statements for the fiscal years ended July 3, 1998 and June 27, 1997 to reflect this change. /s/ ERNST & YOUNG LLP San Jose, California September 21, 1998, except for the second paragraph of the Summary of Significant Accounting Policies footnote, as to which the date is April 8, 1999 F-41 146 NETWORK & STORAGE MANAGEMENT GROUP COMBINED BALANCE SHEETS (IN THOUSANDS) ASSETS
JUNE 27, JULY 3, APRIL 2, 1997 1998 1999 --------- --------- ----------- (UNAUDITED) Cash................................................ $ 921 $ 4,879 $ 2,024 Accounts receivable, net............................ 14,387 15,982 23,090 Inventories......................................... 2,907 711 399 Loan receivable from Seagate Technology and affiliates........................................ -- -- 42,111 Other current assets................................ 2,589 480 3,349 --------- --------- ----------- Total current assets.............................. 20,804 22,052 70,973 Equipment and leasehold improvements, net........... 17,066 11,338 12,733 Goodwill and other intangibles, net................. 56,217 41,331 31,564 --------- --------- ----------- Total assets...................................... $ 94,087 $ 74,721 $ 115,270 ========= ========= =========== LIABILITIES Loan payable to Seagate Technology and affiliates... $ 25,616 $ 10,636 $ -- Accounts payable.................................... 5,674 3,782 4,754 Accrued employee compensation....................... 8,304 8,011 10,107 Accrued expenses.................................... 9,785 7,143 9,533 Accrued income taxes................................ -- 1,290 18,828 Deferred revenue.................................... 3,573 3,880 7,740 --------- --------- ----------- Total current liabilities......................... 52,952 34,742 50,962 Deferred income taxes............................... 6,233 1,691 697 Other liabilities................................... 301 255 -- --------- --------- ----------- Total liabilities................................. 59,486 36,688 51,659 Commitments and contingencies GROUP EQUITY Contributed capital................................. 258,010 258,586 258,884 Accumulated deficit................................. (223,409) (220,553) (195,273) --------- --------- ----------- Total group equity................................ 34,601 38,033 63,611 --------- --------- ----------- Total liabilities and group equity................ $ 94,087 $ 74,721 $ 115,270 ========= ========= ===========
See notes to combined financial statements. F-42 147 NETWORK & STORAGE MANAGEMENT GROUP COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
FOR THE YEARS ENDED NINE MONTHS ENDED ------------------------------- ------------------- JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2, 1996 1997 1998 1998 1999 --------- -------- -------- -------- -------- (UNAUDITED) Revenues: Licensing.............................. $ 102,869 $130,661 $160,192 $120,102 $156,118 Licensing from Seagate Technology...... 9,374 4,920 5,048 4,167 5,135 Maintenance, support and other......... 4,499 5,921 9,806 7,270 8,972 --------- -------- -------- -------- -------- Total revenues....................... 116,742 141,502 175,046 131,539 170,225 Cost of revenues: Licensing.............................. 13,211 11,834 13,714 10,991 8,241 Licensing from Seagate Technology...... 3,999 1,834 411 402 329 Maintenance, support and other......... 194 789 2,067 1,379 2,598 Amortization of developed technologies......................... 9,941 17,655 7,143 6,394 2,360 --------- -------- -------- -------- -------- Total cost of revenues............... 27,345 32,112 23,335 19,166 13,528 --------- -------- -------- -------- -------- Gross profit........................... 89,397 109,390 151,711 112,373 156,697 Operating expenses: Sales and marketing.................... 55,875 68,238 68,314 51,365 63,649 Research and development............... 32,543 33,565 31,677 24,015 26,718 General and administrative............. 20,031 26,021 22,254 17,089 15,557 In-process research and development.... 61,066 -- 6,800 -- -- Amortization of goodwill and other intangibles.......................... 13,035 20,250 13,236 10,656 7,697 Restructuring costs.................... 9,502 2,524 -- -- -- --------- -------- -------- -------- -------- Total operating expenses............. 192,052 150,598 142,281 103,125 113,621 --------- -------- -------- -------- -------- Income (loss) from operations.......... (102,655) (41,208) 9,430 9,248 43,076 Interest expense....................... (1,013) (2,733) (768) (768) (74) Other, net............................. 308 155 55 24 1,472 --------- -------- -------- -------- -------- Interest and other, net................ (705) (2,578) (713) (744) 1,398 --------- -------- -------- -------- -------- Income (loss) before income taxes...... (103,360) (43,786) 8,717 8,504 44,474 Benefit from (provision for) income taxes................................ 8,764 10,586 (5,861) (5,835) (19,194) --------- -------- -------- -------- -------- Net income (loss)...................... $ (94,596) $(33,200) $ 2,856 $ 2,669 $ 25,280 ========= ======== ======== ======== ========
See notes to combined financial statements. F-43 148 NETWORK & STORAGE MANAGEMENT GROUP COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED NINE MONTHS ENDED --------------------------------- --------------------- JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2, 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss).................................. $ (94,596) $ (33,200) $ 2,856 $ 2,669 $ 25,280 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization.................. 24,274 32,642 28,018 23,783 16,314 Deferred income taxes.......................... (1,700) (7,505) (4,542) (3,508) (994) Write-off of in-process research and development................................. 61,066 -- 6,800 -- -- Write-off or write-down of goodwill and intangibles................................. 2,157 13,106 1,900 1,900 -- Write-offs due to restructure.................. 4,427 1,494 -- -- -- Other.......................................... 400 -- -- -- -- Changes in operating assets and liabilities: Accounts receivable......................... (8,420) 7,432 (1,360) (3,050) (7,108) Inventories................................. 117 (1,588) 2,206 2,358 312 Other current assets........................ 848 (419) 2,118 768 (2,869) Accounts payable............................ 2,636 (1,581) (2,218) (1,757) 972 Accrued employee compensation............... 1,211 1,738 (371) 1,146 2,096 Accrued expenses............................ 5,899 -- (2,671) (1,342) 2,390 Accrued income taxes........................ (950) 3,486 1,866 7,598 17,836 Deferred revenue............................ 88 (81) 232 (101) 3,860 Other liabilities........................... (3,130) (399) (46) (40) (255) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities.................................. (5,673) 15,125 34,788 30,424 57,834 INVESTING ACTIVITIES Acquisitions of businesses, net of cash acquired... (31,102) -- (10,000) -- -- Acquisition of equipment and leasehold improvements, net................................ (9,380) (12,625) (3,530) (4,034) (7,652) Acquisition of intangibles......................... -- -- (2,320) -- (290) Other, net......................................... 4 -- -- -- -- --------- --------- --------- --------- --------- Net cash used in investing activities.......... (40,478) (12,625) (15,850) (4,034) (7,942) FINANCING ACTIVITIES Funding by Seagate Technology for acquisitions of businesses....................................... 27,143 -- -- -- -- Borrowings from Seagate Technology................. 131,287 144,427 160,347 104,202 108,784 Repayments to Seagate Technology................... (113,665) (150,398) (175,327) (129,938) (161,531) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities.................................. 44,765 (5,971) (14,980) (25,736) (52,747) Effect of exchange rate changes on cash............ (2) -- -- -- -- --------- --------- --------- --------- --------- Increase (decrease) in cash.................... (1,388) (3,471) 3,958 654 (2,855) Elimination of Arcada's net cash activity for the duplicated six months ended December 30, 1995........................................ 1,768 -- -- -- -- Cash at the beginning of the period................ 4,012 4,392 921 921 4,879 --------- --------- --------- --------- --------- Cash at the end of the period...................... $ 4,392 $ 921 $ 4,879 $ 1,575 $ 2,024 ========= ========= ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest........................... $ 32 $ 156 $ -- $ -- $ -- Cash paid for income taxes....................... 1,694 304 1,814 $ 451 $ 1,055
See notes to combined financial statements. F-44 149 NETWORK & STORAGE MANAGEMENT GROUP COMBINED STATEMENTS OF GROUP EQUITY (IN THOUSANDS)
ACCUMULATED FOR THE NINE MONTHS ENDED APRIL 2, 1999, OTHER AND FOR THE YEARS ENDED JULY 3, 1998, JUNE 27, CONTRIBUTED COMPREHENSIVE ACCUMULATED 1997 AND JUNE 28, 1996, CAPITAL INCOME DEFICIT TOTAL - ---------------------------------------------- ----------- ------------- ----------- -------- BALANCE AT JUNE 30, 1995.................... $140,610 $ 2 $ (95,693) $ 44,919 Acquisition by Seagate Technology of OnDemand Software, Inc. and minority interest of Arcada Holdings, Inc...................... 98,249 -- -- 98,249 Acquisition by Seagate Technology of Calypso Software Systems, Inc..................... 13,799 -- -- 13,799 Income tax benefit from Seagate Technology stock option exercises.................... 1,866 -- -- 1,866 Foreign currency translation adjustment..... -- (2) -- (2) Net loss.................................... -- -- (94,596) (94,596) Elimination of Arcada Holdings, Inc. activity for the duplicated six months ended December 30, 1995.................................. -- -- 80 80 -------- ------ --------- -------- BALANCE AT JUNE 28, 1996.................... 254,524 -- (190,209) 64,315 Income tax benefit from Seagate Technology stock option exercises.................... 3,486 -- -- 3,486 Net loss.................................... -- -- (33,200) (33,200) -------- ------ --------- -------- BALANCE AT JUNE 27, 1997.................... 258,010 -- (223,409) 34,601 Income tax benefit from Seagate Technology stock option exercises.................... 576 -- -- 576 Net income.................................. -- -- 2,856 2,856 -------- ------ --------- -------- BALANCE AT JULY 3, 1998..................... 258,586 -- (220,553) 38,033 Income tax benefit from Seagate Technology stock option exercises (unaudited)........ 298 -- -- 298 Net income (unaudited)...................... -- -- 25,280 25,280 -------- ------ --------- -------- BALANCE AT APRIL 2, 1999 (unaudited)................................. $258,884 -- $(195,273) $ 63,611 ======== ====== ========= ========
See notes to combined financial statements. F-45 150 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business. The Network & Storage Management Group ("NSMG" or the "Network & Storage Management Group") develops and markets software products and provides related services enabling information technology ("IT") professionals to manage distributed network resources and to secure and protect enterprise data. The Network & Storage Management Group operates in a single industry segment, and its products offer features such as system backup, disaster recovery, migration, replication, automated client protection, storage resource management, scheduling, event correlation and desktop management. The Network & Storage Management Group is an operating division of Seagate Software, Inc. ("Seagate Software"), which is a majority-owned and consolidated subsidiary of Seagate Technology, Inc. ("Seagate Technology"), a data technology company that provides products for storing, managing and accessing digital information on computer systems. Seagate Software is headquartered in Scotts Valley, California and has 49 offices and operations in 18 countries worldwide. Restatement of Financial Statements. The Network & Storage Management Group had previously allocated a portion of goodwill to developed technology and evaluated the impairment of goodwill based on the revenues from the related software. Using this method, the Network & Storage Management Group recorded write-downs and write-offs of goodwill in fiscal 1997 in the amount of $10,259,000. The Network & Storage Management Group has re-evaluated its methodology and determined that goodwill should not be allocated to developed technology under Accounting Principles Board Opinion 17, "Intangible Assets." As a result, the Network & Storage Management Group has made adjustments to decrease the amounts of goodwill previously written-down and written-off from $10,259,000 to $6,173,000 in fiscal 1997. The additional goodwill of $4,086,000 is being amortized over the remaining estimated useful lives of approximately 5 years. The effect of this adjustment on previously reported combined financial statements as of and for the years ended July 3, 1998 and June 27, 1997 is as follows (in thousands, except per share amounts):
AS REPORTED AS RESTATED AS OF AND FOR AS OF AND FOR THE YEARS ENDED THE YEARS ENDED ---------------------- ---------------------- JUNE 27, JULY 3, JUNE 27, JULY 3, 1997 1998 1997 1998 --------- --------- --------- --------- Amortization of goodwill............... $ 23,987 $ 12,456 $ 20,250 $ 13,236 Income (loss) from operations.......... (44,945) 10,210 (41,208) 9,430 Net income (loss)...................... (36,937) 3,636 (33,200) 2,856 Goodwill and other intangible assets, net.................................. 52,480 38,374 56,217 41,331 Accumulated deficit.................... (227,146) (223,510) (223,409) (220,553)
F-46 151 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The effect of this adjustment on previously reported combined financial statements as of and for the nine months ended April 3, 1998 is as follows (in thousands, except per share amounts):
AS REPORTED AS RESTATED ----------------- ----------------- AS OF AND FOR THE AS OF AND FOR THE NINE MONTHS ENDED NINE MONTHS ENDED APRIL 3, 1998 APRIL 3, 1998 ----------------- ----------------- (UNAUDITED) (UNAUDITED) ----------------- ----------------- Amortization of goodwill........................... $ 10,071 $ 10,656 Income from operations............................. 9,833 9,248 Net income......................................... 3,254 2,669 Goodwill and other intangible assets, net.......... 36,014 39,168 Accumulated deficit................................ (223,892) (220,741)
Basis of presentation. These financial statements have been prepared using the historical basis of accounting and are presented as if the Network & Storage Management Group had existed as an entity separate from Seagate Software and Seagate Technology during the periods presented. These financial statements include the historical assets, liabilities, revenues and expenses that are directly related to the Network & Storage Management Group's operations. For certain assets and liabilities of Seagate Software that are not specifically identifiable with the Network & Storage Management Group, estimates have been used to allocate such assets and liabilities to the Network & Storage Management Group by applying methodologies management believes are appropriate. The unaudited quarterly consolidated financial statements presented have been prepared on a basis consistent with the audited consolidated financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission. The statements of operations include all revenues and costs attributable to the Network & Storage Management Group, including allocations of certain corporate administration, finance, and management costs. Such costs were proportionately allocated to the Network & Storage Management Group based on detailed inquiries and estimates of time incurred by Seagate Software's corporate marketing and general and administrative departmental managers. In addition, certain of Seagate Software's operations are shared locations involving activities that pertain to the Network & Storage Management Group as well as to other businesses of Seagate Software. Costs incurred in shared locations are allocated based on specific identification, or where specific identification is not possible, such costs are allocated between the Network & Storage Management Group and other businesses of Seagate Software using methodologies that management believes are reasonable. Transactions and balances between entities and locations within the Network & Storage Management Group have been eliminated. From August 1994 to June 1996, Seagate Technology acquired seven software companies that were engaged in developing and marketing network and/or storage management software products. In addition, in February 1996, Seagate Technology merged with Conner Peripherals, Inc. ("Conner") in a transaction accounted for as a pooling-of-interests. In connection with the merger, Seagate Technology purchased the outstanding minority interests in Conner's storage management software operations under Arcada Holdings, Inc. ("Arcada"). Also, in June 1998, the Network & Storage Management Group acquired Eastman Software for $10,000,000 in cash. The amount of capital contributed by Seagate Technology for acquisitions is determined by the amounts paid for such acquisitions by Seagate Technology on behalf of the Network & Storage Management Group. The accompanying financial F-47 152 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) statements present the combined results of operations of the acquired companies from the dates of acquisition. The Network & Storage Management Group operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1996 ended on June 28, 1996, fiscal 1997 ended on June 27, 1997, and fiscal 1998 ended on July 3, 1998. Fiscal years 1996 and 1997 were comprised of 52 weeks, and fiscal 1998 was comprised of 53 weeks. Fiscal 1999 will be a 52-week year and will end on July 2, 1999. All references to years in the notes to combined financial statements represent fiscal years unless otherwise noted. Arcada, which was acquired by the Network & Storage Management Group pursuant to Seagate Technology's merger with Conner, had a fiscal year that ended on the Saturday closest to December 31. Accordingly, Arcada's statement of operations for the year ended December 30, 1995 has been combined with the Network & Storage Management Group's statement of operations for the year ended June 30, 1995. In order to conform Arcada's fiscal year end to the Network & Storage Management Group's fiscal year end, the Network & Storage Management Group's combined statement of operations for the year ended June 28, 1996 includes six months (July 1, 1995 through December 30, 1995) for Arcada which are also included in the Network & Storage Management Group's combined statement of operations for the year ended June 30, 1995. Economic dependence on Seagate Technology. The Network & Storage Management Group incurred net losses of $94,596,000 and $33,200,000 during 1996 and 1997, respectively, and had a working capital deficit of $12,690,000 at July 3, 1998. On July 4, 1998, Seagate Software and Seagate Technology renewed the Revolving Loan Agreement on substantially the same terms and conditions as the prior agreement that was dated June 28, 1996. Under the Revolving Loan Agreement, Seagate Technology finances certain of Seagate Software's working capital needs. The Revolving Loan Agreement provides for maximum outstanding borrowings of up to $60,000,000 and is renewable every two years. Outstanding borrowings by the Network & Storage Management Group from Seagate Technology and affiliates were $25,616,000 and $10,636,000 at June 27, 1997 and July 3, 1998, respectively and a net receivable of $42,111,000 (unaudited) at April 2, 1999. Borrowings from Seagate Technology consist primarily of amounts used to fund the Network & Storage Management Group's operating activities. A net receivable position existed as of April 2, 1999 primarily due to an increase in loan repayments to Seagate Technology resulting from an increase in cash generated from operations. The loan balance is offset and presented on the balance sheet as a net receivable or net payable in accordance with the terms of the loan agreement. Beginning in fiscal 1999, the Network & Storage Management Group will pay interest at the LIBOR rate plus 2% per annum on such borrowings; the Network & Storage Management Group previously paid interest at 6%. Interest expense as presented in the statement of operations primarily relates to interest incurred under the Revolving Loan Agreement. The Network & Storage Management Group and Seagate Software are economically dependent on Seagate Technology and believe that to the extent future cash flows from operations and borrowings under the existing loan agreement with Seagate Technology are not sufficient to fund the Network & Storage Management Group's working capital deficit and planned activities during the next 12 months, that additional funding will be available at a reasonable cost from Seagate Technology. Accounting estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. F-48 153 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Concentration of credit risk. Financial instruments that potentially subject the Network & Storage Management Group to significant concentrations of credit risk consist primarily of cash and accounts receivable. The Network & Storage Management Group places its cash and cash equivalents in high credit quality financial institutions. Accounts receivable are derived from revenues earned from customers primarily located in North America. The Network & Storage Management Group performs ongoing credit evaluations of its customers and generally does not require collateral. The Network & Storage Management Group maintains reserves for potential credit losses and historically such losses have been immaterial. Revenue from one third-party customer, Ingram Micro, accounted for 17%, 22% and 27% of the Network & Storage Management Group's total revenues in 1996, 1997 and 1998, and 28% (unaudited) in the nine months ended April 3, 1998 and 28% (unaudited) in the nine months ended April 2, 1999. Revenue from another third-party customer, Tech Data, accounted for 12% of the Network & Storage Management Group's total revenues in 1998. Foreign currency translation. The U.S. dollar is the functional currency for all of the Network & Storage Management Group's foreign operations. Gains and losses on the remeasurement into U.S. dollars of amounts denominated in foreign currencies are included in net income. Earnings per share. The Network & Storage Management Group is a division of Seagate Software and has no formal capital structure. Accordingly, earnings per share information is not presented. Cash management. Seagate Technology uses a centralized cash management function for all of its domestic operations, including domestic operations of the Network & Storage Management Group. Cash and cash equivalents. The Network & Storage Management Group considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. The Network & Storage Management Group typically uses available cash in excess of amounts required for operating activities to pay amounts due under the Revolving Loan Agreement. Accordingly, the Network & Storage Management Group has not had significant cash equivalents to date. Inventories. Inventories are stated at the lower of cost (first in, first out method) or market, and consist primarily of materials used in software products, related supplies and packaging materials. Equipment and leasehold improvements. Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Assets under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term. Goodwill and other intangible assets. Goodwill represents the excess of the purchase price of acquired companies over the estimated fair values of tangible and intangible net assets acquired. Goodwill is amortized on a straight-line basis over five to seven years. The carrying values of long-term assets and intangibles other than developed technology ("other intangibles") are reviewed if facts and circumstances suggest that they may be impaired. If this review indicates that carrying values of long-term assets and other intangibles and associated goodwill will not be recoverable based on projected undiscounted future cash flows, carrying values are reduced to estimated fair values by first reducing goodwill and second by reducing long-term assets and other intangibles. Other intangible assets consist of trademarks, assembled workforces, distribution networks, developed technology, customer bases, and covenants not to compete related to acquisitions accounted for by the purchase method. See Note on Business Combinations and Acquisitions. Amortization of purchased intangibles, other than acquired developed technology, is provided on the straight-line basis over the F-49 154 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) respective useful lives of the assets ranging from 36 to 60 months for trademarks, 24 to 48 months for assembled workforces and distribution networks, 12 to 36 months for customer bases and 18 to 24 months for covenants not to compete. In-process research and development without alternative future use is expensed when acquired. Developed technology and capitalized software development costs. The Network & Storage Management Group applies Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", to software technologies developed internally, acquired in business acquisitions, and purchased. Internal development costs are included in research and development and are expensed as incurred. SFAS 86 requires the capitalization of certain internal development costs once technological feasibility is established, which based on the Network & Storage Management Group's development process generally occurs upon the completion of a working model. As the time period between the completion of a working model and the general availability of software has been short, capitalization of internal development costs has not been material to date. Capitalized costs are amortized based on the greater of the straight-line basis over the estimated product life (generally 30 to 48 months) or the ratio of current revenues to the total of current and anticipated future revenues. Purchased developed technology, including developed technology acquired in business acquisitions, is amortized based on the greater of the straight-line basis over the estimated useful life (30 to 48 months) or the ratio of current revenues to the total of current and anticipated future revenues. The recoverability of the carrying value of purchased developed technology and associated goodwill is reviewed periodically. The carrying value of developed technology is compared to the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support (net undiscounted cash flows) and to the extent that the carrying value exceeds the undiscounted cash flows the difference is written off. If the developed technology was acquired in a business combination the carrying value of any related goodwill is also compared to the estimated net discounted cash flows less the carrying value of the developed technology and if the carrying value of the goodwill exceeds the net undiscounted cash flows the difference is written off. Fair value disclosures. The Network & Storage Management Group maintains its cash principally with major banks in interest- and non-interest-bearing bank accounts. There are no realized or unrealized gains or losses and fair value approximates carrying value for all cash balances. Pushdown and carveout accounting. Seagate Technology has provided substantial services to Seagate Software, including general management, treasury, tax, financial reporting, benefits administration, insurance, information technology, legal, accounts payable and receivable and credit functions. Seagate Technology has charged Seagate Software for these services through corporate expense allocations, and such expenses in turn have been reallocated by Seagate Software to the Network & Storage Management Group and to the other businesses of Seagate Software. The amount of corporate expense allocations is dependent upon the total amount of allocable costs incurred by Seagate Technology on behalf of Seagate Software and the Network & Storage Management Group less amounts charged as a specific cost or expense rather than by allocation. Included in the Network & Storage Management Group's general and administrative expenses are Seagate Technology allocation charges of $1,771,000, $1,462,000 and $730,000 for 1996, 1997 and 1998, respectively and $525,000 (unaudited) and $387,000 (unaudited) for the nine months ended April 3, 1998 and April 2, 1999, respectively. Included in sales and marketing expenses are Seagate Technology allocation charges of F-50 155 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) $14,000, $12,000 and $462,000 for 1996, 1997 and 1998, respectively and $459,000 (unaudited) and $216,000 (unaudited) for the nine months ended April 3, 1998 and April 2, 1999, respectively. The increase in sales and marketing expenses in 1998 was due to proportional cost allocations from Seagate Technology's corporate branding program, which consisted of television and newspaper advertisements. The Network & Storage Management Group's employees participated in Seagate Technology's profit sharing plan through the first quarter of fiscal 1998 and in Seagate Technology's management bonus plan during 1997. The Network & Storage Management Group has since adopted its own bonus plan. Compensation expenses recorded by the Network & Storage Management Group under Seagate Technology's plans totaled $700,000, $2,664,000 and $0 for 1996, 1997 and 1998, respectively. The employees of the Network & Storage Management Group also participate in Seagate Technology Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits eligible employees who have completed thirty days of employment prior to the inception of the offering period to purchase common stock of Seagate Technology through payroll deductions at the lower of 85% of the fair market value of the common stock at the beginning or at the end of each six-month offering period. Under the plan, approximately 34,500, 71,200 and 75,700 shares of common stock of Seagate Technology were issued to the Network & Storage Management Group's employees in 1996, 1997 and 1998, respectively. The U.S. employees of the Network & Storage Management Group also participate in the Seagate Technology tax-deferred savings plan, the Seagate Technology, Inc. Savings and Investment Plan (the "401(k) plan"). The 401(k) plan is designed to provide qualified employees with an accumulation of funds at retirement. Qualified employees may elect to make contributions to the 401(k) plan on a monthly basis. The Network & Storage Management Group may make annual contributions to the 401(k) plan at the discretion of the Board of Directors. Network & Storage Management Group contributions were immaterial in fiscal years 1996 and 1997 and were $560,000 in fiscal year 1998. Revenue recognition. During fiscal 1998 and prior, the Network & Storage Management Group recognized revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 91-1, "Software Revenue Recognition". The Network & Storage Management Group's total revenues are derived from license revenues for its various software products as well as maintenance, support, training and consulting. Revenues for maintenance, support services, training and consulting are recognized separately from software licenses. License revenues are recognized upon delivery of the product if no significant vendor obligations remain and collection of the resulting receivable is probable. Allowances for estimated future returns are provided upon shipment. Maintenance and support revenues consist of ongoing support and product updates and are recognized ratably over the term of the contract, which is typically twelve months. Revenues from training and consulting are recognized when the services are performed. Revenues from resellers, including VARs, OEMs, distributors and Seagate Technology, are primarily recognized at the time of product delivery to the reseller. The Company's policy is to defer such revenues if resale contingencies exist. Factors considered in the determination of whether such contingencies exist include, but are not limited to, payment terms, collectibility and past history with the customer. Product returns are reserved for in accordance with SFAS 48. Such returns are estimated based on historical return rates. The Company considers other factors such as fixed and determinable fees, resale contingencies, arms length contract terms and the ability to reasonably estimate returns to ensure compliance with SFAS 48. Additionally, the Network and Storage Management Group continually F-51 156 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) reviews its estimated product return provisions to ensure that they are reasonable in relation to actual product returns, which are quantified based on approved return authorization forms received prior to fiscal cutoff dates. Historically, the Network and Storage Management Group's estimated product return rates have not varied materially from actual product return rates. In October 1997 and March 1998, the American Institute of Certified Public Accountants issued Statements of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software transactions and supersede SOP 91-1. The Network & Storage Management Group has assessed the impact of the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its policies and procedures. The Network & Storage Management Group's adoption of SOP 97-2 and SOP 98-4 for transactions entered into after July 3, 1998 did not have a significant impact on revenues or results of operations for the first nine months of fiscal 1999. Advertising expense. The cost of advertising is expensed as incurred. The Network & Storage Management Group does not incur any direct response advertising costs. Advertising costs totaled $13,914,000, $18,571,000 and $12,358,000 in 1996, 1997 and 1998, respectively. Accounts receivable. Accounts receivable are summarized below, in thousands:
JUNE 27, JULY 3, APRIL 2, 1997 1998 1999 -------- ------- ----------- (UNAUDITED) Accounts receivable.................................... $15,340 $16,780 $ 33,165 Less allowance for non-collection...................... (953) (798) (10,075) ------- ------- -------- $14,387 $15,982 $ 23,090 ======= ======= ========
Inventory. The write-downs of inventory to the lower of cost or market were $800,000, $531,000 and $3,674,000 in 1996, 1997 and 1998, respectively. The write-down in fiscal 1998 was a result of consolidating Seagate Software's fulfillment warehouses and changing their strategy to have fulfillment activities handled by an outsourcing partner. As a result of this consolidation excess and obsolete components and finished goods were written down. The write-down in fiscal 1997 and 1996 related to excess and obsolete components and finished goods inventory. Equipment and leasehold improvements. Equipment and leasehold improvements consisted of the following, in thousands:
JUNE 27, JULY 3, APRIL 2, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Equipment............................................ $ 24,063 $ 21,366 $ 24,616 Leasehold improvements............................... 5,274 5,783 8,276 -------- -------- -------- 29,337 27,149 32,892 Less accumulated depreciation and amortization....... (12,271) (15,811) (20,159) -------- -------- -------- $ 17,066 $ 11,338 $ 12,733 ======== ======== ========
Depreciation is recognized on the straight-line basis over the respective useful lives of the assets, ranging from two to five years for equipment and the life of the lease for building and leasehold F-52 157 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) improvements. Depreciation expense was $3,455,000, $7,393,000 and $9,111,000 in 1996, 1997 and 1998, respectively. Goodwill and other intangibles. Goodwill and other intangibles consisted of the following, in thousands:
JUNE 27, JULY 3, APRIL 2, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Goodwill................................................. $ 50,286 $ 49,039 $ 49,139 Developed technology..................................... 28,486 28,449 28,638 Trademarks............................................... 3,653 3,653 3,653 Assembled workforce...................................... 4,638 2,568 2,568 Distribution network..................................... 2,925 2,925 2,925 Other intangibles........................................ 8,604 9,743 9,743 -------- -------- -------- 98,592 96,377 96,666 Accumulated amortization................................. (42,375) (55,046) (65,102) -------- -------- -------- Goodwill and other intangibles........................... $ 56,217 $ 41,331 $ 31,564 ======== ======== ========
Amortization of developed technologies is included in costs of revenues. In 1996, 1997 and 1998 amortization expense for goodwill and other intangibles includes write-offs and write-downs to the estimated fair value of $2,157,000, $6,173,000 and $1,900,000, respectively. In 1997 the amortization of acquired developed technologies included in cost of revenues includes write-downs and write-offs to net realizable value of $6,918,000. Periodically, the Network & Storage Management Group reviews the carrying value of its intangibles other than developed technology to ascertain if there has been any impairment. In 1996, the former owner of Frye Computer Systems, Inc. (a 1995 acquisition) and its original founder, Mr. Frye, left the Network & Storage Management Group. With his departure, the Network & Storage Management Group decided to release Mr. Frye from the remaining period of his covenant not to compete and to not use the Frye name trademark in future products. As a result, the remaining carrying value of the covenant not to compete and trademark and associated goodwill totalling $2,157,000 were written off. The Network & Storage Management Group also periodically reviews the net realizable value of developed technology under the guidance of SFAS No. 86. The Network & Storage Management Group compares the estimated undiscounted future cash flows on a product by product basis to the unamortized cost of developed technology. Unamortized costs in excess of the estimated undiscounted cash flows are written off. The impairment write-offs for developed technology recorded in 1997 were caused by a number of factors including the Network & Storage Management Group's decision to stop selling products or technologies such as DOS, new acquisitions, or new product designs. The Network & Storage Management Group is not currently generating revenue from any products for which the related developed technology has been impaired. In addition, the Network & Storage Management Group assesses the impairment of goodwill not within the scope of SFAS 121 under Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17). During 1997, the Network & Storage Management Group wrote-off and wrote-down goodwill amounting to $6,173,000. The write-offs and write-downs related to the decision to abandon and stop selling all current and future products acquired from Frye Computer Systems, Inc., the decision to F-53 158 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) abandon and stop selling virtually all current and future products acquired in the acquisition of Palindrome Corporation, and the decision to close down and sell Calypso Software Systems, Inc. The Network & Storage Management Group has capitalized the assembled workforce in most of its acquisitions. When the Network & Storage Management Group reviews the carrying value of its intangibles, if there remains less than 5% of the original workforce the related intangible is deemed impaired. In 1998, the Network & Storage Management Group wrote off the workforces and associated goodwill for three previous acquisitions, Network Computing, Inc., Netlabs, Inc., and Creative Interaction Technologies, Inc. because less than 5% of the original workforce remained. The following table provides quantitative information about the write-offs and write-downs of goodwill and other intangibles, in thousands:
1996 1997 1998 --------------------- --------------------- --------------------- DEVELOPED INTANGIBLE GOODWILL TECHNOLOGY GOODWILL INTANGIBLE GOODWILL ---------- -------- ---------- -------- ---------- -------- COVENANT NOT TO COMPETE Frye Computer Systems, Inc..... $1,188 $744 TRADEMARK Frye Computer Systems, Inc..... 225 DEVELOPED TECHNOLOGY Netlabs, Inc................... $ 780 Palindrome Corporation......... 2,740 $2,930 Calypso Software Systems, Inc......................... 1,627 2,573 Creative Interaction Technologies, Inc........... 1,176 Frye Computer Systems, Inc..... 463 670 Network Computing, Inc......... 132 ASSEMBLED WORKFORCE Network Computing, Inc......... $120 $ 155 Netlabs, Inc................... 431 1,045 Creative Interaction Technologies, Inc........... 82 67 ------ ---- ------ ------ ---- ------ Total....................... $1,413 $744 $6,918 $6,173 $633 $1,267 ====== ==== ====== ====== ==== ======
NEW ACCOUNTING PRONOUNCEMENTS The Network & Storage Management Group intends to adopt Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") during fiscal 1999. Both standards will require additional disclosure, but will not have a material effect on the Network & Storage Management Group's financial position or results of operations. SFAS 130 establishes standards for the reporting and display of comprehensive income, including net income and items that are currently reported directly as a component of stockholders' equity such as changes in foreign currency translation adjustments and changes in the fair value of available-for-sale financial instruments. SFAS 131 changes the way companies report segment information and requires segments to be determined based on how management measures performance and makes decisions about allocating resources. The Network & F-54 159 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Storage Management Group has not provided the disclosures related to SFAS 130 for the nine month periods ended April 3, 1998 and April 2, 1999, as these amounts are immaterial. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. It also provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. The Network & Storage Management Group has not yet determined the impact, if any, of adopting this statement. The disclosures prescribed by SOP 98-1 will be effective for the Network & Storage Management Group's combined financial statements for the fiscal year ending June 30, 2000. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" to defer the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Network & Storage Management Group generally does not use derivative financial instruments and the impact of SFAS 133 is not anticipated to be material when adopted. BUSINESS COMBINATIONS AND ACQUISITIONS The Network & Storage Management Group has a history of acquisitions and during the three most recent fiscal years acquired Arcada Holdings, Inc., Calypso Software Systems, Inc., OnDemand Software, Inc. and Sytron Corporation in 1996, made no acquisitions in 1997, and acquired Eastman Software Storage Management Group, Inc. in 1998. In accordance with the provisions of APB Opinion 16, all identifiable assets, including identifiable intangible assets, were assigned a portion of the cost of the acquired enterprise (purchase price) on the basis of their respective fair values. This included the portion of the purchase price properly attributed to incomplete research and development projects that should be expensed according to the requirements of Interpretation 4 of SFAS No. 2. Valuation of acquired intangible assets. To determine the value of developed technologies, the expected future cash flows of existing product and core technologies were evaluated, taking into account risks related to the characteristics and applications of each product, existing and future markets and assessments of the life cycle stage of each product. Based on this analysis, the existing technologies that had reached technological feasibility were capitalized. To determine the value of in-process research and development, the Network & Storage Management Group considered, among other factors, the state of development of each project, the time and cost needed to complete each project, expected income, associated risks which included the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis resulted in amounts assigned to in-process research and development for projects that had not yet reached technological feasibility and which did not have alternative future uses. The Income Approach, which includes analysis of markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each in-process research and development project. The underlying F-55 160 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) in-process projects acquired were the most significant and uncertain assumptions utilized in the valuation analysis of in-process research & development projects. To determine the value of developed technologies, the expected future cash flows of existing product technologies were evaluated, taking into account risks related to the characteristics and applications of each product, existing and future markets and assessments of the life cycle stage of each product. Based on this analysis, the existing technologies that had reached technological feasibility were capitalized. To determine the value of the distribution networks and customer bases, the Network & Storage Management Group considered, among other factors, the size of the current and potential future customer bases, the quality of existing relationships with customers, the historical costs to develop customer relationships, the expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in transitioning the business relationships from the acquired entity to the Network & Storage Management Group and risks related to the viability of and potential changes to future target markets. To determine the value of trademarks, the Network & Storage Management Group considered, among other factors, the assumption that in lieu of ownership of a trademark, the Network & Storage Management Group would be willing to pay a royalty in order to exploit the related benefits of such trademark. To determine the value of assembled workforces, the Network & Storage Management Group considered, among other factors, the costs to replace existing employees including search costs, interview costs and training costs. Goodwill is determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. If the values assigned to identified tangible and intangible assets exceed the amounts paid, including the effect of deferred taxes, the values assigned to long-term assets were reduced proportionally. Acquisition of Sytron Corporation. In July 1995, Arcada Software, Inc., a majority-owned subsidiary of Arcada, acquired the assets and liabilities of Sytron Corporation, a company that developed, produced and marketed software products for data storage management. The purchase price of approximately $5,017,000 was paid in cash. Arcada accounted for the acquisition using the purchase method, and the results of operations of Sytron are only included in the Network & Storage Management Group's operations since the acquisition was completed. The following is a summary of the purchase price allocation, in thousands: Current assets and other tangible assets.................... $ 848 Liabilities assumed......................................... (508) Developed technology........................................ 1,487 In-process research and development......................... 2,817 Goodwill.................................................... 373 ------ $5,017 ======
Acquisition of minority interest of Arcada Holdings, Inc. The combination of Seagate Software with Arcada Holdings, Inc. ("Arcada"), a company which developed, marketed and supported data protection and storage management software products that operated across multiple desktop and client/server environments, was accounted for as a pooling-of-interests and, accordingly, all prior periods presented in the accompanying combined financial statements include the accounts and operations of F-56 161 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Arcada. Arcada's results of operations for the duplicated six months ended December 30, 1995 were as follows, in thousands:
SIX MONTHS ENDED DECEMBER 30, 1995 ----------------- Net revenues................................................ $37,700 Operating expenses.......................................... 29,320 Other income................................................ 588 Net loss.................................................... (80)
In connection with the pooling-of-interests, the Network & Storage Management Group acquired the then outstanding minority interest of Arcada. The minority interest was approximately 31% on a fully diluted basis. The acquisition of the minority interest was accounted for as a purchase and in connection with the acquisition, Seagate Technology issued 2,553,000 shares of common stock with a fair market value of approximately $52,009,000 and 1,817,000 options to purchase common stock with a fair market value of approximately $33,065,000 (aggregate fair value of $85,074,000). The value of the shares of Seagate Technology common stock issued to shareholders of Arcada was determined based on the average market price of Seagate Technology's common stock five days before and five days after October 3, 1995, the date that the terms of the acquisition were agreed to. The options were issued to employees of Arcada and Conner, Arcada's parent, in exchange for options of Arcada. The options have a term of 10 years and vest 1/16 per quarter over 4 years. The value of the options were based on the intrinsic value of the options, which approximates the fair value. The following is a summary of the purchase price allocation for the acquisition of the minority interest, in thousands: Assembled workforce......................................... $ 1,355 Distribution network........................................ 94 Corporate accounts.......................................... 375 Strategic alliances......................................... 1,437 OEM agreements.............................................. 3,217 Value added resellers....................................... 2,030 Trademarks.................................................. 2,811 Developed technology........................................ 4,623 In-process research and development......................... 43,949 Deferred tax liability...................................... (6,254) Goodwill.................................................... 31,437 ------- $85,074 =======
Intangible assets were identified through (i) analysis of the acquisition agreement, (ii) consideration of the Network & Storage Management Group's intentions for future use of the acquired assets, and (iii) analysis of data available concerning Arcada's products, technologies, markets, historical financial performance, estimates of future performance and the assumptions underlying those estimates. The economic and competitive environment in which the Network & Storage Management Group and Arcada operate was also considered in the valuation analysis. Specifically, purchased research and development ("purchased R&D") was identified and valued through extensive interviews and discussions with the Network & Storage Management Group and Arcada management and the analysis of data provided by Arcada concerning Arcada's developmental products their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The Income Approach, which F-57 162 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) includes an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each purchased R&D project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. DISCUSSION OF IN-PROCESS RESEARCH & DEVELOPMENT ONE TIME WRITE-OFF OVERVIEW As of the acquisition date, Arcada had spent a significant amount of money on research and development related to the re-development efforts to add features and utilities to the Desktop, NetWare and Windows NT products such as disk grooming, hierarchical storage management, upgraded graphical user interfaces, file and server replication, and server mirroring in order to continue to meet increasingly complex user needs. In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of software purchased to be integrated with another product or process will be capitalized only if technological feasibility was established for the software component and if all research and development activities for the other components of the product or process were completed at the time of the purchase." Although Seagate purchased existing products from Arcada, since the majority of the original underlying code and base technology for the NetWare and Windows NT product families was completed in the 1990 time frame, the technologies, as of the date of valuation, were undergoing significant re-development. ASSUMPTIONS Revenue Future revenue estimates were generated for the following product families: (i) Desktop, (ii) NetWare, and (iii) Windows NT. Aggregate revenue for Arcada products was estimated to be approximately $94 million for the ten and one-half months ending December 31, 1996. Revenues were estimated to increase to approximately $161 million and $234 million for calendar years 1997 and 1998 when most of the in-process projects were expected to be complete and shipping. Thereafter, revenue was estimated to increase at rates ranging from 35% to 40% for calendar years 1999 through 2002. Revenue estimates were based on (i) aggregate revenue growth rates for the business as a whole, (ii) individual product revenues, (iii) growth rates for the storage management software market, (iv) the aggregate size of the storage management software market, (v) anticipated product development and introduction schedules, (vi) product sales cycles, and (vii) the estimated life of a product's underlying technology. The estimated product development cycle for the new products ranged from 12 to 18 months. Operating expenses Operating expenses used in the valuation analysis of Arcada included (i) cost of goods sold, (ii) general and administrative expense, (iii) selling and marketing expense, and (iv) research and development expense. In developing future expense estimates, an evaluation of both Seagate Software and Arcada's overall business model, specific product results, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics was conducted. Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue, for the developed and in-process technologies ranged from approximately 5% to 30% (30% for Desktop, 10% for NetWare, and 5% for Windows NT). The Network & Storage Management Group's cost of goods sold was 23% for fiscal 1996, 23% for fiscal 1997, and 13% for fiscal 1998. F-58 163 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) General and administrative ("G&A") expense. G&A expense, expressed as a percentage of revenue, for the developed and in-process technologies ranged from 12% in calendar 1996 to 8% in calendar 1998 and beyond. Selling and marketing ("S&M") expense. S&M expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be 30% throughout the estimation period. Research and development ("R&D") expense. R&D expense consists of the costs associated with activities undertaken to correct errors or keep products updated with current information (also referred to as "maintenance" R&D). Maintenance R&D includes all activities undertaken after a product is available for general release to customers to correct errors or keep the product updated with current information. These activities include routine changes and additions. The maintenance R&D expense was estimated to be 5% of revenue for the developed technologies and 3% of revenue for the in-process technologies throughout the estimation period. In addition, as of the date of acquisition, the Network & Storage Management Group management anticipated the costs to complete the Desktop, NetWare, and Windows NT technologies at approximately $6.8 million, $4.5 million, and $7.5 million, respectively. Since the acquisition date, all projects originally acquired from Arcada were commercially released prior to the end of the fourth quarter of fiscal 1997. Effective tax rate The effective tax rate utilized in the analysis of developed and in-process technologies was 38%, which reflects Seagate's combined federal and state statutory income tax rates, exclusive of non-recurring charges at the time of the acquisition and estimated for future years. Discount rate The discount rates selected for Arcada's developed and in-process technologies were 15% and 17.5% respectively. In the selection of the appropriate discount rates, consideration was given to (i) the Weighted Average Cost of Capital (approximately 13% to 15% at the date of acquisition) of its parent, Seagate Technology, Inc. and (ii) the Weighted Average Return on Assets (approximately 18%). The discount rate utilized for the in-process technology was determined to be higher than Seagate's WACC due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than Seagate's WACC, management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. Acquisition of OnDemand Software, Inc. In March 1996, the Network & Storage Management Group acquired all of the outstanding shares and stock options of OnDemand Software, Inc. ("OnDemand"), a company engaged in developing, producing and marketing WinINSTALL, a product which automates installation, upgrades and uninstalls of network applications throughout the enterprise. The purchase price of approximately $13,425,000 was paid in cash. The Network & Storage Management Group accounted for the acquisition using the purchase method, and the results of operations of F-59 164 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) OnDemand are only included in the Network & Storage Management Group's operations since the date the acquisition was completed. The following is a summary of the purchase price allocation, in thousands: Current assets and other tangible assets.................... $ 832 Liabilities assumed......................................... (227) Assembled workforce......................................... 270 Developed technology........................................ 2,000 Covenant not to compete..................................... 50 In-process research and development......................... 8,900 Goodwill.................................................... 1,600 ------- $13,425 =======
OnDemand develops and markets electronic software distribution products involved in network management in the client/server environment. OnDemand's flagship product is WinINSTALL. As of the date of acquisition, OnDemand was in the process of developing the next generation of WinINSTALL Version 6.0. A significant feature of Version 6.0 (not available by any competitive product) was a rollback with clone capability, which would allow the user to selectively return a PC to a previous state upon installation failure or upon user demand. In order for WinINSTALL Version 6.0 to become a commercially viable product, OnDemand, as of the valuation date, had undergone or was in the process of undergoing significant development efforts, including (i) developing rollback facilities, including clone capability, (ii) expanding global editor to be included in the WinINSTALL registry file, (iii) improving WinINSTALL Remote to ease package generation and distribution, (iv) adding a feature that would allow optional electronic mail notification on installation failure and on installation refusals due to reaching license limitations, and (v) expanding copy options and interactive install displays, adding substitution variables, and allowing version control of backup files. As of the date of acquisition, Company management anticipated the costs to complete WinINSTALL Version 6.0 at approximately $920,000. Since the acquisition date, the acquired in-process research and development from OnDemand has been completed and the related products have been released prior to the end of fiscal 1997. Acquisition of Calypso Software Systems, Inc. In May 1996, the Network & Storage Management Group acquired all of the outstanding shares of Calypso Software Systems, Inc. ("Calypso"), a company engaged in developing, producing and marketing software for managing systems and applications in complex, distributed client/server computer networks. The purchase price of approximately $13,865,000 was paid in cash. The Network & Storage Management Group accounted for the acquisition using the purchase method, and the results of operations of Calypso are only included in the Network & Storage Management Group's operations since the date the acquisition was completed. The following is a summary of the purchase price allocation, in thousands: Current assets and other tangible assets.................... $ 1,209 Liabilities assumed......................................... (245) Assembled workforce......................................... 400 Developed technology........................................ 3,600 Customer base............................................... 540 In-process research and development......................... 5,400 Goodwill.................................................... 2,961 ------- $13,865 =======
F-60 165 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Calypso is a software developer in the enterprise network/system management market. Calypso provides software which is designed to enable companies to automate the management of their distributed applications. At the date of acquisition, Calypso had two main products: Maestro Vision ("Maestro") and Atrium Extendible Management System ("EMS") for Spectrum. Both existing products, as of the acquisition date, were planned to be phased out over the following 24 months. Calypso, at the acquisition date, was in the process of developing the next generation Atrium EMS product that can be sold stand-alone. Both Maestro and Atrium EMS for Spectrum were originally designed for use only on certain system platforms, Cabletron and Spectrum, respectively. However, Atrium EMS (stand-alone) would allow systems managers on any system platform to distribute software; monitor CPU, memory, and operating system administration; manage applications, file systems, and print services; and perform UNIX and NT system administration. As of the date of acquisition, Calypso had undergone or was in the process of undergoing the re-write of code in C+, adding navigator capabilities, developing web server and browser interoperability, developing CORBA interoperability, and developing Network OLE/COM interoperability for Atrium EMS (stand-alone). The estimated cost to complete, at the date of acquisition, was approximately $750,000. These in process research and development projects were successfully completed prior to a restructuring of operations in the third quarter of fiscal 1997. As a result of this restructuring and a change in the Company's strategic direction, in the first quarter of fiscal 1998 the Company disposed of all the developed and in process technologies originally acquired from Calypso. Acquisition of Eastman Software Storage Management Group, Inc. In June 1998, the Network & Storage Management Group acquired all of the outstanding capital stock of Eastman Software Storage Management Group, Inc. ("Eastman"), a company engaged in developing, producing and marketing hierarchical storage management products for the Windows NT platform. The purchase price of approximately $10,000,000 was paid in cash. Approximately $6,800,000 of the total purchase price represented the value of in-process technology that had not yet reached technological feasibility, had no alternative future uses and was charged to the Network & Storage Management Group's operations in the quarter ended July 3, 1998. The Network & Storage Management Group accounted for the acquisition using the purchase method, and the results of operations of Eastman are only included in the Network & Storage Management Group's operations since the date the acquisition was completed. Pro forma financial information is not presented as such amounts are not material. The following is a summary of the purchase price allocation, in thousands: Current assets and other tangible assets.................... $ 535 Liabilities assumed......................................... (508) Assembled workforce......................................... 340 Developed technology........................................ 500 In-process research and development......................... 6,800 Microsoft agreement......................................... 1,500 Goodwill.................................................... 833 ------- $10,000 =======
OVERVIEW Eastman Software Storage Management Group's two primary products are OPEN/stor for Windows NT and AvailHSM for NetWare. By integrating Eastman's product line, the Network & Storage Management Group will be able to convert their Storage Migrator product into a stand-alone F-61 166 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) HSM application for Windows NT environments. As of the date of acquisition the Network & Storage Management Group abandoned the AvailHSM product and technology due to dated features and functionality; the valuation analysis did not include a fair value for the AvailHSM product. As for OPEN/stor at the date of acquisition the Network & Storage Management Group planned to phase out the product over the following 12 to 15 months. NSMG's purpose for the acquisition was for the next generation technologies that were underway at Eastman referenced by project names Sakkara and Phoenix. These projects were complete re-writes of Eastman's prior generation technology that would allow the product to be sold stand-alone upon completion. In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of software purchased to be integrated with another product or process will be capitalized only if technological feasibility was established for the software component and if all research and development activities for the other components of the product or process were completed at the time of the purchase." Although the Network & Storage Management Group purchased existing products from Eastman, the existing products did not operate on a stand-alone basis. Therefore, as mentioned above, all of the original underlying code and base technology for the next generation products were in the process of being completely re-written as date of valuation. ASSUMPTIONS Revenue Future revenue estimates were generated for the following technologies: (i) OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing Eastman products was estimated to be approximately $167,000 for the one month ending June 30, 1998. Revenues were estimated to increase to approximately $3.9 million and $7.1 million for fiscal years 1999 and 2000 when most of the in-process projects were expected to be complete and shipping. Thereafter, revenue was estimated to increase at rates ranging from 20% to 30% for fiscal years 2001 through 2006. Revenue estimates were based on (i) aggregate revenue growth rates for the business as a whole, (ii) individual product revenues, (iii) growth rates for the storage management software market, (iv) the aggregate size of the storage management software market, (v) anticipated product development and introduction schedules, (vi) product sales, cycles, and (vii) the estimated life of a product's underlying technology. Operating expenses Operating expenses used in the valuation analysis of Eastman included (i) cost of goods sold, (ii) general and administrative expense, (iii) selling and marketing expense, and (iv) research and development expense. In developing future expense estimates, an evaluation of both the Network & Storage Management Group's and Eastman's overall business model, specific product results, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics was conducted. Cost of goods sold. Cost of goods sold expressed as a percentage of revenue for the developed and in-process technologies was estimated to be approximately 5% throughout the estimation period. The Network & Storage Management Group's cost of goods sold was 23% for fiscal 1996 and 23% for fiscal 1997. General and administrative ("G&A") expenses. G&A expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be approximately 10% throughout the estimation period. F-62 167 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Selling and marketing ("S&M") expense. S&M expense, expressed as a percentage of revenue, for the developed and in-process technologies was estimated to be 27% throughout the estimation period. Research and development ("R&D") expense. R&D expense consists of the costs associated with activities undertaken to correct errors or keep products updated with current information (also referred to as "maintenance" R&D). Maintenance R&D includes all activities undertaken after a product is available for general release to customers to correct errors or keep the product updated with current information. These activities include routine changes and additions. The maintenance R&D expense was estimated to be 5% of revenue for the developed and in-process technologies throughout the estimation period. In addition, as of the date of acquisition, the Network & Storage Management Group's management anticipated the costs to complete the in-process technologies at approximately $1.8 million. EFFECTIVE TAX RATE The effective tax rate utilized in the analysis of developed and in-process technologies was 38%, which reflects Seagate Software's combined federal and state statutory income tax rates, exclusive of non-recurring charges at the time of the acquisition and estimated for future years. DISCOUNT RATE The discount rates selected for Eastman's developed and in-process technologies were 15% and 20%, respectively. In the selection of the appropriate discount rates, consideration was given to (i) the Weighted Average Cost of Capital (approximately 15% at the date of acquisition) and (ii) the Weighted Average Return on Assets (approximately 18%). The discount rate utilized for the in-process technology was determined to be higher than Seagate Software's WACC due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than Seagate Software's WACC, management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. STOCK OPTION PLANS The Seagate Software option plan provides for the issuance of either incentive or nonstatutory stock options to employees and consultants of Seagate Software and Seagate Technology. Seagate Software has reserved a total of 12,600,000 shares under the Plan. Options granted under Seagate Software's Plan are granted at fair market value, expire ten years from the date of the grant and vest over four years; 20% at the end of years one and two and 30% at the end of years three and four. The following table summarizes information about Seagate Software options outstanding as of July 3, 1998 for employees of the Network & Storage Management Group. Certain of Seagate Software's operations are shared locations involving activities that pertain to the Network & Storage Management F-63 168 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Group as well as to other businesses of Seagate Software. Options outstanding for employees in shared locations have been allocated based on specific identification for each employee.
OPTIONS OUTSTANDING EXERCISABLE OPTIONS -------------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES SHARES LIFE (IN YEARS) PRICE OF SHARES PRICE - --------------- --------- --------------- -------- --------- -------- $ 4.00 1,293,677 7.9 $ 4.00 495,911 $4.00 $ 6.00 1,875,278 9.0 6.00 132,420 6.00 $ 7.50 -- 11.00 879,597 9.6 8.86 4,780 8.08 $ 12.75 1,467,378 10.0 12.75 -- -- --------- ------- Total 5,515,930 9.1 7.78 633,111 4.45 ========= =======
Pro forma information. In October 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an alternative to Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APBO 25") and requires additional disclosures. Seagate Software and the Network & Storage Management Group have elected to follow APBO 25 in accounting for stock options granted. Under APBO 25, Seagate Software and the Network & Storage Management Group generally have not recognized compensation expense with respect to such options. Pro forma information regarding net income and earnings per share is required by SFAS 123 for stock options granted after June 30, 1995, as if the Network & Storage Management Group had accounted for Seagate Software stock options under the fair value method of SFAS 123. The fair value of Seagate Software options granted to Network & Storage Management Group employees was estimated using a Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because the Seagate Software stock options granted to the Network & Storage Management Group's employees have characteristics significantly different from those of exchange-traded options (and are not fully transferable) and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its stock options granted to employees. The fair value of Seagate Software stock options granted to the Network & Storage Management Group's employees was estimated assuming no expected dividends and the following weighted average assumptions:
SEAGATE SOFTWARE SEAGATE TECHNOLOGY INCENTIVE EMPLOYEE STOCK STOCK OPTION PURCHASE PLAN SHARES PLAN SHARES -------------------- -------------------- 1996 1997 1998 1996 1997 1998 ---- ---- ---- ---- ---- ---- Expected life (in years)..................... 3.65 3.65 3.67 .50 .50 .56 Risk-free interest rate...................... 5.6% 6.2% 5.7% 5.4% 5.4% 5.5% Volatility................................... .55 .55 .55 .46 .46 .63
F-64 169 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The weighted average exercise price and weighted average fair value of Seagate Software stock options granted to Network & Storage Management Group employees in 1998 under Seagate Software's Plan were $9.04 and $4.20 per share, respectively. The weighted average purchase price and weighted average fair value of shares granted to Networ & Storage Management Group employees in 1998 under Seagate Technology Employee Stock Purchase Plan (the "Purchase Plan") were $26.99 and $12.03, respectively. For purposes of pro forma disclosures, the estimated fair value of options granted to the Network & Storage Management Group's employees is amortized over the options' vesting period for Seagate Software stock options and over the six-month purchase period for stock purchases under the Purchase Plan. For purposes of the determination of pro forma net loss, pro forma expense relating to stock options under FAS 123 was allocated based on Network & Storage Management Group headcount as a percentage of total Seagate Software headcount. The pro forma net loss was $94,846,000, $35,406,000 and $844,000 in 1996, 1997 and 1998, respectively. Because the Network & Storage Management Group does not have a formal capital structure, pro forma net loss per share is not presented. The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, and Seagate Software did not commence granting stock options for the purchase of Seagate Software common stock until June 1996, the pro forma effect will not be fully reflected until 2000. INCOME TAXES The Network & Storage Management Group is included in the consolidated federal and certain combined and consolidated foreign and state income tax returns of Seagate Technology. Seagate Technology and Seagate Software have entered into a tax sharing agreement (the "Tax Allocation Agreement") pursuant to which the Network & Storage Management Group computes hypothetical tax returns (with certain modifications) as if the Network & Storage Management Group was not joined in consolidated or combined returns with Seagate Technology. The Network & Storage Management Group must pay Seagate Technology the positive amount of any such hypothetical taxes. If the hypothetical tax returns show entitlement to refunds, including any refunds attributable to a carryback, then Seagate Technology will pay the Network & Storage Management Group the amount of such refunds. At the end of fiscal 1996 and 1997, there were no intercompany tax-related balances outstanding between the Network & Storage Management Group and Seagate Technology. At the end of fiscal 1998, a $6,958,000 intercompany tax-related balance was due from the Network & Storage Management Group to Seagate Technology. F-65 170 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The (benefit from) provision for income taxes consisted of the following, in thousands:
JUNE 28, JUNE 27, JULY 3, 1996 1997 1998 -------- -------- ------- Current tax expense Federal................................................ $(6,035) $ (2,991) $ 8,282 State.................................................. (1,171) (563) 908 Foreign................................................ 228 473 1,213 ------- -------- ------- Total current tax expense...................... (6,978) (3,081) 10,403 Deferred tax expense Federal................................................ (1,506) (6,330) (3,831) State.................................................. (280) (1,175) (711) ------- -------- ------- Total deferred tax expense..................... (1,786) (7,505) (4,542) ------- -------- ------- (Benefit from) provision for income taxes................ $(8,764) $(10,586) $ 5,861 ======= ======== =======
The (benefit from) provision for income taxes has been computed on a separate return basis subject to the following modifications as required by the Tax Allocation Agreement: (i) profitable members of the consolidated return group are prohibited from applying tax net operating loss carryforwards and tax credit carryforwards to reduce their separately computed tax liabilities to the extent that current year tax losses or tax credits of other members are available to reduce a profitable member's separate tax liability; and (ii) members must reimburse other members to the extent they use another member's tax attributes to reduce their separately computed tax liabilities. Pursuant to the terms of the Tax Allocation Agreement, the tax benefits of certain of the Network & Storage Management Group's fiscal 1996 and 1997 tax losses and credits are recognized in the year such losses and credits are utilized by Seagate Technology in its tax returns. The pro forma information assuming a tax provision based on a separate filing basis is as follows, in thousands:
YEAR ENDED JULY 3, 1998 ------------ Income before provision for income taxes.................... $8,717 Provision for income taxes.................................. 3,064 ------ Net income.................................................. $5,653 ======
The income tax benefits related to the exercise of employee stock options reduced amounts due to or increased amounts due from Seagate Technology pursuant to the Tax Allocation Agreement and were credited to additional paid-in capital. Such amounts approximated $1,866,000, $3,486,000 and $576,000 in 1996, 1997 and 1998, respectively. F-66 171 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Network & Storage Management Group's deferred tax assets and liabilities were as follows, in thousands:
JUNE 27, JULY 3, 1997 1998 -------- -------- DEFERRED TAX ASSETS Reserves and accruals not currently deductible.............. $ 5,001 $ 5,526 Depreciation................................................ 819 (980) Acquisition-related items................................... 8,445 8,534 Domestic and foreign net operating loss carryforwards....... 12,779 12,788 Tax credit carryforwards.................................... 1,155 1,155 Other....................................................... 1,170 1,535 -------- -------- Total deferred tax assets......................... 29,369 28,558 Valuation allowance......................................... (29,369) (28,558) -------- -------- Net deferred tax assets........................... -- -- ======== ======== DEFERRED TAX LIABILITIES Acquisition-related items................................... (6,233) (1,691) -------- -------- Total deferred tax liabilities.................... (6,233) (1,691) -------- -------- Net deferred tax liabilities...................... $ (6,233) $ (1,691) ======== ========
A valuation allowance has been provided for the deferred tax assets as of the end of fiscal 1997 and 1998. Realization of the deferred tax assets is dependent on future earnings, the timing and amount of which are uncertain. In addition, the net operating loss and tax credit carryforwards of acquired subsidiaries are subject to further limitations on utilization due to the "change in ownership" provisions of Internal Revenue Code Section 382 and the "separate return limitation year" rules of the federal consolidated return regulations. Approximately $5,416,000 of the valuation allowance as of July 3, 1998, is attributable to deferred tax assets that when realized will reduce unamortized goodwill or other intangible assets of the acquired subsidiaries. The valuation allowance increased by $12,197,000 and $2,942,000 in 1996 and 1997, respectively and decreased by $811,000 in 1998. As of July 3, 1998, the Network & Storage Management Group has domestic and foreign net operating loss carryforwards of approximately $36,538,000 expiring in 2003 through 2010, if not used to offset future taxable income. In addition, the Network & Storage Management Group, as of July 3, 1998, has research and development tax credit carryforwards of approximately $1,155,000 expiring in 2005 through 2011, if not used to offset future tax liabilities. F-67 172 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The reconciliation between the (benefit from) provision for income taxes at the U.S. statutory rate and the effective rate is summarized as follows, in thousands:
JUNE 28, JUNE 27, JULY 3, 1996 1997 1998 -------- -------- ------- (Benefit) provision at U.S. statutory rate............... $(36,176) $(15,325) $3,051 State income taxes (benefit), net........................ (761) (563) 909 Foreign taxes in excess of the U.S. statutory rate....... 18 75 153 In-process research and development...................... 15,382 -- -- Goodwill and other acquisition-related items............. 2,833 4,307 2,894 Valuation allowance...................................... 9,936 1,395 (811) Other.................................................... 4 (475) (335) -------- -------- ------ $ (8,764) $(10,586) $5,861 ======== ======== ======
Cumulative undistributed earnings of certain foreign operations of the Network & Storage Management Group, of $2,276,000 are considered to be permanently invested in non-U.S. operations. No income tax has been provided on these amounts. Additional state and federal taxes that would have to be provided if these earnings were repatriated to the U.S. cannot be determined at this time. COMMITMENTS Leases. The Network & Storage Management Group leases certain property, facilities and equipment under non-cancelable lease agreements. Facility leases expire at various dates through 2008 and contain various provisions for rental adjustments. The leases require the Network & Storage Management Group to pay property taxes, insurance and normal maintenance costs. The Network & Storage Management Group also occupies certain facilities owned by Seagate Technology. Future minimum payments for operating leases were as follows at July 3, 1998, in thousands:
OPERATING LEASES --------- 1999........................................................ $ 5,137 2000........................................................ 4,605 2001........................................................ 2,995 2002........................................................ 2,603 2003........................................................ 2,471 After 2003.................................................. 34,287 ------- $52,098 =======
Total rent expense for all facility and equipment operating leases was approximately $2,743,000, $4,094,000 and $4,781,000 for 1996, 1997 and 1998, respectively. LEGAL PROCEEDINGS On December 22, 1998, a former employee commenced an action in the Superior Court of Santa Cruz County against Seagate Software, Inc. claiming promissory fraud and fraudulent inducement to enter a contract, breach of a contract, constructive wrongful discharge and related claims, seeking monetary and injunctive relief. Specifically, the former employee alleges that a Seagate Software officer F-68 173 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) agreed to sell him a division of the Network & Storage Management Group business. On May 10, 1999 the plaintiff filed a dismissal with prejudice of all claims with the Superior Court. The Network & Storage Management Group business is engaged in various legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material adverse effect on the Network & Storage Management Group business' financial position, liquidity or results of operations. RESTRUCTURING COSTS Restructuring charges were $9.5 million in fiscal 1996 and $2.5 million in fiscal 1997. The 1996 restructuring charges pertain to the acquisition of Arcada Holdings, Inc. in February 1996. As a result of the acquisition, the Network & Storage Management Group business had obtained duplicate technologies and product lines in data protection and storage management software as those assets acquired in the Palindrome Corporation ("Palindrome") acquisition in fiscal 1995. The Network & Storage Management Group determined that it would be beneficial to consolidate the world-wide sales, marketing, research and development, technical support and other operations and administrative functions of its network and storage management business. A restructuring plan was approved by the Seagate Software Board of Directors in March 1996 and the plan resulted in facility closures and staff reductions of 43 at the Arcada facilities in Westboro, Massachusetts, the United Kingdom and France, as well as staff reductions of 69 at the former Palindrome facility in Naperville, Illinois. In addition, because Arcada had a better industry reputation and superior products to those of Palindrome, the Network & Storage Management Group's plan and strategy going forward was to focus on the technologies and products acquired from Arcada. The revenue and net operating loss relating to products acquired from Palindrome for fiscal 1996 was $15.9 million and $2.1 million, respectively. For fiscal 1997, the revenue and net operating loss relating to products acquired from Palindrome was $3.3 million and $3.7 million, respectively. The non-cash restructuring charges included amounts for abandonment of the Palindrome trademarks, impairment of the capitalized workforce intangible assets pertaining to the acquisition of Palindrome because of the planned layoff of personnel, write-off of a duplicate trade show booth, and write-off of obsolete Palindrome marketing materials. Cash restructuring charges included amounts for severance and benefits to terminated Palindrome employees, costs for facilities lease termination, other contract cancellation fees, and merger related costs incurred by Arcada in the acquisition of the Arcada minority pooling of interests by Seagate Technology. The fiscal 1997 restructuring charges netted to $2.5 million, comprised of a $3.4 million restructuring charge that included the closure of the Network & Storage Management Group's facility located in Cupertino, California. This facility closure resulted in cash charges for severance and benefits for 69 employee terminations and non-cash charges for excess facilities and the write down of equipment. In addition, the $3.4 million included amounts related to the decision, after concluding a sale was no longer viable, to no longer pursue the technologies acquired in the fiscal 1996 acquisition of Calypso Software Systems, Inc. and to shut down its operations. This decision resulted in cash charges for severance and benefits for 35 employee terminations and non-cash charges for the write off of certain remaining intangible assets of Calypso. The revenue and net operating loss relating to products acquired from Calypso for fiscal 1996 was $444,000 and $53,000, respectively. For fiscal 1997, the revenue and net operating loss relating to products acquired from Calypso was $640,000 and $47,000, respectively. The restructuring charges recorded in fiscal 1997 were reduced by $957,000 for the reversal of amounts pertaining to the fiscal 1996 restructuring charges as a result of a higher than planned number of F-69 174 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) voluntary employee terminations without severance benefits prior to the facility shutdown and completion of other aspects of the restructuring plan at less than the originally estimated cost, net of an increase in the accrual for facilities lease payments due to changes in estimates of the costs to terminate leases after facilities closure. A summary of Network & Storage Management Group business restructuring activities is provided below (in thousands):
SEVERANCE CONTRACT LEGAL AND AND EMPLOYEE CANCELLATION ACCOUNTING BENEFITS FACILITIES EQUIPMENT INVENTORY INTANGIBLES FEES FEES ------------ ---------- --------- --------- ----------- ------------ ---------- 1996 restructuring charges......... $1,554 $1,571 $1,018 $300 $4,312 $67 $525 Cash charges....................... (518) -- -- -- -- -- (568) Non-cash charges................... -- (121) (116) -- (4,052) -- -- ------ ------ ------ ---- ------ --- ---- Reserve balances, June 28, 1996.... 1,036 1,450 902 300 260 67 (43) 1997 restructuring charges......... 770 505 728 -- 1,378 -- -- Cash charges....................... (975) (915) -- -- -- -- -- Non-cash charges................... -- (72) (44) -- (1,378) -- -- Adjustments and reclassifications................ (351) 267 (172) (300) (260) (67) 43 ------ ------ ------ ---- ------ --- ---- Reserve balances, June 27, 1997.... 480 1,235 1,414 -- -- -- -- Cash charges....................... (373) (519) (9) -- -- -- -- Non-cash charges................... -- -- (1,045) -- -- -- -- Adjustments and reclassifications................ (107) 467 (360) -- -- -- -- ------ ------ ------ ---- ------ --- ---- Reserve balances, July 3, 1998..... -- 1,183 -- -- -- -- -- Cash charges (unaudited)........... -- (375) -- -- -- -- -- ------ ------ ------ ---- ------ --- ---- Reserve balances, April 2, 1999 (unaudited)...................... $ -- $ 808 $ -- $ -- $ -- -- $ -- ====== ====== ====== ==== ====== === ==== OTHER EXPENSES TOTAL -------- ------ 1996 restructuring charges......... $155 $9,502 Cash charges....................... -- (1,086) Non-cash charges................... (138) (4,427) ---- ------ Reserve balances, June 28, 1996.... 17 3,989 1997 restructuring charges......... 100 3,481 Cash charges....................... -- (1,890) Non-cash charges................... -- (1,494) Adjustments and reclassifications................ (117) (957) ---- ------ Reserve balances, June 27, 1997.... -- 3,129 Cash charges....................... -- (901) Non-cash charges................... -- (1,045) Adjustments and reclassifications................ -- -- ---- ------ Reserve balances, July 3, 1998..... -- 1,183 Cash charges (unaudited)........... -- (375) ---- ------ Reserve balances, April 2, 1999 (unaudited)...................... $ -- $ 808 ==== ======
The Network & Storage Management Group's remaining restructuring reserves at April 2, 1999 pertain to continuing lease payments on facilities that were closed and abandoned as a result of the Palindrome restructuring. The Network & Storage Management Group has been unable to sublease these facilities and anticipates that the remaining restructuring reserves will be utilized over the period through lease termination in fiscal 2002. The fiscal 1996 restructuring reserve of $9,502,000 was for the following specific items: Severance and employee benefits ($1,554,000) -- Severance and employee benefits included amounts for consolidation of operations and termination of employees at the Arcada facilities in Westboro, Massachusetts, the United Kingdom and France, as well as at the former Palindrome facility in Naperville, Illinois. Excess facilities ($1,571,000) -- This accrual was designed to provide for rent termination costs and rent expense for facilities located in Naperville, Westboro, the United Kingdom and France that are to be closed as a result of the restructuring actions. Equipment ($1,018,000) -- This amount is a reserve for equipment at the Naperville, Westboro, the United Kingdom and France facilities. It consists of computer equipment, furniture and fixtures and software at these facilities that will not be used after the locations are closed. All the equipment provided for in this reserve has been abandoned. Inventory ($300,000) -- This consists of obsolete packaging material that will no longer be used and OEM inventory of $80,000 that will no longer be sold. F-70 175 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Intangibles ($4,312,000) -- This write-off consists of Palindrome intangible assets of $3,534,000, $390,000 of developed technology related to Atlas and $388,000 of goodwill related to the Sytron acquisition. The Palindrome intangible assets were further broken down into trademark of $1,000,000, workforce of $1,188,000, distribution network of $69,000 and goodwill of $1,277,000. The Company decided to pursue the Arcada brand name and trade mark and abandon the Palindrome trademark. As a result, Network & Storage Management Group business determined that it would lay off substantially all employees (121 employees) of Palindrome located at the Naperville facility. At the time of original purchase, Network & Storage Management Group business proportionally allocated goodwill to long-lived intangible assets based upon the original purchase price. The amounts of goodwill included in the restructuring reserve relate to the remaining unamortized goodwill associated with the intangible assets written off. Contract cancellation ($67,000) -- This $67,000 item is a canceled contract for outsourced Technical Support with a vendor used by Palindrome. Legal/Accounting fees ($525,000) -- This $525,000 represents an estimate of the legal and accounting fees that were to be incurred by Arcada from the acquisition of Arcada stock by Seagate Technology. Other ($155,000) -- This represents a trade show booth valued at $100,000 that is redundant and $55,000 for obsolete marketing materials. The above assets were not impaired in a prior period because their impairment arose specifically from the restructuring actions taken as a result of the acquisition of the minority interest in Arcada in the third quarter of fiscal 1996. Prior to the acquisition, Palindrome products were marketed and sold as part of the Seagate Software portfolio. In fiscal 1997, Seagate Software recorded an additional restructuring reserve of $3,481,000 that resulted primarily from the plan to shutdown Manchester operations and the decision to try to sell the Calypso technology and a separate decision to consolidate NSMG operations which resulted in the shutdown of the Company's facility in Cupertino, California. Severance and employee benefits ($770,000) -- Severance and employee benefits included amounts for the shutdown and termination of employees at the Cupertino, California facility due to a consolidation of operations and the shutdown and termination of employees at the Calypso facility in Manchester, New Hampshire due to a decision to no longer pursue the Calypso products and technologies. Excess facilities ($505,000) -- This accrual was designed to provide for rent termination costs and rent expense for facilities closures in Manchester, New Hampshire and Cupertino, California. Equipment ($728,000) -- This reserve is for equipment in the Manchester and Cupertino facilities that would not be used after the shutdowns. It consisted of largely of computer equipment but also included amounts for furniture and fixtures and software. All the equipment provided for in this reserve has been abandoned. Intangibles ($1,378,000) -- This asset consisted of Calypso related intangibles first capitalized upon the acquisition of Calypso in fiscal 1996. The amounts written down included Net Developed Technology of $1,086,000 and Assembled Workforce of $292,000. These assets were written off based on management's plan to sell Calypso and its products and technologies. Other ($100,000) -- This represents miscellaneous additional costs related to the Manchester (Calypso) shutdown. F-71 176 NETWORK & STORAGE MANAGEMENT GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The above assets were not impaired in a period prior to recording the restructuring reserves because their impairment arose specifically from the business decision and plan in the fourth quarter of fiscal 1997 to close the Manchester (Calypso) facility and abandon that technology and the additional decision to consolidate operations of the company and close the Cupertino facility. EXPORT SALES Export sales were $32,468,000, $40,748,000 and $57,752,000 in 1996, 1997 and 1998, respectively. SUBSEQUENT EVENT (UNAUDITED) The Network & Storage Management Group, its parent company, Seagate Software, Inc. and Seagate Software's parent company, Seagate Technology, Inc. ("STI") announced on October 5, 1998 that they had entered into an Agreement and Plan of Reorganization (the "Plan") as of such date with Veritas Holding Corporation ("New VERITAS") and VERITAS Software Corporation ("VERITAS"). The Plan was amended and restated on April 15, 1999. VERITAS provides end-to-end storage management software solutions. The Plan provided for the contribution by Seagate Software, STI and certain of their respective subsidiaries to New VERITAS of (a) the outstanding stock of the Network & Storage Management Group and certain other subsidiaries of Seagate Software and (b) those assets used primarily in the network storage management business of Seagate Software (the "NSMG Business"), in consideration for the issuance of shares of Common Stock of New VERITAS to Seagate Software and the offer by New VERITAS to grant options to purchase Common Stock of New VERITAS to certain of Seagate Software's employees who become employees of New VERITAS or its subsidiaries. As part of the Plan, New VERITAS also assumed certain liabilities of the NSMG Business. As a result of the closing in May 1999, New VERITAS issued approximately 69.1 million shares (on a post split basis) of its common stock to Seagate Software and 6.9 million options to purchase the Common Stock of New VERITAS were granted to NSMG business employees. The aggregate number of shares and options of New VERITAS received by Seagate Software and NSMG business employees equals approximately 40% of the fully diluted capitalization of New VERITAS (assuming conversion of all convertible securities, including the VERITAS convertible debentures, and exercise of assumed options and warrants) at the effective time of the closing. In connection with the contribution of the NSMG Business to New VERITAS, VERITAS became a wholly-owned subsidiary of New VERITAS through a merger with a subsidiary of New VERITAS of which VERITAS is the surviving entity. Upon consummation of the merger, the former security holders of VERITAS were issued New VERITAS securities representing approximately 60% of the fully diluted capitalization of New VERITAS as of the closing. F-72 177 AUDITORS' REPORT TO THE DIRECTORS We have audited the balance sheets of Telebackup Systems Inc. as at December 31, 1997 and 1998 and the statements of operations and deficit and changes in financial position for each of the years in the three year period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at December 31, 1997 and 1998 and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1998 in accordance with generally accepted accounting principles in Canada. Generally accepted accounting principles in Canada differ in some respects from those applicable in the United States (note 13). Chartered Accountants Calgary, Canada February 5, 1999 F-73 178 TELEBACKUP SYSTEMS INC. BALANCE SHEETS (AMOUNTS IN CANADIAN DOLLARS) ASSETS
DECEMBER 31, -------------------------- MARCH 31, 1997 1998 1999 ----------- ----------- ----------- (UNAUDITED) Current assets: Cash and temporary investments................. $ 1,236,453 $ 6,151,624 $ 5,347,597 Restricted cash (note 2)....................... 124,123 -- -- Accounts receivable............................ 332,597 656,197 1,465,829 Investment tax credit receivable............... 50,000 -- -- Inventory...................................... 83,994 -- -- Prepaid expenses............................... 8,278 30,515 55,531 ----------- ----------- ----------- 1,835,445 6,838,336 6,868,957 Capital assets (note 3).......................... 1,003,132 860,925 808,848 Debt issuance costs (net of amortization $17,641)....................................... 431,590 -- -- ----------- ----------- ----------- $ 3,270,167 $ 7,699,261 $ 7,677,805 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable............................... $ 111,574 $ 262,815 $ 345,714 Accrued liabilities............................ 31,174 46,936 90,665 Deferred revenue............................... -- 2,710,805 2,824,579 Current portion of long-term debt (note 4)..... 124,800 124,800 124,800 ----------- ----------- ----------- 267,548 3,145,356 3,385,758 Long-term debt (note 4).......................... 3,004,260 302,260 271,020 Shareholders' equity (deficiency): Share capital (note 5)......................... 2,982,155 8,885,247 9,171,872 Warrants....................................... 80,000 -- Deficit........................................ (3,063,796) (4,633,602) (5,150,845) ----------- ----------- ----------- (1,641) 4,251,645 4,021,027 Combination agreement (note 12).................. Commitments (note 7)............................. Canadian and United States accounting policy differences (note 13).......................... ----------- ----------- ----------- $ 3,270,167 $ 7,699,261 $ 7,677,805 =========== =========== ===========
See accompanying notes to financial statements. F-74 179 TELEBACKUP SYSTEMS INC. STATEMENTS OF OPERATIONS AND DEFICIT (AMOUNTS IN CANADIAN DOLLARS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenue: Product sales............. $ 233,353 $ 347,235 $ 1,384,411 $ 657,697 $ 577,798 Maintenance and support... 18,531 23,112 200,000 50,000 -- Custom software development............ -- 115,700 1,838,565 -- 659,385 ----------- ----------- ----------- ----------- ----------- 251,884 486,047 3,422,976 707,697 1,237,183 Cost of sales: Product sales............. 106,058 123,930 311,369 154,171 162,421 Maintenance, support and custom software development............ 43,359 61,444 512,347 -- 146,989 ----------- ----------- ----------- ----------- ----------- 149,417 185,374 823,716 154,171 309,410 Gross profit................ 102,467 300,673 2,599,260 553,526 927,773 Expenses: General and administrative......... 496,753 808,256 1,180,981 143,392 620,958 Selling and marketing..... 306,870 495,538 1,090,763 234,568 361,737 Marketing and royalty agreement.............. 100,000 100,000 200,000 25,000 50,000 Research and development............ 302,650 576,475 1,045,717 197,526 336,638 Interest and bank charges, net.................... 13,514 81,937 97,754 9,278 (64,074) Depreciation and amortization........... 24,117 108,073 553,851 143,963 139,757 ----------- ----------- ----------- ----------- ----------- 1,243,904 2,170,279 4,169,066 753,727 1,445,016 ----------- ----------- ----------- ----------- ----------- Net loss.................... (1,141,437) (1,869,606) (1,569,806) (200,201) (517,243) Deficit, beginning of period.................... (52,753) (1,194,190) (3,063,796) (3,063,796) (4,633,602) ----------- ----------- ----------- ----------- ----------- Deficit, end of period...... $(1,194,190) $(3,063,796) $(4,633,602) $(3,263,997) $(5,150,845) =========== =========== =========== =========== =========== Net loss per share.......... $ (0.18) $ (0.25) $ (0.17) $ (0.02) $ (0.05) =========== =========== =========== =========== ===========
See accompanying notes to financial statements. F-75 180 TELEBACKUP SYSTEMS INC. STATEMENTS OF CHANGES IN FINANCIAL POSITION (AMOUNTS IN CANADIAN DOLLARS)
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ----------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) Cash provided by (used in): Operations: Net loss............................. $(1,141,437) $(1,869,606) $(1,569,806) $ (200,201) $ (517,243) Items not involving cash: Depreciation and amortization...... 24,117 108,073 553,851 143,963 139,757 Software development costs......... 37,673 -- -- -- -- Changes in non-cash working capital: Accounts receivable................ 918 (328,141) (323,600) (605,713) (809,632) Investment tax credit receivable... (30,000) -- 50,000 50,000 -- Inventory.......................... (121,623) 37,629 83,994 -- -- Prepaid expenses................... 12,218 (4,436) (22,237) 4,016 (25,016) Accounts payable................... 19,420 21,418 151,241 (52,457) 82,899 Accrued liabilities................ 32,349 (5,175) 15,762 1,440 43,729 Deferred revenue................... -- -- 2,710,805 -- 113,774 Due from shareholder............... 31,600 -- -- -- -- ----------- ----------- ----------- ---------- ---------- (1,134,765) (2,040,238) 1,650,010 (658,952) (971,732) Investing: Net additions to capital assets...... (183,636) (887,589) (350,580) (12,979) (87,680) Financing: Issue of share capital, net.......... 1,856,401 953,446 6,273,618 275,140 286,625 Warrants............................. -- 80,000 -- -- -- Increase (decrease) in long-term debt, net.......................... 350,000 2,824,360 150,360 (12,201) (31,240) Debt issuance costs.................. -- (449,231) -- -- -- Conversion of debentures............. -- (45,300) (2,932,360) (163,265) -- Issue of promissory notes............ -- 150,000 -- -- -- Repayment of promissory notes........ -- (150,000) -- -- -- ----------- ----------- ----------- ---------- ---------- 2,206,401 3,363,275 3,491,618 99,674 255,385 ----------- ----------- ----------- ---------- ---------- Increase (decrease) in cash and temporary investments................ 888,000 435,448 4,791,048 (572,257) (804,027) Cash and temporary investments, beginning of year.................... 37,128 925,128 1,360,576 1,360,576 6,151,624 ----------- ----------- ----------- ---------- ---------- Cash and temporary investments, end of year................................. $ 925,128 $ 1,360,576 $ 6,151,624 $ 788,319 $5,347,597 =========== =========== =========== ========== ==========
Cash and temporary investments are defined to include restricted cash. See accompanying notes to financial statements. F-76 181 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) CORPORATE PROFILE The Company develops and markets computer software designed to allow data backup via a modem or network. These financial statements are prepared in accordance with accounting principles generally accepted in Canada. 1. SIGNIFICANT ACCOUNTING POLICIES (a) Revenue recognition: In the third quarter of 1998, the Company adopted the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2 with respect to software revenue recognition. Pursuant to SOP 97-2, four specific criteria must be met prior to recognizing revenue for a single-element arrangement or for amounts allocated to individual elements in a multiple-element arrangement. These four criteria are (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the vendor's fee is fixed or determinable; and (d) collectibility is probable. This change in revenue recognition has been applied on a retroactive basis which did not affect revenue for the years ended December 31, 1997 and 1996. The Company sells its software and any related hardware by way of a direct sale or on a revenue sharing basis. The Company previously recognized direct sales revenues from software licenses and hardware upon delivery and installation of the software and hardware products. Sales made on a revenue sharing basis may have required the purchaser to make an initial payment, as well as additional payments based upon a percentage of the future revenues generated by the purchaser. The initial payment was recorded as revenue at the time of delivery and installation of the software and hardware products. Future revenue sharing payments were recorded as revenue if and when earned. (b) Capital assets: Capital assets are recorded at cost. Depreciation is provided using the following methods and rates:
ASSETS METHOD RATE ------ ------ ---- Computer equipment..................................... Declining balance 30% Furniture and fixtures................................. Declining balance 30% World rights........................................... Straight-line 20% Software technology.................................... Straight-line 50% Royalty reduction...................................... Straight-line 50%
(c) Debt issuance costs: Debt issuance costs are amortized to income over the term of the related debt financing. F-77 182 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) Software research and development costs: Research costs are expensed as incurred. Costs related to internal development of software are expensed as incurred unless criteria for deferral and subsequent amortization are met. Specifically, internal software development costs are deferred once technological feasibility for a product is established. As at December 31, 1997, December 31, 1998, and March 31, 1999, the Company has not deferred internal software development costs, as completed development has coincided with technological feasibility. (e) Investment tax credits: Scientific Research and Experimental Development ("SRED") investment tax credits are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized. The Company accounts for investment tax credits using the cost reduction method. (f) Inventory: Inventory, consisting primarily of turnkey computer systems assembled for demonstration purposes and ultimate sale, is recorded at the lesser of cost determined on a first-in first-out basis and market value. (g) Per share data: Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. Fully diluted per share data has not been disclosed as the effect of the exercise of share options is not dilutive. 2. RESTRICTED CASH Restricted cash consists of cash held in trust in connection with the payment of interest on certain debt. 3. CAPITAL ASSETS
ACCUMULATED NET BOOK DECEMBER 31, 1997 COST DEPRECIATION VALUE ----------------- ---------- ------------ ----------- Computer equipment........................ $ 312,560 $ 73,630 $ 238,930 Furniture and fixtures.................... 16,101 4,399 11,702 World rights.............................. 50,000 12,500 37,500 Software technology....................... 300,000 25,000 275,000 Royalty reduction......................... 440,000 -- 440,000 ---------- -------- ---------- $1,118,661 $115,529 $1,003,132 ========== ======== ==========
F-78 183 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 3. CAPITAL ASSETS (CONTINUED)
ACCUMULATED NET BOOK DECEMBER 31, 1998 COST DEPRECIATION VALUE ----------------- ---------- ------------ ----------- Computer equipment........................ $ 629,185 $174,305 $ 454,880 Furniture and fixtures.................... 50,056 11,736 38,320 World rights.............................. 50,000 22,500 27,500 Software technology....................... 300,000 179,775 120,225 Royalty reduction......................... 440,000 220,000 220,000 ---------- -------- ---------- $1,469,241 $608,316 $ 860,925 ========== ======== ==========
ACCUMULATED NET BOOK MARCH 31, 1999 COST DEPRECIATION VALUE -------------- ---------- ------------ ----------- Computer equipment........................ $ 716,865 $216,259 $ 500,606 Furniture and fixtures.................... 50,056 14,539 35,517 World rights.............................. 50,000 25,000 25,000 Software technology....................... 300,000 217,275 82,725 Royalty reduction......................... 440,000 275,000 165,000 ---------- -------- ---------- $1,556,921 $748,073 $ 808,848 ========== ======== ==========
In October 1997, the Company entered into an agreement to license, on a permanent, unlimited and fully paid basis, a third party's patented data reduction process technology. In exchange for the license, the Company had agreed to issue 200,000 Common Shares at $1.50 per share, the market value of the shares. In November 1997, the Company renegotiated its royalty commitment whereby the royalty was converted from a 10% royalty to a $200,000 fixed annual royalty with a $2 million buyout option. The Company had agreed to issue 200,000 Common Shares at $2.20 per share, the market value of the shares, in exchange for the new royalty agreement. 4. LONG-TERM DEBT
DECEMBER 31 MARCH 31 ----------------------- --------- 1997 1998 1999 ---------- --------- --------- Debentures................................. $2,705,060 $ -- $ -- Operating line of credit................... 500,000 427,060 395,820 ---------- --------- --------- 3,205,060 427,060 395,820 Less: Current portion of operating line........ (124,800) (124,800) (124,800) Unamortized allocation to warrants of debenture proceeds.................... (76,000) -- -- ---------- --------- --------- $3,004,260 $ 302,260 $ 271,020 ========== ========= =========
F-79 184 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 4. LONG-TERM DEBT (CONTINUED) (a) Debentures: On September 30, 1997, the Company sold 27,500 Units, each consisting of a $100 principal amount debenture and warrants to purchase 33 Common shares of the Company. The debentures are unsecured, redeemable, convertible and due September 30, 2002 with interest at 6% payable semi-annually. The debentures are convertible at $1.50 per share. In conjunction with the debenture offering, the Company granted to the Agent, an option to purchase up to 2,751 Units at $100 per unit. During 1998, the Agent purchased all 2,751 Units and was issued debentures and warrants in accordance with the terms of the Units. The Debentures were redeemable by the Company: (i) anytime after September 30, 1999 following a period of twenty consecutive trading days during which the weighted average market price of the Common Shares equals or exceeds $3.00; or (ii) anytime following any period of twenty consecutive trading days during the weighted average market price of the Common Shares equals or exceeds $6.00. During 1997 $45,300 of debentures were converted into 30,198 common shares. In 1998, an additional $275,100 of debentures were issued to the Agent, and $2,932,360 of debentures were converted into 1,979,054 common shares and $11,800 of debentures where redeemed for cash. Unamortized debt issuance costs related to the convertible debentures were charged to share capital upon conversion of the related debentures. (b) Credit facilities: At March 31, 1999 the Company has drawn $395,820 (December 31, 1998 -- $427,060, December 31, 1997 -- $500,000) on its operating line of credit due on demand. Borrowings bear interest at the bank's prime rate plus 3%. Notwithstanding the demand feature of the facility, it is classified as long-term as monthly payments of $10,420 plus interest are required to maturity on June 30, 2002. The operating line is renewable annually, however no principal payments were required prior to January 31, 1998 providing that certain conditions were satisfied. Annual principal repayments are approximately $124,800 (December 31, 1998 -- $124,800, December 31, 1997 -- $124,800) plus accrued interest. In addition, the Company has a revolving line of credit authorized to a limit of $150,000 which bears interest at the bank's prime rate plus 2%. Both credit facilities are secured by a general security agreement and an assignment of life insurance on an officer of the Company. (c) Interest expense: Interest on long-term debt amounted to $20,566 and $7,242 for the three months ended March 31, 1998 and 1999, respectively. Interest on long-term debt amounted to $13,126, $73,912 and $168,410 for the years ended December 31, 1996, 1997 and 1998, respectively. F-80 185 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 5. SHARE CAPITAL (a) Authorized: Unlimited number of Common shares. (b) Issued and to be issued:
NUMBER AMOUNT ---------- ---------- December 31, 1995...................................... 2,737,500 $ 172,308 Share split 2:1 basis.................................. 2,737,500 -- Issued for cash, net of issue costs of $338,599........ 1,600,000 1,661,401 Issued pursuant to private placement for cash.......... 195,000 195,000 ---------- ---------- December 31, 1996...................................... 7,270,000 2,028,709 Issued on exercise of stock options.................... 173,000 216,250 Issued on conversion of debenture...................... 30,198 45,300 To be issued, net of issue costs of $48,104 (note 3)... 400,000 691,896 ---------- ---------- December 31, 1997...................................... 7,873,198 2,982,155 Issued on exercise of stock options.................... 312,000 417,990 Issued on conversion of debentures, net of costs of $406,526............................................. 1,979,054 2,561,834 Issued on exercise of warrants, net of costs of $140,211............................................. 994,493 2,843,268 Allocation to warrants of debenture proceeds........... -- 80,000 ---------- ---------- December 31, 1998...................................... 11,158,745 $8,885,247 Issued on exercise of stock options.................... 204,700 286,625 ---------- ---------- March 31, 1999......................................... 11,363,445 $9,171,872 ========== ==========
The 400,000 common shares which were to be issued at December 31, 1997, were subject to relevant regulatory approval, which was received during 1998. On January 31, 1996, the shareholders of the Company approved a two for one Common share split which became effective February 16, 1996. (c) Stock options and warrants: At December 31, the Company had issued options to employees and directors which will allow for the purchase of 755,000, 839,500 and 592,000 common shares for the years 1996, 1997 and 1998, respectively, at prices $1.25, $1.25 to $2.20 and $1.25 to $2.85 per share for the years 1996, 1997 and 1998, respectively. These options expire on various dates during 2001 and 2003. At March 31, 1999, the Company had issued 387,300 options to employees and directors exercisable at prices of $1.25 and $2.85 per share and expiring on various dates during 2001 and 2003. The Company issued 907,698 warrants in conjunction with the convertible debentures. Each warrant entitled the holder to purchase one additional Common Share at a price of $3.00 on or before September 30, 1999. The Company had the right upon 30 days written notice to redeem the warrants for $0.001 at any time following a period of 20 consecutive trading days during which the weighted average market price of the Company's common shares equaled or exceeded $4.00 per share. At December 31, F-81 186 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 5. SHARE CAPITAL (CONTINUED) 1998, 903,710 warrants had been exercised, and 3,988 warrants had been redeemed for aggregate consideration of $3.99. 6. INCOME TAXES Income tax expense differs from the amount which would be computed by applying the federal and provincial combined statutory income tax rate to income before income taxes. The reasons for the difference are as follows:
DECEMBER 31, MARCH 31, ----------------------------------- ---------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- Income tax rate...... 44.6% 44.6% 44.6% 44.6% 44.6% Computed expected tax recovery........... $(509,081) $(833,844) $(700,133) (89,290) (230,690) Unrecognized benefit of tax losses...... 509,081 833,844 700,133 89,290 230,690 --------- --------- --------- --------- --------- $ -- $ -- $ -- $ -- $ -- ========= ========= ========= ========= =========
The Company has available deductions for income tax purposes of approximately $4,400,000 at March 31, 1999 (December 31, 1998 -- $4,000,000, December 31, 1997 -- $2,400,000) consisting of SRED expenditures and operating losses. The operating losses begin expiring in 2002. The Company also estimates that it has available SRED investment tax credits to reduce future income tax payable of approximately $200,000 at March 31, 1999 (December 31, 1998 -- $175,000, (December 31, 1997 -- $100,000). The Company earned refundable SRED investment tax credits prior to becoming a public company. These credits are shown as current assets, and along with the credits above, are subject to technical and financial audit by Revenue Canada. At December 31, 1998, the refundable credits had been received. 7. COMMITMENTS (a) On December 29, 1994, the Company entered into an agreement which allowed the Company utilization of certain technology rights in exchange for a royalty commitment. On November 19, 1997, the royalty commitment was renegotiated, whereby the royalty was converted from a percentage-based royalty to a flat-fee royalty with a buy-out option, which provides the Company the right to call the buy-out option at any time (note 3) (b) The Company is committed to minimum rentals under premises leases of approximately $341,600 per year to 2002 and $231,600 per year to 2004. 8. RELATED PARTIES (a) During the periods ended March 31, 1998 and 1999 and during the years ended December 31, 1996, 1997 and 1998, the Company purchased computer equipment totalling nil, nil, $278,975, $42,820 and nil, respectively, from a shareholder. F-82 187 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 8. RELATED PARTIES (CONTINUED) (b) During the year ended December 31, 1997, interest of $15,000 was paid to two directors of the Company on account of $150,000 in promissory notes which were issued and repaid. (c) The Company leases office space from a shareholder for $3,600 per month. 9. FINANCIAL INSTRUMENTS AND MAJOR CUSTOMERS The carrying value of cash and temporary investments, accounts receivable and accounts payable approximate their fair values due to the short maturity of these instruments. The fair value of the debentures was approximately $2,141,000 at December 31, 1997. The fair value of the Company's operating line approximates its carrying value due to its variable interest rate. During 1998, two customers of the Company individually represented 49% and 48% respectively, of the Company's revenues. In 1997, five customers of the Company individually represented 24%, 21%, 20%, 17% and 10%, respectively, of the Company's revenues. During 1996, three customers of the Company individually represented 42%, 35%, and 20%, respectively, of the Company's revenues. 10. SEGMENT INFORMATION The Company's method for determining what information to report about operating segments is based on the way that management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company's chief operating decision maker is considered to be the Company's President and CEO. The President and CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the President and CEO is identical to the information presented in the accompanying Statements of Operations. Therefore, the Company operates in a single operating segment: developing and marketing computer software designed to allow data backup via a modem or network. The Company does not have significant international operations. 11. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. F-83 188 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 12. COMBINATION AGREEMENT On September 1, 1998 the Company signed a Combination Agreement (the "Agreement") with VERITAS Software Corporation (VERITAS). Consummation of the Agreement is subject to a number of conditions, including regulatory clearances in Canada and the United States, judicial clearance in Canada and formal approval by the shareholders of both companies. Under the terms of the Agreement, at the effective time the Company will issue to its shareholders, exchangeable shares which are exchangeable into common shares of VERITAS. The number of exchangeable shares to be issued to the Company's shareholders will be based on a sliding scale which is tied to an average of the VERITAS common share price for the 10 days prior to the closing of the transaction. In general terms, the total number of exchangeable shares to be issued shall equal (a) in the event that the average price is between U.S.$33.81 per share and U.S.$41.32 per share, 1,710,000 common shares of VERITAS (b) in the event that the average price is less than $33.81 per share, the number of common shares of VERITAS determined by dividing $57,808,000 (U.S.) by such average price, provided however, that, in such case, in no event shall the total exceed 1,900,000 common shares of VERITAS, (c) in the event that the average price is more than $41.32 per common share, the number of common shares of VERITAS determined by dividing $70,654,000 (U.S.) by such average price, provided however, that, in such case, in no event shall the total be less than 1,555,000 common shares of VERITAS. In the event that the Company's shareholders do not approve the terms of the Agreement, the Company shall pay to VERITAS a fee of U.S. $3 million and grant a worldwide, perpetual, royalty-free and fully-paid license to certain Company software. Also, should the Company be acquired within 12 months after the termination of the Agreement as described above a further U.S. $10 million amount becomes payable to VERITAS. In the event that the VERITAS shareholders do not approve the terms of the Agreement, VERITAS shall pay the Company a fee of U.S. $2 million and upon such payment, shall have a worldwide, perpetual, royalty-free and fully-paid license to use, modify, create derivative works of, copy and distribute certain Company software. On May 26, 1999 the shareholders of the Company voted to approve the combination agreement with VERITAS. F-84 189 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The Company's financial statements have been prepared in accordance with accounting principles generally accepted ("GAAP") in Canada which, in the case of the Company, conform in all material respects with those in the United States, except as outlined below: (a) Statement of Operations: The application of U.S. GAAP would have the effect of including in compensation expense the value of common share purchase options granted to certain officers and employees by the Company's founding shareholders, as follows:
YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------- -------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- Net loss as reported........... $(1,141,437) $(1,869,606) $(1,569,806) (200,201) (517,243) Increase in compensation expense............ -- -- 132,000 79,000 18,000 ----------- ----------- ----------- ----------- ----------- Net loss, U.S. GAAP............... $(1,141,437) $(1,869,606) $(1,701,806) (279,201) (535,243) =========== =========== =========== =========== =========== Net loss per share U.S. GAAP.......... $ (0.18) $ (0.25) $ (0.18) (0.03) (0.05) =========== =========== =========== =========== ===========
The Company retroactively adopted SOP 97-2 (see note 1(a)) for Canadian GAAP purposes in the third quarter of 1998. For US GAAP purposes SOP 97-2 requires prospective adoption beginning in the Company's first quarter of 1998. In the case of the Company's 1996 and 1997 revenue as recorded in accordance with Canadian GAAP, the application of SOP 97-2 would not have had any effect. As a result the Company's revenues as recorded in the Statement of Operations are the same under both Canadian an US GAAP. (b) Balance Sheet: The application of U.S. GAAP would have the following effect on the Balance Sheet as at December 31, 1997 from reclassifying shares issued which required regulatory approval from share- F-85 190 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) holders' deficit to liabilities. At December 31, 1998 the application of U.S. GAAP would not have an effect on assets or on the Balance Sheet captions presented below.
DECEMBER 31, 1997 --------------------------------------- INCREASE AS REPORTED (DECREASE) U.S. GAAP ----------- ---------- ---------- Liabilities................................ $3,271,808 $ 740,000 $4,011,808 Shareholders' deficiency................... (1,641) (740,000) (741,641)
In addition, under Canadian GAAP, at March 31, 1999 the Company classified $271,020 (December 31, 1998 -- $302,260, December 31, 1997 -- $375,200) of a demand loan as a long-term liability because that portion of the scheduled installment payments are due beyond one year. Under U.S. GAAP, the entire note would be considered a current liability. (c) Statement of Changes in Financial Position: The application of U.S. GAAP would have the effect of eliminating non-cash items and excluding restricted cash from the definition of cash as follows:
DECEMBER 31, MARCH 31, ------------------------------ --------------- 1996 1997 1998 1998 1999 ---- --------- ----------- -------- ---- Investing: Net additions of capital assets acquired with shares............ $-- $ 740,000 $ -- $ -- $-- Restricted cash.................... -- (124,123) 124,123 -- -- Financing: Issue of shares for non-cash consideration and non-cash charges......................... -- (785,300) (2,561,834) (163,265) -- Conversion of debentures........... -- 45,300 2,932,360 163,265 Debt issue costs................... -- -- (370,526) -- -- == ========= =========== ======== ==
F-86 191 TELEBACKUP SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (AMOUNTS IN CANADIAN DOLLARS) 13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED) The Statement of Changes in Financial Position major categories would be presented under U.S. GAAP as follows:
DECEMBER 31, MARCH 31, -------------------------------------- ----------------------- 1996 1997 1998 1998 1999 ----------- ----------- ---------- ---------- ---------- Operating activities.......... $(1,134,765) $(2,040,238) $1,650,010 $ (658,952) $ (971,732) Investing activities.......... (183,636) (271,712) (226,457) (12,979) (87,680) Financing activities.......... 2,206,401 2,623,275 3,491,618 99,674 255,385 ----------- ----------- ---------- ---------- ---------- 888,000 311,325 4,915,171 (572,257) (804,027) Cash position at beginning of year... 37,128 925,128 1,236,453 1,360,576 6,151,624 ----------- ----------- ---------- ---------- ---------- Cash position at end of year............. $ 925,128 $ 1,236,453 $6,151,624 $ 788,319 $5,347,597 =========== =========== ========== ========== ==========
(d) Comprehensive income (loss): In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods to be provided for comparative purposes. The Company adopted SFAS No. 130 on January 1, 1998, however, no incremental disclosures are required as the Company does not have any elements of comprehensive income (loss) except for the net loss reported in the Statements of Operations. F-87 192 [VERITAS LOGO] 193 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses to be paid by the Registrant in connection with this offering are as follows. All amounts other than the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee are estimates. Securities and Exchange Commission registration fee......... $220,593 NASD filing fee............................................. 30,500 Printing and engraving expenses............................. 400,000* Legal fees and expenses..................................... 200,000* Blue Sky.................................................... 10,000* Accounting fees and expenses................................ 50,000* Transfer agent and registrar fees and expenses.............. 66,000* Miscellaneous............................................... 2,907* -------- Total..................................................... $980,000* ========
- ------------------------- * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's restated certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases) or (iv) for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the bylaws of the Registrant provide that (i) the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, (ii) the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law, (iii) the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions and (iv) the rights conferred in the bylaws are not exclusive. The indemnification provisions in the bylaws and the indemnification agreements to be entered into between the Registrant and its officers and directors, may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities arising under the Securities Act. The Registrant intends to enter into indemnification agreements with each of its current directors and executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's restated certificate of incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer II-1 194 or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. The NSMG combination agreement and the TeleBackup combination agreement contain covenants on the part of the Registrant to maintain indemnification provisions in the charter documents of the surviving corporation of the NSMG combination and the TeleBackup combination which are identical to such provisions contained in the charter documents of VERITAS prior to the combinations. Registrant shall also honor, in all respects, all of the indemnity agreements entered into prior to the combinations, with VERITAS officers and directors, whether or not such persons continue in their positions with Registrant following the effective time. In addition, pursuant to the NSMG combination agreement, Registrant must use its commercially reasonable efforts to maintain director and officer liability insurance with coverages, which are similar to the coverages VERITAS maintained prior to the combinations for a period from and after the effective time until at least six years after the effective time. These covenants are contained in the NSMG combination agreement attached as Appendix A to the Registration Statement on Form S-4, as amended, filed with the Commission on April 21, 1999 under the heading "Indemnification and Insurance -- VERITAS" and in the TeleBackup combination agreement attached as Appendix G to the Registration Statement on Form S-4 (Reg. No. 333-76531), as amended, filed with the Commission on April 21, 1999 under the heading "Indemnification." ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Not Applicable. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits The following exhibits are filed herewith or incorporated by reference herein:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01+ Form of Underwriting Agreement 2.01 Amended and Restated Agreement and Plan of Reorganization among Registrant, VERITAS Software Corporation ("Old VERITAS"), Seagate Technology, Inc., Seagate Software, Inc. ("Seagate Software") and Seagate Software NSMG (incorporated by reference to Exhibit 2.01 of the Registrant's Registration Statement on Form S-4, as amended, filed with the SEC on April 19, 1999 (the "April 1999 Form S-4")) 2.02 Amended and Restated Combination Agreement by and among Old VERITAS and TeleBackup Systems Inc. ("TeleBackup") incorporated by reference to the April 21, 1999 Form S-4 3.01 Amended and Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.01 of the Registrant's Registration Statement on Form 8-A as amended, filed with the SEC on June 2, 1999) (the "June 1999 Form 8-A") 3.02 Amendment to the Amended and Restated Certification of Registrant (incorporated by reference to Exhibit 3.02 of the June 1999 Form 8-A) 3.03 Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.03 of the June 1999 Form 8-A) 4.01 Registration Rights Agreement between Old VERITAS and Warburg, Pincus Investors, L.P. dated April 25, 1997 (incorporated by reference to Exhibit 4.01 of Old VERITAS' Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q")) 4.02 Nomination Agreement between Old VERITAS and Warburg, Pincus Investors, L.P. dated April 25, 1997 (incorporated by reference to Exhibit 4.02 to the June 1997 Form 10-Q).
II-2 195
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 4.03 Indenture dated as of October 1, 1997 between Old VERITAS and State Street Bank and Trust Company of California, N.A. (incorporated by reference to Exhibit 4.06 of Old VERITAS' Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (the "September 1997 Form 10-Q")) 4.04 Amended and Restated First Supplemental Indenture dated July 30, 1999 by and among VERITAS, Old VERITAS and State Street Bank and Trust of California, N.A. 4.05 Registration Rights Agreement dated as of October 1, 1997 between Old VERITAS and UBS Securities LLC (incorporated by reference to Exhibit 4.07 to the September 1997 Form 10-Q) 4.06 Form of Rights Agreement between Registrant and the Right 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 Right Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 4.06 of the April 1999 Form S-4 4.07 Form of Registration Rights Agreement between Registrant and Seagate Software (incorporated by reference to Exhibit 4.07 of the April 1999 Form S-4 4.08 Form of Stockholder Agreement between Registrant, VERITAS, Seagate Software and Seagate Technology (incorporated by reference to Exhibit 4.08 of the April 1999 Form S-4 4.09 Form of Specimen Stock Certificate (incorporated by reference to Exhibit 4.01 of Old VERITAS' Registration Statement on Form S-1 (File No. 33-70726) dated October 22, 1993, as amended) 5.01 Opinion of Fenwick & West LLP 9.01 Form of Voting, Support and Exchange Trust Agreement by and among the Registrant, Old VERITAS, TeleBackup and Montreal Trust Company of Canada (incorporated by reference to Exhibit 9.01 of the Registrant's April 1999 Form S-4) 10.01* Development and License Agreement between Seagate Technology, Inc. and the Registrant (incorporated by reference to Exhibit 10.01 of the April 1999 Form S-4 10.02* Cross License Agreement and OEM Agreement between Seagate Software Information Management Group, Inc. and the Registrant (incorporated by reference to Exhibit 10.02 of the April 1999 Form S-4 10.03 VERITAS 1993 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.03 of the April 1999 Form S-4). 10.04 VERITAS 1993 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.04 of the April 1999 Form S-4) 10.05 VERITAS 1993 Directors Stock Option Plan, as amended (incorporated by reference to Exhibit 10.04 to VERITAS' Registration Statement on Form S-4 filed with the SEC on March 24, 1997 (the "March 1997 Form S-4")) 10.06 OpenVision Technologies, Inc. 1996 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.19 to the March 1997 Form S-4) 10.07 Office building sublease dated February 27, 1998, by and between VERITAS and Space Systems/Loral, Inc. (incorporated by reference to Exhibit 10.14 of VERITAS' Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (the "September 1998 Form 10-Q")) 10.08 Office building lease dated April 30, 1998, by and between VERITAS and Ryan Companies US, Inc. (incorporated by reference to Exhibit 10.15 of the September 1998 Form 10-Q)
II-3 196
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 10.09 VERITAS' 1997 Chief Executive Officer Compensation Plan (incorporated by reference to Exhibit 10.05 of VERITAS' Annual Report on Form 10-K for the year ended December 31, 1997 filed with the SEC on March 2, 1998 (the "1997 Form 10-K")) 10.10 VERITAS' 1997 Executive Officer Compensation Plan (incorporated by reference to Exhibit 10.06 of the 1997 Form 10-K) 10.11 Form of Key Employee Agreement (incorporated by reference to Exhibit 10.11 of the April 1999 Form S-4) 10.12 Office Building Lease, dated September 2, 1994, as amended, by and between VERITAS and John Arriliaga and Richard T. Peery regarding property located in Mountain View, California (incorporated by reference to Exhibit 10.09 of the VERITAS' Annual Report on Form 10-K for the year ended December 31, 1994 filed with the SEC on March 29, 1995) 10.13 Amendment No 1. to Office Building Lease dated May 28, 1997 by and between VERITAS and John Arriliaga and Richard T. Perry (incorporated by reference to Exhibit 10.12 of the 1997 Form 10-K) 10.14 Agreement dated November 7, 1996 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 (incorporated by reference to Exhibit 10.12 to the March 1997 Form S-4) 10.16 Amendment No. 1 to Cross-License and OEM Agreement between Seagate Software Information Management Group, Inc. and the Registrant (incorporated by reference to Exhibit 10.16 of the April 1999 Form S-4) 10.17 Participation Agreement dated April 23, 1999 by and between OLD VERITAS, First Security Bank, National Association as "Owner Trustee", various banks and other lending institutions which are parties thereto from time to time as "Holders", various banks and other lending institutions which are parties thereto from time to time as "Lenders", NationsBank, N.A. as "Agent" for the Lenders and the Holders, and various parties thereto from time to time as "Guarantors". 10.18 Reserved 10.19 Reserved 10.20 Grant Deed dated April 23, 1999 recording grant of real property to First Security Bank, National Association as "Owner Trustee" by Fairchild Semiconductor Corporation of California. 10.21 Memorandum of Lease Agreement and Lease Supplement No. 1 and Deed of Trust dated April 23, 1999 among OLD VERITAS, First Security Bank, National Association and Chicago Title Company. 10.22 Memorandum of Lease Agreement and Lease Supplement No. 2 and Deed of Trust dated April 23, 1999 among OLD VERITAS, First Security Bank, National Association and Chicago Title Company. 10.23 Collateral Assignment of Sublease dated April 23, 1999 made by OLD VERITAS to First Security Bank, National Association. 10.24 Sublease Agreement dated April 23, 1999 by and between OLD VERITAS and Fairchild Semiconductor Corporation of California. 10.25 Certificate re: Representations and Warranties dated April 20, 199 by Fairchild Semiconductor Corporation of California and addressed to OLD VERITAS. 10.26 Security Agreement dated April 23, 1999 between First Security Bank, National Bank as "Owner Trustee" and NationsBank, N.A. as Agent for the "Lenders" and the "Holders".
II-4 197
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 10.27 Form of Agreement of Purchase and Sale by and between Fairchild Semiconductor Corporation of California and OLD VERITAS. 10.28 First Amendment dated April 14, 1999 and Agreement of Purchase and Sale dated March 29, 1999 by and between Fairchild Semiconductor Corporation of California and OLD VERITAS. 10.29 Agency Agreement between OLD VERITAS and First Security Bank, National Association as "Owner Trustee". 10.30 Master Lease Agreement dated April 23, 1999 between First Security Bank, National Association and OLD VERITAS. 21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.01 of the April 1999 Form S-4) 23.01 Consent of Ernst & Young LLP, Independent Auditors 23.02 Consent of Ernst & Young LLP, Independent Auditors 23.03 Consent of Independent Accountants 23.04 Consent of Fenwick & West LLP (included in Exhibit 5.01) 24.01++ Power of Attorney
- ------------------------- * Confidential treatment has been granted with respect to certain portions of this document. + To be filed by amendment. ++ Previously filed. (b) 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 Registration Statement: - Schedule II -- Valuation and Qualifying Accounts 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 financial statements or the notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 198 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 199 SIGNATURES Pursuant to the requirements of the Securities Act, VERITAS Software Corporation has duly caused this Amendment to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Mountain View, County of Santa Clara, State of California, on the 6th day of August, 1999. VERITAS SOFTWARE CORPORATION By: /s/ MARK LESLIE ------------------------------------ Mark Leslie Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- PRINCIPAL EXECUTIVE OFFICER: /s/ MARK LESLIE Chief Executive Officer and August 6, 1999 - ----------------------------------------------------- Chairman of the Board Mark Leslie PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ KENNETH LONCHAR* Senior Vice President, August 6, 1999 - ----------------------------------------------------- Finance Kenneth Lonchar and Chief Financial Officer
II-7 200
SIGNATURE TITLE DATE --------- ----- ---- ADDITIONAL DIRECTORS: /s/ FRED VAN DEN BOSCH* Director August 6, 1999 - ----------------------------------------------------- Fred van den Bosch /s/ STEVEN BROOKS* Director August 6, 1999 - ----------------------------------------------------- Steven Brooks /s/ TERRENCE R. CUNNINGHAM* Director August 6, 1999 - ----------------------------------------------------- Terrence R. Cunningham /s/ WILLIAM H. JANEWAY* Director August 6, 1999 - ----------------------------------------------------- William H. Janeway /s/ GREGORY B. KERFOOT* Director August 6, 1999 - ----------------------------------------------------- Gregory B. Kerfoot /s/ STEPHEN J. LUCZO* Director August 6, 1999 - ----------------------------------------------------- Stephen J. Luczo /s/ JOSEPH D. RIZZI* Director August 6, 1999 - ----------------------------------------------------- Joseph D. Rizzi /s/ GEOFFREY W. SQUIRE* Director August 6, 1999 - ----------------------------------------------------- Geoffrey W. Squire *By: /s/ MARK LESLIE ------------------------------------------------ Mark Leslie Attorney-In-Fact
II-8 201 VERITAS SOFTWARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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. S-1 202 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01+ Form of Underwriting Agreement 4.04 Amended and Restated First Supplemental Indenture dated July 30, 1999 by and among VERITAS, Old VERITAS and State Street Bank and Trust of California, N.A. 5.01 Opinion of Fenwick & West LLP 10.17 Participation Agreement dated April 23, 1999 by and between OLD VERITAS, First Security Bank, National Association as "Owner Trustee", various banks and other lending institutions which are parties thereto from time to time as "Holders", various banks and other lending institutions which are parties thereto from time to time as "Lenders", NationsBank, N.A. as "Agent" for the Lenders and the Holders, and various parties thereto from time to time as "Guarantors". 10.18 Reserved 10.19 Reserved 10.20 Grant Deed dated April 23, 1999 recording grant of real property to First Security Bank, National Association as "Owner Trustee" by Fairchild Semiconductor Corporation of California. 10.21 Memorandum of Lease Agreement and Lease Supplement No. 1 and Deed of Trust dated April 23, 1999 among OLD VERITAS, First Security Bank, National Association and Chicago Title Company. 10.22 Memorandum of Lease Agreement and Lease Supplement No. 2 and Deed of Trust dated April 23, 1999 among OLD VERITAS, First Security Bank, National Association and Chicago Title Company. 10.23 Collateral Assignment of Sublease dated April 23, 1999 made by OLD VERITAS to First Security Bank, National Association. 10.24 Sublease Agreement dated April 23, 1999 by and between OLD VERITAS and Fairchild Semiconductor Corporation of California. 10.25 Certificate re: Representations and Warranties dated April 20, 199 by Fairchild Semiconductor Corporation of California and addressed to OLD VERITAS. 10.26 Security Agreement dated April 23, 1999 between First Security Bank, National Bank as "Owner Trustee" and NationsBank, N.A. as Agent for the "Lenders" and the "Holders". 10.27 Form of Agreement of Purchase and Sale by and between Fairchild Semiconductor Corporation of California and OLD VERITAS. 10.28 First Amendment dated April 14, 1999 and Agreement of Purchase and Sale dated March 29, 1999 by and between Fairchild Semiconductor Corporation of California and OLD VERITAS. 10.29 Agency Agreement between OLD VERITAS and First Security Bank, National Association as "Owner Trustee". 10.30 Master Lease Agreement dated April 23, 1999 between First Security Bank, National Association and OLD VERITAS. 23.01 Consent of Ernst & Young LLP, Independent Auditors 23.02 Consent of Ernst & Young LLP, Independent Auditors 23.03 Consent of Independent Accountants 23.04 Consent of Fenwick & West LLP (included in Exhibit 5.01)
- ------------------------ + To be filed by amendment. EX-4.04 2 AMENDED AND RESTATED FIRST SUPPLEMENTAL INDENTURE 1 Exhibit 4.04 VERITAS SOFTWARE CORPORATION AS ISSUER VERITAS OPERATING CORPORATION AS ISSUER STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A. AS TRUSTEE ----------------- AMENDED AND RESTATED FIRST SUPPLEMENTAL INDENTURE Dated as of July 30, 1999 ----------------- 5 1/4 % Convertible Subordinated Notes due 2004 2 AMENDED AND RESTATED FIRST SUPPLEMENTAL INDENTURE, dated as of July 30, 1999 (the "Restated First Supplemental Indenture"), between VERITAS Operating Corporation, a Delaware corporation (VERITAS Operating Corporation and its successors herein referred to as the "Company"), as co-issuer, VERITAS Software Corporation, a Delaware corporation (VERITAS Software Corporation and its successors herein referred to as "New VERITAS"), as co-issuer, (the Company and New VERITAS, collectively referred to herein as the "Issuers") and State Street Bank and Trust Company of California, N.A., as Trustee (the "Trustee"). RECITALS WHEREAS, the Company and the Trustee are parties to an Indenture, dated as of October 1, 1997 (the "Indenture"), relating to the Company's 5 1/4% Convertible Subordinated Notes due 2004 (the "Securities"). WHEREAS, the Company entered into an Amended and Restated Agreement and Plan of Reorganization dated as of April 15, 1999 (the "Combination Agreement") among the Company, New VERITAS, Seagate Technology, Inc., Seagate Software, Inc., and Seagate Software Network & Storage Management Group, Inc. Pursuant to the Combination Agreement, the Company merged with and into a wholly-owned subsidiary of New VERITAS with the Company as the surviving entity (the "Merger"). Simultaneously with the Merger, the Company, which was formerly named VERITAS Software Corporation, changed its name to VERITAS Operating Corporation and New VERITAS, which was initially named VERITAS Holding Corporation, changed its name to VERITAS Software Corporation. WHEREAS, Section 14.3 of the Indenture provides that in the case of a merger or transfer of substantially all the assets of the Company, the Company and the Person resulting from such merger or which acquires the properties or assets of the Company shall execute and deliver to the Trustee a supplemental indenture modifying the provisions of the Indenture. WHEREAS, the Company desired to amend the Indenture to add New VERITAS as an additional obligor under the Indenture and the Securities on a joint and several basis with the Company and to provide that the Securities are convertible into the common stock of New VERITAS. WHEREAS, New VERITAS desired to assume all of the obligations of the Company under the Indenture and the Securities on a joint and several basis. WHEREAS, the Company, New VERITAS and the Trustee entered into a First Supplemental Indenture dated as of May 28, 1999 (the "First Supplemental Indenture") with respect to the assumption by New VERITAS of the obligations under the Indenture and the Securities, and providing that the Securities are convertible into common stock of New VERITAS. 3 WHEREAS, the First Supplemental Indenture provides that New VERITAS "may exercise every right and power of the Company under the Indenture." WHEREAS, New VERITAS and the Company desire to amend and restate the First Supplemental Indenture to clarify and confirm that New VERITAS' obligations under the Indenture and the Securities are subordinate in right of payment to senior indebtedness of New VERITAS. WHEREAS, all conditions and requirements necessary to make this Restated First Supplemental Indenture a valid, binding and legal instrument in accordance with the terms of the Indenture have been performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized. WHEREAS, in accordance with the terms of the Indenture, the Company and New VERITAS have requested that the Trustee execute and deliver this Restated First Supplemental Indenture and have delivered to the Trustee copies of their respective Board Resolutions authorizing the execution of this Restated First Supplemental Indenture. NOW, THEREFORE, in consideration of the above premises, each party agrees, for the benefit of the other and for the equal and ratable benefit of the Holders of the Securities, as follows: I. EFFECTIVENESS 1.1 Effectiveness of Restated First Supplemental Indenture. This Restated First Supplemental Indenture will be effective upon execution by all parties hereto. Upon effectiveness of this Restated First Supplemental Indenture, the First Supplemental Indenture shall be amended and restated in its entirety hereby. II. ASSUMPTION OF OBLIGATIONS 2.1 Assumption. New VERITAS hereby unconditionally assumes joint and several liability for all of the obligations of the Company under the Indenture and the Securities, including the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the principal of, premium, if any, and interest on the Securities according to the terms of the Securities and as more fully described in the Indenture. Notwithstanding the foregoing, the Company shall remain obligated under the Indenture and the Securities, in accordance with the terms of the Indenture. New VERITAS shall be added as a co-obligor of the Indenture and may exercise every right and power of the Company under the Indenture, and the Company and New VERITAS shall be jointly and severally responsible for all obligations and covenants under the Indenture and the Securities. 2 4 2.2 Subordination. (a) The obligations of New VERITAS under Section 2.1 hereof shall be subordinate and junior in right of payment to the New VERITAS Senior Indebtedness (as defined in Section 2.2(b) hereof) to the same extent and in the same manner that the Securities are subordinate and junior in right of payment to the Senior Indebtedness of the Company pursuant to Article Thirteen of the Indenture. (b) As used herein, "New VERITAS Senior Indebtedness" means the principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in such proceeding) and rent payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or connection with, Indebtedness of New VERITAS, whether outstanding on the date hereof or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by New VERITAS (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to, the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Securities or expressly provides that such Indebtedness is "pari passu" or "junior" to the Securities. Notwithstanding the foregoing, New VERITAS Senior Indebtedness shall not include any Indebtedness of New VERITAS to any subsidiary of New VERITAS. III. AMENDMENTS The Indenture is hereby amended as follows: 3.1 Title Paragraph. In the first paragraph of the Indenture on page 1 thereof the following amendments are hereby made: (a) after the phrase "dated as of October 1, 1997" therein the phrase ",as amended and supplemented" is hereby added thereto. (b) after the phrase "(herein called the "Company")," therein the phrase "VERITAS Holding Corporation (VERITAS Holding Corporation and its successors herein called "New VERITAS")" is hereby added thereto. 3.2 Definitions. The following amendments are hereby made to Section 1.1 of the Indenture: (a) the definition of "Common Stock" is replaced in its entirety by the following: "Common Stock" includes any stock or shares of any class of New VERITAS which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, 3 5 dissolution or winding up of New VERITAS and which is not subject to redemption by New VERITAS; provided, however, subject to the provisions of Section 12.11, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of New VERITAS at the date of the First Supplemental Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of New VERITAS and which are not subject to redemption by New VERITAS; provided, further, however, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. (b) the definition of "Fundamental Change" is replaced in its entirety by the following: "Fundamental Change" means the occurrence of any transaction or event in connection with which all or substantially all of the Common Stock of New VERITAS shall be exchanged for, converted into, acquired for or constitute solely the right to receive, consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock or shares which are (or, upon consummation of or immediately following such transaction or event, will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices. 3.3 Securities Convertible into New VERITAS Common Stock. (a) The words "Common Stock of the Company" are hereby deleted and replaced with the words "Common Stock of New VERITAS" in Article Twelve and elsewhere in the Indenture. (b) The first paragraph of Section 12.11 of the Indenture is hereby amended and restated in its entirety as follows: If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock of New VERITAS (other than a subdivision or combination to which Section 12.4(3) applies), (ii) any consolidation, merger or combination of New VERITAS with another corporation as a result of which holders of Common Stock of New VERITAS 4 6 shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of New VERITAS as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock of New VERITAS shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then New VERITAS, or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that such Security shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock of New VERITAS issuable upon conversion of such Securities (assuming, for such purposes, a sufficient number of authorized shares of Common Stock of New VERITAS available to convert all such Securities) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock of New VERITAS is (i) not a Person with which New VERITAS consolidated or into which New VERITAS merged or which merged into New VERITAS or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person, and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock of New VERITAS in respect of which such rights of election shall not have been exercised ("Non-electing Share")), then for the purposes of this Section 12.11 the kind and amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares. Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 12.11 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales or conveyances. Notice of the execution of such a supplemental indenture shall be given by New VERITAS to the Holder of each Security as provided in Section 1.6 promptly upon such execution. 5 7 (c) In the second paragraph of Section 12.11, in Sections 12.2 through 12.9, and in Section 12.12 of the Indenture, the words "the Company" are hereby deleted and replaced with the words "New VERITAS". 3.4 Amendment to Section 14 of the Indenture. In Sections 14.1 and 14.2 of the Indenture relating to the rights of Holders to cause the Company to repurchase the Securities following a Fundamental Change, references to "the Company" are hereby deleted in their entirety and replaced with references to "New VERITAS" and references to "the Company Notice" are hereby deleted and replaced in their entirety and replaced with "the New VERITAS Notice". IV. NOTIFICATION TO HOLDERS 4.1 Notice to Holders of Securities. The Company shall notify the Holders in accordance with Section 8.6 of the Indenture of the execution of this Restated First Supplemental Indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of this Restated First Supplemental Indenture. V. MISCELLANEOUS PROVISIONS 5.1 Incorporation of Indenture. All the provisions of this Restated First Supplemental Indenture shall be deemed to be incorporated in, and made a part of, the Indenture; and the Indenture, as supplemented and amended by this Restated First Supplemental Indenture, shall be read, taken and construed as one and the same instrument. 5.2 Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Restated First Supplemental Indenture by any of the provisions of the Trust Indenture Act, the required provision shall control. 5.3 Terms Defined. For all purposes of this Restated First Supplemental Indenture, except as otherwise defined herein, capitalized terms used in this Restated First Supplemental Indenture shall have the meanings ascribed to such terms in the Indenture. 5.4 Indenture. Except as amended hereby, the Indenture and the Securities are in all respects ratified and confirmed and all their terms shall remain in full force and effect. From and after the effectiveness of this Restated First Supplemental Indenture, any reference to the Indenture or the Securities shall mean the Indenture or the Securities, as the case may be, as so amended by this Restated First Supplemental Indenture. 5.5 Governing Law. The internal laws of the State of New York shall govern this Restated First Supplemental Indenture, without regard to the principles of the conflicts of law thereof. 6 8 5.6 Successors. All agreements of the Company and New VERITAS in this Restated First Supplemental Indenture and the Securities shall bind its successors and assigns. This Restated First Supplemental Indenture shall be binding upon each Holder of Securities and their respective successors and assigns. 5.7 Multiple Counterparts. The parties may sign multiple counterparts of this Restated First Supplemental Indenture. Each signed counterpart shall be deemed an original, but all of them together represent the same agreement. 5.8 Effectiveness. In accordance with Sections 8.1 and 8.3 of the Indenture, the Company and New VERITAS shall have delivered Board Resolutions authorizing the execution of this Restated First Supplemental Indenture, Officers' Certificates and an Opinion of Counsel to the Trustee as conclusive evidence that this Restated First Supplemental Indenture complies with the applicable requirements of the Indenture and that all of the conditions precedent to the effectiveness of this Restated First Supplemental Indenture have been satisfied. 5.9 Trustee Disclaimer. The Trustee accepts the amendment of the Indenture and the Securities effected by this Restated First Supplemental Indenture and agrees to execute the trust created by the Indenture as hereby amended, but only upon the terms and conditions set forth in the Indenture, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities and responsibilities in the performance of the trust created by the Indenture as hereby amended. Without limiting the generality of the foregoing, the Trustee shall not be responsible in any manner whatsoever for or with respect to any of the recitals or statements contained herein, all of which recitals or statements are made solely by the Company and New VERITAS, or for or with respect to (i) the validity, efficacy or sufficiency of this Restated First Supplemental Indenture or any of the terms or provisions hereof, (ii) the proper authorization hereof by the Company and New VERITAS by corporate action or otherwise, (iii) the due execution hereof by the Company and New VERITAS or (iv) the consequences (direct or indirect and whether deliberate or inadvertent) of any amendment herein provided for, and the Trustee makes no representation with respect to any such matters. 5.10 Separability Clause. In case any clause of this Restated First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 7 9 V. SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated First Supplemental Indenture to be duly executed, all as of the date first written above. VERITAS OPERATING CORPORATION, as Issuer By: /s/ MARK LESLIE ------------------------------ Name: Mark Leslie ------------------------------ Title: Chief Executive Officer ------------------------------ VERITAS SOFTWARE CORPORATION, as Issuer By: /s/ MARK LESLIE ------------------------------ Name: Mark Leslie ------------------------------ Title: Chief Executive Officer ------------------------------ STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: ------------------------------ Name: ------------------------------ Title: ------------------------------ [SIGNATURE PAGE TO AMENDED AND RESTATED FIRST SUPPLEMENTAL INDENTURE] 8 10 V. SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated First Supplemental Indenture to be duly executed, all as of the date first written above. VERITAS OPERATING CORPORATION, as Issuer By: ------------------------------ Name: ------------------------------ Title: ------------------------------ VERITAS SOFTWARE CORPORATION, as Issuer By: ------------------------------ Name: ------------------------------ Title: ------------------------------ STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By: /s/ JONI D'AMICO ------------------------------ Name: Joni D'Amico ------------------------------ Title: Vice President ------------------------------ [SIGNATURE PAGE TO AMENDED AND RESTATED FIRST SUPPLEMENTAL INDENTURE] 9 EX-5.01 3 OPINION OF FENWICK & WEST LLP 1 EXHIBIT 5.01 [LETTERHEAD OF FENWICK & WEST LLP] August 5, 1999 VERITAS Software Corporation 1600 Plymouth Street Mountain View, CA 94043 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 (File Number 333-83777) (the "REGISTRATION STATEMENT") filed by you with the Securities and Exchange Commission (the "COMMISSION") on or about July 27, 1999 in connection with the registration under the Securities Act of 1933, as amended, of the offer and sale of an aggregate of 12,000,000 shares of your Common Stock (the "STOCK") which shares of Stock are presently issued and outstanding and will be sold by certain selling stockholders named in the Registration Statement. In rendering this opinion, we have examined the following: (1) your registration statement on Form S-1 (File Number 333-80851), as amended, filed with the Commission on June 17, 1999, together with the Exhibits filed as a part thereof; (2) your registration statement on Form S-4, as amended (File Number 333-76531) filed with the Commission on April 19, 1999, together with the Exhibits filed as a part thereof; (3) your registration statement on Form 8-A (File Number 000-26247), as amended, filed with the Commission on June 2, 1999; (4) the Registration Statement, together with the Exhibits filed as a part thereof and the Exhibits incoporated therein by reference; (5) the Prospectuses prepared in connection with the Registration Statement; (6) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in your minute books and the minute books of your predecessor, VERITAS Operating Corporation, a Delaware corporation ("VOC"), that are in our possession; 2 August 5, 1999 Page 2 (7) the stock records that you have provided to us (consisting of a certificate from your transfer agent dated August 4, 1999 verifying the number of your issued and outstanding shares of capital stock as of August 3, 1999 and a list of option and warrant holders respecting your capital and of any rights to purchase capital stock that was prepared by you and dated August 4, 1999 verifying the number of such issued and outstanding securities); and (8) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all natural persons executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof. As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from records referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; however, we are not aware of any facts that would cause us to believe that the opinion expressed herein is not accurate. We are admitted to practice law in the State of California, and we express no opinion herein with respect to the application or effect of the laws of any jurisdiction other than the existing laws of the United States of America and the State of California and (without reference to case law or secondary sources) the existing Delaware General Corporation Law. In connection with our opinion expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, that the registration will apply to such shares of Stock and will not have been modified or rescinded and that there will not have occurred any change in law affecting the validity or enforceability of such shares of Stock. Based upon the foregoing, it is our opinion that the 12,000,000 shares of Stock to be sold by the Selling Stockholders, when issued in accordance with and in the manner referred to in the relevant Prospectus associated with the Registration Statement and when evidenced by 3 August 5, 1999 Page 3 appropriate certificates that have been properly executed and delivered, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. This opinion is intended solely for the your use as an exhibit to the Registration Statement for the purpose of the above sale of the Stock and is not to be relied upon for any other purpose. Very truly yours, FENWICK & WEST LLP By: /s/ HORACE L. NASH -------------------------------------- Horace L. Nash, a Partner EX-10.17 4 PARTICIPATION AGREEMENT DATED APRIL 23, 1999 1 EXHIBIT 10.17 - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT Dated as of April 23, 1999 among THE VARIOUS PARTIES HERETO FROM TIME TO TIME, as the Guarantors, VERITAS SOFTWARE CORPORATION as the Construction Agent and as the Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Holders, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Lenders, and NATIONSBANK, N.A., as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and the Holders, to the extent of their interests - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page ---- SECTION 1A. SINGLE PROPERTY................................................ 1 SECTION 1. THE LOANS....................................................... 1 SECTION 2. HOLDER ADVANCES................................................. 2 SECTION 3. SUMMARY OF TRANSACTIONS......................................... 2 3.1. Operative Agreements............................................. 2 3.2. Property Purchase................................................ 2 3.3. Construction of Improvements; Commencement of Basic Rent......... 3 3.4. Ratable Interests of the Lenders................................. 3 SECTION 4. THE CLOSINGS.................................................... 3 4.1. Initial Closing Date............................................. 3 4.2. Initial Closing Date; Property Closing Dates; Acquisition Advances; Construction Advances................................ 3 SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT; REPORTING REQUIREMENTS ON COMPLETION DATE; THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS...................................................... 4 5.1. General.......................................................... 4 5.2. Procedures for Funding........................................... 4 5.3. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders Relating to the Initial Closing Date and the Advance of Funds for the Acquisition of a Property............. 7 5.4. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders Relating to the Advance of Funds after the Acquisition Advance........................................ 11 5.5. Additional Reporting and Delivery Requirements on Completion Date and on Construction Period Termination Date............... 13 5.6. The Construction Agent Delivery of Construction Budget Modifications.................................................. 14 5.7. Restrictions on Liens............................................ 14 5.8. Payments......................................................... 14 5.9. Unilateral Right to Increase the Holder Commitments and the Lender Commitments............................................. 15 5.10. Joinder Agreement Requirements.................................. 15 5.11. Property Cost as of the Rent Commencement Date.................. 15 SECTION 6. REPRESENTATIONS AND WARRANTIES.................................. 16 6.1. Representations and Warranties of the Borrower................... 16 6.2. Representations and Warranties of the Credit Parties............. 18 SECTION 6B. GUARANTY....................................................... 23 6B.1. Guaranty of Payment and Performance............................. 23 6B.2. Obligations Unconditional....................................... 24 6B.3. Modifications................................................... 25 6B.4. Waiver of Rights................................................ 25 6B.5. Reinstatement................................................... 26 6B.6. Remedies........................................................ 26 6B.7. Limitation of Guaranty.......................................... 26 6B.8. Payment of Amounts to the Agent................................. 26 3 SECTION 7. PAYMENT OF CERTAIN EXPENSES...................................... 27 7.1. Transaction Expenses.............................................. 27 7.2. Brokers' Fees..................................................... 28 7.3. Certain Fees and Expenses......................................... 28 7.4. Commitment Fee.................................................... 29 SECTION 8. OTHER COVENANTS AND AGREEMENTS................................... 29 8.1. Cooperation with the Construction Agent or the Lessee............. 29 8.2. Covenants of the Owner Trustee and the Holders.................... 29 8.3. Credit Party Covenants, Consent and Acknowledgment................ 31 8.3A. Affirmative Covenants............................................ 35 8.3B. Negative Covenants............................................... 40 8.4. Sharing of Certain Payments....................................... 44 8.5. Grant of Easements, etc. ......................................... 45 8.6. Appointment by the Agent, the Lenders, the Holders and the Owner Trustee..................................................... 45 8.7. Collection and Allocation of Payments and Other Amounts........... 46 8.8. Release of Properties, etc. ...................................... 49 SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT............................. 49 9.1. The Construction Agent's and the Lessee's Credit Agreement Rights.................................................. 49 9.2. The Construction Agent's and the Lessee's Trust Agreement Rights.................................................. 50 SECTION 10. TRANSFER OF INTEREST............................................ 51 10.1. Restrictions on Transfer......................................... 51 10.2. Effect of Transfer............................................... 52 SECTION 11. INDEMNIFICATION................................................. 52 11.1. General Indemnity................................................ 52 11.2. General Tax Indemnity............................................ 55 11.3. Increased Costs, Illegality, etc. ............................... 59 11.4. Funding/Contribution Indemnity................................... 61 11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT LIABILITY, ETC. ................................................ 62 11.6. Additional Provisions Regarding Environmental Indemnification.... 63 11.7. Additional Provisions Regarding Indemnification.................. 63 11.8. Indemnifications Provided by the Owner Trustee in Favor of the Other Indemnified Persons................................... 63 SECTION 12. MISCELLANEOUS 12.1. Survival of Agreements........................................... 64 12.2. Notices.......................................................... 65 12.3. Counterparts..................................................... 66 12.4. Terminations, Amendments, Waivers, Etc.; Unanimous Vote Matters.. 66 12.5. Headings, etc. .................................................. 68 12.6. Parties in Interest.............................................. 68 12.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; VENUE.................................................... 68 12.8. Severability..................................................... 69 12.9. Liability Limited................................................ 69 12.10. Rights of the Credit Parties.................................... 70 4 12.11. Further Assurances................................................... 70 12.12. Calculations under Operative Agreements.............................. 71 12.13. Confidentiality...................................................... 71 12.14. Financial Reporting/Tax Characterization............................. 71 12.15. Set-off.............................................................. 72 5 SCHEDULES Schedule 8.3A(a)(iii) - Form of Officer's Compliance Certificate Schedule 8.3B(a)(ii) - Schedule of Indebtedness Schedule 8.3B(e) - Schedule of Insignificant Lines of Business Schedule 8.3B(f) - Schedule of Investments EXHIBITS A - Form of Requisition - Sections 4.2, 5.2, 5.3 and 5.4 B - [RESERVED] C - Form of Officer's Certificate - Section 5.3(z) D - Form of Secretary's Certificate - Section 5.3(aa) E - Form of Officer's Certificate - Section 5.3(bb) F - Form of Secretary's Certificate - Section 5.3(cc) G - Form of Outside Counsel Opinion for the Owner Trustee - Section 5.3(dd) H - Form of Outside Counsel Opinion for the Lessee - Section 5.3(ee) I - Form of Officer's Certificate - Section 5.5 J - Description of Material Litigation - Section 6.2(d) Appendix A - Rules of Usage and Definitions 6 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, this "Agreement") is by and among VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Lessee" or the "Construction Agent"); the various parties hereto from time to time as guarantors (subject to the definition of Guarantors in Appendix A hereto, individually, a "Guarantor" and collectively, the "Guarantors"); FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually (in its individual capacity, the "Trust Company"), except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 (the "Owner Trustee", the "Borrower" or the "Lessor"); the various banks and other lending institutions which are parties hereto from time to time as holders of certificates issued with respect to the VS Trust 1999-1 (subject to the definition of Holders in Appendix A hereto, individually, a "Holder" and collectively, the "Holders"); the various banks and other lending institutions which are parties hereto from time to time as lenders (subject to the definition of Lenders in Appendix A hereto, individually, a "Lender" and collectively, the "Lenders"); and NATIONSBANK, N.A., a national banking association, as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (in such capacity, the "Agent"). Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Appendix A hereto. In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1A. SINGLE PROPERTY. Notwithstanding the reference to multiple Properties herein and in the other Operative Agreements, the parties hereto acknowledge and agree that such Properties, as more particularly described in one or more Lease Supplements, constitute a single parcel of real property together with any improvements existing thereon or to be constructed thereon in accordance with the terms and conditions hereof and of the other Operative Agreements. SECTION 1. THE LOANS. Subject to the terms and conditions of this Agreement and the other Operative Agreements and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, the Lenders have agreed to make Loans to the Lessor from time to time in an aggregate principal amount of up to the aggregate amount of the Commitments of the Lenders in order for the Lessor to acquire the Properties and certain Improvements, to develop and construct certain Improvements in accordance with the Agency Agreement and the terms and provisions hereof and for the other purposes described herein, and in consideration of the receipt of proceeds of the Loans, the Lessor will issue the Notes. The Loans shall be made and the Notes shall be issued pursuant to the Credit Agreement. Pursuant to 7 Section 5 of this Agreement and Section 2 of the Credit Agreement, the Loans will be made to the Lessor from time to time at the request of the Construction Agent in consideration for the Construction Agent agreeing for the benefit of the Lessor, pursuant to the Agency Agreement, to acquire the Properties, to acquire the Equipment, to construct certain Improvements and to cause the Lessee to lease the Properties, each in accordance with the Agency Agreement and the other Operative Agreements. The Loans and the obligations of the Lessor under the Credit Agreement shall be secured by the Collateral. SECTION 2. HOLDER ADVANCES. Subject to the terms and conditions of this Agreement and the other Operative Agreements and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, on each date Advances are requested to be made in accordance with Section 5 hereof, each Holder shall make a Holder Advance on a pro rata basis to the Lessor with respect to the VS Trust 1999-1 based on its Holder Commitment in an amount in immediately available funds such that the aggregate of all Holder Advances at all times shall be no less than three percent (3%) of the amount of all outstanding Advances; provided, that no Holder shall be obligated for any Holder Advance in excess of its pro rata share of the Available Holder Commitment. The aggregate amount of Holder Advances shall be up to the aggregate amount of the Holder Commitments. No prepayment or any other payment with respect to Advances shall be permitted such that the aggregate Holder Advances with respect to such outstanding Advance is less than three percent (3%) of all outstanding Advances, except in connection with termination or expiration of the Term or in connection with the exercise of remedies relating to the occurrence of a Lease Event of Default. The representations, warranties, covenants and agreements of the Holders herein and in the other Operative Agreements are several, and not joint or joint and several. The Holder Advances and the obligations of the Lessor under the Trust Agreement shall be secured by the Collateral. SECTION 3. SUMMARY OF TRANSACTIONS. 3.1. OPERATIVE AGREEMENTS. On the date hereof, each of the respective parties hereto and thereto shall execute and deliver this Agreement, the Lease, the Agency Agreement, the Credit Agreement, the Notes, the Trust Agreement, the Certificates, the Security Agreement, each applicable Mortgage Instrument and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. 3.2. PROPERTY PURCHASE. On each Property Closing Date and subject to the terms and conditions of this Agreement (a) the Holders will each make a Holder Advance in accordance with Sections 2 and 5 of this Agreement and the terms and provisions of the Trust Agreement, (b) the Lenders will each make 2 8 Loans in accordance with Sections 1 and 5 of this Agreement and the terms and provisions of the Credit Agreement. (c) the Lessor will purchase and acquire good and marketable title to the applicable Property, identified by the Construction Agent, in each case pursuant to a Deed or Bill of Sale, as the case may be, and grant the Agent a lien on such Property by execution of the required Security Documents, (d) the Agent, the Lessee and the Lessor shall execute and deliver a Lease Supplement relating to such Property and (e) the Basic Term shall commence with respect to such Property. 3.3. CONSTRUCTION OF IMPROVEMENTS; COMMENCEMENT OF BASIC RENT. Construction Advances will be made with respect to particular Improvements to be constructed and with respect to ongoing Work regarding the Equipment and construction of particular Improvements, in each case, pursuant to the terms and conditions of this Agreement and the Agency Agreement. The Construction Agent will act as a construction agent on behalf of the Lessor respecting the Work regarding the Equipment, the construction of such Improvements and the expenditures of the Construction Advances related to the foregoing. The Construction Agent shall promptly notify the Lessor upon Completion of the Improvements and the Lessee shall commence to pay Basic Rent as of the Rent Commencement Date. 3.4. RATABLE INTERESTS OF THE LENDERS. Each Lender agrees at all times (a) to hold the same ratable portion of the aggregate Lender Commitment for Tranche A Loans and the aggregate Lender Commitment for Tranche B Loans and (b) to make advances consistent with such committed amounts referenced in Section 3.4(a) in accordance with the requirements of the Operative Agreements. SECTION 4. THE CLOSINGS. 4.1. INITIAL CLOSING DATE. All documents and instruments required to be delivered on the Initial Closing Date shall be delivered at the offices of Moore & Van Allen, PLLC, Bank of America Corporate Center, 100 North Tryon Street, 47th Floor, Charlotte, North Carolina, or at such other location as may be determined by the Lessor, the Agent and the Lessee. 4.2. INITIAL CLOSING DATE; PROPERTY CLOSING DATES; ACQUISITION ADVANCES; CONSTRUCTION ADVANCES. The Construction Agent shall deliver to the Agent a requisition (a "Requisition"), in the form attached hereto as Exhibit A or in such other form as is satisfactory to the Agent, in its reasonable discretion, in connection with (a) the Transaction Expenses and (b) each Acquisition Advance pursuant to Section 5.3 and (c) each Construction Advance pursuant to Section 5.4. No Requisition shall be required for the Lenders and the Holders to make Advances pursuant to or in connection with Sections 7.1(a), 7.1(b) and 11.8. 3 9 SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT; REPORTING REQUIREMENTS ON COMPLETION DATE; THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS. 5.1. GENERAL. (a) To the extent funds have been advanced to the Lessor as Loans by the Lenders and to the Lessor as Holder Advances by the Holders, the Lessor will use such funds from time to time in accordance with the terms and conditions of this Agreement and the other Operative Agreements (i) according to the directions of the Construction Agent to acquire the Properties in accordance with the terms of this Agreement, the Agency Agreement and the other Operative Agreements, (ii) to make Advances to the Construction Agent to permit the acquisition, testing, engineering, installation, development, construction, modification, design, and renovation, as applicable, of the Properties (or components thereof) in accordance with the terms of the Agency Agreement and the other Operative Agreements, and (iii) to pay Transaction Expenses and other disbursements payable by the Lessor under Section 11.8. (b) In lieu of the payment of interest on the Loans and Holder Yield on the Holder Advances on any Scheduled Interest Payment Date with respect to any Property during the period prior to the Rent Commencement Date with respect to such Property and subject to Section 5.9, (i) each Lender's Loan shall automatically be increased by the amount of interest accrued and unpaid on such Loan for such period (except to the extent that at any time such increase would cause such Lender's Loan to exceed such Lender's Available Commitment, in which case the Lessee shall pay such excess amount to such Lender in immediately available funds on the date such Lender's Available Commitment was exceeded), and (ii) each Holder's Holder Advance shall automatically be increased by the amount of Holder Yield accrued and unpaid on such Holder Advance for such period (except to the extent that any time such increase would cause the Holder Advance of such Holder to exceed such Holder's Available Holder Commitment, in which case the Lessee shall pay such excess amount to such Holder in immediately available funds on the date the Available Holder Commitment of such Holder was exceeded). Such increases in a Lender's Loan and a Holder's Holder Advance shall occur without any disbursement of funds by any Person. 5.2. PROCEDURES FOR FUNDING. (a) The Construction Agent shall designate the date for Advances hereunder in accordance with the terms and provisions hereof; provided, however, it is understood and agreed that no more than two (2) Advances (excluding any conversion and/or continuation of any Loan or Holder Advance) may be requested during any calendar month and no such designation from the Construction Agent is required for funding of Transaction Expenses and other disbursements payable by the Lessor pursuant to or in 4 10 connection with Section 11.8; provided, further, the Construction Agent shall deliver to the Agent on the first Business Day of each month following an Acquisition Advance with respect to a Property until the Completion Date with respect to such Property, a Requisition for any Construction Advance requested with respect to such Property for the immediately preceding month. Not less than (i) three (3) Business Days prior to the date that the first Advance is requested hereunder and (ii) three (3) Business Days prior to the date on which any subsequent Acquisition Advance (or on the first Business Day of the month, in the case of a Construction Advance) is to be made, the Construction Agent shall deliver to the Agent, (A) with respect to the date that the first Advance is requested hereunder and each subsequent Acquisition Advance, a Requisition as described in Section 4.2 hereof (including without limitation a legal description of the Land, if any, a schedule of the Improvements, if any, and a schedule of the Equipment, if any, acquired or to be acquired on such date, and a schedule of the Work, if any, to be performed, each of the foregoing in a form reasonably acceptable to the Agent) and (B) with respect to each Construction Advance, a Requisition identifying (among other things) the Property to which such Construction Advance relates. (b) Each Requisition shall: (i) be irrevocable, (ii) request funds in an amount that is not in excess of the total aggregate of the Available Commitments plus the Available Holder Commitments at such time, and (iii) request that the Holders make Holder Advances and that the Lenders make Loans to the Lessor for the payment of Transaction Expenses, Property Acquisition Costs (in the case of an Acquisition Advance) or other Property Costs (in the case of a Construction Advance) that have previously been incurred or are to be incurred on the date of such Advance to the extent such were not subject to a prior Requisition, in each case as specified in the Requisition. (c) Subject to the satisfaction of the conditions precedent set forth in Sections 5.3 or 5.4, as applicable, on the Property Closing Date or the date on which the Construction Advance is to be made, as applicable, (i) the Lenders shall make Loans based on their respective Lender Commitments to the Lessor in an aggregate amount equal to ninety-seven percent (97%) of the Requested Funds specified in any Requisition plus any additional amount of Transaction Expenses as referenced in Sections 7.1(a) and 7.1(b) and any additional amount respecting any indemnity payment as referenced in Section 11.8, unless any such funding of Transaction Expenses or any indemnity payment is declined in writing by each Lender and each Holder (such decision to be in the sole discretion of each Lender and each Holder) ratably between the Tranche A Lenders and the Tranche B Lenders with the Tranche A Lenders funding eighty-six percent (86%) of the Requested Funds and the Tranche B Lenders funding eleven percent (11%) of the Requested Funds), up to an aggregate principal amount equal to the aggregate of the Available Commitments, (ii) the Holders shall make Holder Advances based on their respective Holder Commitments in an aggregate amount equal to three percent (3%) of the balance of the Requested Funds specified in such Requisition plus any additional amount of Transaction Expenses as referenced in Sections 7.1(a) and 7.1(b) and any additional amount respecting any indemnity payment as referenced in Section 11.8, unless any such funding of Transaction Expenses or any indemnity payment is declined 5 11 in writing by each Lender and each Holder (such decision to be in the sole discretion of each Lender and each Holder), up to the aggregate advanced amount equal to the aggregate of the Available Holder Commitments; and (iii) the total amount of such Loans and Holder Advances made on such date shall (x) be used by the Lessor to pay Property Costs including Transaction Expenses within three (3) Business Days of the receipt by the Lessor of such Advance or (y) be advanced by the Lessor on the date of such Advance to the Construction Agent or the Lessee to pay Property Costs, as applicable. Notwithstanding that the Operative Agreements state that Advances shall be directed to the Lessor, each Advance shall in fact be directed to the Construction Agent (for the benefit of the Lessor) and applied by the Construction Agent (for the benefit of the Lessor) pursuant to the requirements imposed on the Lessor under the Operative Agreements. (d) With respect to an Advance obtained by the Lessor to pay for Property Costs and/or Transaction Expenses or other costs payable under Section 11.8 hereof and not expended by the Lessor for such purpose on the date of such Advance, such amounts shall be held by the Lessor (or the Agent on behalf of the Lessor) until the applicable closing date or payment date or, if such closing date or payment date does not occur within three (3) Business Days of the date of the Lessor's receipt of such Advance, shall be applied regarding the applicable Advance to repay the Lenders and the Holders and, subject to the terms hereof, and of the Credit Agreement and the Trust Agreement, shall remain available for future Advances. Any such amounts held by the Lessor (or the Agent on behalf of the Lessor) shall be subject to the lien of the Security Agreement. (e) All Operative Agreements which are to be delivered to the Lessor, the Agent, the Lenders or the Holders shall be delivered to the Agent, on behalf of the Lessor, the Agent, the Lenders or the Holders, and such items (except for Notes, Certificates, Bills of Sale, the chattel paper originals, with respect to which in each case there shall be only one original) shall be delivered with originals sufficient for the Lessor, the Agent, each Lender and each Holder. All other items which are to be delivered to the Lessor, the Agent, the Lenders or the Holders shall be delivered to the Agent, on behalf of the Lessor, the Agent, the Lenders or the Holders, and such other items shall be held by the Agent. To the extent any such other items are requested in writing from time to time by the Lessor, any Lender or any Holder, the Agent shall provide a copy of such item to the party requesting it. (f) Notwithstanding the completion of any closing under this Agreement pursuant to Sections 5.3 or 5.4, each condition precedent in connection with any such closing may be subsequently enforced by the Agent (unless such has been expressly waived in writing by the Agent). 6 12 5.3. CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS RELATING TO THE INITIAL CLOSING DATE AND THE ADVANCE OF FUNDS FOR THE ACQUISITION OF A PROPERTY. The obligations (i) on the Initial Closing Date of the Lessor, the Agent, the Lenders and the Holders to enter into the transactions contemplated by this Agreement, including without limitation the obligation to execute and deliver the applicable Operative Agreements to which each is a party on the Initial Closing Date, (ii) on the Initial Closing Date of the Holders to make Holder Advances, and of the Lenders to make Loans in order to pay Transaction Expenses and (iii) on a Property Closing Date for the purpose of providing funds to the Lessor necessary to pay the Transaction Expenses and to acquire a Property (an "Acquisition Advance"), in each case (with regard to the foregoing Sections 5.3(i), (ii) and (iii)) are subject to the satisfaction or waiver of the following conditions precedent on or prior to the Initial Closing Date or the applicable Property Closing Date, as the case may be (to the extent such conditions precedent require the delivery of any agreement, certificate, instrument, memorandum, legal or other opinion, appraisal, commitment, title insurance commitment, lien report or any other document of any kind or type, such shall be in form and substance satisfactory to the Agent, in it reasonable discretion; notwithstanding the foregoing, the obligations of each party shall not be subject to any conditions contained in this Section 5.3 which are required to be performed by such party): (a) the correctness of the representations and warranties of the parties to this Agreement contained herein, in each of the other Operative Agreements and each certificate delivered pursuant to any Operative Agreement on each such date; (b) the performance by the parties to this Agreement of the material obligations of their respective agreements contained herein and in the other Operative Agreements to be performed by them on or prior to each such date; (c) the Agent shall have received a fully executed counterpart copy of the Requisition, appropriately completed; (d) title to each such Property shall conform to the representations and warranties set forth in Section 6.2(1) hereof; (e) the Construction Agent shall have delivered to the Agent a good standing certificate for the Construction Agent in the state where each such Property is located, the Deed with respect to the Land and existing Improvements (if any), and a copy of the Bill of Sale with respect to the Equipment (if any), respecting such of the foregoing as are being acquired on each such date with the proceeds of the Loans and Holder Advances or which have been previously acquired with the proceeds of the Loans and Holder Advances and such Land, existing Improvements (if any) and Equipment (if any) shall be located in and Approved State; (f) there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements (other than a Default that would be cured 7 13 upon application of the proceeds of such Advance, provided that such proceeds are so applied or provision reasonably satisfactory to the Agent shall have been made such that the proceeds will be so applied) and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Advance requested by each such Requisition; (g) the Construction Agent shall have delivered to the Agent title insurance commitments to issue policies respecting each such Property, with such endorsements as the Agent deems necessary, in favor of the Lessor and the Agent from a title insurance company acceptable to the Agent, but only with such title exceptions thereto as are acceptable to the Agent; (h) the Construction Agent shall have delivered to the Agent an environmental site assessment respecting each such Property prepared by an independent recognized professional reasonably acceptable to the Agent and evidencing no pre-existing environmental condition (other than any Pre-Existing Environmental Condition) with respect to which there is more than a remote risk of loss; (i) the Construction Agent shall have delivered to the Agent a Survey respecting the Property; (j) [RESERVED]; (k) the Agent shall be satisfied that the acquisition, ground leasing and/or holding of each such Property and the execution of the Mortgage Instrument and the other Security Documents will not materially and adversely affect the rights of the Lessor, the Agent, the Holders or the Lenders under or with respect to the Operative Agreements; (l) the Construction Agent shall have delivered to the Agent invoices for, or other reasonably satisfactory evidence of, the various Transaction Expenses; (m) the Construction Agent shall have caused to be delivered to the Agent a Mortgage Instrument (in such form as is reasonably acceptable to the Agent, with revisions as necessary to conform to applicable state law), Lessor Financing Statements and Lender Financing Statements respecting each such Property, all fully executed and in recordable form; (n) the Lessee shall have delivered to the Agent with respect to each such Property a Lease Supplement and a memorandum (or short form lease) regarding the Lease and such Lease Supplement (such memorandum or short form lease to be in the form attached to the Lease as Exhibit B or in such other form as is reasonably acceptable to the Agent, with modifications as necessary to conform to applicable state law, and in form suitable for recording); 8 14 (o) with respect to each Acquisition Advance, the sum of the Available Commitment plus the Available Holder Commitment (after deducting the Unfunded Amount, if any, and after giving effect to the Acquisition Advance) will be sufficient to pay all amounts payable therefrom; (p) [RESERVED]; (q) [RESERVED]; (r) the Construction Agent shall have delivered to the Agent a preliminary Construction Budget for each such Property, if applicable; (s) the Construction Agent shall have provided evidence to the Agent of insurance with respect to each such Property as provided in the Lease; (t) an Appraisal satisfactory to the Agent regarding each such Property shall be provided to the Agent from an appraiser selected by the Agent; (u) (i) the Agent shall cause Uniform Commercial Code lien searches, tax lien searches and judgment lien searches regarding the Lessee to be conducted (and copies thereof to be delivered to the Agent) in such jurisdictions as reasonably determined by the Agent by a nationally recognized search company acceptable to the Agent and (ii) the Construction Agent shall cause the liens referenced in such lien searches which are objectionable to the Agent to be either removed or otherwise handled in a manner reasonably satisfactory to the Agent; (v) all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements and/or documents related thereto shall have been paid or provisions for such payment shall have been made to the satisfaction of the Agent; (w) in the opinion of the Agent and its respective counsel, the transactions contemplated by the Operative Agreements do not and will not subject the Lessor, the Lenders, the Agent or the Holders to any adverse regulatory prohibitions, constraints, penalties or fines; (x) each of the Operative Agreements to be entered into on such date shall have been duly authorized, executed and delivered by the parties thereto, and shall be in full force and effect, and the Agent shall have received a fully executed copy of each of the Operative Agreements; (y) since the date of the most recent audited financial statements (as delivered pursuant to the requirements of the Lessee Credit Agreement) of the Lessee, there shall not have occurred any event, condition or state of facts which shall have or could 9 15 reasonably be expected to have a Material Adverse Effect, other than as specifically contemplated by the Operative Agreements; (z) as of the Initial Closing Date only, the Agent shall have received an Officer's Certificate, dated as of the Initial Closing Date, of the Lessee in the form attached hereto as Exhibit C or in such other form as is acceptable to the Agent stating that (i) each and every representation and warranty of the Lessee contained in the Operative Agreements to which it is a party is true and correct on and as of the Initial Closing Date; (ii) no Default or Event of Default has occurred and is continuing under any Operative Agreement; (iii) each Operative Agreement to which the Lessee is a party is in full force and effect with respect to it; and (iv) the Lessee has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Initial Closing Date; (aa) as of the Initial Closing Date only, the Agent shall have received (i) a certificate of the Secretary or an Assistant Secretary of the Lessee, dated as of the Initial Closing Date, in the form attached hereto as Exhibit D or in such other form as is acceptable to the Agent attaching and certifying as to (1) the resolutions of its Board of Directors duly authorizing the execution, delivery and performance by the Lessee of each of the Operative Agreements to which it is or will be a party, (2) its certificate of incorporation certified as of a recent date by the Secretary of State of its state of incorporation and its by-laws and (3) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is or will be a party and (ii) a good standing certificate (or local equivalent) from the appropriate office of the respective states where the Lessee is incorporated and where the principal place of business of the Lessee is located as to its good standing in each such state; (bb) as of the Initial Closing Date only, the Agent shall have received an Officer's Certificate of the Lessor dated as of the Initial Closing Date in the form attached hereto as Exhibit E or in such other form as is acceptable to the Agent, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Agreements to which it is a party is true and correct on and as of the Initial Closing Date, (ii) each Operative Agreement to which the Lessor is a party is in full force and effect with respect to it and (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Initial Closing Date; (cc) as of the Initial Closing Date only, the Agent shall have received (i) a certificate of the Secretary, an Assistant Secretary, Trust Officer or Vice President of the Trust Company in the form attached hereto as Exhibit F or in such other form as is acceptable to the Agent, attaching and certifying as to (A) the signing resolutions duly authorizing the execution, delivery and performance by the Lessor of each of the Operative Agreements to which it is or will be a party, (B) its articles of association or other equivalent charter documents and its by-laws, as the case may be, certified as of a 10 16 recent date by an appropriate officer of the Trust Company and (C) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (ii) a good standing certificate from the Office of the Comptroller of the Currency; (dd) as of the Initial Closing Date only, counsel for the Lessor acceptable to the Agent shall have issued to the Lessee, the Holders, the Lenders and the Agent its opinion in the form attached hereto as Exhibit G or in such other form as is reasonably acceptable to the Agent; (ee) as of the Initial Closing Date only, the Construction Agent shall have caused to be delivered to the Agent a legal opinion in the form attached hereto as Exhibit H or in such other form as is acceptable to the Agent, addressed to the Lessor, the Agent, the Lenders and the Holders, from Brobeck, Phleger & Harrison LLP; (ff) [RESERVED]; (gg) [RESERVED]; and (hh) as of the Initial Closing Date, the Agent shall have received (i) the Raytheon Indemnity Assignment, (ii) the Fairchild Sublease, (iii) the Collateral Assignment of Sublease and (iv) the Purchase Agreement Assignment. 5.4 CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS RELATING TO THE ADVANCE OF FUNDS AFTER THE ACQUISITION ADVANCE. The obligations of the Holders to make Holder Advances, and the Lenders to make Loans in connection with all requests for Advances subsequent to the acquisition of a Property (and to pay the Transaction Expenses in connection therewith) are subject to the satisfaction or waiver of the following conditions precedent (to the extent such conditions precedent require the delivery of any agreement, certificate, instrument, memorandum, legal or other opinion, appraisal, commitment, title insurance commitment, lien report or any other document of any kind or type, such shall be in form and substance satisfactory to the Agent, in its reasonable discretion; notwithstanding the foregoing, the obligations of each party shall not be subject to any conditions contained in this Section 5.4 which are required to be performed by such party): (a) the correctness on the date of such Advance of the representations and warranties of the parties to this Agreement contained herein, in each of the other Operative Agreements and in each certificate delivered pursuant to any Operative Agreement (including without limitation the Incorporated Representations and Warranties); (b) the performance by the parties to this Agreement of their respective agreements contained herein and in the other Operative Agreements to be performed by them on or prior to each such date; 11 17 (c) the Agent shall have received a fully executed counterpart of the Requisition, appropriately completed; (d) based upon the applicable Construction Budget which shall satisfy the requirements of this Agreement, the Available Commitments and the Available Commitments and the Available Holder Commitment (after deducting the Unfunded Amount) will be sufficient to complete the Improvements; (e) there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements (other than a Default that would be cured upon application of the proceeds of such Advance, provided that such proceeds are so applied or provision reasonably satisfactory to the Agent shall have been made such that the proceeds will be so applied) and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Construction Advance requested by the applicable Requisition; (f) the title insurance policy delivered in connection with the requirements of Section 5.3(g) shall provide for (or shall be endorsed to provide for) insurance in an amount at least equal to the maximum total Property Cost indicated by the Construction Budget referred to in subparagraph (d) above and there shall be no title change or exception objectionable to the Agent in its reasonable discretion; (g) prior to or in connection with any request for an Advance for Hard Costs respecting any Property, the Construction Agent shall have delivered to the Agent copies of the Plans and Specifications and the final Construction Budget for the applicable Improvements; (h) the Construction Agent shall have delivered to the Agent invoices for, or other reasonably satisfactory evidence of, any Transaction Expenses that are to be paid with the Advance; (i) the Construction Agent shall have delivered, or caused to be delivered to the Agent, invoices, Bills of Sale or other documents reasonably acceptable to the Agent, in each case with regard to any Equipment or other components of such Property then being acquired with the proceeds of the Loans and Holder Advances and naming the Lessor as purchaser and transferee; (j) all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made to the reasonable satisfaction of the Agent; (k) since the date of the most recent audited Financial Statements (as such term is defined in the Lessee Credit Agreement) of the Lessee, there shall not have 12 18 occurred any event, condition or state of facts which shall have or could reasonably be expected to have a Material Adverse Effect, other than as specifically contemplated by the Operative Agreements; (l) in the good faith opinion of the Agent and its counsel, the transactions contemplated by the Operative Agreements do not and will not subject the Lessor, the Lenders, the Agent or the Holders to any adverse regulatory prohibitions, constraints, penalties or fines; (m) prior to or in connection with any request for an Advance for Hard Costs respecting any Property, the Construction Agent shall have caused an Appraisal regarding such Property to be provided to the Agent from an appraiser selected by the Agent; (n) prior to or in connection with any request for an Advance for Hard Costs respecting any portion of any Property where existing improvements are to be removed or demolished, the Construction Agent shall use commercially reasonable efforts to cause to be delivered to the Agent a guaranteed maximum price, bonded demolition contract for such removal or demolition, in form and substance reasonably acceptable to the Agent; and (o) prior to or in connection with any request for an Advance for Hard Costs respecting any Property, the Agent shall have received the EPA Comfort Letter. 5.5. ADDITIONAL REPORTING AND DELIVERY REQUIREMENTS ON COMPLETION DATE AND ON CONSTRUCTION PERIOD TERMINATION DATE. On or prior to the Completion Date for each Property, the Construction Agent shall deliver to the Agent an Officer's Certificate in the form attached hereto as Exhibit I or in such other form as is acceptable to the Agent specifying (a) the address for such Property, (b) the Completion Date for such Property, (c) detailed, itemized documentation supporting the asserted Property Cost figures and (d) that all representations and warranties of the Construction Agent and Lessee in each of the Operative Agreements and each certificate delivered pursuant thereto (including without limitation the Incorporated Representation and Warranties) are true and correct as of the Completion Date. The Agent shall have the right to contest the information contained in such Officer's Certificate. Furthermore, on or prior to the Completion Date for each Property, the Construction Agent shall deliver or cause to be delivered to the Agent (unless previously delivered to the Agent) originals of the following, each of which shall be in form and substance acceptable to the Agent, in its reasonable discretion: (w) a title insurance endorsement regarding the title insurance policy delivered in connection with the requirements of Section 5.3(g), but only to the extent such endorsement is necessary to provide for insurance in an amount at least equal to the maximum total Property Cost and, if endorsed, the endorsement shall not include a title change or exception objectionable to the Agent; (x) an as-built survey for such Property, (y) ACCORD Evidence of Insurance and/or a certified copy of the insurance policies respecting such Property as required hereunder and under the Lease Agreement, and (z) if reasonably requested by the Agent, amendments to the Lessor Financing Statements executed by 13 19 the appropriate parties. In addition, on the Completion Date for such Property the Construction Agent covenants and agrees that the recording fees, documentary stamp taxes or similar amounts required to be paid in connection with the related Mortgage Instrument shall be paid in an amount required by applicable law, subject, however, to the obligations of the Lenders and the Holders to fund such costs to the extent required pursuant to Section 7.1. 5.6 THE CONSTRUCTION AGENT DELIVERY OF CONSTRUCTION BUDGET MODIFICATIONS. The Construction Agent covenants and agrees to deliver to the Agent each month notification of any modification to any Construction Budget regarding any Property if such modification increases the cost to construct such Property; provided no Construction Budget may be increased unless (a) the title insurance policies referenced in Section 5.3(g) are also modified or endorsed, if necessary, to provide for insurance in an amount that satisfies the requirements of Section 5.4(f) of this Agreement and (b) after giving effect to any such amendment, the Construction Budget remains in compliance with the requirements of Section 5.4(d) of this Agreement. 5.7 RESTRICTIONS ON LIENS. On each Property Closing Date, the Construction Agent shall cause each Property acquired by the Lessor on such date to be free and clear of all Liens except those referenced in Sections 6.2(r)(i) and 6.2(r)(ii). On each date a Property is either sold to a third party in accordance with the terms of the Operative Agreements or, pursuant to Section 22.1(a) of the Lease Agreement, retained by the Lessor, the Lessee shall cause such Property to be free and clear of all Liens (other than Lessor Liens and such other Liens that are expressly set forth as title exceptions on the title commitment issued under Section 5.3(g) with respect to such Property, to the extent such title commitment has been approved by the Agent). 5.8 PAYMENTS. All payments of principal, interest, Holder Advances, Holder Yield and other amounts to be made by the Construction Agent or the Lessee under this Agreement or any other Operative Agreements (excluding Excepted Payments which shall be paid directly to the party to whom such payments are owed) shall be made to the Agent at the office designated by the Agent from time to time in Dollars and in immediately available funds, without setoff, deduction, or counterclaim. Subject to the definition of "Interest Period" in Appendix A attached hereto, whenever any payment under this Agreement or any other Operative Agreements shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time in such case shall be included in the computation of interest, Holder Yield and fees payable pursuant to the Operative Agreements, as applicable and as the case may be. 14 20 5.9. UNILATERAL RIGHT TO INCREASE THE HOLDER COMMITMENTS AND THE LENDER COMMITMENTS. Notwithstanding any other provision of any Operative Agreement or any objection by any Person (including without limitation any objection by any Credit Party), (a) each Holder, in its sole discretion, may unilaterally elect to increase its Holder Commitment in order to fund amounts due and owing pursuant to Sections 7.1(a), 7.1(b) and/or 11.8, and such other amounts payable by the Lessor during the Construction Period pursuant to the Operative Agreements, and (b) each Lender, in its sole discretion, may unilaterally elect to increase its Lender Commitment in order to fund amounts due and owing pursuant to Sections 7.1(a), 7.1(b) and/or 11.8, and such other amounts payable by the Lessor during the Construction Period pursuant to the Operative Agreements. 5.10. JOINDER AGREEMENT REQUIREMENTS. Each Domestic Subsidiary of each Credit Party and the Parent formed or acquired subsequent to the Initial Closing Date shall become a Guarantor and shall satisfy the following conditions within thirty (30) days after its formation or acquisition: (a) such Domestic Subsidiary or Parent, as the case may be, shall execute and deliver to the Agent a Joinder Agreement in the form attached hereto as Exhibit K; (b) such Domestic Subsidiary or Parent, as the case may be, shall have delivered to the Agent (x) an Officer's Certificate of such Domestic Subsidiary or Parent, as the case may be, in the form attached hereto as Exhibit C, (y) a certificate of the Secretary or an Assistant Secretary of such Domestic Subsidiary or Parent, as the case may be, in the form attached hereto as Exhibit D and (z) good standing certificates (or local equivalent) from the respective states where such Domestic Subsidiary or Parent, as the case may be, is incorporated or organized and where the principal place of business of such Domestic subsidiary or Parent, as the case may be, is located as to its good standing in each such state; (c) such Domestic Subsidiary or Parent, as the case may be, shall have delivered to the Agent an opinion of counsel (acceptable to the Agent) in the form attached hereto as Exhibit H-1 or such other form as is reasonably acceptable to the Agent and such Domestic Subsidiary or Parent, as the case may be; and (d) the Agent shall have received such other documents, certificates and information as the Agent shall have reasonably requested. 5.11. PROPERTY COST AS OF THE RENT COMMENCEMENT DATE. Upon receipt of the Officer's Certificate from the Construction Agent pursuant to Section 5.5, the Agent shall promptly deliver a notice to the Lessee specifying the amount allocable to the Property Cost respecting the Land, as identified on any Lease Supplement relating to Land, 15 21 and the amount allocable to the Property Cost respecting the Improvements, as identified on any Lease Supplement relating to Improvements. Such amounts identified by the Agent shall be conclusive, absent manifest error. SECTION 6. REPRESENTATIONS AND WARRANTIES. 6.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. Effective as of the Initial Closing Date and the date of each Advance, the Trust Company in its individual capacity and as the Borrower, as indicated, represents and warrants to each of the other parties hereto as follows, provided, that the representations in the following paragraphs (h), (j) and (k) are made solely in its capacity as the Borrower: (a) It is a national banking association and is duly organized and validly existing and in good standing under the laws of the United States of America and has the power and authority to enter into and perform its obligations under the Trust Agreement and (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) has the corporate and trust power and authority to act as the Owner Trustee and to enter into and perform the obligations under each of the other Operative Agreements to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before such Closing Date in connection with or as contemplated by each such Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) does or will contravene any Legal Requirement relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, (A) its charter or by-laws, or (B) any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected, which contravention, breach, default or Lien under clause (B) would materially and adversely affect its ability, in its individual capacity or as the Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or (iv) does or will require any Governmental Action by any Governmental Authority regulating its banking or trust powers; 16 22 (c) The Trust Agreement and, assuming the Trust Agreement is the legal, valid and binding obligation of the Holders, each other Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party have been, or on or before such Closing Date will be, duly executed and delivered by the Trust Company or the Owner Trustee, as the case may be, and the Trust Agreement and each such other Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against the Trust Company or the Owner Trustee, as the case may be, in accordance with the terms thereof; (d) There is no action or proceeding pending or, to its knowledge, threatened to which it is or will be a party, either in its individual capacity or as the Owner Trustee, before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability, in its individual capacity or as the Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or would question the validity or enforceability of any of the Operative Agreements to which it is or will become a party; (e) It, either in its individual capacity or as the Owner Trustee, has not assigned or transferred any of its right, title or interest in or under the Lease, the Agency Agreement or its interest in any Property or any portion thereof, except in accordance with the Operative Agreements; (f) No Default of Event or Default under the Operative Agreements attributable to it has occurred and is continuing; (g) Except as otherwise contemplated in the Operative Agreements, the proceeds of the Loans and Holder Advances shall not be applied by the Owner Trustee, either in its individual capacity or as the Owner Trustee, for any purpose other than the purchase and/or lease of the Properties, the acquisition, installation and testing of the Equipment, the construction of Improvements and the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Sections 7.1(a) and 7.1(b) of this Agreement, in each case which accrue prior to the Rent Commencement Date with respect to a particular Property; (h) Neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Agent, and neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf will take any action which would subject, as a direct result of such action alone, the issuance or sale of any interest in the Trust Estate or the Notes to the provisions of 17 23 Section 5 of the Securities Act or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended: (i) The Owner Trustee's principal place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 79 South Main Street, Salt Lake City, Utah 84111; (j) The Owner Trustee is not engaged principally in, and does not have as one (1) of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve system of the United States), and no part of the proceeds of the Loans or the Holder Advances will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System of the United States; (k) The Owner Trustee is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act; (l) Each Property is free and clear of all Lessor Liens attributable to the Owner Trustee, either in its individual capacity or as the Owner trustee; and (m) The Owner Trustee, in its trust capacity, is not a party to any documents, instruments or agreements other than the Operative Agreements executed by the Owner Trustee, in its trust capacity. 6.2 REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES. Effective as of the Initial Closing Date, the date of each Advance, the date each Domestic Subsidiary or Parent, as the case may be, delivers a Joinder Agreement and the Rent Commencement Date, each Credit Party represents and warrants to each of the other parties hereto that: (a) The Lessee has delivered to the Agent the financial statements and other reports referred to in Section 8.3A(a)(i) and (ii) hereof; (b) The execution and delivery by each Credit Party of this Agreement and the other applicable Operative Agreements as of such date and the performance by each Credit Party of its respective obligations under this Agreement and the other applicable Operative Agreements are within the corporate, partnership or limited liability company (as the case may be) powers of each Credit Party, have been duly authorized by all necessary corporate action on the part of each Credit Party (including without limitation 18 24 any necessary shareholder action), have been duly executed and delivered, have received all necessary governmental approval, and do not and will not (i) violate any Legal Requirement which is binding on any Credit Party or any of its Subsidiaries, (ii) contravene or conflict with, or result in a breach of, any provision of the Articles of Incorporation, By-Laws or other organizational documents of any Credit Party or any of its Subsidiaries or of any agreement, indenture, instrument or other document which is binding on any Credit Party or any of its Subsidiaries or (iii) result in, or require, the creation or imposition of any Lien (other than pursuant to the terms of the Operative Agreements) on any asset of any Credit Party or any of its Subsidiaries; (c) This Agreement and the other applicable Operative Agreements executed prior to and as of such date by any Credit Party, constitute the legal, valid and binding obligation of such Credit Party, as applicable, enforceable against the such Credit Party, as applicable, in accordance with their terms. Each Credit Party has executed the various Operative Agreements required to be executed by such Credit Party as of such date; (d) There are no material actions, suits or proceedings pending or, to our knowledge, threatened against any Credit Party in any court or before any Governmental Authority (nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority to set aside, restrain, enjoin or prevent the full performance of any Operative Agreement or any transaction contemplated thereby) that (i) concern any Property or any Credit Party's interest therein, (ii) question the validity or enforceability of any Operative Agreement or any transaction described in the Operative Agreements or (iii) shall have or could reasonably be expected to have a Material Adverse Effect; provided, for purposes of disclosure, the Credit Parties have described the litigation set forth on Exhibit J; (e) No Governmental Action by any Governmental Authority or other authorization, registration, consent, approval, waiver, notice or other action by, to or of any other Person pursuant to any Legal Requirement, contract, indenture, instrument or agreement or for any other reason is required to authorize or is required in connection with (i) the execution, delivery or performance of any Operative Agreement, (ii) the legality, validity, binding effect or enforceability of any Operative Agreement, (iii) the acquisition, ownership, construction, completion, occupancy, operation, leasing or subleasing of any Property or (iv) any Advance, in each case, except those which have been obtained and are in full force and effect; (f) Upon the execution and delivery of the Lease and each Lease Supplement to the Lease, (i) the Lessee will have unconditionally accepted the Property subject to the Lease Supplement and will have a valid and subsisting leasehold interest in such Property, subject only to the Permitted Liens, and (ii) no offset will exist with respect to any Rent or other sums payable under the Lease; (g) Except as otherwise contemplated by the Operative Agreements, the Construction Agent shall not use the proceeds of any Holder Advance or Loan for any 19 25 purpose other than the purchase and/or lease of the Properties, the acquisition, installation and testing of the Equipment, the construction of Improvements and the payment of Transaction Expenses, in each case which accrue prior to the Rent Commencement Date with respect to a particular Property; (h) All information (including without limitation the financial statements and other reports delivered to the Agent pursuant to Section 8.3A(a)(i) and (ii)) heretofore or contemporaneously herewith furnished by each Credit Party or its Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all information hereafter furnished by or on behalf of each Credit Party or its Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and such information, taken as a whole, does not and will not omit to state any material fact necessary to make such information, taken as a whole, not misleading; (i) The principal place of business, chief executive office and office of the Construction Agent and the Lessee where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 1600 Plymouth Street, Mountain View, California 94043; (j) The representations and warranties of each Credit Party set forth in any of the Operative Agreements are true and correct in all material respects on and as of each such date as if made on and as of such date. Each Credit Party is in all material respects in compliance with its respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements which is continuing and which has not been cured within any cure period expressly granted under the terms of the applicable Operative Agreement or otherwise waived in accordance with the applicable Operative Agreement. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on the date of each Advance; (k) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property then being financed consists of (i) unimproved Land or (ii) Land and existing Improvements thereon which Improvements are either suitable for occupancy at the time of acquisition or will be constructed, renovated, modified or demolished in accordance with the terms of this Agreement. Each Property then being financed is located at the location set forth on the applicable Requisition, each of which is in one (1) of the Approved States; (l) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, the Lessor has good and marketable fee simple title to each Property, subject only to (i) such Liens referenced in Sections 6.2(r)(i) and 20 26 6.2(r)(ii) on the applicable Property Closing Date and (ii) subject to Section 5.7, Permitted Liens after the applicable Property Closing Date; (m) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, no portion of any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended; (n) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property complies with all Insurance Requirements and all standards of Lessee with respect to similar properties owned by Lessee; (o) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property complies with all Legal Requirements as of such date (including without limitation all zoning and land use laws and Environmental Laws), except to the extent that failure to comply therewith, individually or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect; provided, however, that solely with respect to the Pre-Existing Environmental Conditions, compliance with the CD, and with any and all other applicable orders and directives of federal, state and local Governmental Authorities, shall constitute compliance with Legal Requirements; (p) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, all utility services and facilities necessary for the construction and operation of the Improvements and the installation and operation of the Equipment regarding each Property (including without limitation gas, electrical, water and sewage services and facilities) are available at the Land or will be constructed prior to the Completion Date for such Property; (q) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, acquisition, installation and testing of the Equipment (if any) and construction of the Improvements (if any) to such date shall have been performed in a good and workmanlike manner, substantially in accordance with the applicable Plans and Specifications; (r) (i) The Security Documents create, as security for the Obligations (as such term is defined in the Security Agreement), valid and enforceable security interests in, and Liens on, all of the Collateral, in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements, and such security interests and Liens are subject to 21 27 no other Liens other than (A) Liens that are expressly set forth as title exceptions on the title commitment issued under Section 5.3(g) with respect to the applicable Property, to the extent such title commitment has been approved by the Agent and (B) from and after the applicable Property Closing Date, Permitted Liens. Upon recordation of the Mortgage Instrument in the real estate recording office in the applicable Approved State identified by the Construction Agent or the Lessee, the Lien created by the Mortgage Instrument in the real property described therein shall be a perfected first priority mortgage Lien on such real property in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements. To the extent that the security interests in the portion of the Collateral comprised of personal property can be perfected by filing in the filing offices in the applicable Approved States or elsewhere identified by the Construction Agent or the Lessee, upon filing of the Lender Financing Statements in such filing offices, the security interests created by the Security Agreement shall be perfected first priority security interests in such personal property in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements; (ii) The Lease Agreement creates, as security for the obligations of the Lessee under the Lease Agreement, valid and enforceable security interests in, and Liens on, each Property leased thereunder, in favor of the Lessor, and such security interests and Liens are subject to no other Liens other than Liens that are expressly set forth as title exceptions on the title commitment issued under Section 5.3(g) with respect to the applicable Property, to the extent such title commitment has been approved by the Agent. Upon recordation of the memorandum of the Lease Agreement (or a short form lease) in the real estate recording office in the applicable Approved State identified by the Construction Agent or the Lessee, the Lien created by the Lease Agreement in the real property described therein shall be a perfected first priority mortgage Lien on such real property in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements. To the extent that the security interests in the portion of any Property comprised of personal property can be perfected by the filing in the filing offices in the State of California or elsewhere identified by the Construction Agent or the Lessee upon filing of the Lessor Financing Statements in such filing offices, a security interest created by the Lease Agreement shall be perfected first priority security interests in such personal property in favor of the Lessor, which rights pursuant to the Lessor Financing Statements are assigned to the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements; (s) The Plans and Specifications for each Property will be prepared prior to the commencement of construction in accordance with all applicable Legal Requirements (including without limitation all applicable Environmental Laws and building, planning, zoning and fire codes), except to the extent the failure to comply therewith, individually 22 28 or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect. Upon completion of the Improvements for the Property in accordance with the applicable Plans and Specifications, such Improvements will be within any building restriction lines and will not encroach in any manner onto any adjoining land (except as permitted by express written easements, which have been approved by the Agent); (t) As of the Rent Commencement Date only, each Property shall be improved in accordance with the applicable Plans and Specifications in a good and workmanlike manner and shall be operational; (u) As of each Property Closing Date only, each Property has been acquired at a price that is not in excess of fair market value; and (v) Each Credit Party has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers of each Credit Party and its Subsidiaries) that could be adversely affected by the Year 2000 Problem, (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis and (iii) to date, implemented that plan in accordance with that timetable. Based on the foregoing, each Credit Party believes that all computer applications (including those of suppliers, vendors and customers of each Credit Party and its Subsidiaries) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so shall not have and could not reasonably be expected to have a Material Adverse Effect. SECTION 6B. GUARANTY 6B.1. GUARANTY OF PAYMENT AND PERFORMANCE. Subject to Section 6B.7, each Guarantor hereby, jointly and severally, unconditionally guarantees to each Financing Party the prompt payment and performance of the Company Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) or when such is otherwise to be performed; provided, notwithstanding the foregoing, the obligations of the Guarantors under this Section 6B shall not constitute a direct guaranty of the indebtedness of the Lessor evidenced by the Notes but rather a guaranty of the Company Obligations arising under the Operative Agreements. This Section 6B is a guaranty of payment and performance and not of collection and is a continuing guaranty and shall apply to all Company Obligations whenever arising. All rights granted to the Financing Parties under this Section 6B shall be subject to the provisions of Section 8.2(h) and 8.6. 23 29 6B.2. OBLIGATIONS UNCONDITIONAL. Each Guarantor agrees that the obligations of the Guarantors hereunder are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Operative Agreements, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Company Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety, guarantor or co-obligor, it being the intent of this Section 6B.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that this Section 6B may be enforced by the Financing Parties without the necessity at any time of resorting to or exhausting any other security or collateral and without the necessity at any time of having recourse to the Notes, the Certificates or any other of the Operative Agreements or any collateral, if any, hereafter securing the Company Obligations or otherwise and each Guarantor hereby waives the right to require the Financing Parties to proceed against the Construction Agent, the Lessee or any other Person (including without limitation a co-guarantor) or to require the Financing Parties to pursue any other remedy or enforce any other right. Each Guarantor further agrees that it hereby waives any and all right of subrogation, indemnity, reimbursement or contribution against the Lessee and the Construction Agent or any other Guarantor of the Company Obligations for amounts paid under this Section 6B until such time as the Loans, Holder Advances, accrued but unpaid interest, accrued but unpaid Holder Yield and all other amounts owing under the Operative Agreements have been paid in full. Without limiting the generality of the waiver provisions of this Section 6B, each Guarantor hereby waives any rights to require the Financing Parties to proceed against the Construction Agent, the Lessee or any co-guarantor or to require Lessor to pursue any other remedy or enforce any other right. Each Guarantor further agrees that nothing contained herein shall prevent the Financing Parties from suing on any Operative Agreement or foreclosing any security interest in or Lien on any collateral, if any, securing the Company Obligations or from exercising any other rights available to it under any Operative Agreement, or any other instrument of security, if any, and the exercise of any of the aforesaid rights and the completion of any foreclosure proceedings shall not constitute a discharge of any Guarantor's obligations hereunder; it being the purpose and intent of each Guarantor that its obligations hereunder shall be absolute, independent and unconditional under any and all circumstances; provided that any amounts due under this Section 6B which are paid to or for the benefit of any Financing Party shall reduce the Company Obligations by a corresponding amount (unless required to be rescinded at a later date). Neither any Guarantor's obligations under this Section 6B nor any remedy for the enforcement thereof shall be impaired, modified, changed or released in any manner whatsoever by an impairment, modification, change, release or limitation of the liability of the Construction Agent or the Lessee or by reason of the bankruptcy or insolvency of the Construction Agent or the Lessee. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Company Obligations and notice of or proof of reliance by any Financing Party upon this Section 6B or acceptance of this Section 6B. Each Guarantor also expressly waives any and all benefits under the California Civil Code Sections 2787 to 2855, inclusive. The Company Obligations shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Section 6B. All dealings between the Construction Agent, the Lessee and any of the guarantors, on the one 24 30 hand, and the Financing Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Section 6B. 6B.3. Modifications. Each Guarantor agrees that (a) all or any part of the security now or hereafter held for the Company Obligations, if any, may be exchanged, compromised or surrendered from time to time; (b) no Financing Party shall have any obligation to protect, perfect, secure or insure any such security interests, liens or encumbrances now or hereafter held, if any, for the Company Obligations or the properties subject thereto; (c) the time or place of payment of the Company Obligations may be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; (d) the Construction Agent, the Lessee and any other party liable for payment under the Operative Agreements may be granted indulgencies generally; (e) any of the provisions of the Notes, the Certificates or any of the other Operative Agreements may be modified, amended or waived; (f) any party (including any co-guarantor) liable for the payment thereof may be granted indulgences or be released; and (g) any deposit balance for the credit of the Construction Agent, the Lessee or any other party liable for the payment of the Company Obligations or liable upon any security therefor may be released, in whole or in part, at, before or after the stated, extended or accelerated maturity of the Company Obligations, all without notice to or further assent by such Guarantor, which shall remain bound thereon, notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence or release. 6B.4. Waiver of Rights. Each Guarantor expressly waives to the fullest extent permitted by applicable law: (a) notice of acceptance of this Section 6B by any Financing Party and of all extensions of credit or other Advances to the Construction Agent and the Lessee by the Lenders pursuant to the terms of the Operative Agreements; (b) presentment and demand for payment or performance of any of the Company Obligations; (c) protest and notice of dishonor or of default with respect to the Company Obligations or with respect to any security therefor; (d) notice of any Financing Party obtaining, amending, substituting for, releasing, waiving or modifying any security interest, lien or encumbrance, if any, hereafter securing the Company Obligations, or any Financing Party's subordinating, compromising, discharging or releasing such security interests, liens or encumbrances, if any; and (e) all other notices to which such Guarantor might otherwise be entitled. Notwithstanding anything to the contrary herein, (i) each Guarantor's payments hereunder shall be due five (5) Business Days after written demand by the Agent for such payment (unless the Company Obligations are automatically accelerated pursuant to the applicable provisions of the Operative Agreements in which case the Guarantors' payments shall be automatically due) and (ii) any modification of the Operative Agreements which has the effect of increasing the Company Obligations shall not be enforceable against a Guarantor unless such Guarantor executes the document evidencing such modification or otherwise reaffirms its guaranty in writing in connection with such modification. 25 31 6B.5. REINSTATEMENT. The obligations of the Guarantors under this Section 6B shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Company Obligations is rescinded or must be otherwise restored by any holder of any of the Company Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify each Financing Party on demand for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred by any Financing Party in connection with such rescission or restoration, including without limitation any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6B.6. REMEDIES. The Guarantors agree that, as between the Guarantors, on the one hand, and each Financing Party, on the other hand, the Company Obligations may be declared to be forthwith due and payable as provided in the applicable provisions of the Operative Agreements (and shall be deemed to have become automatically due and payable in the circumstances provided therein) notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing such Company Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or such Company Obligations being deemed to have become automatically due and payable), such Company Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors in accordance with the applicable provisions of the Operative Agreements. 6B.7. LIMITATION OF GUARANTY. Notwithstanding any provision to the contrary contained herein or in any of the other Operative Agreements, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including without limitation because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including without limitation the Bankruptcy Code). Subject to Section 6B.5, upon the satisfaction of the Company Obligations in full, regardless of the source of payment, the Guarantors' obligations hereunder shall be deemed satisfied, discharged and terminated other than indemnifications set forth herein that expressly survive. 6B.8. PAYMENT OF AMOUNTS TO THE AGENT. Each Financing Party hereby instructs each Guarantor, and each Guarantor hereby acknowledges and agrees, that until such time as the Loans and the Holder Advances are paid in 26 32 full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released any and all Rent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person shall instead be paid directly to the Agent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) or as the Agent may direct from time to time for allocation and distribution in accordance with the procedures set forth in Section 8.7 hereof. SECTION 7. PAYMENT OF CERTAIN EXPENSES. 7.1. TRANSACTION EXPENSES. (a) The Lessor agrees on the Initial Closing Date, to pay, or cause to be paid, all Transaction Expenses arising from the Initial Closing Date, including without limitation all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Initial Closing Date, the initial fees and expenses of the Owner Trustee due and payable on such Initial Closing Date, all fees, taxes and expenses for the recording, registration and filing of documents and all other reasonable fees, expenses and disbursements incurred in connection with such Initial Closing Date; provided, however, the Lessor shall pay such amounts described in this Section 7.1(a) only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment and without regard to whether such amounts are referenced in any Requisition. On the Initial Closing Date after satisfaction of the conditions precedent for such date (excluding the requirement that a Requisition be delivered), the Holders shall make Holder Advances and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in this Section 7.1(a). (b) Assuming no Default (other than a Default that would be cured upon application of the proceeds of such Advance, provided such proceeds are so applied or provision reasonably satisfactory to the Agent shall have been made such that such proceeds will be so applied) or Event of Default shall have occurred and be continuing and only for the period prior to the Rent Commencement Date, the Lessor agrees on each Property Closing Date, on the date of any Construction Advance and on the Completion Date to pay, or cause to be paid, all Transaction Expenses including without limitation all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and billed in connection with such Advance or such Completion Date, all amounts described in Section 7.1(a) of this Agreement which have not been previously paid, the annual fees and reasonable out-of-pocket expenses of the Owner Trustee, all fees, expenses and disbursements incurred with respect to the various items referenced in Sections 5.3, 5.4 and/or 5.5 (including without limitation any premiums for title insurance policies and charges for any updates to such policies) and all other reasonable fees, 27 33 expenses and disbursements in connection with such Advance or such Completion Date including without limitation all expenses relating to and all fees, taxes and expenses for the recording, registration and filing of documents and during the Commitment Period, all fees, expenses and costs referenced in Sections 7.3(a), 7.3(b), 7.3(d) and 7.4; provided however, the Lessor shall pay such amounts described in this Section 7.1(b) only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment and without regard to whether such amounts are referenced in any Requisition. On each Property Closing Date, on the date of any Construction Advance or any Completion Date, after satisfaction of the conditions precedent for such date (excluding the requirement that a Requisition be delivered), the Holders shall make a Holder Advance and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in this Section 7.1(b). (c) All fees payable pursuant to the Operative Agreements shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed. (d) The Lessor shall use commercially reasonable efforts to cause invoices respecting the Transaction Expenses set forth in this Section 7.1 of legal counsel and other professional service providers retained by the Lessor to be provided to the Lessee; provided, however, the failure of the Lessor to cause such invoices to be provided shall in no way excuse or otherwise affect the payment obligations for such Transaction Expenses. 7.2. BROKERS' FEES. The Lessee agrees to pay or cause to be paid any and all brokers' fees, if any, including without limitation any interest and penalties thereon, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements. 7.3. CERTAIN FEES AND EXPENSES. The Lessee agrees to pay or cause to be paid (a) the $5,000 initial and $5,000 annual Owner Trustee's fee and all reasonable expenses of the Owner Trustee and any co-trustees (including without limitation reasonable counsel fees and expenses) or any successor owner trustee and/or co-trustee, for acting as the owner trustee under the Trust Agreement, (b) all reasonable costs and expenses incurred by the Credit Parties, the Agent, the Lenders, the Holders or the Lessor in entering into any Lease Supplement and any future amendments, modifications, supplements, restatements and/or replacements with respect to any of the Operative Agreements, whether or not such Lease Supplement, amendments, modifications, supplements, restatements and/or replacements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by any Credit Party, the Agent, the Lenders, the Holders or the Lessor, (c) all reasonable costs and expenses incurred by the Credit Parties, the Agent, the Lenders, the Holders of the Lessor in connection with any exercise of remedies under any Operative Agreement or any purchase of any Property by the Credit Parties or any third party and (d) all reasonable costs and expenses incurred by the Construction Agent, the Lessee, the 28 34 Agent, the Lenders, the Holders or the Lessor in connection with any transfer or conveyance of any Property, whether or not such transfer or conveyance is ultimately accomplished. 7.4. COMMITMENT FEE. During the Commitment Period, the Lessee agrees to pay or to cause to be paid to the Agent for the account of (a) the Lenders, respectively, a commitment fee (the "Lender Commitment Fee") equal to the product of the Commitment of each Lender multiplied by a per annum rate equal to the Applicable Percentage for the Lender Commitment Fee and (b) the Holders, respectively, a commitment fee (the "Holder Commitment Fee") equal to the product of the Holder Commitment of each Holder multiplied by a per annum rate equal to the Applicable Percentage for the Holder Commitment Fee. Such Commitment Fees shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed and shall be payable quarterly in arrears on each Commitment Fee Payment Date. If all or a portion of any such Commitment Fee shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee on demand, at a rate per annum equal to the ABR (or in the case of overdue amounts relating to Holder Commitment Fees, the ABR plus 1.00%) plus two percent (2%) from the date of such non-payment until such amount is paid in full. SECTION 8. OTHER COVENANTS AND AGREEMENTS. 8.1. COOPERATION WITH THE CONSTRUCTION AGENT OR THE LESSEE. The Holders, the Lenders, the Lessor (at the direction of the Majority Secured Parties) and the Agent shall, at the expense of and to the extent reasonably requested by the Construction Agent or the Lessee (but without assuming additional liabilities on account thereof and only to the extent such is acceptable to the Holders, the Lenders, the Lessor (at the direction of the Majority Secured Parties) and the Agent in their reasonable discretion), cooperate with the Construction Agent or the Lessee in connection with the Construction Agent or the Lessee satisfying its covenant obligations contained in the Operative Agreements including without limitation at any time and from time to time, promptly and duly executing and delivering any and all such further instruments, documents and financing statements (and continuation statements related thereto). 8.2 COVENANTS OF THE OWNER TRUSTEE AND THE HOLDERS. Each of the Owner Trustee and the Holders hereby agrees that so long as this Agreement is in effect: (a) Neither the Owner Trustee (in its trust capacity or in its individual capacity) nor any Holder will create or permit to exist at any time, and each of them will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Properties attributable to it; provided, however, that the Owner Trustee and the Holders shall not be required to so 29 35 discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not materially and adversely affect the rights of the Lessee under the Lease and the other Operative Agreements or involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, any Property or title thereto or any interest therein or the payment of Rent; (b) Without prejudice to any right under the Trust Agreement of the Owner Trustee to resign (subject to the requirement set forth in the Trust Agreement that such resignation shall not be effective until a successor shall have agreed to accept such appointment), or the Holders' rights under the Trust Agreement to remove the institution acting as the Owner Trustee (after consent to such removal by the Agent as provided in the Trust Agreement), each of the Owner Trustee and the Holders hereby agrees with the Lessee and the Agent (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article VIII of the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of any such party without the prior written consent of such party and (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect such party; (c) The Owner Trustee or any successor may resign or be removed by the Holders as the Owner Trustee, a successor Owner Trustee may be appointed and a corporation may become the Owner Trustee under the Trust Agreement, only in accordance with the provisions of Article IX of the Trust Agreement and, with respect to such appointment, with the consent of the Lessee (so long as there shall be no Lease Event of Default that shall have occurred and be continuing), which consent shall not be unreasonably withheld or delayed; (d) The Owner Trustee, in its capacity as the Owner Trustee under the Trust Agreement, and not in its individual capacity, shall not contract for, create, incur or assume any Indebtedness, or enter into any business or other activity or enter into any contracts or agreements, other than pursuant to or under the Operative Agreements; (e) The Holders will not instruct the Owner Trustee to take any action in violation of the terms of any Operative Agreement; (f) Neither any Holder nor the Owner Trustee shall (i) commence any case, proceeding or other action with respect to the Owner Trustee under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official with respect to the Owner Trustee or for all or any substantial benefit of the creditors of the Owner Trustee; and neither any Holder nor the 30 36 Owner Trustee shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph; (g) The Owner Trustee shall give prompt notice to the Lessee, the Holders and the Agent if the Owner Trustee's principal place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to any Property are kept, shall cease to be located at 79 South Main Street, Salt Lake City, Utah 84111, or if it shall change its name; and (h) The Owner Trustee shall take or refrain from taking such actions and grant or refrain from granting such approvals with respect to the Operative Agreements and/or relating to any Property in each case as directed in writing by the Agent (until such time as the Loans are paid in full, and then by the Majority Holders) or, in connection with Sections 8.5 and 9.2 hereof, the Lessee; provided, however, that notwithstanding the foregoing provisions of this subparagraph (h) the Owner Trustee, the Agent, the Lenders and the Holders each acknowledge, covenant and agree that neither the Owner Trustee nor the Agent shall act or refrain from acting, regarding each Unanimous Vote Matter, until such party has received the approval of each Lender and each Holder affected by such matter. 8.3. CREDIT PARTY COVENANTS, CONSENT AND ACKNOWLEDGMENT. (a) Each Credit Party acknowledges and agrees that the Owner Trustee, pursuant to the terms and conditions of the Security Agreement and the Mortgage Instruments, shall create Liens respecting the various personal property, fixtures and real property described therein in favor of the Agent. Each Credit Party hereby irrevocably consents to the creation, perfection and maintenance of such Liens until such liens are subject to release in accordance with this Agreement and the other Operative Agreements. Each Credit Party shall, to the extent reasonably requested by any of the other parties hereto, cooperate with the other parties in connection with their covenants herein or in the other Operative Agreements and shall from time to time duly execute and deliver any and all such future instruments, documents and financing statements (and continuation statements related thereto) as any other party hereto may reasonably request. (b) The Lessor hereby instructs each Credit Party, and each Credit Party hereby acknowledges and agrees, that until such time as the Loans and the Holder Advances are paid in full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released (i) any and all Rent (excluding Excepted Payments which shall be payable to each Holder or other Person entitled thereto) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person shall instead be paid directly to the Agent (excluding Excepted Payments which shall be payable to each Holder or other Person entitled thereto) or as the Agent may direct from time to time for allocation and distribution in accordance with the procedures set forth in Section 8.7 hereof, (ii) all rights of the Lessor under the Lease shall be exercised by the Agent and (iii) each Credit Party shall cause all 31 37 notices, certificates, financial statements, communications and other information which are delivered, or are required to be delivered, to the Lessor, to also be delivered at the same time to the Agent. (c) No Credit Party shall consent to or permit any amendment, supplement or other modification of the terms or provisions of any Operative Agreement except in accordance with Section 12.4 of this Agreement. (d) The Lessee hereby covenants and agrees to cause an Appraisal or reappraisal (in form and substance satisfactory to the Agent and from an appraiser selected by the Agent) to be issued respecting any Property as reasonably requested by the Agent from time to time (i) at each and every time as such shall be required to satisfy any regulatory requirements imposed on the Agent, the Lessor, the Trust Company, any Lendor and/or any Holder and (ii) after the occurrence of an Event of Default. (e) The Lessee hereby covenants and agrees that, except for amounts payable as Basic Rent, any and all payment obligations owing from time to time under the Operative Agreements by any Person to the Agent, any Lender, any Holder or any other Person shall (without further action) be deemed to be Supplemental Rent obligations payable by the Lessee in accordance with the terms and conditions of this Agreement and the other Operative Agreements. Without limitation, such obligations of the Lessee shall include the Supplement Rent obligations pursuant to Section 3.3 of the Lease, arrangement fees, administrative fees, participation fees, commitment fees, unused fees, prepayment penalties, breakage costs, indemnities, trustee fees and transaction expenses incurred by the parties hereto in connection with the transactions contemplated by the Operative Agreements. (f) At any time the Lessor or the Agent is entitled under the Operative Agreements to possession of a Property or any component thereof, each of the Construction Agent and the Lessee hereby covenants and agrees, at its own cost and expense, to assemble and make the same available to the Agent (on behalf of the Lessor). (g) The Lessee hereby covenants and agrees that, respecting each Property, Non-Integral Equipment financed under the Operative Agreements may constitute up to, but shall not exceed, ten percent (10%) of the aggregate Advances extended at or prior to such time with respect to such Property. (h) The Lessee hereby covenants and agrees that as of Completion (i) the aggregate Property Cost shall not exceed $72,000,000 and (ii) each parcel of the Property shall be a Permitted Facility. (i) The Lessee hereby covenants and agrees that it shall give prompt notice to the Agent if the Lessee's principal place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to any 32 38 Property are kept, shall cease to be located at 1600 Plymouth Street, Mountain View, California 94043 or if it shall change its name. (j) Unless the Agent otherwise agrees in writing, the Lessee hereby covenants and agrees that the aggregate Property Cost of Non-Integral Equipment purchased for any reason by the Lessee prior to the Expiration Date shall not exceed ten percent (10%) of the aggregate Property Cost for all Properties funded during the Commitment Period. (k) The Lessee shall, on or before the first Business Day of each fiscal quarter of the Lessee, furnish to the Agent a written notice setting forth the Lessee's calculation, in reasonable detail, of the ratio of Funded Indebtedness to EBITDA and the level of EBITDA for the immediately preceding fiscal quarter of the Lessee. (l) The Lessee hereby covenants and agrees that the rights of the Lessee under this Agreement and the Lease shall not impair or in any way diminish the obligations of the Construction Agent and/or the rights of the Lessor under the Agency Agreement. (m) Each Credit Party shall promptly notify the Agent, or cause the Agent to be promptly notified, upon such Credit Party gaining knowledge of the occurrence of any Default or Event of Default which is continuing at such time. In any event, such notice shall be provided to the Agent within ten (10) days of when such Credit Party gains such knowledge. (n) Until all of the obligations under the Operative Agreements have been finally and indefeasibly paid and satisfied in full and the Commitments and the Holder Commitments terminated each Credit Party, unless consent has been obtained from the Majority Secured Paries, will: (i) except as permitted by Sections 8.3A and 8.3B, preserve and maintain its separate legal existence and all rights, franchises, licenses and privileges necessary to the conduct of its business, and qualify and remain qualified as a foreign corporation (or partnership, limited liability company or other such similar entity, as the case may be) and authorized to do business in each jurisdiction in which the failure to do so qualify would have a Material Adverse Effect; (ii) pay and perform all obligations of the Credit Parties under the Operative Agreements and pay and perform (A) all taxes, assessments and other governmental charges that may be levied or assessed upon it or any of its property, and (B) all other indebtedness, obligations and liabilities in accordance with customary trade practices, which if not paid would have a Material Adverse Effect; provided that any Credit Party may contest any item described in this Section 8.3(n)(ii) in good faith so long as adequate reserves are maintained with respect thereto in accordance with GAAP; 33 39 (iii) to the extent failure to do so would have a Material Adverse Effect, observe and remain in compliance with all applicable Laws and maintain in full force and effect all Governmental Actions, in each case applicable to the conduct of its business; keep in full force and effect all licenses, certifications or accreditations necessary for any Facility to carry on its business; and not permit the termination of any insurance reimbursement program available to any Facility; and (iv) provided that the Agent, the Lenders and the Holders use reasonable efforts to minimize disruption to the business of the Credit Parties, permit representatives of the Agent or any Lender or Holder, from time to time, to visit and inspect its properties; inspect, audit and make extracts from its books, records and files, including without limitation management letters prepared by independent accountants; and discuss with its principal officers, and its independent accountants, its business, assets, liabilities, financial condition, results of operations and business prospects. (o) [RESERVED]. (p) Promptly after obtaining any required architectural approvals by any business park or any other applicable entity with oversight responsibility for the applicable Improvements, the Construction Agent shall deliver to the Agent copies of the same. (q) Each Credit Party will promptly notify the Agent in the event such Credit Party discovers or determines that any computer application (including those of any supplier, vendor or customer of such Credit Party or any of its Subsidiaries) that is material to such Credit Party's or any of its Subsidiaries' business and operations will not be Year 2000 Compliant, except to the extent that such failure shall not have and could not reasonably be expected to have a Material Adverse Effect. (r) Each Credit Party hereby covenants and agrees that, except for amounts payable as Basic Rent, any and all payment obligations owing from time to time under the Operative Agreements by any Person to the Agent, any Lender, any Holder or any other Person shall (without further action) be deemed to be Supplemental Rent obligations payable by the Lessee and guaranteed by the other Credit Parties. Without limitation, such obligations of the Credit Parties shall include without limitation arrangement fees, administrative fees, unused fees, breakage costs, indemnities, trustee fees and transaction expenses incurred by the parties hereto in connection with the transactions contemplated by the Operative Agreements. (s) Each Credit Party hereby covenants and agrees to cause each Domestic Subsidiary of each Credit Party and the Parent formed or acquired after the Initial Closing Date to execute a Joinder Agreement and to observe the terms of Sections 5.10(a)-(d) of 34 40 this Agreement, all within thirty (30) days of the formation or acquisition of such Domestic Subsidiary or the Parent, as the case may be. (t) The Lessee hereby covenants and agrees that it will (i) cause the Improvements to be constructed by, and use commercially reasonable efforts to cause the demolition of existing improvements to be performed by, a Contractor that is a licensed general contractor, and that shall carry insurance of the types and in the minimum amounts set forth in Section 14.2(c) of the Lease, under a maximum fixed price contact, and (ii) cause such Contractor to retain licensed consultants, engineers, architects and subcontractors, all of whom shall carry insurance of the types and in the minimum amounts set forth in Section 14.2(c) of the Lease, in connection with the construction of Improvements and the demolition of existing improvements in accordance with the terms and conditions of the Operative Agreements. 8.3A. AFFIRMATIVE COVENANTS. (a) INFORMATION COVENANTS. The Credit Parties will furnish, or cause to be furnished, to the Agent on behalf of the Lenders: (i) Annual Financial Statements. As soon as available, and in any event within 90 days after the close of each fiscal year of the Lessee, a consolidated and consolidating balance sheet and income statement of the Credit Parties and their Consolidated Subsidiaries as of the end of such fiscal year, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal year, in each case setting forth in comparative form consolidated and consolidating figures for the preceding fiscal year, all such financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified as to the status of the Credit Parties and their Consolidated Subsidiaries as a going concern or any other material qualifications or exceptions. (ii) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the close of each fiscal quarter of the Credit Party (other than the fourth fiscal quarter, in which case 90 days after the end thereof) a consolidated and consolidating balance sheet and income statement of the Credit Parties and their Consolidated Subsidiaries as of the end of such fiscal quarter, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal quarter, in each case setting forth in comparative form consolidated and consolidating figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably 35 41 acceptable to the Agent, and accompanied by a certificate of the chief financial officer of the Lessee to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Credit Parties and their Consolidated Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. (iii) Officer's Certificate. At the time of delivery of the financial statements provided for in Sections 8.3A(a)(i) and 8.3A(a)(ii) above, a certificate of the chief financial officer of the Lessee or the Parent, as applicable, substantially in the form of Schedule 8.3A(a)(iii), (i) demonstrating compliance with the financial covenants contained in Section 8.3(k) by calculation thereof as of the end of each such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Credit Parties propose to take with respect thereto. (iv) Annual Business Plan and Budgets. At least 30 days prior to the end of each fiscal year of the Lessee, beginning with the fiscal year ending December 31, 1999, an annual budget of the Parent and its Consolidated Subsidiaries containing, among other things, pro forma financial statements for the next fiscal year. (v) Accountant's Certificate. Within 120 days after the close of each fiscal year of the Lessee, a certificate of the accountants conducting the annual audit stating that they have reviewed this Credit Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default and, if any such Default or Event of Default exists, specifying the nature and extent thereof. (vi) Auditor's Reports. Promptly upon receipt thereof, a copy of any other report or "management letter" submitted by independent accountants to the Parent or any of its Consolidated Subsidiaries in connection with any annual, interim or special audit of the books of such Person. (vii) Reports. Promptly upon transmission or receipt thereof, (i) copies of any filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as the Parent or any Consolidated Subsidiary shall send to its shareholders or to a holder of any Indebtedness owed by the Parent or any Consolidated Subsidiary in its capacity as such a holder and (ii) upon the request of the Agent, all reports and written information to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters. (viii) ERISA. Upon the Parent, any of its Consolidated Subsidiaries or any ERISA Affiliate obtaining knowledge thereof, the Lessee will give written notice to the 36 42 Agent promptly (and in any event within five Business Days) of: (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or might reasonably lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against a Credit Party or any of its Consolidated Subsidiaries or any ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which a Credit Party or any of its Consolidated Subsidiaries or any ERISA Affiliate is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) any change in the funding status of any Plan that could have a Material Adverse Effect, together with a description of any such event or condition or a copy of any such notice and a statement by the chief financial officer of the Lessee briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by a Credit Party or any of its Consolidated Subsidiaries with respect thereto. Promptly upon request, the Lessee shall furnish the Agent and the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each "plan year" (within the meaning of Section 3(39) of ERISA). (ix) Environmental. (A) Upon the reasonable written request of the Agent, the Lessee will furnish or cause to be furnished to the Agent, at the Lessee's expense, a report of an environmental assessment of reasonable scope, form and depth, (including, where appropriate, invasive soil or groundwater sampling) by a consultant reasonably acceptable to the Agent as to the nature and extent of the presence of any Hazardous Materials on any Real Properties and as to the compliance by a Credit Party or any of its Consolidated Subsidiaries with Environmental Laws at such Real Properties. If the Lessee fails to deliver such an environmental report within seventy-five (75) days after receipt of such written request then the Agent may arrange for same, and the Credit Parties hereby grant to the Agent and their representatives access to the Real Properties to reasonably undertake such an assessment (including, where appropriate, invasive soil or groundwater sampling). The reasonable cost of any assessment arranged for by the Agent pursuant to this provision will be payable by the Credit Parties on demand (except that during the Construction Period, such cost shall be paid by Lessor; provided, however, the Lessor shall pay such amounts described in this Section 8.3A(a)(ix) only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment) and added to the obligations secured by the Security Documents. 37 43 (B) The Lessee and its Consolidated Subsidiaries will conduct and complete (or, in the case of Pre-Existing Environmental Conditions, cause to be conducted and completed) all investigations, studies, sampling, and testing and all remedial, removal, and other actions necessary to address all Hazardous Materials on, from or affecting any of the Real Properties to the extent necessary to be in compliance with all Environmental Laws and with the validly issued orders and directives of all Governmental Authorities with jurisdiction over such Real Properties to the extent any failure could have a Material Adverse Effect. (X) Other Information. With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of a Credit Party and any of its Consolidated Subsidiaries as the Agent or the Majority Secured Parties may reasonably request. (b) PRESERVATION OF EXISTENCE AND FRANCHISES. Each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority, except in connection with any Permitted Acquisition. (c) BOOKS AND RECORDS. Each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves). (d) COMPLIANCE WITH LAW. Each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, comply with all laws, rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its Property if noncompliance with any such law, rule, regulation, order or restriction could have a Material Adverse Effect; provided, however, that solely with respect to the Pre-Existing Environmental Conditions, compliance with the CD, and with any and all other applicable orders and directives of federal, state and local Governmental Authorities, shall constitute compliance with Legal Requirements. (e) PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Subject to Lessee's permitted contest rights under Section 11.2 hereof and Section 13.1 of the Lease, each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, pay and discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials 38 44 and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) except as prohibited hereunder, all of its other Indebtedness as it shall become due; provided, however, that a Credit Party and any of its Consolidated Subsidiaries shall not be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) could give rise to an immediate right to foreclose on a Lien securing such amounts or (ii) could have a Material Adverse Effect. (f) MAINTENANCE OF PROPERTY. Each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, maintain and preserve its properties and equipment material to the conduct of its business in good repair, working order and condition, normal wear and tear and casualty and condemnation excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as may be needed or proper, to the extent and in the manner customary for companies in similar businesses. (g) PERFORMANCE OF OBLIGATIONS. Each of the Credit Parties will, and will cause each of its Consolidated Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound. (h) FINANCIAL COVENANTS. (i) Leverage Ratio. The Leverage Ratio, as of the last day of each fiscal quarter of the Lessee, shall be less than or equal to: (A) From the Closing Date to and including December 31, 2000, 1.25 to 1.0; and (B) From January 1, 2001 and thereafter, 1.0 to 1.0. (ii) EBITDA. EBITDA, for each period set forth below, as shown on the financial statements of Credit Parties and their Consolidated Subsidiaries delivered pursuant to Section 8.3(A)(a)(i), shall not be less than (i) $130,000,000 for each twelve month period ending December 31, 1999, March 31, 2000, June 30, 2000 and September 30, 2000, (ii) $200,000,000 for each twelve month period ending December 31, 2000, March 31, 2001, June 30, 2001 and September 30, 2001 (iii) $230,000,000 for each twelve month period ending December 31, 2001, March 31, 2002, June 30, 2002 and September 30, 2002, (iv) $340,000,000 for each twelve month period ending December 31, 2002, March 31, 2003, June 30, 2003 and September 30, 2003 and (v) $450,000,000 39 45 for each twelve month period ending as of December 31, 2003 and each March 31, June 30, September 30 and December 31 thereafter. (iii) Quick Ratio. The Quick Ratio, as of the last day of each fiscal quarter of the Lessee, shall be greater than or equal to 1.50 to 1.0. (iv) Calculation Method. For purposes of calculating the Leverage Ratio and the Quick Ratio, unsecured convertible subordinated debentures of a Credit Party permitted by Section 8.3B(a)(vi) shall not be considered Funded Debt. (i) NSMG ACQUISITION. The Credit Parties hereby agree that they will cause the following events to occur (in the order designated below) prior to September 30, 1999: (i) the merger of Merger Sub with and into the Lessee shall occur (making the Lessee a wholly-owned Subsidiary of the Parent) in accordance with the terms of the Reorganization Agreement and applicable law; (ii) each share of Capital Stock of the Lessee will be converted into one share of Capital Stock of the Parent in accordance with the terms of the Reorganization Agreement and applicable law; and (iii) the Parent shall have acquired all of the Capital Stock of NSMG and the NSMG Business in accordance with the terms of the Reorganization Agreement and applicable law. 8.3B. NEGATIVE COVENANTS. (a) INDEBTEDNESS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, contract, create, assume or permit to exist any Indebtedness, except: (i) Indebtedness arising under this Participation Agreement and the other Operative Agreements; (ii) Indebtedness of a Credit Party and its Consolidated Subsidiaries set forth in Schedule 8.3B(a)(ii) (and renewals, refinancings and extensions thereof on terms and conditions no less favorable to such Person than such existing Indebtedness); (iii) purchase money Indebtedness (including obligations in respect of Capital Leases) hereafter incurred by a Credit Party or any of its Consolidated Subsidiaries to finance the purchase of fixed assets provided that (i) the total of all such Indebtedness for all such Persons taken together (including any such Indebtedness referred to in subsection 40 46 (b) above) shall not exceed (A) during fiscal year 1999 and 2000, an aggregate principal amount of $25,000,000 at any one time outstanding and (B) at any time subsequent to fiscal year 2000, $40,000,000 at any one time outstanding; (ii) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (iii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iv) other unsecured Indebtedness of the Credit Parties and their Consolidated Subsidiaries in an aggregate amount not to exceed $150,000,000 on terms and conditions satisfactory in form and substance to the Majority Secured Parties; (v) the Subordinated Debt; and (vi) Indebtedness of a Credit Party consisting of unsecured convertible subordinated debentures on terms and conditions (including, without limitation, the subordination terms) reasonably acceptable to the Agent, and any renewal, refinancings or extensions thereof on terms and conditions (including, without limitation, the subordinations terms) reasonably acceptable to the Agent. (b) LIENS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to contract, create, incur, assume or permit to exist any Lien with respect to any of its Property, whether now owned or after acquired, except for Permitted Liens. (c) NATURE OF BUSINESS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, substantively alter the character or conduct of its business from that conducted as of the Initial Closing Date or engage in any business other than the business conducted as of the Initial Closing Date other than activities in the systems management software business substantially similar or related to such businesses. (d) CONSOLIDATION, MERGER, DISSOLUTION, ETC. No Credit Party will, nor will it permit any Consolidated Subsidiaries to, enter into any transaction of merger or consolidation or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, notwithstanding the foregoing provisions of this Section 8.3B(d), (a) the Lessee may merge or consolidate with any of its Consolidated Subsidiaries provided that (i) the Lessee shall be the continuing or surviving corporation, and (ii) after giving effect to such transaction, no Default or Event of Default arises, (b) any Consolidated Subsidiary of the Lessee may be merged or consolidated with or into any other Consolidated Subsidiary of the Lessee provided that after giving effect to such transaction no Default or Event of Default exists, (c) any Wholly-Owned Subsidiary of the Lessee may dissolve, liquidate or wind up its affairs at any time provided that such 41 47 dissolution, liquidation or winding up, as applicable, could not have a Material Adverse Effect and (d) the Lessee may merge with Merger Sub (as defined in the Reorganization Agreement) pursuant to the terms of the Reorganization Agreement provided that after giving effect to such merger no Default or Event of Default exists. (e) ASSET DISPOSITIONS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, sell, lease, transfer or otherwise dispose of any Property (including, without limitation, pursuant to any sale/leaseback transaction or securitization transaction) other than (i) the sale of assets in the ordinary course of business for fair consideration, (ii) the sale or disposition of assets no longer used or useful in the conduct of such Person's business and (iii) the sale by NSMG for fair consideration of those lines of business identified on Schedule 8.3B(e). (f) INVESTMENTS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, make Investments in or to any Persons, except for Permitted Investments. (g) RESTRICTED PAYMENTS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, directly or indirectly, declare, order, make or set apart any sum for or pay any Restricted Payment, except (i) to make dividends payable solely in the same class of Capital Stock of such Person so long as no Default or Event of Default exists and is continuing or would be directly or indirectly caused as a result thereof, (ii) to make dividends or other distributions payable to the Lessee (directly or indirectly through Subsidiaries), (iii) prior to the Reorganization, the repurchase by the Lessee of outstanding shares of Capital Stock of the Lessee so long as no Default or Event of Default exists and is continuing or would be directly or indirectly caused as a result thereof and (iv) after the Reorganization, the repurchase by the Parent of outstanding shares of Capital Stock of the Parent so long as no Default or Event of Default exists and is continuing or would be directly or indirectly caused as a result thereof. (h) OTHER INDEBTEDNESS. No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, (i) after the issuance thereof, amend or modify (or permit the amendment or modification of) any of the terms of any Indebtedness of a Credit Party or any of its Consolidated Subsidiaries if such amendment or modification would add or change any terms in a manner adverse to such Credit Party or any of its Consolidated Subsidiaries, or shorten the final maturity or average life to maturity or require any payment to be made sooner than originally scheduled or increase the interest rate applicable thereto or change any subordination provision thereof or (ii) make (or give any notice with respect thereto) any voluntary or optional payment or prepayment or redemption or acquisition for value of 42 48 (including without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any other Indebtedness of a Credit Party or any of its Consolidated Subsidiaries. (i) TRANSACTIONS WITH AFFILIATES. ---------------------------- No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, enter into or permit to exist any transaction or series of transactions with any officer, director, shareholder, Subsidiary or Affiliate of such Person other than (a) transactions permitted by Section 8.3B(d), Section 8.3B(f) or Section 8.3B(g), (b) normal compensation and reimbursement of expenses of officers and directors, (c) any employment agreement (including customary benefits thereunder) that is entered into in the ordinary course of business and (d) other transactions which are entered into in the ordinary course of such Person's business on terms and conditions substantially as favorable to such Person as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate. (j) FISCAL YEAR; ORGANIZATIONAL DOCUMENTS. ------------------------------------- No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, (a) change its fiscal year without having first provided 30 days prior written notice to the Agent, or (b) amend, modify or change its articles of incorporation (or corporate charter or other similar organizational document) or bylaws (or other similar document) in any manner that would reasonably be likely to adversely affect the rights of the Lenders and Holders without the prior written consent of the Majority Secured Parties. (k) LIMITATION ON RESTRICTED ACTIONS. -------------------------------- No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Person to (a) pay dividends or make any other distributions on such Person's Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Indebtedness or other obligation owed to a Credit Party or any of its Consolidated Subsidiaries, (c) make loans or advances to Credit Party or any of its Consolidated Subsidiaries, (d) sell, lease or transfer any of its properties or assets to a Credit Party or any of its Consolidated Subsidiaries, except (in respect of any of the matters referred to in clauses (a)-(d) above) for such encumbrances or restrictions existing under or by reason of (i) this Participation Agreement and the other Operative Agreements or (ii) applicable law. (l) OWNERSHIP OF SUBSIDIARIES. ------------------------- Notwithstanding any other provisions of this Credit Agreement to the contrary, the Credit Parties will not, nor will they permit any of their Consolidated Subsidiaries to, (i) 43 49 permit any Person (other than the Parent, the Lessee or any Wholly-Owned Subsidiary of the Lessee) to own any Capital Stock of any Subsidiary of a Credit Party, (ii) permit any Subsidiary of a Credit Party to issue any shares of preferred Capital Stock or (iii) permit, create, incur, assume or suffer to exist any Lien on any Capital Stock of any Subsidiary of a Credit Party. (m) SALE LEASEBACKS. --------------- No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any lease, whether an Operating Lease or a Capitalized Lease, of any Property (whether real, personal or mixed), whether now owned or hereafter acquired, (a) which such Credit Party or any of its Consolidated Subsidiaries has sold or transferred or is to sell or transfer to a Person which is not a Credit Party or any of its Consolidated Subsidiaries or (b) which a Credit Party or any of its Consolidated Subsidiaries intends to use for substantially the same purpose as any other Property which has been sold or is to be sold or transferred by such Credit party or its Consolidated Subsidiaries to another Person which is not a Credit Party or any of its Consolidated Subsidiaries in connection with such lease. (n) NO FURTHER NEGATIVE PLEDGES. --------------------------- No Credit Party will, nor will it permit any of its Consolidated Subsidiaries to, enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for any obligation if security is given for any other obligation, except pursuant to this Participation Agreement and the other Operative Agreements. (o) CAPITAL EXPENDITURES. -------------------- The Credit Parties hereby agree that the Credit Parties and their Consolidated Subsidiaries will not make any Capital Expenditures if any Default or Event or Default has occurred and is continuing or would be directly or indirectly caused as a result thereof. 8.4 SHARING OF CERTAIN PAYMENTS. --------------------------- Except for Excepted Payments, the parties hereto acknowledge and agree that all payments due and owing by any Credit Party to the Lessor under the Lease or any of the other Operative Agreements shall be made by such Credit Party directly to the Agent as more particularly provided in Section 8.7 hereof. The Lessor, the Holders, the Agent, the Lenders and the Credit Parties acknowledge the terms of Section 8.7 of this Agreement regarding the allocation of payments and other amounts made or received from time to time under the Operative Agreements and agree, that all such payments and amounts are to be allocated as provided in Section 8.7 of this Agreement. 44 50 8.5 GRANT OF EASEMENTS, ETC. The Owner Trustee, the Agent, the Lenders and the Holders hereby agree that, so long as no Event of Default shall have occurred and be continuing, the Lessee may take the following actions in the name and stead of the Owner Trustee (but at Lessee's sole cost and expense) in connection with the transactions contemplated by the Agency Agreement, the Lease or the other Operative Agreements, (i) grant easements and other rights in the nature of easements with respect to any Property, (ii) release existing easements or other rights in the nature of easements which are for the benefit of any Property, (iii) execute and deliver to any Person any instrument appropriate to confirm or effect such grants or releases, and (iv) execute and deliver to any Person such other documents or materials in connection with the acquisition, development, construction, testing or operation of any Property, including without limitation reciprocal easement agreements, construction contracts, operating agreements, development agreements, plats, replats or subdivision documents; provided, that each of the agreements referred to in this Section 8.5 shall be of the type normally executed by the Lessee in the ordinary course of the Lessee's business and shall be on commercially reasonable terms so as not to diminish the fair market value of any Property; provided, further, that nothing in this Section 8.5 shall be deemed to permit the Lessee to modify, amend, alter, release, terminate or otherwise affect that certain Grant of Easements, Restriction and Indemnity Agreement dated as of December 24, 1997 and executed by Raytheon Semiconductor, Inc., as grantor, in favor of Raytheon, together with its successors in title, as grantee, without the consent of the Agent. The Owner Trustee shall, upon Lessee's reasonable request, promptly execute and deliver any instrument necessary or appropriate to confirm such grant, release, dedication or transfer to any Person permitted under this Section 8.5. 8.6. APPOINTMENT BY THE AGENT, THE LENDERS, THE HOLDERS AND THE OWNER TRUSTEE. The Holders hereby appoint the Agent to act as collateral agent for the Holders in connection with the Lien granted by the Security Documents to secure the Holder Amount. The Lenders and the Holders acknowledge and agree and direct that the rights and remedies of the beneficiaries of the Lien of the Security Documents shall be exercised by the Agent on behalf of the Lenders and the Holders as directed from time to time by the Majority Secured Parties or, pursuant to Sections 8.2(h) and 12.4, all of the Lenders and the Holders, as the case may be; provided, in all cases, the Agent shall allocate payments and other amounts received in accordance with Section 8.7. The Agent is further appointed to provide notices under the Operative Agreements on behalf of the Owner Trustee (as determined by the Agent, in its reasonable discretion), to receive notices under the Operative Agreements on behalf of the Owner Trustee and (subject to Sections 8.5 and 9.2) to take such other action under the Operative Agreements on behalf of the Owner Trustee as the Agent shall determine in its reasonable discretion from time to time. The Agent hereby accepts such appointments. For purposes hereof, the provisions of Section 7 of the Credit Agreement, together with such other terms and provisions of the Credit Agreement and the other Operative Agreements as required for the full interpretation and operation of Section 7 of the Credit Agreement are hereby incorporated by reference as if restated for the mutual benefit of the Agent and each Holder as if each 45 51 Holder were a Lender thereunder. Outstanding Holder Advances and outstanding Loans shall each be taken into account for purposes of determining Majority Secured Parties. Further, the Agent shall be entitled to take such action on behalf of the Owner Trustee as is delegated to the Agent under any Operative Agreement (whether express or implied) as may be reasonably incidental thereto. The parties hereto hereby agree to the provisions contained in this Section 8.6. Any appointment of a successor agent under Section 7.9 of the Credit Agreement shall also be effective as an appointment of a successor agent for purposes of this Section 8.6. 8.7. COLLECTION AND ALLOCATION OF PAYMENTS AND OTHER AMOUNTS. (a) Each Credit Party has agreed pursuant to Section 5.8 and otherwise in accordance with the terms of this Agreement to pay to (i) the Agent any and all Rent (excluding Excepted Payments) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person and (ii) each Person as appropriate the Excepted Payments. Promptly after receipt, the Agent shall apply and allocate, in accordance with the terms of this Section 8.7, such amounts received from any Credit Party and all other payments, receipts and other consideration of any kind whatsoever received by the Agent pursuant to the Security Agreement or otherwise received by the Agent, the Holders or any of the Lenders in connection with the Collateral, the Security Documents or any of the other Operative Agreements. Ratable distributions among the Lenders and the Holders under this Section 8.7 shall be made based on (in the case of the Lenders) the ratio of the outstanding Loans to the aggregate Property Cost and (in the case of the Holders) the ratio of the outstanding Holder Advances to the aggregate Property Cost. Ratable distributions among the Tranche A Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche A Lender's Commitment for Tranche A Loans to the aggregate of all the Tranche A Lenders' Commitments for Tranche A Loans. Ratable distributions among the Tranche B Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche B Lender's Commitment for Tranche B Loans to the aggregate of all the Tranche B Lenders' Commitments for Tranche B Loans. Ratable distributions among the Lenders (in situations where the Tranche A Lenders are not differentiated from the Tranche B Lenders) shall be made based on the ratio of the individual Lender's Commitment to the aggregate of all the Lenders' Commitments. Ratable distributions among the Holders under this Section 8.7 shall be based on the ratio of the individual Holder's Holder Commitment to the aggregate of all the Holders' Holder Commitments. (b) Payments and other amounts received by the Agent from time to time in accordance with the terms of subparagraph (a) shall be applied and allocated as follows (subject in all cases to Section 8.7(c)): (i) Any such payment or amount identified as or deemed to be Basic Rent shall be applied and allocated by the Agent first, ratably to the Lenders and the Holders for application and allocation to the payment of interest on the Loans and thereafter the principal of the Loans which is due and payable on such date and to the payment of accrued Holder Yield with respect to the Holder Advances 46 52 and thereafter the portion of the Holder Advances which is due on such date; and second, if no Default or Event of Default has occurred and is continuing, any excess shall be paid to such Person or Persons as the Lessee may designate; provided, that if a Default or Event of Default has occurred and is continuing, such excess (if any) shall instead be held by the Agent until the earlier of (I) the first date thereafter on which no Default or Event of Default shall be continuing (in which case such payments or returns shall then be made to such other Person or Persons as the Lessee may designate) and (II) the Maturity Date or the Expiration Date, as the case may be (or, if earlier, the date of any Acceleration), in which case such amounts shall be applied and allocated in the manner contemplated by Section 8.7(b)(iv). (ii) If on any date the Agent or the Lessor shall receive any amount in respect of (A) any Casualty or Condemnation pursuant to Sections 15.1(a) or 15.1(g) of the Lease (excluding any payments in respect thereof which are payable to the Lessee in accordance with the Lease), or (B) the Termination Value in connection with the delivery of a Termination Notice pursuant to Article XVI of the Lease, or (C) the Termination Value in connection with the exercise of the Purchase Option under Section 20.1 of the Lease or the exercise of the option of the Lessor to transfer the Properties to the Lessee pursuant to Section 20.3 of the Lease, or (D) any payment required to be made or elected to be made by the Construction Agent to the Lessor pursuant to the terms of the Agency Agreement, then in each case, the Lessor shall be required to pay such amount received (1) if no Acceleration has occurred, to prepay the principal balance of the Loans and the Holder Advances, on a pro rata basis, a portion of such amount to be distributed to the Lenders and the Holders or (2) if an Acceleration has occurred, to apply and allocate the proceeds respecting Sections 8.7(b)(ii)(A) through 8.7(b)(ii)(D) in accordance with Section 8.7(b)(iii) hereof. (iii) An amount equal to any payment identified as proceeds of the sale or other disposition (or lease upon the exercise of remedies) of the Properties or any portion thereof, whether pursuant to Article XXII of the Lease or the exercise of remedies under the Security Documents or otherwise, the execution of remedies set forth in the Lease and any payment in respect of excess wear and tear pursuant to Section 22.3 of the Lease (whether such payment relates to a period before or after the Construction Period Termination Date) shall be applied and allocated by the Agent first, ratably to the payment of the principal and interest of the Tranche B Loans then outstanding, second, ratably to the payment to the Holders of the outstanding principal balance of all Holder Advances plus all outstanding Holder Yield with respect to such outstanding Holder Advances, third, to the extent such amount exceeds the maximum amount to be returned pursuant to the foregoing provisions of this paragraph (iii), ratably to the payment of the principal and interest of the Tranche A Loans then outstanding, fourth, to any and all other amounts owing under the Operative Agreements to the Lenders under the Tranche B Loans, fifth, to any and all other amounts owing under the 47 53 Operative Agreements to the Holders, sixth, to any and all other amounts owing under the Operative Agreements to the Lenders under the Tranche A Loans, and seventh, to the extent moneys remain after application and allocation pursuant to clauses first through sixth above, to the Owner Trustee for application and allocation to any and all other amounts owing to the Holders or the Owner Trustee and as the Holders shall determine; provided, where no Event of Default shall exist and be continuing and a prepayment is made for any reason with respect to less than the full amount of the outstanding principal amount of the Loans and the outstanding Holder Advances, the proceeds shall be applied and allocated ratably to the Lenders and to the Holders. (iv) An amount equal to (A) any such payment identified as a payment of the Maximum Amount or any payment pursuant to Section 22.1(b) of the Lease (or otherwise) of the Maximum Residual Guarantee Amount (and any such lesser amount as may be required by Section 22.1(b) of the Lease) in respect of the Properties and (B) any other amount payable upon any exercise of remedies after the occurrence of an Event of Default not covered by Sections 8.7(b)(i) or 8.7(b)(iii) above (including without limitation any amount received in connection with an Acceleration which does not represent proceeds from the sale or liquidation of the Properties) and (C) any other amount payable to any Guarantor pursuant to Section 6B, shall be applied and allocated by the Agent first, ratably, to the payment of the principal and interest balance of Tranche A Loans then outstanding, second, ratably to the payment of the principal and interest balance of the Tranche B Loans then outstanding, third, ratably to the payment of the principal balance of all Holder Advances plus all outstanding Holder Yield with respect to such outstanding Holder Advances, fourth, to the payment of any other amounts owing to the Lenders hereunder or under any of the other Operative Agreement, and fifth, to the extent moneys remain after application and allocation pursuant to clauses first through fourth above, to the Owner Trustee for application and allocation to Holder Advances and Holder Yield and any other amounts owing to the Holders or the Owner Trustee as the Holders shall determine. (v) An amount equal to any such payment identified as Supplemental Rent shall be applied and allocated by the Agent to the payment of any amounts then owing to the Agent, the Lenders, the Holders and the other parties to the Operative Agreements (or any of them) (other than any such amounts payable pursuant to the preceding provisions of this Section 8.7(b)) as shall be determined by the Agent in its reasonable discretion; provided, however, that Supplemental Rent received upon the exercise of remedies after the occurrence and continuance of an Event of Default in lieu of or in substitution of the Maximum Residual Guarantee Amount or as a partial payment thereon shall be applied and allocated as set forth in Section 8.7(b)(iv). 48 54 (vi) The Agent in its reasonable judgment shall identify the nature of each payment or amount received by the Agent and apply and allocate each such amount in the manner specified above. (c) Upon the payment in full of the Loans, the Holder Advances and all other amounts then due and owing by the Owner Trustee hereunder or under any Credit Document and the payment in full of all other amounts then due and owing to the Lenders, the Holders, the Agent, the Owner Trustee and the other Financing Parties pursuant to the Operative Agreements, any moneys remaining with the Agent shall be returned to the Lessee. In the event of an Acceleration it is agreed that, prior to the application and allocation of amounts received by the Agent in the order described in Section 8.7(b) above or any distribution of money to the Lessee, any such amounts shall first be applied and allocated to the payment of (i) any and all sums advanced by the Agent in order to preserve the Collateral or to preserve its Lien thereon, (ii) the expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral, or of any exercise by the Agent of its rights under the Security Documents, together with reasonable attorneys' fees and expenses and court costs and (iii) any and all other amounts reasonably owed to the Agent under or in connection with the transactions contemplated by the Operative Agreements (including without limitation any accrued and unpaid administration fees). 8.8. RELEASE OF PROPERTIES, ETC. If the Lessee shall at any time purchase any Property pursuant to the Lease, or the Construction Agent shall purchase any Property pursuant to the Agency Agreement, or if any Property shall be sold in accordance with Article XXII of the Lease, then, upon satisfaction by the Owner Trustee of its obligation to prepay the Loans, Holder Advances and all other amounts owing to the Lenders and the Holders under the Operative Agreements, the Agent is hereby authorized and directed to release such Properties from the Liens created by the Security Documents to the extent of its interest therein. In addition, upon the termination of the Commitments and the Holder Commitments and the payment in full of the Loans, the Holder Advances and all other amounts owing by the Owner Trustee and the Lessee hereunder or under any other Operative Agreement the Agent is hereby authorized and directed to release all of the Properties from the Liens created by the Security Documents to the extent of its interest therein. Upon request of the Owner Trustee following any such release, the Agent shall, at the sole cost and expense of the Lessee, execute and deliver to the Owner Trustee and the Lessee such documents as the Owner Trustee or the Lessee shall reasonably request to evidence such release. SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT. 9.1. THE CONSTRUCTION AGENT'S AND THE LESSEE'S CREDIT AGREEMENT RIGHTS. Notwithstanding anything to the contrary contained in the Credit Agreement, the Agent, the Lenders, the Holders, the Credit Parties and the Owner Trustee hereby agree that, prior to the 49 55 occurrence and continuation of any Default or Event of Default, the Construction Agent or the Lessee, as the case may be, shall have the following rights: (a) the right to designate an account to which amounts funded under the Operative Agreements shall be credited pursuant to Section 2.3(a) of the Credit Agreement; (b) the right to terminate or reduce the Commitments pursuant to Section 2.5(a) of the Credit Agreement; (c) the right to exercise the conversion and continuation options pursuant to Section 2.7 of the Credit Agreement; (d) the right to receive any notice and any certificate, in each case issued pursuant to Section 2.11(a) of the Credit Agreement; (e) the right to replace any Lender pursuant to Section 2.11(b) of the Credit Agreement; (f) the right to approve any successor agent pursuant to Section 7.9 of the Credit Agreement; (g) the right to consent to any assignment by a Lender to which the Lessor has the right to consent pursuant to Section 9.8 of the Credit Agreement; and (h) the right to notice of and the opportunity to cure any Credit Agreement Event of Default within the applicable period set forth in Section 6 of the Credit Agreement (except that the Lessee shall not have any additional right to cure any Credit Agreement Event of Default that is also a Lease Event of Default beyond such cure rights as are expressly set forth in Section 17 of the Lease). 9.2. THE CONSTRUCTION AGENT'S AND THE LESSEE'S TRUST AGREEMENT RIGHTS. Notwithstanding anything to the contrary contained in the Trust Agreement, the Credit Parties, the Owner Trustee and the Holders hereby agree that, prior to the occurrence and continuation of any Default or Event of Default, the Construction Agent or the Lessee, as the case may be, shall have the following rights: (a) the right to exercise the conversion and continuation options pursuant to Section 3.8 of the Trust Agreement; (b) the right to receive any notice and any certificate, in each case issued pursuant to Section 3.9(a) of the Trust Agreement; 50 56 (c) the right to replace any Holder pursuant to Section 3.9(b) of the Trust Agreement; (d) the right to exercise the removal options contained in Section 9.1 of the Trust Agreement; provided, however, that no removal of the Owner Trustee and appointment of a successor Owner Trustee by the Holders pursuant to Section 9.1 of the Trust Agreement shall be made without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee. SECTION 10. TRANSFER OF INTEREST. 10.1 RESTRICTIONS ON TRANSFER. Each Lender may participate, assign or transfer all or a portion of its interest hereunder and under the other Operative Agreements in accordance with Sections 9.7 and 9.8 of the Credit Agreement; provided, each participant, assignee or transferee must obtain the same ratable interest in Tranche A Loans, Tranche A Commitments, Tranche B Loans and Tranche B Commitments (and to the extent the selling Lender is also a Holder (or an Affiliate of a Holder), each such participant, assignor or transferee must also obtain the same ratable interest in and to the Holder Advances, Holder Commitments and the Trust Estate); provided further, that each Lender that participates, assigns or transfers all or a portion of its interest hereunder and under the other Operative Agreements shall deliver to the Agent a copy of each Assignment and Acceptance (as referenced in Section 9.8 of the Credit Agreement) for purposes of maintaining the Register. The Holders may, directly or indirectly, assign, convey or otherwise transfer any of their right, title or interest in or to the Trust Estate or the Trust Agreement with the prior written consent of the Agent and the Lessee (which consent shall not be unreasonably withheld or delayed) and in accordance with the terms of Section 11.8(b) of the Trust Agreement; provided, to the extent the selling Holder is also a Lender (or an Affiliate of a Lender), each such assignee, receiver of a conveyance or other transferee must also obtain the same ratable interest in and to the Tranche A Loans, Tranche A Commitments, Tranche B Loans and Tranche B Commitments. The Owner Trustee may, subject to the rights of the Lessee under the Lease and the other Operative Agreements and to the Lien of the applicable Security Documents but only with the prior written consent of the Agent (which consent may be withheld by the Agent in its sole discretion) and (provided, no Default or Event of Default has occurred and is continuing) with the consent of the Lessee, directly or indirectly, assign, convey, appoint an agent with respect to enforcement of, or otherwise transfer any of its right, title or interest in or to any Property, the Lease, the Trust Agreement and the other Operative Agreements (including without limitation any right to indemnification thereunder), or any other document relating to a Property or any interest in a Property as provided in the Trust Agreement and the Lease. The provisions of the immediately preceding sentence shall not apply to the obligations of the Owner Trustee to transfer Property to the Lessee or a third party purchaser pursuant to Article XXII of the Lease upon payment for such Property in accordance with the terms and conditions of the Lease. No Credit Party may assign any of the Operative Agreements or any of their respective rights or 51 57 obligations thereunder or with respect to any Property in whole or in part to any Person without the prior written consent of the Agent, the Lenders, the Holders and the Lessor. 10.2. EFFECT OF TRANSFER. From and after any transfer effected in accordance with this Section 10, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer; provided, however, that any transferor shall remain liable hereunder and under such other documents to the extent that the transferee shall not have assumed the obligations of the transferor thereunder. Upon any transfer by the Owner Trustee, a Holder or a Lender as above provided, any such transferee shall assume the obligations of the Owner Trustee, the Holder or the Lender, as the case may be, and shall be deemed an "Owner Trustee", "Holder", or "Lender", as the case may be, for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 10, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including without limitation rights to indemnification under any such document. SECTION 11. INDEMNIFICATION. 11.1. GENERAL INDEMNITY. Subject to and limited by in all respects by the provisions of Sections 11.6 through 11.8 and whether or not any of the transactions contemplated hereby shall be consummated, the Indemnity Provider hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims, which may be imposed on, incurred by or asserted against an Indemnified Person by any third party, including without limitation Claims arising from the negligence of an Indemnified Person (but not to the extent such Claims arise from the gross negligence or willful misconduct of such Indemnified Person itself, as determined by a court of competent jurisdiction, as opposed to gross negligence or willful misconduct imputed to such Indemnified Person) in any way relating to or arising or alleged to arise out of the execution, delivery, performance or enforcement of this Agreement, the Lease or any other Operative Agreement or on or with respect to any Property or any component thereof, including without limitation Claims in any way relating to or arising or alleged to arise out of (a) the financing, refinancing, purchase, acceptance, rejection, ownership, design, construction, refurbishment, development, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, occupancy, operation, maintenance repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of any Property or any part thereof, including without limitation the acquisition, holding or disposition of any interest in the Property, lease or agreement comprising a portion of any thereof; (b) any latent or other defects in any Property or any portion thereof whether or not discoverable by an Indemnified Person or the Indemnity 52 58 Provider; (c) a violation of Environmental Laws. Environmental Claims or other loss of or damage to any property or the environment relating to the Property, the Lease, the Agency Agreement or the Indemnity Provider; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Indemnity Provider of any of its representations or warranties under the Operative Agreements to which the Indemnity Provider is a party or failure by the Indemnity Provider to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; (f) the transactions contemplated hereby or by any other Operative Agreement, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA; (g) personal injury, death or property damage, including without limitation Claims based on strict or absolute liability in tort; and (h) any fees, expenses and/or other assessments by any business park or any other applicable entity with oversight responsibility for the applicable Property. If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including without limitation a written notice of such proceeding), for any Claim, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that in the case of any such Claim, if action shall be required by law or regulation to be taken prior to the end of such period of thirty (30) days, such Indemnified Person shall endeavor to, in such notice to the Indemnity Provider, inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim without the consent of the Indemnity Provider before seven (7) days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to in this sentence shall not diminish the Indemnity Provider's obligation hereunder except to the extent such failure precludes in all respects the Indemnity Provider from contesting such Claim. If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to respond to such Claim), the Indemnity Provider shall request in writing that such Indemnified Person respond to such Claim, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such action (including without limitation by pursuit of appeals) (provided, however, that (A) if such Claim, in the Indemnity Provider's reasonable discretion, can be pursued by the Indemnity Provider on behalf of or in the name of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control the response to such Claim and (B) in the case of any Claim (and notwithstanding the provisions of the foregoing subsection (A)), the Indemnified Person may request the Indemnity Provider to conduct and control the response to such Claim (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld; provided, however, that any Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict of interest between such Indemnified Person and the Indemnity Provider)) by, in the sole discretion of the Person conducting and controlling the response to such Claim (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using 53 59 reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time. The party controlling the response to any Claim shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of the response to such Claim; provided, that all decisions ultimately shall be made in the discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the response to such Claim and may settle such Claim if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Claim (and any future Claim, the pursuit of which is precluded by reason of such resolution of such Claim) and shall pay to the Indemnity Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 11.1 by way of indemnification or advance for the payment of an amount regarding such Claim. Notwithstanding the foregoing provisions of this Section 11.1, an Indemnified Person shall not be required to take any action and the Indemnity Provider shall not be permitted to respond to any Claim in its own name or that of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with such Claim, including without limitation all reasonable legal, accounting and investigatory fees and disbursements and, if the Indemnified Person has informed the Indemnity Provider that it intends to contest such Claim (whether or not the control of the contest is then assumed by the Indemnity Provider), the Indemnity Provider shall have agreed that the Claim is an indemnifiable Claim hereunder, (B) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related Claims that have been or could be raised for which the Indemnity Provider may be liable to pay an indemnity under this Section 11.1) exceeds $25,000 (or such lesser amount as may be subsequently agreed between the Indemnity Provider and the Indemnified Person), (C) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of the Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such Claim shall involve the payment of any amount prior to the resolution of such Claim, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the amount that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person) prior to the date such payment is due, (E) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the Indemnity Provider shall have provided to such Indemnified Person an opinion of independent counsel selected by the Indemnity Provider and reasonably satisfactory to the Indemnified Person stating that a reasonable basis exists to contest such Claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that the position asserted in such appeal will more likely than not prevail) and (F) no Event of Default shall have occurred and be continuing. In no event shall an Indemnified Person be required to appeal an adverse judicial 54 60 determination to the United States Supreme Court. In addition, an Indemnified Person shall not be required to contest any Claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 11.1, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Indemnity Provider's expense, an opinion of independent counsel selected by the Indemnity Provider and reasonably acceptable to the Indemnified Person stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. In no event shall the Indemnity Provider be permitted to adjust or settle any Claim without the consent of the Indemnified Person to the extent any such adjustment or settlement involves, or is reasonably likely to involve, any performance by or adverse admission by or with respect to the Indemnified Person. 11.2. GENERAL TAX INDEMNITY. (a) Subject to and limited by in all respects the provisions of Sections 11.6 through 11.8 and Section 3.9(a) of the Trust Agreement, the Indemnity Provider shall pay and assume liability for, and does hereby agree to indemnify, protect and defend each Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis, and all payments pursuant to the Operative Agreements shall be made free and clear of and without deduction for any and all present and future Impositions. (b) Notwithstanding anything to the contrary in Section 11.2(a) hereof, the following shall be excluded from the indemnity required by Section 11.2(a) (collectively, the "Excluded Taxes"): (i) Taxes (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on a Indemnified Person (other than the Lessor, the Owner Trustee and the Trust) by the United States federal government that are based on or measured by the net income (including without limitation taxes based on capital gains and minimum taxes) of such Person; provided, that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on any Indemnified Person (other than the Lessor, the Owner Trustee and the Trust) by any state or local jurisdiction or taxing authority within any state or local jurisdiction and that are based upon or measured by the net income (including without limitation taxes based on capital gains and minimum taxes) of such Person; provided, however, that the Indemnity Provider shall not have any obligation to indemnify any Indemnified Person for any California unitary tax obligations of the Indemnified Person that are not attributable to the payments received under the Operative Agreements or otherwise attributable to the 55 61 transactions contemplated thereby; provided, further, that such Taxes shall not be excluded under this subparagraph (ii) to the extent such Taxes would have been imposed had the location, possession or use of any Property in, the location or the operation of the Lessee in, or the Lessee's making payments under the Operative Agreements from, the jurisdiction imposing such Taxes been the sole connection between such Indemnified Person and the jurisdiction imposing such Taxes; provided, further, that this clause (ii) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (iii) any Tax to the extent it relates to any act, event or omission that occurs after the termination of the Lease and redelivery or sale of the Property in accordance with the terms of the Lease (but not any Tax that relates to such termination, redelivery or sale and/or to any period prior to such termination, redelivery or sale); and (iv) any Taxes which are imposed on an Indemnified Person as a result of the gross negligence or willful misconduct of such Indemnified Person itself, as determined by a court of competent jurisdiction (as opposed to gross negligence or willful misconduct imputed to such Indemnified Person), but not Taxes imposed as a result of ordinary negligence of such Indemnified Person; (c) (i) Subject to the terms of Section 11.2(f), the Indemnity Provider shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnified Person, as appropriate, and the Indemnity Provider shall at its own expense, upon such Indemnified Person's reasonable request, furnish to such Indemnified Person copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 11.2(f) and which the Indemnity Provider pays directly to the taxing authorities, the Indemnity Provider shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Indemnity Provider reimburses an Indemnified Person, the Indemnity Provider shall do so within thirty (30) days after receipt by the Indemnity Provider of demand by such Indemnified Person describing in reasonable detail the nature of the Imposition and the basis for the demand (including without limitation the computation of the amount payable), accompanied by receipts or other reasonable evidence of such demand. In the case of Impositions for which a contest is conducted pursuant to Section 11.2(f), the Indemnity Provider shall pay such Impositions or reimburse such Indemnified Person for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 11.2(f). 56 62 (iii) At the Indemnity Provider's request, the amount of any indemnification payment by the Indemnity Provider pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Indemnity Provider and the Indemnified Person. The fees and expenses of such independent public accounting firm shall be paid by the Indemnity Provider unless such verification shall result in an adjustment in the Indemnity Provider's favor of fifteen percent (15%) or more of the payment as computed by the Indemnified Person, in which case such fee shall be paid by the Indemnified Person. (d) The Indemnity Provider shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of each Property and any other tax returns required for the Owner Trustee respecting the transactions described in the Operative Agreements. In case any other report or tax return shall be required to be made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a) and of which the Indemnity Provider has knowledge or should have knowledge, the Indemnity Provider, at its sole cost and expense, shall notify the relevant Indemnified Person of such requirement and (except if such Indemnified Person notifies the Indemnity Provider that such Indemnified Person intends to prepare and file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in the Indemnity Provider's name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnified Person, advise such Indemnified Person of such fact and prepare such return, statement or report for filing by such Indemnified Person or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Indemnity Provider under or arising out of subsection (a), provide such Indemnified Person at the Indemnity Provider's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a). Such Indemnified Person shall, upon the Indemnity Provider's request and at the Indemnity Provider's expense, provide any data maintained by such Indemnified Person (and not otherwise available to or within the control of the Indemnity Provider) with respect to each Property which the Indemnity Provider may reasonably require to prepare any required tax returns or reports. (e) As between the Indemnity Provider on one hand, and each Financing Party on the other hand, the Indemnity Provider shall be responsible for, and the Indemnity Provider shall indemnify and hold harmless each Financing Party (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States or foreign withholding taxes or similar levies, imposts, charges, fees, deductions or withholdings (collectively, "Withholdings") imposed in respect of the interest payable on the Notes, Holder Yield payable on the Certificates or with respect to any other payments under the Operative Agreements (all such payments being referred to herein as "Exempt Payments" to be made without deduction, withholding or set off) (and, if any Financing Party receives a demand for such payment 57 63 from any taxing authority or a Withholding is otherwise required with respect to any Exempt Payment, the Indemnity Provider shall discharge such demand on behalf of such Financing Party); provided, however, that the obligation of the Indemnity Provider under this Section 11.2(e) shall not apply to: (i) Withholdings on any Exempt Payment to any Financing Party which is a non-U.S. Person unless such Financing Party is, on the date hereof (or on the date it becomes a Financing Party hereunder) and on the date of any change in the principal place of business or the lending office of such Financing Party, entitled to submit a Form 1001 (relating to such Financing Party and entitling it to a complete exemption from Withholding on such Exempt Payment) or Form 4224 or is otherwise subject to exemption from Withholding with respect to such Exempt Payment (except where the failure of the exemption results from a change in the principal place of business of the Lessee; provided if a failure of exemption for any Financing Party results from a change in the principal place of business or lending office of any other Financing Party, then such other Financing Party shall be liable for any Withholding or indemnity with respect thereto), or (ii) Any U.S. Taxes imposed solely by reason of the failure by a non-U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non-U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes. For the purposes of this Section 11.2(e), (A) "U.S. Person" shall mean a citizen, national or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the Untied States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America and (D) "Form 4224" shall mean Form 4224(R) (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of Treasury of the United States of America (or in relation to either such Form such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates). Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates. If a Financing Party or an Affiliate with whom such Financing Party files a consolidated tax return (or equivalent) subsequently receives the benefit in any country of 58 64 a tax credit or an allowance resulting from U.S. Taxes with respect to which it has received a payment of an additional amount under this Section 11.2(e), such Financing Party will pay to the Indemnity Provider such part of that benefit as in the opinion of such Financing Party will leave it (after such payment) in a position no more and no less favorable than it would have been in if no additional payment had been required to be paid, provided always that (i) such Financing Party will be the sole judge of the amount of any such benefit and of the date on which it is received, (ii) such Financing Party will have the absolute discretion as to the order and manner in which it employs or claims tax credits and allowances available to it and (iii) such Financing Party will not be obliged to disclose to the Indemnity Provider any information regarding its tax affairs or tax computations. Each non-U.S. Person that shall become a Financing Party after the date hereof shall, upon the effectiveness of the related transfer or otherwise upon becoming a Financing Party hereunder, be required to provide all of the forms and statements referenced above or other evidences of exemption from Withholdings. (f) If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including without limitation a written notice of such proceeding), for any Impositions, the provisions in Section 11.1 relating to notification and rights to contest shall apply; provided, however, that the Indemnity Provider shall have the right to conduct and control such contest only if such contest involves a Tax other than a Tax on net income of the Indemnified Person and can be pursued independently from any other proceeding involving a Tax liability of such Indemnified Person. 11.3. INCREASED COSTS, ILLEGALITY, ETC. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request hereafter adopted, promulgated or made by any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Financing Party of agreeing to make or making, funding or maintaining Advances, then the Lessee shall from time to time, upon demand by such Financing Party (with a copy of such demand to the Agent but subject to the terms of Section 2.11 of the Credit Agreement and 3.9 of the Trust Agreement, as the case may be), pay to the Agent for the account of such Financing Party additional amounts sufficient to compensate such Financing Party for such increased cost. A certificate as to the amount of such increased cost, submitted to the Lessee and the Agent by such Financing Party, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Financing Party determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law, but in each case promulgated or made after the date hereof) affects or would affect the amount of capital required or expected to 59 65 be maintained by such Financing Party or any corporation controlling such Financing Party and that the amount of such capital is increased by or based upon the existence of such Financing Party's commitment to make Advances and other commitments of this type or upon the Advances, then, upon demand by such Financing Party (with a copy of such demand to the Agent but subject to the terms of Section 2.11 of the Credit Agreement and 3.9 of the Trust Agreement), the Lessee shall pay to the Agent for the account of such Financing Party, from time to time as specified by such Financing Party, additional amounts sufficient to compensate such Financing Party or such corporation in the light of such circumstances, to the extent that such Financing Party reasonably determines such increase in capital to be allocable to the existence of such Financing Party's commitment to make such Advances. A certificate as to such amounts submitted to the Lessee and the Agent by such Financing Party shall be conclusive and binding for all purposes, absent manifest error. (c) Without limiting the effect of the foregoing, the Lessee shall pay to each Financing Party on the last day of the Interest Period therefor so long as such Financing Party is maintaining reserves against "Eurocurrency liabilities" under Regulation D an additional amount (determined by such Financing Party and notified to the Lessee through the Agent) equal to the product of the following for each Eurodollar Loan or Eurodollar Holder Advance, as the case may be, for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, outstanding on such day; and (ii) the remainder of (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, for such Interest Period as provided in the Credit Agreement or the Trust Agreement, as the case may be (less the Applicable Percentage), and the denominator of which is one (1) minus the effective rate (expressed as a decimal) at which such reserve requirements are imposed on such Financing Party on such day minus (y) such numerator; and (iii) 1/360. (d) Without affecting its rights under Sections 11.3(a), 11.3(b) or 11.3(c) or any other provision of any Operative Agreement, each Financing Party agrees that if there is any increase in any cost to or reduction in any amount receivable by such Financing Party with respect to which the Lessee would be obligated to compensate such Financing Party pursuant to Sections 11.3(a) or 11.3(b), such Financing Party shall use reasonable efforts to select an alternative office for Advances which would not result in any such increase in any cost to or reduction in any amount receivable by such Financing Party; provided, however, that no Financing Party shall be obligated to select an alternative office for Advances if such Financing Party determines that (i) as a result of such selection such Financing Party would be in violation of any applicable law, regulation, treaty, or guideline, or would incur additional costs or expenses or (ii) such selection 60 66 would be inadvisable for regulatory reasons or materially inconsistent with the interests of such Financing Party. (e) With reference to the obligations of the Lessee set forth in Sections 11.3(a) through 11.3(d), the Lessee shall not have any obligation to pay to any Financing Party amounts owing under such Sections for any period which is more than one (1) year prior to the date upon which the request for payment therefor is delivered to the Lessee. (f) Notwithstanding any other provision of this Agreement, if any Financing Party shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Financing Party to perform its obligations hereunder to make or maintain Eurodollar Loans or Eurodollar Holder Advances, as the case may be, then (i) each Eurodollar Loan or Eurodollar Holder Advance, as the case may be, will automatically, at the earlier of the end of the Interest Period for such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, or the date required by law, convert into an ABR Loan or an ABR Holder Advance, as the case may be, and (iii) the obligation of the Financing Parties to make, convert or continue Eurodollar Loans or Eurodollar Holder Advances, as the case may be, shall be suspended until the Agent shall notify the Lessee that such Financing Party has determined that the circumstances causing such suspension no longer exist. (g) If, with respect to any Advances consisting of Eurodollar Loans and Eurodollar Holder Advances required by the Borrower, the Agent or the Majority Secured Parties shall have determined in good faith (which determination shall, save for manifest error, be conclusive and binding upon the Borrower) that (a) deposits of sufficient amount and maturity for funding such Advances are not available to the Lenders or the Holders in the relevant market in the ordinary course of business or (b) by reason of circumstances affecting the relevant market, adequate and fair means do not exist for ascertaining the rate of interest to be applicable to such Advances, then (i) the Agent or the Majority Secured Parties, as the case may be, shall promptly give notice thereof to the Borrower, (ii) the notice requesting such Borrowing shall, unless the Borrower otherwise notifies the Agent, automatically be amended to request ABR Loans and ABR Holder Advances instead of Eurodollar Loans and Eurodollar Holder Advances, and (iii) no Lender or Holder, as the case may be, shall be under any obligation to make additional Eurodollar Loans and Eurodollar Holder Advances to the Borrower, unless and until the Agent shall have notified the Borrower that such Eurodollar Loans and Eurodollar Holder Advances are again available hereunder. 11.4. FUNDING/CONTRIBUTION INDEMNITY. Subject to the provisions of Section 2.11(a) of the Credit Agreement and 3.9(a) of the Trust Agreement, as the case may be, the Lessee agrees to indemnify each Financing Party and to hold each Financing Party harmless from any loss or reasonable expense which such Financing Party may sustain or incur as a consequence of (a) any default in connection with the drawing of 61 67 funds for any Advance, (b) any default in making any repayment after a notice thereof has been given in accordance with the provisions of the Operative Agreements or (c) the making of a voluntary or involuntary payment of Eurodollar Loans or Eurodollar Holder Advances, as the case may be, on a day which is not the last day of an Interest Period with respect thereto. Such indemnification shall be in an amount equal to the excess, if any, of (x) the amount of interest or Holder Yield, as the case may be, which would have accrued on the amount so paid, or not so borrowed, accepted, converted or continued for the period from the date of such payment or of such failure to borrow, accept, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, accept, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable Eurodollar Rate plus the Applicable Percentage for such Loan or Holder Advance, as the case may be, for such Interest Period over (y) the amount of interest (as determined by such Financing Party in its reasonable discretion) which would have accrued to such Financing Party on such amount by (i) (in the case of the Lenders) reemploying such funds in loans of the same type and amount during the period from the date of payment or failure to borrow to the last day of the then applicable Interest Period (or, in the case of a failure to borrow, the Interest Period that would have commenced on the date of such failure) and (ii) (in the case of the Holders) placing such amount on deposit for a comparable period with leading banks in the relevant interest rate market. This covenant shall survive the termination of the Operative Agreements and the payment of all other amounts payable hereunder. 11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT LIABILITY, ETC. SUBJECT TO AND LIMITED BY IN ALL RESPECTS THE PROVISIONS OF SECTION 11.6 THROUGH 11.8 AND WITHOUT LIMITING THE GENERALITY OF THE INDEMNIFICATION PROVISIONS OF ANY AND ALL OF THE OPERATIVE AGREEMENTS, EACH PERSON PROVIDING INDEMNIFICATION OF ANOTHER PERSON UNDER ANY OPERATIVE AGREEMENT HEREBY FURTHER EXPRESSLY RELEASES EACH BENEFICIARY OF ANY SUCH INDEMNIFICATION FROM ALL CLAIMS FOR LOSS OR DAMAGE, DESCRIBED IN ANY OPERATIVE AGREEMENT, CAUSED BY ANY ACT OR OMISSION ON THE PART OF ANY SUCH BENEFICIARY ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF ANY SUCH BENEFICIARY, AND INDEMNIFIES, EXONERATES AND HOLDS EACH SUCH BENEFICIARY FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, LOSSES, COSTS, LIABILITIES, DAMAGES AND EXPENSES (INCLUDING WITHOUT LIMITATION ATTORNEY'S FEES AND EXPENSES), DESCRIBED ABOVE, INCURRED BY ANY SUCH BENEFICIARY (IRRESPECTIVE OF WHETHER ANY SUCH BENEFICIARY IS A PARTY TO THE ACTION FOR WHICH INDEMNIFICATION UNDER THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT IS SOUGHT) ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF ANY SUCH BENEFICIARY. 62 68 11.6 ADDITIONAL PROVISIONS REGARDING ENVIRONMENTAL INDEMNIFICATION. Subject to the following sentence, each and every indemnified Person shall at all times have the rights and benefits, and the Indemnity Provider shall have the obligations, in each case provided pursuant to the Operative Agreements with respect to environmental matters, violations of any Environmental Law, any Environmental Claim or other loss of or damage to any property or the environment relating to any Property, the Lease, the Agency Agreement or the Indemnity Provider (including without limitation the rights and benefits provided pursuant to Section 11.1(c). Notwithstanding any provision in this Section 11 to the contrary, the Indemnity Provider shall not be obligated to indemnify any Person for any Claim arising from or out of with respect to environmental matters, violations of any Environmental Law, any Environmental Claim or loss of or damage to any Property or the environment relating to any Property, the Lease, the Agency Agreement or the Indemnity Provider to the extent such Claim is subject to indemnification by Raytheon or Fairchild and Raytheon or Fairchild, as the case may be, has actually indemnified such Person with respect to such Claim. 11.7 ADDITIONAL PROVISIONS REGARDING INDEMNIFICATION. Notwithstanding the provisions of Sections 11.1, 11.2 and 11.5 (other than with respect to matters concerning environmental indemnification referenced in Section 11.6), (a) the Owner Trustee shall be the only beneficiary of the provisions set forth in Sections 11.1, 11.2 and 11.5 (again, subject to the immediately preceding parenthetical phrase) with respect to each Property solely for the period prior to the earlier to occur of the applicable Completion Date or Construction Period Termination Date for such Property, as applicable, and (b) such limited rights of indemnification referenced in Section 11.7(a) (to the extent relating to third-party claims) shall be limited to third-party claims caused by or resulting from the Indemnity Provider's acts or omissions and/or all other Persons acting by, through or under the Indemnity Provider. After the earlier to occur of the applicable Completion Date or Construction Period Termination Date for such Property, as applicable, each Indemnified Person shall be a beneficiary of the provisions set forth in Sections 11.1, 11.2 and 11.5 11.8 INDEMNIFICATIONS PROVIDED BY THE OWNER TRUSTEE IN FAVOR OF THE OTHER INDEMNIFIED PERSONS. To the extent the Indemnity Provider is not obligated to indemnify each Indemnified Person with respect to the various matters described in this Section 11.8, the Owner Trustee shall provide such indemnities (but only to the extent amounts sufficient to pay such indemnity are funded by the Lenders and the Holders) in favor of each Indemnified Person in accordance with this Section 11.8 and shall pay all such amounts owed with respect to this Section 11.8 with amounts advanced by the Lenders and the Holders(a) to the extent, but only to the extent, amounts are available therefor with respect to the Available Commitments and the Available Holder Commitments (subject to the rights of the Lenders and the Holders to increase their respective commitment amounts in accordance with the provisions of Sections 5.9) and (b) unless each Lender and each Holder has declined in writing to fund such amount. Notwithstanding any other provision in any other Operative Agreement to the contrary, all 63 69 amounts so advanced shall be deemed added (ratably, based on the ratio of the Property Cost for each Property individually to the Aggregate Property Cost of all Properties at such time) to the Property Cost of all Properties then subject to the terms of the Operative Agreements. Whether or not any of the transactions contemplated hereby shall be consummated, the Owner Trustee hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims, which may be imposed on, incurred by or asserted against an Indemnified Person by any third party, including without limitation Claims arising from the negligence of an Indemnified Person (but not to the extent such Claims arise from the gross negligence or willful misconduct of such Indemnified Person itself, as determined by a court of competent jurisdiction, as opposed to gross negligence or willful misconduct imputed to such Indemnified Person or breach of such Indemnified Person's obligations under this Agreement, the Lease or any other Operative Agreement) in any way relating to or arising or alleged to arise out of the execution, delivery, performance or enforcement of this Agreement, the Lease or any other Operative Agreement or on or with respect to any Property or any component thereof, including without limitation Claims in any way relating to or arising or alleged to arise out of the matters set forth in Sections 11.1(a) through 11.1(h). The Owner Trustee shall pay and assume liability for, and does hereby agree to indemnify, protect and defend each Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis, and all payments pursuant to the Operative Agreements shall be made free and clear of and without deduction for any and all present and future Impositions. Notwithstanding anything to the contrary in this paragraph, the Excluded Taxes shall be excluded from the indemnity provisions afforded by this paragraph. THE INDEMNITY OBLIGATIONS UNDERTAKEN BY THE OWNER TRUSTEE PURSUANT TO THIS SECTION 11.8 ARE IN ALL RESPECTS SUBJECT TO THE LIMITATIONS ON LIABILITY REFERENCED IN SECTION 12.9. SECTION 12. MISCELLANEOUS. 12.1 SURVIVAL OF AGREEMENTS. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, the transfer of any Property to the Owner Trustee, the acquisition of any Property (or any of its components), the construction of any Improvements, the Completion of any Property, any disposition of any interest of the Owner Trustee in any Property or any interest of the Holders in the Trust Estate, the payment of the Notes and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the 64 70 parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. 12.2 Notices. ------- All notices required or permitted to be given under any Operative Agreement shall be in writing. Notices may be served by certified or registered mail, postage paid with return receipt requested; by private courier, prepaid; by telex, facsimile, or other telecommunication device capable of transmitting or creating a written record; or personally. Mailed notices shall be deemed delivered five (5) business days after mailing, properly addressed. Couriered notices shall be deemed delivered when delivered as addressed, or if the addressee refuses delivery, when presented for delivery notwithstanding such refusal. Telex or telecommunicated notices shall be deemed delivered when receipt is either confirmed by confirming transmission equipment or acknowledged by the addressee or its office. Personal delivery shall be effective when accomplished. Unless a party changes its address by giving notice to the other party as provided herein, notices shall be delivered to the parties at the following addresses: If to the Construction Agent or the Lessee, or to any Guarantor, to such entity at the following address: Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attention: Jay Jones, Esq. Telephone: (650) 335-8647 Telecopy: (650) 526-2525 If to the Owner Trustee, to it at the following address: First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton Vice President Telephone: (801) 246-5300 Telecopy: (801) 246-5053 If to the Holders, to each such Holder at the address set forth for such Holder on Schedule I of the Trust Agreement. 65 71 If to the Agent, to it at the following address: NationsBank, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Attention: Sharon Ellis Telephone: (214) 209-0906 Telecopy: (214) 209-0980 If to any Lender, to it at the address set forth for such Lender in Schedule 2.1 of the Credit Agreement. From time to time any party may designate additional parties and/or another address for notice purposes by notice to each of the other parties hereto. Each notice hereunder shall be effective upon receipt or refusal thereof. 12.3. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one (1) and the same instrument. 12.4. TERMINATIONS, AMENDMENTS, WAIVERS,ETC.: UNANIMOUS VOTE MATTERS. Each Basic Document may be terminated, amended, supplemented, waived or modified only by an instrument in writing sign by, subject to Article VIII of the Trust Agreement regarding termination of the Trust Agreement, the Majority Secured Parties, the Agent and each Credit Party (to the extent such Credit Party is a party to such Basic Document); provided, to the extent no Default or Event of Default shall have occurred and be continuing, the Majority Secured Parties shall not amend, supplement, waive or modify any provision of any Basic Document in such a manner as to adversely affect the rights of any Credit Party without the prior written consent (not to be unreasonably withheld or delayed) of such Credit Party. Each Operative Agreement which is not a Basic Document may be terminated, amended, supplemented, waived or modified only by an instrument in writing signed by the parties thereto and (without the consent of any other Financing Party) the Agent. In addition, the Unanimous Vote Matters shall require the consent of each Lender and each Holder affected by such matter. Notwithstanding the foregoing, no such termination, amendment, supplement, waiver or modification shall, without the consent of the Agent and, to the extent affected thereby, each Lender and each Holder (collectively, the "Unanimous Vote Matters") (i) reduce the amount of any Note or any Certificate, extend the scheduled date of maturity of any Note, extend the scheduled Expiration Date, extend any payment date of any Note or Certificate, reduce the stated rate of interest payable on any Note, reduce the stated Holder Yield payable on any Certificate (other than as a result of waiving the applicability of any post-default increase in interest rates or Holder Yields), modify the priority of any Lien in favor of the Agent under any Security 66 72 Document, subordinate any obligation owed to such Lender or Holder, reduce any Lender Commitment Fees or any Holder Commitment Fees payable to such Lender or Holder (as the case may be) under this Participation Agreement, extend the scheduled date of payment of any Lender Commitment Fees or any Holder Commitment Fees payable to such Lender or Holder (as the case may be), fund any Advance referenced in Section 2.1 of the Agency Agreement in excess of the then current aggregate sum of the Available Commitments and the Available Holder Commitments, elect to decline the funding of any Transaction Expense with respect to Sections 7.1(a) or 7.1(b), elect to decline the funding of any indemnity payment by the Owner Trustee with respect to Section 11.8 or increase the amount or extend the expiration date of such Lender's Commitment or the Holder Commitment of such Holder, or (ii) terminate, amend, supplement, waive or modify any provision of this Section 12.4 or reduce the percentages specified in the definitions of Majority Lenders, Majority Holders or Majority Secured Parties, or consent to the assignment or transfer by the Owner Trustee of any of its rights and obligations under any Credit Document or release a material portion of the Collateral (except in accordance with Section 8.8) or release any Credit Party from its obligations under any Operative Agreement or otherwise alter any payment obligations of any Credit Party to the Lessor or any Financing Party under the Operative Agreements, or (iii) terminate, amend, supplement, waive or modify any provision of Section 7 of the Credit Agreement (which shall also require the consent of the Agent), or (iv) eliminate the automatic option under Section 5.3(b) of the Agency Agreement requiring that the Construction Agent pay certain liquidated damages in exchange for the conveyance of a Property to the Construction Agent, or (v) permit the extension of the Construction Period beyond the date that is two (2) years from the Initial Closing Date. Any such termination, amendment, supplement, waiver or modification shall apply equally to each of the Lenders and the Holders and shall be binding upon all the parties to this Agreement. In the case of any waiver, each party to this Agreement shall be restored to its former position and rights under the Operative Agreements, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. If at a time when the conditions precedent set forth in the Operative Agreements to any Loan are, in the opinion of the Majority Lenders, satisfied, any Lender shall fail to fulfill its obligations to make such Loan (any such Lender, a "Defaulting Lender") then, for so long as such failure shall continue, the Defaulting Lender shall (unless the Lessee and the Majority Lenders, determined as if the Defaulting Lender were not a "Lender", shall otherwise consent in writing) be deemed for all purposes relating to terminations, amendments, supplements, waivers or modifications under the Operative Agreements to have no Loans, shall not be treated as a "Lender" when performing the computation of Majority Lenders or Majority Secured Parties, and shall have no rights under this Section 12.4; provided that any action taken pursuant to the second paragraph of this Section 12.4 shall not be effective as against the Defaulting Lender. If at a time when the conditions precedent set forth in the Operative Agreements to any Holder Advance are, in the opinion of the Majority Holders, satisfied, any Holder shall fail to fulfill its obligations to make such Holder Advance (any such Holder, a "Defaulting Holder") then, for so long as such failure shall continue, the Defaulting Holder shall (unless the Lessee and the Majority Holders, determined as if the Defaulting Holder were not a "Holder", shall 67 73 otherwise consent in writing) be deemed for all purposes relating to terminations, amendments, supplements, waivers or modifications under the Operative Agreements to have no Holder Advances, shall not be treated as a "Holder" when performing the computation of Majority Holders or Majority Secured Parties, and shall have no rights under this Section 12.4; provided that any action taken pursuant to the second paragraph of this Section 12.4 shall not be effective as against the Defaulting Holder. 12.5 HEADINGS, etc. The Table of Contents and headings of the various Articles and Sections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 12.6 PARTIES IN INTEREST. Except as expressly provided herein, none of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto. 12.7 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; VENUE. (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Operative Agreement may be brought in the courts of the State of California in Santa Clara County or of the United States for the Northern District of California, and, by execution and delivery of this Agreement, each of the parties to this Agreement hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the parties to this Agreement further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 12.2, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of any party to serve process in any other manner permitted by Law or to commence legal proceedings or to otherwise proceed against any party in any other jurisdiction. (b) EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 68 74 (c) Each of the parties to this Agreement hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Operative Agreement brought in the courts referred to in subsection (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 12.8. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.9. Liability Limited. (a) The Lenders, the Agent, the Credit Parties, the Owner Trustee and the Holders each acknowledge and agree that the Owner Trustee is (except as otherwise expressly provided herein or therein) entering into this Agreement and the other Operative Agreements to which it is a party (other than the Trust Agreement and to the extent otherwise provided in Section 6.1 of this Agreement), solely in its capacity as trustee under the Trust Agreement and not in its individual capacity and that the Trust Company shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Owner Trustee, except for its own gross negligence or willful misconduct and as otherwise expressly provided herein or in the other Operative Agreements. (b) Anything to the contrary contained in this Agreement, the Credit Agreement, the Notes or in any other Operative Agreement notwithstanding, no Exculpated Person shall be personally liable in any respect for any liability or obligation arising hereunder or in any other Operative Agreement including without limitation the payment of, or interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in the Credit Agreement, the Notes, this Agreement, the Security Agreement or any of the other Operative Agreements. The Lenders, the Holders and the Agent agree that, in the event any remedies under any Operative Agreement are pursued, neither the Lenders, the Holders nor the Agent shall have any recourse against any Exculpated Person, for any deficiency, loss or Claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively against the Trust Estate (excluding Excepted Payments) and the Credit Parties (with respect to the Credit Parties' obligations under the Operative Agreements); but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Estate (excluding Excepted Payments) in 69 75 respect of any and all liabilities, obligations and undertakings contained herein and/or in any other Operative Agreement. Notwithstanding the provisions of this Section, nothing in any Operative Agreement shall: (i) constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes and/or the Certificates arising under any Operative Agreement or secured by any Operative Agreement, but the same shall continue until paid or discharged; (ii) relieve any Exculpated Person from liability and responsibility for (but only any to the extent of the damages arising by reason of): active waste knowingly committed by any Exculpated Person with respect to any Property, any fraud, gross negligence or willful misconduct on the part of any Exculpated Person; (iii) relieve any Exculpated Person from liability and responsibility for (but only to the extent of the moneys misappropriated, misapplied or not turned over)(A) except for Excepted Payments, misappropriation or misapplication by the Lesser (i.e., application in a manner contrary to any of the Operative Agreements) of any insurance proceeds or condemnation award paid or delivered to the Lesser by any Person other than the Agent, (B) except for Excepted Payments, any deposits or any escrows or amounts owed by the Construction Agent under the Agency Agreement held by the Lesser or (C) except for Excepted Payments, any rent or other income received by the Lessor from any Credit Party that is not turned over to the Agent; or (iv) affect or in any way limit the Agent's rights and remedies under any Operative Agreement with respect to the Rents and rights and powers of the Agent under the Operative Agreements or to obtain a judgment against the Lessee's interest in the Properties or the Agent's rights and powers to obtain a judgment against the Lessor or any Credit Party (provided, that no deficiency judgment or other money judgment shall be enforced against any Exculpated Person except to the extent of the Lessor's interest in the Trust Estate (excluding Excepted Payments) or to the extent the Lessor may be liable as otherwise contemplated in clauses (ii) and (iii) of this Section 12.9(b)). 12.10 RIGHTS OF THE CREDIT PARTIES. If at any time all obligations (i) of the Owner Trustee under the Credit Agreement, the Security Documents and the other Operative Agreements and (ii) of the Credit Parties under the Operative Agreements have in each case been satisfied or discharged in full, then the Credit Parties shall be entitled to (a) terminate the Lease and guaranty obligations under Section 6B and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to any of the Properties. Upon the termination of the Lease and Section 6B pursuant to the foregoing clause (a), the Lessor shall transfer to the Lessee all of its right, title and interest free and clear of the Lien of the Lease, the Lien of the Security Documents and all Lessor Liens in and to any Properties then subject to the Lease and any amounts or proceeds referred to in the foregoing clause (b) be paid over to the Lessee. 12.11. FURTHER ASSURANCES. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate 70 76 the intent and purposes of this Participation Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including without limitation the preparation, execution and filing of any and all Uniform Commercial Code financing statements, filings of Mortgage Instruments and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense and without need of any prior request from any other party, shall take such action as may be necessary (including without limitation any action specified in the preceding sentence), or (if the Owner Trustee shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. In addition, in connection with the sale or other disposition of any Property or any portion thereof, the Lessee agrees to execute such instruments of conveyance as may be reasonably required in connection therewith. 12.12. CALCULATIONS UNDER OPERATIVE AGREEMENTS. The parties hereto agree that all calculations and numerical determinations to be made under the Operative Agreements by the Owner Trustee shall be made by the Agent and that such calculations and determinations shall be conclusive and binding on the parties hereto in the absence of manifest error. 12.13. CONFIDENTIALITY. Each Financing Party agrees to keep confidential any information furnished or made available to it by any Credit Party or any of its Subsidiaries pursuant to this Agreement that is marked confidential; provided that nothing herein shall prevent any Financing Party from disclosing such information (a) to any other Financing Party or any Affiliate of any Financing Party, or any officer, director, employee, agent, or advisor of any Financing Party of Affiliate of any Financing Party, (b) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (c) as required by any law, rule, or regulation, (d) upon the order of any court or administrative agency, (e) upon the request or demand of any regulatory agency or authority, (f) that is or becomes available to the public or that is or becomes available to any Financing Party other than as a result of a disclosure by any Financing Party prohibited by this Agreement, (g) in connection with any litigation to which such Financing Party or any of its Affiliates may be a party, (h) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Operative Agreement, and (i) subject to provisions substantially similar to those contained in this Section, to any actual or proposed participant or assignee. 12.14. FINANCIAL REPORTING/TAX CHARACTERIZATION. Lessee agrees to obtain advice from its own accountants and tax counsel regarding the financial reporting treatment and the tax characterization of the transactions described in the Operative Agreements. Lessee further agrees that Lessee shall not rely upon any statement of any Financing Party or any of their respective Affiliates and/or Subsidiaries regarding any such financial reporting treatment and/or tax characterization. 71 77 12.15 SET-OFF. In addition to any rights now or hereafter granted under applicable Law and not by way of limitation of any such rights, upon and after the occurrence of any Event of Default and during the continuance thereof, the Lenders, the Holders, their respective Affiliates and any assignee or participant of a Lender or a Holder in accordance with the applicable provisions of the Operative Agreements are hereby authorized by the Credit Parties at any time or from time to time, without notice to the Credit Parties or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and to apply any and all deposits (general or special, time or demand, including without limitation indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Lenders, the Holders, their respective Affiliates or any assignee or participant of a Lender or a Holder in accordance with the applicable provisions of the Operative Agreements to or for the credit or the account of any Credit Party against and on account of the obligations of any Credit Party under the Operative Agreements irrespective of whether or not (a) the Lenders or the Holders shall have made any demand under any Operative Agreement or (b) the Agent shall have declared any or all of the obligations of any Credit Party under the Operative Agreements to be due and payable and although such obligations shall be contingent or unmatured. Notwithstanding the foregoing, neither the Agent nor any other Financing Party shall exercise, or attempt to exercise, any right of setoff, banker's lien, or the like, against any deposit account or property of any Credit Party held by the Agent or any other Financing Party, without the prior written consent of the Majority Secured Parties, and any Financing Party violating this provision shall indemnify the Agent and the other Financing Parties from any and all costs, expenses, liabilities and damages resulting therefrom. The contractual restriction on the exercise of setoff rights provided in the foregoing sentence is solely for the benefit of the Agent and the Financing Parties and may not be enforced by any Credit Party. [signature pages follow] 72 78 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. CONSTRUCTION AGENT AND LESSEE: VERITAS SOFTWARE CORPORATION, as the Construction Agent and as the Lessee By: /s/ Ken Lonchar ------------------------------------ Name: Kenneth E. Lonchar ------------------------------------ Title: Senior Vice President ------------------------------------ OWNER TRUSTEE AND LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ AGENT AND LENDERS: NATIONSBANK, N.A., as a Lender and as the Agent By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ COMMERCIA BANK-CALIFORNIA, as a Lender By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 79 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. CONSTRUCTION AGENT AND LESSEE: VERITAS SOFTWARE CORPORATION, as the Construction Agent and as the Lessee By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ OWNER TRUSTEE AND LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 By: /s/ Val T. Orton ------------------------------------ Name: Val T. Orton ------------------------------------ Title: Vice President ------------------------------------ AGENT AND LENDERS: NATIONSBANK, N.A., as a Lender and as the Agent By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ COMERICA BANK-CALIFORNIA, as a Lender By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 80 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. CONSTRUCTION AGENT AND LESSEE: VERITAS SOFTWARE CORPORATION, as the Construction Agent and as the Lessee By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- OWNER TRUSTEE AND LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- AGENT AND LENDERS: NATIONSBANK, N.A., as a Lender and as the Agent By: /s/ Sharon Ellis ----------------------------------- Name: SHARON ELLIS --------------------------------- Title: VICE PRESIDENT -------------------------------- COMERICA BANK-CALIFORNIA, as a Lender By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. CONSTRUCTION AGENT AND LESSEE: VERITAS SOFTWARE CORPORATION, as the Construction Agent and as the Lessee By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- OWNER TRUSTEE AND LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- AGENT AND LENDERS: NATIONSBANK, N.A., as a Lender and as the Agent By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- COMERICA BANK-CALIFORNIA, as a Lender By: /s/ Robert E. Ways ---------------------------------- Name: Robert E. Ways -------------------------------- Title: Corporate Banking Officer ------------------------------- 82 KEY BANK NATIONAL ASSOCIATION, as a Lender By: /s/ Mary K. Young ---------------------------------- Name: Mary K. Young -------------------------------- Title: Assistant Vice President ------------------------------- FLEET NATIONAL BANK, as a Lender By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- [signature pages continued] 83 KEY BANK NATIONAL ASSOCIATION, as a Lender By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ FLEET NATIONAL BANK, as a Lender By: /s/ Michael S. Barclay --------------------------------------- Name: Michael S. Barclay ------------------------------------- Title: VP ------------------------------------ [signature pages continued] 84 HOLDERS: NATIONSBANK, N.A., as a Holder By: /s/ Sharon Ellis --------------------------------------- Name: SHARON ELLIS ------------------------------------- Title: VICE PRESIDENT ------------------------------------ KEY BANK NATIONAL ASSOCIATION as a Holder By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ FLEET NATIONAL BANK, as a Holder By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 85 HOLDERS: NATIONSBANK, N.A., as a Holder By: --------------------------------- Name: --------------------------------- Title: --------------------------------- KEY BANK NATIONAL ASSOCIATION as a Holder By: /s/ Mary K. Young --------------------------------- Name: Mary K. Young --------------------------------- Title: Assistant Vice President --------------------------------- FLEET NATIONAL BANK, as a Holder By: --------------------------------- Name: --------------------------------- Title: --------------------------------- 86 HOLDERS: NATIONSBANK, N.A., as a Holder By: --------------------------------- Name: --------------------------------- Title: --------------------------------- KEY BANK NATIONAL ASSOCIATION as a Holder By: --------------------------------- Name: --------------------------------- Title: --------------------------------- FLEET NATIONAL BANK, as a Holder By: /s/ Michael S. Barclay --------------------------------- Name: Michael S. Barclay --------------------------------- Title: VP --------------------------------- 87 Schedule 8.3A(a)(iii) [FORM OF OFFICER'S COMPLIANCE CERTIFICATE] For the fiscal quarter ended _____________, 19__. I, ___________________, _____________________ of VERITAS SOFTWARE CORPORATION (the "Lessee") hereby certify that, to the best of my knowledge and belief, with respect to that certain Participation Agreement dated as of April 23, 1999 (as amended, modified, restated or supplemented from time to time, the "Participation Agreement"; all of the defined terms in the Credit Agreement are incorporated herein by reference) among the Lessee, the Lessor, the Guarantors, the Lenders, the Holders and NationsBank, N.A., as Agent: a. The company-prepared financial statements which accompany this certificate are true and correct in all material respects and have been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments. b. Since ________________ (the date of the last similar certification, or, if none, the Initial Closing Date) no Default or Event of Default has occurred; and Delivered herewith are detailed calculations demonstrating compliance by the Credit Parties with the financial covenants contained in Section 8.3A (h) of the Participation Agreement, and setting forth the ratio of Funded Indebtedness to EBITDA and level of EBITDA, pursuant to Section 8.3(k) of the Participation Agreement as of the end of the fiscal period referred to above. This ____ day of _____________, 19__. VERITAS SOFTWARE CORPORATION By:_________________________________ Name:_______________________________ Title:______________________________ 88 Attachment to Officer's Certificate COMPUTATION OF FINANCIAL COVENANTS 89 Schedule 8.3B(a)(ii) [SCHEDULE OF INDEBTEDNESS] 1. $100,000,000 5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2004 1. LETTER OF CREDIT FOR $231,000 IN FAVOR OF SGI 90 Schedule 8.3B(e) [SCHEDULE OF INSIGNIFICANT LINES OF BUSINESS] None 91 Schedule 8.3B(f) [SCHEDULE OF INVESTMENTS] None 92 EXHIBIT A REQUISITION FORM (Pursuant to Sections 4.2, 5.2, 5.3 and 5.4 of the Participation Agreement) VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Company") hereby certifies as true and correct and delivers the following Requisition to NATIONSBANK, N.A., as the agent for the Lenders (hereinafter defined) and respecting the Security Documents, as the agent for the Lenders and the Holders (hereinafter defined), to the extent of their interests (the "Agent"): Reference is made herein to that certain Participation Agreement dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Participation Agreement") among the Company, in its capacity as the Lessee and as the Construction Agent, the various parties thereto from time to time, as the guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee, the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders"), and the Agent. Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth therefor in the Participation Agreement. Check one: ____ INITIAL CLOSING DATE:_____________________________ (three (3) Business Days prior notice required for Advance) ____ PROPERTY CLOSING DATE:____________________________ (three (3) Business Days prior notice required for Advance) ____ CONSTRUCTION ADVANCE DATE:________________________ (three (3) Business Days prior notice required for Advance) 1. Transaction Expenses and other fees, expenses and disbursements under Sections 7.1(a) or 7.1(b) of the Participation Agreement and any and all other amounts contemplated to be financed under the Participation Agreement including without limitation any Work, broker's fees, taxes, recording fees and the like (with supporting invoices or closing statement attached): A-1 93 Party to Whom Amount Owed Amount is Owed (in U.S. Dollars) ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- 2. Description of Land (which shall be a legal description of the Land in connection with an Advance to pay Property Acquisition Costs): See attached Schedule 1 3. Description of Improvements: See attached Schedule 2 4. Description of Equipment: See attached Schedule 3 5. Description of Work: See attached Schedule 4 6. Aggregate Loans and Holder Advances requested since the Initial Closing Date with respect to each Property for which Advances are requested under this Requisition (listed on a Property by Property basis), including without limitation all amounts requested under this Requisition: [IDENTIFY ON A PROPERTY BY PROPERTY BASIS] $ [Property] ------------------ In connection with this Requisition, the Company hereby requests that the Lenders make Loans to the Lessor in the amount of $----------- and that the Holders make Holder Advances to the Lessor in the amount of $-----------------. The Company hereby certifies (i) that the foregoing amounts requested do not exceed the total aggregate of the Available Commitments plus the Available Holder Commitments and (ii) each of the provisions of the Participation Agreement applicable to the Loans and Holder Advances requested hereunder have been complied with as of the date of this Requisition. The Company requests the Loans be allocated as follows: $------------------ ABR Loans $------------------ Eurodollar Loans The Company requests the Holder Advances be allocated as follows: $------------------ ABR Holder Advances $------------------ Eurodollar Holder Advances A-2 94 The Company has caused this Requisition to executed by its duly authorized officer as of this --------- day of -----------------, -------. VERITAS SOFTWARE CORPORATION By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- A-3 95 Schedule 1 Description of Land (Legal Description and Street Address) A-4 96 Schedule 2 Description of Improvements A-5 97 Schedule 3 Description of Equipment
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A-6 98 Schedule 4 Work Work Performed for which the Advance is requested: - ---------------------------------------------------------- - ---------------------------------------------------------- A-7 99 EXHIBIT B [Reserved] B-1 100 EXHIBIT C VERITAS SOFTWARE CORPORATION OFFICER'S CERTIFICATE (Pursuant to Section 5.3(z) of the Participation Agreement) VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Company"), DOES HEREBY CERTIFY as follows: 1. Each and every representation and warranty of each Credit Party contained in the Operative Agreements to which it is a party is true and correct on and as of the date hereof. 2. No Default or Event of Default has occurred and is continuing under any Operative Agreement. 3. Each Operative Agreement to which any Credit Party is a party is in full force and effect with respect to it. 4. The Company has duly performed and complied with all covenants, agreements and conditions contained in the Participation Agreement (hereinafter defined) or in any Operative Agreement required to be performed or complied with by it on or prior to the date hereof. Capitalized terms used in this Officer's Certificate and not otherwise defined herein have the respective meanings ascribed thereto in the Participation Agreement dated as of April 23, 1999 among the Company, as the Lessee and as the Construction Agent, the various parties thereto from time to time, as guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee, the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly executed and delivered as of this ______ day of __________, ____. VERITAS SOFTWARE CORPORATION By: __________________________ Name: ________________________ Title: _______________________ C-1 101 EXHIBIT D VERITAS SOFTWARE CORPORATION SECRETARY'S CERTIFICATE (Pursuant to Section 5.3(aa) of the Participation Agreement) VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Company") DOES HEREBY CERTIFY as follows: 1. Attached hereto as Schedule 1 is a true, correct and complete copy of the resolutions of the Board of Directors of the Company duly adopted by the Board of Directors of the Company on . Such resolutions have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 2. Attached hereto as Schedule 2 is a true, correct and complete copy of the Articles of Incorporation of the Company on file in the Office of the Secretary of State of . Such Articles of Incorporation have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 3. Attached hereto as Schedule 3 is a true, correct and complete copy of the Bylaws of the Company. Such Bylaws have not been amended, modified or rescinded since their date of adoption and remain in full force and effect as of the date hereof. 4. The persons named below now hold the offices set forth opposite their names, and the signatures opposite their names and titles are their true and correct signatures.
Name Office Signature - ------------------ ---------------------- ---------------------- - ------------------ ---------------------- ----------------------
D-1 102 IN WITNESS WHEREOF, the Company has caused this Secretary's Certificate to be duly executed and delivered as of this day of , . VERITAS SOFTWARE CORPORATION By: --------------------------- Name: --------------------------- Title: -------------------------- D-2 103 Schedule I Board Resolutions D-3 104 Schedule 2 Articles of Incorporation D-4 105 Schedule 3 Bylaws D-5 106 EXHIBIT E FIRST SECURITY BANK, NATIONAL ASSOCIATION OFFICER'S CERTIFICATE (Pursuant to Section 5.3(bb) of the Participation Agreement) FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually (except with respect to paragraph 1 below, to the extent any such representations and warranties are made in its individual capacity) but solely as the owner trustee under the VS Trust 1999-1 (the "Owner Trustee"), DOES HEREBY CERTIFY as follows: 1. Each and every representation and warranty of the Owner Trustee contained in the Operative Agreements to which it is a party is true and correct on and as of the date hereof. 2. Each Operative Agreement to which the Owner Trustee is a party is in full force and effect with respect to it. 3. The Owner Trustee has duly performed and complied with all covenants, agreements and conditions contained in the Participation Agreement (hereinafter defined) or in any Operative Agreement required to be performed or complied with by it on or prior to the date hereof. Capitalized terms used in this Officer's Certificate and not otherwise defined herein have the respective meanings ascribed thereto in the Participation Agreement dated as of April 23, 1999 (the "Participation Agreement") among Veritas Software Corporation, as the Lessee and as the Construction Agent, the various parties thereto from time to time, as guarantors (the "Guarantors"), the Owner Trustee, the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). E-1 107 IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's Certificate to be duly executed and delivered as of this ___ day of ________, _________. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the VS Trust 1999-1 By: ________________________________ Name: ______________________________ Title: _____________________________ E-2 108 EXHIBIT F FIRST SECURITY BANK NATIONAL ASSOCIATION SECRETARY'S CERTIFICATE (Pursuant to Section 5.3(cc) of the Participation Agreement) CERTIFICATE OF ASSISTANT SECRETARY I, _____________________, duly elected and qualified Assistant Secretary of the Board of Directors of First Security Bank, National Association (the "Association"), hereby certify as follows: 1. The Association is a National Banking Association duly organized, validly existing and in good standing under the laws of the United States. With respect thereto the following is noted: A. Pursuant to Revised Statutes 324, et seq., as amended, 12 U.S.C. 1, et seq., the Comptroller of the Currency charters and exercises regulatory and supervisory authority over all National Banking Associations; B. On December 9, 1881, the First National Bank of Ogden, Utah was chartered as a National Banking Association under the laws of the United States and under Charter No. 2597; C. On October 2, 1922, in connection with a consolidation of The First National Bank of Ogden, Ogden, Utah and The Utah National Bank of Ogden, Ogden, Utah, the title was changed to "The First & Utah National Bank of Ogden", on January 18, 1923, The First & Utah National Bank of Ogden changed its title to "First Utah National Bank of Ogden"; on January 19, 1926, the title was changed to "First National Bank of Ogden"; on February 24, 1934, the title was changed to "First Security Bank of Utah, National Association"; on June 21, 1996, the title was changed to "First Security Bank, National Association"; and D. First Security Bank, National Association, Ogden, Utah, continues to hold a valid certificate to do business as a National Banking Association. 2. The Association's Articles of Association, as amended, are in full force and effect, and a true, correct and complete copy is attached hereto as Schedule A and incorporated herein by reference. Said Articles were last amended October 20, 1975, as required by law on notice at a duly called special meeting of the shareholders of the Association. F-1 109 3. The Association By-Laws, as amended, are in full force and effect; and a true, correct and complete copy is attached hereto as Schedule B and incorporated herein by reference. Said By-Laws, still in full force and effect, were adopted September 17, 1942, by resolution, after proper notice of consideration and adoption of By-Laws was given to each and every shareholder, at a regularly called meeting of the Board of Directors with a quorum present. 4. Pursuant to the authority vested in it by an Act of Congress approved December 23, 1913 and known as the Federal Reserve Act, as amended, the Federal Reserve Board (now the Board of Governors of the Federal Reserve System) has granted to the Association now known as "First Security Bank, National Association" of Ogden, Utah, the right to act, when not in contravention of State or local law, as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which State banks, trust companies or other corporations which come into competition with National Banks are permitted to act under the laws of the State of Utah; and under the provisions of applicable law, the authority so granted remains in full force and effect. 5. Pursuant to authority vested by Act of Congress (12 U.S.C. 92a and 12 U.S.C. 481, as amended) the Comptroller of the Currency has issued Regulation 9, as amended, dealing, in part, with the Fiduciary Powers of National Banks, said regulation providing in subparagraph 9.7(a)(1-2): (1) The board of directors is responsible for the proper exercise of fiduciary powers by the Bank. All matters pertinent thereto, including the determination of policies, the investment and disposition of property held in fiduciary capacity, and the direction and review of the actions of all officers, employees, and committees utilized by the Bank in the exercise of its fiduciary powers, are the responsibility of the board. In discharging this responsibility, the board of directors may assign, by action duly entered in the minutes, the administration of such of the Bank's fiduciary powers as it may consider proper to assign to such director(s), officer(s), employee(s) or committee(s) as it may designate. (2) No fiduciary account shall be accepted without the prior approval of the board, or of the director(s), officer(s), or committee(s) to whom the board may have designated the performance of that responsibility.... 6. A Resolution relating to Exercise of Fiduciary Powers was adopted by the Board of Directors at a meeting held July 26, 1994 at which time there was a quorum present, said resolution is still in full force and effect and has not been rescinded. Said resolution is attached hereto as Schedule C and incorporated herein by reference. F-2 110 7. A Resolution relating to the Designation of Officers and Employees to Exercise Fiduciary Powers was adopted by the Trust Policy Committee at a meeting held February 7, 1996 at which time a quorum was present; said resolution is still in full force and effect and has not been rescinded. Said resolution is attached hereto as Schedule D and is incorporated herein by reference. 8. Attached hereto as Schedule E and incorporated herein by reference, is a listing of facsimile signatures of persons authorized (herein "Authorized Signatory or Signatories") on behalf of the Association and its Trust Group to act in exercise of its fiduciary powers subject to the resolutions in Paragraphs 6 and 7, above. 9. The principal office of the First Security Bank, National Association, Trust Group and of its departments, except for the St. George, Utah, Ogden, Utah, and Provo, Utah, branch offices, is located at 79 South Main Street, Salt Lake City, Utah 84111 and all records relating to fiduciary accounts are located at such principal office of the Trust Group or in storage facilities within Salt Lake County, Utah, except for those of the Ogden, Utah, St. George, Utah, and Provo, Utah, branch offices, which are located at said office. 10. Each Authorized Signatory (i) is a duly elected or appointed, duly qualified officer or employee of the Association; (ii) holds the office or job title set forth below his or her name on the date hereof; (iii) and the facsimile signature appearing opposite the name of each such officer or employee is a true replica of his or her signature. F-3 111 IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Association this ------------- day of -----------------, --------. (SEAL) -------------------------------- R. James Steenblik Senior Vice President Assistant Secretary F-4 112 Schedule A Articles of Association F-5 113 Schedule B Bylaws F-6 114 Schedule C Resolution Relating to Exercise of Fiduciary Powers F-7 115 Schedule D Resolution Relating to the Designation of Officers and Employees To Exercise Fiduciary Powers F-8 116 Schedule E Authorized Signatory or Signatories F-9 117 EXHIBIT G [Outside Counsel Opinion for the Owner Trustee] (Pursuant to Section 5.3(dd) of the Participation Agreement) ----------------, ---- TO THOSE ON THE ATTACHED DISTRIBUTION LIST Re: Trust Agreement dated as of April 23, 1999 Dear Sirs: We have acted as special counsel for First Security Bank, National Association, a national banking association, in its individual capacity ("FSB") and in its capacity as trustee (the "Owner Trustee") under the Trust Agreement dated as of April 23, 1999 (the "Trust Agreement") by and among it and the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), in connection with the execution and delivery by the Owner Trustee of the Operative Agreements to which it is a party. Except as otherwise defined herein, the terms used herein shall have the meanings set forth in Appendix A to the Participation Agreement dated as of April 23, 1999 (the "Participation Agreement") by and among Veritas Software Corporation (the "Lessee"), the various parties thereto from time to time, as guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee, the Holders, the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion. Based upon the foregoing, we are of the opinion that: 1. FSB is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America and each of FSB and the Owner Trustee has under the laws of the State of Utah and federal banking law the power and authority to enter into and perform its obligations under the Trust Agreement and each other Operative Agreement to which it is a party. 2. The Owner Trustee is the duly appointed trustee under the Trust Agreement. G-1 118 3. The Trust Agreement has been duly authorized, executed and delivered by one (1) of the officers of FSB and, assuming due authorization, execution and delivery by the Holders, is a legal, valid and binding obligation of the Owner Trustee (and to the extent set forth therein, against FSB), enforceable against the Owner Trustee (and to the extent set forth therein, against FSB) in accordance with its terms, and the Trust Agreement creates under the laws of the State of Utah for the Holders the beneficial interest in the Trust Estate it purports to create and is a valid trust under the laws of the State of Utah. 4. The Operative Agreements to which it is party have been duly authorized, executed and delivered by FSB, and, assuming due authorization, execution and delivery by the other parties thereto, are legal, valid and binding obligations of FSB, enforceable against FSB in accordance with their respective terms. 5. The Operative Agreements to which it is party have been duly authorized, executed and delivered by Owner Trustee, and, assuming due authorization, execution and delivery by the other parties thereto, are legal, valid and binding obligations of the Owner Trustee, enforceable against the Owner Trustee in accordance with their respective terms. The Notes and Certificates have been duly issued, executed and delivered by the Owner Trustee, pursuant to authorization contained in the Trust Agreement, and the Certificates are entitled to the benefits and security afforded by the Trust Agreement in accordance with its terms and the terms of the Trust Agreement. 6. The execution and delivery by each of FSB and the Owner Trustee of the Trust Agreement and the Operative Agreements to which it is a party, and compliance by FSB or the Owner Trustee, as the case may be, with all of the provisions thereof do not and will not contravene any Laws applicable to or binding on FSB, or as the Owner Trustee, or contravene the provisions of, or constitute a default under, its charter documents or by-laws or, to our knowledge after due inquiry, any indenture, mortgage contract or other agreement or instrument to which FSB or Owner Trustee is a party or by which it or any of its property may be bound or affected. 7. The execution and delivery of the Operative Agreements by each of FSB and the Owner Trustee and the performance by each of FSB and the Owner Trustee of their respective obligations thereunder does not require on or prior to the date hereof the consent or approval of, the giving of notice to, the registration or filing with, or the taking of any action in respect of any Governmental Authority or any court. 8. Assuming that the trust created by the Trust Agreement is treated as a grantor trust for federal income tax purposes within the contemplation of Section 671 through 678 of the Internal Revenue Code of 1986, there are no fees, taxes, or other charges (except taxes imposed on fees payable to the Owner Trustee) payable to the State of Utah or any political subdivision thereof in connection with the execution, delivery or performance by the Owner Trustee, the Agent, the Lenders, the Lessee or the Holders, as the case may be, of the Operative Agreements or in connection with the acquisition of any Property by the Owner Trustee or in connection with the making by any Holder of its investment in the Trust or its acquisition of the beneficial G-2 119 interest in the Trust Estate or in connection with the issuance and acquisition of the Certificates, or the Notes, and neither the Owner Trustee, the Trust Estate nor the trust created by the Trust Agreement will be subject to any fee, tax or other governmental charge (except taxes on fees payable to the Owner Trustee) under the laws of the State of Utah or any political subdivision thereof on, based on or measured by, directly or indirectly, the gross receipts, net income or value of the Trust Estate by reason of the creation or continued existence of the trust under the terms of the Trust Agreement pursuant to the laws of the State of Utah or the Owner Trustee's performance of its duties under the Trust Agreement. 9. There is no fee, tax or other governmental charge under the laws of the State of Utah or any political subdivision thereof in existence on the date hereof on, based on or measured by any payments under the Certificates, Notes or the beneficial interest in the Trust Estate, by reason of the creation of the trust under the Trust Agreement pursuant to the laws of the State of Utah or the Owner Trustee's performance of its duties under the Trust Agreement within the State of Utah. 10. Upon the filing of the financing statement on form UCC-1 in the form attached hereto as Schedule 1 with the Utah Division of Corporation and Commercial Code, the Agent's security interest in the Trust Estate, for the benefit of the Lenders and the Holders, will be perfected, to the extent that such perfection is governed by Article 9 of the Uniform Commercial Code as in effect in the State of Utah (the "Utah UCC"). Your attention is directed to the Utah UCC, which provides, in part, that a filed financing statement which does not state a maturity date or which states a maturity date of more than five (5) years is effective only for a period of five (5) years from the date of filing, unless within six (6) months prior to the expiration of said period a continuation statement is filed in the same office or offices in which the original statement was filed. The continuation statement must be signed by the secured party, identify the original statement by file number and state that the original statement is still effective. Upon the timely filing of a continuation statement, the effectiveness of the original financing statement is continued for five (5) years after the last date to which the original statement was effective. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the original statement. The foregoing opinions are subject to the following assumptions, exceptions and qualifications: A. We are attorneys admitted to practice in the State of Utah and in rendering the foregoing opinions we have not passed upon, or purported to pass upon, the laws of any jurisdictions other than the State of Utah and the federal banking law governing the banking and trust powers of FSB. In addition, without limiting the foregoing we express no opinion with respect to (i) federal securities laws, including the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Trust Indenture Act of 1939, as amended, (ii) the Federal Aviation Act of 1958, as amended, (iii) the Federal Communications Act of 1934, as amended, or (iv) state securities or blue sky laws. Insofar as the foregoing opinions relate to the legality, validity, binding effect and enforceability of the documents involved in these transactions, which by their terms are governed by the laws of a state other than Utah, we have G-3 120 assumed that the laws of such state (as to which we express no opinion), are in all material aspects identical to the laws of the State of Utah. B. The opinions set forth in paragraphs 3, 4, and 5 above are subject to the qualification that enforceability of the Trust Agreement and the other Operative Agreements to which FSB and the Owner Trustee are parties, in accordance with their respective terms, may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, receivership or similar laws affecting enforcement of creditors' rights generally, and (ii) general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. C. As to the documents involved in these transactions, we have assumed that each is a legal, valid and binding obligation of each party thereto, other than FSB or the Owner Trustee, and is enforceable against each such party in accordance with their respective terms. D. We have assumed that all signatures, other than those of the Owner Trustee or FSB, on documents and instruments involved in these transactions are genuine, that all documents and instruments submitted to us as originals are authentic, and that all documents and instruments submitted to us as copies conform with the originals, which facts we have not independently verified. E. We do not purport to be experts in respect of, or express any opinion concerning laws, rules or regulations applicable to the particular nature of the equipment or property involved in these transactions. F. We have made no investigation of, and we express no opinion concerning, the nature of the title to any part of the equipment or property involved in these transactions or the priority of any mortgage or security interest. G. We have assumed that the Participation Agreement and the transactions contemplated thereby are not within the prohibitions of Section 406 of the Employee Retirement Income Security Act of 1974. H. In addition to any other limitation by operation of law upon the scope, meaning, or purpose of this opinion, the opinions expressed herein speak only as of the date hereof. We have no obligation to advise the recipients of this opinion (or any third party) and make no undertaking to amend or supplement such opinions if facts come to our attention or changes in the current law of the jurisdictions mentioned herein occur which could affect such opinions the legal analysis, a legal conclusion or any information confirmation herein. I. This opinion is for the sole benefit of the Lessee, the Construction Agent, the Guarantors, the Owner Trustee, the Holders, the Lenders, the Agent and their respective successors and assigns in matters directly related to the Participation Agreement or the transaction contemplated thereunder and may not be relied upon by any other person other than such parties and their respective successors and assigns without the express written consent of G-4 121 the undersigned. The opinions expressed in this letter are limited to the matter set forth in this letter, and no other opinions should be inferred beyond the matters expressly stated. Very truly yours, RAY, QUINNEY & NEBEKER M. John Ashton G-5 122 Distribution List NationsBank, N.A., as the Agent, a Holder and a Lender The various banks and other lending institutions which are parties to the Participation Agreement from time to time, as additional Holders The various banks and other lending institutions which are parties to the Participation Agreement from time to time, as additional Lenders Veritas Software Corporation, as the Construction Agent and the Lessee The various parties to the Participation Agreement from time to time, as the Guarantors. First Security Bank, National Association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1. G-6 123 EXHIBIT H [In-House and Outside Counsel Opinion for the Lessee] (Pursuant to Section 5.3(ee) of the Participation Agreement) [Form of In-House Counsel Opinion for the Lessee] April , 1999 TO THOSE ON THE ATTACHED DISTRIBUTION LIST Re: Synthetic Lease Financing Provided in favor of Veritas Software Corporation Ladies and Gentlemen: I have acted as general counsel to Veritas Software Corporation, a Delaware corporation (the "Lessee") in connection with certain transactions contemplated by the Participation Agreement dated as of April , 1999 (the "Participation Agreement"), among the Lessee, the various parties thereto from time to time as guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee (the "Owner Trustee"), the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). This opinion is delivered pursuant to Section 5.3(ee) of the Participation Agreement. All capitalized terms used herein, and not otherwise defined herein, shall have the meanings assigned thereto in Appendix A to the Participation Agreement. In connection with the foregoing, I have examined originals, or copies certified to my satisfaction, of such corporate documents and records of the Lessee, certificates of public officials and representatives of the Lessee as to certain factual matters, and such other instruments and documents which I have deemed necessary or advisable to examine for the purpose of this opinion. With respect to such examination, I have assumed (i) the statements of fact made in all such certificates, documents and instruments are true, accurate and complete; (ii) the genuineness of all signatures (other than the signatures of persons signing on behalf of the Lessee) and (iii) the authenticity and completeness of all documents, certificates, instruments, records and corporate records submitted to us as originals and the conformity to the original instruments of all documents submitted to us as copies, and the authenticity and completeness of the originals of such copies. Based on the foregoing, and having due regard for such legal considerations as I deem relevant, and subject to the limitations and assumptions set forth herein, I am of the opinion that: H-1 124 1. Lessee has the corporate power and authority to conduct its business as presently conducted. 2. Lessee (i) is not subject to, or is exempt from, regulation under (A) the Federal Power Act, the Public Utility Holding Company Act of 1935 or other federal or state laws and regulations applicable to public utilities. (B) any federal or state laws and regulations applicable to banks, finance companies and other financial institutions, or (C) any other federal or state laws and regulations limiting Lessee's ability to borrow money; and (ii) is not an investment company or a company controlled by an investment company, within the meaning of the Investment Company Act of 1940. This opinion is limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters stated herein. This opinion is based on and is limited to the laws of the State of California and the federal laws of the United States of America. Insofar as the foregoing opinion relates to matters of law other than the foregoing, no opinion is hereby given. This opinion is for the sole benefit of the addressees and their respective successors and assigns and may not be relied upon by any other person other than such parties and their respective successors and assigns without the express written consent of the undersigned. The opinions expressed herein are as of the date hereof and I make no undertaking to amend or supplement such opinions if facts come to my attention or changes in the current law of the jurisdictions mentioned herein occur which could affect such opinions. Very truly yours, Jay Jones H-2 125 Distribution List First Security Bank, National Association, individually, and as the Lessor, the Borrower and the Owner Trustee NationsBank, N.A., as the Agent, a Lender and a Holder Comerica Bank--California, as a Lender Key Bank National Association, as a Lender and a Holder Fleet National Bank, as a Lender and a Holder H-3 126 [BROBECK HALE AND DORR INTERNATIONAL LETTERHEAD] April 23, 1999 To Each of the Parties Listed on Schedule A Attached Hereto Re: Veritas Software Corporation Synthetic Leasing Financing Ladies and Gentlemen: We have acted as special counsel to Veritas Software Corporation, a Delaware corporation doing business in California as Veritas Storage Management Corp. ("LESSEE"), in connection with the execution and delivery of the documents listed below, each dated the date hereof unless otherwise specified below, related to the funding on the date hereof of a synthetic lease (off-balance sheet) financing in the total funded amount of $72,000,000 for the acquisition of certain land and improvements and the development of corporate facilities to be located in Mountain View, California (the "TRANSACTION"). For purposes of this opinion, we have examined the following documents: 1. Master Lease Agreement by and between First Security Bank, National Association, a national banking association, not in its individual capacity, but solely as Trustee of the VS Trust 1999-1 ("LESSOR"), and Lessee (the "LEASE"); 2. Participation Agreement by and among the Lessee, Lessor, the holders of Certificates issued with respect to the VS Trust 1999-1 (the "HOLDERS"), the lenders party thereto ("LENDERS"), and Nationsbank, N.A., as agent for the Lenders and the Holders ("AGENT") (the "PARTICIPATION AGREEMENT"); 3. Agency Agreement between Lessor and Lessee; 4. Trust Agreement between the Holders and Lessor; 5. Credit Agreement between the Lenders, Lessor and Agent; 6. The Tranche A Notes and the Tranche B Notes; 7. Security Agreement between Lessor and Agent, as accepted and agreed to by Lessee; 127 To Each of the Parties April 23, 1999 Listed on Schedule A Page 2 Attached Hereto 8. Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing by Lessor, as grantor, to Chicago Title Company, as trustee ("TRUSTEE"), in favor of Agent, for the benefit of the Lenders and the Holders (the "LENDER DEED OF TRUST") and that certain Joinder of Lessee thereto, whereby Lessee is joined as an additional guarantor of its interest in the leasehold estate encumbered by the Lender Deed of Trust (the "JOINDER OF LESSEE"). 9. Memorandum of Lease Agreement and Lease Supplement No. 1 and Deed of Trust between Lessor, Lessee and Trustee (the "LAND LEASE SUPPLEMENT") and Memorandum of Lease Agreement and Lease Supplement No. 2 and Deed of Trust between Lessor, Lessee and Trustee (the "IMPROVEMENTS LEASE SUPPLEMENT") (the Land Lease Supplement and the Improvements Lease Supplement are together referred to herein as the "LESSOR DEED OF TRUST"); 10. Lease Supplement No. 1 between Lessee and Lessor and Lease Supplement No. 2 between Lessee and Lessor (each a "LEASE SUPPLEMENT"); 11. (a) a UCC-1 financing statement to be filed with the California Secretary of State executed by Veritas Software Corporation ("VERITAS"), as debtor, and a UCC-1 financing statement to be filed with the California Secretary of State executed by Veritas Storage Management Corp. ("VSMC"), as debtor, each in favor of Agent, as secured party relating to the Collateral encumbered by such a security interest as arises under the Security Agreement (collectively, the "LESSEE SECURITY AGREEMENT FINANCING STATEMENTS"); (b) a UCC-1 financing statement to be filed with the California Secretary of State executed by Lessor, as debtor, in favor of Agent, as secured party relating to the Collateral encumbered by such a security interest as arises under the Security Agreement (the "LESSOR SECURITY AGREEMENT FINANCING STATEMENT") (the Lessee Security Agreement Financing Statements and the Lessor Security Agreement Financing Statement are collectively referred to herein as the "SECURITY AGREEMENT FINANCING STATEMENTS"); (c) a UCC-1 financing statement to be filed with the California Secretary of State executed by Veritas, as debtor, and a UCC-1 financing statement to be filed with the California Secretary of State executed by VSMC, as debtor, each in favor of Agent, as secured party, relating to the Collateral encumbered by such a security interest as arises under the Joinder of Lessee (collectively, the "LESSEE DEED OF TRUST FINANCING STATEMENTS"); 128 To Each of the Parties April 23, 1999 Listed on Schedule A Page 3 Attached Hereto (d) a UCC-1 financing statement to be filed with the California Secretary of State executed by Lessor, as debtor, in favor of Agent, as secured party, relating to the Collateral encumbered by such a security interest as arises under the Lender Deed of Trust (the "LESSOR DEED OF TRUST FINANCING STATEMENT") (the Lessee Deed of Trust Financing Statements and the Lessor Deed of Trust Financing Statement are collectively referred to herein as the "DEED OF TRUST FINANCING STATEMENTS"); (e) a UCC-1 financing statement to be filed with the California Secretary of State executed by Veritas, as debtor, and a UCC-1 financing statement to be filed with the California Secretary of State executed by VSMC, as debtor, each in favor of Lessor, as secured party, relating to the Collateral encumbered by such a security interest as arises under the Lessor Deed of Trust (collectively, the "LEASE FINANCING STATEMENTS") (collectively with (a), (b), (c) and (d), the "FINANCING STATEMENTS" with each a "FINANCING STATEMENT"); 13. Agreement of Purchase and Sale dated as of March 29, 1999 by and between Fairchild Semiconductor Corporation of California (the "SELLER") and Lessee, as amended (the "PURCHASE AGREEMENT"); 14. Fixture filings to be recorded in the Official Records of Santa Clara County, California, executed by Lessor, as debtor, and fixture filings to be recorded in the Official Records of Santa Clara County, California, executed by Lessee, as debtor (collectively, the "FIXTURE FILINGS); 15. Assignment of Purchase Agreement between Lessor and Lessee (the "ASSIGNMENT"); 16. Grant Deed from Seller to Lessor (the "DEED"); 17. Sublease Agreement between Lessee, as sublessor, and Seller, as sublessee (the "SUBLEASE"); 18. Collateral Assignment of Sublease by Lessee in favor of Agent (the "COLLATERAL ASSIGNMENT"); and 19. Subordination, Non-Disturbance and Attornment Agreement between Lessee, Lessor and Agent (the "SNDA"). The documents listed above as documents 2-6 are collectively referred to herein as the "LOAN DOCUMENTS" and the documents listed above as documents 7-13 are collectively referred to herein as the "SECURITY DOCUMENTS." Together, the Lease, the Loan Documents, the 129 To Each of the Parties April 23, 1999 Listed on Schedule A Page 4 Attached Hereto Security Documents and the documents listed above as documents 14-18 are collectively referred to herein as the "OPERATIVE DOCUMENTS." This opinion is being delivered to you pursuant to Section 5.3(ee) of the Participation Agreement. The Agent, Lenders and Holders are sometimes collectively referred to herein as the "LENDER PARTIES." Unless otherwise defined herein, capitalized terms used and not defined herein shall have the meanings given to them in Appendix A of the Participation Agreement. For purposes of this opinion, we have examined the following documents: 1. Executed copies of the Operative Documents; 2. An executed copy of the Certificate of Lessee ("CERTIFICATE OF LESSEE"), executed by Jay A. Jones, the Secretary of Lessee, for the benefit of the undersigned, dated April 23, 1999 a copy of which is attached hereto as Exhibit A; 3. A copy of the Certificate of Incorporation of Lessee, certified by the Delaware Secretary of State on April 13, 1999 and further certified as current by the Secretary of Lessee on April 23, 1999 ("LESSEE CERTIFICATE OF INCORPORATION"); 4. A copy of the Bylaws of Lessee, certified as current by the Secretary of Lessee on April 23, 1999 ("LESSEE BYLAWS"); 5. A Certificate of Good Standing for Lessee, issued on April 13, 1999 by the Secretary of State of the State of Delaware; 6. A Certificate of Good Standing (Foreign Corporation) for Lessee, issued on April 14, 1999 by the Secretary of State of the State of California; and 7. A copy of the Unanimous Written Consent by the Board of Directors of the Lessee, on March 25, 1999, certified by the Secretary of Lessee on April 23, 1999. The documents listed above as documents 3, 4 and 7 are collectively referred to herein as the "CONSTITUENT DOCUMENTS." We represent Lessee only with respect to specific matters and our relationship with Lessee is such that we have no detailed or continuing familiarity with any of its day-to-day operations, business or financial affairs. Although attorneys in our firm have been involved in the governmental approval process for the Property, we have made no independent review of that process, nor have we made any physical inspection of the Property, nor have we undertaken independent investigation respecting any fire or public health laws or compliance with the regulations of any insurance company. Our opinion is based exclusively upon a review of the 130 To Each of the Parties April 23, 1999 Listed on Schedule A Page 5 Attached Hereto Operative Documents, the Constituent Documents, the Certificate of Lessee and the Certificates of the Secretaries of State referred to above, (and for purposes of our opinion in Paragraph 3 below, any Material Agreements identified in the Certificate of Lessee). In addition, we have relied upon the representations and warranties of Lessee set forth in the Certificate of Lessee with respect to the factual determinations underlying the legal conclusions set forth herein. Whenever any opinion expressed herein with respect to the existence or absence of facts is qualified by the phrase "to our current actual knowledge," such knowledge is limited solely to (i) the representations of Lessee set forth in the Certificate of Lessee and the Operative Documents, (ii) an examination of documents in those of our files solely related to the Transaction and (iii) the actual knowledge of those attorneys in our firm who have substantively represented Lessee with respect to the Transaction (but not including any constructive or imputed notice of any information) or who have had an active involvement in the preparation of this opinion ("Primary Lawyer Group"). We have not attempted to verify independently the representations of Lessee; and we have not conducted any investigation, nor do we intend to undertake for purposes of this opinion any investigation, of any facts that may be ascertained by the examination of all of the other files or attorneys of our firm or any court files or third parties. In our examination and review we have assumed the genuineness of all signatures other than the officers of Lessee, the legal capacity of natural persons, the authenticity of the documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as certified, facsimile or photostatic copies, and the authenticity of the originals of such copies. The law covered by the opinions expressed herein is limited to the federal law of the United States and the General Corporation Law of the State of Delaware, the laws of the State of New York and the laws of the State of California, in each case as expressly provided below. We express no opinion with respect to the effect or applicability of the laws of any other jurisdiction. For purposes of our opinions expressed in Paragraph 1 below, with respect to due incorporation, valid existence and good standing of Lessee, we are relying solely on our review and examination of the certificates received from the Secretary of State of the State of Delaware, and the Secretary of State of the State of California, without further investigation of the corporate records of Lessee. Our opinions expressed in Paragraphs 1 and 2 below relate solely to the laws of the State of California, the General Corporation Law of the State of Delaware, and applicable federal laws of the United States, and we express no opinion in Paragraphs 1 and 2 below with respect to the effect or applicability of the laws of any other jurisdiction. 131 To Each of the Parties April 23, 1999 Listed on Schedule A Page 6 Attached Hereto Our opinions expressed in clauses (ii) and (iii) of Paragraph 3 below are limited to laws and regulations normally applicable to transactions of the type contemplated in the Operative Documents and do not extend to licenses, permits and approvals necessary for the development of the Property or the conduct of Lessee's business. Our opinions expressed in Paragraphs 4(a) and 9(a) below relate solely to the laws of the State of New York (and, in the case of Paragraph 9(a) insofar as matters of California law are relevant to the opinions relating to perfection expressed therein, the laws of the State of California), and we express no opinion in Paragraphs 4(a) and 9(a) below with respect to the effect or applicability of the laws of any other jurisdiction. Such opinion is limited to laws and regulations normally applicable to transactions of the type contemplated in the Operative Documents and do not extend to licenses, permits and approvals necessary for the conduct of Lessee's business. We have made no investigation of New York law with respect to the creation of any leasehold estate, with respect to the creation, perfection or priority of any real estate lien or security interest in real property, or with respect to the exercise of any remedies relating to any leasehold estate, real estate lien or security interest in real property, nor have we consulted with counsel admitted to practice law in the State of New York regarding such matters, and we express no opinion herein relating to New York law with respect to any such matters. Our opinions expressed in Paragraphs 4(b), 6, 7, 8, 9(b), 10, 11, 12 and 13 below relate solely to the laws of the State of California (except for the opinions expressed in Paragraph 11 below which also relate to the federal laws of the United States), and we express no opinion in Paragraphs 4(b), 6, 7, 8, 9(b), 10, 11, 12 and 13 below with respect to the effect or applicability of the laws of any other jurisdiction (except as expressly set forth in this sentence). Such opinions are limited to laws and regulations normally applicable to transactions involving California real property interests as contemplated in the Operative Documents. We invite your attention to the fact that the Operative Documents state that they are governed by the law of the State of New York. We have not, for purposes of our opinions expressed in Paragraphs 4(b), 6, 7, 8, 9(b), 10, 11, 12 and 13 examined the question of, and express no opinion as to, what law would govern the interpretation, characterization or enforcement of the Operative Documents, and our opinions with regard to the Operative Documents in Paragraphs 4(b), 6, 7, 8, 9(b), 10, 11, 12 and 13 respectively, are based on the assumption that the internal law of the State of California would govern the provisions thereof, and in addition, in the case of Paragraphs 6 and 7, upon the assumptions set forth therein, respectively. Insofar as our opinion expressed in Paragraph 13 below concerns the law of the State of California limiting the rates of interest legally chargeable or collectible, we have relied upon our understanding that each of the Lender Parties (as defined below) is a subsidiary of a bank holding company or is a bank organized under the laws of the United States or any State thereof and, as a result thereof, is exempt from the restrictions of Section 1 of Article XV of the 132 To Each of the Parties Listed on Schedule A April 23, 1999 Attached Hereto Page 7 Constitution of the State of California relating to rates of interest upon the loan of money. We further assume in this regard that all Advances have been and will be made by each of the Lender Parties for its own account and without intent to circumvent otherwise applicable interest rate limitations under California law and that there is no present express or implied agreement or plan to sell participations or any other interest in the Operative Documents to any Person other than a Person that also qualifies for an exemption from the interest rate limitations of California law. In addition and without limiting the previous six paragraphs, we express no opinion herein with respect to the effect of any pension, employee benefit or tax laws (except as provided in Paragraph 10 below), or any zoning or similar land use law, any state or federal antitrust law, state or federal securities laws. Further, we express no opinion as to compliance or noncompliance by Lessor, Agent, Holders or Lenders with any federal, state or other law (i) requiring any of Lessor, Agent, Holders or Lenders to be licensed as a bank, finance company or other type of financial institution, (ii) pertaining to matters regulating the assets held by the Lenders on the basis of portfolio requirements or Lessor's, Agent's, Holders' or Lenders' capitalization, such as loan limits and capital adequacy requirements, and (iii) otherwise applicable to Lessor, Agent, Holders or Lenders and relating to their legal or regulatory status or the nature of their business. In rendering this opinion, with your permission and without independent investigation (unless otherwise noted), we are making and relying on the following assumptions: 133 To Each of the Parties April 23, 1999 Listed on Schedule A Page 8 Attached Hereto A. THERE ARE NO DOCUMENTS OR AGREEMENTS THAT WOULD MODIFY OR CONFLICT WITH THE OPERATIVE DOCUMENTS, BETWEEN OR AMONG ANY OF THE PARTIES THERETO AND/OR ANY OTHER PERSON OR ENTITY ("Person"); B. EACH OF LESSOR, AGENT, EACH HOLDER AND EACH LENDER IS DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF ITS RESPECTIVE JURISDICTION OF FORMATION AND ANY OTHER RELEVANT JURISDICTION, AND HAS ALL REQUISITE POWER AND AUTHORITY TO CARRY ON ITS BUSINESS AS NOW CONDUCTED, TO ENTER INTO THE OPERATIVE DOCUMENTS TO WHICH IT IS A PARTY AND TO CARRY OUT THE TERMS AND TO EXERCISE THE REMEDIES OF THE OPERATIVE DOCUMENTS TO WHICH IT IS A PARTY; C. ALL OF THE OPERATIVE DOCUMENTS TO WHICH THEY ARE PARTIES, RESPECTIVELY, HAVE BEEN DULY AUTHORIZED, EXECUTED AND DELIVERED BY LESSOR, AGENT, EACH HOLDER AND EACH LENDER, AND ALL THE OPERATIVE DOCUMENTS TO WHICH THEY ARE PARTIES, RESPECTIVELY, ARE LEGAL, VALID, BINDING AND ENFORCEABLE AS TO LESSOR (EXCEPT FOR PURPOSES OF OUR OPINIONS IN PARAGRAPHS 4, 8 AND 9 BELOW AS SET FORTH IN SUCH OPINIONS), AGENT, EACH HOLDER AND EACH LENDER; AND D. LESSOR, AGENT, EACH HOLDER AND EACH LENDER HAS FILED ANY REQUIRED CALIFORNIA AND NEW YORK STATE FRANCHISE, INCOME OR SIMILAR TAX RETURNS AND HAS PAID ANY REQUIRED CALIFORNIA AND NEW YORK STATE FRANCHISE, INCOME OR SIMILAR TAXES. Based upon the foregoing and our reliance thereon and having regard for legal considerations which we deem relevant, we are of the opinion that: 1. Lessee is a duly incorporated and validly existing corporation in good standing under the laws of the State of Delaware, is in good standing as a foreign corporation in the State of California and has the corporate power and authority to enter into and perform its obligations under the Operative Documents to which it is or is to be a party and each other agreement, instrument and document to be executed and delivered by it in connection with the transactions contemplated by the Operative Documents. 2. Lessee has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is a party and has duly executed and delivered each Operative Document to which it is a party. 3. The execution and delivery by Lessee of the Operative Documents to which it is a party and compliance by Lessee with the material provisions thereto, do not and will not (i) violate or conflict with the Lessee Certificate of Incorporation or the Lessee Bylaws, (ii) to our current actual knowledge, conflict with, or require any consents, authorizations, registrations, declarations or filings (except as may relate to the perfection of liens or security interests) by Lessee under, the laws of any state having applicability to Lessee, as presently in effect and interpreted, or any order of any Governmental Authority applicable to or binding on Lessee, (iii) conflict with, or require any consents, authorizations, registrations, declarations or 134 To Each of the Parties April 23, 1999 Listed on Schedule A Page 9 Attached Hereto filings (except as may relate to the perfection of liens or security interests) by Lessee, or any stockholders, or any trustee or holder of indebtedness, of the Lessee (except for such approvals and consents which have been already obtained), under the laws of the State of California or, to our current actual knowledge, the State of New York having applicability to Lessee, in each case as presently in effect and interpreted, (iv) to our current actual knowledge, conflict with or constitute a violation of any court orders, writs, judgments or decrees of any court, or any arbitrator or governmental agency or authority, (v) constitute a material breach of any Material Agreement (as defined in the Certificate of Lessee) to which Lessee is a party or by which Lessee is bound or, to our current actual knowledge, any other agreement or instrument to which Lessee is a party or by which Lessee or any of its properties may be bound or affected, or (vi) result in the creation of any Lien (other than Permitted Liens and Lessor Liens) upon the Property under the express terms of the Lessee Certificate of Incorporation, the Lessee Bylaws or, to our current actual knowledge, any other agreement or instrument to which Lessee is a party or by which any of its properties may be bound or affected. 4. (a) Under the laws of the State of New York, the Operative Documents (other than the Lease) to which Lessee and/or Lessor is a party constitute the legal, valid and binding obligation of Lessee, enforceable against Lessee and the Lessor in accordance with their terms. (b) Under the laws of the State of California, the Operative Documents (other than the Lease) to which Lessee and/or Lessor is a party constitute the legal, valid and binding obligation of Lessee, enforceable against Lessee and Lessor in accordance with their terms. 5. We have no current actual knowledge of any pending or threatened actions, suits, litigation or other proceedings against Lessee or the Property before any court, arbitrator or Governmental Authority that question or challenge the legality, validity or enforceability of the Operative Documents or the Transaction, that concern the Property or the Lessee's interest therein or which, if determined adversely to Lessee, would be likely to have a Material Adverse Effect (as defined in the Certificate of Lessee) on Lessee. 6. Assuming that the Transaction, insofar as the Lease is concerned, is recharacterized by a court of competent jurisdiction as a loan from Lessor or Lessee, (i) the Lease constitutes a legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, and (ii) Lessee's obligations to make the payments characterized as "Basic Rent" and "Supplemental Rent" under the Lease will entitle Lessor to pursue its rights and remedies under the Loan Documents against the Collateral covered thereby upon a material breach of such obligations (provided, however, we express no opinion as to the nature or characterization of such payments as "Basic Rent" or "Supplemental Rent" or otherwise). 135 To Each of the Parties Listed on Schedule A April 23, 1999 Attached Hereto Page 10 7. Assuming that the Transaction, insofar as the Lease is concerned, is characterized by a court of competent jurisdiction as an operating lease between Lessor and Lessee, (i) the Lease constitutes a legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, (ii) the Lease and the applicable Lease Supplement are in a form sufficient to demise to Lessee a valid leasehold interest in the Property described in such Lease Supplement and (iii) the Lessee's obligations to make the payments characterized as "Basic Rent" and "Supplemental Rent" under the Lease are enforceable; provided, however, we express no opinion as to the nature or characterization of such payments as "Basic Rent" or "Supplemental Rent" or otherwise; and further provided that we express no opinion as to the enforceability of the Lease remedies obligating Lessee to pay the Termination Value or any other amount in excess of accrued and unpaid "Basic Rent," including, but not limited to, the availability to Lessor of any rights or remedies under the Lease with respect to payments of "Supplemental Rent", where a court of competent jurisdiction has not recharacterized the Transaction, insofar as the Lease is concerned, as a loan from Lessor to Lessee. 8. The Deed, the Lender Deed of Trust (and the Joinder of Lessee attached thereto), the Lessor Deed of Trust, the Collateral Assignment and the Fixture Filings are each in a form sufficient for recording in the Official Records of Santa Clara County. Upon proper recording in the Official Records in Santa Clara County and the payment of all fees required in connection therewith the Lender Deed of Trust, the Joinder of Lessee, the Collateral Assignment and the Fixture Filings related thereto will create in favor of the Agent a valid and enforceable record lien on and security interest in the Lessee's and Lessor's interests in the Collateral described therein. Upon proper recording in the Official Records in Santa Clara County and the payment of all fees required in connection therewith the Lessor Deed of Trust and the Fixture Filings related thereto will create in favor of the Lessor a valid and enforceable record lien on and security interest in the Lessee's interests in the Collateral described therein. No other recordations or filings are necessary in order to provide such constructive notice of the lien of the Lender Deed of Trust or the Lessor Deed of Trust with respect to the real property described therein. 9. (a)(i) Under the laws of the State of New York, the Security Agreement creates in favor of the Agent, for the benefit of the secured parties named therein, a security interest in the Collateral described therein to which Article 9 of the New York Uniform Commercial Code ("NYUCC") is applicable (the "ARTICLE 9 COLLATERAL"). The Security Agreement Financing Statements are in appropriate form for filing with the California Secretary of State. Upon the filing of the Security Agreement Financing Statements with the California Secretary of State, the Agent, as secured party, will have a perfected security interest in that portion of the Article 9 Collateral in which a security interest is perfected by the filing of a financing statement with the California Secretary of State under the NYUCC and Division 9 of 136 To Each of the Parties April 23, 1999 Listed on Schedule A Page 11 Attached Hereto the California Uniform Commercial Code (the "CUCC"). Upon proper filing of the Security Agreement Financing Statements pursuant to the filing system established under applicable California law, no other action is necessary under the NYUCC to perfect such security interests in the Article 9 Collateral. (ii) Under the laws of the State of New York, the security interests in the Collateral described in the Deed of Trust Financing Statements and the Lease Financing Statements will be perfected upon the proper filing of the Deed of Trust Financing Statements and the Lease Financing Statements covering such Collateral with the California Secretary of State. Upon proper filing of the Deed of Trust Financing Statements and the Lease Financing Statements pursuant to the filing system established under applicable California law, no other action is necessary under the NYUCC to perfect the security interests in the Collateral described in the Deed of Trust Financing Statements and the Lease Financing Statements. (b)(i) Under the laws of the State of California, the Security Agreement creates in favor of the Agent, for the benefit of the secured parties named therein, a security interest in the Article 9 Collateral. The Security Agreement Financing Statements are in appropriate form for filing with the California Secretary of State. Upon the filing of the Security Agreement Financing Statements with the California Secretary of State, the Agent, as secured party, will have a perfected security interest in that portion of the Article 9 Collateral in which a security interest is perfected by the filing of a financing statement with the California Secretary of State under Division 9 of the CUCC. Upon proper filing of the Security Agreement Financing Statements pursuant to the filing system established under applicable California law, no other action is necessary under the CUCC to perfect such security interests in the Article 9 Collateral. (ii) Under the laws of the State of California, the security interests in the Collateral described in the Deed of Trust Financing Statements and the Lease Financing Statements will be perfected upon the proper filing of the Deed of Trust Financing Statements and the Lease Financing Statements covering such Collateral with the California Secretary of State. Upon proper filing of the Deed of Trust Financing Statements and the Lease Financing Statements pursuant to the filing system established under applicable California law, no other action is necessary under the CUCC to perfect the security interests in the Collateral described in the Deed of Trust Financing Statements and the Lease Financing Statements. 10. There are no mortgage taxes or filing fees payable to any public body solely in connection with the recording of the Lender Deed of Trust, the Lessor Deed of Trust or the Fixture Filings in the Official Records of Santa Clara County except filing fees payable to the County Recorder of Santa Clara County. 137 To Each of the Parties April 23, 1999 Listed on Schedule A Page 12 Attached Hereto 11. No Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the acquisition of the Property by Lessee or, to our current actual knowledge, Lessor. 12. To our current actual knowledge, title to the Properties located in the State of California may be held in the name of the Lessor. 13. The Transaction and, particularly, Lessee's obligations to make payments of "Basic Rent" and "Supplemental Rent" will not violate the usury laws of the State of California. The opinions expressed herein with respect to the laws of the State of New York are subject to and limited by the following qualifications, assumptions, limitations and exceptions: (a) The enforceability of Lessee's and Lessor's obligations under the Operative Documents may be subject to or limited by (i) bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer and other similar laws affecting the rights of creditors generally; and (ii) general equitable principles (whether relief is sought in a proceeding at law or in equity), including, without limitation, concepts of materiality, reasonableness, good faith, and fair dealing. (b) We express no opinion as to provisions of the Operative Documents purporting to establish an evidentiary standard or to authorize conclusive determinations by the Agent, Lenders, Holders or Lessor (collectively, "Lender Parties") or any other Person or allowing the Lender Parties or any other Person to make determinations in its sole discretion. (c) We also express no opinion as to: (i) the enforceability of provisions of the Operative Documents pursuant to which Lessee or Lessor agrees to make payments without set-off, defense or counterclaim; (ii) the enforceability of provisions relating to indemnification, contribution or exculpation, to the extent any such provision is contrary to public policy or prohibited by law (including, without limitation, federal and state securities laws); (iii) any provision providing for the exclusive jurisdiction of a particular court or purporting to waive rights to trial by jury, service of process or objections to the laying of venue or to forum on the basis of forum non conveniens, in connection with any litigation arising out of or pertaining to the Operative Documents; (iv) provisions contained in the Operative Documents purporting to waive either illegality as a defense to the performance of contract obligations or any other defense to such performance which cannot, as a matter of law, be effectively waived; (v) any provision of the Operative Documents insofar as it provides that any Person purchasing a participation from any Lender Party or other Person may exercise set-off or 138 To Each of the Parties April 23, 1999 Listed on Schedule A Page 13 Attached Hereto similar rights with respect to such participation or that any Lender Party or other Person may exercise set-off or similar rights other than in accordance with applicable law; (vi) any provision of the Operative Documents permitting modification thereof only by means of an agreement in writing signed by the parties thereto; (vii) any provision of the Operative Documents requiring payment of attorneys' fees, except to the extent a court determines such fees to be reasonable; (viii) the effect of the law of any jurisdiction other than the State of New York which limits the rates of interest legally chargeable or collectible; (ix) any provisions purporting to exclude conflict of law principles under New York law or otherwise select the laws of New York to govern any of the Operative Documents or any security interest; (x) any provision purporting to waive any right to claim punitive damages; (xi) any provision providing for arbitration of disputes; and (xii) any Collateral which is an accession to, or commingled or processed with, other goods to the extent that the security interest of the Lender Parties is limited by Section 9-314 or 9-315 of the NYUCC or Section 9314 or 9315 of the CUCC. (d) The enforceability of any provisions of the Operative Documents which are deemed to constitute a subordination of the rights of Lessee or Lessor may be limited by exoneration and other defenses similar to those that may be asserted by any guarantor. (e) The enforceability of certain remedial and other provisions of the Security Documents, including, without limitation, certain of the waivers therein, may be limited by applicable state and federal laws (including judicial decisions), but such laws do not, in our opinion (subject to the limitations, qualifications and assumptions expressed herein), render any Security Document, taken as a whole, invalid or unenforceable, and each of the Security Documents, taken as a whole, contains adequate provisions for the practical realization by the Lender Parties of the material rights and benefits afforded thereby. (f) The effectiveness of any Financing Statement will lapse five years from the date the same if filed unless a continuation statement is filed within six months prior to the expiration of that five year period. (g) Under the NYUCC and CUCC events occurring subsequent to the date hereof may affect any security interest subject to the NYUCC and CUCC. Without limiting the generality of the foregoing, to the extent provided by Article 9 of the NYUCC and Division 9 of the CUCC, additional filings with respect to the Collateral may be necessary to continue perfection of all or certain of the Collateral if (i) Lessee or Lessor changes its name (or any of the Financing Statements otherwise becomes seriously misleading), (ii) any item of Collateral located in California is removed from that state or (iii) Lessee or Lessor changes the jurisdiction in which its chief executive office is located to a jurisdiction other than California. 139 To Each of the Parties April 23, 1999 Listed on Schedule A Page 14 Attached Hereto (h) To the extent that any of the Collateral consists of or constitutes "proceeds" (as such term is defined in sec. 9-306 of the NYUCC), the security interest therein is limited and conditioned as set forth in such Section. (i) The opinions expressed herein with respect to the creation, attachment or perfection of any security interest: (i) are limited to the opinions expressed in Paragraphs 9(a)(i) and (ii) above and to the Collateral specifically described in the Security Agreement, the Joinder of Lessee, the Lessor Deed of Trust and Lender Deed of Trust, respectively, which is governed by relevant provisions as currently in effect of Article 9 of the NYUCC (for purposes of this paragraph only, the "Covered Collateral"); (ii) do not apply to Collateral requiring perfection procedures other than the filing of a financing statement in the office of the California Secretary of State; and (iii) by reason of the operation of Section 9-103 of the NYUCC, are limited as to our perfection opinions in Paragraphs 9(a)(i) and (ii)(insofar as such opinion governs goods and such other items of the Covered Collateral described in Section 9-103(1)(a) of the NYUCC) to goods and such other items located in the State of California. We express no opinion with respect to the priority of any security interest. We have assumed for purposes of the opinions in Paragraphs 9(a)(i) and (ii) above that the Lessee and Lessor are located in California for purposes of sec. 9-103(3)(b) and sec. 9-103(6)(f) of the NYUCC. We have also assumed for purposes of such opinions that Lessee and Lessor have rights in the Covered Collateral within the meaning of the NYUCC and the CUCC, that all required consents of third parties to the grant of security interests in the Covered Collateral have been obtained and that the Lender Parties (except for Lessor with respect to the attachment and/or and perfection of Lessor's security interests) have given "value" within the meaning of the NYUCC and the CUCC. We have assumed for the purposes of our opinions in Paragraph 9(a)(ii) that the security interests (to which the Deed of Trust Financing Statements and the Lease Financing Statements, respectively, pertain) in the Collateral described in the Deed of Trust Financing Statements in favor of the Agent and in the Collateral described in the Lease Financing Statements in favor of the Lessor, respectively, have attached for purposes of the NYUCC and the CUCC. (j) We also express no opinion as to the title of Lessee or Lessor to any Collateral or the classification of the Collateral. (k) We express no opinion (i) with respect to any Collateral of a type described in Section 9-401(1)(a) or (b) of the NYUCC or Section 9401(1)(a) or (b) of the CUCC or represented by any certificate of title and (ii) as to the accuracy or completeness of any description of the Collateral (including the scope of the term "general intangibles") or the characterization of any Collateral as real property, personal property, equipment or fixtures. 140 To Each of the Parties April 23, 1999 Listed on Schedule A Page 15 Attached Hereto The opinions expressed herein with respect to the laws of the State of California are subject to and limited by the following qualifications, assumptions, limitations and exceptions: (a) Our opinions are subject to the effect of the limitations imposed by the CUCC relating to or affecting the rights and remedies available to secured creditors. (l) Our opinions are subject to the effect of judicial decisions which may permit the introduction of extrinsic evidence to interpret the terms of written contracts. (m) The legality, validity, binding nature and enforceability of obligations of Lessee or Lessor under the Operative Documents may be subject to or limited by (1) bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer and other similar laws affecting the rights of landlords and of creditors; (2) general principles of equity (whether relief is sought in a proceeding at law or in equity), including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the discretion of any court of competent jurisdiction in awarding specific performance or injunctive relief and other equitable remedies; and (3), without limiting the generality of the foregoing, in the event that a court applies California law when interpreting any Operative Document, the effect of California court decisions and statutes which indicate that provisions of any Operative Document which permit any Lender Party or any other Person to take action or make determinations may be subject to a requirement that such action be taken or such determinations be made on a reasonable basis in good faith or that it be shown that such action is reasonably necessary for the protection of such Lender Party or such other Person. (n) With respect to our opinion above concerning enforcement of the assignment of rents set forth in any of the Operative Documents, we note the limitations and requirements with respect to the enforcement thereof set forth in Section 2938 of the California Civil Code ("CC"). (o) With respect to the opinions set forth above, we note that if any of the obligations of Lessee under the Lease or any Operative Document relating thereto are determined by a court applying California law to be obligations that are secured by a deed of trust or mortgage on the real property covered thereby of which is located in the State of California, such obligations may be affected by the California antideficiency, one-action and related laws, and laws relating to default cure rights, including, without limitation, the following: (i) Section 726 of the California Code of Civil Procedure ("CCP") provides that any action to recover on a debt or other right secured by a mortgage or a deed of trust on real property must comply with the requirements of that section, which requirements relate to and specify the procedures for the sale of encumbered property, the application of proceeds, the rendition in certain cases of a deficiency judgment and other related matters. In such an 141 To Each of the Parties April 23, 1999 Listed on Schedule A Page 16 Attached Hereto action or proceeding, the debtor may require the creditor to exhaust all of its security before a personal judgment may be obtained against the debtor for a deficiency, and failure to comply with the provisions of Section 726 (including an attempt to exercise a right to set off with respect to any funds of the debtor that may be deposited with the creditor from time to time) may result in the creditor's loss of its lien on real property collateral; (ii) Section 580b of the CCP provides that no deficiency judgment shall be rendered upon a purchase money obligation in favor of the vendor arising from the sale of real property where such purchase money obligation is secured by a lien on the real property purchased from the vendor or in favor of a lender where the proceeds of the loan are used to purchase a one-to-four family dwelling occupied entirely or in part by the borrower and where such loan is secured by a lien on such dwelling; (iii) Sections 580a and 580d of the CCP, respectively, which (i) limit any deficiency after judicial foreclosure to the excess of the debt over the fair market value of the foreclosed property at the time of sale, and (ii) prevent a deficiency judgment after a nonjudicial or trustee's foreclosure sale pursuant to a power of sale; (iv) Section 2924c of the CC provides for certain default cure rights following acceleration of the maturity of an obligation secured by a deed of trust or mortgage on real property, which may be exercised at any time within the reinstatement period described in such Section; (v) Section 726.5 of the CCP authorizes, under certain circumstances, a real estate-secured commercial lender to waive its lien against a parcel of "environmentally impaired" security (as therein defined) and sue the borrower without foreclosing on the real property collateral for the loan; (vi) Section 9501 of the CUCC prescribes the rights and remedies of secured creditors with both real and personal property security; (vii) CCP Sections 729.010 through 729.090 provide for certain redemption and other rights following any judicial foreclosure sale; (viii) Section 736 of the CCP permits a lender, under certain circumstances, to sue for breach of contract relating to any "environmental provisions" (as therein defined) concerning real property security without foreclosing on the real property security or in an action brought following foreclosure, whether judicial or non-judicial; and (ix) CC Sections 2924, 2924b and 2924c require that certain procedures be followed by the holder of a deed of trust or mortgage with power of sale before exercising any power of sale thereunder. (p) The enforceability of any "environmental provision" of the Operative Documents is also limited by, and also subject to compliance by the beneficiaries thereunder with, statutory or other legal requirements, including, without limitation, CCP Sections 564, 726.5 and 736 and CC Section 2929.5. As used above, the term "environmental provision" has the meaning set forth in CCP Section 736(f)(2). 142 To Each of the Parties April 23, 1999 Listed on Schedule A Page 17 Attached Hereto (q) The effectiveness of the Financing Statements will lapse five years from the date the same is filed unless a continuation statement is filed within six months prior to the expiration of that five year period. (r) To the extent provided by Division 9 of the CUCC, additional filings with respect to the Collateral may also be necessary to continue perfection of the security interest in all or certain of the Collateral if Lessee or Lessor changes its name (or any Financing Statement otherwise becomes seriously misleading), if any item of Collateral that is located in California is removed from that State or if Lessee or Lessor changes the jurisdiction in which its chief executive office is located to a jurisdiction other than California. (s) To the extent that any of the Collateral consists of or constitutes "proceeds" (as such term is defined in Section 9306 of the CUCC), the security interest therein is limited and conditioned as set forth in such Section 9306. (t) The opinions expressed herein with respect to the creation, attachment or perfection of any security interest (except to the extent expressly stated in Paragraph 8 above): (i) are limited to the opinions expressed in Paragraphs 9(b)(i) and (ii) above and to the Collateral specifically described in the Security Agreement, the Joinder of Lessee, the Lessor Deed of Trust and Lender Deed of Trust, respectively, which is governed by relevant provisions as currently in effect of Division 9 of the CUCC (for purposes of this paragraph only, the "Covered Collateral"); (ii) do not apply to Collateral requiring perfection procedures other than the filing of a financing statement in the office of the California Secretary of State; and (iii) by reason of the operation of Section 9103 of the CUCC, are limited as to our perfection opinions in Paragraphs 9(a)(i) and (ii)(insofar as such opinion governs goods and such other items of the Covered Collateral described in Section 9103(1)(a) of the CUCC) to goods and such other items located in the State of California. We express no opinion with respect to the priority of any security interest. We have assumed for purposes of the opinions in Paragraphs 9(b)(i) and (ii) above that Lessee and Lessor are each located in California for purposes of Section 9103(3)(b) and Section 9103(6)(f) of the CUCC. We have also assumed for purposes of such opinions that Lessee and Lessor each have rights in the Covered Collateral within the meaning of the CUCC, that all required consents of third parties to the grant of security interests in the Covered Collateral have been obtained and that the Lender Parties (except for Lessor with respect to the attachment and/or and perfection of Lessor's security interests) have given "value" within the meaning of the CUCC. We have assumed for the purposes of our opinions in Paragraph 9(b)(ii) that the security interests (to which the Deed of Trust Financing Statements and the Lease Financing Statements, respectively, pertain) in the Collateral described in the Deed of Trust Financing Statements in favor of the Agent and in the Collateral described in the Lease Financing Statements in favor of the Lessor, respectively, have attached for purposes of the CUCC. 143 To Each of the Parties April 23, 1999 Listed on Schedule A Page 18 Attached Hereto (u) We also express no opinion (i) as to the title of the Lessee or Lessor to any Collateral or (ii) as to whether the Lease constitutes a security interest or creates a security interest within the meaning of the CUCC. (v) We express no opinion (i) with respect to any Collateral of a type described in Section 9401(1)(a) or (b) of the CUCC or represented by any certificate of title, (ii) as to the accuracy or completeness of any description of the Property or any other property or Collateral (including the scope of the term "general intangibles"), or the characterization of any Collateral as real property, personal property, equipment or fixtures and (iii) as to any Collateral which is an accession to, or commingled or processed with, other goods to the extent that the security interest of the Lender Parties is limited by Section 9314 or 9315 of the CUCC. (w) The rights of Lender Parties in respect of fixtures may be limited by CC Sections 1013, 1013.5 and 1019 and CUCC Section 9313 which concern fixtures and their removal except to the extent that appropriate agreements are obtained from owners and encumbrancers of, and others claiming an interest in, the real property on which such fixtures are located. (x) We express no opinion as to whether any divisions of real property or any interests therein contemplated by the Operative Documents comply with the Subdivision Map Act (as defined in Section 66410 of the California Government Code) or any city, county or other local rules, ordinances or regulations promulgated by authority thereof or in connection therewith. (y) We express no opinion as to the title of the Lessee or the Lessor to the Property or any Improvements pursuant to the Lease. (z) We further advise you that if a court of competent jurisdiction applies the laws of the State of California to a lease of real property located in the State of California, the obligations of Lessee under the Lease may also be affected under California law by the provisions of CC Sections 1932 and 1933 (relating, inter alia, to termination of a lease upon casualty to the leasehold estate) or by Section 1265.130 of the CCP (relating to termination of a lease upon a taking of the leasehold estate for public use in certain circumstances). (aa) We express no opinion as to the validity, binding nature or enforceability of any provisions of the Operative Documents that: (i) purport to waive regulatory, constitutional, statutory or common law rights, including the right to receive notice or to be allowed to cure, reinstate or redeem in the event of default, or that expressly or by implication waive broadly or vaguely stated rights, unknown future rights and defenses to obligations, in each case to the extent such rights or defenses are not waivable under applicable law; (ii) purport to require the Lessee or Lessor to make payments without set-off, defense or counterclaim; (iii) specify the manner of foreclosure or exercise of remedies in respect of deposit accounts insofar as the CUCC does not address the same; 144 To Each of the Parties April 23, 1999 Listed on Schedule A Page 19 Attached Hereto (iv) purport to require the award or payment of attorneys' fees, expenses or costs in any action where any Person is not the prevailing party, or the impact of CC Section 1717 et seq. on any such provisions; (v) provide that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, that the election of some particular remedy or remedies does not preclude recourse to one or another remedy or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy; (vi) prohibit waiver of any terms or provisions of the Operative Documents other than in writing or prohibit oral modifications thereof or modification by course of dealing to the extent such provisions are inconsistent with applicable law; (vii) address arbitration of disputes; (viii) purport to waive statutes of limitation; (ix) authorize Lessor or any other Person to set off and apply any deposits at any time held, and any other indebtedness at any time owing, by Lessee or Lessor to or for the account of Lessor; (x) purport to limit the standards imposed upon any Person for the care of the Collateral in such Person's possession; (xi) purport to exclude conflict of law principles under California law or otherwise select the laws of New York to govern any of the Operative Documents or any security interest in real property located in the State of California; (xii) require the Lessee or Lessor to provide hazard insurance coverage against risks in an amount exceeding the replacement value of any improvements to real property; (xiii) impose requirements respecting impound accounts in conflict with applicable law; (xiv) provide for the application of insurance or condemnation proceeds to reduce indebtedness; (xv) purport to assign rents, issues and profits absolutely and not as security; (xvi) indemnify any Person against, or require contributions toward, that Person's liability for its own wrongful or negligent acts or where such indemnification or contribution is contrary to public policy or prohibited by law; (xvii) provide for penalties, liquidated damages, acceleration of future amounts due (other than principal) without appropriate discount to present value, late charges, prepayment charges and increased interest rates upon default; (xviii) provide that time is of the essence; (xix) provide for the confession of judgment; (xx) attempt to change or waive rules of evidence or fix the method or quantum of proof to be applied in litigation or similar proceedings; (xxi) provide for the exclusive jurisdiction of a particular court or purport to waive rights to trial by jury, service of process or objections to the laying of venue or to forum on the 145 To Each of the Parties Listed on Schedule A April 23, 1999 Attached Hereto Page 20 basis of forum non conveniens, in connection with any litigation arising out of or pertaining to the Operative Documents; (xxii) appoint any Lender Party as Lessee's or Lessor's agent or attorney-in-fact; or (xxiii) any provision purporting to waive any right to claim punitive damages. (bb) The enforceability of any provisions of the Operative Documents which are deemed to constitute a subordination of the rights of Lessee or Lessor may be limited by exoneration and other defenses similar to those that may be asserted by any guarantor. (cc) With respect to the provisions of the Operative Documents relating to the application of condemnation proceeds, you should be aware that CCP Section 1265.225 provides that where there is a partial taking of property encumbered by a lien, the lienholder may share in the award only to the extent determined by the court to be necessary to prevent impairment of the security, and the lien shall continue upon the part of the property not taken as security for the unpaid portion of the indebtedness. However, the lienholder and the property owner may at any time after commencement of the condemnation proceeding agree that some or all of the award shall be apportioned to the lienholder on the indebtedness. (dd) Notwithstanding our opinions above, we express no opinion as to the enforceability of the power of sale (and the related remedies of Lessor consistent with the characterization of the Transaction as a loan) in the Lease and the Lessor Deed of Trust, where a court of competent jurisdiction has not recharacterized the Transaction, insofar as the Lease is concerned, as a loan from Lessor to Lessee. (ee) We wish to point out that the Lenders, as holders of the Tranche A Notes and Tranch B Notes, may be required to prove the outstanding amount thereof. We further wish to point out that under Section 18104 of the California Probate Code, the Holders may be required to prove their interests as beneficiaries under the VS Trust 1999-1. Without qualification of the opinions rendered above, we express no opinion as to (i) whether the Lease or any of the other Operative Documents will be construed to create the legal relationships they purport to create for purposes of determining the rights and obligations of the parties thereto; (ii) whether the legal relationships purported to be created by the Lease or any of the other Operative Documents will be binding and conclusive with respect to the rights of persons who are not parties thereto; or (iii) whether the legal relationships purported to be created by the Lease or any of the other Operative Documents will be respected for tax, accounting, financial or other regulatory purposes. The opinions expressed herein are solely for your benefit and for the benefit of your successors and assigns in connection with the Transaction, and such opinions may not be relied on in any manner or for any purpose by any other Person. In addition, this opinion is rendered as of the date hereof and speaks only to the addresses set forth on Schedule A, and it shall not be deemed to have been updated to any date upon which any such other Person may 146 To Each of the Parties April 23, 1999 Listed on Schedule A Page 21 Attached Hereto rely hereon. Further, we do not undertake to advise you or such other Person of matters which occur subsequent to the date hereof and which affect the opinions expressed herein. Very truly yours, BROBECK, PHLEGER & HARRISON LLP 147 SCHEDULE A NATIONSBANK, N.A., as the Agent, a Lender and a Holder FIRST SECURITY BANK, NATIONAL ASSOCIATION, individually and as Borrower, Lessor and Owner Trustee COMERICA BANK - CALIFORNIA, as a Lender KEYBANK, NATIONAL ASSOCIATION, as a Lender and a Holder FLEET NATIONAL BANK, as a Lender and a Holder Together with such parties' successors and assigns 148 EXHIBIT A CERTIFICATE OF LESSEE THIS CERTIFICATE OF LESSEE ("Certificate") is made as of April 23, 1999, by Veritas Software Corporation, a Delaware corporation doing business in California as Veritas Storage Management Corp. ("Lessee"). This Certificate is made for the benefit of Brobeck, Phleger & Harrison LLP ("BPH") in connection with BPH's opinion (the "Opinion") delivered to these parties listed in Schedule A attached to the Opinion. Capitalized terms not defined herein are used herein as defined in the Opinion. After due inquiry and investigation, the undersigned hereby represents to and for the benefit of BPH as follows: 1. I am an officer of Lessee (specifically, the Secretary of Lessee), and I am familiar with the day-to-day operations of Lessee. 2. Lessee is party to no Material Agreements as of the date hereof (other than the Operative Documents, except as set forth on Schedule 1 hereto. "Material Agreement" means an agreement of Lessee involving borrowed money in an amount (whether or not funded) in excess of $5,000,000, where Lessee is a borrower or guarantor of the amount. 3. The Lessee Constituent Documents remain in full force and effect and have not been altered or amended in any respect. 4. The Operative Documents do not and will not conflict with any Material Agreement or other indenture, mortgage, deed of trust, contract, or other material agreement or other instrument to which Lessee is a party or by which Lessee is bound. 5. Except as set forth on Schedule 2 hereto, the representations and warranties of Lessee contained in the Operative Documents to which it is a party are true and correct on and as of the date hereof as though made on and as of such date. 6. The Operative Documents do not and will not result in the creation or imposition of any lien on any material asset of Lessee (other than liens permitted under the Operative Documents). 7. The Operative Documents do not and will not violate or contravene any judgment, decree, injunction or order of any federal, New York or California court or other tribunal, or any arbitrator or governmental agency or authority having jurisdiction over Lessee or the Property of Lessee and by which Lessee is bound. 8. There are no proceedings pending, threatened or contemplated for the dissolution, merger, consolidation or liquidation of Lessee or for the sale of all or substantially all of the assets of Lessee. 149 9. There are no actions, suits or proceedings pending or, to the best of my knowledge, threatened against or affecting the Lessee or the properties of Lessee before any court, board of arbitration, governmental agency or authority which (i) challenge or question the validity or enforceability of the Operative Documents or the rights and remedies of the Lessor with respect to Lessee or the Property under the Operative Documents, or (ii) which, if determined adversely to Lessee, would be reasonably likely to have a Material Adverse Effect (as such term is defined in Appendix A to the Participation Agreement). 10. All tax returns and payments due and owing with respect to Lessee have been filed with or paid to the proper authorities in the State of California. 11. The chief executive office of Lessee is located at 1600 Plymouth Street, Mountain View, California. 12. Lessee neither engages or holds itself out as being engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities. IN WITNESS WHEREOF, the undersigned has executed this Certificate as Secretary of Lessee (and solely in such capacity) as of the day and year first above written. ------------------------------------ Name: ------------------------------- Title: ------------------------------ 150 SCHEDULE 1 ---------- Material Agreements $100,000,000 5 1/4% Convertible Subordinated Notes Due November 1, 2004. 151 EXHIBIT H-1 [Outside Counsel Opinion of the Additional Credit Parties] (Pursuant To Section 5.10(c) of the Participation Agreement) TO THOSE ON THE ATTACHED DISTRIBUTION LIST Re: Synthetic Lease Financing Provided in favor of Veritas Software Corporation Dear Sirs: We have acted as special counsel to _______________, a _______________ corporation (the "Joinder Party") in connection with certain transactions contemplated by the Participation Agreement dated as of April 23, 1999 (the "Participation Agreement"), among Veritas Software Corporation, a Delaware corporation (the "Lessee"), the various parties thereto from time to time, as guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee (the "Owner Trustee"), the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders") and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). This opinion is delivered pursuant to Section 5.10(c) of the Participation Agreement. All capitalized terms used herein, and not otherwise defined herein, shall have the meanings assigned thereto in Appendix A to the Participation Agreement. In connection with the foregoing, we have examined originals, or copies certified to our satisfaction, of the Operative Agreements (including without limitation that certain Joinder Agreement dated as of , (the "Joinder Agreement"), between the Joinder Party and the Agent, and such other corporate, partnership or limited liability company documents and records of the Joinder Party, certificates of public officials and representatives of the Joinder Party as to certain factual matters, and such other instruments and documents which we have deemed necessary or advisable to examine for the purpose of this opinion. With respect to such examination, we have assumed (i) the statements of fact made in all such certificates, documents and instruments are true, accurate and complete; (ii) the due authorization, execution and delivery of the Operative Agreements by the parties thereto other than the Joinder Party; (iii) the genuineness of all signatures (other than the signatures of persons signing on behalf of the Joinder Party), the authenticity and completeness of all documents, certificates, instruments, records and corporate records submitted to us as originals and the conformity to the original 152 instruments of all documents submitted to us as copies, and the authenticity and completeness of the originals of such copies; (iv) that all parties other than the Joinder Party have all requisite corporate power and authority to execute, deliver and perform the Operative Agreements; and (v) the enforceability of the Operative Agreements against all parties thereto other than the Joinder Party. We have further assumed that the laws of the States of [STATE OF LAWYER'S ADMISSION] and New York are substantively identical. Based on the foregoing, and having due regard for such legal considerations as we deem relevant, and subject to the limitations and assumptions set forth herein, including without limitation the matters set forth in the last two (2) paragraphs hereof, we are of the opinion that: (a) The Joinder Party is a corporation, duly incorporated, validly existing and in good standing under the laws of _____________ and has the power and authority to conduct its business as presently conducted and to execute, deliver and perform its obligations under the Operative Agreements to which it is a party. The Joinder Party is duly qualified to do business in all jurisdictions in which its failure to so qualify would materially impair its ability to perform its obligations under the Operative Agreements to which it is a party or its financial position or its business as now and now proposed to be conducted. (b) The execution, delivery and performance by the Joinder Party of the Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of the Joinder Party and the Operative Agreements to which the Joinder Party is a party have been duly executed and delivered by the Joinder Party. (c) The Operative Agreements to which the Joinder Party is a party constitute valid and binding obligations of the Joinder Party enforceable against the Joinder Party in accordance with the terms thereof, subject to bankruptcy, insolvency, liquidation, reorganization, fraudulent conveyance, and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). (d) The execution and delivery by the Joinder Party of the Operative Agreements to which it is a party and compliance by the Joinder Party with all of the provisions thereof do not and will not (i) contravene the provisions of, or result in any breach of or constitute any default under, or result in the creation of any Lien (other than Permitted Liens and Lessor Liens) upon any of its property under, its Articles of Incorporation and By-Laws or any indenture, mortgage, chattel mortgage, deed of trust, lease, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which the Joinder Party is a party or by which it or any of its property may be bound or affected, or (ii) contravene any Laws or any order of any Governmental Authority applicable to or binding on the Joinder Party. (e) No Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery or performance by the Joinder Party of any of the Operative Agreements to which it is a party or for the acquisition, ownership, construction and completion of the Properties, except for those which have been obtained. H-1-2 153 (f) Except as set forth on Schedule 1 hereto, there are no actions, suits or proceedings pending or to our knowledge, threatened against the in any court or before any Governmental Authority that concern the Properties or the Joinder Party's interest therein or that question the validity or enforceability of any Operative Agreement to which the Joinder Party is a party or the overall transaction described in the Operative Agreements to which the Joinder Party is a party. (g) Neither the nature of the Properties, nor any relationship between the Joinder Party and any other Person, nor any circumstance in connection with the execution, delivery and performance of the Operative Agreements to which the Joinder Party is a party is such as to require any approval of stockholders of, or approval or consent of any trustee or holders of indebtedness of, the Joinder Party, except for such approvals and consents which have been duly obtained and are in full force and effect. (h) Except with respect to (i) perfection and the effect of perfection or nonperfection of the security interest in the Collateral, and (ii) usury law, in any action or proceeding arising out of or related to any of the Operative Agreements in any court of the State of California or in any federal court sitting in the State of California, such court would recognize and give effect to the New York choice of law provisions of the Operative Agreements. This opinion is limited to the matter stated herein and no opinion is implied or may be inferred beyond the matters state herein. This opinion is based on and is limited to the laws of the States of [ ], and the federal laws of the United States of America. Insofar as the foregoing opinion relates to matters of law other than the foregoing, no opinion is hereby given. This opinion is for the sole benefit of the Joinder Party, the Lessee, the Construction Agent, the Guarantors, the Owner Trustee, the Holders, the Lenders, the Agent and their respective successors and assigns and may not be relied upon by any other person other than such parties and their respective successors and assigns without the express written consent of the undersigned. The opinions expressed herein are as of the date hereof and we make no undertaking to amend or supplement such opinions if facts come to our attention or changes in the current law of the jurisdictions mentioned herein occur which could affect such opinions. Very truly yours, [JOINDER PARTY'S OUTSIDE COUNSEL] H-1-3 154 Distribution List NATIONSBANK, N.A., as the Agent, a Holder and a Lender The various banks and other lending institutions which are parties to the Participation Agreement from time to time, as additional Holders The various banks and other lending institutions which are parties to the Participation Agreement from time to time, as additional Lenders Veritas Software Corporation, as the Construction Agent and the Lessee The various parties to the Participation Agreement from time to time as Guarantors First Security Bank, National Association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 , as the Joinder Party - -------------------------------- H-1-4 155 Schedule 1 (Litigation) H-1-5 156 EXHIBIT I VERITAS SOFTWARE CORPORATION OFFICER'S CERTIFICATE (Pursuant to Section 5.5 of the Participation Agreement) VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Company") DOES HEREBY CERTIFY as follows: 1. The address for the subject Property is ___________________________________ ______________________________________. 2. The Completion Date for the construction of Improvements at the Property occurred on __________________. 3. Attached hereto as Schedule 1 is the detailed, itemized documentation supporting the asserted Property Cost figures. 4. All representations and warranties of the Company in each Operative Agreement and in each certificate delivered pursuant thereto (including without limitation the Incorporated Representations and Warranties) are true and correct as of the Completion Date. Capitalized terms used in this Officer's Certificate and not otherwise defined have the respective meanings ascribed thereto in the Participation Agreement dated as of April 23, 1999 among the Company, as the Lessee and as the Construction Agent, the various parties thereto from time to time, as guarantors (the "Guarantors"), First Security Bank, National Association, as the Owner Trustee, the various banks and other lending institutions which are parties thereto from time to time, as holders (the "Holders"), the various banks and other lending institutions which are parties thereto from time to time, as lenders (the "Lenders"), NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. [The remainder of this page has been intentionally left blank.] I-1 157 IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly executed and delivered as of this ___ day of ______________, ______. VERITAS SOFTWARE CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ I-2 158 Schedule 1 (Itemized Documentation in Support of Asserted Property Cost) I-3 159 EXHIBIT J [Description of Material Litigation] (Pursuant to Section 6.2(d) of the Participation Agreement) EXHIBIT J The following are pre-litigation matters in which Lessee is currently involved and for which Lessee could face liability: 1. NETWORK CATALYST, INC. ("NCI") NCI alleges that Lessee (formerly OpenVision) may have underreported royalties for the System Detective software product over the past four years. NCI also alleges that Lessee failed to collect monies owed by customers for renewals of maintenance contracts for System Detective software and that Lessee owed NCI a responsibility for renewing such contracts. 2. THE SCRIPPS RESEARCH INSTITUTE ("TSRI") Lessee (formerly OpenVision) is currently in settlement negotiations with TSRI. TSRI alleges that the HSM software purchased from Lessee was not fully functional on its systems. 3. FUSION Three former principals of Fusion ("Fusion Affiliates") allege that Lessee (formerly OpenVision) failed to furnish royalty reports to them and/or sent reports lacking reasonable detail, in accordance with an agreement executed in 1993, regarding revenue from AXXION/HA and DTS products. 4. JAMES SALSMAN An employment matter in which Mr. Salsman has alleged wrongful termination based on violations of his religious, constitutional and political beliefs. J-1 160 EXHIBIT K [Form of Joinder Agreement] (Pursuant to Section 5.10(a) of the Participation Agreement) THIS JOINDER AGREEMENT (as amended, modified, supplemented, restated and/or replaced from time to time, the "Agreement"), dated as of , , is by and between , a (the "Company"), and NationsBank, N.A., as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and the Holders, to the extent of their interests (the "Agent"). Capitalized terms not otherwise defined herein shall have the meanings set forth therefor in the Participation Agreement dated as of April 23, 1999 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Participation Agreement") among Veritas Software Corporation, as the Construction agent and the Lessee, the various parties thereto from time to time, as the Guarantors, First Security Bank, National Association, as the Owner Trustee under the VS Trust 1999-1, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, and the Agent. The Company is either a Domestic Subsidiary or the Parent, and, consequently, the Credit Parties are required by Section 8.3(s) of the Participation Agreement to cause the Company to become a "Guarantor". Accordingly, the Company hereby agrees as follows with the Agent, for the benefit of the Financing Parties: 1. The Company hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Company will be deemed to be a party to the Participation Agreement and a "Guarantor" for all purposes of the Participation Agreement and all other Operative Agreements, and shall have all of the obligations of a Guarantor under the Operative Agreements as if the Company had executed the Participation Agreement. The Company hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Operative Agreements. Without limiting the generality of the foregoing terms of this paragraph 1, the Company hereby (i) jointly and severally together with the other Guarantors, guarantees to each Financing Party, as provided in Section 6B.1 through 6B.8 of the Participation Agreement, the prompt payment and performance of the Company Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. 2. THE COMPANY HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES TO THE PROVISIONS OF SECTION 12.7 OF THE PARTICIPATION AGREEMENT, INCLUDING WITHOUT LIMITATION THOSE PROVISIONS REGARDING GOVERNING LAW, SUBMISSION TO JURISDICTION, WAIVER OF K-1 161 JURY TRIAL AND VENUE. THIS PROVISION HAS BEEN SPECIFICALLY REVIEWED BY THE COMPANY. 3. The chief executive office and principal place of business of the Company are located at the location(s) set forth on Schedule 1 attached hereto. 4. All notices and other communications to be delivered to the Company shall be directed to [__________] at its address set forth in Section 12.2 of the Participation Agreement or such other address as may be specified, in accordance with the terms of the Participation Agreement by [__________] from time to time. 5. The Company hereby waives acceptance by the Financing Parties of the guaranty by the Company under Sections 6B.1 through 6B.8 of the Participation Agreement upon the execution of this Agreement by the Company. 6. This Agreement may be executed in multiple counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 7. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its authorized officers, and the Agent, for the benefit of the Financing Parties, has caused the same to be accepted by its authorized officer, as of the day and year first above written. [COMPANY] By: ------------------------------ Name: ---------------------------- Title: --------------------------- Acknowledged and accepted: [BANK], as the Agent By: ------------------------------ Name: ---------------------------- Title: --------------------------- K-2 162 Schedule 1 [Chief Executive Office and Principal Place of Business of the Company] K-3 163 - ------------------------------------------------------------------------------- Appendix A Rules of Usage, Accounting Terms and Definitions - ------------------------------------------------------------------------------- I. Rules of Usage The following rules of usage shall apply to this Appendix A and the Operative Agreements (and each appendix, schedule, exhibit and annex to the foregoing) unless otherwise required by the context or unless otherwise defined therein: (a) Except as otherwise expressly provided, any definitions set forth herein or in any other document shall be equally applicable to the singular and plural forms of the terms defined. (b) Except as otherwise expressly provided, references in any document to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits are references to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in or to such document. (c) The headings, subheadings and table of contents used in any document are solely for convenience of reference and shall not constitute a part of any such document nor shall they affect the meaning, construction or effect of any provision thereof. (d) References to any Person shall include such Person, its successors, permitted assigns and permitted transferees. (e) Except as otherwise expressly provided, reference to any agreement means such agreement as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. (f) Except as otherwise expressly provided, references to any law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor. (g) When used in any document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. (h) References to "including" means including without limiting the generality of any description preceding such term and for purposes hereof the rule of ejusdem generis shall not be A-1 164 applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. (i) References herein to "attorney's fees", "legal fees", "costs of counsel" or other such references shall be deemed to include the allocated cost of in-house counsel. (j) Each of the parties to the Operative Agreements and their counsel have reviewed and revised, or requested revisions to, the Operative Agreements, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construction and interpretation of the Operative Agreements and any amendments or exhibits thereto. (k) Capitalized terms used in any Operative Agreements which are not defined in this Appendix A but are defined in another Operative Agreement shall have the meaning so ascribed to such term in the applicable Operative Agreement. II. Accounting Terms Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Agreement and the other Operative Agreements shall (except as otherwise expressly provided herein or therein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 8.3A(a) (or, prior to the delivery of the first financial statements pursuant to Section 8.3A(a), consistent with the financial statements as at December 31, 1997); provided, however, if (a) the Credit Parties shall reasonably object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Agent or the Majority Secured Parties shall so object in writing within 60 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Credit Parties to the Lenders as to which no such objection shall have been made. Notwithstanding the above, the parties hereto acknowledge and agree that, for purposes of all calculations made under the financial covenants set forth in Section 8.3A(h) so long as the Lessee shall have provided the Agent with a Pro Forma Compliance Certificate with respect to any Permitted Acquisition, income statement items (whether positive or negative) attributable to the Property acquired in such Permitted Acquisition and any Indebtedness incurred by the applicable Credit Parties in order to consummate such Permitted Acquisition shall be included to the extent relating to any period applicable in such calculations occurring after the date of such Permitted Acquisition (and, notwithstanding the foregoing, during the first four fiscal quarters following the date of such Permitted Acquisition, such Permitted Acquisition and any Indebtedness incurred by the applicable Credit Parties in order to consummate such Permitted A-2 165 Acquisition (A) shall be deemed to have occurred on the first day of the four fiscal quarter period immediately preceding the date of such Permitted Acquisition and (B) if such Indebtedness has a floating or formula rate, then the implied rate of interest for such Indebtedness for the applicable period shall be determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination. III. Definitions "ABR" shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Lending Rate in effect on such day, and (b) the Federal Funds Effective Rate in effect on such day plus one-half of one percent (0.5%). For purposes hereof: "Prime Lending Rate" shall mean the rate which the Agent announces from time to time as its prime lending rate as in effect from time to time. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Any Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. The Prime Lending Rate shall change automatically and without notice from time to time as and when the prime lending rate of the Agent changes. "Federal Funds Effective Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members or the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three (3) Federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Lending Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Lending Rate or the Federal Funds Effective Rate, respectively. "ABR Holder Advance" shall mean a Holder Advance bearing a Holder Yield based on the ABR. "ABR Loans" shall mean Loans the rate of interest applicable to which is based upon the ABR. "Acceleration" shall have the meaning given to such term in Section 6 of the Credit Agreement. "ACCORD Evidence of Insurance" shall mean an ACCORD Evidence of Insurance or other similar evidence of insurance reasonably acceptable to the Agent. "Accounts" shall have the meaning given to such term in Section 1 of the Security Agreement. A-3 166 "Acquisition Advance" shall have the meaning given to such term in Section 5.3 of the Participation Agreement. "Acquisition Loan" shall mean any Loan made in connection with an Acquisition Advance. "Advance" shall mean a Construction Advance or an Acquisition Advance. "Affiliate" shall mean, with respect to any Person, any Person or group acting in concert in respect of the Person in question that, directly or indirectly, controls or is controlled by or is under common control with such Person. "After Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient calculated at the then maximum marginal rates generally applicable to Persons of the same type as the recipients with respect to the receipt by the recipient of such amounts (less any tax savings realized as a result of the payment of the indemnified amount), such increased payment (as so reduced) is equal to the payment otherwise required to be made. "Agency Agreement" shall mean the Agency Agreement, dated on or about the Initial Closing Date between the Construction Agent and the Lessor. "Agency Agreement Event of Default" shall mean an "Event of Default" as defined in Section 5.1 of the Agency Agreement. "Agent" shall mean NationsBank, N.A., as agent for the Lenders pursuant to the Credit Agreement, or any successor agent appointed in accordance with the terms of the Credit Agreement and respecting the Security Documents, for the Lenders and the Holders, to the extent of their interests. "Applicable Percentage" shall mean for Eurodollar Loans, Eurodollar Holder Advances and Commitment Fees, the appropriate applicable percentages corresponding to the Pricing Level in effect as of the most recent Calculation Date as shown below; A-4 167
================================================================================================== Ratio of Funded Applicable Applicable Indebtedness Applicable Percentage for Percentage for Pricing to EBITDA and level Percentage for Eurodollar Commitment Level of EBITDA Eurodollar Loans Holder Advances Fee - -------------------------------------------------------------------------------------------------- I Funded Indebtedness .875% 1.875% .225% (EBITDA < or equal to .80 and EBITDA > or equal to $250 million - -------------------------------------------------------------------------------------------------- II Funded Indebtedness/ 1.000% 2.000% .250% EBITDA < or equal to .80 and EBITDA > or equal to $150 million but < $250 million - -------------------------------------------------------------------------------------------------- III Funded Indebtedness/ 1.125% 2.125% .275% EBITDA > .80 and EBITDA > or equal to $250 million - -------------------------------------------------------------------------------------------------- IV Funded Indebtedness/ 1.250% 2.250% .300% EBITDA < or equal to .80 and EBITDA > or equal to $75 million but < $150 million or Funded Indebtedness/EBITDA > .80 and EBITDA > or equal to $150 million but < $250 million - -------------------------------------------------------------------------------------------------- V Funded Indebtedness/ 1.50% 2.500% .375% EBITDA < or equal to .80 and EBITDA < $75 million or Funded Indebtedness/EBITDA > .80 and EBITDA > or equal to $75 million but < $150 million - -------------------------------------------------------------------------------------------------- VI Funded Indebtedness/ 1.750% 2.750% .450% EBITDA > .80 and EBITDA < $75 million ==================================================================================================
The Applicable Percentage for Eurodollar Loans, Eurodollar Holder Advances and the Commitment Fees shall, in each case, be determined and adjusted quarterly on the first day of A-5 168 each fiscal quarter of the Lessee (each a "Calculation Date"); provided, however, that (i) the initial Applicable Percentage, in each case, shall be based on Pricing Level V (as shown above) and shall remain at Pricing Level V until the occurrence of the Calculation Date relating to the second fiscal quarter of the Lessee occurring in fiscal year 1999 and, thereafter, the Pricing Level shall be determined as shown above, and (ii) if the Lessee fails to provide the written notice required by Section 8.3(k) of the Participation Agreement to the Agent on or before the most recent Calculation Date, the Applicable Percentage, in each case, from such Calculation Date shall be based on Pricing Level VI until such time that such written notice is provided whereupon the Pricing Level shall be determined as specified in such notice. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentage shall be applicable to all existing Eurodollar Loans and Eurodollar Holder Advances as well as any new Eurodollar Loans and Eurodollar Holder Advances made or issued. "Appraisal" shall mean, with respect to any Property or the Properties, taken as a whole, an appraisal to be delivered in connection with the Participation Agreement or in accordance with the terms of the Lease, in each case prepared by a reputable appraiser reasonably acceptable to the Agent, which in the judgment of counsel to the Agent, complies with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements. "Appraisal Procedure" shall have the meaning given such term in Section 22.4 of the Lease. "Approved State" shall mean each of the following: California and any other state within the continental United States proposed by the Lessee and consented to in writing by the Agent. "Appurtenant Rights" shall mean (a) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land underlying the Improvements or the Improvements, including without limitation the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (b) all permits, licenses and rights, whether or not of record, appurtenant to such Land or the Improvements. "Assignment and Acceptance" shall mean the Assignment and Acceptance in the form attached to the Credit Agreement as Exhibit B. "Available Commitment" shall mean, as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate principal amount of all Loans made by such Lender as of such date after giving effect to Section 5.2(d) of the Participation Agreement (but without giving effect to any other repayments or prepayments of any Loans hereunder). "Available Holder Commitments" shall mean an amount equal to the excess, if any, of (a) the aggregate amount of the Holder Commitments over (b) the aggregate amount of the Holder A-6 169 Advances made since the Initial Closing Date after giving effect to Section 5.2(d) of the Participation Agreement (but without giving effect to any other repayments or prepayments of any Holder Advances). "Bankruptcy Code" shall mean title 11 of the U.S. Code entitled "Bankruptcy," as now or hereafter in effect or any successor thereto. "Basic Documents" shall mean the following: the Participation Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the Credit Agreement, the Notes, the Lease and the Security Agreement. "Basic Rent" shall mean, the sum of (a) the Loan Basic Rent and (b) the Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is due. "Basic Term" shall have the meaning specified in Section 2.2 of the Lease. "Basic Term Commencement Date" shall have the meaning specified in Section 2.2 of the Lease. "Basic Term Expiration Date" shall have the meaning specified in Section 2.2 of the Lease. "Benefited Lender" shall have the meaning specified in Section 9.10(a) of the Credit Agreement. "Bill of Sale" shall mean a Bill of Sale regarding Equipment in form and substance satisfactory to the Agent. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States (or any successor). "Borrower" shall mean the Owner Trustee, not in its individual capacity but as Borrower under the Credit Agreement. "Borrowing Date" shall mean any Business Day specified in a notice delivered pursuant to Section 2.3 of the Credit Agreement as a date on which the Lessor requests the Lenders to make Loans hereunder. "Budgeted Total Property Cost" shall mean, at any date of determination with respect to any Construction Period Property, an amount equal to the aggregate amount which the Construction Agent in good faith expects to be expended in order to achieve Completion with respect to such Property. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in North Carolina or any other states from which the Agent, any Lender or any A-7 170 Holder funds or engages in administrative activities with respect to the transactions under the Operative Agreements are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capitalized Lease" shall mean, as applied to any Person, any lease of property (whether real, personal, tangible, intangible or mixed of such Person) by such Person as the lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Capital Expenditures" shall mean all expenditures of the Credit Parties and their Consolidated Subsidiaries which, in accordance with GAAP, would be classified as capital expenditures, including, without limitation, Capitalized Leases. "Capital Stock" shall mean any nonredeemable capital stock of any Credit Party or any of its Subsidiaries, whether common or preferred. "Cash Equivalents" shall mean (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time and demand deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Bank"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America in which the Lessee shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d). "Casualty" shall mean any damage or destruction of all or any portion of the Property as a result of a fire or other casualty. "CD" shall have the meaning given to such term in Section 15.2(a) of the Lease. A-8 171 "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificate" shall mean a Certificate in favor of each Holder regarding the Holder Commitment of such Holder issued pursuant to the terms and conditions of the Trust Agreement in favor of each Holder. "Change of Control" shall mean the occurrence of any of the following events: (a) prior to the Reorganization, a "person" or a "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act) shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over, 30% or more of the outstanding voting stock of the Lessee, (b) after the Reorganization, (i) the Parent shall fail to own directly 100% of the outstanding Capital Stock of the Lessee, (ii) a "person" or a "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act) (other than SSI) shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over, 30% or more of the outstanding voting stock of the Parent or (iii) SSI shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its acquisition of, control over, 45% or more of the outstanding voting stock of the Parent or (c) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted either the board or the board of directors of the Lessee or the Parent, as the case may be, together with any new members of such board or board of directors (i) whose elections by such board or board of directors or whose nomination for election by the stockholders of the Lessee or the stockholders of the Parent, as the case may be, was approved by a vote of a majority of the members of such board or board of directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the directors of the Lessee or of the Parent, as the case may be, then in office. Notwithstanding the foregoing in subsection (c), the three new board members appointed to the board of directors of the Parent in connection with the Reorganization shall be an acceptable change to the board of directors of the Parent. As used herein, "beneficial ownership" shall have the meaning provided in Rule 13(d)-3 of the Securities and Exchange Commission under the Securities Act of 1934. "Chattel Paper" shall have the meaning given to such term in Section 1 of the Security Agreement. "Claims" shall mean any and all obligations, liabilities, losses, actions, suits, penalties, claims, demands, costs and expenses (including without limitation reasonable attorney's fees and expenses) of any nature whatsoever. "Closing Date" shall mean the Initial Closing Date and each Property Closing Date. A-9 172 "Code" shall mean the Internal Revenue Code of 1986 together with rules and regulations promulgated thereunder, as amended from time to time, or any successor statute thereto. "Collateral" shall mean all assets of the Lessor, the Construction Agent and the Lessee, now owned or hereafter acquired, upon which a Lien is purported to be created by one or more of the Security Documents. "Collateral Assignment of Sublease" shall mean, with respect to the Fairchild Sublease, that certain Collateral Assignment dated on or about the applicable Property Closing Date executed by the Lessee in favor of the Agent. "Commitment" shall mean, as to any Lender, the obligation of such Lender to make the portion of the Loans to the Lessor in an aggregate principal amount at any time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 2.1 of the Credit Agreement, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements. "Commitment Fee" shall mean, collectively, the Holder Commitment Fee and the Lender Commitment Fee. "Commitment Fee Payment Date" shall mean the last Business Day of each March, June, September and December and the last Business Day of the Commitment Period, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement or the Holder Commitment shall terminate as provided in the Trust Agreement. "Commitment Percentage" shall mean, as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the aggregate principal amount of all of the Loans then outstanding), and such Commitment Percentage shall take into account both the Lender's Tranche A Commitment and the Lender's Tranche B Commitment. "Commitment Period" shall mean the period from and including the Initial Closing Date to and including the Construction Period Termination Date, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement or the Holder Commitment shall terminate as provided in the Trust Agreement. "Company Obligations" shall mean the obligations of VSC, in any and all capacities under and with respect to the Operative Agreements and each Property. "Completion" shall mean, with respect to the Properties, such time as the acquisition, installation, testing and final completion of the Improvements has been substantially achieved in accordance with the Plans and Specifications, the Agency Agreement and/or the Lease and in compliance with all Legal Requirements and Insurance Requirements (except if non-compliance, A-10 173 individually or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect), a certificate of occupancy has been issued by the appropriate governmental entity and the Lessee shall have the obligation under the Lease to pay Rent as of such date. If the Lessor purchases a Property that includes existing Improvements that are to be immediately occupied by the Lessee without any improvements financed pursuant to the Operative Agreements, the date of Completion for such Property shall be the Property Closing Date. "Completion Date" shall mean, with respect to the Properties, the earlier of (a) the date on which Completion for the Properties has occurred or (b) the Construction Period Termination Date. "Condemnation" shall mean any taking or sale of the use, access, occupancy, easement rights or title to any Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Person having the power of eminent domain, including without limitation an action by a Governmental Authority to change the grade of, or widen the streets adjacent to, any Property or alter the pedestrian or vehicular traffic flow to any Property so as to result in a change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. "Consolidated Subsidiary" shall mean, as to any Person, any Subsidiary of such Person which under the rules of GAAP consistently applied should have its financial results consolidated with those of such Person for purposes of financial accounting statements. "Construction Advance" shall mean an advance of funds to pay Property Costs pursuant to Section 5.4 of the Participation Agreement. "Construction Agent" shall mean Veritas Software Corporation, a Delaware corporation, as the construction agent under the Agency Agreement. "Construction Agent Options" shall have the meaning given to such term in Section 2.1 of the Agency Agreement. "Construction Budget" shall mean the cost of acquisition, installation, testing, constructing and developing the Properties as determined by the Construction Agent in its reasonable, good faith judgment. "Construction Commencement Date" shall mean, with respect to Improvements, the date on which construction of such Improvements commences pursuant to the Agency Agreement. "Construction Contract" shall mean any contract entered into between the Construction Agent or the Lessee with a Contractor for the construction of Improvements or any portion thereof on the Property. A-11 174 "Construction Loan" shall mean any Loan made in connection with a Construction Advance. "Construction Loan Property Cost" shall mean with respect to the Construction Period Properties at the date of determination, an amount equal to (a) the aggregate principal amount of Construction Loans made on or prior to such date with respect to the Properties minus (b) the aggregate principal amount of prepayments or repayments of the Loans allocated to reduce the Construction Loan Property Cost of such Properties pursuant to Section 2.6(c) of the Credit Agreement. "Construction Period" shall mean, with respect to the Properties, the period commencing on the Construction Commencement Date and ending on the Completion Date. "Construction Period Property" means, at any date of determination, the Properties as to which the Rent Commencement Date has not occurred on or prior to such date. "Construction Period Termination Date" shall mean, subject to the extension of such date by the Lenders and the Holders, in their sole and absolute discretion, in accordance with the provisions set forth in Sections 2.1 and 2.6(c) of the Agency Agreement, (a) the earlier of (i) the date that the Commitments have been terminated in their entirety in accordance with the terms of Section 2.5(a) of the Credit Agreement, or (ii) the second anniversary of the Initial Closing Date or (b) such later date as may be agreed to by the Majority Secured Parties. "Contractor" shall mean each entity with whom the Construction Agent or the Lessee contracts to construct any Improvements or any portion thereof on the Property. "Contributed Companies" shall mean NSMG, Seagate Software Limited, a corporation formed under the laws of the United Kingdom, Seagate Software GmbH, a corporation formed under the laws of Germany, Seagate Software International Holdings Ltd., a limited liability company organized under the laws of the Cayman Islands and Seagate Software Storage Management Group, Inc., a Delaware corporation. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Credit Party, are treated as a single employer under Section 414 of the Code. "Co-Owner Trustee" shall have the meaning specified in Section 9.2 of the Trust Agreement. "Credit Agreement" shall mean the Credit Agreement, dated on or about the Initial Closing Date, among the Lessor, the Agent and the Lenders, as specified therein. "Credit Agreement Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Credit Agreement Event of Default. A-12 175 "Credit Agreement Event of Default" shall mean any event or condition defined as an "Event of Default" in Section 6 of the Credit Agreement. "Credit Documents" shall mean the Participation Agreement, the Agency Agreement, the Credit Agreement, the Notes and the Security Documents. "Credit Parties" shall mean the Construction Agent, the Lessee and each Guarantor. "Deed" shall mean a warranty deed regarding the Land and/or Improvements in form and substance satisfactory to the Agent. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Holder" shall have the meaning given to such term in Section 12.4 of the Participation Agreement. "Defaulting Lender" shall have the meaning given to such term in Section 12.4 of the Participation Agreement. "Deficiency Balance" shall have the meaning given in Section 22.1(b) of the Lease Agreement. "Documents" shall have the meaning given to such term in Section 1 of the Security Agreement. "Dollars" and "$" shall mean dollars in lawful currency of the United States of America. "Domestic Subsidiary" shall mean, with respect to any Person, any Subsidiary of such Person which is incorporated or organized under the laws of any State of the United States or the District of Columbia. "EBITDA" shall mean, for any period, with respect to the Credit Parties and their Consolidated Subsidiaries on a consolidated basis, without duplication, the sum of (a) Net Income for such period plus (b) an amount which, in the determination of Net Income for such period has been deducted for (i) Interest Expense for such period, (ii) total Federal, state, foreign or other income taxes for such period, as determined in accordance with GAAP, (iii) all depreciation and amortization for such period, as determined in accordance with GAAP, and (iv) during any period within four years of the closing of any Permitted Acquisition or the Reorganization, all non-cash restructuring charges for such period taken in connection with such Permitted Acquisition or the Reorganization (excluding any non-cash charges that require an accrual or reserve for cash charges for any future period) minus (c) an amount equal to any software development expenses occurring during such period which have been classified as a capital expenditure. "Election Notice" shall have the meaning given to such term in Section 20.1 of the Lease. A-13 176 "Eligible Assignee" shall mean (i) a Lender or a Holder, as the case may be: (ii) an Affiliate of a Lender or a Holder, as the case may be; and (iii) any other Person approved by the Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with the Operative Agreements, the Lessee or the Construction Agent, such approval not to be unreasonably withheld or delayed by the Lessee or the Construction Agent and such approval to be deemed given by the Lessee or the Construction Agent if no objection is received by the assigning Lender or Holder and the Agent from the Lessee or the Construction Agent within two Business Days after notice of such proposed assignment has been provided by the assigning Lender or Holder to the Lessee or the Construction Agent; provided, however, that neither the Lessee or the Construction Agent nor an Affiliate of the Lessee or the Construction Agent shall qualify as an Eligible Assignee. "Employee Benefit Plan" or "Plan" shall mean an employee benefit plan (within the meaning of Section 3(3) of ERISA, including without limitation any Multiemployer Plan), or any "plan" as defined in Section 4975(e)(1) of the Code and as interpreted by the Internal Revenue Service and the Department of Labor in rules, regulations, releases or bulletins in effect on any Closing Date. "Environmental Claims" shall mean any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding, or claim (whether administrative, judicial, or private in nature) arising (a) pursuant to, or in connection with, an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Substance, (c) from any abatement, removal, remedial, corrective, or other response action in connection with a Hazardous Substance, Environmental Law, or other order of a Tribunal or (d) form any actual or alleged damage, injury, threat, or harm to health, safety, natural resources, or the environment. "Environmental Laws" shall mean any current or future legal requirement of any Governmental Authority pertaining to (a) the protection of health, safety, and the indoor or outdoor environment, (b) the conservation, management, or use of natural resources and wildlife, (c) the protection or use of surface water and groundwater or (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation or handling of, or exposure to, any hazardous or toxic substance or material or (e) pollution (including any release to land surface water and groundwater and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 USC 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 USC 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC 7401 et seq., Toxic Substances Control Act of 1976, 15 USC 2601 et seq., Hazardous Materials Transportation Act, 49 USC App. 1801 et seq., Occupational Safety and Health Act of 1970, as amended, 29 USC 651 et seq., Oil Pollution Act of 1990, 33 USC 2701 et seq., Emergency Planning and Community Right-to-Know Act of 1986, 42 USC 11001 et seq., National Environmental Policy Act of 1969, 42 USC A-14 177 4321 et seq., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) et seq., any analogous implementing or successor law, and any amendment, rule, regulation, order, or directive issued thereunder. "EPA" shall have the meaning given to such term in Section 15.2(a) of the Lease. "EPA Comfort Letter" shall mean, with respect to any Property, a letter from the EPA respecting compliance with the CD, remediation of the Pre-Existing Environmental Conditions and related matters, in form and substance acceptable to the Agent. "Environmental Violation" shall mean any activity, occurrence or condition that violates or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to violate or results in or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to result in noncompliance with any Environmental Law. "Equipment" shall mean equipment, apparatus, furnishings, fittings and personal property of every kind and nature whatsoever purchased, leased or otherwise acquired using the proceeds of the Loans or the Holder Advances by the Construction Agent, the Lessee or the Lessor and all improvements and modifications thereto and replacements thereof, whether or not now owned or hereafter acquired or now or subsequently attached to, contained in or used or usable in any way in connection with any operation of any Improvements, including but without limiting the generality of the foregoing, all equipment described in the Appraisal including without limitation all heating, electrical, and mechanical equipment, lighting, switchboards, plumbing, ventilation, air conditioning and air-cooling apparatus, refrigerating, and incinerating equipment, escalators, elevators, loading and unloading equipment and systems, cleaning systems (including without limitation window cleaning apparatus), telephones, communication systems (including without limitation satellite dishes and antennae), televisions, computers, sprinkler systems and other fire prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of every kind and description. "Equipment Schedule" shall mean (a) each Equipment Schedule attached to the applicable Requisition and (b) each Equipment Schedule attached to the applicable Lease Supplement. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" shall mean an entity, whether or not incorporated, which is under common control with any Credit Party or any of its Consolidated Subsidiaries within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes any Credit Party or any A-15 178 of its Consolidated Subsidiaries and which is treated as a single employer under Sections 414(b), (c), (m), or (o) of the Code. "Eurocurrency Reserve Requirements" shall mean for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal) of reserve requirements in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed on eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D) maintained by a member bank of the Federal Reserve System. "Eurodollar Holder Advance" shall mean a Holder Advance bearing a Holder Yield based on the Eurodollar Rate. "Eurodollar Loans" shall mean Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate" means for any Eurodollar Loan or Eurodollar Holder Advance comprising part of the same borrowing or advance (including without limitation conversions, extensions and renewals), for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Loan or Eurodollar Holder Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). As used herein, "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks) ("RMMRS"). In the event the RMMRS is not then quoting such offered rates, "Eurodollar Rate" shall mean for the Interest Period for each Eurodollar Loan or Eurodollar Holder Advance comprising part of the same borrowing or advance (including without limitation conversions, extensions and renewals), the average (rounded upward to the nearest one sixteenth (1/16) of one percent (1%)) per annum rate of interest determined by the office of the Agent (each such determination to be conclusive and binding) as of two (2) Business Days prior to the first day of such Interest Period, as the effective rate at which deposits in immediately available funds in U.S. dollars are being, have been, or would be offered or quoted by the Agent to major banks in the applicable interbank market for Eurodollar deposits at any time during the Business Day which is the second Business Day immediately preceding the first day of such Interest Period, for a term comparable to such Interest Period and in the amount of the requested Eurodollar Loan and/or Eurodollar Holder Advance. If no such offers or quotes are generally available for such A-16 179 amount, then the Agent shall be entitled to determine the Eurodollar Rate by estimating in its reasonable judgment the per annum rate (as described above) that would be applicable if such quote or offers were generally available. "Event of Default" shall mean a Lease Event of Default, an Agency Agreement Event of Default or a Credit Agreement Event of Default. "Excepted Payments" shall mean: (a) all indemnity payments (including without limitation indemnity payments made pursuant to Section 11 of the Participation Agreement), whether made by adjustment to Basic Rent or otherwise, to which the Owner Trustee, any Holder or any of their respective Affiliates, agents, officers, directors or employees is entitled; (b) any amounts (other than Basic Rent or Termination Value) payable under any Operative Agreement to reimburse the Owner Trustee, any Holder or any of their respective Affiliates (including without limitation the reasonable expenses of the Owner Trustee, the Trust Company and the Holders incurred in connection with any such payment) for performing or complying with any of the obligations of any Credit Party under and as permitted by any Operative Agreement; (c) any amount payable to a Holder by any transferee of such interest of a Holder as the purchase price of such Holder's interest in the Trust Estate (or a portion thereof); (d) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies other than such proceeds or payments payable to the Agent or any Lender; (e) any insurance proceeds under policies maintained by the Owner Trustee or any Holder; (f) Transaction Expenses or other amounts, fees, disbursements or expenses paid or payable to or for the benefit of the Owner Trustee or any Holder; (g) all right, title and interest of any Holder or the Owner Trustee to any Property or any portion thereof or any other property to the extent any of the foregoing has been released from the Liens of the Security Documents and the Lease pursuant to the terms thereof; (h) upon termination of the Credit Agreement pursuant to the terms thereof, all remaining property covered by the Lease or Security Documents; (i) all payments in respect of the Holder Yield; (j) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (i) above; and A-17 180 (k) any rights of either the Owner Trustee or the Trust Company to demand, collect, sue for or otherwise receive and enforce payment of any of the foregoing amounts, provided that such rights shall not include the right to terminate the Lease. "Excess Proceeds" shall mean the excess, if any, of the aggregate of all awards, compensation or insurance proceeds payable in connection with a Casualty or Condemnation over the Termination Value paid by the Lessee pursuant to the Lease with respect to such Casualty or Condemnation. "Excluded Taxes" shall have the meaning given to such term in Section 11.2(b) of the Participation Agreement. "Exculpated Persons" shall mean the Trust Company (except with respect to the representations and warranties and the other obligations of the Trust Company pursuant to the Operative Agreements expressly undertaken in its individual capacity, including without limitation the representations and warranties of the Trust Company pursuant to Section 6.1 of the Participation Agreement, the obligations of the Trust Company pursuant to Section 8.2 of the Participation Agreement and the obligations of the Trust Company pursuant to the Trust Agreement), the Holders (except with respect to the obligations of the Holders pursuant to the Participation Agreement and the Trust Agreement expressly undertaken in their respective individual capacities), their officers, directors, shareholders and partners. "Exempt Payments" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Expiration Date" shall mean either (a) the Basic Term Expiration Date or (b) the last day of the applicable Renewal Term; provided, in no event shall the Expiration Date be later than the annual anniversary of the Initial Closing Date occurring in the year 2006, unless such later date has been expressly agreed to in writing by each of the Lessor, the Lessee, the Agent, the Lenders and the Holders. "Fair Market Sales Value" shall mean, with respect to the Properties, taken as a whole, the amount, which in any event, shall not be less than zero (0), that would be paid in cash in an arms-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, such Properties. Fair Market Sales Value shall be determined based on the assumption that, except for purposes of Section 17 of the Lease, such Properties are in the condition and state of repair required under Section 10.1 of the Lease and each Credit Party is in compliance with the other requirements of the Operative Agreements. "Fairchild" shall mean Fairchild Semiconductor Corporation of California, a Delaware corporation, and its successors and assigns. A-18 181 "Fairchild SNDA" shall mean that certain Subordination, Non-Disturbance and Attornment Agreement dated as of April 23, 1999, among Fairchild, the Lessee, the Owner Trustee and the Agent. "Fairchild Sublease" shall mean that certain Sublease Agreement dated on or about the applicable Property Closing Date between VSC, as sub-landlord, and Fairchild, as sub-tenant. "Federal Funds Effective Rate" shall have the meaning given to such term in the definition of ABR. "Financing Parties" shall mean the Lessor, the Owner Trustee, in its trust capacity, the Agent, the Holders and the Lenders. "Fixtures" shall mean all fixtures relating to the Improvements, including without limitation all components thereof, located in or on the Improvements, together with all replacements, modifications, alterations and additions thereto. "Force Majeure Event" shall mean any event beyond the control of the Construction Agent, other than a Casualty or Condemnation, including without limitation strikes or lockouts (but only when the Construction Agent is legally prevented from securing replacement labor or materials as a result thereof), adverse soil conditions, acts of God, adverse weather conditions, inability to obtain labor or materials after all possible efforts have been expended by the Construction Agent, governmental activities, civil commotion and enemy action; but excluding any event, cause or condition that results from the Construction Agent's financial condition. "Form 1001" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Form 4224" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Funded Indebtedness" shall mean, with respect to the Lessee and its Consolidated Subsidiaries determined in accordance with GAAP on a consolidated basis, without duplication, (a) all obligations for borrowed money of the Lessee or any of its Consolidated Subsidiaries, (b) all obligations of the Lessee or any of its Consolidated Subsidiaries evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (c) all purchase money Indebtedness of the Lessee or any of its Consolidated Subsidiaries, including without limitation the principal portion of all obligations under Capitalized Leases, (d) the maximum amount of all standby letters of credit issued or bankers' acceptance facilities created for the account of the Lessee or any of its Consolidated Subsidiaries and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (e) the principal balance outstanding under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product to which the Lessee or any of its Consolidated Subsidiaries is a party, where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP, (f) all Indebtedness of another Person of the type A-19 182 referred to in clause (a) - (e) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien on, or payable out of the proceeds of production from, property owned or acquired by the Lessee or any of its Consolidated Subsidiaries, whether or not the obligations secured thereby have been assumed, (g) all Guaranty Obligations of the Lessee or any of its Consolidated Subsidiaries with respect to Indebtedness of the type referred to in clauses (a) - (e) above of another Person and (h) Indebtedness of the type referred to in clauses (a) - (e) above of any partnership or incorporated joint venture in which the Lessee or any of its Consolidated Subsidiaries is legally obligated or has a reasonable expectation of being liable with respect thereto. "GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the accounting principles board of the American Institute of Certified Public Accountants, and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination. "Governmental Action" shall mean all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Legal Requirement, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operating of the Property. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantors" shall mean the various parties to the Participation Agreement from time to time, as guarantors of the Construction Agent and the Lessee with respect to the Operative Agreements and the Properties. "Guaranty Obligations" shall mean, with respect to any Person, without duplication, any obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (a) to purchase any such Indebtedness or other obligation or any property constituting security therefor, (b) to advance or provide funds or other support for the payment or purchase of such Indebtedness or obligation or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, maintenance agreements, comfort letters, take or pay arrangements, put agreements or similar agreements or arrangements) for the benefit of the holder of Indebtedness of such other Person, (c) to lease or purchase property, securities or services primarily for the purpose of assuring the owner of such Indebtedness or (d) to otherwise assure or hold harmless the owner of such Indebtedness or obligation against loss in respect thereof. The amount of any Guaranty Obligation hereunder shall (subject to any limitations A-20 183 set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made. "Hard Costs" shall mean all costs and expenses payable for supplies, materials, labor and profit with respect to the Improvements under any Construction Contract. "Hazardous Materials" shall mean any substance, material or waste defined in or regulated under any Environmental Laws. "Hazardous Substance" shall mean any of the following: (a) any petroleum or petroleum product, explosives, radioactive materials, asbestos, formaldehyde, polychlorinated biphenyls, lead and radon gas; (b) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste, or pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous to the environment or human health or safety as determined in accordance with any Environmental Law; or (c) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant that would support the assertion of any claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law. "Holder Advance" shall mean any advance made by any Holder to the Owner Trustee pursuant to the terms of the Trust Agreement or the Participation Agreement. "Holder Amount" shall mean as of any date, the aggregate amount of Holder Advances made by each Holder to the Trust Estate pursuant to Section 2 of the Participation Agreement and Section 3.1 of the Trust Agreement less any payments of any Holder Advances received by the Holders pursuant to Section 3.4 of the Trust Agreement. "Holder Commitments" shall mean $2,160,000, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, if there shall be more than one (1) Holder, the Holder Commitment of each Holder shall be as set forth in Schedule I to the Trust Agreement as such Schedule I may be amended and replaced from time to time. "Holder Construction Property Cost" shall mean, with respect to the Construction Period Properties, taken as a whole, at any date of determination, an amount equal to the outstanding Holder Advances made with respect thereto under the Trust Agreement. "Holder Overdue Rate" shall mean the lesser of (a) the then current rate of Holder Yield respecting the particular amount in question plus two percent (2%) and (b) the highest rate permitted by applicable law. "Holder Property Cost" shall mean with respect to the Properties an amount equal to the outstanding Holder Advances with respect thereto. A-21 184 "Holder Commitment Fee" shall have the meaning given to such term in Section 7.4 of the Participation Agreement. "Holder Yield" shall mean with respect to Holder Advances from time to time either the Eurodollar Rate plus the Applicable Percentage or the ABR as elected by the Owner Trustee from time to time with respect to such Holder Advances in accordance with the terms of the Trust Agreement; provided, however, (a) upon delivery of the notice described in Section 3.7(c) of the Trust Agreement, the outstanding Holder Advances of each Holder shall bear yield at the ABR applicable from time to time from and after the dates and during the periods specified in Section 3.7(c) of the Trust Agreement, and (b) upon the delivery by a Holder of the notice described in Section 11.3(f) of the Participation Agreement, the Holder Advances of such Holder shall bear a yield at the ABR applicable from time to time after the dates and during the periods specified in Section 11.3(f) of the Participation Agreement. "Holders" shall mean NationsBank, N.A. and shall include the other banks and financial institutions which may be from time to time holders of Certificates in connection with the VS Trust 1999-1. "Impositions" shall mean any and all liabilities, losses, expenses, costs, charges and Liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes") including but not limited to (i) real and personal property taxes, including without limitation personal property taxes on any property covered by the Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; (vi) assessments on any Property, including without limitation all assessments for public Improvements or benefits, whether or not such improvements are commenced or completed within the Term; and (vii) taxes, Liens, assessments or charges asserted, imposed or assessed by the PBGC or any governmental authority succeeding to or performing functions similar to, the PBGC; and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Governmental Authority upon or with respect to (a) any Property or any part thereof or interest therein; (b) the leasing, financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, sale, transfer of title, return or other disposition of such Property or any part thereof or interest therein; (c) the Notes, other indebtedness with respect to any Property, or the Certificates, or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from any Property or any part thereof or interest therein; (e) the Operative Agreements, the performance thereof, or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to any Property or any part thereof or interest therein upon the sale of disposition thereof; (g) any A-22 185 contract (including the Agency Agreement) relating to the construction, acquisition or delivery of the Improvements or any part thereof or interest therein; (h) the issuance of the Notes or the Certificates; (i) the Owner Trustee, the Trust or the Trust Estate; or (j) otherwise in connection with the transactions contemplated by the Operative Agreements. "Improvements" shall mean, with respect to the construction, renovations and/or Modifications of any Land, all buildings, structures, Fixtures, and other improvements of every kind existing at any time and from time to time on or under the Land purchased or otherwise acquired using the proceeds of the Loans or the Holder Advances, together with any and all appurtenances to such buildings, structures or improvements, including without limitation sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including without limitation all Modifications and other additions to or changes in the Improvements at any time, including without limitation (a) any Improvements existing as of the Property Closing Date as such Improvements may be referenced on the applicable Requisition and (b) any Improvements made subsequent to such Property Closing Date. "Indebtedness" of a Person shall mean, without duplication, such Person's: (a) obligations for borrowed money; (b) obligations representing the deferred purchase price of Property (whether real, personal, tangible, intangible or mixed) or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade); (c) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person; (d) obligations which are evidenced by notes, acceptances or other instruments; (e) Capitalized Lease obligations; (f) net liabilities under interest rate swap, exchange or cap agreements; and (g) contingent obligations; (h) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made; (i) all Guaranty Obligations of such Person with respect to Indebtedness of another Person (obligations of a Person under an Operating Lease shall not be considered Indebtedness); A-23 186 (j) the maximum amount of all standby letters of credit issued or bankers' acceptances facilities created for account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed); (k) all preferred Capital Stock issued by such Person and which by the terms thereof could be (at the request of the holders thereof or otherwise) subject to mandatory sinking fund payments, redemption or other acceleration; and (l) the principal portion of all obligations of such Person under any synthetic, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product of such Person where such transaction is considered borrowed money indebtedness for tax but is classified as an operating lease in accordance with GAAP. "Indemnified Person" shall mean the Lessor, the Owner Trustee, in its individual and its trust capacity, the Trust, the Trust Company, the Agent, the Holders, the Lenders and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Indemnity Agreement" shall mean that certain Environmental Indemnity Agreement dated on or about the applicable Property Closing Date between VSC and Fairchild and that certain Grant of Easements, Restriction and Indemnity Agreement dated as of December 24, 1997 executed by Raytheon Semiconductor, Inc., as grantor, in favor of Raytheon, together with its successors in title, as grantee. "Indemnity Provider" shall mean, respecting each Property, the Lessee. "Initial Closing Date" shall mean April 23, 1999. "Initial Construction Advance" shall mean any initial Advance to pay for: (a) Property Costs for construction of any Improvements; and (b) the Property Costs of restoring or repairing any Property which is required to be restored or repaired in accordance with Section 15.1(e) of the Lease. "Instruments" shall have the meaning given to such term in Section 1 of the Security Agreement. "Insurance Requirements" shall mean all terms and conditions of any insurance policy either required by the Lease to be maintained by the Lessee or required by the Agency Agreement to be maintained by the Construction Agent, and all requirements of the issuer of any such policy and, regarding self insurance, any other requirements of the Lessee. "Interest Expense" shall mean for any period, with respect to the Credit Parties and their Consolidated Subsidiaries on a consolidated basis, all interest expense, including the interest component under Capitalized Leases, as determined in accordance with GAAP. A-24 187 "Interest Period" shall mean (a) during the Commitment Period and thereafter as to any Eurodollar Loan or Eurodollar Holder Advance (i) with respect to the initial Interest Period, the period beginning on the date of the first Eurodollar Loan and Eurodollar Holder Advance and ending one (1) month, two (2) months, three (3) months or six (6) months thereafter, as selected by the Lessor (in the case of a Eurodollar Loan) or the Owner Trustee (in the case of a Eurodollar Holder Advance) in its applicable notice given with respect thereto and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan or Eurodollar Holder Advance and ending one (1) month, two (2) months, three (3) months or six (6) months thereafter, as selected by the Lessor by irrevocable notice to the Agent (in the case of a Eurodollar Loan) or by the Owner Trustee (in the case of a Eurodollar Holder Advance) in each case not less than three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided, however, that all of the foregoing provisions relating to Interest Periods are subject to the following: (A) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Maturity Date or the Expiration Date, as the case may be, (C) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month, (D) there shall not be more than four (4) Interest Periods outstanding at any one (1) time. "Investment" means (a) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of assets, Capital Stock, bonds, notes, debentures, partnership, joint ventures or other ownership interests or other securities of any Person or (b) any deposit with, or advance, loan or other extension of credit to, any Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or (c) any other capital contribution to or investment in any Person, including, without limitation, any Guaranty Obligations (including any support for a letter of credit issued on behalf of such Person) incurred for the benefit of such Person. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Joinder Agreement" shall mean a joinder agreement, in the form of Exhibit K to the Participation Agreement, executed from time to time between the Parent or a Domestic Subsidiary of any Credit Party and the Agent. "Joinder of Lessee" shall mean that certain joinder dated as of April 23, 1999, executed by the Lessee, as grantor, in favor of the Agent, as beneficiary, attached to and made a part of that certain deed of trust dated as of such date, executed by the Owner Trustee, as grantor, in favor of the Agent, as beneficiary. "Land" shall mean a parcel of real property described on (a) the Requisition issued by the Construction Agent on the Property Closing Date relating to such parcel and (b) the schedules to A-25 188 each applicable Lease Supplement executed and delivered in accordance with the requirements of Section 2.4 of the Lease. "Land Cost" shall mean one hundred percent (100%) of the cost of the Land for all, but not less than all, the Properties. "Law" shall mean any statute, law, ordinance, regulation, rule, directive, order, writ, injunction or decree of any Tribunal. "Lease" or "Lease Agreement" shall mean the Master Lease Agreement dated on or about the Initial Closing Date, between the Lessor and the Lessee, together with any Lease Supplements thereto. "Lease Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" shall have the meaning specified in Section 17.1 of the Lease. "Lease Supplement" shall mean each Lease Supplement substantially in the form of Exhibit A to the Lease, together with all attachments and schedules thereto. "Legal Requirements" shall mean all foreign, federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Owner Trustee, any Holder, the Lessor, any Credit Party, the Agent, any Lender or any Property, Land, Improvement, Equipment or the taxation, demolition, construction, use or alteration of such Improvements, whether now or hereafter enacted and in force, including without limitation any that require repairs, modifications or alterations in or to any Property or in any way limit the use and enjoyment thereof (including without limitation all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. Section 12101 et. seq., and any other similar federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including without limitation all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to any Credit Party affecting any Property or the Appurtenant Rights. "Lender Commitments" shall mean $69,840,000, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, if there shall be more than one (1) Lender, the Lender Commitment of each Lender shall be as set forth in Schedule 2.1 to the Credit Agreement as such Schedule 2.1 may be amended and replaced from time to time. "Lender Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdiction in order to procure a security interest in favor of the Agent in the Collateral subject to the Security Documents. A-26 189 "Lender Commitment Fee" shall have the meaning given to such term in Section 7.4 of the Participation Agreement. "Lenders" shall mean NationsBank, N.A. and shall include the other banks and financial institutions which may be from time to time party to the Participation Agreement and the Credit Agreement. "Lessee" shall have the meaning set forth in the Lease. "Lessor" shall mean the Owner Trustee, not in its individual capacity, but as the Lessor under the Lease. "Lessor Basic Rent" shall mean the scheduled Holder Yield due on the Holder Advances on any Scheduled Interest Payment Date pursuant to the Trust Agreement (but not including interest on (a) any such scheduled Holder Yield due on the Holder Advances prior to the Rent Commencement Date with respect to the Property to which such Holder Advances relate or (b) overdue amounts under the Trust Agreement or otherwise). "Lessor Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdictions in order to protect the Lessor's interest under the Lease to the extent the Lease is a security agreement or a mortgage. "Lessor Lien" shall mean any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor or the Trust Company, in its individual capacity, not resulting from the transactions contemplated by the Operative Agreements, (b) any act or omission of the Lessor or the Trust Company, in its individual capacity, which is not required by the Operative Agreements or is in violation of any of the terms of the Operative Agreements, (c) any claim against the Lessor or the Trust Company, in its individual capacity, with respect to Taxes or Transaction Expenses against which the Lessee is not required to indemnify the Lessor or the Trust Company, in its individual capacity, pursuant to Section 11 of the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Properties, the Trust Estate or the Operative Agreements other than the transfer of title to or possession of any Properties by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement, the Security Agreement or the Participation Agreement or pursuant to the exercise of the remedies set forth in Article XVII of the Lease. "Leverage Ratio" shall mean, as of the end of each fiscal quarter of the Lessee, with respect to the Credit Parties and their Consolidated Subsidiaries on a consolidated basis, the ratio of (a) Funded Indebtedness minus Subordinated Debt on such date to (b) EBITDA for the twelve month period ending on such date. A-27 190 "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind, including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof. "Limited Recourse Amount" shall mean with respect to all the Properties on an aggregate basis, an amount equal to the sum of the Termination Values with respect to all the Properties on an aggregate basis on each Payment Date, less the Maximum Residual Guarantee Amount as of such date with respect to all the Properties on an aggregate basis. "Loan Basic Rent" shall mean the scheduled interest due on the Loans on any Scheduled Interest Payment Date pursuant to the Credit Agreement (but not including interest on (a) any such Loan due prior to the Rent Commencement Date with respect to the Property to which such Loan relates or (b) any overdue amounts under Section 2.8(b) of the Credit Agreement or otherwise). "Loan Property Cost" shall mean, with respect to the Properties, taken as a whole, at any date of determination, an amount qual to (a) the aggregate principal amount all Loans (including without limitation all Acquisition Loans and Construction Loans) made on or prior to such date with respect to such Properties minus (b) the aggregate amount of prepayments or repayments as the case may be of the Loans allocated to reduce the Loan Property Cost of such Properties pursuant to Section 2.6(c) of the Credit Agreement. "Loans" shall mean the loans extended pursuant to the Credit Agreement and shall include both the Tranche A Loans and the Tranche B Loans. "Majority Holders" shall mean at any time, Holders whose Holder Advances outstanding represent at least fifty-one percent (51%) of (a) the aggregate Holder Advances outstanding or (b) to the extent there are no Holder Advances outstanding, the aggregate Holder Commitments. "Majority Lenders" shall mean at any time, Lenders whose Loans outstanding represent at least fifty-one percent (51%) of (a) the aggregate Loans outstanding or (b) to the extent there are no Loans outstanding, the aggregate of the Lender Commitments. "Majority Secured Parties" shall mean at any time, Lenders and Holders whose Loans and Holder Advances outstanding represent at least fifty-one percent (51%) of (a) the aggregate Advances outstanding or (b) to the extent there are no Advances outstanding, the sum of the aggregate Holder Commitments plus the aggregate Lender Commitments; provided, however, any amendment to Section 8.3(A)(h)(ii) shall require the consent of Lenders and Holders whose Loans and Holder Advances outstanding represent at least sixty-six and two-thirds percent (66 2/3%) of (x) the aggregate Advances outstanding or (y) to the extent there are no Advances outstanding, the sum of the aggregate Holder Commitments plus the aggregate Lender Commitments. A-28 191 "Marketing Period" shall mean, if the Lessee has given a Sale Notice in accordance with Section 20.1 of the Lease, the period commencing on the date such Sale Notice is given and ending on the Expiration Date. "Material Adverse Effect" shall mean any event, circumstance, occurrence, fact, condition or change materially adversely affecting (a) the acquisition, construction, equipping, financing, operation, maintenance, leasing, ownership, use or regulatory status of any Property, (b) the business, assets, properties, financial condition, operations, prospects or rights or interests of the Credit Parties, on a consolidated basis, which individually or in the aggregate has caused directly or indirectly Net Income for any fiscal quarter (plus, within four years of the closing of the Reorganization, to the extent deducted in the determination of Net Income for such fiscal quarter (x) non-cash charges taken in such fiscal quarter in connection with the Reorganization and (y) the write-down of goodwill taken in such fiscal quarter in connection with the Reorganization) to be less than zero, (c) the value, utility or useful life of any Property or the use, or ability of the Lessee to use, any Property for the purpose for which it was intended, (d) the validity or enforceability of any Operative Agreements or the rights and remedies of the Agent, the Lenders, the Holders or the Lessor thereunder or (e) the validity, priority or enforceability of any Lien on any Property created by any of the Operative Agreements. "Material Default" shall mean any Default under Sections 17.1(a), (b), (g), (h), (i), (j) or (l)(i) of the Lease. "Maturity Date" shall mean the Expiration Date. "Maximum Amount" shall mean (a) the Land Cost, plus (b) the product of eighty-nine and nine tenths percent (89.9%) multiplied by the following: (the aggregate Termination Value for all, but not less than all, the Properties, minus the Land Cost, minus all structuring fees payable in connection with the transactions evidenced by the Operative Agreements to NationsBanc Montgomery Securities LLC, NationsBank, N.A. and/or any Affiliates of either of the foregoing, minus accrued, unpaid Holder Yield respecting any and all Construction Period Properties) minus (c) the accreted value (calculated at a rate of six and one-half percent (6.50%) per annum) of any payments previously made by the Construction Agent or the Lessee regarding any and all Construction Period Properties and not reimbursed. "Maximum Residual Guarantee Amount" shall mean (i) with respect to the Property constituting the Land, an amount equal to the Land Cost and (ii) with respect to the Property constituting the Improvements on the Land, the product of the aggregate Property Cost for all of the Properties (exclusive of the Land Cost) times eighty-four percent (84%), in each case as set forth in the applicable Lease Supplement. "Merger Sub" shall mean the newly formed, wholly owned subsidiary of the Parent formed in connection with the Reorganization. "Modifications" shall have the meaning specified in Section 11.1(a) of the Lease. A-29 192 "Mortgage Instrument" shall mean any mortgage, deed of trust or any other instrument executed by the Owner Trustee and/or the Lessee in favor of the Agent (for the benefit of the Lenders and the Holders) (including, without limitation, the Joinder of Lessee), and evidencing a Lien on the Property, in form and substance reasonably acceptable to the Agent. "Multiemployer Plan" shall mean a Plan covered by Title IV of ERISA which is a multiemployer plan as defined in Section 3(37) or 4001(a)(3) of ERISA. "Multiple Employer Plan" shall mean a Plan covered by Title IV of ERISA, other than a Multiemployer Plan, which any Credit Party or any of its Subsidiaries or any ERISA Affiliate and at least one employer other than a Credit Party or any of its Subsidiaries or any ERISA Affiliate are contributing sponsors. "Net Income" shall mean for any period, the net income after taxes for such period of the Credit Parties and their Consolidated Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "New Facility" shall have the meaning given to such term in Section 28.1 of the Lease. "Non-Integral Equipment" shall mean Equipment which (a) is personal property that is readily removable without causing material damage to the applicable Property and (b) is not integral or necessary, respecting the applicable Property, for compliance with Section 8.3 of the Lease or otherwise to the structure thereof, the mechanical operation thereof, the electrical systems thereof or otherwise with respect to any aspect of the physical plant thereof. "Notes" shall mean those notes issued to the Lenders pursuant to the Credit Agreement and shall include both the Tranche A Notes and the Tranche B Notes. "NSMG" shall mean Seagate Software Network & Storage Management Group, Inc., a Delaware corporation. "NSMG Business" shall mean the business of the network software management group of SSI as set forth in the Reorganization Agreement. "Obligations" shall have the meaning given to such term in Section 1 of the Security Agreement. "Officer's Certificate" with respect to any person shall mean a certificate executed on behalf of such person by a Responsible Officer who has made or caused to be made such examination or investigation as is necessary to enable such Responsible Officer to express an informed opinion with respect to the subject matter of such Officer's Certificate. "Operating Lease" shall mean, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the lessee at any time) of any Property (whether real, A-30 193 personal or mixed) which is not a Capitalized Lease other than any such lease in which that Person is the lessor. "Operative Agreements" shall mean the following: the Participation Agreement, the Agency Agreements, the Trust Agreement, the Certificates, the Credit Agreement, the Notes, the Lease, the Lease Supplements (and memoranda of the Lease and each Lease supplement in a form reasonably acceptable to the Agent), the Fairchild Sublease, the Collateral Assignment of Sublease, the Joinder Agreements, the Security Agreement, the Mortgage Instruments, the other Security Documents, the Deeds and Bills of Sale, the Veritas SNDA, the Fairchild SNDA, the Purchase Agreement, the Purchase Agreement Assignment, the Indemnity Agreements, the Raytheon Indemnity Assignment and any and all other agreements, documents and instruments executed in connection with any of the foregoing. "Original Executed Counterpart" shall have the meaning given to such term in Section 5 of Exhibit A to the Lease. "Overdue Interest" shall mean any interest payable pursuant to section 2.8(b) of the Credit Agreement. "Overdue Rate" shall mean (a) with respect to the Loan Basic Rent, and any other amount owed or with respect to the Credit Agreement or the Security Documents, the rate specified in Section 2.8(b) of the Credit Agreement, (b) with respect to the Lessor Basic Rent, the Holder Yield and any other amount owed under or with respect to the Trust Agreement, the Holder Overdue Rate, and (c) with respect to any other amount, the amount referred to in clause (y) of Section 2.8(b) of the Credit Agreement. "Owner Trustee," "Borrower" or "Lessor" shall mean First Security Bank, National Association, not individually, except as expressly stated in the various Operative Agreements, but solely as the Owner Trustee under the VS Trust 1999-1, and any successor, replacement and/or additional Owner Trustee expressly permitted under the Operative Agreements. "Parcel Sale Requirements" shall have the meaning given to such term in Section 20.1 of the Lease. "Parent" shall mean Veritas Holding Corporation, a Delaware corporation. "Participant" shall have the meaning given to such term in Section 9.7 of the Credit Agreement. "Participation Agreement" shall mean the Participation Agreement dated on or about the Initial Closing Date, among the Lessee, the Guarantors, the owner Trustee, not in its individual capacity except as expressly stated therein, the Holders, the Lenders and the Agent. A-31 194 "Payment Date" shall mean any Scheduled Interest Payment Date and any date on which interest or Holder Yield in connection with a prepayment of principal on the Loans or of the Holder Advances is due under the Credit Agreement or the Trust Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. "Pension Plan" shall mean a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer Plan), and to which any Credit Party or any ERISA Affiliate may have any liability, including without limitation any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five (5) years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Acquisition" shall mean a statutory merger, the acquisition of all of the Capital Stock of another Person or all or substantially all of the assets of another Person, provided that each of the following conditions are satisfied: (a) prior to such acquisition, the Lessee shall deliver to the Agent and the Majority Secured Parties a Pro Forma Compliance Certificate demonstrating that after giving effect to such acquisition on a pro forma basis, as if such acquisition had occurred on the first day of the twelve month period ending on the last day of the Lessee's most recently completed fiscal year, the Credit Parties would have been in compliance with all the financial covenants set forth in Section 8.3A(b), (b) the acquisition is consummated pursuant to a negotiated acquisition agreement and involves the purchase of a business similar to the business of the Lessee as of the Initial Closing Date, (c) after giving effect to the acquisition, the representations and warranties set forth in Section 6 hereof shall be true and correct in all material respects on and as of the date of such acquisition with the same effect as though made on and as of such date and (d) no Default or Event of Default exists and is continuing or would result from such acquisition. "Permitted Facility" shall mean a Class A office building to be used and operated by the Lessee in its ordinary course of business as of the Initial Closing Date. "Permitted Investments" shall mean Investments which are (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made by the Lessee or any of its Consolidated Subsidiaries in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) Investments consisting of Capital Stock, obligations, securities or other property received by the Lessee or any of its Consolidated Subsidiaries in settlement of accounts receivable (created in the ordinary course of business) from bankrupt obligors; (iv) Investments existing as of the Closing Date and set forth in Schedule 8.3B(f); (vi) advances or loans to directors, officers, employees, agents, customers or suppliers that do not exceed $5,000,000 in the aggregate at any one time outstanding for the Lessee and its Consolidated Subsidiaries; and (vii) Permitted Acquisitions. A-32 195 "Permitted Liens" shall mean: (a) the respective rights and interests of the parties to the Operative Agreements as provided in the Operative Agreements; (b) the rights of any sublessee or assignee under a sublease or an assignment expressly permitted by the terms of the Lease for no longer than the duration of the Lease; (c) Liens for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 13.1 of the Lease; (d) Liens arising by operation of law, materialmen's, mechanics', workmen's, repairmen's, employees', carriers', warehousemen's and other like Liens relating to the construction of the Improvements or in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than thirty (30) days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (e) Liens of any of the types referred to in clause (d) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor and the Agent have been made), which bonding (or arrangements) shall comply with applicable Legal Requirements, and shall have effectively stayed any execution or enforcement of such Liens; (f) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (g) Liens in favor of municipalities to the extent agreed to by the Lessor or permitted under Section 8.5 of the Participation Agreement; (h) Liens and other matters set forth as exceptions on the title commitment issued under Section 5.3(g) with respect to a particular Property, to the extent such title commitment has been approved by the Agent; and (i) Such other additional matters as may be approved in writing by Lessor. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, governmental authority or any other entity. A-33 196 "Plan" shall mean any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which the Lessee or any of its Consolidated Subsidiaries or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. "Plans and Specifications" shall mean, with respect to Improvements, the plans and specifications for such Improvements to be constructed or already existing, as such Plans and Specifications may be amended, modified or supplemented from time to time in accordance with the terms of the Operative Agreements. "Pre-Existing Environmental Condition" shall have the meaning given to such term in Section 15.2(b) of the Lease. "Pre-Existing Hazardous Substances" shall have the meaning given to such term in Section 15.2(a) of the Lease. "Prime Lending Rate" shall have the meaning given to such term in the definition of ABR. "Pro Forma Compliance Certificate" shall mean a certificate of the chief financial officer of the Lessee delivered to the Agent in connection with any Permitted Acquisition and containing reasonably detailed calculations, upon giving effect to the applicable transaction on a pro forma basis, of the financial covenants set forth in Section 8.3A(h). "Property" shall mean the Land and/or each item of Equipment and the various Improvements in each case as more particularly described on any applicable Lease Supplement, including without limitation each Construction Period Property and each Property for which the Basic Term has commenced. For purposes of Sections 8.3A and 8.3B of the Participation Agreement only, the term "Property" shall mean any interest in any kind of property or asset, whatever real, personal or mixed, or tangible or intangible. "Property Acquisition Cost" shall mean the cost to the Lessor to purchase a Property on a Property Closing Date. "Property Closing Date" shall mean the date on which the Lessor purchases a Property or, with respect to the first Advance, the date on which the Lessor seeks reimbursement for Property previously purchased by the Lessor. "Property Cost" shall mean with respect to the Properties the aggregate amount (and/or the various items and occurrences giving rise to such amounts) of the Loan Property Cost plus the Holder Property Cost for such Property (as such amounts shall be increased equally among all Properties respecting the Holder Advances and the Loans extended from time to time to pay for the Transaction Expenses and indemnity payments pursuant to Section 11.8, in each case of the Participation Agreement). A-34 197 "Purchase Agreement" shall mean that certain Agreement of Purchase and Sale dated as of March 29, 1999 between Fairchild, as seller, and VSC, as purchaser. "Purchase Agreement Assignment" shall mean that certain Assignment of Purchase Agreement dated on or about the applicable Property Closing Date between VSC and the Owner Trustee. "Purchase Option" shall have the meaning given to such term in Section 20.1 of the Lease. "Purchasing Lender" shall have the meaning given to such term in Section 9.8(a) of the Credit Agreement. "Quick Ratio" shall mean, with respect to the Credit Parties and their Consolidated Subsidiaries on a consolidated basis as of the last day of any fiscal quarter, the ratio of (a) the sum of (i) cash and Cash Equivalents on such date plus (ii) the aggregate book value of all accounts receivable on such date to (b) the sum of (i) current liabilities on such date, as determined in accordance with GAAP plus (ii) Operating Lease commitments on such date, as determined in accordance with GAAP plus (iii) the principal balance outstanding of the Indebtedness permitted under Section 8.3B(a)(iv) on such date. "Raytheon" shall mean Raytheon Company, a Delaware corporation and its successors and assigns. "Raytheon Indemnity Assignment" shall mean that certain Assignment dated as of April 23, 1999 and executed by Fairchild in favor of the Owner Trustee. "Real Properties" shall mean the real properties that the Lessee or any Consolidated Subsidiary may own or lease (as lessee or sublessee) from third parties from time to time. "Register" shall have the meaning given to such term in Section 9.9(a) of the Credit Agreement. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Release" shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Substance. "Renewal Term" shall have the meaning specified in Section 2.2 of the Lease. A-35 198 "Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Rent Commencement Date" shall mean the final Completion Date for all Properties in the aggregate. "Reorganization" shall mean that certain plan of reorganization described in Section 1 of the Reorganization Agreement whereby (i) the Lessee will become a Wholly Owned Subsidiary of the Parent and each share of Capital Stock of the Lessee will be converted into one share of Capital Stock of the Parent and (ii) each of the Contributed Companies shall have become a Wholly-Owned Subsidiary of the Parent. "Reorganization Agreement" shall mean that certain Agreement and Plan of Reorganization dated as of October 5, 1998 by and among Veritas Software Corporation (including for all purposes Veritas Surviving Corporation), the Parent, Seagate Technology, Inc., SSI and Seagate Software Network & Storage Management Group, Inc. "Reportable Event" shall have the meaning specified in ERISA. "Reportable Event" shall mean a "reportable event" as defined in Section 4043 of ERISA with respect to which the notice requirements to the PBGC have not been waived. "Requested Funds" shall mean any funds requested by the Lessee or the Construction Agent, as applicable, in accordance with Section 5 of the Participation Agreement. "Requisition" shall have the meaning specified in Section 4.2 of the Participation Agreement. "Responsible Officer" shall mean the Chairman or Vice Chairman of the Board of Directors, the Chairman or Vice Chairman of the Executive Committee of the Board of Directors, the President, any Senior Vice President or Executive Vice President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer, except that when used with respect to the Trust Company or the Owner Trustee, "Responsible Officer" shall also include the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, the Controller and any Assistant Controller or any other officer of the Trust Company or the Owner Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payment" means (i) any dividend or other payment or distribution, direct or indirect, on account of any shares of any class of Capital Stock of the Lessee or any of its Consolidated Subsidiaries, now or hereafter outstanding (including without limitation any payment in connection with any dissolution, merger, consolidation or disposition involving the Lessee or any of its Consolidated Subsidiaries), or to the holders, in their capacity as such, of any shares of A-36 199 any class of Capital Stock of the Lessee or any of its Consolidated Subsidiaries, now or hereafter outstanding, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of the Lessee or any of its Consolidated Subsidiaries, now or hereafter, outstanding and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of the Lessee or any of its Consolidated Subsidiaries, now or hereafter outstanding. "RI/FS" shall have the meaning given to such term in Section 15.2(a) of the Lease. "ROD" shall have the meaning given to such term in Section 15.2(a) of the Lease. "Sale Date" shall have the meaning given to such term in Section 22.1(a) of the Lease. "Sale Notice" shall mean a notice given to the Lessor in connection with the election by the Lessee of its Sale Option. "Sale Option" shall have the meaning given to such term in Section 20.1 of the Lease. "Sale Proceeds Shortfall" shall mean the amount by which the proceeds of a sale described in Section 22.1 of the Lease are less than the Limited Recourse Amount with respect to the Properties if it has been determined that the Fair Market Sales Value of the Properties at the expiration of the term of the Lease has been impaired by greater than ordinary wear and tear during the Term of the Lease. "Scheduled Interest Payment Date" shall mean (a) as to any Eurodollar Loan or Eurodollar Holder Advance, the last day of the Interest Period applicable to such Eurodollar Loan or Eurodollar Holder Advance, (except that with respect to any Eurodollar Loan having an Interest Period of six (6) months or any Eurodollar Holder Advance with Holder Yield calculated on the basis of six (6) month Eurodollar Rate, the term "Scheduled Interest Payment Date" shall mean each applicable three (3) month anniversary date of such Eurodollar Loan or Eurodollar Holder Advance) (b) as to any ABR Loan or any ABR Holder Advance, the fifteenth date of each month, unless such day is not a Business Day and in such case on the next occurring Business Day and (c) as to all Loans and Holder Advances, the date of any voluntary or involuntary payment, prepayment, return or redemption, and the Maturity Date or the Expiration Date, as the case may be. "Secured Parties" shall have the meaning given to such term in the Security Agreement. "Securities Act" shall mean the Securities Act of 1993, as amended, together with the rules and regulations promulgated thereunder. "Security Agreement" shall mean the Security Agreement dated on or about the Initial Closing Date between the Lessor and the Agent, for the benefit of the Secured Parties, and accepted and agreed to by the Lessee. A-37 200 "Security Documents" shall mean the collective reference to the Security Agreement, the Mortgage Instruments, (to the extent the Lease is construed as a security instrument) the Lease, the UCC Financing Statements and all other security documents hereafter delivered to the Agent granting a lien on any asset or assets of any Person to secure the obligations and liabilities of the Lessor under the Credit Agreement and/or under any of the other Credit Documents or to secure any guarantee of any such obligations and liabilities. "Soft Costs" shall mean all costs which are ordinarily and reasonably incurred in relation to the acquisition, development, installation, construction, improvement and testing of the Properties other than Hard Costs, including without limitation structuring fees, administrative fees, legal fees, upfront fees, fees and expenses related to appraisals, title examinations, title insurance, document recordation, surveys, environmental site assessments, geotechnical soil investigations and similar costs and professional fees customarily associated with a real estate closing, the Lender Unused Fee, the Holder Unused Fee, fees and expenses of the Owner Trustee payable or reimbursable under the Operative Agreements and costs and expenses incurred pursuant to Sections 7.3(a) and 7.3(b) of the Participation Agreement. "SSI" shall mean Seagate Software, Inc., a Delaware corporation. "Subordinated Debt" shall mean the $100,000,000 5 1/4% Convertible Subordinated Notes due November 1, 2004 issued by the Lessee pursuant to that certain Indenture dated on or about October 1, 1997 between the Lessee and State Street Bank and Trust Company of California, N.A., as trustee. "Subsidiary" shall mean, as to any Person, any corporation of which at least a majority of the outstanding stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person, or by one (1) or more Subsidiaries, or by such Person and one (1) or more Subsidiaries. "Supplemental Amounts" shall have the meaning given to such term in Section 9.18 of the Credit Agreement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which the Lessee assumes or agrees to pay to the Lessor, the Trust Company, the Holders, the Agent, the Lenders or any other Person under the Lease or under any of the other Operative Agreements including without limitation payments of the Termination Value and the Maximum Residual Guarantee Amount and all indemnification amounts, liabilities and obligations. "Survey" shall mean that certain Survey of the Lands of Raytheon Company dated as of November 21, 1997 and revised as of December 22, 1997, prepared by Brian Kangas Foulk, and approved by the Agent. A-38 201 "Taxes" shall have the meaning specified in the definition of "Impositions". "TCE" shall have the meaning given to such term in Section 15.2(a) of the Lease. "Term" shall mean the Basic Term and each Renewal Term, if any. "Termination Date" shall have the meaning specified in Section 16.2(a) of the Lease. "Termination Event" shall mean (a) with respect to any Pension Plan, the occurrence of a Reportable Event or an event described in Section 4062(e) of ERISA, (b) the withdrawal of any Credit Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the distribution of a notice of intent to terminate a Plan or Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the institution of proceedings to terminate a Plan or Multiemployer Plan by the PBGC under Section 4042 of ERISA, (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (f) the complete or partial withdrawal of any Credit Party or any ERISA Affiliate from a Multiemployer Plan. "Termination Notice" shall have the meaning specified in Section 16.1 of the Lease. "Termination Value" shall mean the sum of (a) any of (i) with respect to all Properties, an amount equal to the aggregate outstanding Property Cost for all the Properties, in each case as of the last occurring Payment Date, or (ii) with respect to a particular Property, an amount equal to the Property Cost allocable to such Property, or (iii) with respect to any portion of any Property for which Lessee has provided a notice of its desire to purchase such portion of such Property pursuant to Section 20.1 of the Lease, an amount equal to the pro rata portion of the Property Cost for such Property allocable to such portion of such Property plus (b) respecting the amounts described in each of the foregoing subclause (i), (ii) or (iii), as applicable, any and all accrued but unpaid interest on the Loans and any and all Holder Yield on the Holder Advances related to the applicable Property Cost, plus (c) to the extent the same is not duplicative of the amounts payable under clause (b) above, all other Rent and other amounts then due and payable or accrued under the Agency Agreement, Lease and/or under any other Operative Agreement (including without limitation amounts under Sections 11.1 and 11.2 of the Participation Agreement and all costs and expenses referred to in clause FIRST of Section 22.2 of the Lease). "Tranche A Commitments" shall mean the obligation of the Tranche A Lenders to make the Tranche A Loans to the Lessor in an aggregate principal amount at any one (1) time outstanding not to exceed the aggregate of the amounts set forth opposite each Tranche A Lender's name on Schedule 2.1 to the Credit Agreement, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, no Tranche A Lender shall be obligated to make Tranche A Loans in excess of such Tranche A Lender's share of the Tranche A Commitments as set forth adjacent to such Tranche A Lender's name on Schedule 2.1 to Credit Agreement. A-39 202 "Tranche A Lenders" shall mean NationsBank, N.A. and shall include the several banks and other financial institutions from time to time party to the Credit Agreement that commit to make the Tranche A Loans. "Tranche A Loans" shall mean the Loans made pursuant to the Tranche A Commitment. "Tranche A Note" shall have the meaning given to it in Section 2.2 of the Credit Agreement. "Tranche B Commitments" shall mean the obligation of the Tranche B Lenders to make the Tranche B Loans to the Lessor in an aggregate principal amount at any one (1) time outstanding not to exceed the aggregate of the amounts set forth opposite each Tranche B Lender's name on Schedule 2.1 to the Credit Agreement, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, no Tranche B Lender shall be obligated to make Tranche B Loans in excess of such Tranche B Lender's share of the Tranche B Commitments as set forth adjacent to such Tranche B Lender's name on Schedule 2.1 to Credit Agreement. "Tranche B Lenders" shall mean NationsBank, N.A. and shall include the several banks and other financial institutions from time to time party to the Credit Agreement that commit to make the Tranche B Loans. "Tranche B Loan" shall mean the Loans made pursuant to the Tranche B Commitment. "Tranche B Note" shall have the meaning given to it in Section 2.2 of the Credit Agreement. "Transaction Expenses" shall mean all Soft Costs and all other costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Agreements and the transactions contemplated by the Operative Agreements including without limitation all costs and expenses described in Section 7.1 of the Participation Agreement and the following: (a) the reasonable fees, out-of-pocket expenses and disbursements of counsel in negotiating the terms of the Operative Agreements and the other transaction documents, preparing for the closings under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Agreements; (b) the reasonable fees, out-of-pocket expenses and disbursements of accountants for any Credit Party in connection with the transaction contemplated by the Operative Agreements; A-40 203 (c) any and all other reasonable fees, charges or other amounts payable to the Lenders, the Agent, the Holders, the Owner Trustee or any broker which arises under any of the Operative Agreements; (d) any other reasonable fee, out-of-pocket expenses, disbursement or cost of any party to the Operative Agreements or any of the other transaction documents; and (e) any and all Taxes and fees incurred in recording or filing any Operative Agreement or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Agreement. "Tribunal" shall mean any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision agency, department, commission, board, bureau or instrumentality of a governmental body. "Trust" shall mean the VS Trust 1999-1. "Trust Agreement" shall mean the Trust Agreement dated on or about the Initial Closing Date between the Holders and the Owner Trustee. "Trust Company" shall mean First Security Bank, National Association, in its individual capacity, and any successor owner trustee under the Trust Agreement in its individual capacity. "Trust Estate" shall have the meaning specified in Section 2.2 of the Trust Agreement. "Type" shall mean, as to any Loan, whether it is an ABR Loan or a Eurodollar Loan. "UCC Financing Statements" shall mean collectively the Lender Financing Statements and the Lessor Financing Statements. "Unanimous Vote Matters" shall have the meaning given it in Section 12.4 of the Participation Agreement. "Unfunded Amount" shall have the meaning specified in Section 3.2 of the Agency Agreement. "Unfunded Liability" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of the Company or any member of the Controlled Group to the PBGC or such Plan under Title IV of ERISA. A-41 204 "Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code as in effect in any applicable jurisdiction. "United States Bankruptcy Code" shall mean Title 11 of the United States Code. "U.S. Person" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "U.S. Taxes" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Veritas SNDA" shall mean that certain Subordination, Non-Disturbance and Attornment Agreement dated as of April 23, 1999 among the Agent, the Owner Trustee and the Lessee. "VSC" shall mean Veritas Software Corporation, a Delaware corporation, and its successors and permitted assigns. "VS Trust 1999-1" shall mean the grantor trust created pursuant to the terms and conditions of the Trust Agreement. "Wholly Owned Subsidiary" of any Person shall mean any Subsidiary 100% of whose voting stock or other equity interests is at the time owned by such Person directly or indirectly through other Wholly Owned Subsidiaries. "Withholdings" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Work" shall mean the furnishing of labor, materials, components, furniture, furnishings, fixtures, appliances, machinery, equipment, tools, power, water, fuel, lubricants, supplies, goods and/or services with respect to any Property. "Year 2000 Compliant" shall have the meaning specified in Section 6.2(v) of the Participation Agreement. "Year 2000 Problem" shall mean the risk that computer applications used by any Credit Party or any of its Subsidiaries or any supplier, vendor or customer of any Credit Party or any of its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999. A-42 EX-10.20 5 GRANT DEED DATED APRIL 23, 1999 1 EXHIBIT 10.20 RECORDING REQUESTED BY DOC #: 14770727 CHICAGO TITLE COMPANY 4/23/1999 8:00 AM AND WHEN RECORDED MAIL TO Veritas Software Corporation 1600 Plymouth St. Mountain View, Ca. 94043 Escrow No. 004852 - SM Order No. 004252 - LM - ---------------------------------SPACE ABOVE THIS LINE FOR RECORDERS' USE------- 350 Ellis St. Mt. View Assessor's Parcel No. GRANT DEED 160-53-003 - -------------------------------------------------------------------------------- THE UNDERSIGNED GRANTOR(S) DECLARE(S) DOCUMENTARY TRANSFER TAX IS $ See attached affidavit [ ] unincorporated area [X] City of Mountain View [X] computed on the full value of the interest or property conveyed, or is [ ] computed on the full value less the value of liens or encumbrances remaining at time of sale, and FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, Fairchild Semiconductor Corporation of California, a Delaware corporation, who acquired title as Raytheon Semiconductor, Inc., a Delaware Corporation hereby GRANT(S) to First Security Bank, National Association, not individually, but solely as Owner Trustee under the VS Trust 1999-1 the following described real property in the City of Mountain View County of SANTA CLARA, State of California: LEGAL DESCRIPTION ATTACHED HERETO AND MADE A PART HEREOF BY REFERENCE Dated April 23, 1999 Fairchild Semiconductor Corporation of California, a Delaware corporation By: /s/ DAVID E. BOXER ------------------------------- its: Executive Vice President By: /s/ JOSEPH D. MARTIN ------------------------------- its: Executive Vice President MAIL TAX STATEMENTS TO PARTY SHOWN ON FOLLOWING LINE. IF NO PARTY SO SHOWN, MAIL AS DIRECTED ABOVE - -------------------------------------------------------------------------------- Name Street Address City, State & Zip 2 Page 1 Escrow No. 804852 -SM LEGAL DESCRIPTION EXHIBIT All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: All of Lot 23, as shown upon that certain Map entitled, "Tract No. 2724 Ellis- Middlefield Industrial Park", which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California, on June 16, 1960 in Book 121 of Maps, at Pages 40, 41, 42, 43 and 44. 3 STATE OF MAINE ) ) SS COUNTY OF CUMBERLAND ) On April 21, before me, Diane L. Lovejoy, personally appeared Joseph D. Martin and Daniel E. Boxer, [x] personally known to me -OR- [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument DIANE L. LOVEJOY the person(s), or the entity upon behalf of which the person(s) acted, executed the PUBLIC NOTARY instrument. STATE OF MAINE WITNESS my hand and official seal. /s/ DIANE L. LOVEJOY ----------------------- SIGNATURE OF NOTARY CAPACITY CLAIMED BY SIGNER - -------------------------- Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] INDIVIDUAL [ ] CORPORATE OFFICER(S) ----------------------------- Title(s) [ ] PARTNER(S) [ ] LIMITED [ ] GENERAL [ ] ATTORNEY-IN-FACT [ ] TRUSTEE(S) [ ] GUARDIAN/CONSERVATOR [ ] OTHER: ---------------------- ---------------------- SIGNER IS REPRESENTING: - ---------------------- Name of Person(s) or Entity(ies) - ---------------------------------- - ---------------------------------- 4 DO NOT RECORD FILOR REQUESTS DO NOT RECORD STAMP VALUE DECLARATION OF TAX DUE: SEPARATE PAPER: (Revenue and Taxation Code 11932-11933) NOTE: This Declaration is not a public record DOCUMENT NO. ------------------------ Property located in: ( ) Unincorporated (x) the City of Mt. View APN: 160-53-003 DOCUMENTARY TRANSFER TAX $39,270.00 (x) Computed on full value ( ) Computed on full value less lien or encumbrances remaining at the time of conveyance CITY CONVEYANCE TAX $117,810.00 "I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct." 4/23/99 [signature illegible] - ------------------------------- ---------------------------------- Date Chicago Title as Escrow Agent REV. 01/97 DO NOT RECORD EX-10.21 6 MEMORANDUM OF LEASE AGREEMENT SUPPLEMENT NO. 1 1 EXHIBIT 10.21 CT 804852ZSMC/I Recording Requested By CHICAGO TITLE COMPANY, and When Recorded Return to: MOORE & VAN ALLEN, PLLC 100 North Tryon Street, Floor 47 Charlotte, North Carolina 28202-4003 Attention: Todd Caraway, Esq. APN # 160-53-003 MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. 1 AND DEED OF TRUST dated as of April 23, 1999 among VERITAS SOFTWARE CORPORATION, as the Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually but solely as Owner Trustee under the VS Trust 1999-1, as the Lessor, and CHICAGO TITLE COMPANY, as Trustee Location of Premises: County of Santa Clara State of California 2 THIS MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. 1 AND DEED OF TRUST ("Memorandum"), dated as of April 23, 1999, is by and among FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, with an office at 79 South Main Street, Salk Lake City, Utah 84111 (hereinafter referred to as "Lessor"), VERITAS SOFTWARE CORPORATION, a Delaware corporation, doing business in California as Veritas Storage Management Corp., with an office at 1600 Plymouth Street, Mountain View, California 94043 (hereinafter referred to as "Lessee") and CHICAGO TITLE COMPANY, with an office at 110 West Taylor Street, San Jose, California 95110 (hereinafter referred to as "Trustee"). WITNESSETH: That for value received, Lessor and Lessee do hereby covenant, promise and agree as follows: 1. CERTAIN DEFINITIONS AND REFERENCE TERMS. To the extent any capitalized term is not defined herein, such term shall have the meaning set forth in Appendix A to that certain Participation Agreement dated as of April 23, 1999 by and among the Grantor, Veritas Software Corporation, a Delaware Corporation, the various parties thereto from time to time, as the Guarantors, the various banks and other lending institutions which are parties thereto from time to time, as Holders and Lenders, and NationsBank, N.A., as Agent for the Lenders and the Holders. 2. DEMISED PREMISES AND DATE OF LEASE. Lessor has leased to Lessee, and Lessee has leased from Lessor, for the Term (as hereinafter defined), certain real property and other property located in Santa Clara County, California which is described in the attached Schedule 1 (the "Property"), pursuant to the terms of a Master Lease Agreement between Lessor and Lessee dated as of April 23, 1999 (as such may be amended, modified, extended, supplemented, restated and/or replaced from time to time, "Lease") and a Lease Supplement No. 1 between Lessor and Lessee dated as of April 23, 1999 (the "Lease Supplement"). 3. TERM, RENEWAL, EXTENSION AND PURCHASE OPTION. The term of the Lease for the Property ("Term") commenced as of April 23, 1999 and shall end as of April 23, 2004, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. The Lease contains provisions for renewal and extension. The tenant has a purchase option under the Lease. 4. TAX PAYER NUMBERS. Lessor's tax payer number: 87-6243518. Lessee's tax payer number: 94-2823068. 5. DEED OF TRUST; POWER OF SALE. (a) It is the intent of the parties that: (i) the Lease constitutes an operating lease from Lessor to the Lessee for purposes of the Lessee's financial 2 3 reporting, (ii) the Lease and other transactions contemplated hereby preserve ownership of the Properties in the Lessee for federal and state income tax and bankruptcy purposes, (ii) the Lease grants to Lessor a Lien on the Property covered thereby, and (iv) the obligations of the Lessee to pay Basic Rent and any part of the Termination Value shall be treated as payments of interest and principal, respectively, for federal and state income tax and bankruptcy purposes. Lessor shall be deemed to have a valid and binding security interest in and Lien on the Property, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Agreements (it being understood and agreed that the Lessee does hereby grant a Lien, and convey, transfer, assign, mortgage and warrant to Lessor and its successors, transferees and assigns, the Property and any proceeds or products thereof, to have and hold the same as collateral security for the payment and performance of the obligations of the Lessee under the Operative Agreements) each of the parties hereto agrees that it will not, nor will it permit any Affiliate to at any time, take any action or fail to take any action with respect to the preparation or filing or any income tax return, including and amended income tax return, to the extent that such action or such failure to take action would be inconsistent with the intention of the parties expressed in this Section 5. (b) Specifically, without limiting the generality of Section 5(a), the parties hereto intend and agree that in the event of any insolvency or receivership proceeds or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting Lessee or Lessor or any collection actions, the transactions evidenced by the Lease and the Operative Agreements shall be regarded as loans made by the Lenders and the Holders to the Lessee. (c) Specifically, without limiting the generality of Section 5(b), the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of the exercise of remedies under the Operative Agreements, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting the Lessee and the Lessor, or any enforcement or collection actions, the transactions evidenced by the Lease are loans made by the Lenders and the Holders as unrelated third party lenders to the Lessee secured by the Property (it being understood that the Lessee hereby mortgages, grants, bargains, sells, releases, confirms, conveys, assigns, transfers and sets over to the Lessor, and grants a security interest in, the Property (consisting of a leasehold deed of trust with respect to all right, title and interest of the Lessee in and to the Land and a fee deed of trust with respect to all right, title and interest of Lessee in and to the fee title to, and reversionary interest in, the Property) and a leasehold deed of trust on the Lessee's leasehold estate under the Lease, all to secure such loans, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease and the other Operative Agreements shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void. As additional security for the Rent, the Termination Value and all other sums owed to the Lessor by the Lessee under the Lease, the Lessee does hereby grant, bargain, sell, transfer and 3 4 convey unto the Trustee, its successors in trust and assigns, IN TRUST, WITH POWER OF SALE, all of the Lessee's right, title and interest in and to the Property, together with all of the right, power and authority of the Lessee to alter, modify or change the terms, conditions and provisions of the Lease and any other lease pertaining to the Property, to consent to any request made by a tenant or landlord pursuant thereto, or to surrender, cancel or terminate the same or to accept any surrender, cancellation or termination of the same, together with all of the options, rights, powers and privileges of the Lessee under any lease pertaining to the Property, whether heretofore or hereafter existing, including, without limitation, the rights and options to purchase the Property contained in Articles XIX and XX of the Lease, and all present and future right, title and interest of the Lessee in and to (i) all refunds, tax abatement agreements, rebates, reserves, deferred payments, deposits, cost; savings, awards and payments of any kind due from or payable by (a) any Governmental Authority, or (b) any insurance or utility company, in each case under clause (a) or (b) above in respect of the Property, and (ii) all refunds, rebates and payments of any kind due from or payable by any Governmental Authority for any taxes, assessments, or governmental or quasi-governmental charges or levies imposed upon the Lessee in respect of the Property, and all plans and specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Property or any construction on the Property, all proceeds (including claims and demands therefor) of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including without limitation the proceeds of insurance and condemnation awards in respect of the Property or any portion thereof, all additional estates, rights and interests hereafter acquired by the Lessee in the Property, or any portion thereof, together with all proceeds of the conversion, whether voluntary or involuntary, of any of the Property into cash or other liquid claims, including without limitation, all awards, payments or proceeds, including interest thereon, and the right to receive the same, which may be made as a result of any casualty, any exercise of the right of eminent domain or deed in lieu thereof, any injury to the Property and any defect in title in the Property or other matter insured under any policy of title insurance, together with attorney's fees, costs and disbursements incurred by the Lessor in connection with the collection of such awards, payments and proceeds, and the Lessee further grants to the Lessor, pursuant to the California Uniform Commercial Code (the "UCC"), a security interest in all present and future right, title and interest of the Lessee in and to any portion of the foregoing property for which a security interest may be created under the UCC. To have and to hold the same whether now owned or held or hereafter acquired unto the Trustee, its successors-in-trust forever, IN TRUST, WITH POWER OF SALE, to secure to the Lessor the payment of the Rent, the Termination Value and all other sums owing to the Lessor under the Lease and the performance and observance of the terms, covenants, warranties, conditions, agreements and obligations under the Lease. If the Lessee shall pay all sums due under the Lease when due according to the terms thereof and shall otherwise fully and properly perform and comply withy all of the obligations, agreements, terms and conditions of the Lease, then this conveyance shall become null and void. In the event of the occurrence of a Lease Event of Default, then the Lessor shall have all rights and remedies set forth in the Lease including, without limitation the right to foreclose its interest (or cause such interest to be foreclosed) in any or all of the Property in accordance with 4 5 applicable law. The Trustee and the Lessor and each of them are authorized prior or subsequent to the institution of any foreclosure proceedings to enter upon the Property or any part thereof and to take possession of the Property and exercise without interference from the Lessee, any and all rights which the Lessee has with respect to the management, possession, operation, protection or preservation of the Property; provided, however, that Lessee shall be entitled, up to 30 days after the termination of the Lessee's occupancy of the Property to enter the property during normal business hours for the purpose of removing its personal property and trade fixtures therefrom at its expense, provided that such personal property and trade fixtures are not Improvements and Lessee repairs any damage to the Improvements caused by such removal. It is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE LESSEE UNDER THIS INSTRUMENT. The proceeds of any sale held by Trustee or Lessor or any receiver or public officer in foreclosure of the liens and security interests evidenced hereby shall be applied first to all costs and expenses of the sale, including but not limited to, reasonable Trustee's fees and then as provided in Section 22.2 of the Lease. If the Lessor so elects, the Trustee may sell any personal property covered by this instrument at one or more separate sales in any manner permitted by the UCC. One or more exercises of the powers herein granted shall not extinguish nor exhaust such powers until the entire property is sold or until the entire amounts evidenced and/or secured by the Lease and the Operative Agreements is paid in full. (d) Specifically, but without limiting the generality of Section 5(b), the Lessor and the Lessee further intend and agree that, with respect to that portion of the Property constituting personal property, for the purpose of securing the Lessee's obligations for the repayment, of the above-described obligations to the Lessor, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the UCC; (ii) the conveyance provided for hereby shall be deemed to be a grant by the Lessee to the Lessor of a lien and security interest in all of the Lessee's present and future right, title and interest in and to such portion of the Property, including but not limited to the Lessee's leasehold estate therein and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property to secure such obligations, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void; (iii) the possession by the Lessor of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the UCC; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as 5 6 applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. The Lessor and the Lessee shall, to the extent consistent with this Memorandum, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if the Lease were deemed create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest with priority over all Liens other than Permitted Liens, under applicable law and will be maintained as such throughout the Term. 6. EFFECT OF MEMORANDUM. The purpose of this instrument is to give notice of the Lease and the Lease Supplement and their respective terms, covenants and conditions to the same extent as if the Lease and the Lease supplement were fully set forth herein. This Memorandum shall not modify in any manner the terms, conditions or intent of the Lease or the Lease Supplement and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or the Lease Supplement or determine the intent of the parties under the Lease or the Lease Supplement. 7. PURCHASE OPTION IN FAVOR OF LESSEE. Lessee has a Purchase Option (as such term is defined in section 20.1 of the Lease) respecting the Property pursuant to and in accordance with the terms and provisions of the Lease, which provides, inter alia, that upon payment by Lessee of the Termination Value and related amounts set forth therein, Lessor shall convey the Property to Lessee in accordance with the procedure set forth therein. 8. RATIFICATION. The terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. In the event of any conflict between the terms of the Lease and the terms of this Memorandum, the terms of the Lease shall control. 9. GOVERNING LAW. THE LEASE AND THIS MEMORANDUM SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF EXCEPT TO THE EXTENT THE LAWS OF CALIFORNIA ARE REQUIRED TO APPLY WITH RESPECT TO THE RECORDING AND ENFORCEMENT OF THIS MEMORANDUM. 10. COUNTERPART EXECUTION. This Memorandum may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. 11. FUTURE ADVANCES; REVOLVING CREDIT. In the event a court of competent jurisdiction rules that this instrument constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties pursuant to Section 5 hereof, then this instrument will be deemed given to secure not only existing financing, but also future advances made pursuant to or as provided in the Lease, whether such advances are obligatory or to be made at the option of the Lessor, or otherwise, to the same extent as if such future advances were made on the date of execution of this instrument, although there may be no advance made at the time of execution 6 7 hereof, and although there may be no financing outstanding at the time any advance is made. To the fullest extent permitted by law, the lien of this instrument shall be valid as to all such amounts, including all future advances, from the time this instrument is recorded. [The remainder of this page has been intentionally left blank.] 7 8 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By: /s/ VAL T. ORTON ------------------------- Name: Val T. Orton ----------------------- Title: Vice President ---------------------- First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President LESSEE: VERITAS SOFTWARE CORPORATION By: ------------------------- Name: ----------------------- Title: ---------------------- Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones, Esq. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By: ------------------------- Name: ----------------------- Title: ---------------------- First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President LESSEE: VERITAS SOFTWARE CORPORATION* By: /s/ KEN LOCHAR ------------------------- Name: Ken Lochar ----------------------- Title: Sr. VP & CFO ---------------------- Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones, Esq. * doing business in California as Veritas Storage Management Corp. 10 STATE OF UTAH COUNTY OF SALT LAKE On April 19, 1999 before me, Mark Graham, Notary Public in and for said County and State, personally appeared Val T. Orton as Vice President of First Security Bank, National Association, not individually but solely as Owner Trustee under the VS Trust 1999-1 personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted executed the instrument. WITNESS my hand and official seal. Signature /s/ Mark Graham ------------------------ [SEAL] Notary Public MARK GRAHAM 79 South Main Salt Lake City, UTAH 84111 My Commission Expires September 10, 2002 State of Utah 11 State of California County of Santa Clara On April 20, 1999 before me, Rosa Elizabeth Carretero -------------- ---------------------------------------------- Date Name and Title of Officer (e.g., "Jane Doe",Notary Public personally appeared [illegible] ------------------------------------------------------- Name(s) of Signer(s) [X] personally known to me - OR - [ ] proved to me on the basis of satisfactory evidence to be the person whose name [NOTARY PUBLIC SEAL] subscribed to the within instrument and acknowledged to me that he executed the ROSA ELIZABETH CARRETERO same in his authorized capacity, and that Comm. #1157948 by his signature on the instrument the NOTARY PUBLIC - CALIFORNIA person, or the entity upon behalf of SANTA CLARA COUNTY which the person acted, executed the My Comm. Expires Oct. 1, 2001 instrument. WITNESS my hand and official seal /s/ ROSA ELIZABETH CARRETERO --------------------------------------- Signature of Notary Public 12 Schedule 1 All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: All of Lot 23, as shown upon that certain Map entitled, "Tract No. 2724 Ellis- Middlefield Industrial Park", which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California, on June 16, 1960 in Book 121 of Maps, at Pages 40, 41, 42, 43 and 44. EX-10.22 7 MEMORANDUM OF LEASE AGREEMENT SUPPLEMENT NO. 2 1 EXHIBIT 10.22 CT 804852 SMC/I Recording Requested By CHICAGO TITLE COMPANY, and When Recorded Return to: MOORE & VAN ALLEN, PLLC 100 North Tryon Street, Floor 27 Charlotte, North Carolina 28202-4003 Attention: Todd Caraway, Esq. APN #160-53-003 MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. 2 AND DEED OF TRUST dated as of April 23, 1999 among VERITAS SOFTWARE CORPORATION as the Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually but solely as Owner Trustee under the VS Trust 1999-1, as the Lessor, and CHICAGO TITLE COMPANY, as Trustee Location of Premises: County of Santa Clara State of California 2 THIS MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. 2 AND DEED OF TRUST ("Memorandum"), dated as of April 23, 1999, is by and among FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, with an office at 79 South Main Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Lessor"), VERITAS SOFTWARE CORPORATION, a Delaware corporation, doing business in California as Veritas Storage Management Corp., with an office at 1600 Plymouth Street, Mountain View, California 94043 (hereinafter referred to as "Lessee") and CHICAGO TITLE COMPANY, with an office at 110 West Taylor Street, San Jose, California 95110 (hereinafter referred to as "Trustee"). WITNESSETH: That for value received, Lessor and Lessee do hereby covenant, promise and agree as follows: 1. CERTAIN DEFINITIONS AND REFERENCE TERMS. To the extent any capitalized term is not defined herein, such term shall have the meaning set forth in Appendix A to that certain Participation Agreement dated as of April 23, 1999 by and among the Grantor, Veritas Software Corporation, a Delaware corporation, the various parties thereto from time to time, as the Guarantors, the various banks and other lending institutions which are parties thereto from time to time, as Holders and Lenders, and NationsBank, N.A., as Agent for the Lenders and the Holders. 2. DEMISED PREMISES AND DATE OF LEASE. Lessor has leased to Lessee, and Lessee has leased from Lessor, for the Term (as hereinafter defined), certain real property and other property located in Santa Clara County, California which is described in the attached Schedule 1 (the "Property"), pursuant to the terms of a Master Lease Agreement between Lessor and Lessee dated as of April 23, 1999 (as such may be amended, modified, extended, supplemented, restated and/or replaced from time to time, "Lease") and a Lease Supplement No. 2 between Lessor and Lessee dated as of April 23, 1999 (the "Lease Supplement"). 3. TERM, RENEWAL, EXTENSION AND PURCHASE OPTION. The term of the Lease for the Property ("Term") commenced as of April 23, 1999 and shall end as of April 23, 2004, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. The Lease contains provisions for renewal and extension. The tenant has a purchase option under the Lease. 4. TAX PAYER NUMBERS. Lessor's tax payer number: 87-6243518. Lessee's tax payer number: 94-2823068. 5. DEED OF TRUST; POWER OF SALE. (a) It is the intent of the parties that: (i) the Lease constitutes an operating lease from Lessor to the Lessee for purposes of the Lessee's financial 2 3 reporting, (ii) the Lease and other transactions contemplated hereby preserve ownership of the Properties in the Lessee for federal and state income tax and bankruptcy purposes, (ii) the Lease grants to Lessor a Lien on the Property covered thereby, and (iv) the obligations of the Lessee to pay Basic Rent and any part of the Termination Value shall be treated as payments of interest and principal, respectively, for federal and state income tax and bankruptcy purposes. Lessor shall be deemed to have a valid ad binding security interest in and Lien on the Property, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Agreements (it being understood and agreed that the Lessee does hereby grant a Lien, and convey, transfer, assign, mortgage and warrant to Lessor and its successors, transferees and assigns, the Property and any proceeds or products thereof, to have and hold the same as collateral security for the payment and performance of the obligations of the Lessee under the Operative Agreements) each of the parties hereto agrees that it will not, nor will it permit any Affiliate to at any time, take any action or fail to take any action with respect to the preparation or filing or any income tax return, including an amended income tax return, to the extent that such action or such failure to take action would be inconsistent with the intention of the parties expressed in this Section 5. (b) Specifically, without limiting the generality of Section 5(a), the parties hereto intend and agree that in the event of any insolvency or receivership proceeds or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting Lessee or Lessor or any collection actions, the transactions evidenced by the Lease and the Operative Agreements shall be regarded as loans made by the Lenders and the Holders to the Lessee. (c) Specifically, without limiting the generality of Section 5(b), the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of the exercise of remedies under the Operative Agreements, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting the Lessee and the Lessor, or any enforcement or collection actions, the transactions evidenced by the Lease are loans made by the Lenders and the Holders as unrelated third party lenders to the Lessee secured by the Property (it being understood that the Lessee hereby mortgages, grants, bargains, sells, releases, confirms, conveys, assigns, transfers and sets over to the Lessor, and grants a security interest in, the Property (consisting of a leasehold deed of trust with respect to all right, title and interest of the Lessee in and to the Land and a fee deed of trust with respect to all right, title and interest of Lessee in and to the fee title to, and reversionary interest in, the Property) and a leasehold deed of trust on the Lessee's leasehold estate under the Lease, all to secure such loans, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease and the other Operative Agreements shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void. As additional security for the Rent, the Termination Value and all other sums owed to the Lessor by the Lessee under the Lease, the Lessee does hereby grant, bargain, sell, transfer and 3 4 convey unto the Trustee, its successors in trust and assigns, IN TRUST, WITH POWER OF SALE, all of the Lessee's right, title and interest in and to the Property, together with all of the right, power and authority of the Lessee to alter, modify or change the terms, conditions and provisions of the Lease and any other lease pertaining to the Property, to consent to any request made by a tenant or landlord pursuant thereto, or to surrender, cancel or terminate the same or to accept any surrender, cancellation or termination of the same, together with all of the options, rights, powers and privileges of the Lessee under any lease pertaining to the Property, whether heretofore or hereafter existing, including, without limitation, the rights and options to purchase the Property contained in Articles XIX and XX of the Lease, and all present and future right, title and interest of the Lessee in and to (i) all refunds, tax abatement agreements, rebates, reserves, deferred payments, deposits, cost; savings, awards and payments of any kind due from or payable by (a) any Governmental Authority, or (b) any insurance or utility company, in each case under clause (a) or (b) above in respect of the Property, and (ii) all refunds, rebates and payments of any kind due from or payable by any Governmental Authority for any taxes, assessments or governmental or quasi-governmental charges or levies imposed upon the Lessee in respect of the Property, and all plans and specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Property or any construction on the Property, all proceeds (including claims and demands therefor) of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including without limitation the proceeds of insurance and condemnation awards in respect of the Property or any portion thereof, all additional estates, rights and interests hereafter acquired by the Lessee in the Property, or any portion thereof, together with all proceeds of the conversion, whether voluntary or involuntary, of any of the Property into cash or other liquid claims, including without limitation, all awards, payments or proceeds, including interest thereon, and the right to receive the same, which may be made as a result of any casualty, any exercise of the right of eminent domain or deed in lieu thereof, any injury to the Property and any defect in title in the Property or other matter insured under any policy of title insurance, together with attorney's fees, costs and disbursements incurred by the Lessor in connection with the collection of such awards, payments and proceeds, and the Lessee further grants to the Lessor, pursuant to the California Uniform Commercial Code (the "UCC"), a security interest in all present and future right, title and interest of the Lessee in and to any portion of the foregoing property for which a security interest may be created under the UCC. To have and to hold the same whether now owned or held or hereafter acquired unto the Trustee, its successors-in-trust forever, IN TRUST, WITH POWER OF SALE, to secure to the Lessor the payment of the Rent, the Termination Value and all other sums owing to the Lessor under the Lease and the performance and observance of the terms, covenants, warranties, conditions, agreements and obligations under the Lease. If the Lessee shall pay all sums due under the Lease when due according to the terms thereof and shall otherwise fully and properly perform and comply with all of the obligations, agreements, terms and conditions of the Lease, then this conveyance shall become null and void. In the event of the occurrence of a Lease Event of Default, then the Lessor shall have all rights and remedies set forth in the Lease including, without limitation the right to foreclosure its interest (or cause such interest to be foreclosed) in any or all of the Property in accordance with 4 5 applicable law. The Trustee and the Lessor and each of them are authorized prior or subsequent to the institution of any foreclosure proceedings to enter upon the Property or any part thereof and to take possession of the Property and exercise without interference from the Lessee, any and all rights which the Lessee has with respect to the management, possession, operation, protection or preservation of the Property; provided, however, that Lessee shall be entitled, up to 30 days after the termination of the Lessee's occupancy of the Property to enter the Property during normal business hours for the purpose of removing its personal property and trade fixtures therefrom at its expense, provided that such personal property and trade fixtures are not Improvements and Lessee repairs any damage to the Improvements caused by such removal. It is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE LESSEE UNDER THIS INSTRUMENT. The proceeds of any sale held by Trustee or Lessor or any receiver or public officer in foreclosure of the liens and security interests evidenced hereby shall be applied first to all costs and expenses of the sale, including but not limited to, reasonable Trustee's fees and then as provided in Section 22.2 of the Lease. If the Lessor so elects, the Trustee may sell any personal property covered by this instrument at one or more separate sales in any manner permitted by the UCC. One or more exercises of the powers herein granted shall not extinguish nor exhaust such powers until the entire Property is sold or until the entire amounts evidenced and/or secured by the Lease and the Operative Agreements is paid in full. (d) Specifically, but without limiting the generality of Section 5(b), the Lessor and the Lessee further intend and agree that, with respect to that portion of the Property constituting personal property, for the purpose of securing the Lessee's obligations for the repayment, of the above-described obligations to the Lessor, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the UCC; (ii) the conveyance provided for hereby shall be deemed to be a grant by the Lessee to the Lessor of a lien and security interest in all of the Lessee's present and future right, title and interest in and to such portion of the Property, including but not limited to the Lessee's leasehold estate therein and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property to secure such obligations, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void; (iii) the possession by the Lessor of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the UCC; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as 5 6 applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. The Lessor and the Lessee shall, to the extent consistent with this Memorandum, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if the Lease were deemed create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest with priority over all Liens other than Permitted Liens, under applicable law and will be maintained as such throughout the Term. 6. EFFECT OF MEMORANDUM. The purpose of this instrument is to give notice of the Lease and the Lease Supplement and their respective terms, covenants and conditions to the same extent as if the Lease and the Lease Supplement were fully set forth herein. This Memorandum shall not modify in any manner the terms, conditions or intent of the Lease or the Lease Supplement and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or the Lease Supplement or determine the intent of the parties under the Lease or the Lease Supplement. 7. PURCHASE OPTION IN FAVOR OF LESSEE. Lessee has a Purchase Option (as such term is defined in Section 20.1 of the Lease) respecting the Property pursuant to and in accordance with the terms and provisions of the Lease, which provides, inter alia, that upon payment by Lessee of the Termination Value and related amounts set forth therein, Lessor shall convey the Property to Lessee in accordance with the procedure set forth therein. 8. RATIFICATION. The terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. In the event of any conflict between the terms of the Lease and the terms of this Memorandum, the terms of the Lease shall control. 9. GOVERNING LAW. THE LEASE AND THIS MEMORANDUM SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF EXCEPT TO THE EXTENT THE LAWS OF CALIFORNIA ARE REQUIRED TO APPLY WITH RESPECT TO THE RECORDING AND ENFORCEMENT OF THIS MEMORANDUM. 10. COUNTERPART EXECUTION. This Memorandum may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. 11. FUTURE ADVANCES; REVOLVING CREDIT. In the event a court of competent jurisdiction rules that this instrument constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties pursuant to Section 5 hereof, then this instrument will be deemed given to secure not only existing financing, but also future advances made pursuant to or as provided in the Lease, whether such advances are obligatory or to be made at the option of the Lessor, or otherwise, to the same extent as if such future advances were made on the date of execution of this instrument, although there may be no advance made at the time of execution 6 7 hereof, and although there may be no financing outstanding at the time any advance is made. To the fullest extent permitted by law, the lien of this instrument shall be valid as to all such amounts, including all future advances, from the time this instrument is recorded. [The remainder of this page has been intentionally left blank.] 7 8 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By: /s/ VAL T. ORTON ------------------------- Name: Val T. Orton ----------------------- Title: Vice President ---------------------- First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President LESSEE: VERITAS SOFTWARE CORPORATION By: ------------------------- Name: ----------------------- Title: ---------------------- Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones, Esq. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By: ------------------------- Name: ----------------------- Title: ---------------------- First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President LESSEE: VERITAS SOFTWARE CORPORATION* By: /s/ KEN LONCHAR ------------------------- Name: Ken Lonchar ----------------------- Title: Sr. VP & CFO ---------------------- Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones, Esq. * doing business in California as Veritas Storage Management Corp. 10 STATE OF UTAH COUNTY OF SALT LAKE On April 21, 1999 before me, Mark Graham, Notary Public in and for said County and State, personally appeared Val T. Orton as Vice President of First Security Bank, National Association, not individually but solely as Owner Trustee under the VS Trust 1999-1 personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted executed the instrument. WITNESS my hand and official seal. Signature /s/ Mark Graham ------------------------ [SEAL] 11 State of California County of Santa Clara On April 20, 1999 before me, Rosa Elizabeth Carretero -------------- ---------------------------------------------- Date Name and Title of Officer (e.g., "Jane Doe, Notary Public") personally appeared Ken Lonchar ------------------------------------------------------- Name(s) of Signer(s) [X] personally known to me - OR - [ ] proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the [SEAL] same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal /s/ ROSA ELIZABETH CARRETERO --------------------------------------- Signature of Notary Public 12 Schedule 1 All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: All of Lot 23, as shown upon that certain Map entitled, "Tract No. 2724 Ellis- Middlefield Industrial Park", which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California, on June 16, 1960 in Book 121 of Maps, at Pages 40, 41, 42, 43 and 44. EX-10.23 8 COLLATERAL ASSIGNMENT OF SUBLEASE 1 EXHIBIT 10.23 CT 804852SMC/I RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: MOORE & VAN ALLEN, PLLC 100 North Tryon Street, Floor 47 Charlotte, North Carolina 28202-4003 Attention: Lea Stromire Johnson (Space Above for Recorder's Use) - ------------------------------------------------------------------------------- APN 160-53-003 COLLATERAL ASSIGNMENT OF SUBLEASE THIS COLLATERAL ASSIGNMENT OF SUBLEASE (as amended, modified, supplemented, restated and/or replaced from time to time, the "Assignment"), dated as of April 23, 1999, is made by Veritas Software Corporation, a Delaware corporation, doing business in California as Veritas Storage Management Corp. ("Sublessor"), having an address of 1600 Plymouth Street, Mountain View, California 94043, to First Security Bank, National Association, not individually but solely as Owner Trustee under the VS Trust 1999-1 (the "Owner Trustee") having an address of 79 South Main Street, Salt Lake City, Utah 84111. To the extent any capitalized term is not defined herein, such term shall have the meaning set forth in Appendix A to the Participation Agreement among the Sublessor, the Owner Trustee, the various banks or other lending institutions which are parties thereto from time to time as Lenders and Holders and NationsBank, N.A., a national banking association, as agent for the Lenders and Holders (the "Participation Agreement"). R E C I T A L S A. The Sublessor is the current sublessor of certain real property more particularly described on Exhibit A attached hereto (the "Premises"), pursuant to a certain sublease agreement dated as of April 23, 1999, between Sublessor, as Sublessor, and Fairchild Semiconductor Corporation, a Delaware corporation, as Sublessee (the sublease together with any and all renewals, extensions, amendments and supplements thereto is hereafter referred to as the "Sublease"). B. As a condition to the execution of the Operative Agreements, Sublessor is required to enter into this Assignment to secure the payment and performance of any and all indebtedness, liabilities, obligations and other amounts owing under the Operative Agreements to Owner Trustee, whether now or hereafter disbursed and existing, as amended, modified, extended, renewed or replaced from time to time as well as the payment and performance obligations related to this Assignment (collectively, the "Liabilities"). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor hereby agrees with Owner Trustee as follows: 2 1. Subject to the provisions of Paragraph 2 of this Assignment, and as collateral security for the payment and performance of the Liabilities, Sublessor hereby assigns, transfers and sets over to Owner Trustee any and all of Sublessor's right, title and interest, powers, privileges and other benefits as sublessor, grantor, lessee or grantee under the Sublease, including, without limitation, (a) proceeds thereof, (b) the right to enter upon, take possession of and use any and all property leased or granted to Sublessor, (c) the right to make all waivers and agreements, to give all notices, consents and releases, to take all action upon the happening of any default giving rise to a right in favor of Sublessor under the Sublease and (d) to do any and all other things whatsoever which Sublessor is or may become entitled to do under the Sublease. 2. During the occurrence and continuance of a Lease Event of Default, Sublessor agrees that, to the extent permitted by law, at the option of Owner Trustee and in addition to such other rights and remedies as may be afforded to Owner Trustee under the Operative Agreements, by law or in equity, Owner Trustee shall have the right, without giving further notice to or obtaining the consent of Sublessor, to exercise, enforce or avail itself of any of the rights, powers, privileges, authorizations or benefits assigned and transferred to Owner Trustee pursuant to this Assignment, including, without limitation, the right to enter upon and take possession of the Premises by or through its own action or that of any agents or assigns, in which event Sublessor agrees to peacefully vacate and surrender the Premises to Owner Trustee or its agents or assigns, together with all improvements, appurtenances, machinery, equipment, furniture, furnishings, fixtures and other property of Sublessor then situated thereon or attached thereto to the extent such have been financed pursuant to the Operative Agreements or to the extent such is reasonably required to operate the Premises. Thereafter, any expenses, including, without limitation, rent incurred by Owner Trustee in connection with its entry upon and possession of the Premises and the aforesaid appurtenances thereto and improvements thereon shall, to the extent permitted by applicable law, be deemed to be additional obligations of Sublessor pursuant to the Operative Agreements. 3. This Agreement is executed only as security for the Liabilities and, therefore, the execution and delivery of this Assignment shall not subject Owner Trustee to, or transfer or pass to Owner Trustee or in any way affect or modify, the liability of Sublessor under the Sublease, it being understood and agreed that, notwithstanding this Assignment or any subsequent assignment, all of the obligations of Sublessor to each and every other party, under the Sublease shall be and remain enforceable by such other party, its successors and assigns, against, but only against, Sublessor or persons other than Owner Trustee and its successors and assigns. 4. To protect the security afforded by this Assignment, Sublessor agrees as follows: (a) Subject to any express provision within the respective Sublease which may grant the Sublessor a right to contest, Sublessor shall faithfully abide by, perform and discharge each and every material obligation, covenant, condition, duty and agreement which the Sublease provides are to be performed by Sublessor. 2 3 (b) Should Sublessor fail to perform or discharge its obligations or duties under the Sublease as required in Paragraph 4(a) above or under this Assignment, then Owner Trustee may, but shall have no obligation to (and shall not thereby release Sublessor from any Liability hereunder), perform or discharge any such obligation or duty under the Sublease to such extent as Owner Trustee may deem necessary or advisable to protect the security provided hereby, including appearing in and defending any action or proceeding purporting to affect the security hereof or the rights or powers of Owner Trustee hereunder. In exercising any such powers, Owner Trustee may pay necessary and advisable costs (including, without limitation, reasonable attorneys' fees and expenses), and all such expenses paid or incurred by Owner Trustee shall be additional obligations of Sublessor pursuant to the Operative Agreements. (c) During the occurrence and continuance of a Lease Event of Default, Owner Trustee shall have the right to assign Sublessor's rights and interests in the Sublease. 5. During the occurrence and continuance of a Lease Event of Default, Sublessor does hereby irrevocably appoint Owner Trustee as Sublessor's true and lawful attorney, with full power (in the name of Sublessor or otherwise) to ask, require, demand, receive and give acquittance for every payment under or arising out of the Sublease to which Sublessor is or may become entitled, including, without limitation, to enforce compliance by any other party with any term or provision of the Sublease, to endorse each and every check or other instrument or order in connection therewith, and to file any claim, take any action, or institute any proceeding which Owner Trustee may deem to be necessary or advisable. 6. Until the Liabilities are fully paid and discharged, this Assignment and all representations, warranties, covenants, agreements, grants of security and other terms and provisions hereof shall remain in full force and effect. No termination or cancellation (regardless of cause or procedure) of this Assignment shall in any way affect or impair the powers, obligations, duties, rights and liabilities of Sublessor or Owner Trustee in any way or respect relating to any transaction or event occurring prior to such termination or cancellation which shall survive such termination or cancellation. 7. Sublessor shall, from time to time, do and perform any other act or acts and shall execute, acknowledge, deliver and file, register, record (and shall re-file, re-register and re-record whenever required) any further instruments, including, without limitation, any extensions and renewals thereof, or substitutions therefor required by law or reasonably requested by Owner Trustee in order to confirm, or further assure, the interests of Owner Trustee hereunder. Without limiting the foregoing, the Sublessor hereby authorizes the Owner Trustee to take all such actions and measures to record this Assignment in appropriate real estate offices where the Premises are located. 8. Sublessor shall cause a copy of every notice or communication received from any of the other parties to the Sublease, which notices or communication shall notify Sublessor of any material default, event of default, material breach or other material violation on the part of 3 4 Sublessor under the Sublease, to be delivered to Owner Trustee within ten (10) business days of Sublessor's receipt of said notice or communication in the manner and at the place provided for in the Participation Agreement for the giving of notices thereunder, or at such other address or in such other manner as Owner Trustee shall designate. Sublessor shall similarly notify Owner Trustee upon receiving notice of the filing or any bankruptcy petition by or against, or the institution of any insolvency or reorganization proceeding involving the lessee under the Sublease and any material notices, summonses, pleadings, applications and other documents received by Sublessor in connection with any such proceeding. 9. Owner Trustee hereby agrees with Sublessor so long as no Lease Event of Default has occurred and is continuing, (i) Owner Trustee shall neither exercise, enforce or avail itself of, nor seek to exercise, enforce or avail itself of any of the rights, powers, privileges, authorizations or benefits assigned and transferred to Owner Trustee pursuant to this Assignment, and (ii) Sublessor may exercise or enforce, or seek to exercise or enforce such rights, powers, privileges, authorizations or benefits under the Sublease. 10. This Agreement shall be governed and controlled by the internal laws of the State of California. 11. If any provision of this Assignment or the application thereof to Sublessor or any circumstance is held invalid or unenforceable, the remainder of this Assignment and the application of such provision will not be affected thereby and the provisions of this Agreement shall be severable in any such instance. 12. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Sublessor, Owner Trustee and their respective successors and assigns, all subject to any restriction on successions or assignments provided for in the Operative Agreements. 13. Any notice(s) required or desired to be given to Owner Trustee or Sublessor hereunder shall be delivered to the recipient party in the manner and at the place provided for in the Participation Agreement for the giving of notices thereunder. 4 5 IN WITNESS WHEREOF, this instrument is executed by Sublessor as of the date hereinabove written. VERITAS SOFTWARE CORPORATION* By: /s/ KEN LONCHAR ------------------------------- Name: Ken Lonchar ----------------------------- Title: Sr. VP & CFO ----------------------------- * doing business in California as Veritas Storage Management Corp. 6 STATE OF CALIFORNIA COUNTY OF SANTA CLARA On April 20, 1999 before me, Rosa Elizabeth Carretero, Notary Public in and for said County and State, personally appeared Ken Lonchar as CFO of Veritas Software Corporation, a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted executed the instrument. WITNESS my hand and official seal. Signature /s/ Rosa Elizabeth Carretero ---------------------------- [SEAL] 7 Exhibit A All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: All of Lot 23, as shown upon that certain Map entitled, "Tract No. 2724 Ellis- Middlefield Industrial Park", which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California, on June 16, 1960 in Book 121 of Maps, at Pages 40, 41, 42, 43 and 44. EX-10.24 9 SUBLEASE AGREEMENT DATED APRIL 23, 1999 1 EXHIBIT 10.24 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT ("Sublease"), dated for reference purposes as of April 23, 1999, is made by and between VERITAS SOFTWARE CORPORATION, a Delaware corporation ("Sublandlord"), and FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation ("Subtenant"). R E C I T A L S WHEREAS, Subtenant has agreed to sell fee title of certain real property consisting of approximately 19.61 acres located at 350 Ellis Street in the City of Mountain View, County of Santa Clara, State of California (the "Land") together with certain improvements thereon consisting of an approximately one hundred nineteen thousand (119,000) square foot building (and certain leasehold improvements situated therein) the "Main Building") and that certain machine/equipment area located adjacent to the Main Building (the "Equipment Area") in the approximate location shown on the site plan attached hereto as Exhibit "A" (the Main Building and the Equipment Area (but not the Subtenant Improvements described in Section 2(a) of this Sublease) are collectively referred to herein as the "Premises" and the Land and the Premises are collectively referred to as the "Property") to Sublandlord pursuant to that certain Agreement of Purchase and Sale dated as of March 22, 1999 by and between Subtenant and Lessor (the "Purchase Agreement"). WHEREAS, Sublandlord has agreed to (i) assign all of its rights and benefits (but none of its liabilities or obligations as further set forth in Section 11.1 of the Purchase Agreement) pursuant to the Purchase Agreement to VS Trust 1999-1, a ___________ ("Lessor"), and, (ii) upon Lessor's purchase of the Property, lease the Property from Lessor. WHEREAS, Lessor, Sublandlord and Subtenant have agreed that certain leasehold improvements located in and about the Main Building and Equipment Area are to remain the property of the Subtenant (or Raytheon Company) following the close of escrow under the Purchase Agreement, and not withstanding such sale shall be Subtenant's (or Raytheon Company's) sole and exclusive property under this Sublease for the duration hereof and thereafter as indicated, consisting of the Subtenant Improvements, as defined in Section 2(a) of this Sublease. WHEREAS, Subtenant desires to sublease the Premises from Sublandlord on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for all other consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, Sublandlord and Subtenant agree as follows: 1. Re-Affirmation and Incorporation of Recitals. Each of Sublandlord and Subtenant acknowledges and agrees that the Recitals set forth above (a) are true and correct in all 2 respects and (b) are hereby incorporated herein by this references as if said Recitals were set forth herein as representations and warranties of the Sublandlord and Subtenant. 2. Demise of Premises. Sublandlord hereby subleases to Subtenant and Subtenant hereby leases from Sublandlord the Premises and Subtenant Improvements (as defined herein). (a) Exclusive Use of Subtenant Improvements. Sublandlord and Subtenant hereby acknowledge and agree that the Premises include certain improvements owned by Subtenant or Raytheon Company, which shall remain Subtenant's (or Raytheon Company's) sole and exclusive property during the term of this Sublease and which shall be removed (except for the items identified in subparagraphs (viii), (x) and (xvi) below) by Subtenant upon the expiration or earlier termination of this Sublease in accordance with Section 32 of this Sublease, and consisting of the following (the "Subtenant Improvements"), situated on or under the Land in the areas designated as areas A through S, inclusive, on the site plan attached hereto as Exhibit "B": (i) storage tanks on a concrete pad, (ii) process wastewater treatment plant with tanks within cement vault, (iii) electric boxes on concrete pad, (iii) incinerator on a concrete pad, (iv) diesel tank and emergency electrical generator on concrete pad, (v) concrete pads, (vi) concrete block chemical storage building, (vi) hazardous waste tank in steel vault, (vii) two (2) metal buildings (it being understood and agreed that Subtenant shall have the right to relocate the northwestern most metal building in one of the areas designated as "I" on the aforementioned site plan to a location within the dotted "Excluded Area" shown on Exhibit "A" attached hereto), (viii) groundwater treatment system, (ix) cooling towers on concrete pad, (x) soil vapor extraction system (fenced area), (xi) metal sheds, (xii) refrigeration unit on concrete pad, (xiii) groundwater office trailer (portable), (xiv) metal covers over concrete pads, (xv) PH meters for process wastewater treatment plant, (xvi) electrical for soil vapor extraction system on concrete pad, and (xvii) concrete block storage building. The parties hereto acknowledge that a hydrogen tank is situated on the Developable Land (as defined below) in the northwest corner of the Developable Land, which is also included as part of the Subtenant Improvements. During the term of this Sublease, Subtenant shall have access over the Developable Land to use, maintain and repair, if necessary, the Subtenant's hydrogen tank and related piping. In addition, Sublandlord's leasehold estate includes the rights of Lessor to that certain Air Products pipeline containing gaseous nitrogen exists on or under the Developable Land and during the term of this Sublease, Subtenant shall have the exclusive right to use such pipeline and shall have access over the Developable Land to use, maintain and repair, if necessary, the Air Products pipeline and related piping. All of the foregoing rights of Subtenant shall be exercised at Subtenant's sole cost and expense, and Subtenant shall indemnify, defend (with counsel acceptable to Sublandlord) and hold Sublandlord and Sublandlord's Agents and the Lenders and Lenders' Agents harmless from and against any and all claims, damages, losses, causes of action, judgments, obligations and liabilities, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys fees and costs), on account of or arising out of the Subtenant's use, ownership, maintenance, repair, alteration or removal of any of the Subtenant Improvements (except for the items identified in subparagraphs (viii), (x) and (xvi) above), the hydrogen tank or the Air Products pipeline and related piping and improvements on or following the Commencement Date of this Sublease. Subtenant's obligations under the preceding sentence shall survive the expiration or earlier termination of this Sublease. -2- 3 (b) Exclusive Use of Excluded Area. Subject to the terms and conditions set forth in Paragraph 3 below, Subtenant shall have the exclusive right, during the term of this Sublease, to use that portion of the Land, consisting of eleven and forty-nine hundredths (11.49) acres (the "Excluded Area"), that is bounded by the dotted lines shown on Exhibit "A" and which is referred to as the "Excluded Area" on such Exhibit "A". (The Main Building and the Equipment Area are located within the Excluded Area). Subject to the terms and conditions hereof, Subtenant shall have the right to use that portion of the Excluded Area which does not have buildings, structures, improvements or other property on it for parking, ingress and egress and other uses reasonably related to Subtenant's business. The balance of the Land that is located outside of the dotted lines shown on Exhibit "A" and which is not part of the Excluded Area, consisting of eight and twelve one hundredths (8.12) acres, is referred to herein as the "Developable Land." Subtenant shall have no rights to use or occupy any portion of the Developable Land during the Term hereof without Sublandlord's prior written approval in each instance, except as permitted under Section 2(a) above. (c) Acceptance of Premises and Subtenant Improvements. Subtenant acknowledges that prior to the Commencement Date of this Sublease (as defined below), Subtenant owned the Premises, the Land and certain of the Subtenant Improvements. Subtenant is familiar with the condition of the Premises, the Subtenant Improvements, the Land and the Subtenant Improvements and, as of the Commencement Date of this Sublease, Subtenant accepts the Premises, the Excluded Area and the Subtenant Improvements in their "as is" condition. As of the Commencement Date, Subtenant shall be deemed to have accepted the Premises, the Subtenant Improvements and the Excluded Area subject to all applicable laws and other matters of public record governing the use of the Premises, the Subtenant Improvements and the Excluded Area. Subtenant acknowledges that neither Sublandlord nor Sublandlord's agents have made any representation or warranty as to the suitability of the Premises, the Subtenant Improvements or the Excluded Area for the conduct of Subtenant's business, the condition of the Premises or the Subtenant Improvements, or the use of occupancy which may be made thereof and Subtenant has independently investigated and is satisfied that the Premises and the Excluded Area is and will be suitable for Subtenant's intended use. Any agreements, warranties or representations not expressly contained herein (or in the Exhibits attached hereto) shall in no way bind either Sublandlord or Subtenant, and Sublandlord and Subtenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Sublease (or in the Exhibits attached hereto). This Sublease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Sublease shall be effective until set forth in a writing signed by both Sublandlord and Subtenant. (d) Lessor Inspection. Notwithstanding the other terms of this Sublease, Lessor and any Lender shall have and retain the right to inspect any portion of the Premises from time to time upon no less than twenty-four hours prior written notice to Subtenant. 3. Excluded Area. (a) Subtenant's Rights in Excluded Area. In addition to Subtenant's lease of the Premises described above, during the Sublease Term, Subtenant shall have the following rights with respect to the Excluded Area (exclusive of the Main Building) contained within the -3- 4 dotted lines shown on Exhibit "A" attached hereto: (i) the exclusive right to use all of the parking spaces within the Excluded Area; (ii) the exclusive right to use the Excluded Area (exclusive of the Main Building for ingress and egress, and (ii) such other rights as are reasonably necessary and convenient to Subtenant's possession and use of the Premises and/or Subtenant Improvements or performance of Subtenant's rights and obligations under this Sublease (including, without limitation, the right to use the access roads, sidewalks and landscaped areas and other facilities on the Excluded Area). (b) Reserved Rights of Sublandlord. (i) The provisions of Paragraph 2(b) to the contrary notwithstanding, Sublandlord reserves unto itself (as owner of the Developable Land for federal income tax purposes, as lessee of the Developable Land for financial accounting purposes and as Lessor's Construction Agent), to Lessor (as owner of the Developable Land) and to tenants of any building which may be constructed on the Developable Land, and to the agents, employees, servants, invitees, contractors, guests, employees, customers and representatives of such tenants, the non-exclusive right to use an approximately twenty-four (24) foot wide strip of land along the northern border of the Excluded Area (wide enough to accommodate one lane of traffic in each direction), for pedestrian and vehicular ingress and egress (but not parking) and access to and from the Developable Land and Ellis Street. (ii) During the Sublease Term, Sublandlord agrees not to make any material changes in the size, shape, location, amount and extent of the Excluded Area or materially or adversely impair use of or access to the Main Building, Equipment Area or Subtenant Improvements. (iii) Provided that Subtenant's use, occupancy and enjoyment of the Premises, the Equipment Area and the Excluded Area or access to the same is not unreasonably interfered with, Sublandlord shall have the right to close, at reasonable times and upon reasonable prior notice (except in the case of an emergency), all or any portion of the Excluded Area for the prevention of a dedication thereof, or the accrual of rights of any person or public therein. (iv) Sublandlord further reserves, for itself, Lessor and their respective agents, the right to: (A) Retain and use in the event of an emergency only (with immediate telephonic notice to Subtenant), one set of passkeys to enter the Premises but no keys shall be required to be given to Sublandlord to provide access to any areas reasonably reserved by Subtenant from Sublandlord access based upon the proprietary nature of any work being performed therein. (B) Approve the weight, size, placement and time and manner of movement within the Building of any safe, central filing system or other heavy article of Subtenant's property; provided that such approval shall not be unreasonably withheld for any such article reasonably required for the operation of Subtenant's business in the Premises. Subtenant shall move its property entirely at its own risk. -4- 5 (C) Show the Premises to prospective purchasers, subtenants, brokers, lenders, investors, rating agencies or others at any reasonable time, provided that sublandlord gives at least 24 hours prior written notice to Subtenant, agrees to be escorted by an employee of Subtenant and does not materially interfere with Subtenant's use of the Premises. (D) To take any other reasonable action in connection with the operation, maintenance, preservation and/or development of the Property provided the same shall not interfere with Subtenant's rights under this Sublease. (c) Maintenance by Subtenant. During the Sublease Term, Subtenant shall be responsible, at its sole cost, for maintaining the Excluded Area (and Main Building, the Equipment Area and the Subtenant Improvements) in such manner as is suitable to satisfy Subtenant's business needs. (d) Parcelization of Land. Subtenant acknowledges and agrees that, at any time following the Commencement Date of this Sublease, Sublandlord shall have the right, in its sole and absolute discretion, subject to obtaining any necessary governmental approvals required, to subdivide or parcelize the Land into two or more separate, legal parcels (one of which shall consist of the Excluded Area) so long as (i) Subtenant's use, occupancy, and enjoyment of the Premises and the Subtenant Improvements, and (ii) its rights hereunder, including, without limitation, its parking rights, are not materially diminished. 4. Sublease Term. (a) Sublease Term. The term of this Sublease ("Sublease Term") shall be for the period commencing on the date on which escrow closes on the acquisition of fee title to the Land (and the Premises) from Subtenant (the "Commencement Date") and ending (unless sooner terminated in accordance with the terms of this Sublease) on December 31, 2000. (b) Early Termination. Subtenant shall have the right to terminate or cancel this Sublease at any time prior to the expiration of the Sublease Term provided Subtenant delivers to Sublandlord not less than twelve (12) months' prior written notice of such termination. Based on the foregoing, in no event shall the effective date of any early termination of this Sublease pursuant to this Subparagraph 4(b) occur prior to the date twelve (12) months following the Commencement Date of this Sublease. Upon the effective date of such early termination of the Sublease, all rights and obligations of the parties hereunder (excepting therefrom the rights and obligations that expressly survive the termination of this Sublease including Subtenant's and Sublandlord's (or Lessor's, as the case may be) obligations under Paragraph 32 below) shall cease. 5. Rent. (a) Time of Payment. Subtenant shall pay to Sublandlord as base rent for the Premises the sum specified in Subparagraph 5(b) below (the "Monthly Installment") each month in advance on the first day of each calendar month, without deduction or offset, except as expressly provided hereunder, and without prior notice or demand commencing on the Commencement Date (as defined above) and continuing through the Sublease Term, together -5- 6 with such additional rents as are payable by Subtenant to Sublandlord under the terms of this Sublease. The Monthly Installment for any period during the Sublease Term which is less than one (1) full month shall be a pro rate portion of the Monthly Installment based upon a thirty (30) day month. (b) Monthly Installment. The Monthly Installment of rent to be paid each month by Subtenant to Sublandlord during the Sublease Term, subject to adjustment as provided below, shall be equal to one-twelfth (1/12th) of an amount that will yield Sublandlord an eight percent (8%) annual return on the portion of the Purchase Price paid by Sublandlord that is allocable to the Excluded Area and the improvements thereon. The acreage of the Excluded Area shall deemed to be 11.49 acres, and the acreage of the Land shall be deemed to be 19.61 acres. The portion of the Purchase Price that is allocable to the Excluded Area and the improvements thereon shall be determined by multiplying $32,200,000 by a fraction, the numerator of which is the acreage included in the Excluded Area (11.49 acres) and the denominator of which is the total acreage included in the entire Land (19.61 acres). Thus, the Monthly Installment shall be equal to $125,778.68 per month. Once the allocation of FAR Funds (as defined in the Purchase Agreement) has been determined pursuant to Section 6.3(j) of the Purchase Agreement, the Purchase Price used to calculate the Monthly Installment, and thus the Monthly Installment, shall be adjusted accordingly. (c) Additional Rent. All taxes, utilities, services, insurance premiums, late charges, costs, expenses and other sums which Subtenant is required to pay under this Sublease, and all reasonable damages, costs, and attorneys' fees and expenses which Sublandlord may incur by reason of any default of Subtenant or failure on Subtenant's part to comply with the terms of this Sublease, shall be deemed to be additional rent ("Additional Rent") and shall be paid, commencing on the Commencement Date, in addition to the Monthly Installment of rent, and, in the event of nonpayment by Subtenant, Sublandlord shall have all of the rights and remedies with respect thereto as Sublandlord has for the nonpayment of the Monthly Installment of rent. Monthly Installments of rent and Additional Rent are collectively referred to herein as "Rent". (d) Place of Payment. Rent shall be payable in lawful money of the United States of America to Sublandlord at 1600 Plymouth Street, Mountain View, California 94043, Attn: __________ or to such other person(s) or at such other place(s) as Sublandlord may designate in writing. Upon designation of another person to receive the Rent, all subsequent payments of Rent shall be directed to such other person until such other person given written notice to direct such payments elsewhere. (e) Late Payments. Any Monthly Installment of rent and Additional Rent due under this Sublease that is not received by sublandlord within five (5) days after written notice that such sum is past due shall bear interest at the Permitted Rate (as defined in Paragraph 31) from the date due until fully paid. The payment of interest shall not cure any default by Subtenant under this Sublease. In addition, Subtenant acknowledges that the late payment by Subtenant to Sublandlord of rent will cause Sublandlord to incur costs not contemplated by this Sublease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Sublandlord by the terms of any ground -6- 7 lease, mortgage or trust deed covering the Premises. Accordingly, if any Monthly Installment of rent and Additional Rent due from Subtenant shall not be received by Sublandlord or Sublandlord's designee within five (5) days after written notice that such sum is past due, then Subtenant shall pay to Sublandlord, in addition to the interest provided above, a late charge in a sum equal to Two Hundred Fifty Dollars ($250.00) for each delinquent payment. Acceptance of a late charge by Sublandlord shall not constitute a waiver of Subtenant's default with respect to the overdue amount, nor shall it prevent Sublandlord from exercising any of its other rights and remedies. (a) Holdover Rent. If Subtenant fails to vacate the Premises or commence demolition of the Main Building and related improvements (the removal of any asbestos and all other Hazardous Materials, if any, in the Main Building shall constitute, among other things, demolition for purposes of this paragraph) as set forth in more detail in Paragraphs 32(b)-(d) on or before the earlier of January 1, 2001 or the date thirty (30) days after the effective date of the earlier termination of this Sublease, as such earlier date may be extended pursuant to the terms below, Subtenant shall pay to Sublandlord an amount equal to two hundred percent (200%) of the daily Rent due under this Sublease immediately prior to such date for each day that Subtenant fails to vacate the Premises or commence demolition of the Main Building and related improvements as set forth above. For the purposes of the immediately preceding sentence, Subtenant shall be deemed to have commenced demolition of the Main Building and related improvements or commenced removal of asbestos and all other Hazardous Materials, if any, in the Main Building if Subtenant has undertaken activity in such regards which evidences Subtenant's clear and good faith intention to complete such demolition and remediation in an expeditious manner. Sublandlord's acceptance of any payments pursuant to this Paragraph shall not constitute a consent to Subtenant's holdover or result in any renewal of this Sublease. The provisions set forth herein are in addition to and do not effect Sublandlord's right of re-entry or any other rights of Sublandlord under this Sublease or at law. 6. Use of Premises. (a) Restrictions on Use. Subtenant shall use the Premises (and the Subtenant Improvements) for research and development, manufacturing, general office purposes, and any other legally permitted use, provided such use is in conformance and compliance with all applicable governmental laws, regulations, rules and ordinances including, without limitation, all applicable environmental and zoning and land use laws, regulations, rules, and ordinances (collectively, "Law" or "Laws"). Except as required under Section 32 hereof, Subtenant shall not commit or suffer to be committed, any waste upon the Premises, the Subtenant Improvements or the Excluded Area, or any nuisance, or allow the Premises, the Subtenant Improvements or the Excluded Area to be used for any unlawful purpose or any purpose not permitted by this Sublease. Subtenant, at its sole cost and expense, shall procure, maintain and make available for Sublandlord's reasonable inspection throughout the Lease Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Subtenant's permitted uses of the Premises. (b) Suitability. Subtenant acknowledges that neither Sublandlord nor any agent or employee of Sublandlord has made any representation or warranty with respect to the Premises, the Subtenant Improvements or the Excluded Area or with respect to the suitability of -7- 8 the same for the conduct of the Subtenant's business, nor has Sublandlord agreed to undertake any modification, alteration or improvement to the Premises, except as provided in this Sublease. Subtenant acknowledges that Sublandlord makes no representations regarding the use of the Premises, the Subtenant Improvements or the Excluded Area by Subtenant or that the uses permitted by Subparagraph 6(a) are allowed by governmental or quasi-governmental agencies having jurisdiction or applicable laws, statutes, ordinances, rules, regulations, orders or requirements now or hereafter in effect. 7. Hazardous Materials. Subtenant and Subtenant's agents, employees, contractors, assignees and subtenants may not use, place, store or transport (collectively, "Use") Hazardous Material(s) (defined below) on or about any portion of the Premises or Excluded Area or any other part of the Land (or in connection with the use or operation of the Subtenant Improvements) unless Subtenant complies with all applicable Laws with respect to the Use by Subtenant, its agents, employees, contractors, assignees or subtenants of such Hazardous Materials. Nothing herein shall be construed to allow Subtenant to release or dispose of (collectively, "Release") Hazardous Materials in or about any portion of the premises or Excluded Area unless such Release is in compliance with applicable Laws. Any Use of the Hazardous Materials beyond the scope allowed in this Paragraph and any Release of Hazardous Materials shall be subject to Sublandlord's and Lessor's prior written consent, which may be withheld in Sublandlord's or Lessor's sole and absolute discretion, and shall require an amendment to the Sublease in the event Sublandlord and Lessor do consent which shall set forth the materials, scope of use, indemnification and any other matter required by Sublandlord and Lessor in Sublandlord's and Lessor's sole and absolute discretion. Subtenant shall indemnify, defend and hold Sublandlord and Sublandlord's agents harmless from and against any and all claims, losses, damages, liabilities, or expenses arising in connection with the Use or Release of Hazardous Materials on or following the Commencement Date of this Sublease in violation of Law by Subtenant, Subtenant's agents, employees, contractors, assignees or subtenants using the Premises or Excluded Area. Subtenant's obligation to defend, hold harmless and indemnify pursuant to this Paragraph 7 shall survive the expiration or earlier termination of this Sublease. The foregoing indemnity shall not apply to, and Subtenant shall not be responsible hereunder for, the presence of Hazardous Materials on, under, or about the Premises or Excluded Area to the extent caused by Sublandlord, its agents, employees, contractors, assignees or subtenants (other than Subtenant); provided that Sublandlord hereby acknowledges and agrees that the foregoing indemnity is intended to supplement that certain Indemnity Agreement between Subtenant and Sublandlord in the form of Exhibit C to the Purchase Agreement (the "Indemnity Agreement"), and to the extent the foregoing indemnity contradicts Subtenant's obligations under the Indemnity Agreement, the Indemnity Agreement shall prevail. The parties hereto agree and acknowledge that all of Subtenant's indemnity obligations set forth in this Sublease are supplemental to Subtenant's obligations set forth in the Indemnity Agreement. Sublandlord shall have the right, upon reasonable advance notice to Subtenant, to inspect, investigate, sample and/or monitor the Premises and Excluded Area, including any soil, water, groundwater, or other sampling, to the extent reasonably necessary to determine whether Subtenant is complying with the terms of this Sublease with respect to Hazardous Materials. In connection therewith, Subtenant shall provide Sublandlord with reasonable access to all portions -8- 9 of the Premises, the Subtenant Improvements and the Excluded Area (subject to reasonable security measures imposed by Subtenant); provided, however, that Sublandlord shall avoid any unreasonable interference with the operation of Subtenant's business on or in the Premises or the Excluded Area. All costs reasonably incurred by Sublandlord in performing such inspections, investigation, sampling and/or monitoring shall be reimbursed by Subtenant to Sublandlord as Additional Rent within thirty (30) days after Sublandlord's demand for payment if it is determined that Hazardous Materials have been Used by Subtenant or Subtenant's Agents on or after the Commencement Date of this Sublease in violation of Laws or a Release of Hazardous Materials in violation of Laws has occurred on, in or under the Premises or the Excluded Area, or any portion thereof. Notwithstanding anything to the contrary contained in this Sublease, Sublandlord and Subtenant acknowledges that (i) the Environmental Protection Agency is currently overseeing cleanup measures that are being conducted at the Land and at surrounding parcels of real property, (ii) the Land is part of a regional Superfund site known as the Middlefield-Ellis-Whitman (MEW) site, (iii) Raytheon, a former owner of the Land, is under a Consent Decree that provides that Raytheon will perform groundwater and soil remediation for the property it occupied and operated within the MEW area, (iv) in 1987, a soil-bentonite, subsurface, slurry wall was installed by Raytheon around the perimeter of the Land enclosing the soil and water bearing zones as part of the remedial measures conducted by Raytheon, (v) a groundwater extraction and treatment system was installed in 1987 on the Land and, as long term remedial measure, groundwater is extracted from several wells located both within the boundaries of the Land and from adjacent property, (vi) a soil vapor extraction system (covering approximately a surface area of four acres and going to a depth of approximately 15 to 18 feet) was installed by Raytheon in 1996 to remediate the contaminated soils in the Land and Raytheon has petitioned and obtained approval from the Environmental Protection Agency for closure for part of the soil vapor remedial system, and (vii) the groundwater and soil treatment facilities referred to above are maintained by Raytheon and Raytheon has provided an indemnification to Subtenant to protect it from clean up or other liability related to contamination existing prior to the date Subtenant acquired title to the Land and the improvements then located thereon. As used in this Sublease, the term "Hazardous Materials" means any chemical, substance, waste or material which has been or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including without limitation, those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," or "solid waste" under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Hazardous Materials Transportation Act, as amended, and in the regulations promulgated pursuant to said laws; those substances defined as "hazardous wastes" in section 25117 of the California Health & Safety Code, or as "hazardous substances" in section 25316 of the California Health & Safety Code, as amended, and in the regulations promulgated pursuant to said laws; those substances listed in the United States Department of Transportation Table (49 CRF 172.101 and amendments thereto) or designated by the Environmental Protection Agency (or any successor agency) as hazardous substances (see, e.g., 40 CFR Part 302 and amendments thereto); such other substances, materials and wastes which are or become regulated or become classified as hazardous or toxic under any Laws, including -9- 10 without limitation the California Health & Safety Code, Division 20, and Title 26 of the California Code of Regulations; and any material, waste or substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a "hazardous substance" pursuant to section 311 of the Clean Water Act of 1977, 33 U.S.C. sections 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. Section 1317), as amended; (v) flammable explosives; (vi) radioactive materials; or (vii) radon gas. 8. Taxes and Assessments. (a) Subtenant's Property. Subtenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Subtenant's trade fixtures, equipment, furnishings, furniture, inventory, appliances and other personal property installed or located on or within the Premises or Excluded Area, including, without limitation, the Subtenant Improvements (except for the Subtenant Improvements described in subparagraphs (viii), (x) and (xvi) of Section 2(a) above) to the extent any such improvements are separately assessed (collectively, the "personal property"). Subtenant shall use its commercially reasonable efforts to cause said personal property to be assessed and billed separately from the real property of Sublandlord. If any of Subtenant's said personal property shall be assessed with Sublandlord's real property, Subtenant shall pay Sublandlord, as Additional Rent, the taxes attributable to Subtenant's personal property within thirty (30) days after receipt of a written statement from Sublandlord setting forth the taxes applicable to Subtenant's property. Subtenant shall comply with the provisions of any law, ordinance, rule or regulation of taxing authorities which require Subtenant to file a report of Subtenant's personal property located on or within the Premises or the Excluded Area. (b) Definition of Taxes. The term "Taxes" as used in this Sublease shall collectively mean (to the extent any of the following are not paid by Subtenant pursuant to Paragraphs 8(a) above, all real estate taxes and general and special assessments (including, but not limited to, assessments for public improvements or benefit); taxes based on vehicles utilizing parking areas on the Excluded Area; environmental surcharges; gross rental receipts taxes; water and sewer taxes, levies, assessments and other charges in the nature of real property taxes or assessments (including, but not limited to, assessments for public improvements or benefit); and all other governmental, quasi-governmental or special district impositions of any kind and nature whatsoever; regardless of whether any of the foregoing are now customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or whether extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing and which during the Sublease Term are laid, levied, assessed or imposed upon or which become a lien upon or chargeable against the Premises and/or the Excluded Area under or by virtue of any present or future laws, statutes, ordinances, regulations, or other requirements of any governmental, quasi-governmental or special district authority whatsoever, excluding net income, succession, transfer, gift, franchise, estate or inheritance taxes. The term "environmental surcharges" shall include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder, or imposed by any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy or any natural resource in -10- 11 regard to the use, operation or occupancy of the Premises and/or the Excluded Area. The term "Taxes" shall include (to the extent the same are not paid by Subtenant pursuant to Paragraph 8(a)), without limitation, all taxes, assessments, levies, fees, impositions or charges levied, imposed, assessed, measured, or based in any manner whatsoever upon or with respect to the use, possession, occupancy, leasing, operation or management of the Premises and/or the Excluded Area or in lieu of or equivalent to any Taxes set forth in this Paragraph 8(b). In the event any such Taxes are payable by Sublandlord as lessee of the Property and it shall not be lawful for Subtenant to reimburse Sublandlord for such Taxes, then the Rentals payable hereunder shall be increased to net Sublandlord the same net Rental after imposition of any such Tax upon Sublandlord as would have been payable to Sublandlord prior to the imposition of any such Tax. (c) Taxes as Operating Expense. All Taxes which are levied or assessed or which become a lien upon the Premises and/or the Excluded Area or which become due or accrue during the Sublease Term shall be an Operating Expense, and Subtenant shall pay as Additional Rent each month during the Sublease Term, commencing on the Commencement Date, 1/12th of such Taxes, based on Sublandlord's estimate thereof, pursuant to Paragraph 11 below. Taxes during any partial tax fiscal year(s) within the Sublease Term shall be prorated according to the ratio which the number of days during the Sublease Term or of actual occupancy of the Premises by Subtenant, whichever is greater, during such year bears to 365. In calculating Subtenant's share of Taxes to be paid under this Sublease, during the period of the Sublease Term that the Excluded Area is not a separate, legal parcel, the Taxes allocable to the Excluded Area shall be based on the ratio that the acreage included within the Excluded Area bears to the total acreage included within that portion of the Land (plus the assessed value of any improvements and building located thereon) that is covered by the tax bill covering the Excluded Area. Notwithstanding the foregoing, in no event shall Subtenant's Share of Taxes include taxes assessed on any new improvements constructed on the Developable Land. 9. Indemnity; Insurance. (a) Indemnity. Subtenant agrees to indemnify, protect, defend (with counsel selected by Subtenant and reasonably acceptable to Sublandlord) and hold harmless Sublandlord, each Lender and their respective Agents (except to the extent arising from the active negligence or willful misconduct of, or breach of this Sublease by, Sublandlord, such Lender or their respective Agents) against any and all claims, damages, losses, causes of action, judgments, obligations and liabilities, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys' fees and costs), on account of, or arising out of (i) the operation, use, or occupancy of the Premises and Excluded Area (and any and all of the Subtenant Improvements except for the items set forth in subparagraphs (viii), (x) and (xvi) of Paragraph 2(a)), or any part thereof, by Subtenant and/or its Agents during the term of this Sublease, (ii) any occurrence in, on or about the Premises and/or the Excluded Area during the term of this Sublease, or (iii) any occurrence in, on or about the Premises or Excluded Area or Land, to the extent caused by or contributed to by Subtenant and/or its Agents during the term of this Sublease. The obligations of Subtenant under this Paragraph 9(a) shall survive the expiration or earlier termination of this Sublease. -11- 12 (b) Insurance by Sublandlord. Sublandlord shall, during the Sublease Term, procure and keep in force the following insurance, the cost of which shall be an Operating Expense, payable by Subtenant pursuant to Paragraph 11 below: (i) Liability Insurance. Commercial general liability or comprehensive general liability insurance against any and all claims for personal injury, death or property damage occurring in or about the Premises or the Excluded Area in an initial amount of $2,000,000 per occurrence and $2,000,000 in the aggregate with umbrella coverage of at least $5,000,000 per occurrence and in the aggregate. Such insurance shall have such increased limits of coverage as Sublandlord or Lessor may from time to time determine are reasonably necessary for its protection, provided that in no event shall such increased coverage exceed the coverage which is customary for similar buildings in the South Bay area. (c) Insurance by Subtenant. Subtenant shall, during the Sublease Term, at Subtenant's sole cost and expense, procure and keep in force the insurance set forth in Paragraphs 9(c)(i), 9(c)(ii), 9(c)(iii) and 9(c)(iv) below. All insurance that Subtenant is required to procure and maintain shall provide that it may not be cancelled or materially modified without thirty (30) days prior written notice to Sublandlord and Lessor. (i) Liability Insurance. Commercial general liability or comprehensive general liability insurance and naming Subtenant as insured and Sublandlord and each Lender as additional insured, against any and all claims for personal injury, death or property damage occurring in or about the Premises or the Excluded Area, or arising out of Subtenant's or Subtenant's Agents' use of the Excluded Area, use or occupancy of the Premises or Excluded Area or Subtenant's operations on the Premises and Excluded Area. Such insurance shall have a combined single limit of not less than $2,000,000 per occurrence and $5,000,000 in the aggregate. Such insurance shall contain a cross-liability (severability of interests) clause and an extended ("broad form") liability endorsement, including blanket contractual coverage and motor vehicle liability coverage. Such insurance shall name Lessor and Sublandlord as additional insureds. Such liability insurance shall be primary and not contributing to any insurance available to Lessor, Sublandlord or each Lender, and Lessor's, Sublandlord's and each Lender's insurance (if any) shall be in excess thereto. Such insurance shall specifically insure Subtenant's performance of the indemnity, defense and hold harmless agreements contained in Paragraph 9(a), although Subtenant's obligations pursuant to Paragraph 9(a) shall not be limited to the amount of any insurance required of or carried by Subtenant under this Paragraph 9(c)(i). Subtenant shall be responsible for insuring that the amount of insurance maintained by Subtenant is sufficient for Subtenant's purposes. Such liability insurance shall be primary and non-contributing to any insurance available to Lessor and Sublandlord, but only as respects Subtenant's negligence for bodily injury or property damage arising out of their business operations. (ii) Business Interruption Insurance. Business interruption insurance naming Sublandlord, Lessor and each Lender as additional insureds in an amount sufficient to cover twelve (12) months of Subtenant's Rent obligation under this Sublease. (iii) Property Insurance. "All risk" property insurance, providing protection against those perils included within the classification of "all risk" insurance, on the -12- 13 Premises and Excluded Area, including any improvements or fixtures constructed or installed on the Premises and Excluded Area by Sublandlord or Lessor. (iv) Other. Such other insurance as required by law, including, without limitation, workers' compensation insurance. (v) Optional Insurance. Subtenant may, but shall not be obligated to, during the Sublease Term, at Subtenant's sole cost and expense, procure and keep in force the following insurance: (A) Personal Property Insurance. "All risk" property insurance, providing protection against those perils included within the classification of "all risk" insurance, on all leasehold improvements and Subtenant installed in the Premises or on the Excluded Area by Subtenant at its expense (if any), and on all equipment, trade fixtures, inventory, fixtures and personal property located on or in the premises or the Excluded Area, including improvements or fixtures hereinafter constructed or installed on the Premises or the Excluded Area. Sublandlord shall have no interest in nor any right to the proceeds of any insurance procured by Subtenant pursuant to this Subparagraph 9(c)(v)(A). Subtenant acknowledges and agrees that Sublandlord shall not be obligated under this Sublease to maintain all risk or property insurance covering the leasehold improvements or any equipment, trade fixtures, inventory, fixtures or personal property referred to in this Subparagraph 9(c)(v)(A). If Sublandlord elects to so obtain insurance covering Subtenant's obligations under this Subparagraph 9(c)(v)(A), the cost of such insurance shall not be an Operating Expense and Subtenant shall be liable for the cost of any deductible amount relating to such insurance. (d) Failure by Subtenant to Obtain Insurance. If Subtenant does not take out the insurance required pursuant to Paragraph 9(c)(i), 9(c)(ii), 9(c)(iii) or 9(c)(iv) or keep the same in full force and effect, without prior notice to Subtenant, Sublandlord may, but shall not be obligated to, take out the necessary insurance and pay the premium therefor, and Subtenant shall repay to Sublandlord, as Additional Rent, the amount so paid promptly upon demand. In addition, Sublandlord may recover from Subtenant and Subtenant agrees to pay, as Additional Rent, any and all reasonable expenses (including reasonable deductibles and attorneys' fees) and damages which Sublandlord may sustain by reason of the failure of Subtenant to obtain and maintain such insurance, it being expressly declared that the expenses and damages of Sublandlord shall not be limited to the amount of the premiums thereon. (e) Claims by Subtenant. Except to the extent arising out of the active negligence or willful misconduct of Lessor, any Lender or Sublandlord or any of their respective Agents, neither Lessor, any Lender nor Sublandlord shall be liable to Subtenant, and Subtenant waives all claims against Lessor, each Lender and Sublandlord, for injury or death to any person, damage to any property, or loss of use of any property in the Premises or the Excluded Area by and from all causes, including without limitation, any defect in the Premises or the Excluded Area and/or any damage or injury resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the Premises or the Excluded Area, or from breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether the damage or injury results from conditions arising upon the Premises or the Excluded Area or from other sources. The preceding to the contrary -13- 14 notwithstanding, under no circumstances shall Lessor, any Lender or Sublandlord be liable to Subtenant for any claim by Subtenant of lost profits, loss of income or loss of business. (f) Mutual Waiver of Subrogation. Sublandlord hereby releases Subtenant, and Subtenant hereby releases Sublandlord (and, to the extent Lessor carries any insurance on the Property or any furnishings, fixtures, equipment, inventory or other property in, or about the Premises, Sublandlord shall use its reasonable best efforts to cause Lessor to release Subtenant), and their respective officers, agents, employees and servants, from any and all claims or demands of damages, loss, expense or injury to the Premises or the Excluded Area (or the Land), or to the furnishings, fixtures, equipment, inventory or other property of either Sublandlord or Subtenant in, about or upon the Premises or the Excluded Area (or the Land) (collectively, a "Claim"), which is caused by or results from perils, events or happenings which are the subject of insurance carried by the respective parties pursuant to this Paragraph 9 or otherwise and in force at the time of any such loss, whether due to the negligence of the other party or its agents and regardless of cause or origin; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss, to the extent such insurance is not prejudiced thereby, to the extent insured against and to the extent each such Claim is fully satisfied by proceeds from such insurance. In the event of a Claim concerning Subtenant's Use or Release of Hazardous Materials in, on or about the Premises, the Excluded Area or the Land, Subtenant shall use any proceeds from insurance received by Subtenant in connection with such Claim to remove and/or remediate the Hazardous Materials. 10. Utilities. Subtenant shall pay during the Sublease Term and prior to delinquency all charges for water, gas, light, heat, power, electricity, telephone or other communication service, janitorial service, trash pick-up, sewer and all other services supplied to Subtenant or consumed by Subtenant or any of Subtenant's agents, contractors or invitees on the Premises or the Excluded Area (collectively, the "Services") and all taxes, levies, fees or surcharges therefor. Subtenant shall arrange for Services to be supplied to the Premises and the Excluded Area and shall contract for all of the Services in Subtenant's name prior to the Commencement Date. In the event that any of the Services cannot be separately billed or metered to the Premises or the Excluded Area, or if any of the Services are not separately metered as of the Commencement Date, the cost of such Services shall be an Operating Expense and Subtenant shall pay such cost to Sublandlord, as Additional Rent, as provided in Paragraph 11 below. 11. Operating Expenses. (a) Definition. "Operating Expense" or "Operating Expenses," as used in this Sublease, shall mean and include all items identified in other paragraphs of this Sublease as an Operating Expense and the reasonable and necessary cost paid or incurred by Sublandlord for the operation, maintenance, and repair of the Premises and Excluded Area, which costs shall include, without limitation: the cost of any necessary Services and utilities supplied to the Premises and Excluded Area (to the extent the same are not separately incurred by, or charged or metered to, Subtenant). Sublandlord and Subtenant acknowledge that, during the Sublease Term, the Premises and Excluded Area will be managed, maintained and operated by Subtenant, at Subtenant's cost, in a continuation of its present operations. Consequently, other than those costs or expenses that are expressly identified in this Sublease as an Operating Expenses, neither Sublandlord nor Subtenant contemplate any other expenses incurred or to be incurred by -14- 15 Sublandlord to be passed through to Subtenant under this Sublease as an Operating Expense or otherwise. Because Subtenant is responsible, pursuant to the terms of Paragraph 12(b) of this Sublease, for repair and maintenance of the Premises (and the interior improvements located therein) and all buildings, structures and improvements located on the Excluded Area, Sublandlord should not be incurring any repair or maintenance expenses with respect to the same (and Sublandlord shall not be incurring any Operating Expenses to be passed through to Subtenant with respect to the same except to the extent that Sublandlord is reasonably likely to be exposed to criminal or civil liability for any failure by Subtenant to perform any maintenance or repairs as determined in Sublandlord's reasonable discretion, in which case sublandlord may perform such repairs or maintenance following five (5) days advance written notice to Subtenant if such repairs or maintenance have not been performed within such 5-day period). If any Operating Expenses incurred by Sublandlord are incurred with respect to the entire Land (and not just the Excluded Area), then Subtenant's share of such Operating Expenses shall be in the ratio that the acreage included within the Excluded Area bears to the acreage included within the entire Land; provided, however, if the Premises, the Subtenant Improvements and other buildings, structures or improvements located on the Excluded Area are separately assessed from any other buildings, structures or improvements situated on the Land, then Subtenant shall be obligated to pay one hundred percent (100%) of all Taxes levied or assessed with respect to the Premises and other buildings, structures or improvements located on the Excluded Area and which become due or accrue during the term of this Sublease. If Sublandlord subdivides or parcelizes the Land into two or more legal parcels (one of which is the Excluded Area), and the Excluded Area and the buildings, structures and improvements situated thereon are assessed separately from the balance of the Land and the buildings, structures or improvements situated on such balance of the Land, then Subtenant shall pay, as an Operating Expense, one hundred percent (100%) of all necessary Operating Expenses incurred by Sublandlord in connection with the Premises and the buildings, structures and other improvements located on the Excluded Area and the Excluded Area (including, without limitation, Taxes levied or assessed with respect to or against the Excluded Area and Taxes allocable to the Premises, Subtenant Improvements and all leasehold improvements, constructed or installed therein) and the buildings, structures, and other improvements located on the Excluded Area. Notwithstanding anything to the contrary contained in this Sublease, within one hundred eighty (180) days after receipt by Subtenant of Sublandlord's statement of Operating Expenses prepared pursuant to Paragraph 10(a) hereof for any prior annual period during the Sublease Term, Subtenant or its authorized representative shall have the right to inspect the books of Sublandlord during the business hours of Sublandlord at Sublandlord's office or, at Sublandlord's option, such other location as Sublandlord reasonably may specify, for the purpose of verifying the information contained in the statement. Unless Subtenant asserts specific errors within one hundred eighty (180) days after receipt of the statement, the statement shall be deemed correct as between Sublandlord and Subtenant, except as to individual components subsequently determined within one (1) year to be in error by future audit. (b) Payment of Operating Expenses by Subtenant. Prior to the Commencement Date, and annually thereafter, Sublandlord shall deliver to Subtenant an estimate of necessary Operating Expenses incurred by Sublandlord (and not otherwise incurred by Subtenant) for the succeeding year. Subtenant's payment of Operating Expenses shall be based -15- 16 upon Sublandlord's estimate of Operating Expenses and shall be payable in equal monthly installments in advance on the first day of each calendar month commencing on the Commencement Date and continuing throughout the Sublease Term. (c) Exclusions From Operating Expenses. Notwithstanding anything to the contrary contained in this Sublease, in no event shall Subtenant have any obligation to perform, to pay directly, or to reimburse Sublandlord for, all or any portion of the following costs and expenses (collectively, "Costs"): (i) the cost of any work performed (such as preparing a tenant's space for occupancy, for renovating an existing tenant's premises, including painting and decorating) or services provided (such as separately metered electricity) for any tenant (including Subtenant) at such tenant's cost or provided by Sublandlord without charge; (ii) the expenses and salaries of Sublandlord's officers, partners, agents and employees or any general corporate overhead and administrative expense of Sublandlord; (iii) the cost of any items for which Sublandlord is actually reimbursed by insurance proceeds, condemnation awards, or another tenant or occupant of another building located on the land; (iv) any advertising or promotional expenses; (v) any costs representing an amount paid to a related or affiliated person of Sublandlord which is in excess of the amount which would have been paid in the absence of such relationship; (vi) any expenses for repairs or maintenance unless permitted under Paragraph 11(a) hereof or unless otherwise agreed to in writing by Subtenant or which are actually reimbursed through warranties or guaranties (excluding any mandatory deductibles); (vii) any electric power or other utility costs or expenses for which Subtenant directly contracts with the local public service company; (viii) any costs, including without limitation, attorneys' fees associated with the operation of the business of the entity which constitutes Sublandlord, including accounting and legal matters, costs of selling, syndicating, financing, mortgaging or hypothecating any of Sublandlord's interest in the Premises or the Land or any part thereof, costs of any dispute between Sublandlord and its employees, disputes of Sublandlord with project management or personnel or outside fees paid in connection with disputes with other tenants; (ix) the cost of any work or services performed for any tenant (including Subtenant) at such tenant's cost; (x) any reserves of any kind, including without limitation, replacement reserves or reserves for bad debts or lost rent; (xi) depreciation of the Premises or any improvements, buildings or structures on the Land; (xii) cost of repairs, replacements or other work occasioned by the exercise by governmental authorities of the right of eminent domain; (xiii) the cost of repairs arising out of the gross negligence or willful misconduct of Sublandlord or any of its agents, employees or contractors; (xiv) any management fees, costs, or expenses incurred by Sublandlord; (xv) costs of selling, syndicating, financing, mortgaging or hypothecating any of Lessor's interest in the Premises or any other buildings, structures or improvements on the Land; and (xvi) costs incurred for the investigation and remediation of a Release of Hazardous Materials occurring prior to the Commencement Date. (d) Inspection of Records. Sublandlord agrees that any Operating Expense statements submitted by Sublandlord shall be reasonably detailed and certified as true and correct by Sublandlord. Sublandlord further agrees to make available its books and records relating to Operating Expenses for Subtenant's audit, upon reasonable notice, at Sublandlord's office. If such audit discloses any errors, appropriate adjustments shall be made, and if such errors are in excess of five percent (5%) of the amount charged to Subtenant, Sublandlord shall pay for the reasonable costs of such audit within thirty (30) days of demand. -16- 17 (e) Betterments. With respect to betterments or other extraordinary or special assessments that may be included in the definition of Taxes, Subtenant's obligations shall apply only to the extent such assessments are payable during and in respect of the Sublease Term if paid over the longest period permitted by law. (f) Right to Contest. Subtenant at its cost shall have the right, at any time, to seek a reduction in the assessed valuation of the Premises, or other improvements located on the Excluded Area, and/or the Excluded Area, or to contest any Taxes that are to be paid by Subtenant. If Subtenant seeks a reduction or contests the Taxes, Subtenant shall continue to pay its share of any such Taxes during such proceedings. Sublandlord shall not be required to join in any proceedings or contest brought by the Subtenant unless the provisions of any law require that the proceeding or contest be brought by or in the name of Sublandlord or any owner of the premises. In that case Sublandlord shall join in the proceeding or contest or permit it to be brought in Sublandlord's name as long as Sublandlord is not required to bear any cost. Subtenant, on final determination of the proceeding or contest, shall immediately pay or discharge all costs, charges, interest, and penalties incidental to the decision or judgment. 12. Repairs and Maintenance. (a) [Intentionally Omitted] (b) Subtenant's Repairs. Subtenant shall, at its sole cost, be responsible for the repair and maintenance of the Premises (and the interior improvements located therein) and all buildings, structures and improvements located on the Excluded Area. Subtenant shall not allow the Premises or the other buildings, structures or improvements located on the Excluded Area to fall into such disrepair as to constitute a health or safety risk. Subtenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Sublandlord acknowledges that it is the responsibility of Subtenant (subject to the provisions of Paragraph 32 below) to demolish the Premises and the other buildings, structures and improvements located on the Excluded Area at or following the expiration of the Sublease Term and, therefore, Sublandlord shall not require Subtenant to maintain the Premises or other buildings, structures or improvements located on the Excluded Area in good condition or repair during the Sublease Term, except to the extent (1) Sublandlord reasonably determines any maintenance to be necessary to avoid criminal or civil liability for any failure by Subtenant to maintain or repair the Premises or any improvements thereto, in which case Subtenant shall be obligated to take all actions reasonably required by Landlord to address such potential liability arising therefrom or (2) Subtenant's failure to maintain or repair the Premises exacerbates any environmental condition or contamination in, on or about the Premises or the Excluded Property. Should Subtenant fail to keep the Premises or any other buildings, structures or improvements located on the Excluded Area in safe condition within fifteen (15) days after notice from Sublandlord or should Subtenant fail thereafter to diligently perform its obligations under this Paragraph 12(b), Sublandlord, in addition to all other remedies available hereunder or by law and without waiving any alternative remedies, may take such reasonable steps as to make -17- 18 the Premises or other buildings, structures or improvements on the Excluded Area safe, and in that event, Subtenant shall reimburse Sublandlord as Additional Rent for the reasonable costs so incurred by Sublandlord within fifteen (15) days of written demand by Sublandlord. Sublandlord shall have no maintenance or repair obligations whatsoever with respect to the Premises or any buildings, structures or improvements located thereon. Subtenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Sublandlord as provided in Section 1942 of said Civil Code. 13. Alterations. (a) Limitations. Subtenant shall not make, or suffer to be made, any structural alterations, improvements or additions in, on, about or to the Premises or any other buildings, structure or improvements located on the Excluded Area, or any part thereof, without the prior consent of Sublandlord (which consent shall not be unreasonably withheld, conditioned or delayed as long as Subtenant provides Sublandlord with additional rent in an amount equal to the additional costs of demolition and removal associated with such improvements valued in excess of Ten Thousand Dollars ($10,000)) and without a valid building permit issued by the appropriate governmental authority. Sublandlord's consent shall not be required for interior non-structural alterations within the Premises or any other buildings, structures or improvements located on the Excluded Area as long as subtenant provides Sublandlord with additional rent in an amount equal to the additional cost of demolition and removal associated with such improvements valued in excess of Ten Thousand Dollars ($10,000). Subtenant shall give written notice to Sublandlord five (5) business days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises or any other buildings, structures or improvements located on the Excluded Area, and prior to the commencement of any work of improvement on the Premises or any other buildings, structures or improvements located on the Excluded Area. All alterations or improvements made to the Premises by Subtenant shall be made in accordance with applicable Laws and in a workmanlike manner. At the time Subtenant requests Sublandlord's consent to any structural alterations or improvements, Sublandlord shall notify Subtenant in writing whether Sublandlord will require Subtenant, at Subtenant's expense, to remove any such structural alterations or improvements and restore the Premises or other improvements located on the Excluded Area to their prior condition at the expiration or earlier termination of this Sublease. All non-structural alteration or improvements made by Subtenant to the Premises or other improvements located on the Excluded Area during the Sublease Term, including, without limitation, movable furniture and trade fixtures not affixed to the Premises or other improvements located on the Excluded Area, shall be removed from the Excluded Area by Subtenant at Subtenant's sole cost and expense, upon the expiration or earlier termination of the Sublease. 14. Default. (a) Events of Default. A breach of this Sublease by Subtenant shall exist if any of the following events (hereinafter referred to as "Event of Default") shall occur: -18- 19 (i) Default in the payment when due of any Monthly Installment of rent, Additional Rent or other payment required to be made by Subtenant hereunder, where such default shall not have been cured within ten (10) days after written notice of its default is given to Subtenant; (ii) Subtenant's failure to perform any other term, covenant or condition contained in this Sublease where such failure shall have continued for thirty (30) days after written notice of such failure is given to Subtenant; provided, however, Subtenant shall not be deemed in default if Subtenant commences to cure such failure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion within a period not to exceed six (6) months thereafter; (iii) Subtenant's assignment of its assets for the benefit of its creditors; (iv) The sequestration of, attachment of, or execution on, any substantial part of the property of Subtenant or on any property essential to the conduct of Subtenant's business, shall have occurred and Subtenant shall have failed to obtain a return or release of such property within sixty (60) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier. (v) Subtenant hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; (vi) Subtenant shall take any corporate action to authorize any of the actions set forth in clause (v) above; (vii) Any case, proceeding or other action against Subtenant shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (a) results in the entry of an order for relief against it which is not fully stayed within ten (10) business days after the entry thereof or (b) remains undismissed for a period of sixty (60) days; or (viii) Subtenant's failure to maintain any of the insurance it is required to maintain pursuant to Section 9(c) above where such failure has not been cured within three (3) business days after written notice is given to Subtenant. (b) REMEDIES. Upon any Event of Default, Sublandlord shall have the following remedies, in addition to all other rights and remedies provided by law, to which Sublandlord may resort cumulatively, or in the alternative: -19- 20 (i) Recovery of Rent. Sublandlord shall be entitled to keep this Sublease in full force and effect (whether or not Subtenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Sublease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 31 below) from the due date of each installment of rent or other sum until paid. (ii) Termination. Sublandlord may terminate this Sublease by giving Subtenant written notice of termination. On the giving of the notice all of Subtenant's rights in the Premises and the Excluded Area shall terminate. Upon the giving of the notice of termination, Subtenant shall surrender and vacate the Premises and the Excluded Area in the condition required by Paragraph 32, and Sublandlord may reenter and take possession of the Premises and all the remaining improvements or property and eject Subtenant or any of Subtenant's subtenants, assignees or other person or persons claiming any right under or through Subtenant or eject some and not others or eject none. This Sublease may also be terminated by a judgment specifically providing for termination. Any termination under this Paragraph shall not release Subtenant from the payment of any sum then due Sublandlord or from any claim for damages or rent previously accrued or then accruing against Subtenant. In no event shall any one or more of the following actions by Sublandlord constitute a termination of this Sublease: (A) Maintenance and preservation of the Premises (or any other improvements, buildings, or structures located on the Excluded Area) or the Excluded Area; (B) Efforts to relet the Premises; (C) Appointment of a receiver in order to protect Sublandlord's interest hereunder; (D) Consent to any subletting of the Premises or any other buildings, structures or improvements located thereon or assignment of this Sublease by Subtenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or (E) Any other action by Sublandlord or Sublandlord's agents intended to mitigate the adverse effects from any breach of this Sublease by Subtenant. (iii) Damages. In the event this Sublease is terminated pursuant to Subparagraph 14(b)(ii) above, or otherwise, Sublandlord shall be entitled to damages in the following sums: (A) The worth at the time of award of the unpaid rent which has been earned at the time of termination; plus (B) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Subtenant proves could have been reasonably avoided; plus -20- 21 (C) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Subtenant proves could be reasonably avoided; and (D) Any other amount necessary to compensate Sublandlord for all detriment proximately caused by Subtenant's failure to perform Subtenant's obligations under this Sublease, or which in the ordinary course of things would be likely to result therefrom. (E) The "worth at the time of award" of the amounts referred to in Subparagraphs (A) and (B) of this Subparagraph 14(b)(iii), is computed by allowing interest at the Permitted Rate. The "worth at the time of award" of the amounts referred to in Subparagraph (C) of this subparagraph 14(b)(iii) is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent," as used in this Paragraph 14, shall include all sums required to be paid by Subtenant to Sublandlord pursuant to the terms of this Sublease. (c) Sublandlord shall be in default under this Sublease hereunder if Sublandlord breaches an agreement, or fails to perform an obligation required of Sublandlord within ten (10) days after notice in the case of a monetary obligation, or thirty (30) days after notice in the case of a nonmonetary obligation; provided, however, that if the nature of a nonmonetary obligation of Sublandlord is such that more than thirty (30) days are reasonably required for performance, then Sublandlord shall not be in default if Sublandlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. If Sublandlord breaches any agreement in this Sublease or fails to make any payment or perform any other act on its part to be performed under this Sublease, provided that Subtenant has delivered to Sublandlord (and Sublandlord's Lender, if required) written notice of such default and Sublandlord (or Sublandlord's Lender, if required) has failed to cure such default within the time period required under this Section 14(c), Subtenant may make such payment or cure such performance or breach to the extent Subtenant deems desirable and, in connection therewith, pay reasonable expenses and employ counsel. All sums reasonably advanced by Subtenant on Sublandlord's behalf, any delinquent sums owed by Sublandlord to Subtenant under any provision of this Sublease, and all penalties, interest and other costs in connection therewith, including reasonable attorneys' fees and collection costs, shall be due and payable by Sublandlord on written demand, together with interest thereon from the date of delinquency at the Permitted Rate. 15. Destruction. (a) Restoration or Maintain in Safe Condition. If the Premises or Subtenant Improvements is damaged by any peril after the Commencement Date of this Sublease such that Subtenant cannot reasonably run its normal business operations in the Premises, Subtenant shall either (i) restore the same, or, (ii) as reasonably agreed upon by Sublandlord and Subtenant, either (A) remove the Main Building and related leasehold improvements in accordance with the terms and conditions of Paragraph 32 hereof, and all Subtenant Improvements (except for those Subtenant Improvements described in subparagraphs (viii), (x) and (xvi) of Section 2(a)), or (B) -21- 22 place the damaged improvements or Excluded Area, as the case may be, in safe condition; provided, however, the Sublandlord's and Subtenant's election under clause (B) of the preceding sentence shall not be permitted unless the Sublease is terminated by Tenant pursuant to Subparagraph 15(b). If a Release of Hazardous Materials is placed, stored, transported or used by Subtenant and/or Subtenant's Agents in, on or about the Property occurs as a result of such peril, Subtenant shall investigate and clean up any contaminated soil and/or groundwater contaminated by such Release to levels established by all appropriate governmental agencies. All insurance proceeds available from the property damage insurance carried by Subtenant pursuant to Paragraph 9(c)(v) of this Sublease shall be paid to and become the property of Subtenant. If this Sublease is not terminated by Subtenant as provided in Subparagraph 15(b), then upon issuance of all necessary governmental permits, Subtenant shall either commence and diligently prosecute to completion the restoration of the damaged Premises or Subtenant Improvements, to the extent then allowed by Law, to substantially the same condition in which the damaged Premises or Subtenant Improvements was immediately prior to such damage, or remove the rubble generated from such damage, if any, from the Excluded Area and cause such Excluded Area to be placed in a safe condition. In the event of such damage to the Premises or the Subtenant Improvements, Sublandlord shall have no obligation to rebuild or restore the same (unless such damage was caused by the acts, negligence or willful misconduct of Sublandlord) and Sublandlord shall have no obligation to rebuild or restore any trade fixtures and/or personal property and/or alterations, additions or other improvements constructed or installed by Subtenant in the Premises. (b) Subtenant's Right to Terminate. If the Premises or Subtenant Improvements, or any portion thereof, is damaged by any peril, then as soon as reasonably practicable, Subtenant shall obtain and deliver to Sublandlord an opinion of Subtenant's architect or construction consultant as to when the restoration work may be completed. Subtenant shall have the option to terminate this Sublease in the event any of the following occurs, which option may be exercised only by delivery to Sublandlord of a written notice of election to terminate within sixty (60) days after Subtenant receives from Sublandlord the estimate of the time needed to complete such restoration: (i) The Premises or Subtenant Improvements, or any portion thereof, is damaged by any peril and, in the reasonable opinion of Subtenant's architect or construction consultant, the restoration of the damaged improvements cannot be substantially completed within one hundred twenty (120) days of the peril causing such damage. (ii) The Premises or Subtenant Improvements is damaged by any peril within twelve (12) months of the last day of the Sublease Term, and, in the reasonable opinion of Subtenant's architect or construction consultant, the restoration work cannot be substantially completed within the earlier of (1) ninety (90) days after the date of such damage, or (2) sixty (60) days prior to the expiration of the Sublease Term. (c) Abatement of Rent. In the event of damage to the Premises or Subtenant Improvements which does not result in the termination of this Sublease, all Rentals shall be temporarily abated, but only to the extent such amount is covered and paid for from the proceeds of business interruption insurance carried by Subtenant, during the period of restoration, in proportion to the degree to which Subtenant's use of the Premises and Subtenant Improvements -22- 23 is impaired by such damage. All other Rentals due hereunder shall continue unaffected during such period. Subtenant shall not be entitled to any compensation from Sublandlord for loss of Subtenant's property or leasehold improvements or loss to Subtenant's business or income caused by such damage or restoration. Subtenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law, hereinafter enacted. 16. Condemnation. (a) Definition of Terms. For the purposes of this Sublease, the term (1) "Taking" means a taking of the Premises or Excluded Area or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or entire Excluded Area or so much of the Premises or Excluded Area as to prevent or substantially impair the use thereof by Subtenant for the uses herein specified; (3) "Partial Taking" means a Taking which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises or Excluded Area, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. (b) Rights. The parties agree that in the event of a Taking all rights between them or in and to an Award shall be as set forth herein and Subtenant shall have no right to any Award except as set forth herein. (c) Total Taking. In the event of a Total Taking during the term hereof, (1) the rights of Subtenant under the Sublease and the leasehold estate of Subtenant in and to the Premises and the Excluded Area (and the Subtenant Improvements) shall cease and terminate as of the Date of Taking; (2) Sublandlord shall refund to Subtenant any prepaid rent; (3) Subtenant shall pay Sublandlord any rent or charges due Sublandlord under the Sublease, each prorated as of the Date of Taking; (4) Subtenant shall satisfy all obligations of Sublandlord with respect to Subtenant's Use of Hazardous Materials, as may be imposed by the condemning authority pursuant to such taking (provided that Lessor or Sublandlord, as Lessor's agent, uses its good faith efforts to include Subtenant in any negotiations or discussions about the Total Taking with the applicable authority); (5) Subtenant shall receive from the Award those portions of the Award attributable to trade fixtures of Subtenant and for moving expenses of Subtenant; and (6) the remainder of the Award shall be paid to and be the property of Sublandlord. (d) Partial Taking. In the event of a Partial Taking during the term hereof, (1) at Subtenant's election, either (A) the rights of Subtenant under this Sublease and the leasehold estate of Subtenant in and to the portion of the Premises or Excluded Area taken shall cease and terminate as of the Date of Taking or (B) Subtenant may terminate this Sublease in accordance with Section 32; (2) from and after the Date of Taking the Monthly Installment of Basic Rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Premises after the Taking and the denominator of which is the number of -23- 24 square feet contained in the Premises prior to the Taking; (3) Subtenant shall receive from the Award the portions of the Award attributable to the Subtenant Improvements and other Subtenant trade fixtures of Subtenant; and (4) the remainder of the Award shall be paid to and be the property of Landlord and Sublandlord. In the event of a Partial Taking, Subtenant shall, unless Subtenant elects to terminate this Sublease in accordance with Section 32 hereof and to the extent solely from any severance award received by Sublandlord, promptly commence repairing or restoring the Premises to an architecturally completed unit and diligently prosecute such repair or restoration to completion. 17. Mechanics' Liens. Subtenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Subtenant or any contractor employed by Subtenant with respect to the Premises or the Subtenant Improvements (or any leasehold improvements constructed or installed by or for Subtenant); (B) indemnify, defend, protect and hold Lessor and Sublandlord, the Premises and the Excluded Area harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Subtenant or any contractor employed by Subtenant with respect to the Premises (and/or any leasehold improvements constructed or installed by or for Subtenant); and (C) permit Sublandlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Subtenant is required to post an improvement bond with a public agency in connection with the above, Subtenant agrees to include Lessor and Sublandlord as an additional obligee. 18. Inspection of the Premises. Subtenant shall permit Lessor, Sublandlord and their respective agents to enter the Premises or Excluded Area at any reasonable time for the purpose of inspecting the same, protecting the interests of Sublandlord in the Premises, performing Sublandlord's maintenance and repair responsibilities, if any (upon one (1) business day's prior notice except in an emergency), posting a notice of non-responsibility for alterations, additions or repairs, posting a "For Sale" sign or signs, and at any time within nine (9) months prior to expiration of this Sublease, to place upon the Premises or Excluded Area, ordinary "For Sublease" signs. Sublandlord shall have the right to use any and all reasonable means under the circumstance to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Sublandlord in an emergency shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Subtenant from the Premises. 19. Compliance With Laws. Subtenant covenants and agrees to conform and comply with all Laws and with all requirements of any public body or officers having jurisdiction over the Premises and with the requirements or regulations of any Board of Fire Underwriters or insurance company insuring the Premises, all at Subtenant's own expense without reimbursement from Sublandlord. Subtenant need not, however, comply with any such Law or requirement of public authority so long as Subtenant shall be contesting the validity thereof, or the applicability thereof to the Premises. 20. Subordination. This Sublease is subject and subordinate to any and all underlying leases, deeds of trust, assignments of leases and rents or other security instruments existing as of the date of execution of this Sublease and disclosed to Subtenant or which hereafter may be made -24- 25 and/or to any renewal, modification, replacement, extension or expansion hereafter or any consolidation or spreader thereof theretofore or hereinafter made (collectively, a "Security Instrument"); provided, however, that notwithstanding any provisions with respect to the subordination of this Sublease to any Security Instrument which now exists or may hereafter be made or to any renewal, modification, replacement or extension hereafter of any Security Instrument, or to any consolidation or spreader of any Security Instrument, heretofore or hereafter made, any such subordination is subject to the express conditions that so long as this Sublease is in full force and effect and no Event of Default by Subtenant exists under this Sublease, (a) Subtenant shall not be evicted from the Premises or the Excluded Area, nor shall Subtenant's continuing use and occupancy of the Premises or the Excluded Area be interrupted, restricted or impaired, nor shall any of Subtenant's rights under this Sublease be affected in any way by reason of any default under such Security Instrument; and (b) Subtenant's leasehold estate under the Sublease shall not be terminated or disturbed by reason of any default under such Security Instrument which does not arise from a default by Subtenant hereunder, and this Sublease and Subtenant's rights hereunder, including any rights of offset, shall be recognized by the lender or Lessor. Sublandlord agrees to procure, execute and deliver to Subtenant and Subtenant agrees to execute the same, all concurrently with the execution of this Sublease, the written agreement of Lessor and Agent, on behalf of each Lender, substantially in the form of Exhibit "C" attached hereto (the "SNDA"). In the event of a default under any Security Instrument, Subtenant shall become a subtenant of and attorn to the successor-in-interest to Sublandlord upon the same terms and conditions contained in this Sublease and shall execute any instrument reasonably required by Sublandlord's successor for that purpose provided such successor in interest assumes the Sublandlord's obligations under this Sublease accruing from and after the date such party becomes the successor in interest. Subtenant shall also, upon written request of Sublandlord, execute and deliver all instruments as may be reasonably required from time to time to subordinate the rights of Subtenant under this Sublease to any underlying lease or any deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above). If the SNDA is not tendered to Subtenant, in addition to any other rights and remedies available to Subtenant, Subtenant may, at its option, cancel this Sublease on the date ten (10) days following such notice, and the Sublease and the term and estate hereby granted shall then terminate at noon of such cancellation date as if such cancellation date were the expiration date, unless all of such agreements shall have been tendered meanwhile. Upon any such cancellation, Sublandlord shall pay no further obligation to Subtenant hereunder except to return any moneys theretofore paid by Subtenant to Sublandlord as Rent under this Sublease. 21. Notices. Any notice required or desired to be given under this Sublease shall be in writing with copies directed as below and shall be personally served or given by mail. Any notice given by mail shall be deemed to have been given when seventy-two (72) hours have elapsed from the time such notice was deposited in the United States mails, certified and postage prepaid, return receipt requested, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this paragraph. At the date of execution of this Sublease, the address of Sublandlord is: -25- 26 Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones with a copy to: Brobeck, Phleger & Harrison LLP 550 West "C" Street, Suite 1300 San Diego, California 92101 Attn: Todd Anson, Esq. and the address of Subtenant is: Fairchild Semiconductor Corporation of California 333 Western Avenue South Portland, ME 04106 Attn: Dan Boxer, Esq. with a copy to: Berliner Cohen 10 Almaden Blvd., Suite 1100 San Jose, CA. 95113 Attn: Sam Farb 22. Attorney's Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Sublease, to recover rent or possession of the Premises or the Excluded Area, to terminate this Sublease, or to enforce, interpret, protect or establish any term or covenant of this Sublease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including reasonable attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 23. Subleasing and Assignment. (a) Sublandlord's Consent Required. Subtenant's interest in this Sublease is not assignable, by operation of law or otherwise (except as may be required for security purposes), nor shall Subtenant have the right to sublet the Premises or the Excluded Area, transfer any interest of Subtenant therein or permit any use of the Premises by another party, without the prior written consent of Lessor and Sublandlord to each such assignment, subletting, transfer or use, which consent Sublandlord may withhold in its sole discretion. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or -26- 27 subletting without such consent shall be void and shall, at the option of Sublandlord, terminate this Sublease. Lessor's or Sublandlord's waiver or consent to any assignment or subletting hereunder shall not relieve Subtenant from any obligation under this Sublease unless the consent shall so expressly provide in writing. (b) Transfers to an Affiliate. Notwithstanding the foregoing, Subtenant may, without Lessor's or Sublandlord's prior written consent, assign its interest in the Sublease or sublet the Premises or Excluded Area, or a portion thereof to (i) a subsidiary, affiliate, division or corporation controlled by or under common control with Subtenant; provided that (a) Sublandlord receives written notice of the name and address of the proposed transferee, (b) the transferee assumes the obligations of the Subtenant under this Sublease in a written instrument, in form and substance reasonably satisfactory to Sublandlord, which shall be delivered to Sublandlord as a condition precedent to the effectiveness of such assignment; and (c) the transferor tenant remains liable as a primary obligor for the obligations of Subtenant under this Sublease. 24. Successors. The covenants and agreements contained in this Sublease shall be binding on the parties hereto and on their respective heirs, successors and assigns (to the extent the Sublease is assignable). 25. Mortgagee Protection. In the event of any default on the part of Sublandlord, Subtenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been previously furnished to Subtenant. So long as such beneficiary or mortgagee is making reasonable efforts to cure the default, including, but not limited to, obtaining possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure, Subtenant shall not have the right to terminate this Sublease. 26. Estoppel Certificate. Subtenant agrees within fifteen (15) business days following reasonable request by Sublandlord to execute and deliver to Sublandlord any documents, including estoppel certificates presented to Subtenant by Sublandlord, (1) certifying that this Sublease is unmodified and in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to Subtenant's knowledge, any uncured defaults on the part of Sublandlord hereunder, or specifying the defaults, if any, and (3) evidencing the status of the Sublease as may be required either by a Lender making a loan or any other advance to Sublandlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Sublandlord. 27. Surrender of Sublease Not Merger. The voluntary or other surrender of this Sublease by Subtenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Sublandlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Sublandlord of any or all such subleases or subtenants. 28. Waiver. The waiver by Sublandlord or Subtenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant -27- 28 or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. Any waiver shall be in writing and signed by both Sublandlord and Subtenant. 29. General. (a) Captions. The captions and Paragraph headings used in this Sublease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Sublease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Sublease. As used in this Sublease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. (b) Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Sublease. (c) Severability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Sublease, but this Sublease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Sublease shall be construed and enforced in accordance with the laws of the State of California. (d) Quiet Enjoyment. Upon Subtenant paying the rent for the Premises (and the use of the Excluded Area) observing and performing all of the covenants, conditions and provisions on Subtenant's part to be observed and performed hereunder, Subtenant shall have quiet possession of the Premises (and the use of the Excluded Area) for the entire term hereof subject to all of the provisions of this Sublease. (e) Law. As used in this Sublease, the term "Law" or "Laws" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Sublease or the Premises or both, in effect at the Commencement Date of this Sublease or any time during the Sublease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). (f) Agent. As used in this Sublease, the term "Agent" shall mean, with respect to either Sublandlord, Subtenant or any Lender, its respective agents, employees, contractors (and their subcontractors), and invitees (and in the case of subtenant, its subtenants). (g) Lender. As used in this Sublease, the term "Lender" shall mean any beneficiary, mortgagee, secured party or other holder of any Security Instrument. 30. Sign. Subtenant shall have the right at its cost to maintain its name on signage within or on the Premises or on the Excluded Area, provided any such signage placed by Subtenant on the Main Building or on the Excluded Area shall be in compliance with all applicable laws, ordinances, rules and regulations. -28- 29 31. Interest on Past Due Obligations. Any Monthly Installment of Rent due from Subtenant, or any other sum due under this Sublease from Subtenant, which is received by Sublandlord after the date ten (10) days following the date written notice is given by Sublandlord to Subtenant that such sum has not been paid when due, shall bear interest from said due date until paid, at an annual rate equal to the greater of (the "Permitted Rate"): (1) ten percent (10%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Subtenant. In addition, Subtenant shall pay all costs and attorneys' fees incurred by Sublandlord in collection of such amounts. 32. Surrender of the Premises. (a) Removal of Property. On the last day of the Sublease Term, or on the sooner termination of this Sublease, Subtenant shall surrender the Premises and the Excluded Area to Sublandlord in their then existing condition existing except as otherwise provided in this Paragraph 32. Not later than the expiration or earlier termination of the Sublease Terms, Subtenant shall remove all of Subtenant's personal property and trade fixtures (including, without limitation, all machinery and equipment) from the Main Building, and all property not so removed shall be deemed abandoned by Subtenant and may be removed by Sublandlord at Subtenant's sole cost and expense. Anything herein to the contrary notwithstanding, at the expiration or earlier termination of the Sublease Term, Subtenant shall not be obligated to remove from the Excluded Area any "Remediation Equipment" as such term is defined in that certain Grant of Easements, Restriction and Indemnity Agreement dated December 24, 1997, executed by Raytheon Semiconductor, Inc., a Delaware corporation, as grantor, and Raytheon Company, as grantee, and recorded in the Official Records of Santa Clara County on December 30, 1997, as Document No.: 13994862 (the "Easements Agreement"). (b) Demolition of Main Building and Related Improvements. (i) The parties hereto agree that Subtenant shall (A) complete the demolition of the Main Building and related structures and improvements including, without limitation, the Subtenant Improvements (except for those items set forth in subparagraphs (viii), (x) and (xvi) of Paragraph 2(a) of this Sublease) on the Excluded Area and the Main Building foundation, (B) complete, at Subtenant's cost, the remediation of any contaminated soil underlying the Main Building or related improvements (as further discussed in Paragraph 32(d) below) either (i) to levels at or below the cleanup level or standards established by the United States Environmental Protection Agency Record of Decision for the Raytheon facility, or (ii) to levels acceptable to the environmental agency or agencies having jurisdiction over such cleanup or remediation (such levels described in clauses (i) or (ii) above being referred to hereinafter as the "Soil Remediation Standard") and (C) obtain, at Subtenant's cost, an "environmental closure" pertaining to the operations of Subtenant within the Main Building and related facilities, as required by all applicable governmental agencies having jurisdiction over such closure (the items set forth in subparagraphs (A), (B) and (C) of this subparagraph are collectively referred to as the "Demolition") on or before January 1, 2001 (such date is referred to herein as the "Departure Deadline"), without any liability of Sublandlord or Lessor, as the case may be, for overtime or -29- 30 additional labor resulting from Subtenant's failure, if applicable, to correctly estimate the time necessary for completion of the Demolition. For purposes of this Paragraph 32(b), Subtenant shall be deemed to have completed the soil contamination remediation referred to above, if applicable, at such time as (Y) Subtenant's environmental consultant overseeing such remediation confirms or states in writing that soil contamination under the Main Building, if any, has been remediated to levels that meet the Soil Remediation Standard, or (Z) Subtenant causes, at Subtenant's cost, an environmental assessment of the soil under the demolished Main Building to be performed by an environmental consultant and such assessment indicates that the soil under the demolished Main Building and related improvements does not contain Hazardous Materials in violation of the Soil Remediation Standard. The environmental consultant referred to in the preceding sentence shall be selected by Subtenant and approved by Sublandlord and Lessor, which approval shall not be unreasonably withheld. Sublandlord and Lessor shall approve or disapprove of the environmental consultant selected by Subtenant within five (5) days of receipt of such contractor's identity as well as written information about the contractor's experience and credentials. If Sublandlord or Lessor fail to disapprove such contractor within such five (5) day period, Sublandlord and Lessor shall be deemed to have approved such contractor. Any report prepared by such contractor shall be addressed to the Financing Parties. Alternatively, such contractor shall provide the Financing Parties with a signed statement that they may rely on such report. (ii) Subtenant shall use commercially reasonable efforts to complete the Demolition in an expeditious manner following the expiration or earlier termination of the Sublease Term in order to permit Sublandlord or Lessor, as the case may be, to commence development of the Excluded Area. Sublandlord, in its own capacity or as construction agent of Lessor, agrees to reasonably cooperate with Subtenant in Subtenant's efforts to cause the applicable governmental agency or agencies to respond in a timely manner to Subtenant's plan for removal of any contaminated soil from under the Main Building or the related improvements. Sublandlord and Lessor agree to reasonably cooperate with Subtenant with regard to the Demolition and not to unreasonably interfere with, delay or impair Subtenant's efforts to complete the demolition in an expeditious manner. If, however, Subtenant fails to complete the Demolition on or before the Departure Deadline, then Subtenant shall pay to Sublandlord, as Sublandlord's sole and exclusive remedy for such delay in the completion of the Demolition, liquidated damages in a per day amount equal to the Monthly Installment of rent paid by Subtenant for the month immediately preceding the expiration or earlier termination of the Sublease Term divided by thirty (30) for each day from and after the Departure Deadline until the Demolition is completed. Nothing within the preceding sentence shall preclude Sublandlord or Lessor from exercising any rights or remedies against Subtenant under the Purchase Agreement (to the extent such remedies survive the close of escrow thereunder) or that certain Environmental Indemnity Agreement by and between Sublandlord and Subtenant (the "Indemnity Agreement"). (iii) Notwithstanding the provisions of subparagraph 32(b)(ii) above, if Subtenant fails to complete the Demolition on or before the Departure Deadline due to Subtenant's failure to use commercially reasonable efforts to complete the Demolition in an expeditious manner, Subtenant shall pay Sublandlord, as Sublandlord's sole and exclusive remedy for Subtenant's failure to complete the Demolition on or before the Departure Deadline, -30- 31 liquidated damages in the amount of Seven Thousand Five Hundred Dollars ($7,500) per day for each day that Subtenant fails to complete the Demolition by or after the Departure Deadline due to Subtenant's breach of its obligation under the first sentence of subparagraph 32(b)(ii). Nothing within the preceding sentence shall preclude Sublandlord from exercising any remedies against Subtenant under the Purchase Agreement (to the extent such remedies survive the close of escrow thereunder) or the Indemnity Agreement. Notwithstanding the foregoing, Subtenant shall only be obligated to pay liquidated damages in the amount set forth in this subparagraph 32(b)(iii)(instead of the amount set forth in subparagraph 32(b)(ii) above) for each day after the Departure Deadline that the Demolition has not been completed and Sublandlord or Lessor, as the case may be, is ready to commence grading or the construction of improvements on the Excluded Area or any portion thereof; provided, however, that if the condition of the Excluded Area prevents or delays the Sublandlord's ability to commence grading or construction thereon, the condition set forth in this sentence shall not apply. (iv) The parties hereto acknowledge and agree that Sublandlord's carrying costs, lost opportunity costs and other expenses incurred by Sublandlord as a result of not having full and unrestricted access to the Excluded Area by the Departure Deadline are impracticable or extremely difficult to ascertain. The parties hereto agree that the amounts of liquidated damages set forth in subparagraph 32(b)(ii) and 32(b)(iii) are reasonable estimates of the damages that will be incurred by Sublandlord in the event Subtenant is not able to complete the Demolition by the Departure Deadline. By executing this paragraph below, the parties hereto agree to the provisions of these liquidated damages provisions. Subtenant: [INIT] Sublandlord: -------- -------- (c) Remediation of Contaminated Soil. If contaminated soil is discovered under the approximately 119,000 square foot Main Building and/or related improvements following the demolition of the same by Subtenant, then such contaminated soil shall not be treated or remediated by Subtenant on the Excluded Area after the Departure Deadline. If Subtenant has not disposed of or remediated any such contaminated soil underlying the Main Building and/or related improvements by the Departure Deadline, then Subtenant agrees to dispose or treat, or cause to be disposed or treated, such soil contamination off-site at a registered hazardous waste disposal site (if legally required) or off-site as required by applicable environmental Laws, with Subtenant or Raytheon Company named on all permits and manifests with respect to such contaminated soil as the party responsible for such disposal or treatment (i.e., the generator). Sublandlord acknowledges and agrees that if contaminated soil is discovered under the Main Building and/or related improvements following the demolition of such Main Building and related improvements, and if Subtenant reasonably believes that Raytheon Company is responsible for the clean up or remediation of such contaminated soil (or for the cost of clean up or remediation), then Subtenant will promptly notify Raytheon Company of such contamination and request that Raytheon Company undertake the disposal or treatment of such contaminated soil as provided above. Subtenant shall have no liability to Sublandlord or Lessor for the clean up or remediation of such contaminated soil if Raytheon Company accepts responsibility for the clean up or remediation of such contaminated soil in accordance with the terms set forth above and disposes of or treats such contamination such that it is removed or remediated in accordance with applicable environmental laws and regulations by the Departure -31- 32 liquidated damages in the amount of Seven Thousand Five Hundred Dollars ($7,500) per day for each day that Subtenant fails to complete the Demolition by or after the Departure Deadline due to Subtenant's breach of its obligation under the first sentence of subparagraph 32(b)(ii). Nothing within the preceding sentence shall preclude Sublandlord from exercising any remedies against Subtenant under the Purchase Agreement (to the extent such remedies survive the close of escrow thereunder) or the Indemnity Agreement. Notwithstanding the foregoing, Subtenant shall only be obligated to pay liquidated damages in the amount set forth in this subparagraph 32(b)(ii) (instead of the amount set forth in subparagraph 32(b)(ii) above) for each day after the Departure Deadline that the Demolition has not been completed and Sublandlord or Lessor, as the case may be, is ready to commence grading or the construction of improvements on the Excluded Area or any portion thereof; provided, however, that if the condition of the Excluded Area prevents or delays the Sublandlord's ability to commence grading or construction thereon, the condition set forth in this sentence shall not apply. (iv) The parties hereto acknowledge and agree that Sublandlord's carrying costs, lost opportunity costs and other expenses incurred by Sublandlord as a result of not having full and unrestricted access to the Excluded Area by the Departure Deadline are impracticable or extremely difficult to ascertain. The parties hereto agree that the amounts of liquidated damages set forth in subparagraph 32(b)(ii) and 32(b)(iii) are reasonable estimates of the damages that will be incurred by Sublandlord in the event Subtenant is not able to complete the Demolition by the Departure Deadline. By executing this paragraph below, the parties hereto agree to the provisions of these liquidated damages provisions. Subtenant: Sublandlord: /s/ [INITIALS] ------------------- ------------------- (c) Remediation of Contaminated Soil. If contaminated soil is discovered under the approximately 119,000 square foot Main Building and/or related improvements following the demolition of the same by Subtenant, then such contaminated soil shall not be treated or remediated by Subtenant on the Excluded Area after the Departure Deadline. If Subtenant has not disposed of or remediated any such contaminated soil underlying the Main building and/or related improvements by the Departure Deadline, then Subtenant agrees to dispose or treat, or cause to be disposed or treated, such soil contamination off-site at a registered hazardous waste disposal site (if legally required) or off-site as required by applicable environmental Laws, with Subtenant or Raytheon Company named on all permits and manifests with respect to such contaminated soil as the party responsible for such disposal or treatment (i.e., the generator). Sublandlord acknowledges and agrees that if contaminated soil is discovered under the main building and/or related improvements following the demolition of such Main Building and related improvements, and if Subtenant reasonably believes that Raytheon Company is responsible for the clean up or remediation of such contaminated soil (or for the cost of clean up or remediation), then Subtenant will promptly notify Raytheon Company of such contamination and request that Raytheon Company undertake the disposal or treatment of such contaminated soil as provided above. Subtenant shall have no liability to Sublandlord or Lessor for the clean up or remediation of such contaminated soil if Raytheon Company accepts responsibility for the clean up or remediation of such contaminated soil in accordance with the terms set forth above and disposes of or treats such contamination such that it is removed or remediated in accordance with applicable environmental laws and regulations by the Departure -31- 33 Deadline. The parties agree that any contaminated soil discovered under the Main Building or the related improvements shall be remediated or treated by Subtenant, at Subtenant's sole cost (except as set forth in the preceding sentence), to levels that meet the Soils Remediation Standard. Subtenant shall not be obligated to remove any contaminated soil or other Hazardous Materials discovered under the Main Building or related improvements (or on or under the Excluded Area) if the same is remediated or treated to levels that meet the Soil Remediation Standard. (d) Costs of Demolition. (i) Prior to vacating the Main Building (which shall occur not later than December 31, 2000), Subtenant shall contract with a licensed contractor to demolish, at Lessor's cost (to the extent the funding requirements set forth in that certain Participation Agreement dated April __, 1999 among Lessor, Sublandlord and others (the "Participation Agreement") and that certain Agency Agreement dated April __, 1999 between Lessor and Sublandlord (the "Agency Agreement") are satisfied, the Main Building (and certain related structures and improvements located on the Excluded Area), including, without limitation, the foundation of the Main Building. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being at Lessor's costs shall be at Sublandlord's cost. Subtenant shall have the right to select the contractor to perform such demolition work. The contractor shall be selected through a bid process in which Subtenant shall obtain bids from not less than three licensed contractors selected by Subtenant and approved by Sublandlord, as Lessor's agent, which such approval shall not be unreasonably withheld. Based on such bids and any other information that the Subtenant may reasonably consider, Subtenant shall select the contractor to perform the demolition and such contractor selected by Subtenant shall be subject to the approval of Sublandlord and Lessor (which such approval shall not be unreasonably withheld). Subtenant's contract with such contractor shall contain terms that are commercially reasonable for such a contract. Sublandlord and Lessor shall provide the approvals or disapprovals set forth in this subparagraph within five (5) days of receipt of the information about the contractors selected by Subtenant to make bids or the bids and the identity of the contractor selected by Subtenant to perform the work. If Sublandlord or Lessor fails to disapprove such contractor(s) within such five (5) day period, Sublandlord and Lessor shall be deemed to have approved such contractor(s). If Sublandlord or Lessor reasonably disapproves any bidders or contractor selected by Subtenant, then, concurrently with notifying Subtenant of its disapproval, Sublandlord or lessor, as the case may be, shall provide Subtenant in writing with the name, address and telephone number of a replacement bidder or contractor, as the case may be, acceptable to Sublandlord and Lessor. (ii) Lessor shall pay (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) one hundred percent (100%) of the cost of demolishing and removing from the Property the Main Building and related structures and improvements located on the Excluded Area, including the foundation of the Main Building (and the cost of removing such demolished Main Building, foundations, structures and improvements from the Property). If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being paid by Lessor shall be paid by Sublandlord, except as set forth below. Notwithstanding the foregoing, Subtenant shall be responsible for (A) the cost of -32- 34 removal of any Hazardous Materials, including asbestos, located within the Main Building, (B) the cost of removal (or remediation as provided above) in compliance with applicable Laws of any asbestos or other Hazardous Materials located under the Main Building to levels that meet the Soils Remediation Standard (except Subtenant shall not be responsible hereunder for removal of any groundwater contamination under the Main Building) and (C) the cost of demolishing/removing the improvements constructed after the Commencement Date of this Sublease by or on behalf of Subtenant identified in Paragraph 13(a) above. The cost to be borne by Lessor (the "Cost to Lessor") (to the extent the funding requirements set forth in the Participation Agreement and the Agency agreement are satisfied) for demolishing the Main Building and related structures and improvements on the Excluded Area shall be net of the cost of health and safety plans and procedures incurred by Subtenant and/or Subtenant's affiliates, agents, employees or contractors for demolition and removal of the improvements, and the cost of protective measures for construction workers incurred by Subtenant and/or Subtenant's affiliates, agents, employees or contractors relating to any Hazardous Materials within or under the Main Building, which shall be at Subtenant's (or Raytheon's) cost. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being at Lessor's costs of Demolition shall be borne by Subtenant. (iii) Upon Sublandlord's selection of a contractor, Sublandlord shall cause Lessor (to the extent the funding requirements set forth in the Participant Agreement and the Agency Agreement are satisfied) to deposit into an interest bearing escrow account as quickly as practicable under the Financing Documents, but in no event more than forth (40) days after Sublandlord's approval of the contractor as set forth in subparagraph 32(d)(ii) above, an amount equal to such contractor's estimated Cost to Lessor. If Sublandlord or Lessor fails to cause such amount to be deposited into the escrow account as provided herein, Subtenant shall not be required to demolish the Main Building and related improvements or remediate any soil contamination under the Main Building, if any, or remove any asbestos from the Main Building or any of the related improvements. Upon Subtenant's submission to the escrow holder of reasonably detailed documentation with respect to costs actually incurred with respect to the Demolition which are Costs to Lessor, the escrow holder shall promptly disburse from the escrow account to Subtenant or Subtenant's designees funds sufficient to pay such Costs to Lessor. In the event the total Costs to Lessor are less than the amount held in escrow, all remaining amounts held in the escrow account shall be returned to Sublandlord, as agent for Lessor. In the event the total Costs to Lessor exceed the amount held in escrow, Lessor shall promptly reimburse Subtenant (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) such additional costs. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being reimbursed by Lessor shall be reimbursed by Sublandlord. (vi) The parties hereto agree that Subtenant or Raytheon Company shall be identified as the party responsible for the proper disposal of any Hazardous Materials within the Main Building (e.g., asbestos) or contaminated soil to be removed from the Excluded Area as part of the demolition and removal obligations referred to in this paragraph, and in the -33- 35 event Subtenant or Raytheon Company fails to timely and completely perform such asbestos and contaminated soil removal or remediation as provided above, Sublandlord, in addition to Sublandlord's other remedies under this Sublease, may, as Lessor's agent, elect to do so (with Subtenant named on all permits and manifests relating to such asbestos and contaminated soil removal) and, in such event, Subtenant shall reimburse, or cause Raytheon Company to reimburse, Lessor for its reasonable costs incurred in removing such asbestos and contaminated soil from or under the Main Building and related structures as provided above. Such reimbursement shall be required to be made within thirty (30) days following receipt of a written notice or statement setting forth in reasonable detail such costs to be reimbursed. (e) Relocation of Remediation Well Sites and Equipment. Subtenant agrees to reasonably cooperate with Sublandlord, as Lessor's agent, promptly to engineer and relocate, on Sublandlord's reasonable request and at Subtenant's cost, any existing soil or water remediation well sites and equipment (as further set forth in Section 9.1(g) of the Purchase Agreement) which Subtenant is not required to remove pursuant to Paragraph 32 herein. Sublandlord agrees to reasonably cooperate with Subtenant with respect to the engineering and relocation of such items. Such cooperation shall include, without limitation, the prompt delivery to Subtenant of any development plans for the Property and Sublandlord's participation in good faith and timely discussions with Subtenant regarding the relocation of such items. (f) Survival. The obligations of Lessor, Subtenant and Sublandlord under this Paragraph 32 shall survive the expiration or earlier termination of this Sublease. 33. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Sublease on behalf of Sublandlord and Subtenant, respectively. 34. Brokers. Sublandlord and Subtenant each represent and warrant to the other that it has not dealt with any broker respecting this transaction other than Cornish & Carey Commercial ("C&C"); however, no commission shall be owing to C&C based on the parties hereto entering into this Sublease. Each party hereto agrees to indemnify and hold the other harmless from and against damages, losses, liabilities, claims, demands, costs or expenses suffered or incurred by the other in the event of any breach by such party of any representation, warranty or covenant set forth in this Paragraph 34. 35. Consent. Wherever in this Sublease it is provided that either party shall not unreasonably withhold consent or approval, such consent or approval (collectively referred to as "consent") shall also not be unreasonably withheld, conditioned or delayed. If a party considers that the other party has unreasonably withheld or delayed a consent, it shall so notify the other party within ten (10) days after receipt of notice of denial of the requested consent or, in case notice of denial is not received, within twenty (20) days after giving the first-mentioned notice, may submit the question of whether the withholding or delaying of such consent is unreasonable to determination by arbitration. 36. Right of Sublandlord to Perform. Except as provided otherwise herein, all covenants and agreements to be performed by Subtenant under this Sublease shall be performed at Subtenant's sole cost and expense and without any abatement of rent or right of set-off. If -34- 36 Subtenant fails to pay any sum of money, other than rent, or fails to perform any other act on its part to be performed under this Sublease, and the failure continues beyond any applicable grace or cure period set forth herein then in addition to any other available remedies, Sublandlord may, at its election make the payment or perform the other act on Subtenant's part. Sublandlord's election to make the payment or perform the act on Subtenant's part shall not give rise to any responsibility of Sublandlord to continue making the same or similar payments or performing the same or similar acts. Subtenant shall, promptly upon demand by Sublandlord, reimburse Sublandlord for all reasonable sums paid by Sublandlord and all necessary incidental costs, together with interest at the Permitted Rate or two percent (2%) above the prime rate announced by Bank of America from time to time, whichever is greater from the date of payment by Sublandlord. Sublandlord shall have the same rights and remedies if Subtenant fails to pay those amounts as Sublandlord would have in the event of a default by Subtenant in the payment of rent. Sublandlord shall provide Sublandlord with written notice and the appropriate cure period provided in the Lease before performing any act on behalf of Subtenant and will provide Subtenant with written request for any reimbursement payable hereunder. 37. Expenses and Legal Fees. All sums reasonably incurred by Sublandlord in connection with any Event of Default by Subtenant under this Sublease or holding over of possession by Subtenant after the expiration or earlier termination of this Sublease, including without limitation all reasonable costs, expenses and reasonable accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable by Subtenant to Sublandlord on demand, and shall bear interest at the Permitted Rate. Should either Sublandlord or Subtenant bring any action in connection with this Sublease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts. 38. WAIVER OF JURY TRIAL. SUBLANDLORD AND SUBTENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. 39. Satisfaction of Judgment. The obligations of Sublandlord and Subtenant do not constitute the personal obligations of the directors, officers or shareholders of Sublandlord or its constituent partners. Should Subtenant recover a money judgment against Sublandlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Sublandlord in the Property and out of the rent, insurance proceeds or other income from such property receivable by Sublandlord or out of consideration received by Sublandlord from the sale or other disposition of all or any part of Sublandlord's right, title or interest in the Property, and no action for any deficiency may be sought or obtained by Subtenant. -35- 37 40. Changes Required by Accounting Rules. If, in connection with obtaining synthetic lease financing for the acquisition and development of the Property, Sublandlord is required to make modifications to this Sublease in order to comply with all applicable accounting requirements for such financing, Subtenant will not unreasonably withhold or delay its consent, provided that the modifications do not increase the obligations of Subtenant or impair Subtenant's rights under this Sublease. 41. Security Measures. Subtenant hereby acknowledges that Sublandlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Property. Subtenant assumes all responsibility for the protection of Subtenant, its agents, invitees and property from acts of third parties. IN WITNESS WHEREOF, the parties have executed this Sublease on the dates set forth below. SUBTENANT: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation DATED: April 21, 1999 By: /s/ Daniel E. Boxer -------------------------------------- Name: Daniel E. Boxer ------------------------------------ Title: Executive Vice President ----------------------------------- SUBLANDLORD: VERITAS SOFTWARE CORPORATION, a Delaware Corporation DATED:___________, 1999 By: /s/ Jay A. Jones -------------------------------------- Name: Jay A. Jones ------------------------------------ Title: Vice President and General Counsel ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- -36- 38 CONSENT OF LESSOR The undersigned Lessor under that certain Sublease Agreement dated as of April __, 1999 by and between Lessor and Lessee hereby consents to the subletting of the Premises by Subtenant on the terms and conditions contained in this Sublease including, without limitation, the terms and conditions set forth in Paragraph 32, and Lessor agrees to be bound by its obligations under Paragraph 32. This consent shall apply only to this Sublease and shall not be deemed to be a consent to any other subleases. LESSOR FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as Owner Trustee under the VS Trust 1999-1 By: /s/ Val T. Orton ------------------------------------ Name: Val T. Orton ---------------------------------- Title: Vice President --------------------------------- 39 EXHIBIT "A" [EXHIBIT MAP] 40 EXHIBIT "B" [ELLIS STREET MAP] 41 EXHIBIT "B" [350 ELLIS STREET FLOOR PLAN] 42 EXHIBIT "B" [540 PRICE AVENUE MAP] EX-10.25 10 CERTIFICATE RE: REPRESENTATIONS AND WARRANTIES 1 EXHIBIT 10.25 CERTIFICATE RE: REPRESENTATIONS AND WARRANTIES The undersigned, Fairchild Semiconductor Corporation of California, a Delaware corporation ("Fairchild Semiconductor"), hereby certifies that each of the representations and warranties contained in Paragraph 8.1 of the Agreement of Purchase and Sale dated March 29, 1999, by and between Fairchild Semiconductor, as seller, and Veritas Software Corporation, a Delaware corporation ("Veritas"), as purchaser, is true and correct as of the date escrow closes on the sale of the property located at 350 Ellis Street, Mountain View, California, from Fairchild Semiconductor to Veritas or Veritas' assignee. FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By: /s/ [Signature Illegible] ------------------------------- Its: ------------------------------ April 20, 1999 -1- EX-10.26 11 SECURITY AGREEMENT DATED APRIL 23, 1999 1 EXHIBIT 10.26 - -------------------------------------------------------------------------------- SECURITY AGREEMENT Dated as of April 23, 1999 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 and NATIONSBANK, N.A. as the Agent for the Lenders and the Holders and accepted and agreed to by VERITAS SOFTWARE CORPORATION - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS 1. Definitions.............................................................. 2 2. Grant of Security Interest............................................... 3 3. Payment of Obligations................................................... 5 4. Other Covenants.......................................................... 5 5. Default; Remedies........................................................ 6 6. Remedies Not Exclusive................................................... 6 7. Performance by the Agent of the Borrower's Obligations................... 7 8. Duty of the Agent........................................................ 7 9. Powers Coupled with an Interest.......................................... 7 10. Execution of Financing Statements........................................ 8 11. Security Agreement Under Uniform Commercial Code......................... 8 12. Authority of the Agent................................................... 9 13. Notices.................................................................. 9 14. Severability............................................................. 9 15. Amendment in Writing; No Waivers; Cumulative Remedies.................... 9 16. Section Headings......................................................... 10 17. Successors and Assigns................................................... 10 18. The Borrower's Waiver of Rights.......................................... 10 19. GOVERNING LAW............................................................ 10 20. Obligations Are Without Recourse......................................... 11 21. Partial Release; Full Release............................................ 11 22. Miscellaneous............................................................ 11 23. Conflicts with Participation Agreement................................... 12 24. LESSEE AS A PARTY........................................................ 12 3 SECURITY AGREEMENT This SECURITY AGREEMENT, dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, this "Security Agreement"), is made between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as Owner Trustee under the VS Trust 1999-1 (the "Borrower"), and NATIONSBANK, N.A., a national banking association ("Bank"), as agent for (a) the Lenders (hereinafter defined) under the Credit Agreement dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Credit Agreement") by and among the Borrower, the lending institutions from time to time parties thereto (the "Lenders") and Bank as the agent for the Lenders and (b) the holders of the certificates issued pursuant to the Trust Agreement dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Trust Agreement") among the holders from time to time parties thereto (the "Holders") and the Borrower, in its individual capacity thereunder and in its capacity as Owner Trustee thereunder. The Lenders and the Holders, together with their successors and permitted assigns, are collectively referred to hereinafter as the "Secured Parties" Bank, in its capacity as agent for the Secured Parties is referred to hereinafter as the "Agent", and this Security Agreement is accepted and agreed to by Veritas Software Corporation, a Delaware corporation. Preliminary Statement Pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower in an aggregate amount not to exceed the aggregate Lender Commitments upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes issued by the Borrower under the Credit Agreement. Pursuant to the Trust Agreement, the Holders have agreed to purchase the ownership interests of the Trust created thereby in an aggregate amount not to exceed the aggregate Holder Commitments upon the terms and subject to the conditions set forth therein, to be evidenced by the Certificates issued by the Borrower under the Trust Agreement. The Borrower is, or shall be upon the date of the initial Advance with respect to each Property, the legal and beneficial owner of such Property. It is a condition, among others, to the obligation of the Lenders to make their respective Loans to the Borrower under the Credit Agreement and the Holders to make their respective Holder Advances under the Trust Agreement that the Borrower shall have executed and delivered this Security Agreement to the Agent, for the benefit of the Lenders and the Holders. NOW, THEREFORE, in consideration of the premises and to induce the Lenders to make their respective Loans under the Credit Agreement and to induce the Holders to make their respective Holder Advances under the Trust Agreement, the Borrower hereby agrees with the Agent, for the benefit of the Lenders and the Holders, as follows: 4 1. DEFINITIONS. (a) As used herein, the following terms shall have the following respective meanings: "Accounts" shall mean all "accounts," as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, including without limitation (i) all accounts receivable, other receivables, book debts and other forms of obligations now owned or hereafter received or acquired by or belonging or owing to the Borrower, whether arising out of goods sold or leased or services rendered by it or from any other transaction (including without limitation any such obligations which may be characterized as an account under the Uniform Commercial Code), (ii) all of the Borrower's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, (iii) all of the Borrower's rights to any goods represented by any of the foregoing (including without limitation unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (iv) all monies due or to become due to the Borrower under all purchase orders and contracts for the sale or lease of goods or the performance of services or both by the Borrower (whether or not yet earned by performance on the part of the Borrower) now or hereafter in existence, including without limitation the right to receive the proceeds of said purchase orders and contracts, and (v) all collateral security and guarantees of any kind, now or hereafter in existence, given by any Person with respect to any of the foregoing. "Chattel Paper" shall mean any and all "chattel paper," as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, wherever located. "Documents" shall mean any and all "documents", as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, wherever located, including without limitation each bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. "General Intangibles" shall mean any and all "general intangibles," as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, including without limitation all contracts, undertakings, or agreements in or under which the Borrower may now or hereafter have any right (other than any right evidenced by Chattel Paper, Documents or Instruments), title or interest, including without limitation any agreements relating to the terms of payment or the terms of performance of any Account. "Holders" shall have the meaning specified in the first paragraph of this Security Agreement. 2 5 "Instruments" shall mean any and all "instruments", as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, wherever located, including without limitation all certificated securities, all certificates of deposit, and all notes and other, without limitation, evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Investment Property" shall mean any and all "investment property," as such term is defined in the Uniform Commercial Code, now owned or hereafter acquired by the Borrower, wherever located. "Lenders" shall have the meaning specified in the first paragraph of this Security Agreement. "Lessee" shall mean Veritas Software Corporation, a Delaware corporation, its successors, permitted assigns and permitted transferees. "Obligations" shall mean any and all obligations now existing or hereafter arising under the Credit Agreement, the Notes, the Trust Agreement, the Certificates and/or any other Operative Agreement. (b) Capitalized terms used but not otherwise defined in this Security Agreement shall have the respective meanings specified in the Credit Agreement or Appendix A to the Participation Agreement dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof, the "Participation Agreement") among Lessee, the various parties thereto from time to time, as guarantors, the Borrower, the Holders, the Lenders and NATIONSBANK, N.A., as agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. (c) The rules of usage set forth in Appendix A to the Participation Agreement shall apply to this Agreement. 2. GRANT OF SECURITY INTEREST. To secure payment of all the amounts advanced under the Credit Agreement in connection with the Notes, all the amounts advanced or contributed under the Trust Agreement in connection with the Certificates and all other amounts now or hereafter owing to the Lenders, the Holders or the Agent thereunder or under any other Operative Agreement, THE BORROWER HEREBY CONVEYS, GRANTS, ASSIGNS, TRANSFERS, HYPOTHECATES, MORTGAGES AND SETS OVER TO THE AGENT FOR THE BENEFIT OF THE SECURED PARTIES, A FIRST PRIORITY SECURITY INTEREST IN AND LIEN ON THE TRUST 3 6 ESTATE, WHETHER NOW EXISTING OR HEREAFTER ACQUIRED INCLUDING WITHOUT LIMITATION THE FOLLOWING: (a) all right, title and interest of the Borrower in and to the Operative Agreements now existing or hereafter acquired by the Borrower (including without limitation all rights to payment and indemnity rights of the Borrower under the Participating Agreement) (all of the foregoing in this paragraph (a) being referred to as the "Rights in Operative Agreements"); (b) all right, title and interest of the Borrower in and to all of the Equipment; (c) all right, title and interest of the Borrower in and to all of the Fixtures; (d) all the estate, right, title, claim or demand whatsoever of the Borrower, in possession or expectancy, in and to each Property, Fixture or Equipment or any part thereof; (e) all right, title and interest of the Borrower in and to all substitutes, modifications and replacements of, and all additions, accessions and improvements to, the Fixtures and Equipment, subsequently acquired or leased by the Borrower or constructed, assembled or placed by the Borrower on any Property, immediately upon such acquisition, lease, construction, assembling or placement, and in each such case, without any further conveyance, assignment or other act by the Borrower; (f) all right, title and interest of the Borrower in, to and under books and records relating to or used in connection with the operation of one (1) or more Properties or any part thereof; all rights of the Borrower to the payment of money and all property; and all rights in and to any causes of action or choses in action now or hereafter existing in favor of the Borrower and all rights to any recoveries therefrom; (g) all right, title and interest of the Borrower in and to all unearned premiums under insurance policies now held or subsequently obtained by the Lessee relating to one (1) or more Properties and the Borrower's interest in and to all proceeds of any insurance policies maintained by or for the benefit of the Borrower, including without limitation any right to collect and receive such proceeds; and all awards and other compensation, including without limitation the interest payable thereon and any right to collect and receive the same, made to the present or any subsequent owner of any Property for the taking by eminent domain, condemnation or otherwise, of all or any part of any Property or any easement or other right therein; (h) all right, title and interest of the Borrower in and to (i) all consents, licenses, certificates and other governmental approvals relating to construction, completion, use or operation of any Property or any part thereof and (ii) all Plans and Specifications relating to any Property; 4 7 (i) all right, title and interest of the Borrower in and to all Rent and all other rents, payments, purchase prices, receipts, revenues, issues and profits payable under the Lease or pursuant to any other lease with respect to any Property; (j) all right, title and interest of the Borrower in and to all Instruments and Documents; (k) all right, title and interest of the Borrower in and to all General Intangibles; (l) all right, title and interest of the Borrower in and to all Chattel Paper (including without limitation all rights under the Lease); (m) all right, title and interest of the Borrower in and to all money, cash or cash equivalent and bank accounts; (n) all right, title and interest of the Borrower in and to all Accounts; (o) all right, title and interest of the Borrower in and to all proceeds of letters of credit issued in favor of the Borrower in connection with any Property; and (p) all right, title and interest of the Borrower in and to all proceeds, both cash and noncash, of any of the foregoing. (All of the foregoing property and rights and interests now owned or held or subsequently acquired by the Borrower and described in the foregoing clauses (a) through (p) are collectively referred to as the "Trust Property"). TO HAVE AND TO HOLD the Trust Property and the rights and privileges hereby granted unto the Agent (for the benefit of the Lenders and the Holders) its successors and assigns for the uses and purposes set forth, until all of the obligations owing to the Lenders, the Holders and the Agent under the Operative Agreements are paid in full; provided that EXCLUDED from the Trust Property at all times and in all respects shall be all Excepted Payments. 3. PAYMENT OF OBLIGATIONS. The Borrower shall pay all Obligations in accordance with the terms of the Credit Agreement, the Notes, the Trust Agreement, the Certificates and the other Operative Agreements and perform each term to be performed by it under the Credit Agreement, the Notes, the Trust Agreement, the Certificates and the other Operative Agreements. 4. OTHER COVENANTS. At any time and from time to time, upon the reasonable written request of the Agent, and at the expense of the Borrower (with funds provided by the Lessee for such purpose), the 5 8 Borrower will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent reasonably may request for the purposes of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers granted by this Security Agreement. 5. DEFAULT; REMEDIES. (a) If a Credit Agreement Event of Default has occurred and is continuing: (i) the Agent, in addition to all other remedies available at law or in equity, shall have the right forthwith to enter upon any Property (or any other place where any component of any Property is located at such time) without charge, and take possession of all or any portion of the Trust Property, and to re-let the Trust property and receive the rents, issues and profits thereof, to make repairs and to apply said rentals and profits, after payment of all necessary or proper charges and expenses, on account of the amounts hereby secured (subject to the Excepted Payments); and (ii) the Agent, shall, as a matter of right, be entitled to the appointment of a receiver for the Trust Property, and the Borrower hereby consents to such appointment and waives notice of any application therefor. (b) If a Credit Agreement Event of Default has occurred and is continuing, the Agent may proceed by an action at law, suit in equity or other appropriate proceeding, to protect and enforce its rights, whether for the foreclosure of the Lien of this Security Agreement, or for the specific performance of any agreement contained herein or for an injunction against the violation of any of the terms hereof. The proceeds of any sale of any of the Trust Property shall be applied pursuant to Section 8.7 of the Participation Agreement. In addition, the Agent may proceed under Section 11 hereof. (c) The Borrower hereby waives the benefit of all appraisement, valuation, stay, extension and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale of the Trust Property or any portion thereof or interest therein. 6. REMEDIES NOT EXCLUSIVE. The Agent shall be entitled to enforce payment of the indebtedness and performance of the Obligations and to exercise all rights and powers under this Security Agreement or under any of the other Operative Agreements or other agreements or any laws now or hereafter in force, notwithstanding some or all of the Obligations may now or hereafter be otherwise secured, whether by deed of trust, mortgage, security agreement, pledge, Lien, assignment or otherwise. Neither the acceptance of this Security Agreement nor its enforcement, shall prejudice or in any manner affect the Agent's right to realize upon or enforce any other security now or hereafter held by the Agent, it being agreed that the Agent shall be entitled to enforce this Security 6 9 Agreement and any other security now or hereafter held by the Agent in such order and manner as the Agent may determine in its absolute discretion. No remedy conferred hereunder or under any other Operative Agreement upon or reserved to the Agent is intended to be exclusive of any other remedy herein or therein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Operative Agreements to the Agent or to which it may otherwise be entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by the Agent. In no event shall the Agent, in the exercise of the remedies provided in this Security Agreement (including without limitation in connection with the assignment of Rents to the Agent, or the appointment of a receiver and the entry of such receiver onto all or any part of the Land), be deemed a "mortgagee in possession" or a "pledgee in possession," and the Agent shall not in any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies. 7. PERFORMANCE BY THE AGENT OF THE BORROWER'S OBLIGATIONS. If the Borrower fails to perform or comply with any of its agreements contained herein the Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. The expenses of the Agent incurred in connection with actions undertaken as provided in this Section 7, together with interest thereon at a rate per annum equal to the Overdue Rate, from the date of payment by the Agent to the date reimbursed by the Borrower, shall be payable by the Borrower (with funds provided by the Lessee for such purpose) to the Agent on demand and constitutes part of the Obligations secured hereby. 8. DUTY OF THE AGENT. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of any Trust Property in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar property for its own account. Neither the Agent, any Lender, any Holder nor any of their respective directors, officers, employees, shareholders, partners or agents shall be liable for failure to demand, collect or realize upon any of the Trust Property or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Trust Property upon the request of the Borrower or any other Person or to take any other action whatsoever with regard to the Trust Property or any part thereof. 9. POWERS COUPLED WITH AN INTEREST. All powers, authorizations and agencies contained in this Security Agreement are coupled with an interest and are irrevocable until this Security Agreement is terminated and the Liens created hereby are released. 7 10 10. EXECUTION OF FINANCING STATEMENTS. Pursuant to Section 9-402 of the Uniform Commercial Code, the Borrower authorizes the Agent at the expense of the Borrower (such amounts to be paid with funds provided by the Lessee for such purpose) to file financing statements with respect to the Trust Property under this Security Agreement without the signature of the Borrower in such form and in such filing offices as the Agent reasonably determines appropriate to perfect the security interests of the Agent under this Security Agreement. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. For purposes of such financing statement, the Borrower shall be deemed to be the debtor, and the Agent shall be deemed to be the secured party. The address of the Borrower is 79 South Main Street, Salt Lake City, Utah 84111, Attention: Val T. Orton, Vice President, and the address of the Agent is NationsBank, N.A., 901 Main Street, 67th Floor, Dallas, Texas 75202, Attention: Ms. Sharon Ellis. 11. SECURITY AGREEMENT UNDER UNIFORM COMMERCIAL CODE. (a) It is the intention of the parties hereto that this Security Agreement as it relates to matters of the grant, perfection and priority of security interests the subject hereof, shall constitute a security agreement within the meaning of the Uniform Commercial Code of the States in which the Trust Property is located. If a Credit Agreement Event of Default shall occur, then in addition to having any other right or remedy available at law or in equity, the Agent may proceed under the applicable Uniform Commercial Code and exercise such rights and remedies as may be provided to a secured party by such Uniform Commercial Code with respect to all or any portion of the Trust Property which is personal property (including without limitation taking possession of and selling such property). If the Agent shall elect to proceed under the Uniform Commercial Code, then fifteen (15) days' notice of sale of the personal property shall be deemed reasonable notice and the reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by the Agent shall include, but not be limited to, attorneys' fees and legal expenses. At the Agent's request, the Borrower shall assemble such personal property and make it available to the Agent at a place designated by the Agent which is reasonably convenient to both parties. (b) The Borrower, upon request by the Agent from time to time, shall execute, acknowledge and deliver to the Agent one (1) or more separate security agreements, in form satisfactory to the Agent, covering all or any part of the Trust Property and will further execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any financing statement, affidavit, continuation statement or certificate or other document as the Agent may request in order to perfect, preserve, maintain, continue or extend the security interest under, and the priority of the Liens granted by, this Security Agreement and such security instrument. The Borrower further agrees to pay to the Agent (with funds provided by the Lessee for such purpose) on demand all reasonable costs and expenses incurred by the Agent in connection with the preparation, execution, recording, filing and re-filing of any such document and all reasonable costs and expenses 8 11 of any record searches for financing statements the Agent shall reasonably require. The filing of any financing or continuation statements in the records relating to personal property or chattels shall not be construed as in any way impairing the right of the Agent to proceed against any property encumbered by this Security Agreement. 12. AUTHORITY OF THE AGENT. The Borrower acknowledges that the rights and responsibilities of the Agent under this Security Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Security Agreement shall be governed by the Credit Agreement and Section 8.6 of the Participation Agreement and by such other agreements with respect thereto as may exist from time to time (until such time as all amounts due and owing to the Secured Parties and the Agent under the Operative Agreements have been paid in full), but the Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and the Borrower shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 13. NOTICES. All notices required or permitted to be given under this Security Agreement shall be in writing and delivered as provided in Section 12.2 of the Participation Agreement. 14. SEVERABILITY. Any provision of this Security Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 15. AMENDMENT IN WRITING; NO WAIVERS; CUMULATIVE REMEDIES. (a) None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except in accordance with the terms of Section 12.4 of the Participation Agreement. (b) No failure to exercise, nor any delay in exercising, on the part of the Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent of any right or remedy hereunder on any one (1) occasion shall not be construed as a bar to any right or remedy which the Agent would otherwise have an any future occasion. 9 12 (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 16. SECTION HEADINGS. The section headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. SUCCESSORS AND ASSIGNS. This Security Agreement shall be binding upon the successors of the Borrower, and the Borrower shall not assign any of its rights or obligations hereunder or with respect to any of the Trust Property without the prior written consent of the Agent. This Security Agreement shall inure to the benefit of the Agent, the Lenders, the Holders and their respective successors and assigns, in accordance with their respective interest herein. 18. THE BORROWER'S WAIVER OF RIGHTS. Except as otherwise set forth herein, to the fullest extent permitted by law, the Borrower waives the benefit of all laws now existing or that may subsequently be enacted providing for (a) any appraisement before sale of any portion of the Trust Property, (b) any extension of the time for the enforcement of the collection of the indebtedness or the creation or extension of a period of redemption from any sale made in collecting such debt and (c) exemption of any portion of the Trust Property from attachment, levy or sale under execution or exemption from civil process. Except as otherwise set forth herein, to the fullest extent the Borrower may do so, the Borrower agrees that the Borrower will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, exemption, extension or redemption, or requiring foreclosure of this Security Agreement before exercising any other remedy granted hereunder and the Borrower and its successors and assigns, and for any and all Persons ever claiming any interest in the Trust Property, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the Obligations and marshalling in the event of foreclosure of the Liens hereby created. 19. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN SECTION 11(a) HEREOF, THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 10 13 20. OBLIGATIONS ARE WITHOUT RECOURSE. The provisions of the Participation Agreement relating to limitations on liability are hereby incorporated by reference herein, Mutatis Mutandis. 21. PARTIAL RELEASE; FULL RELEASE. The Agent may release for such consideration as it may require any portion of the Trust Property without (as to the remainder of the Trust Property) in any way impairing or affecting the Lien, security interest and priority herein provided for the Agent compared to any other Lien holder or secured party. Further, the Agent shall execute and deliver to the Borrower such documents and instruments as may be required to release the Lien and security interest created by this Security Agreement with respect to the Properties as provided in Section 8.8 of the Participation Agreement or to grant the easements and permit the other matters provided for in Section 8.5 of the Participation Agreement. 22. MISCELLANEOUS. (a) This Security Agreement is one (1) of the documents which create Liens and security interests that secure payment and performance of the Obligations. The Agent, at its election, may commence or consolidate in a single action all proceedings to realize upon all such Liens and security interests. The Borrower hereby waives (i) any objections to the commencement or continuation of an action to foreclose the Lien of this Security Agreement or exercise of any other remedies hereunder based on any action being prosecuted or any judgment entered with respect to the Obligations or any Liens or security interests that secure payment and performance of the Obligations and (ii) any objections to the commencement of, continuation of, or entry of a judgment in any such other action based on any action or judgment connected to this Security Agreement. In case of a foreclosure sale, the Trust Property may be sold, at the Agent's election, in one (1) parcel or in more than one (1) parcel and the Agent is specifically empowered (without being required to do so, and in its sole and absolute discretion) to cause successive sales of portions of the Trust Property to be held. (b) This Security Agreement may not be amended, waived, discharged or terminated except in accordance with Section 12.4 of the Participation Agreement. Upon the prior written consent of the Majority Secured Parties and unless such matter is a Unanimous Vote Matter, the Agent may release any portion of the Trust Property or any other security, and grant such extensions and indulgences in relation to the Obligations secured hereby without in any manner affecting the priority of the Lien hereof on any part of the Trust Property. (c) THE PROVISIONS OF THE PARTICIPATION AGREEMENT RELATING TO SUBMISSION TO JURISDICTION AND VENUE ARE HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS. 11 14 23. CONFLICTS WITH PARTICIPATION AGREEMENT. Notwithstanding any other provision hereof, in the event of any conflict between the terms of this Security Agreement and the Participation Agreement, the terms of the Participation Agreement shall govern. 24. LESSEE AS A PARTY. LESSEE HAS EXECUTED THIS SECURITY AGREEMENT FOR THE PURPOSE OF SUBJECTING TO THE SECURITY INTERESTS GRANTED HEREUNDER ALL OF ITS RIGHT, TITLE, ESTATE AND INTEREST, IF ANY, IN AND TO THE TRUST PROPERTY TO SECURE ALL OBLIGATIONS OF ALL CREDIT PARTIES UNDER THE OPERATIVE AGREEMENTS. ACCORDINGLY, LESSEE HEREBY GRANTS TO THE AGENT (FOR THE BENEFIT OF THE LENDERS AND THE HOLDERS) A SECURITY INTEREST IN AND TO ALL OF ITS RIGHT, TITLE, ESTATE AND INTEREST, IF ANY, IN AND TO THE TRUST PROPERTY (TO THE EXTENT LESSEE HAS ANY RIGHT, TITLE OR INTEREST THEREIN AND WITHOUT REGARD TO ANY LANGUAGE IN SECTION 2 OR THE DEFINITION OF "TRUST PROPERTY" OR ANY DEFINITION OF ANY ITEM CONSTITUTING THE TRUST PROPERTY WHICH OTHERWISE WOULD LIMIT THE TRUST PROPERTY TO THE RIGHT, TITLE AND INTEREST OF THE BORROWER THEREIN) TO SECURE ALL OBLIGATIONS OF ALL CREDIT PARTIES UNDER THE OPERATIVE AGREEMENTS. LESSEE ACKNOWLEDGES AND AGREES THAT, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, THE AGENT SHALL HAVE THE RIGHT TO EXERCISE ANY OR ALL OF ITS REMEDIES HEREUNDER AS AGAINST ANY SUCH RIGHT, TITLE, ESTATE OR INTEREST OF LESSEE IN OR TO THE TRUST PROPERTY. [signature page follows] 12 15 IN WITNESS WHEREOF, each of the undersigned have caused the Security Agreement to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By: /s/ VAL T. ORTON ----------------------------------------- Name: Val T. Orton --------------------------------------- Title: Vice President -------------------------------------- NATIONSBANK, N.A., as the Agent for the Lenders and the Holders By: /s/ SHARON ELLIS ------------------------------------------ Name: SHARON ELLIS ---------------------------------------- Title: VICE PRESIDENT --------------------------------------- Accepted and Agreed to: VERITAS SOFTWARE CORPORATION By: /s/ KENNETH E. LONCHAR ------------------------------------- Name: Kenneth E. Lonchar ----------------------------------- Title: Senior Vice President ---------------------------------- EX-10.27 12 FORM OF AGREEMENT OF PURCHASE AND SALE 1 EXHIBIT 10.27 AGREEMENT OF PURCHASE AND SALE 350 ELLIS STREET, MOUNTAIN VIEW, CA ARTICLE 1 PROPERTY/PURCHASE PRICE 1.1 Certain Basic Terms. (a) Seller and Notice Address: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware Corporation 333 Western Avenue South Portland, ME 04106 Attn: Dan Boxer Telephone: 207-775-8755 Facsimile: 207-761-6020 With a copy to: Berliner Cohen 10 Almaden Blvd., 11th Floor San Jose, CA 95113 Attn: Samuel L. Farb Telephone: 408-286-5800 Facsimile: 408-998-5388 (b) Purchaser and Notice Address: VERITAS SOFTWARE CORPORATION a Delaware corporation 1600 Plymouth Street Mountain View, CA 94043 Attn: Jay L. Jones Telephone: 415-335-8000 Facsimile: 415-526-2525 With a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1200 San Diego, CA 92101 Attn: Todd J. Anson Telephone: 619-234-1966 Facsimile: 619-234-3848 -1- 2 With a copy to: EY\Kenneth Leventhal 550 California Street, Suite 1100 San Francisco, CA 94104 Attn: Luigi Sciabarrasi Telephone: 415-248-2092 Facsimile: 415-248-2093 (c) Date of this Agreement: The later date of execution by the Seller or the Purchaser, as indicated on the signature page. (d) Purchase Price: $35,700,000 (subject to $3,500,000 holdback as provided in Section 6.3(j) below). (e) Earnest Money: $1,000,000, plus interest accrued thereon while in escrow. (f) Closing Date: Time is of the essence of this Agreement. As designated by the Purchaser upon not less than five (5) days' prior notice, but not later than April 15, 1999 (except as provided in Section 6.1). (g) Title Company and Chicago Title Company Escrow Agent: 110 West Taylor Street San Jose, CA. 95110 (h) Broker: Cornish & Carey 1.2 Property. Subject to the terms and conditions of this Agreement, Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller, the following: (a) the land located in the City of Mountain View, County of Santa Clara, State of California, as described in Exhibit A attached hereto, consisting of approximately nineteen and sixty-one hundredths (19.61 acres) (the "Land"), commonly referred to as 350 Ellis Street, Mountain View, California; (b) all buildings and improvements located on the Land, including, without limitation, that certain approximately 119,000 square foot building located on the Land (collectively, the "Improvements"), together with all rights, benefits, privileges, easements, tenements, hereditaments, and appurtenances thereunto belonging or appertaining thereto, and Seller's rights, easements or other interests, if any, in and to adjacent streets, alleys and rights-of-way, or other property abutting such Land (including, without limitation, all rights owned by Seller to any minerals and mineral rights, water and water rights, wells (excluding groundwater monitoring wells), well rights and well permits, water and sewer taps, sanitary or storm sewer -2- 3 capacity or reservations and rights under utility agreements with any applicable governmental or quasi-governmental entities or agencies with respect to the providing of utility services to such Land or the Improvements located thereon (the "Appurtenances"); (c) With respect to the Land or any other property or interest included within the term "Property", any pending or future award made in condemnation thereof, or any payment made in lieu of such condemnation, any award or payment for damage thereto, and any proceeds of insurance or claim or cause of action for damage, injury, or loss thereto or thereof; provided, however, Seller reserves all of its rights, claims and causes of action under the Easements Agreement referred to in Section 9.1(g) (it being understood and agreed that the indemnification obligation of Raytheon Company under paragraph 4 of such Easements Agreement runs with the Property); (d) All licenses, permits, certificates of occupancy and franchises issued by any governmental authority relating to the use, maintenance, occupancy or operation of the Land and/or the Improvements to the extent allocable to the Land and/or Improvements; provided, however, such licenses, permits and certificates of occupancy shall not include, until termination or expiration of the Sublease referred to herein (at which time the same shall be assigned to Purchaser if so desired by Purchaser), those licenses and permits that are necessary or reasonably required by Seller in connection with the business operations of Seller to be undertaken on the Property following the close of escrow hereunder pursuant to, or under, the Sublease referred to below; provided, however, such reservation on licenses and permits shall be voided to the extent such reservation impairs the construction or development work of Purchaser on the Property (excluding therefrom the Excluded Area) during the term of the Sublease referred to below; and (e) All service contracts which are in force and pertain to the Land or Improvements (as amended through the Closing Date, individually, a "Service Contract" and collectively, "Service Contracts") to the extent assignable by Seller and to the extent which Purchaser shall elect to have assigned to it pursuant to the provisions of this Agreement; provided, however, such Service Contracts shall not include, until termination or expiration of the Sublease referred to herein (at which time the same shall be assigned to Purchaser if so desired by Purchaser), any Service Contract that is necessary or reasonably required by Seller in connection with the business operations of Seller to be undertaken on the Property following the close of escrow hereunder pursuant to, or under, the Sublease referred to below; provided, however, such reservation of Service Contracts shall be voided to the extent such reservation impairs the construction or development work of Purchaser on the Property (excluding therefrom the Excluded Area) during the term of the Sublease referred to below. For purposes of this Agreement, the Land, Improvements and Appurtenances are collectively referred to herein as the "Property." Anything herein to the contrary notwithstanding, the Property shall not include the groundwater monitoring wells, extraction or treatment systems and soil vapor extraction systems located on the Property or any other Remediation Equipment (as defined in the Easements Agreement referred to in Section 9.1(g) below), which shall continue to be owned by Raytheon Company subject to the terms of the Easements Agreement referred to in Section 9.1(g) below. -3- 4 1.3 Earnest Money. (a) On or about February 19, 1999, Purchaser deposited into an escrow account with Escrow Agent a deposit in the amount of Two Hundred Fifty Thousand Dollars ($250,000) (the "First Deposit"). The First Deposit is currently being held in an interest bearing account (with interest accruing for the benefit of Purchaser). Such First Deposit shall be fully refundable to Purchaser until the conditions set forth in Sections 3.1(a) and 3.1(b) below are satisfied or deemed satisfied by Purchaser. Upon the conditions set forth in Sections 3.1(a) and 3.1(b) being satisfied or deemed satisfied by Purchaser, the First Deposit shall become non-refundable to Purchaser (except in the event of a material breach or default by Seller under this Agreement, Seller's breach of its obligation to execute and deliver the Sublease referred to in Section 2.5 below or a failure of any of the other Closing conditions set forth in Section 3.1). In the event Purchaser materially breaches any of its obligations under this Agreement (for any reason other than a material breach or default by Seller) prior to the Closing hereunder (but after the conditions set forth in Sections 3.1(a) and 3.1(b) have been satisfied or deemed satisfied or have been waived by Purchaser), Seller shall be entitled to the First Deposit and the Second Deposit referred to below, together with all interest accrued thereon while in escrow, as liquidated damages. The First Deposit, together with all interest accrued thereon while in escrow, shall be credited against the Purchase Price for the Property as of the close of escrow hereunder. (b) Not later than three (3) business days following the satisfaction or deemed satisfaction of the conditions set forth in Section 3.1(a) and 3.1(b) below (or Purchaser's waiver of such conditions) and full execution of this Agreement and delivery of a fully-executed copy of this Agreement into Escrow, but in no event later than 4:00 p.m., PST, on March 26, 1999, Purchaser shall deposit into escrow with Escrow Agent, in an interest bearing account (with interest to accrue to the Purchaser), an additional Seven Hundred Fifty Thousand Dollars ($750,000) (the "Second Deposit"). The Second Deposit, together with all interest accrued thereon while in escrow, shall be non-refundable to Purchaser upon deposit of the same into escrow with Escrow Agent as provided in the immediately preceding sentence (except in the event of a material breach or default by Seller under this Agreement or any other failure to close escrow not arising from the Purchaser's material breach or default under this Agreement). In the event Purchaser materially breaches any of its obligations under this Agreement (for any reason other than a breach or default by Seller hereunder) prior to the Closing hereunder (but after satisfaction or deemed satisfaction (or Purchaser's waiver) of the conditions set forth in Sections 3.1(a) and 3.1(b) below), then Seller shall be entitled to the Second Deposit referred to above (and the First Deposit), together with all interest accrued thereon while in escrow, as liquidated damages. The Second Deposit, together with all interest accrued thereon while in escrow, shall be credited against the Purchase Price for the Property as of the close of escrow hereunder. The First Deposit and the Second Deposit (together with the interest accrued thereon while in escrow) is collectively referred to herein as the "Earnest Money." The Escrow Agent shall pay the Earnest Money to Seller at and upon the Closing, or otherwise, to the party entitled to receive the Earnest Money in accordance with this Agreement. The Earnest Money -4- 5 shall be held and disbursed by the Escrow Agent pursuant to Article 10 and Sections 1.3 and 1.4 of this Agreement. 1.4 Remedies. (a) PURCHASER AND SELLER AGREE THAT SELLER'S ECONOMIC DETRIMENT RESULTING FROM THE REMOVAL OF THE PROPERTY FROM THE REAL ESTATE MARKET FOR AN EXTENDED PERIOD OF TIME AND ANY CARRYING AND OTHER COSTS INCURRED AFTER THE REMOVAL OF THE PROPERTY FROM THE REAL ESTATE MARKET ARE IMPRACTICABLE OR EXTREMELY DIFFICULT TO ASCERTAIN. PURCHASER AND SELLER AGREE THAT THE AMOUNT OF THE EARNEST MONEY IS A REASONABLE ESTIMATE OF THE DAMAGES THAT WILL BE INCURRED BY SELLER IN THE EVENT ESCROW FAILS TO CLOSE ON THE PROPERTY AS A RESULT OF A BREACH OR DEFAULT OF THIS AGREEMENT BY PURCHASER. PURCHASER AGREES THAT IN THE EVENT OF A BREACH OR DEFAULT BY PURCHASER FOR ANY REASON OTHER THAN A BREACH OR DEFAULT BY SELLER, SELLER'S SOLE REMEDY FOR PURCHASER'S FAILURE TO PURCHASE THE PROPERTY IN LIEU OF ALL OTHER REMEDIES SELLER MIGHT OTHERWISE HAVE HEREUNDER OR BY APPLICABLE LAW, INCLUDING WITHOUT LIMITATION, AN ACTION FOR SPECIFIC PERFORMANCE OF THIS AGREEMENT, SHALL BE TO TERMINATE THIS AGREEMENT AND RECEIVE THE EARNEST MONEY AS LIQUIDATED DAMAGES AND NOT AS A PENALTY. PURCHASER AND SELLER ACKNOWLEDGE AND AGREE THAT THE LIMITATION ON DAMAGES SET FORTH IN THIS LIQUIDATED DAMAGES PROVISION SHALL NOT BE APPLICABLE TO ANY BREACH BY PURCHASER OF ANY INDEMNIFICATION OBLIGATION OF PURCHASER UNDER THIS AGREEMENT OR A BREACH BY PURCHASER OF ITS OBLIGATIONS UNDER SECTIONS 6.3(i) AND 6.3(j) BELOW. BY INITIALING THIS SECTION 1.4(a) BELOW, PURCHASER AND SELLER AGREE TO THE TERMS OF THIS SECTION 1.4(a). SELLER'S INITIALS: /s/ BB PURCHASER'S INITIALS: /s/ [ILLEGIBLE] ---------- ---------------- (b) If escrow fails to close under this Agreement as a result of Seller's default, then, without prejudice to Purchaser's remedies against Seller arising from a willful or knowing breach by Seller of any of its obligations under Section 2.2 or Article 5 of this Agreement or any of Seller's representations or warranties hereunder, Purchaser shall either (i) bring an action for specific performance to enforce this Agreement, or (ii) terminate this Agreement, and in the event of such termination, Seller shall promptly cause the Earnest Money to be returned to Purchaser and shall reimburse Purchaser for the cost of the Survey (provided Purchaser provides Seller with a copy of the Survey). (c) If this Agreement is terminated due to the default of a party, then the defaulting party shall pay any fees due to the Escrow Agent for holding the Earnest Money and -5- 6 any fees due to the Title Company for cancellation of the escrow and/or the Title Commitment referred to below. ARTICLE 2 TITLE REVIEW 2.1 Delivery of Title Commitment and Survey. Not later than the close of escrow on the Property, Purchaser shall cause to be prepared: (i) a current, effective commitment for title insurance (the "Title Commitment") issued by the Title Company, in the amount of the Purchase Price with Purchaser as the proposed insured, and accompanied by true, complete, and legible copies of all documents referred to in the Title Commitment; and (ii) a current ALTA-ACSM Urban survey of the Property (the "Survey"). The Survey shall determine the total acreage included with the Land and the total acreage included within the Excluded Area (as defined in the Sublease referred to in Section 2.5 below). 2.2 Title Review and Approval. Purchaser acknowledges that it has received and reviewed a preliminary title report (Second Amended) dated as of March 10, 1999, prepared by Chicago Title Company, Order No. 804852 ("Preliminary Title Report") showing the state of the title of the Property. Purchaser accepts and approves of title exception numbers 1-15 as shown on the Preliminary Title Report. For purposes of this Agreement, the term "Permitted Exceptions" shall mean (i) those title exceptions applicable to the Property which are accepted by Purchaser in accordance with the terms of this Section 2.2, (ii) the Sublease, and (iii) all title matters to the extent arising from the acts of Purchaser or its agents, employees or representatives. Seller shall have no obligation to cure or cause to be removed any title objections except any deed of trust or mortgage entered into by Seller encumbering the Property and any exceptions or encumbrances to title which are created or caused voluntarily by Seller after the date of this Agreement, which liens, exceptions or encumbrances Seller shall cause to be released or effectively insured over at the Closing. If Seller fails or refuses to remove or cure any title matter that Seller expressly agrees to remove or cure, then Seller shall be in material breach of its obligations under this Agreement. 2.3 Title Policy. A condition to Purchaser's obligation to close shall be that as of the Closing, (i) title to the Property shall be insurable under an ALTA Form B (or other form required by state law) Owner's Policy of Title Insurance ("Title Policy") issued by the Title Company, dated the date and time of the recording of the Deed in the amount of the Purchase Price, insuring Purchaser as owner of fee simple title to the Property, subject to the Permitted Exceptions. If a current survey of the Property is required in order for Title Company to issue the ALTA Title Policy to Purchaser and Purchaser has not obtained such ALTA survey by the scheduled Closing date, then the condition set forth herein shall be satisfied if Title Company is prepared to issue to Purchaser at Closing a CLTA Standard Form Owner's Policy of Title Insurance dated the date and time of the recording of the Deed in the amount of the Purchase Price, insuring Purchaser as owner of fee simple title to the Property, subject to the Permitted Exceptions. In connection with Purchaser's contemplated off-balance sheet financing of the acquisition of the Property, the trustee with respect to such financing may desire to obtain an -6- 7 owner's policy of title insurance, at no cost to Seller, and/or the agent with respect to such financing may elect to obtain a lender's policy of title insurance, at no cost to Seller. 2.4 Title and Survey Costs. Subject to Section 1.4(b) above, the cost of the Survey, including any necessary revisions, and the premium for any endorsements requested by Purchaser, shall be paid by the Purchaser. The premium for a CLTA Title Policy, excluding Purchaser's endorsements, shall be paid by Seller, and the cost of any title insurance policy or endorsements requested by Purchaser in excess of the premium of a CLTA Title Policy shall be borne by Purchaser. 2.5 Sublease. Concurrent with the Closing hereunder, and as an additional condition to Purchaser's obligation to close escrow, Seller and Purchaser shall enter into a written lease agreement or, in the event the acquisition of the Property is financed through a synthetic lease structure, Seller and Veritas Software Corporation (or any wholly owned subsidiary of Veritas Software Corporation) shall enter into a written sublease agreement (such lease or sublease is referred to herein as the "Sublease") under which, as of the date of Closing, Seller shall lease from Purchaser or sublease from Veritas Software Corporation (or any wholly-owned subsidiary of Veritas Software Corporation) the existing approximately 119,000 square foot building located on the Land and Seller shall be granted the right to use the existing parking areas and other related facilities and/or equipment to utilize the premises as needed for Seller's business, located at 350 Ellis Street, Mountain View, California. The term of the Sublease shall be for a minimum term of twelve (12) months and shall expire, if not earlier terminated, no later than December 31, 2000. Seller may elect in its sole discretion to terminate the Sublease early upon not less than twelve (12) months notice to the landlord thereunder. Said Sublease shall be in the form and content of Exhibit B attached hereto. Seller agrees that such Sublease may be subordinated to the terms of a master lease or off-balance sheet financing operating lease to be entered into by Purchaser, as lessee, and a third party, as part of Purchaser's financing of the acquisition of the Property, provided that Seller is granted non-disturbance rights (on terms and conditions reasonably acceptable to Seller and providing that a termination of such master lease shall not cause a termination of Seller's rights under the Sublease) and that such master lease shall not adversely affect Seller's rights under the Sublease and/or increase Seller's obligations under this Agreement or the Sublease. The Sublease shall not be subordinated to any master lease or off-balance sheet financing operating lease as referred to above (or any other financing secured by the Premises described in the Sublease) unless Seller is granted such non-disturbance rights as provided above. ARTICLE 3 CONDITIONS TO CLOSING 3.1 Purchaser's Conditions to Closing. The close of escrow on the Property and Purchaser's obligation under this Agreement to purchase the Property shall be subject to the satisfaction, at or prior to the time stated herein, of the following conditions, with Purchaser to retain the right to waive in writing, in whole or in part, any of the following conditions at or prior to the time stated herein for satisfaction of such conditions or for approval or disapproval by Purchaser. -7- 8 (a) Feasibility Period. Purchaser shall have until 4:00 p.m. PST, on March 5, 1999 (the "Feasibility Period") (i) to conduct such studies or investigations of the Property (including, without limitation, environmental testing) or matters pertaining thereto as Purchaser may deem appropriate to ascertain whether the Property is suited to Purchaser's intended purposes, and (ii) to determine in Purchaser's sole discretion whether the development of the Property is economically feasible, and to deliver to Seller its written notice of approval or disapproval of the feasibility of the Property. If Purchaser does not give Seller written notice of disapproval on or before the expiration of the Feasibility Period, then the conditions set forth in this Section 3.1(a) shall be deemed satisfied and Purchaser shall be deemed to have approved the Property. Purchaser acknowledges and agrees that the purchase and sale of the Property as described herein, and the close of escrow hereunder, shall not be conditioned upon Purchaser obtaining or achieving approval of a .50 FAR for the Property. Purchaser hereby approves the feasibility of the Property and acknowledges and agrees that the conditions set forth in this Section 3.1(a) are satisfied. (b) Off Balance Sheet Financing. Not later than the expiration of the Feasibility Period, Purchaser shall have satisfied itself, in its reasonable discretion, that the acquisition of the Property under this Agreement can be successfully achieved through off-balance sheet financing (or other financing acceptable to Purchaser). If, prior to the expiration of the Feasibility Period, Purchaser does not give Seller written notice that the condition set forth in this Section 3.1(b) has not been satisfied, then the condition set forth in this Section 3.1(b) shall be deemed satisfied. Purchaser hereby acknowledges and agrees that the condition set forth in this Section 3.1(b) is satisfied. Purchaser further acknowledges and agrees that Purchaser obtaining off-balance sheet financing (or other financing acceptable to Purchaser) is not a condition to Purchaser's obligations under this Agreement. Seller agrees to reasonably cooperate with Purchaser, at de minimis cost to Seller, in Purchaser's efforts to finance the acquisition and development of the Property (including, without limitation, the demolition costs described in Section 2.5 of this Agreement) with off-balance sheet financing (typically known as synthetic lease financing), including cooperating with Purchaser in assigning its rights under this Agreement for the purpose of such financing. Upon the assignment by Purchaser of this Agreement to the ultimate buyer of the Property (other than an Affiliate as set forth in Section 11.1(c) below) as permitted by this Agreement, Veritas Software Corporation ("Veritas") shall (as set forth in Section 11.1(d) of this Agreement) retain all obligations and liabilities of Purchaser hereunder (including, without limitation, its indemnification obligations under this Agreement). (c) Title Policy. As of the Closing, Title Company shall be prepared and willing to issue to Purchaser the Title Policy referred to in Section 2.3 above in the amount of the Purchase Price. Purchaser may desire to obtain, at Purchaser's sole cost, various endorsements to such Title Policy, including, without limitation, (i) an endorsement to provide Purchaser with assurance that the Property is the same as shown on a survey plat attached to or made part of the Title Policy, (ii) an endorsement to provide Purchaser with assurance that the Property is situated -8- 9 within a designated zone classification and to confirm that Purchaser's proposed use or uses of the Property as office/light industrial/research and development are allowed under such classification, (iii) an endorsement to provide Purchaser with assurance that the policy limits will be increased, upon payment of an additional premium, to reflect the value of any improvements constructed by Purchaser on the Property, (iv) an endorsement to provide Purchaser with assurances that there are no mechanic's liens on the Property, and (v) an endorsement assuring Purchaser that there are no enforceable violations of covenants, conditions or restrictions against the Property; provided, however, the issuance of such endorsements shall not be a condition to Purchaser's obligation to close escrow hereunder. To the extent Title Company requires an indemnity from Seller in order to issue any mechanic's lien endorsement to Purchaser at Closing, Seller agrees to so indemnify the Title Company against damage or loss that may arise from the filing of any mechanic's lien claims in connection with work performed on the Property prior to the Close of Escrow by Seller or any of its agents, employees or contractors. (d) Performance by Seller. Seller shall have performed, observed and complied in all material respects with all of the covenants and agreements required by this Agreement to be performed, observed and complied with by it within the applicable time period set forth herein for performance of such covenants and agreements. In addition, the representations and warranties of Seller set forth in Section 8.1 shall be true and correct as of the date of this Agreement and as of the close of escrow. (e) Insolvency. During the period commencing on the date of this Agreement and ending on the date escrow closes hereunder, no action or proceeding shall have been commenced by or against Seller under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors and no attachment, execution, or levy shall have attached to or been issued with respect to the Property or any portion thereof. (f) Moratorium. During the period commencing on the date of this Agreement through the Close of Escrow, no moratorium, statute, regulation, ordinance or federal, state, county or local legislation, or order, judgment, ruling or decree of any governmental agency or of any court having jurisdiction over the Property shall have been enacted, adopted, passed, issued, or entered into which would preclude Purchaser from developing the Property as a corporate headquarters facility at an FAR of less than .35. 3.2 Failure of Purchaser's Conditions to Closing. If any of the conditions in Sections 3.1(a) or 3.1(b) is not satisfied or deemed satisfied (or waived in writing by Purchaser) at or prior to the time prescribed herein, then this Agreement shall terminate and the First Deposit, together with all interest accrued thereon while held in escrow, shall be promptly refunded by Escrow Agent to Purchaser and all rights, obligations and liabilities of Seller and Purchaser under this Agreement (except those that expressly survive termination of this Agreement) shall terminate. If any of the conditions described in Sections 3.1(c), 3.1(d), 3.1(e) or 3.1(f) above or any other condition to Purchaser's obligation to close escrow expressly set forth in this Agreement is not satisfied or deemed satisfied (or waived in writing by Purchaser) on or prior to the time prescribed herein, then Purchaser shall be entitled to the return of its Earnest Money deposits and all interest accrued thereon while in escrow and, in the event of Seller's default or breach of any of its -9- 10 covenants or agreements set forth in this Agreement, the provisions of Section 1.4(b) above and 10.5 below shall control. 3.3 Seller's Conditions to Closing. The close of escrow on the Property and Seller's obligation under this Agreement to sell the Property shall be subject to the satisfaction, at or prior to the time stated herein, of the following condition, with Seller to retain the right to waive in writing, in whole or in part, the condition set forth in Section 3.3(a) at or prior to the time stated herein for satisfaction of such condition or: (a) Performance by Purchaser. Purchaser shall have performed, observed and complied in all material respects with all of the covenants and agreements required by this Agreement to be performed, observed and complied with by it within the applicable time period set forth herein for performance of such covenants and agreements. In addition, the representations and warranties of Purchaser set forth in Section 8.2 shall be true and correct as of the Closing. 3.4 Failure of Seller's Conditions to Closing. If the condition in Section 3.3(a) is not satisfied or waived in writing by Seller at or prior to the time prescribed herein, then Seller may terminate this Agreement by written notice to Purchaser and the Earnest Money shall be paid to Seller as liquidated damages and all rights, obligations and liabilities of Seller and Purchaser under this Agreement (excepting therefrom those that expressly survive termination of this Agreement) shall terminate. ARTICLE 4 RIGHT OF ENTRY AND DELIVERY OF DOCUMENTS 4.1 Right of Entry. During the Feasibility Period (and at all reasonable times thereafter until the Closing or earlier termination of this Agreement), at normal business hours, Purchaser and its designated agents, employees, consultants and other representatives shall be granted a right of entry on the Property to perform, at Purchaser's sole cost, such soil, groundwater, engineering and geological tests, environmental and architectural studies, and other physical inspections and to make such other reports as Purchaser shall deem appropriate and for any other purpose related to Purchaser's investigation or proposed development of the Property; provided, however, that Purchaser shall repair any damage to the Property caused by Purchaser's entry and activities thereon. Purchaser agrees to provide Seller with not less than twenty-four (24) hours notice prior to entering onto the Property. In connection with the entry onto the Property by Purchaser or its designated agents, employees, consultants and other representatives, all reasonable steps shall be taken by Purchaser (and such persons entering onto the Property) to minimize any interference with Seller's business operations on the Property, and Purchaser agrees to comply with Seller's reasonable security measures. Prior to any entry onto the Property by Purchaser of its designated agents, employees, consultants or other representatives at any time prior to the close of escrow hereunder, Purchaser shall procure and maintain in effect during the executory period of this Agreement, worker's compensation insurance in such amount as required by law and commercial general liability or comprehensive general liability insurance covering Purchaser and the Property. Seller shall be -10- 11 named as an additional insured on such liability insurance policy, and such liability insurance shall be for a combined single limit in the minimum amount of Two Million Dollars ($2,000,000) per occurrence. Prior to any entry onto the Property by Purchaser or any of its agents, employees, consultants or other representatives, Purchaser shall present to Seller a copy of the liability insurance policy maintained by Purchaser in accordance with the terms hereof (or a certificate of such insurance). Seller shall be given written notice at least thirty (30) days prior to cancellation, material amendment or reduction of any coverage under such liability policy referred to above. Purchaser shall indemnify and hold Seller harmless from any and all liens, losses, claims, demands, causes of action, damages, liabilities, costs or expenses arising out of or connected with Purchaser's and/or any of its agents', employees', consultants', or other representatives' activities on the Property; provided, however, that Purchaser shall have no liability to Seller for any lien, loss, claim, demand, cause of action, damage, liability, cost or expense arising as a result of (a) Purchaser merely discovering any Hazardous Materials (as defined below) on or about the Property in connection with its investigation of the Property; or (b) the acts of Seller or Seller's employees, agents, contractors or invitees (other than Purchaser and its agents, employees, contractors and invitees); and further that Purchaser shall have no liability for the repair of any damage caused by Seller's negligence or willful misconduct or for the remediation, containment, abatement or control of any hazardous material (or any defect) that existed in the Property prior to Purchaser's entry thereon. As used in this Agreement, the term "Hazardous Materials" shall mean any chemical, substance, waste or material which has been or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including, without limitation, those substances included within the definitions of hazardous substances, hazardous materials, toxic substances or solid wastes under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Hazardous Materials Transportation Act, as amended, and in the regulations promulgated pursuant to said laws; those substances defined as hazardous wastes in Section 25117 of the California Health & Safety Code, or as hazardous substances in Section 25316 of the California Health & Safety Code, as amended, and in the regulations promulgated pursuant to said laws; those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or designated by the Environmental Protection Agency (or any successor agency) as hazardous substances (see, e.g., 40 CFR Part 302 and amendments thereto); such other substances, materials and wastes which are or become regulated or become classified as hazardous or toxic under any Laws, including without limitation, the California Health & Safety Code, Division 20, and Title 26 of the California Code of Regulations; and any material, waste, substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a hazardous substance pursuant to Section 311 of the Clean Water Act of 1977, 33 U.S.C. sections 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. Section 1317), as amended; (v) flammable explosives; (vi) radioactive materials; or (vii) radon gas. During the Feasibility Period and at all reasonable times thereafter until the Closing or earlier termination of this Agreement, Purchaser shall have the right to examine, during normal business hours (and upon at least 48 hours prior notice to Seller), all of the books and financial records of Seller related solely to the ownership, management and operation of the Property (except -11- 12 that Seller shall not be obligated to provide or make available to Purchaser any appraisals or financial projections with respect to the Property, any prior offers on the Property, or any other proprietary information or information protected by the attorney-client privilege), and to interview any persons involved in the management or operation of the Property. Seller shall act in good faith, at de minimis expense to Seller, to try to make such persons available to Purchaser for interviewing and to cooperate with Purchaser in such interviews and investigations; provided, however, Purchaser acknowledges that some former employees of Seller who previously were involved in the management or operation of the Property are no longer employed by Seller and consequently may be difficult to make such former employees available to Purchaser. 4.2 Delivery of Documents. Prior to the execution of this Agreement (or concurrently herewith), Seller delivered or made available to Purchaser, without representation as to accuracy or completeness, the following documents ("Property Information"): (a) a copy of an updated preliminary title report or title policy for the Property, together with a copy of all documents referred to in the preliminary title report or policy; (b) a copy of property tax assessments and tax bills with respect to the Property for calendar years 1996, 1997 and 1998, and current year-to-date; (c) copies of management contracts, maintenance and repair contracts and all service supply contracts or agreements currently related to the Property and in Seller's possession; (d) copies of all present insurance policies covering the Property; (e) to the extent in Seller's possession, an ALTA survey, including a current legal description; (f) monthly and annual operating statements for the Property for calendar year ending 1996 and 1997 (and part of 1998); (g) to the extent in Seller's possession, a list and copies of all licenses, permits, maps, certificates of occupancy, building inspection approvals, and covenants, conditions and restrictions with respect to the Property; (h) to the extent in Seller's possession, soils reports, engineering, architectural studies and historical significance applications or any similar data relating to the Property; (i) to the extent in Seller's possession, environmental documentation with respect to the environmental condition of the Property; and (j) to the extent in Seller's possession, correspondence related to the current maintenance or repair of the Property or its operations or leasing. -12- 13 In addition to the documents referred to in this Section 4.2 above, Seller agrees to make available to Purchaser for Purchaser's review at Seller's offices during the Feasibility Period, all documents, reports and other writings relating to the physical or legal condition of the Property known by Dan Boxer, Executive Vice-President and General Counsel, to be in Seller's possession; provided, however, Seller shall not be obligated to make available to Seller any appraisals, financial projections, third party offers or letters of intent applicable to the Property or any other proprietary documents or confidential information or information protected by the attorney-client privilege. All of the documents, reports, and information furnished or made available by Seller to Purchaser shall be kept confidential and shall not be disclosed to any third party; except that Purchaser may disclose such material to its attorneys, accountants, consultants who have a need to know such information in order to evaluate the Property and to provide recommendations to Purchaser as to whether it should purchase the same and to prospective lenders, and assignees of Purchaser's interest in this Agreement for the purpose of off-balance sheet financing or any other financing of the acquisition of the Property. Purchaser may also disclose any documents, reports or other information furnished by Seller to Purchaser related to the Property to governmental agencies (including, without limitation, the Environmental Protection Agency) as part of Purchaser's investigations of the Property. Such confidentiality obligations shall survive termination of this Agreement but shall not survive the Closing. In the event Purchaser does not close escrow under this Agreement, then Purchaser shall deliver or assign to Seller, within ten (10) days following the date this Agreement terminates, all of the documents, reports, studies, correspondence and other materials delivered by Seller to Purchaser as referred to above, and, provided that such failure to close escrow does not arise from the material breach or default by Seller under this Agreement, Purchaser shall also deliver and assign to Seller any and all environmental reports, soils and geologic studies, due diligence reports and other third party reports or studies delivered to or prepared by Purchaser (or received by Purchaser) related to the Property. The obligations of Purchaser under this paragraph shall survive termination of this Agreement. ARTICLE 5 OPERATIONS AND RISK OF LOSS 5.1 Performance Under Contracts. During the executory period of this Agreement, Seller will perform its material obligations under agreements with third parties that materially affect the Property, and shall keep in effect all liability insurance coverage, promptly comply with all liability insurance requirements and operate the Property substantially in the manner in which it has been operated by Seller prior to the execution of this Agreement. 5.2 New Contract. During the executory period of this Agreement, without Purchaser's prior written consent (which consent shall not be unreasonably withheld or delayed), Seller will not enter into, extend, renew or amend in any material respect, terminate (unless the party with whom Seller is in contract is in default or breach of its obligations under such contract), or waive any default under, any contract that will be an obligation affecting the Property following the close of escrow; provided, however, the foregoing shall not preclude or -13- 14 prevent Seller from entering into any contract that does not encumber the Property but that is related solely to the operation of Seller's business conducted on the Property, nor shall the foregoing prevent Seller from renewing or extending any contract applicable to the Excluded Area or the Improvements thereon which is related solely to the operation of Seller's business conducted on the Property and which will not survive the termination of expiration of the Sublease. 5.3 Listings and Other Offers. During the executory period of this Agreement, Seller will not make or accept any offers to sell the Property, or enter into any contracts or agreements (whether binding or not) to sell the Property or otherwise negotiate any back up offers with any prospective purchaser of the Property. 5.4 Taxes and Legal Requirements. Seller shall pay before delinquency all taxes and assessments and all other impositions of any kind or nature whatsoever, levied, imposed or assessed, and all other expenses and obligations at any time incurred by Seller, in connection with the ownership, occupancy, use or operation of the Property, and Seller shall promptly comply, or cause to be complied, with all applicable laws, statutes, ordinances, rules and regulations, including, without limitation, the United States Environmental Protection Agency Record of Decision for the Raytheon facility (the "Record of Decision"), of any governmental or quasi-governmental agency having jurisdiction over the Property or the use of all or a part thereof to the extent relating to Seller's ownership, occupation, use or operation of the Property. The preceding to the contrary notwithstanding, Seller's obligation with respect to complying with environmental laws, statutes, ordinances, rules, regulations and Record of Decision shall be governed solely by Seller's Environmental Indemnity attached hereto as Exhibit C. The obligations of this Section 5.4 shall survive the Closing. 5.5 Damage. In the event of any substantial and material damage to the Improvements on the Property occurring before the Closing, Seller shall elect to either (i) assume in writing the responsibility to restore such damage and continue to occupy the Improvements (or, alternatively, remove such damaged Improvements and continue to occupy the balance of the Improvements) following the closing hereunder without abatement or offset of rent under the Sublease, or (ii) not execute the Sublease as of the closing, and following the Close of Escrow use commercially reasonable efforts to perform or cause to be performed, at Lessor's cost (except for the cost of removal of any asbestos or other Hazardous Materials from the Improvements) if Veritas enters into an assignment with respect to this Agreement pursuant to Section 11.1(a)(2) below (and the funding requirements set forth in the agreements executed by Veritas, Lessor (as defined in Section 11.1(a) below) and the Financing Parties (as defined in Section 11.1(b) below) in connection with the synthetic lease financing discussed in Section 3.1(b) above (collectively, the "Financing Documents") have been satisfied), or otherwise at Purchaser's cost, the planned removal of the Improvements (including the damaged Improvements) in an expeditious manner. If Seller elects not to execute the Sublease as provided in clause (ii) above, then, in addition to removing the Improvements on the Property, Seller shall be obligated, to remove, not later than January 1, 2001, the asbestos and any other Hazardous Materials, if any, in the Improvements and to remove or remediate any contaminated soil under the approximately 119,000 square foot building located on the Excluded Area in accordance with the provisions of paragraph 32 of the -14- 15 Sublease (which such paragraph 32 is incorporated herein by reference) and either (x) to levels at or below the cleanup level or standards established by the Record of Decision, or (y) to levels acceptable to the environmental agency or agencies having jurisdiction over such cleanup or remediation (such levels described in clauses (x) or (y) above being referred to hereinafter as the "Soil Remediation Standard"). If Seller elects not to execute the Sublease as provided in clause (ii) above, the provisions of subparagraphs 32(b), 32(c) and 32(d) shall apply to the removal of the Improvements from the Property, the removal of removal or other Hazardous Materials from the Improvements and the removal or remediation of any contaminated soil under the approximately 119,000 square foot building located on the Excluded Area in accordance with the provisions of paragraph 32 of the Sublease and to levels that meet the Soil Remediation Standard. Purchaser or, if Veritas enters into an assignment with respect to this Agreement pursuant to Section 11.1(a)(2) below and the funding requirements set forth in the Financing Documents have been satisfied, Lessor shall reimburse Seller for the cost of removing such Improvements within ten (10) days following receipt of a written notice, invoice or statement setting forth the costs to be reimbursed. If the casualty shall damage any portion of the Property other than the building Improvements and related structures such that the effect of such damage results in greater than 10% decrease in the value of the Property (as reasonably determined by Purchaser), then Purchaser shall have the option to terminate this Agreement prior to Closing, in which event the Earnest Money shall be promptly returned to Purchaser. 5.6 Condemnation. Seller, upon actually becoming aware of same, shall promptly notify Purchaser in writing of any condemnation proceeding affecting the Property commenced prior to the close of escrow or upon receipt of any written notice of a potential condemnation. If, by reason of any such proceeding, the value of the Property, in Purchaser's reasonable judgment, is impaired or reduced, Purchaser may, at its option, elect either to (i) terminate this Agreement (provided Purchaser shall not be permitted to terminate this Agreement if the reduction in value is estimated by Purchaser in good faith to be less than $3,000,000), or (ii) continue the Agreement in effect without any reduction in the Purchase Price, in which event, upon the close of escrow, Seller shall assign to Purchaser, and Purchaser shall be entitled to receive, any compensation, awards, or other payments or relief resulting from such condemnation proceeding and relating to the Property. ARTICLE 6 CLOSING 6.1 Closing. The close of escrow under this Agreement shall occur, subject to satisfaction of the conditions set forth in this Agreement (or waiver by the party for whose benefit such conditions exist), upon not less than five (5) days' prior notice from Purchaser to Seller, but in no event shall escrow close hereunder later than April 15, 1999 (the "Closing Date"); provided, however, if all conditions to closing have been satisfied but Purchaser's synthetic lease financing is not ready to close due to the lender thereunder completing its financing documents, then Seller and Purchaser agree that the April 15, 1999 date referred to above shall be extended to April 19, 1999. Time is of the essence. The consummation of the transaction contemplated herein ("Closing") shall occur on the Closing Date at the offices of the Escrow Agent. Closing shall occur through an escrow with the Escrow Agent. Funds shall be -15- 16 deposited into and held by Escrow Agent in a closing escrow account with a bank satisfactory to Purchaser and Seller. Upon satisfaction or completion of all Closing conditions and deliveries, the parties shall direct the Escrow Agent to immediately record and deliver the closing documents to the appropriate parties and make disbursements according to the closing statements executed by Seller and Purchaser. The Escrow Agent shall agree in writing with Seller and Purchaser that (1) recordation of the Deed constitutes its representation that it is holding the closing documents, closing funds and closing statement and is prepared and irrevocably committed to disburse the closing funds in accordance with the closing statements and (2) release of funds to the Seller shall irrevocably commit it to issue the Title Policy in accordance with this Agreement. Provided such supplemental escrow instructions are not in conflict with this Agreement as it may be amended in writing from time to time, Seller and Purchaser agree to execute such supplemental escrow instructions as may be appropriate to enable Escrow Agent to comply with the terms of this Agreement. 6.2 Conditions to the Parties' Obligations to Close. In addition to all other conditions set forth herein, the obligation of Seller, on the one hand, and Purchaser, on the other hand, to consummate the transactions contemplated hereunder shall be contingent upon the following: (a) The other party's representations and warranties contained herein shall be true and correct as of the date of this Agreement and the Closing Date; (b) As of the Closing Date, the other party shall have performed its obligations hereunder and all deliveries to be made at Closing have been tendered; (c) There shall exist no actions, suits, arbitrations, claims, attachments, proceedings, assignments for the benefit of creditors, insolvency, bankruptcy, reorganization or other proceedings, pending or threatened against the other party or the Property that would materially and adversely affect the operation or value of the Property or the other party's ability to perform its obligations under this Agreement or which seeks to restrain or prohibit, or to obtain damages or a discovery order with respect to, this Agreement or the consummation of the transactions contemplated hereby; (d) Any other condition set forth in this Agreement to such party's obligation to close is not satisfied by the applicable date; (e) As a condition to Purchaser's obligation to close, there shall be no notice issued of any material violation or alleged violation of any law, rule, regulation or code including, without limitation, the Record of Decision, which would affect Purchaser (other than possibly with respect to the existing environmental condition of the Property known or disclosed to Purchaser), which has not been corrected to the satisfaction of the issuer of the notice and no material, adverse change in the condition of or affecting the Property shall have occurred or been discovered since the expiration of the Feasibility Period, (f) As a condition to Purchaser's obligation to close, at Closing Seller shall not be in default under any agreement to be assigned to, or obligation to be assumed by, Purchaser under this Agreement. -16- 17 So long as a party is not in default hereunder, if any condition referred to in this Section 6.2 to such party's obligation to proceed with the Closing hereunder has not been satisfied as of the Closing Date or other applicable date, such party may, in its sole discretion, either (i) terminate this Agreement by delivering written notice to the other party on or before the Closing Date or other applicable date, (ii) extend the time available for the satisfaction of such condition by up to a total of ten (10) business days or (iii) elect to close, notwithstanding the non-satisfaction of such condition, in which event such party shall be deemed to have waived any such condition except for breach by a party of a covenant in which case the Closing shall not relieve such breaching party from any liability it would otherwise have hereunder. If such party elects to proceed pursuant to clause (ii) above, and such condition remains unsatisfied after the end of such extension period, then, at such time, such party may elect to proceed pursuant to either clause (i) or (iii) above. 6.3 Seller's Deliveries in Escrow. At least three (3) business days prior to the Closing Date, Seller shall deliver into escrow to the Escrow Agent the following: (a) Deed. A grant deed in the standard form of Title Company, conveying to Purchaser fee simple title to the Property, subject only to the Permitted Exceptions and the Sublease (the "Deed"). (b) Assignment of Permits, Contracts and Utility Rights. Such assignments and other documents and certificates as Purchaser may reasonably require in order to fully and completely transfer and assign to Purchaser all of Seller's right, title, and interest, in and to the permits, rights under utility agreements (including any deposits pursuant thereto) and similar rights applicable to the Property (excepting therefrom permits and rights which are necessary or reasonably required in connection with the operation of Seller's business which is contemplated to continue on a portion of the Property following the Closing). (c) Environmental Indemnity. The environmental indemnity agreement in the form of Exhibit C, executed and acknowledged by Seller ("Environmental Indemnity"). Such Environmental Indemnity shall be recorded at the close of escrow following the Grant Deed. (d) Certificate. A certificate from Seller that each of the representations and warranties contained in Section 8.1 hereof is true and correct as set forth herein as of the closing date. (e) FIRPTA and Form 590RE. A Foreign Investment in Real Property Tax Act affidavit and California Withholding Certificate Form 590RE executed by Seller. If Seller fails to provide the necessary affidavit and/or documentation of exemption on the Closing Date, Purchaser may proceed with the Closing and withhold from the Purchase Price such sums as are required to be withheld in accordance with the withholding provisions of Section 1445 of the Internal Revenue Code and the laws of the State of California. (f) Authority. Evidence of existence, organization, and authority of Seller and the authority of the person executing documents on behalf of Seller reasonably satisfactory to Purchaser, the Escrow Agent and the Title Company. -17- 18 hereunder, Seller and Purchaser shall each execute escrow instructions and deliver the same to Escrow Holder instructing Escrow Holder to hold and disburse the Holdback Funds in accordance with the terms of this Section 6.3(i) above. The rights and obligations of Seller and Purchaser under this Section 6.3(i) shall survive the Closing. (j) At Closing, Seller shall also deposit into a separate, interest bearing escrow account with Escrow Holder the sum of Three Million Five Hundred Thousand Dollars ($3,500,000) (the "FAR Funds"). The FAR Funds equal the agreed upon difference in value of the Property based on whether the Property has a .50 FAR (floor area ratio) or a .45 FAR. As of the date of execution of this Agreement, the Property has a .35 FAR (and any increased FAR for the Property above .35 is not a condition to closing). The Property is subject to having a FAR above .35 should the City of Mountain View determine in its discretion that the Property (or its use or occupancy) satisfies certain Transit Zone standards for increased FAR and the City of Mountain View grants the Property a Transit Oriented Development Permit ("TOD Permit"). Purchaser or, if Veritas enters into an assignment with respect to this Agreement pursuant to Section 11.1(a)(2) below, Veritas, acting as the agent of Lessor under the Financing Documents, hereby agrees to exercise diligent and commercially reasonable efforts to cause the City of Mountain View to approve a .50 FAR for the Property. Purchaser's obligation under the immediately preceding sentence shall survive the Closing and shall expire upon the earlier of (x) the date Purchaser obtains final approval of a .50 FAR for the Property, (y) the date the City of Mountain View makes a final decision not to approve a .50 FAR for the Property, or (z) February 18, 2000. Seller agrees to reasonably cooperate with Purchaser, at de minimus cost to Seller, in Seller's efforts to achieve a .50 FAR for the Property. Such cooperation shall include, without limitation, signing, as owner of the Property, applications for entitlements prior to the Closing. Seller further agrees not to actively and knowingly interfere with, or cause or encourage any third party to interfere with Purchaser's efforts to obtain transit rezoning, a TOD Permit, any other entitlement or any increase in the FAR for the Property up to .50 FAR. Seller's and Purchaser's obligations under this paragraph shall survive the Closing. The parties hereto agree that if, on or before February 18, 2000, the City of Mountain View finally approves a .50 FAR for the Property (and the appeal or referendum period, if any, applicable to such decision expires without any appeal, referendum or challenge having been made), then the parties shall promptly instruct Escrow Holder to release the entire FAR Funds (and all interest accrued thereon while in escrow) to Seller. If, on or before February 18, 2000, the City of Mountain View makes a final decision (and the appeal or referendum period, if any, applicable to such decision expires without any appeal, referendum or challenge having been made) that the FAR for the Property will be .45 or less, then the parties shall promptly instruct Escrow Holder to release the entire FAR Funds (and all interest accrued thereon while in escrow) to Purchaser. If, on or before February 18, 2000, the City of Mountain View makes a final decision (and the appeal or referendum period, if any, applicable to such decision expires without any appeal, referendum or challenge having been made) that the FAR for the Property will be greater than .45, then for every one percent (.01) above 45% that is the ultimate FAR for the Property, Seller shall receive Seven Hundred Thousand Dollars ($700,000) (prorated for any -19- 19 portion of one percent), together with the interest accrued thereon while in escrow, from the FAR Funds in escrow and Purchaser shall receive the balance of the FAR Funds and all interest accrued on such balance in escrow (and the parties shall promptly so instruct Escrow Holder to release the FAR Funds and interest thereon accordingly). The above allocation rules set forth in this paragraph shall be hereinafter referred to as the "Allocation Rules." If, on or before February 18, 2000, the City of Mountain View has not made any final decision with respect to adjusting the FAR for the Property, then the parties shall promptly instruct Escrow Holder to release the entire FAR Funds (and all interest accrued thereon while in escrow) to Seller. If, on or before February 18, 2000, the City of Mountain View has made a final decision with respect to the FAR for the Property and an appeal or referendum is filed and that appeal or referendum itself is finally resolved before February 18, 2000, then the FAR Funds shall be distributed in accordance with the Allocation Rules set forth earlier in this paragraph, except that the FAR used in implementing the Allocation Rules shall be the FAR resulting from the final resolution of the appeal or referendum. If on or before February 18, 2000, the City of Mountain View has made a final decision with respect to FAR for the Property, and an appeal or referendum is filed which is not finally resolved before February 18, 2000, the FAR Funds shall be distributed in accordance with the Allocation Rules except that the FAR used in implementing the Allocation Rules shall be the FAR decided by the City of Mountain View prior to the filing of the appeal or referendum. If any appeal or referendum is filed by or on behalf of Seller (objecting to the decision of the City on the FAR for the Property) to increase the FAR for the Property, the FAR Funds shall be distributed in accordance with the Allocation Rules based upon the decision of the City of Mountain View regarding the FAR at the time such appeal or referendum is filed. Notwithstanding anything to the contrary contained herein, Seller shall not file or bring, or cause to be filed or brought, an appeal or referendum of any final decision of the City of Mountain View relating to FAR for the Property or any other action relating to the Property entitlements without the consent of the Purchaser, which consent may be granted, if at all, in Purchaser's sole and absolute discretion. As an illustrative example of the foregoing, if prior to February 18, 2000, the City of Mountain View makes a final decision to increase the FAR for the Property to .465, then Seller shall be entitled to receive $1,050,000 (plus interest accrued thereon while in escrow) from the FAR Funds and Purchaser shall be entitled to receive $2,450,000 (plus interest accrued thereon while in escrow). On or before the Closing hereunder, Seller and Purchaser shall each execute joint escrow instructions and deliver the same to Escrow Holder instructing Escrow Holder to hold and disburse the FAR Funds in accordance with the terms of this Section 6.3(j) above. The rights and obligations of Seller and Purchaser under this Section 6.3(j) shall survive the Closing. As used in this paragraph, the terms "final approval" or "final decision" shall mean the final decision or approval by the City of Mountain View prior to the filing of any administrative or judicial appeal or referendum. If, during the term of the Sublease referred to in Section 2.5 above, Seller receives any portion of the FAR Funds from escrow pursuant to the terms of the paragraph above, then the triple net monthly rent payable by Seller, as tenant, under the Sublease shall be adjusted, commencing as of the date Seller receives such portion of the FAR Funds, to equal an amount that will yield Purchaser, as landlord under the Sublease, an eight percent (8%) annual return on the portion of the adjusted Purchase Price Paid by Seller (which adjusted Purchase Price shall be equal to $32,200,000 plus the amount of the FAR Funds received by Seller pursuant to the terms -20- 20 of the paragraph above) that is allocable to the Excluded Area and the Improvements thereon. The portion of the adjusted Purchase Price that is allocable to the Excluded Area and the Improvements thereon (as of the date Seller receives any portion of the FAR Funds) shall be determined by multiplying the sum of $32,200,000 plus the amount of the FAR Funds received by Seller pursuant to the terms of the paragraph above by a fraction, the numerator of which is the acreage included in the Excluded Area (which is approximately 11.49 acres) and the denominator of which is the total acreage included in the entire Property (which is approximately 19.61 acres). 6.4 Purchaser's Deliveries in Escrow. Except as specified below, at least three business days prior to the Closing Date (except as otherwise provided), Purchaser shall deliver into escrow to the Escrow Agent the following: (a) Purchase Price. On the Closing Date, the Purchase Price, less the Earnest Money that is applied to the Purchase Price, plus or minus applicable prorations and Purchaser's withholding obligations pursuant to Section 6.3(c) above, deposited by Purchaser with the Escrow Agent in immediate, same-day federal funds wired for credit into the Escrow Agent's escrow account. On the Closing Date, Purchaser shall also deliver into Escrow for release to Seller at Closing an amount equal to all utility deposits, if any, related to the Property that Seller will be assigning to Purchaser at Closing. (b) Environmental Indemnity. The Environmental Indemnity, executed and acknowledged by Purchaser. (c) Additional Documents. Any additional documents that Seller, the Escrow Agent or the Title Company may reasonably require for the proper consummation of the transaction contemplated by this Agreement. (d) Sublease. Subject to Section 5.5 above, an original counterpart of the Sublease, executed by Purchaser, as landlord. 6.5 Possession. Seller shall deliver possession of the Property to Purchaser at the Closing subject only to the Permitted Exceptions and the Sublease. ARTICLE 7 PRORATIONS 7.1 Proration of Taxes and Assessments. General real estate taxes and assessments imposed by governmental authority ("Taxes") and any assessments by private covenant constituting a lien or charge on the Property for the then-current calendar year or other current tax period not yet due and payable shall be prorated between Seller and Purchaser as of the close of the day immediately preceding the Closing Date. If the Closing occurs prior to the receipt by Seller of the tax bill for the calendar year or other applicable tax period in which the Closing occurs, Purchaser and Seller shall prorate Taxes for such calendar year or other applicable tax period based upon the most recent ascertainable assessed values and tax rates prior to Closing. With respect to supplemental taxes assessed against the Property under California Revenue and -21- 21 Taxation Code Section 75 et seq., Seller shall be responsible for and pay before delinquency all such taxes assessed against the Property applicable to construction or transfers occurring before the Closing Date, and Purchaser shall be responsible and pay for such taxes applicable to construction and transfers occurring on and after the Closing Date. Any reconciliation of estimated closing adjustments, or corrections of errors in the calculation of closing adjustments, shall be made as soon as practicable after the Closing and the provisions of this Section 7.1 shall survive the Closing. 7.2 Closing Costs. Seller shall bear the cost of a CLTA policy of title insurance in the amount of the Purchase Price, and Purchaser or, if Veritas enters into an assignment with respect to this Agreement pursuant to Section 11.1(a)(2) below, Lessor (as defined in Section 11.1(a) below) shall bear the excess cost associated with an ALTA extended owner's policy of title insurance and any endorsements requested by Purchaser. Purchaser shall also pay for any title insurance policy or policies to be issued to its trustee or agent in connection with any off-balance sheet financing secured by the Property. County transfer taxes associated with the closing of the sale of the Property shall be borne by Seller. City conveyance taxes or fees shall be split equally by Seller and Purchaser. All other closing costs incurred in connection with the closing of the transaction described in this Agreement (including, without limitation, recording costs and escrow fees) shall be borne by Seller and Purchaser in accordance with the custom in Santa Clara County. Seller and Purchaser shall each bear their own legal and accounting fees incurred in connection with the Closing of the subject transaction. 7.3 Commissions. Seller and Purchaser represent and warrant each to the other that they have not dealt with any real estate broker, sales person or finder in connection with this transaction other than Broker and EY Kenneth Leventhal Real Estate Group ("EYKL"). At the close of escrow hereunder, and only if escrow closes hereunder, Seller shall pay Broker a real estate sales commission equal to Six Hundred Thirty Thousand Dollars ($630,000) and pay to EYKL a real estate sales commission equal to Seven Hundred Thousand Dollars ($700,000) (for total commissions in the amount of One Million Three Hundred Thirty Thousand Dollars ($1,330,000). In addition, at such time as Seller receives any portion of the FAR Funds from Escrow Holder pursuant to the terms of Section 6.3(j), Seller agrees to pay to Broker a real estate sales commission equal to two percent (2%) of the amount of such FAR Funds received by Seller. Each party shall indemnify and hold harmless the other party from and against any claim for broker's or finder's fees or commissions in connection with the negotiation, execution or consummation of this Agreement or the transactions contemplated hereby based upon any statement, representation or agreement of such party. This provision shall survive the Closing or any termination of this Agreement. -22- 22 ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 Seller's Representations and Warranties. As a material inducement to Purchaser to execute this Agreement and consummate this transaction, Seller represents and warrants to Purchaser that: (a) Authority. Seller has been duly organized and is validly existing as a corporation, is in good standing in the state of its organization and is qualified to do business, and is in good standing, in the state in which the Property is located. Seller has the full right and authority and has obtained any and all consents required therefor to enter into this Agreement, consummate or cause to be consummated the Seller's Closing obligations and make or cause to be made transfers and assignments contemplated herein. The persons signing this Agreement on behalf of Seller are authorized to do so. This Agreement has been, and the documents to be executed by Seller pursuant to this Agreement will be, authorized and properly executed and does and will constitute the valid and binding obligations of Seller, enforceable against Seller in accordance with their terms. (b) Conflicts and Pending Actions or Proceedings. There is no agreement to which Seller is a party or, to Seller's current actual knowledge, binding on Seller which is in conflict with this Agreement. There is no action or proceeding pending or, to Seller's knowledge, threatened against or relating to the Property, including, without limitation, any condemnation proceedings or which challenges or impairs Seller's ability to execute or perform its obligations under this Agreement, the Sublease or with respect to the Property. (c) Agreements With Governmental Authorities/Restrictions. To Seller's current actual knowledge, Seller has not entered into, and has no knowledge of, any agreement with Seller or application filed by Seller to any governmental or public body or authority with respect to any future annexation, zoning modification, variance, platting or other land use matter. To Seller's current actual knowledge, except with respect to the environmental condition of the Property as disclosed to Purchaser in Article 9 of this Agreement or as otherwise set forth in any environmental documents provided or made available (or to be provided or made available) to Purchaser, neither Seller nor the Property is in violation or non-compliance with any restriction or covenant affecting the Property. (d) Condemnation. To Seller's current actual knowledge, no condemnation, eminent domain or similar proceedings are pending or threatened with regard to the Property. (e) Notice of Special Assessments. Seller has not received any written notice and has no knowledge of any pending threatened liens, special assessments, condemnations, impositions or increases in assessed valuations (other than annual increases in real property taxes and assessments or increased valuations based upon a change of ownership of the Property upon Closing) to be made against the Property by any governmental authority. (f) Binding Agreements. To Seller's current, actual knowledge, except for any Permitted Exceptions entered into by Seller and any agreements terminable at-will without -23- 23 penalty or premium, and except as described in Section 8.1(c) above, neither Seller nor its agents or employees have entered into any written agreements concerning the Property by which Purchaser would be bound following the Closing. (g) Encumbrances. To Seller's current, actual knowledge, Seller has not hypothecated, transferred, encumbered or affirmatively taken any action with respect to the Property, or any portion thereof, which would adversely effect Seller's ability to convey the Property to Purchaser pursuant to this Agreement. To Seller's current actual knowledge, there shall be no leases or tenancies (except for the Sublease) in effect on the Property as of the Closing, and, except for the Sublease, to Seller's current actual knowledge, no facts or conditions exist that will prevent possession of the Property from being delivered to Purchaser upon Closing. (h) Contract Obligations. To Seller's current, actual knowledge, Purchaser shall have no liability as a successor-in-interest for any written contracts or agreements entered into by Seller in connection with its operation of the Property, except for obligations (i) accruing after the Closing Date pursuant to any contract or agreement which is expressly assumed by Purchaser, or (ii) in any document which is a Permitted Exception set forth in the Preliminary Title Report. (i) No Bankruptcy. No filing or petition under the United State bankruptcy laws or any state insolvency laws, or any laws for composition of indebtedness or for the reorganization of debtors has been filed by Seller. (j) Entitlements. Seller shall not knowingly and actively take any action prior to or after Closing that is likely to decrease the square footage of improvements that may be constructed by Purchaser on the Property. (k) Disclosures. To Seller's current actual knowledge, the documents provided by Seller to Purchaser pursuant to Section 4.2 hereof and any other matters heretofore disclosed to Purchaser in writing by Seller do not contain any untrue statement of a material fact. The term "to the current, actual knowledge of Seller" or "to Seller's current actual knowledge" or other derivations thereof, shall mean the current, actual knowledge of Dan Boxer, who is Executive Vice President and General Counsel of Seller, as of the Date of this Agreement, without any duty of inquiry or investigation. All of the representations and warranties set forth in this Section 8.1 above shall be true upon the execution of this Agreement and shall continue to be true as of the Closing Date without the necessity of a separate certificate with respect thereto and shall survive the delivery of the Deed and other Closing instruments and documents for a period of one (1) year following the Closing. If no action or suit is filed by Purchaser against Seller within one (1) year following the Closing based on a breach of any such representation, warranty or covenant set forth in this Section 8.1 above, then such representations, warranties, and covenants for which no such action or suit is filed by Purchaser against Seller shall be deemed void and of no further force and effect. If, prior to Closing, Seller discovers any information which would make any of the -24- 24 representations or warranties set forth in Section 8.1 above untrue or inaccurate, Seller shall promptly notify Purchaser and, in such instance, if such new information is material to Purchaser's decision whether or not to purchase the Property, Purchaser shall have the right to terminate this Agreement (and, in the event of such termination, as Purchaser's sole remedy, Purchaser shall receive the return of its Earnest Money). 8.2 Purchaser's Representations and Warranties. As a material inducement to Seller to execute this Agreement and consummate this transaction, Purchaser represents and warrants to Seller that: (a) Organization and Authority. Purchaser has been duly organized and is validly existing as a corporation duly organized and existing under the laws of the State of Delaware and in good standing in the State of its organization, and will be qualified to do business in the state in which the Property is located on the Closing Date. Purchaser has the full right and authority and has obtained any and all consents (subject to receiving the approval or deemed approval of Purchaser's Board of Directors to the Environmental Indemnity as described in Section 9.3 below) required therefor to enter into this Agreement and to consummate or cause to be consummated the sale. This Agreement and all of the documents to be delivered by Purchaser at the Closing have been or will be authorized and properly executed and will constitute the valid and binding obligations of Purchaser, enforceable in accordance with their terms. (b) No Bankruptcy. No filing or petition under the United States bankruptcy laws or any state insolvency laws, or any laws for composition of indebtedness or for the reorganization of debtors has been filed by Purchaser. All of the representations and warranties set forth in this Section 8.2 above shall be true upon the execution of this Agreement and shall continue to be true as of the Closing Date without the necessity of a separate certificate with respect thereto and shall survive the delivery of the Deed and other Closing instruments and documents for a period of one (1) year following Closing. If no action or suit is filed by Seller against Purchaser within one (1) year following the Closing based on a breach of any such representation or warranty set forth in this Section 8.2 above, then such representations and warranties for which no such action or suit is filed by Seller against Purchaser shall be deemed void and of no further force and effect. If, prior to Closing, Purchaser discovers any information which would make any of the representations or warranties set forth in Section 8.2 untrue or inaccurate, Purchaser shall promptly notify Seller and, in such instance, if such new information is material to Seller's decision whether or not to sell the Property, Seller shall have the right to terminate this Agreement (and, in the event of such termination, as Seller's sole remedy, Seller shall be entitled to retain or receive the Earnest Money as its property). -25- 25 ARTICLE 9 DISCLOSURES; "AS IS" SALE 9.1 Environmental Disclosures. Seller hereby discloses to Purchaser that the following is true and correct to the actual knowledge of Seller: (a) In 1984, the California Regional Water Quality Control Board issued cleanup orders to Raytheon Company, Fairchild Semiconductor Corporation (not related to Seller), Intel Corporation, NEC Electronics, Inc. and Siltec Corporation with respect to Hazardous Materials contamination existing in the regional site known as the Middlefield-Ellis-Whisman (MEW) site (of which the Property is a part). Three (3) Superfund sites exist within the MEW area. The Environmental Protection Agency ("EPA") is currently overseeing cleanup measures that are being conducted on the Property and neighboring properties. The Property has been identified in EPA Orders as containing sources of contamination including underground and aboveground storage tanks for chemical products and wastes, pH neutralization systems and industrial wastewater treatment systems. The Property is listed on the National Priorities List. (b) In April 1985, the EPA issued a "Request for Information" pursuant to Section 106(e) of CERCLA and took over as the lead agency at the Property. Raytheon Company, Fairchild Semiconductor Corporation and Intel Corporation entered an Administrative order on Consent with the EPA on August 15, 1985 to conduct Remedial Investigation/Feasibility Studies (RI/FS) at the regional site referred to above. The RI/FS was finalized in 1988. The EPA issued a Record of Decision (ROD) in May 1989. The ROD, which was later modified in September 1990 and April 1996, established specific cleanup concentrations for semiconductor-related contamination (TCE) and ten other compounds, and required the implementation of site-specific source control remediation measures and a regional groundwater remediation program. Raytheon Company and Intel Corporation entered into a Consent Decree (CD) with the EPA in May 1991 that was entered by the United States District Court, Northern District of California on April 10, 1992. (c) The CD referred to above provides that Raytheon Company will perform groundwater and soil remediation for the sites it occupied and operated within the MEW area. The facility specific work at the Property is now in the operation and maintenance phase. (d) In 1987, a soil-bentonite, subsurface, slurry wall was installed by Raytheon Company around the perimeter of the Property enclosing the soil and water bearing zones as part of the remedial measures. Groundwater is extracted from the water bearing zones by Raytheon Company within the area enclosed by the slurry wall maintaining an inward and upward groundwater flow gradient to keep contaminated groundwater from flowing away from the Property. (e) The groundwater extraction and treatment system was installed in 1987. Groundwater is extracted from several wells located both within the Property boundaries and from adjacent property. The groundwater extraction system is a long term remedial measure that Raytheon Company is required to maintain. The groundwater extraction system, soil vapor -26- 26 extraction system referred to below and groundwater monitoring are ongoing at the Property to remediate and monitor trichlorethylene, 1,1,1-trichloroethane, I, I-and trans-1,1-dichloroethylene contamination believed to have emanated from former underground tanks, (f) A soil vapor extraction system was installed by Raytheon in 1996 to remediate the contaminated soils in or under the Property. This system covers a surface area of approximately four (4) acres and proceeds to a depth of approximately 15 to 18 feet. The system is composed of eighty-eight (88) shallow and deep soil vapor extraction wells and one soil vapor extraction treatment system. Raytheon Corporation has petitioned and obtained approval from the EPA for closure for part of the soil vapor remedial system. (g) Although Seller is the current owner of the Property, the treatment systems referred to above are maintained by Raytheon Company, a Delaware corporation ("Raytheon Company"). Raytheon Semiconductor, Inc., a Delaware corporation, as grantor ("Grantor"), and Raytheon Company, as grantee, executed a Grant of Easements, Restriction and Indemnity Agreement dated December 24, 1997, recorded in the Official Records of Santa Clara County on December 30, 1997, as Document No.: 13994862 (the "Easements Agreement"). A copy of such Easements Agreement is attached hereto as Exhibit D and made a part hereof. At Closing, Seller shall execute an assignment agreement, in form reasonably acceptable to Purchaser and Seller, pursuant to which Seller assigns to Purchaser, on a non-exclusive basis (reserving unto Seller all of the rights and benefits granted to Grantee under the Easements Agreement), the rights of Grantee under the Easements Agreement. Under the terms of paragraph 4.b. of the Easements Agreement, Raytheon Company agreed to indemnify, defend and hold the aforementioned Grantor harmless from any damages, claims, losses, expenses, costs, obligations and liabilities, including, without limitation, liabilities for all reasonable attorneys', accountants' and expert fees and expenses asserted against or incurred or suffered by such Grantor arising out of or related to environmental conditions (i) which first occurred, existed or arose prior to December 24, 1997, and (ii) which arose or resulted from the release of hazardous substances in, on, under, from, or at the Grantor Property (as defined in the Easements Agreement); except to the extent such are exacerbated by activities or negligent omissions of Grantor or any third party (other than Agents acting on behalf of Raytheon Company in the performance of Remedial Measures (as defined in the Easements Agreement) on or after December 24, 1997. Paragraph 5.a. of the Easements Agreement provides that the obligations of Raytheon Company, as set forth in the Easements Agreement, including the indemnities set forth in Paragraph 4 of the Easements Agreement, benefit and run with the Grantor Property. In the event escrow closes hereunder, Purchaser agrees not to take any action, or permit any affiliate, agent, employee, contractor, successor, assign, tenant, lender or other authorized representative of Purchaser to take any action, that would result in a breach or default of the obligations of the Grantee thereunder. The provisions of the immediately preceding sentence shall survive the Close of Escrow. In the event escrow closes hereunder, Purchaser shall, upon prior written notice, provide Raytheon Company, its consultants and contractors access to the Property in accordance with the Easements Agreement and shall permit them to install, operate and maintain remedial treatment systems and to conduct all other remediation activities which Raytheon Company determines to be necessary or appropriate in accordance with and to the extent permitted by the Easements -27- 27 Agreement (and/or those certain provisions attached hereto as Exhibit E (the "Raytheon Acquisition Excerpts") which are excerpts from that certain agreement pursuant to which Seller acquired Raytheon Semiconductor) or required by applicable governmental agencies. Purchaser will cause any successor owners and occupants of the Property to afford Raytheon Company the same rights to access and to conduct remediation activities as provided under the Easements Agreement and the Raytheon Acquisition Excerpts (which access shall only be to the extent necessary to conduct the remediation of contamination existing on, in or under the Property and shall terminate upon completion of such remediation), and Purchaser agrees to record an appropriate acknowledgement of such rights in the Registry of Deeds or Official Records of Santa Clara County upon Raytheon Company's or Seller's request. The obligations of Purchaser and Seller under this paragraph shall survive the close of escrow hereunder. In the event escrow closes hereunder, Seller shall reasonably cooperate with Purchaser to engineer and relocate, upon Purchaser's reasonable request, and at Seller's cost, any existing soil or water remediation well sites and equipment (including, without limitation, hydrogen and other tanks and all associated piping including the Air Products pipeline located on the Developable Property (as defined in Section 2(b) of the Sublease) that may encumber Purchaser's ability to develop the Property. The obligations of Seller under this paragraph shall survive the close of escrow hereunder. 9.2 As Is Sale. Purchaser acknowledges and agrees that it has been given or will be given before the end of the Feasibility Period, a full opportunity to inspect and investigate each and every aspect of the Property, either independently or through agents of Purchaser's choosing, including, without limitation: (i) All matters relating to title, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements and building codes. (ii) The physical condition of the Property, including, without limitation, the interior, the exterior, the structure, the paving, the utilities, and all other physical and functional aspects of the Property. In the event Purchaser enters onto the Property to perform any test, inspection or investigation of the Property, Purchaser shall do so in a manner that causes the least interference possible to Seller's business operations on the Property. Purchaser agrees not to undertake any invasive testing or investigation of the Property unless and until Seller has approved (which shall not be unreasonably withheld) the scope of such invasive testing or investigation and the contractor or consultant to undertake performance of the same. Seller shall receive copies of all reports issued, and shall be entitled to the return, if available, of all water or soil samples taken from the Property, in connection with the examination of the environmental condition of the Property; provided, however, any reports, studies, or other documents delivered by Purchaser to Seller shall be delivered to Seller without representation or warranty, express or implied, by Purchaser as to accuracy or completeness. (iii) Any easements and/or access rights affecting the Property. (iv) All other matters of material significance affecting the Property. -28- 28 PURCHASER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT SELLER IS SELLING AND PURCHASER IS PURCHASING THE PROPERTY ON AN "AS IS WITH ALL FAULTS" BASIS AND THAT, SUBJECT TO SELLER'S OBLIGATION TO EXECUTE THE ENVIRONMENTAL INDEMNITY AS PROVIDED IN SECTION 9.3 OF THIS AGREEMENT, PURCHASER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS (EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT) OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION: (i) THE QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, THE STRUCTURAL ELEMENTS, FOUNDATION, ROOF, APPURTENANCES, ACCESS, LANDSCAPING, PARKING FACILITIES AND THE ELECTRICAL, MECHANICAL, HVAC, PLUMBING, SEWAGE, AND UTILITY SYSTEMS, FACILITIES AND APPLIANCES, (ii) THE QUALITY, NATURE, ADEQUACY, AND PHYSICAL CONDITION OF SOILS, GEOLOGY AND ANY GROUNDWATER, (iii) THE EXISTENCE, QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF UTILITIES SERVING THE PROPERTY, (iv) THE DEVELOPMENT POTENTIAL OF THE PROPERTY, AND THE PROPERTY'S USE, HABITABILITY, MERCHANTABILITY, OR FITNESS, SUITABILITY, VALUE OR ADEQUACY OF THE PROPERTY FOR ANY PARTICULAR PURPOSE, (v) THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY OR ANY OTHER PUBLIC OR PRIVATE RESTRICTIONS ON USE OF THE PROPERTY, (vi) THE COMPLIANCE OF THE PROPERTY OR ITS OPERATION WITH ANY APPLICABLE CODES, LAWS, REGULATIONS, STATUTES, ORDINANCES, COVENANTS, CONDITIONS AND RESTRICTIONS OF ANY GOVERNMENTAL OR QUASI-GOVERNMENTAL ENTITY OR OF ANY OTHER PERSON OR ENTITY, (vii) THE PRESENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PROPERTY OR THE ADJOINING OR NEIGHBORING PROPERTY, AND (viii) THE QUALITY OF ANY LABOR AND MATERIALS USED IN ANY IMPROVEMENTS ON THE PROPERTY, AND (ix) THE CONDITION OF TITLE TO THE PROPERTY. 9.3 Seller's Environmental Indemnity Agreement. At least three (3) business days prior to the close of escrow hereunder, Purchaser and Seller shall execute and deposit into escrow for delivery to the other at Closing, a counterpart original of the Environmental Indemnity in the form of Exhibit C attached hereto. 9.4 Purchaser's Indemnity. Purchaser shall indemnify, defend (using counsel selected by Purchaser and reasonably acceptable to Seller) and hold harmless Seller and its agents, employees, directors, officers, successors and assigns from and against any and all damages, claims, losses, expenses, costs, obligations and liabilities, including, without limitation, liabilities for all reasonable attorneys', accountants', and experts' fees and expenses including those incurred to enforce Purchaser's obligations under this Section 9.4 ("Covered Liabilities") asserted or incurred or suffered by Seller arising out of or relating to the release or discharge first occurring on after the Closing hereunder of any hazardous or toxic substances, materials or wastes in, on, under or from any portion of the Property or the Improvements located thereon -29- 29 (except in each case from (i) hazardous or toxic substances, materials or wastes released or discharged by Seller (except to the extent exacerbated by Purchaser or its agents, employees, contractors, lessees, sublessees or other representatives of Purchaser), or (ii) an off-site source); provided, however, that any leaking, leaching, migration or similar movement of hazardous or toxic substances, materials or wastes which existed in soil or groundwater prior to Closing hereunder shall not be considered a release or discharge by Purchaser except to the extent movement is exacerbated by the negligent acts or omissions or willful misconduct of Purchaser or anyone other than Raytheon Company and Seller post-Closing on the Property (and provided further than construction or other development activities on the Property that are performed in accordance with due care shall not be considered "exacerbation" of any pre-existing condition). Anything herein to the contrary notwithstanding, if Purchaser shall be obligated to indemnify Seller as provided under this Section 9.4, then Purchaser may, at its election, control the defense of any claims against Seller that are indemnified hereunder (provided Seller shall have the right to reasonably approve the counsel defending Seller under this indemnification obligation), and, if required, Purchaser also shall control the remediation in connection with any such Covered Liabilities. Purchaser shall also indemnify and hold harmless Raytheon Company and Seller against all claims and liabilities caused by any refusal by Purchaser or successor owners of the Property to allow remediation by Raytheon Company or Seller of contamination existing on, in or under the Property or any unreasonable interference with the conduct, management or control of remediation by Raytheon Company or Seller. The obligations of Purchaser under this Section 9.4 shall run solely to the benefit of Seller (and its successors or assigns) and shall survive the close of escrow hereunder. The preceding notwithstanding, it is the intent of the parties hereto that Purchaser shall not be responsible or liable for any contamination or for the existence of any hazardous or toxic substance which were first released, discharged or disposed on, in or under the Property prior to the close of escrow hereunder (unless Purchaser has exacerbated such contamination or hazardous or toxic materials as a result of Purchaser's negligent acts or omissions or willful misconduct, provided that construction or other development activities on the Property that are performed in accordance with due care shall not be considered "exacerbation" of any pre-existing condition). ARTICLE 10 EARNEST MONEY PROVISIONS 10.1 Investment and Use of Funds. The Escrow Agent shall invest the Earnest Money in government insured interest-bearing accounts satisfactory to Purchaser, shall not commingle the Earnest Money with any funds of the Escrow Agent or others, and shall promptly provide Purchaser and Seller with confirmation of the investments made. If the Closing under this Agreement occurs, the Escrow Agent shall apply the Earnest Money to the Purchase Price on the Closing Date. 10.2 Termination Before Close. If any of the conditions to Purchaser's obligation to close escrow hereunder set forth in Sections 2.2, 2.3, 2.5, 3.1(a) through 3.1(f) and 6.3 above are not satisfied or deemed satisfied (or waived by Purchaser in writing) on or before the date such -30- 30 applicable condition is required to be satisfied herein (or if no date is expressly prescribed in this Agreement, then by the Close of Escrow), Purchaser shall be entitled to a full return of the Earnest Money deposited by Purchaser hereunder, as well as interest accrued thereon, and this Agreement shall terminate. If Purchaser breaches or defaults under any obligation under this Agreement, including, without limitation, its obligation to purchase the Property, for any reason other than a Seller breach or default hereunder, or Purchaser breaches any representation or warranty of Purchaser set forth in Section 8.2 above, Seller shall be entitled to receive or retain the full Earnest Money, as well as interest accrued thereon, as liquidated damages pursuant to the terms of Section 1.4 below. 10.3 Interpleader. Seller and Purchaser mutually agree that in the event of any controversy regarding the Earnest Money, unless mutual written instructions are received by the Escrow Agent directing the Earnest Money's disposition, the Escrow Agent shall not take any action, but instead shall await the disposition of any proceeding relating to the Earnest Money or, at the Escrow Agent's option, the Escrow Agent may interplead all parties and deposit the Earnest Money with a court of competent jurisdiction in which event the Escrow Agent may recover all of its court costs and reasonable attorneys' fees. Seller or Purchaser, whichever loses in any such interpleader action, shall be solely obligated to pay such costs and fees of the Escrow Agent as well as the reasonable attorneys' fees of the prevailing party in accordance with the other provisions of this Agreement. 10.4 Liability of Escrow Agent. The parties acknowledge that the Escrow Agent is acting solely as a stakeholder at their request and for their convenience, that the Escrow Agent shall not be deemed to be the agent of either of the parties, and that the Escrow Agent shall not be liable to either of the parties for any action or omission on its part taken or made in good faith, and not in disregard of this Agreement, but shall be liable for its negligent acts and for any loss, cost or expense incurred by Seller or Purchaser resulting from the Escrow Agent's mistake of law respecting the Escrow Agent's scope or nature of its duties. Seller and Purchaser shall jointly and severally indemnify and hold the Escrow Agent harmless from and against all costs, claims and expenses, including reasonable attorneys' fees, incurred in connection with the performance of the Escrow Agent's duties hereunder, except with respect to actions or omissions taken or made by the Escrow Agent in bad faith, in disregard of this Agreement or involving negligence on the part of the Escrow Agent. 10.5 Escrow Fee. If the Closing fails to occur because of a failure by Seller to comply with its obligations hereunder, then, without limiting Purchaser's other rights and remedies against Seller by reason thereof, the costs customarily charged and incurred in connection with the escrow, including the cost of the escrow fee, any cancellation fees or other costs of the Title Company, shall be paid by Seller (excluding any special escrow costs, premiums or fees incurred at Purchaser's direction prior to the Closing). If the Closing fails to occur because of a failure by Purchaser to comply with any of its obligations hereunder, then, without limiting Seller's other rights and remedies against Purchaser by reason thereof, such costs referred to in the immediately preceding sentence shall be paid by Purchaser. If Closing shall fail to occur for any other reason, such costs shall be equally divided between the parties (excluding any special costs, premiums or fees incurred at Buyer's direction prior to Closing). -31- 31 ARTICLE 11 MISCELLANEOUS 11.1 Assignment. (a) Purchaser's Right to Assign. Subject to the provisions of this Section 11.1, neither party may assign this Agreement without the prior written consent of the other, and any such prohibited assignment shall be void. The preceding to the contrary notwithstanding, Purchaser shall have the unconditional right, without obtaining Seller's prior consent (but upon written notice to Seller), to assign (1) the rights and obligations of Purchaser under this Agreement to (A) any person who or entity which controls, is controlled by or is under common control with Purchaser, (B) any entity resulting from the merger, consolidation or other reorganization with Purchaser whether or not Purchaser is the surviving entity, (C) any entity which acquires all or substantially all of the assets or stock of Purchaser (any person or entity identified in clauses (A), (B) and (C) of this paragraph are hereinafter referred to as "Affiliate"), and (2) the rights and benefits of Purchaser pursuant to this Agreement (but not the obligations or liabilities of Purchaser pursuant to this Agreement which shall be retained exclusively by Veritas Software Corporation ("Veritas")) to a third party (the "Lessor") as part of a sale/leaseback, off-balance sheet lease financing operating lease or similar transaction pursuant to which Purchaser (or an Affiliate) shall lease the Property from Lessor pursuant to a written lease or written leases. For purposes of this paragraph, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management, affairs and policies of anyone, whether through the ownership of voting securities, by contract or otherwise. (b) Third Party Beneficiaries. The parties acknowledge that Veritas or an Affiliate of Veritas is intended to be the ultimate occupant and user of the Property; therefore, the parties acknowledge that Veritas (or its Affiliate) is an intended third party beneficiary of all of Seller's covenants, representations, warranties and obligations under this Agreement. The parties acknowledge that any Financing Party (as defined below) acting in conjunction with Lessor shall be providing substantial amounts of financing with regard to the Property; therefore, each such Financing Party and each agent acting on behalf of any such Financing Party shall also be an intended third party beneficiary of all of Seller's covenants, representations, warranties and obligations under this Agreement. For purposes of this Agreement the term "Financing Party" shall mean any entity providing financing to Purchaser, or Lessor, as the case may be, secured by a mortgage or deed of trust on the Property, any entity participating in any such financing, any entity holding any beneficial interest in any trust for which the holder of legal title to the Property serves as trustee, and any entity acting as agent for any of the foregoing entities and any successor or assign of any of the foregoing entities. (c) Assignment to Affiliate. Upon an assignment by Purchaser to an Affiliate, and assumption by such Affiliate of all obligations and liabilities of Purchaser under this Agreement, the assigning Purchaser shall have no further obligations hereunder (except Purchaser shall not be relieved or released of any of its indemnification obligations hereunder or any post-closing obligations) and the Affiliate will consummate the transaction described herein. -32- 32 ARTICLE 11 MISCELLANEOUS 11.1 Assignment. (a) Purchaser's Right to Assign. Subject to the provisions of this Section 11.1, neither party may assign this Agreement without the prior written consent of the other, and any such prohibited assignment shall be void. The preceding to the contrary notwithstanding, Purchaser shall have the unconditional right, without obtaining Seller's prior consent (but upon written notice to Seller), to assign (1) the rights and obligations of Purchaser under this Agreement to (A) any person who or entity which controls, is controlled by or is under common control with Purchaser, (B) any entity resulting from the merger, consolidation or other reorganization with Purchaser whether or not Purchaser is the surviving entity, (C) any entity which acquires all or substantially all of the assets or stock of Purchaser (any person or entity identified in clauses (A), (B) and (C) of this paragraph are hereinafter referred to as "Affiliate"), and (2) the rights and benefits of Purchaser pursuant to this Agreement (but not the obligations or liabilities of Purchaser pursuant to this Agreement which shall be retained exclusively by Veritas Software Corporation ("Veritas")) to a third party (the "Lessor") as part of a sale/leaseback, off-balance sheet lease financing operating lease or similar transaction pursuant to which Purchaser (or an Affiliate) shall lease the Property from Lessor pursuant to a written lease or written leases. For purposes of this paragraph, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management, affairs and policies of anyone, whether through the ownership of voting securities, by contract or otherwise. (b) Third Party Beneficiaries. The parties acknowledge that Veritas or an Affiliate of Veritas is intended to be the ultimate occupant and user of the Property; therefore, the parties acknowledge that Veritas (or its Affiliate) is an intended third party beneficiary of all of Seller's covenants, representations, warranties and obligations under this Agreement. The parties acknowledge that any Financing Party (as defined below) acting in conjunction with Lessor shall be providing substantial amounts of financing with regard to the Property; therefore, each such Financing Party and each agent acting on behalf of any such Financing Party shall also be an intended third party beneficiary of all of Seller's covenants, representations, warranties and obligations under this Agreement. For purposes of this Agreement the term "Financing Party" shall mean any entity providing financing to Purchaser, or Lessor, as the case may be, secured by a mortgage or deed of trust on the Property, any entity participating in any such financing, any entity holding any beneficial interest in any trust for which the holder of legal title to the Property serves as trustee, and any entity acting as agent for any of the foregoing entities and any successor or assign of any of the foregoing entities. (c) Assignment to Affiliate. Upon an assignment by Purchaser to an Affiliate, and assumption by such Affiliate of all obligations and liabilities of Purchaser under this Agreement, the assigning Purchaser shall have no further obligations hereunder (except Purchaser shall not be relieved or released of any of its indemnification obligations hereunder or any post-closing obligations) and the Affiliate will consummate the transaction described herein. -32- 33 (d) Assignment to Lessor. Upon an assignment by Purchaser to Lessor, Lessor shall have all the rights and benefits of Purchaser pursuant to this Agreement; provided, however, Veritas shall retain all (and shall not be relieved or released from any) of the obligations or liabilities of Purchaser hereunder and Veritas will consummate or cause to be consummated the transactions described in this Agreement. All obligations and liabilities shall be retained by Veritas solely as the agent of Lessor pursuant to the Financing Documents. Purchaser and Seller acknowledge and agree that Lessor may, without the consent of and without giving notice to Seller or Purchaser, collaterally assign or otherwise grant a lien and security interest in its right, title and interest pursuant to this Agreement and any proceeds thereof (excluding therefrom the Holdback Funds and the FAR Funds which shall be deemed the property of Seller while in escrow) to any entity acting as agent on behalf of the Financing Parties providing any such sale/leaseback, off-balance sheet lease financing operating lease or any similar transaction (as described in Paragraph 11.1(a) above). 11.2 Headings. The article and paragraph headings of this Agreement are for convenience only and in no way limit or enlarge the scope or meaning of the language hereof. 11.3 Invalidity and Waiver. If any portion of this Agreement is held invalid or inoperative, then so far as is reasonable and possible the remainder of this Agreement shall be deemed valid and operative, and effect shall be given to the intent manifested by the portion held invalid or inoperative. The failure by either party to enforce against the other any term or provision of this Agreement shall be deemed not to be a waiver of such party's right to enforce against the other party the same or any other such term or provision in the future. 11.4 Governing Law. This Agreement and said other instruments shall, in all respects, be governed, construed, applied, and enforced in accordance with the law of the state in which the Property is located. 11.5 Survival. The provisions of this Agreement that contemplate performance after the Closing and the obligations of the parties not fully performed at the Closing shall survive the Closing and shall not be deemed to be merged into or waived by the instruments of Closing. 11.6 No Third-Party Beneficiary. This Agreement is not intended to give or confer any benefits, rights, privileges, claims, actions or remedies to any person or entity as a third-party beneficiary, decree, or otherwise; except in the event Purchaser assigns this Agreement as permitted under Section 11.1, then each Financing Party (and each agent acting on behalf of any such Financing Party) acting in conjunction with any third party providing any sale/leaseback, off-balance sheet lease financing operating lease or similar transaction (as described in Section 11.1(b) above) shall be an intended third party beneficiary as set forth therein. 11.7 Entirety and Amendments. This Agreement embodies the entire agreement between the parties and supersedes all prior agreements and understandings relating to the Property. This Agreement may be amended or supplemented only by an instrument in writing executed by the party against whom enforcement is sought. -33- 34 11.8 Time of the Essence. Time is of the essence in the performance of this Agreement. 11.9 Confidentiality. Between the date hereof and for a period ending one year after the Closing Date, neither Seller nor Purchaser will announce or disclose or cause or permit to be announced or disclosed, in any manner whatsoever, the terms, conditions or substance of this Agreement without first obtaining the written consent of the other party. The foregoing shall not preclude either party from discussing the substance or any relevant details of such transactions with any of its attorneys, accountants, professional consultants, lenders, partners, investors, or any prospective lender, partner or investor, as the case may be, or any governmental agency including, but not limited to, the Environmental Protection Agency and the California Water Quality Control Board, or prevent either party hereto, from complying with laws, rules, regulations and court orders, including without limitation, governmental regulatory, disclosure, tax and reporting requirements. Following the close of escrow hereunder, either party hereto may release a press notice relating to, or otherwise to announce or disclose the sale, which disclosure may identify the Property, the Purchase Price of the Property, and the identity of the parties. The immediately preceding sentence shall not preclude either of the parties from disclosing, prior to, on or after the close of escrow hereunder, the terms or conditions of this Agreement to a governmental agency, including, without limitation, a governmental regulatory agency (including, without limitation, the Securities Exchange Commission) or taxing authority. Purchaser and Seller may disclose this transaction or any aspect or information related to this transaction as its attorneys deem is necessary to comply with applicable law. In addition to any other remedies available to a party, each party shall have the right to seek equitable relief, including without limitation injunctive relief or specific performance, against the other party in order to enforce the provisions of this Paragraph 11.9. 11.10 Attorneys' Fees. Should either party employ attorneys to enforce any of the provisions hereof, the party against whom any final judgment is entered agrees to pay the prevailing party all reasonable costs, charges and expenses, including attorneys' fees, expended or incurred by the prevailing party in connection therewith. 11.11 Notices. All notices required or permitted hereunder shall be in writing and shall be served on the parties at the addresses set forth in Paragraph 1.1. Any such notices shall be either (a) sent by overnight delivery using a nationally recognized overnight courier, in which case notice shall be deemed delivered one business day after deposit with such courier, (b) sent by telefax, in which case notice shall be deemed delivered upon transmission of such notice provided that a hard copy is sent concurrently in accordance with clauses (a) or (c) of this sentence, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt or refusal of delivery. A party's address may be changed by written notice to the other party; provided, however, that no notice of a change of address shall be effective until actual receipt of such notice. Copies of notices are for informational purposes only, and a failure to give or receive copies of any notice shall not be deemed a failure to give notice. The attorney for a party has the authority to send notices on behalf of such party. -34- 35 11.12 Further Assurances. In addition to the acts and deeds recited herein and contemplated to be performed, executed and/or delivered by Seller to Purchaser at Closing, Seller and Purchaser each agree to perform, execute and deliver, but without any obligation to incur any additional liability or expense, on or after the Closing any further deliveries and assurances as may be reasonably necessary to consummate the transactions contemplated hereby or to further perfect the conveyance, transfer and assignment of the Property to Purchaser and the lease back of a portion of the Property to Seller pursuant to the terms of the Sublease. 11.13 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one Agreement. To facilitate execution of this Agreement, the parties may execute and exchange by telephone facsimile counterparts of the signature pages. 11.14 Interpretation. The parties hereto acknowledge that, although Seller's legal counsel primarily has been responsible for drafting this Agreement and the exhibits hereto, Purchaser and its legal counsel have been involved in the negotiations of such Agreement and exhibits. Accordingly the parties hereto agree that the doctrine or presumption that ambiguities in a contract shall be construed against the party drafting the same shall not be employed in connection with this Agreement and the exhibits attached hereto. This Agreement and the exhibits attached hereto shall be construed in accordance with their fair meaning. 11.15 Specific Performance. Seller hereby acknowledges that, in the event of a breach or threatened breach of any of the provisions of this Agreement by Seller, damages at law may be an inadequate remedy to Purchaser and, accordingly, without limiting the other remedies of Purchaser, Seller's obligations under this Agreement may be enforceable by specific performance. 11.16 Release of Claims. Except for the obligations of the parties hereto under this Agreement that survive the close of escrow hereunder and except for the obligations of the parties under the Sublease and the Environmental Indemnity Agreement attached hereto as Exhibit "C," as of the Close of Escrow hereunder, Purchaser and Seller shall be deemed to have waived, for themselves, and their respective successors and assigns, any and all claims each of them may have against the other with respect to this Agreement and the Property. With respect to the claims waived and released by the respective parties as provided in this Section 11.16, the parties hereto expressly waive the benefits of Section 1542 of the Civil Code of the State of California, 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 the debtor. Seller's Initials: [illegible] Purchaser's Initials: [illegible] ----------- ----------- -35- 36 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year written below. SELLER: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By: /s/ DANIEL E. BOXER ------------------------------------- Name: DANIEL E. BOXER ------------------------------------- Date: 3/26/99 Title: EXEC VP ----------------------------------- By: /s/ MATTHEW W. TOWNE ------------------------------------- Name: MATTHEW W. TOWNE ----------------------------------- Date: 3/26/99 Title: Treasurer ---------------------------------- PURCHASER: VERITAS SOFTWARE CORPORATION, a Delaware corporation By: -------------------------------------- Name: ------------------------------------ Date: Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Date: Title: ----------------------------------- -36- 37 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year written below. SELLER: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By: ------------------------------------- Name: ------------------------------------- Date: Title: ----------------------------------- By: ------------------------------------- Name: ----------------------------------- Date: Title: ---------------------------------- PURCHASER: VERITAS SOFTWARE CORPORATION, a Delaware corporation By: /s/ JAY A. JONES -------------------------------------- Name: JAY A. JONES ------------------------------------ Date: March 29, 1999 Title: VICE PRESIDENT AND GENERAL COUNSEL ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Date: Title: ----------------------------------- -36- 38 Escrow Agent has executed this Agreement in order to confirm that Escrow Agent shall act as escrowee with respect to and hold in escrow the Earnest Money, or applicable portion thereof as provided in this Agreement, and the interest accrued thereon while in escrow, and shall disburse the Earnest Money and the interest earned thereon, pursuant to the provisions of this Agreement. CHICAGO TITLE COMPANY By: -------------------------------------- Name: ------------------------------------ Date: Title: ----------------------------------- -37- 39 EXHIBITS A -- Legal Description of Real Property B -- Sublease C -- Form of Seller Environmental Indemnity Agreement D -- Easements Agreement Executed by Raytheon Company E -- Raytheon Acquisition Excerpts -38- 40 EXHIBIT "A" LEGAL DESCRIPTION OF REAL PROPERTY The land referred to herein is situated in the State of California, County of Santa Clara, City of Mountain View, described as follows: LOT 23, as shown on that certain Map entitled, "Tract No. 2724 Ellis-Middlefield Industrial Park," which Map was filed for record in the Office of the Recorder of Santa Clara County, State of California, on June 16, 1960, in Book 121 of Maps at Pages 40, 41, 42, 43 and 44, and being known as 350 Ellis Street APN: 160-53-003 JPN: 159-41-13 -1- 41 EXHIBIT B SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT ("Sublease"), dated for reference purposes as of April __, 1999, is made by and between VERITAS SOFTWARE CORPORATION, a Delaware corporation ("Sublandlord"), and FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation ("Subtenant"). RECITALS WHEREAS, Subtenant has agreed to sell fee title of certain real property consisting of approximately 19.61 acres located at 350 Ellis Street in the City of Mountain View, County of Santa Clara, State of California (the "Land") together with certain improvements thereon consisting of an approximately one hundred nineteen thousand (119,000) square foot building (and certain leasehold improvements situated therein) (the "Main Building") and that certain machine/equipment area located adjacent to the Main Building (the "Equipment Area") in the approximate location shown on the site plan attached hereto as Exhibit "A" (the Main Building and the Equipment Area (but not the Subtenant Improvements described in Section 2(a) of this Sublease) are collectively referred to herein as the "Premises" and the Land and the Premises are collectively referred to as the "Property") to Sublandlord pursuant to that certain Agreement of Purchase and Sale dated as of March 22, 1999 by and between Subtenant and Lessor (the "Purchase Agreement"). WHEREAS, Sublandlord has agreed to (i) assign all of its rights and benefits (but none of its liabilities or obligations as further set forth in Section 11.1 of the Purchase Agreement) pursuant to the Purchase Agreement to VS Trust 1999-1, a ______________ ("Lessor"), and, (ii) upon Lessor's purchase of the Property, lease the Property from Lessor. WHEREAS, Lessor, Sublandlord and Subtenant have agreed that certain leasehold improvements located in and about the Main Building and Equipment Area are to remain the property of the Subtenant (or Raytheon Company) following the close of escrow under the Purchase Agreement, and not withstanding such sale shall be Subtenant's (or Raytheon Company's) sole and exclusive property under this Sublease for the duration hereof and thereafter as indicated, consisting of the Subtenant Improvements, as defined in Section 2(a) of this Sublease. WHEREAS, Subtenant desires to sublease the Premises from Sublandlord on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for all other consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, Sublandlord and Subtenant agree as follows: 1. Re-Affirmation and Incorporation of Recitals. Each of Sublandlord and Subtenant acknowledges and agrees that the Recitals set forth above (a) are true and correct in all 42 respects and (b) are hereby incorporated herein by this references as if said Recitals were set forth herein as representations and warranties of the Sublandlord and Subtenant. 2. Demise of Premises. Sublandlord hereby subleases to Subtenant and Subtenant hereby leases from Sublandlord the Premises and Subtenant Improvements (as defined herein) (a) Exclusive Use of Subtenant Improvements. Sublandlord and Subtenant hereby acknowledge and agree that the Premises include certain improvements owned by Subtenant or Raytheon Company, which shall remain Subtenant's (or Raytheon Company's) sole and exclusive property during the term of this Sublease and which shall be removed (except for the items identified in subparagraphs (viii), (x) and (xvi) below) by Subtenant upon the expiration or earlier termination of this Sublease in accordance with Section 32 of this Sublease, and consisting of the following (the "Subtenant Improvements"), situated on or under the Land in the areas designated as areas A through S, inclusive, on the site plan attached hereto as Exhibit "B": (i) storage tanks on a concrete pad, (ii) process wastewater treatment plant with tanks within cement vault, (iii) electric boxes on concrete pad, (iii) incinerator on a concrete pad, (iv) diesel tank and emergency electrical generator on concrete pad, (v) concrete pads, (vi) concrete block chemical storage building, (vi) hazardous waste tank in steel vault, (vii) two (2) metal buildings (it being understood and agreed that Subtenant shall have the right to relocate the northwestern most metal building in one of the areas designated as "I" on the aforementioned site plan to a location within the dotted "Excluded Area" shown on Exhibit "A" attached hereto), (viii) groundwater treatment system, (ix) cooling towers on concrete pad, (x) soil vapor extraction system (fenced area), (xi) metal sheds, (xii) refrigeration unit on concrete pad, (xiii) groundwater office trailer (portable), (xiv) metal covers over concrete pads, (xv) PH meters for process wastewater treatment plant, (xvi) electrical for soil vapor extraction system on concrete pad, and (xvii) concrete block storage building. The parties hereto acknowledge that a hydrogen tank is situated on the Developable Land (as defined below) in the northwest comer of the Developable Land, which is also included as part of the Subtenant Improvements. During the term of this Sublease, Subtenant shall have access over the Developable Land to use, maintain and repair, if necessary, the Subtenant's hydrogen tank and related piping. In addition, Sublandlord's leasehold estate includes the rights of Lessor to that certain Air Products pipeline containing gaseous nitrogen exists on or under the Developable Land and during the term of this Sublease, Subtenant shall have the exclusive right to use such pipeline and shall have access over the Developable Land to use, maintain and repair, if necessary, the Air Products pipeline and related piping. All of the foregoing rights of Subtenant shall be exercised at Subtenant's sole cost and expense, and Subtenant shall indemnify, defend (with counsel acceptable to Sublandlord) and hold Sublandlord and Sublandlord's Agents and the Lenders and Lenders' Agents harmless from and against any and all claims, damages, losses, causes of action, judgments, obligations and liabilities, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys fees and costs), on account of or arising out of the Subtenant's use, ownership, maintenance, repair, alteration or removal of any of the Subtenant Improvements (except for the items identified in subparagraphs (viii), (x) and (xvi) above), the hydrogen tank or the Air Products pipeline and related piping and improvements on or following the Commencement Date of this Sublease. Subtenant's obligations under the preceding sentence shall survive the expiration or earlier termination of this Sublease. -2- 43 (b) Exclusive Use of Excluded Area. Subject to the terms and conditions set forth in Paragraph 3 below, Subtenant shall have the exclusive right, during the term of this Sublease, to use that portion of the Land, consisting of eleven and forty-nine hundredths (11.49) acres (the "Excluded Area"), that is bounded by the dotted lines shown on Exhibit "A" and which is referred to as the "Excluded Area" on such Exhibit "A". (The Main Building and the Equipment Area are located within the Excluded Area). Subject to the terms and conditions hereof, Subtenant shall have the right to use that portion of the Excluded Area which does not have buildings, structures, improvements or other property on it for parking, ingress and egress and other uses reasonably related to Subtenant's business. The balance of the Land that is located outside of the dotted lines shown on Exhibit "A" and which is not part of the Excluded Area, consisting of eight and twelve one hundredths (8.12) acres, is referred to herein as the "Developable Land." Subtenant shall have no rights to use or occupy any portion of the Developable Land during the Term hereof without Sublandlord's prior written approval in each instance, except as permitted under Section 2(a) above. (c) Acceptance of Premises and Subtenant Improvements. Subtenant acknowledges that prior to the Commencement Date of this Sublease (as defined below), Subtenant owned the Premises, the Land and certain of the Subtenant Improvements. Subtenant is familiar with the condition of the Premises, the Subtenant Improvements, the Land and the Subtenant Improvements and, as of the Commencement Date of this Sublease, Subtenant accepts the Premises, the Excluded Area and the Subtenant Improvements in their "as is" condition. As of the Commencement Date, Subtenant shall be deemed to have accepted the Premises, the Subtenant Improvements and the Excluded Area subject to all applicable laws and other matters of public record governing the use of the Premises, the Subtenant Improvements and the Excluded Area. Subtenant acknowledges that neither Sublandlord nor Sublandlord's agents have made any representation or warranty as to the suitability of the Premises, the Subtenant Improvements or the Excluded Area for the conduct of Subtenant's business, the condition of the Premises or the Subtenant Improvements, or the use or occupancy which may be made thereof and Subtenant has independently investigated and is satisfied that the Premises and the Excluded Area is and will be suitable for Subtenant's intended use. Any agreements, warranties or representations not expressly contained herein (or in the Exhibits attached hereto) shall in no way bind either Sublandlord or Subtenant, and Sublandlord and Subtenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Sublease (or in the Exhibits attached hereto). This Sublease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Sublease shall be effective until set forth in a writing signed by both Sublandlord and Subtenant. (d) Lessor Inspection. Notwithstanding the other terms of this Sublease, Lessor and any Lender shall have and retain the right to inspect any portion of the Premises from time to time upon no less than twenty-four hours prior written notice to Subtenant. 3. Excluded Area. (a) Subtenant's Rights in Excluded Area. In addition to Subtenant's lease of the Premises described above, during the Sublease Term, Subtenant shall have the following rights with respect to the Excluded Area (exclusive of the Main Building) contained within the -3- 44 dotted lines shown on Exhibit "A" attached hereto: (i) the exclusive right to use all of the parking spaces within the Excluded Area; (ii) the exclusive right to use the Excluded Area (exclusive of the Main Building for ingress and egress, and (ii) such other rights as are reasonably necessary and convenient to Subtenant's possession and use of the Premises and/or Subtenant Improvements or performance of Subtenant's rights and obligations under this Sublease (including, without limitation, the right to use the access roads, sidewalks and landscaped areas and other facilities on the Excluded Area). (b) Reserved Rights of Sublandlord. (i) The provisions of Paragraph 2(b) to the contrary notwithstanding, Sublandlord reserves unto itself (as owner of the Developable Land for federal income tax purposes, as lessee of the Developable Land for financial accounting purposes and as Lessor's Construction Agent), to Lessor (as owner of the Developable Land) and to tenants of any building which may be constructed on the Developable Land, and to the agents, employees, servants, invitees, contractors, guests, employees, customers and representatives of such tenants, the non-exclusive right to use an approximately twenty-four (24) foot wide strip of land along the northern border of the Excluded Area (wide enough to accommodate one lane of traffic in each direction), for pedestrian and vehicular ingress and egress (but not parking) and access to and from the Developable Land and Ellis Street. (ii) During the Sublease Term, Sublandlord agrees not to make any material changes in the size, shape, location, amount and extent of the Excluded Area or materially or adversely impair use of or access to the Main Building, Equipment Area or Subtenant Improvements. (iii) Provided that Subtenant's use, occupancy and enjoyment of the Premises, the Equipment Area and the Excluded Area or access to the same is not unreasonably interfered with, Sublandlord shall have the right to close, at reasonable times and upon reasonable prior notice (except in the case of an emergency), all or any portion of the Excluded Area for the prevention of a dedication thereof, or the accrual of rights of any person or public therein. (iv) Sublandlord further reserves, for itself, Lessor and their respective agents, the right to: (A) Retain and use in the event of an emergency only (with immediate telephonic notice to Subtenant), one set of passkeys to enter the Premises but no keys shall be required to be given to Sublandlord to provide access to any areas reasonably reserved by Subtenant from Sublandlord access based upon the proprietary nature of any work being performed therein. (B) Approve the weight, size, placement and time and manner of movement within the Building of any safe, central filing system or other heavy article of Subtenant's property; provided that such approval shall not be unreasonably withheld for any such article reasonably required for the operation of Subtenant's business in the Premises. Subtenant shall move its property entirely at its own risk. -4- 45 (C) Show the Premises to prospective purchasers, subtenants, brokers, lenders, investors, rating agencies or others at any reasonable time, provided that Sublandlord gives at least 24 hours prior written notice to Subtenant, agrees to be escorted by an employee of Subtenant and does not materially interfere with Subtenant's use of the Premises. (D) To take any other reasonable action in connection with the operation, maintenance, preservation and/or development of the Property provided the same shall not interfere with Subtenant's rights under this Sublease. (c) Maintenance by Subtenant. During the Sublease Term, Subtenant shall be responsible, at its sole cost, for maintaining the Excluded Area (and Main Building, the Equipment Area and the Subtenant Improvements) in such manner as is suitable to satisfy Subtenant's business needs. (d) Parcelization of Land. Subtenant acknowledges and agrees that, at any time following the Commencement Date of this Sublease, Sublandlord shall have the right, in its sole and absolute discretion, subject to obtaining any necessary governmental approvals required, to subdivide or parcelize the Land into two or more separate, legal parcels (one of which shall consist of the Excluded Area) so long as (i) Subtenant's use, occupancy, and enjoyment of the Premises and the Subtenant Improvements, and (ii) its rights hereunder, including, without limitation, its parking rights, are not materially diminished. 4. Sublease Term. (a) Sublease Term. The term of this Sublease ("Sublease Term") shall be for the period commencing on the date on which escrow closes on the acquisition of fee title to the Land (and the Premises) from Subtenant (the "Commencement Date") and ending (unless sooner terminated in accordance with the terms of this Sublease) on December 31, 2000. (b) Early Termination. Subtenant shall have the right to terminate or cancel this Sublease at any time prior to the expiration of the Sublease Term provided Subtenant delivers to Sublandlord not less than twelve (12) months' prior written notice of such termination. Based on the foregoing, in no event shall the effective date of any early termination of this Sublease pursuant to this Subparagraph 4(b) occur prior to the date twelve (12) months following the Commencement Date of this Sublease. Upon the effective date of such early termination of the Sublease, all rights and obligations of the parties hereunder (excepting therefrom the rights and obligations that expressly survive the termination of this Sublease including Subtenant's and Sublandlord's (or Lessor's, as the case may be) obligations under Paragraph 32 below) shall cease. 5. Rent. (a) Time of Payment. Subtenant shall pay to Sublandlord as base rent for the Premises the sum specified in Subparagraph 5(b) below (the "Monthly Installment") each month in advance on the first day of each calendar month, without deduction or offset, except as expressly provided hereunder, and without prior notice or demand, commencing on the Commencement Date (as defined above) and continuing through the Sublease Term, together -5- 46 with such additional rents as are payable by Subtenant to Sublandlord under the terms of this Sublease. The Monthly Installment for any period during the Sublease Term which is less than one (1) full month shall be a pro rata portion of the Monthly Installment based upon a thirty (30) day month. (b) Monthly Installment. The Monthly Installment of rent to be paid each month by Subtenant to Sublandlord during the Sublease Term, subject to adjustment as provided below, shall be equal to one-twelfth (1/12th) of an amount that will yield Sublandlord an eight percent (8%) annual return on the portion of the Purchase Price paid by Sublandlord that is allocable to the Excluded Area and the improvements thereon. The acreage of the Excluded Area shall be deemed to be 11.49 acres, and the acreage of the Land shall be deemed to be 19.61 acres. The portion of the Purchase Price that is allocable to the Excluded Area and the improvements thereon shall be determined by multiplying $32,200,000 by a fraction, the numerator of which is the acreage included in the Excluded Area (11.49 acres) and the denominator of which is the total acreage included in the entire Land (19.61 acres). Thus, the Monthly Installment shall be equal to $125,778.68 per month. Once the allocation of FAR Funds (as defined in the Purchase Agreement) has been determined pursuant to Section 6.3(j) of the Purchase Agreement, the Purchase Price used to calculate the Monthly Installment, and thus the Monthly Installment, shall be adjusted accordingly. (c) Additional Rent. All taxes, utilities, services, insurance premiums, late charges, costs, expenses and other sums which Subtenant is required to pay under this Sublease, and all reasonable damages, costs, and attorneys' fees and expenses which Sublandlord may incur by reason of any default of Subtenant or failure on Subtenant's part to comply with the terms of this Sublease, shall be deemed to be additional rent ("Additional Rent") and shall be paid, commencing on the Commencement Date, in addition to the Monthly Installment of rent, and, in the event of nonpayment by Subtenant, Sublandlord shall have all of the rights and remedies with respect thereto as Sublandlord has for the nonpayment of the Monthly Installment of rent. Monthly Installments of rent and Additional Rent are collectively referred to herein as "Rent". (d) Place of Payment. Rent shall be payable in lawful money of the United States of America to Sublandlord at 1600 Plymouth Street, Mountain View, California 94043, Attn: _______________ or to such other person(s) or at such other place(s) as Sublandlord may designate in writing. Upon designation of another person to receive the Rent, all subsequent payments of Rent shall be directed to such other person until such other person gives written notice to direct such payments elsewhere. (e) Late Payments. Any Monthly Installment of rent and Additional Rent due under this Sublease that is not received by Sublandlord within five (5) days after written notice that such sum is past due shall bear interest at the Permitted Rate (as defined in Paragraph 31) from the date due until fully paid. The payment of interest shall not cure any default by Subtenant under this Sublease. In addition, Subtenant acknowledges that the late payment by Subtenant to Sublandlord of rent will cause Sublandlord to incur costs not contemplated by this Sublease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Sublandlord by the terms of any ground -6- 47 lease, mortgage or trust deed covering the Premises. Accordingly, if any Monthly Installment of rent and Additional Rent due from Subtenant shall not be received by Sublandlord or Sublandlord's designee within five (5) days after written notice that such sum is past due, then Subtenant shall pay to Sublandlord, in addition to the interest provided above, a late charge in a sum equal to Two Hundred Fifty Dollars ($250.00) for each delinquent payment. Acceptance of a late charge by Sublandlord shall not constitute a waiver of Subtenant's default with respect to the overdue amount, nor shall it prevent Sublandlord from exercising any of its other rights and remedies. (a) Holdover Rent. If Subtenant fails to vacate the Premises or commence demolition of the Main Building and related improvements (the removal of any asbestos and all other Hazardous Materials, if any, in the Main Building shall constitute, among other things, demolition for purposes of this paragraph) as set forth in more detail in Paragraphs 32(b)-(d) on or before the earlier of January 1, 2001 or the date thirty (30) days after the effective date of the earlier termination of this Sublease, as such earlier date may be extended pursuant to the terms below, Subtenant shall pay to Sublandlord an amount equal to two hundred percent (200%) of the daily Rent due under this Sublease immediately prior to such date for each day that Subtenant fails to vacate the Premises or commence demolition of the Main Building and related improvements as set forth above. For the purposes of the immediately preceding sentence, Subtenant shall be deemed to have commenced demolition of the Main Building and related improvements or commenced removal of asbestos and all other Hazardous Materials, if any, in the Main Building if Subtenant has undertaken activity in such regards which evidences Subtenant's clear and good faith intention to complete such demolition and remediation in an expeditious manner. Sublandlord's acceptance of any payments pursuant to this Paragraph shall not constitute a consent to Subtenant's holdover or result in any renewal of this Sublease. The provisions set forth herein are in addition to and do not affect Sublandlord's right of re-entry or any other rights of Sublandlord under this Sublease or at law. 6. Use of Premises. (a) Restrictions on Use. Subtenant shall use the Premises (and the Subtenant improvements) for research and development, manufacturing, general office purposes, and any other legally permitted use, provided such use is in conformance and compliance with all applicable governmental laws, regulations, rules and ordinances including, without limitation, all applicable environmental and zoning and land use laws, regulations, rules, and ordinances (collectively, "Law" or "Laws"). Except as required under Section 32 hereof, Subtenant shall not commit or suffer to be committed, any waste upon the Premises, the Subtenant Improvements or the Excluded Area, or any nuisance, or allow the Premises, the Subtenant Improvements or the Excluded Area to be used for any unlawful purpose or any purpose not permitted by this Sublease. Subtenant, at its sole cost and expense, shall procure, maintain and make available for Sublandlord's reasonable inspection throughout the Lease Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Subtenant's permitted uses of the Premises. (b) Suitability. Subtenant acknowledges that neither Sublandlord nor any agent or employee of Sublandlord has made any representation or warranty with respect to the Premises, the Subtenant Improvements or the Excluded Area or with respect to the suitability of -7- 48 the same for the conduct of Subtenant's business, nor has Sublandlord agreed to undertake any modification, alteration or improvement to the Premises, except as provided in this Sublease. Subtenant acknowledges that Sublandlord makes no representations regarding the use of the Premises, the Subtenant Improvements or the Excluded Area by Subtenant or that the uses permitted by Subparagraph 6(a) are allowed by governmental or quasi-governmental agencies having jurisdiction or applicable laws, statutes, ordinances, rules, regulations, orders or requirements now or hereafter in effect. 7. Hazardous Materials. Subtenant and Subtenant's agents, employees, contractors, assignees and subtenants may not use, place, store or transport (collectively, "Use") Hazardous Material(s) (defined below) on or about any portion of the Premises or Excluded Area or any other part of the Land (or in connection with the use or operation of the Subtenant Improvements) unless Subtenant complies with all applicable Laws with respect to the Use by Subtenant, its agents, employees, contractors, assignees or subtenants of such Hazardous Materials. Nothing herein shall be construed to allow Subtenant to release or dispose of (collectively, "Release") Hazardous Materials in or about any portion of the Premises or Excluded Area unless such Release is in compliance with applicable Laws. Any Use of the Hazardous Materials beyond the scope allowed in this Paragraph and any Release of Hazardous Materials shall be subject to Sublandlord's and Lessor's prior written consent, which may be withheld in Sublandlord's or Lessor's sole and absolute discretion, and shall require an amendment to the Sublease in the event Sublandlord and Lessor do consent which shall set forth the materials, scope of use, indemnification and any other matter required by Sublandlord and Lessor in Sublandlord's and Lessor's sole and absolute discretion. Subtenant shall indemnify, defend and hold Sublandlord and Sublandlord's agents harmless from and against any and all claims, losses, damages, liabilities, or expenses arising in connection with the Use or Release of Hazardous Materials on or following the Commencement Date of this Sublease in violation of Law by Subtenant, Subtenant's agents, employees, contractors, assignees or subtenants using the Premises or Excluded Area. Subtenant's obligation to defend, hold harmless and indemnify pursuant to this Paragraph 7 shall survive the expiration or earlier termination of this Sublease. The foregoing indemnity shall not apply to, and Subtenant shall not be responsible hereunder for, the presence of Hazardous Materials on, under, or about the Premises or Excluded Area to the extent caused by Sublandlord, its agents, employees, contractors, assignees or subtenants (other than Subtenant); provided that Sublandlord hereby acknowledges and agrees that the foregoing indemnity is intended to supplement that certain Indemnity Agreement between Subtenant and Sublandlord in the form of Exhibit C to the Purchase Agreement (the "Indemnity Agreement"), and to the extent the foregoing indemnity contradicts Subtenant's obligations under the Indemnity Agreement, the Indemnity Agreement shall prevail. The parties hereto agree and acknowledge that all of Subtenant's indemnity obligations set forth in this Sublease are supplemental to Subtenant's indemnity obligations set forth in the Indemnity Agreement. Sublandlord shall have the right, upon reasonable advance notice to Subtenant, to inspect, investigate, sample and/or monitor the Premises and Excluded Area, including any soil, water, groundwater, or other sampling, to the extent reasonably necessary to determine whether Subtenant is complying with the terms of this Sublease with respect to Hazardous Materials. In connection therewith, Subtenant shall provide Sublandlord with reasonable access to all portions -8- 49 of the Premises, the Subtenant Improvements and the Excluded Area (subject to reasonable security measures imposed by Subtenant); provided, however, that Sublandlord shall avoid any unreasonable interference with the operation of Subtenant's business on or in the Premises or the Excluded Area. All costs reasonably incurred by Sublandlord in performing such inspections, investigation, sampling and/or monitoring shall be reimbursed by Subtenant to Sublandlord as Additional Rent within thirty (30) days after Sublandlord's demand for payment if it is determined that Hazardous Materials have been Used by Subtenant or Subtenant's Agents on or after the Commencement Date of this Sublease in violation of Laws or a Release of Hazardous Materials in violation of Laws has occurred on, in or under the Premises or the Excluded Area, or any portion thereof. Notwithstanding anything to the contrary contained in this Sublease, Sublandlord and Subtenant acknowledges that (i) the Environmental Protection Agency is currently overseeing cleanup measures that are being conducted at the Land and at surrounding parcels of real property, (ii) the Land is part of a regional Superfund site known as the Middlefield-Ellis-Whitman (MEW) site, (iii) Raytheon, a former owner of the Land, is under a Consent Decree that provides that Raytheon will perform groundwater and soil remediation for the property it occupied and operated within the MEW area, (iv) in 1987, a soil-bentonite, subsurface, slurry wall was installed by Raytheon around the perimeter of the Land enclosing the soil and water bearing zones as part of the remedial measures conducted by Raytheon, (v) a groundwater extraction and treatment system was installed in 1987 on the Land and, as a long term remedial measure, groundwater is extracted from several wells located both within the boundaries of the Land and from adjacent property, (vi) a soil vapor extraction system (covering approximately a surface area of four acres and going to a depth of approximately 15 to 18 feet) was installed by Raytheon in 1996 to remediate the contaminated soils in the Land and Raytheon has petitioned and obtained approval from the Environmental Protection Agency for closure for part of the soil vapor remedial system, and (vii) the groundwater and soil treatment facilities referred to above are maintained by Raytheon and Raytheon has provided an indemnification to Subtenant to protect it from clean up or other liability related to contamination existing prior to the date Subtenant acquired title to the Land and the improvements then located thereon. As used in this Sublease, the term "Hazardous Materials" means any chemical, substance, waste or material which has been or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including without limitation, those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," or "solid waste" under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Hazardous Materials Transportation Act, as amended, and in the regulations promulgated pursuant to said laws; those substances defined as "hazardous wastes" in section 25117 of the California Health & Safety Code, or as "hazardous substances" in section 25316 of the California Health & Safety Code, as amended, and in the regulations promulgated pursuant to said laws; those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or designated by the Environmental Protection Agency (or any successor agency) as hazardous substances (see, eg., 40 CFR Part 302 and amendments thereto); such other substances, materials and wastes which are or become regulated or become classified as hazardous or toxic under any Laws, including -9- 50 without limitation the California Health & Safety Code, Division 20, and Title 26 of the California Code of Regulations; and any material, waste or substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a "hazardous substance" pursuant to section 311 of the Clean Water Act of 1977, 33 U.S.C. sections 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. Section 1317), as amended; (v) flammable explosives; (vi) radioactive materials; or (vii) radon gas. 8. Taxes and Assessments. (a) Subtenant's Property. Subtenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Subtenant's trade fixtures, equipment, furnishings, furniture, inventory, appliances and other personal property installed or located on or within the Premises or Excluded Area, including, without limitation, the Subtenant Improvements (except for the Subtenant Improvements described in subparagraphs (viii), (x) and (xvi) of Section 2(a) above) to the extent any such improvements are separately assessed (collectively, the "personal property"). Subtenant shall use its commercially reasonable efforts to cause said personal property to be assessed and billed separately from the real property of Sublandlord. If any of Subtenant's said personal property shall be assessed with Sublandlord's real property, Subtenant shall pay Sublandlord, as Additional Rent, the taxes attributable to Subtenant's personal property within thirty (30) days after receipt of a written statement from Sublandlord setting forth the taxes applicable to Subtenant's property. Subtenant shall comply with the provisions of any law, ordinance, rule or regulation of taxing authorities which require Subtenant to file a report of Subtenant's personal property located on or within the Premises or the Excluded Area. (b) Definition of Taxes. The term "Taxes" as used in this Sublease shall collectively mean (to the extent any of the following are not paid by Subtenant pursuant to Paragraphs 8(a) above, all real estate taxes and general and special assessments (including, but not limited to, assessments for public improvements or benefit); taxes based on vehicles utilizing parking areas on the Excluded Area; environmental surcharges; gross rental receipts taxes; water and sewer taxes, levies, assessments and other charges in the nature of real property taxes or assessments (including, but not limited to, assessments for public improvements or benefit); and all other governmental, quasi-governmental or special district impositions of any kind and nature whatsoever; regardless of whether any of the foregoing are now customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or whether extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing and which during the Sublease Term are laid, levied, assessed or imposed upon or which become a lien upon or chargeable against the Premises and/or the Excluded Area under or by virtue of any present or future laws, statutes, ordinances, regulations, or other requirements of any governmental, quasi-governmental or special district authority whatsoever, excluding net income, succession, transfer, gift, franchise, estate or inheritance taxes. The term "environmental surcharges" shall include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder, or imposed by any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy or any natural resource in -10- 51 regard to the use, operation or occupancy of the Premises and/or the Excluded Area. The term "Taxes" shall include (to the extent the same are not paid by Subtenant pursuant to Paragraph 8(a)), without limitation, all taxes, assessments, levies, fees, impositions or charges levied, imposed, assessed, measured, or based in any manner whatsoever upon or with respect to the use, possession, occupancy, leasing, operation or management of the Premises and/or the Excluded Area or in lieu of or equivalent to any Taxes set forth in this Paragraph 8(b). In the event any such Taxes are payable by Sublandlord as lessee of the Property and it shall not be lawful for Subtenant to reimburse Sublandlord for such Taxes, then the Rentals payable hereunder shall be increased to net Sublandlord the same net Rental after imposition of any such Tax upon Sublandlord as would have been payable to Sublandlord prior to the imposition of any such Tax. (c) Taxes as Operating Expense. All Taxes which are levied or assessed or which become a lien upon the Premises and/or the Excluded Area or which become due or accrue during the Sublease Term shall be an Operating Expense, and Subtenant shall pay as Additional Rent each month during the Sublease Term, commencing on the Commencement Date, 1/12th of such Taxes, based on Sublandlord's estimate thereof, pursuant to Paragraph 11 below. Taxes during any partial tax fiscal year(s) within the Sublease Term shall be prorated according to the ratio which the number of days during the Sublease Term or of actual occupancy of the Premises by Subtenant, whichever is greater, during such year bears to 365. In calculating Subtenant's share of Taxes to be paid under this Sublease, during the period of the Sublease Term that the Excluded Area is not a separate, legal parcel, the Taxes allocable to the Excluded Area shall be based on the ratio that the acreage included within the Excluded Area bears to the total acreage included within that portion of the Land (plus the assessed value of any improvements and building located thereon) that is covered by the tax bill covering the Excluded Area. Notwithstanding the foregoing, in no event shall Subtenant's Share of Taxes include taxes assessed on any new improvements constructed on the Developable Land. 9. Indemnity; Insurance. (a) Indemnity. Subtenant agrees to indemnify, protect, defend (with counsel selected by Subtenant and reasonably acceptable to Sublandlord) and hold harmless Sublandlord, each Lender and their respective Agents (except to the extent arising from the active negligence or willful misconduct of, or breach of this Sublease by, Sublandlord, such Lender or their respective Agents) against any and all claims, damages, losses, causes of action, judgments, obligations and liabilities, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys' fees and costs), on account of, or arising out of (i) the operation, use, or occupancy of the Premises and Excluded Area (and any and all of the Subtenant Improvements except for the items set forth in subparagraphs (viii), (x) and (xvi) of Paragraph 2(a)), or any part thereof, by Subtenant and/or its Agents during the term of this Sublease, (ii) any occurrence in, on or about the Premises and/or the Excluded Area during the term of this Sublease, or (iii) any occurrence in, on or about the Premises or Excluded Area or Land, to the extent caused by or contributed to by Subtenant and/or its Agents during the term of this Sublease. The obligations of Subtenant under this Paragraph 9(a) shall survive the expiration or earlier termination of this Sublease. -11- 52 (b) Insurance by Sublandlord. Sublandlord shall, during the Sublease Term, procure and keep in force the following insurance, the cost of which shall be an Operating Expense, payable by Subtenant pursuant to Paragraph 11 below: (i) Liability Insurance. Commercial general liability or comprehensive general liability insurance against any and all claims for personal injury, death or property damage occurring in or about the Premises or the Excluded Area in an initial amount of $2,000,000 per occurrence and $2,000,000 in the aggregate with umbrella coverage of at least $5,000,000 per occurrence and in the aggregate. Such insurance shall have such increased limits of coverage as Sublandlord or Lessor may from time to time determine are reasonably necessary for its protection, provided that in no event shall such increased coverage exceed the coverage which is customary for similar buildings in the South Bay area. (c) Insurance by Subtenant. Subtenant shall, during the Sublease Term, at Subtenant's sole cost and expense, procure and keep in force the insurance set forth in Paragraphs 9(c)(i), 9(c)(ii), 9(c)(iii) and 9(c)(iv) below. All insurance that Subtenant is required to procure and maintain shall provide that it may not be cancelled or materially modified without thirty (30) days prior written notice to Sublandlord and Lessor. (i) Liability Insurance. Commercial general liability or comprehensive general liability insurance and naming Subtenant as insured and Sublandlord and each Lender as additional insured, against any and all claims for personal injury, death or property damage occurring in or about the Premises or the Excluded Area, or arising out of Subtenant's or Subtenant's Agents' use of the Excluded Area, use or occupancy of the Premises or Excluded Area or Subtenant's operations on the Premises and Excluded Area. Such insurance shall have a combined single limit of not less than $2,000,000 per occurrence and $5,000,000 in the aggregate. Such insurance shall contain a cross-liability (severability of interests) clause and an extended ("broad form") liability endorsement, including blanket contractual coverage and motor vehicle liability coverage. Such insurance shall name Lessor and Sublandlord as additional insureds. Such liability insurance shall be primary and not contributing to any insurance available to Lessor, Sublandlord or each Lender, and Lessor's, Sublandlord's and each Lender's insurance (if any) shall be in excess thereto. Such insurance shall specifically insure Subtenant's performance of the indemnity, defense and hold harmless agreements contained in Paragraph 9(a), although Subtenant's obligations pursuant to Paragraph 9(a) shall not be limited to the amount of any insurance required of or carried by Subtenant under this Paragraph 9(c)(i). Subtenant shall be responsible for insuring that the amount of insurance maintained by Subtenant is sufficient for Subtenant's purposes. Such liability insurance shall be primary and noncontributing to any insurance available to Lessor and Sublandlord, but only as respects Subtenant's negligence for bodily injury or property damage arising out of their business operations. (ii) Business Interruption Insurance. Business interruption insurance naming Sublandlord, Lessor and each Lender as additional insureds in an amount sufficient to cover twelve (12) months of Subtenant's Rent obligation under this Sublease. (iii) Property Insurance. "All risk" property insurance, providing protection against those perils included within the classification of "all risk" insurance, on the -12- 53 Premises and Excluded Area, including any improvements or fixtures constructed or installed on the Premises and Excluded Area by Sublandlord or Lessor. (iv) Other. Such other insurance as required by law, including, without limitation, workers' compensation insurance. (v) Optional Insurance. Subtenant may, but shall not be obligated to, during the Sublease Term, at Subtenant's sole cost and expense, procure and keep in force the following insurance: (A) Personal Property Insurance. "All risk" property insurance, providing protection against those perils included within the classification of "all risk" insurance, on all leasehold improvements and Subtenant installed in the Premises or on the Excluded Area by Subtenant at its expense (if any), and on all equipment, trade fixtures, inventory, fixtures and personal property located on or in the Premises or the Excluded Area, including improvements or fixtures hereinafter constructed or installed on the Premises or the Excluded Area. Sublandlord shall have no interest in nor any right to the proceeds of any insurance procured by Subtenant pursuant to this Subparagraph 9(c)(v)(A). Subtenant acknowledges and agrees that Sublandlord shall not be obligated under this Sublease to maintain all risk or property insurance covering the leasehold improvements or any equipment, trade fixtures, inventory, fixtures or personal property referred to in this Subparagraph 9(c)(v)(A). If Sublandlord elects to so obtain insurance covering Subtenant's obligations under this Subparagraph 9(c)(v)(A), the cost of such insurance shall not be an Operating Expense and Subtenant shall be liable for the cost of any deductible amount relating to such insurance. (d) Failure by Subtenant to Obtain Insurance. If Subtenant does not take out the insurance required pursuant to Paragraph 9(c)(i), 9(c)(ii), 9(c)(iii) or 9(c)(iv) or keep the same in full force and effect, without prior notice to Subtenant, Sublandlord may, but shall not be obligated to, take out the necessary insurance and pay the premium therefor, and Subtenant shall repay to Sublandlord, as Additional Rent, the amount so paid promptly upon demand. In addition, Sublandlord may recover from Subtenant and Subtenant agrees to pay, as Additional Rent, any and all reasonable expenses (including reasonable deductibles and attorneys' fees) and damages which Sublandlord may sustain by reason of the failure of Subtenant to obtain and maintain such insurance, it being expressly declared that the expenses and damages of Sublandlord shall not be limited to the amount of the premiums thereon. (e) Claims by Subtenant. Except to the extent arising out of the active negligence or willful misconduct of Lessor, any Lender or Sublandlord or any of their respective Agents, neither Lessor, any Lender nor Sublandlord shall be liable to Subtenant, and Subtenant waives all claims against Lessor, each Lender and Sublandlord, for injury or death to any person, damage to any property, or loss of use of any property in the Premises or the Excluded Area by and from all causes, including without limitation, any defect in the Premises or the Excluded Area and/or any damage or injury resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the Premises or the Excluded Area, or from breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether the damage or injury results from conditions arising upon the Premises or the Excluded Area or from other sources. The preceding to the contrary -13- 54 notwithstanding, under no circumstances shall Lessor, any Lender or Sublandlord be liable to Subtenant for any claim by Subtenant of lost profits, loss of income or loss of business. (f) Mutual Waiver of Subrogation. Sublandlord hereby releases Subtenant, and Subtenant hereby releases Sublandlord (and, to the extent Lessor carries any insurance on the Property or any furnishings, fixtures, equipment, inventory or other property in, on or about the Premises, Sublandlord shall use its reasonable best efforts to cause Lessor to release Subtenant), and their respective officers, agents, employees and servants, from any and all claims or demands of damages, loss, expense or injury to the Premises or the Excluded Area (or the Land), or to the furnishings, fixtures, equipment, inventory or other property of either Sublandlord or Subtenant in, about or upon the Premises or the Excluded Area (or the Land) (collectively, a "Claim"), which is caused by or results from perils, events or happenings which are the subject of insurance carried by the respective parties pursuant to this Paragraph 9 or otherwise and in force at the time of any such loss, whether due to the negligence of the other party or its agents and regardless of cause or origin; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss, to the extent such insurance is not prejudiced thereby, to the extent insured against and to the extent each such Claim is fully satisfied by proceeds from such insurance. In the event of a Claim concerning Subtenant's Use or Release of Hazardous Materials in, on or about the Premises, the Excluded Area or the Land, Subtenant shall use any proceeds from insurance received by Subtenant in connection with such Claim to remove and/or remediate the Hazardous Materials. 10. Utilities. Subtenant shall pay during the Sublease Term and prior to delinquency all charges for water, gas, light, heat, power, electricity, telephone or other communication service, janitorial service, trash pick-up, sewer and all other services supplied to Subtenant or consumed by Subtenant or any of Subtenant's agents, contractors or invitees on the Premises or the Excluded Area (collectively, the "Services") and all taxes, levies, fees or surcharges therefor. Subtenant shall arrange for Services to be supplied to the Premises and the Excluded Area and shall contract for all of the Services in Subtenant's name prior to the Commencement Date. In the event that any of the Services cannot be separately billed or metered to the Premises or the Excluded Area, or if any of the Services are not separately metered as of the Commencement Date, the cost of such Services shall be an Operating Expense and Subtenant shall pay such cost to Sublandlord, as Additional Rent, as provided in Paragraph 11 below. 11. Operating Expenses. (a) Definition. "Operating Expense" or "Operating Expenses," as used in this Sublease, shall mean and include all items identified in other paragraphs of this Sublease as an Operating Expense and the reasonable and necessary cost paid or incurred by Sublandlord for the operation, maintenance, and repair of the Premises and Excluded Area, which costs shall include, without limitation: the cost of any necessary Services and utilities supplied to the Premises and Excluded Area (to the extent the same are not separately incurred by, or charged or metered to, Subtenant). Sublandlord and Subtenant acknowledge that, during the Sublease Term, the Premises and Excluded Area will be managed, maintained and operated by Subtenant, at Subtenant's cost, in a continuation of its present operations. Consequently, other than those costs or expenses that are expressly identified in this Sublease as an Operating Expense, neither Sublandlord nor Subtenant contemplate any other expenses incurred or to be incurred by -14- 55 Sublandlord to be passed through to Subtenant under this Sublease as an Operating Expense or otherwise. Because Subtenant is responsible, pursuant to the terms of Paragraph 12(b) of this Sublease, for repair and maintenance of the Premises (and the interior improvements located therein) and all buildings, structures and improvements located on the Excluded Area, Sublandlord should not be incurring any repair or maintenance expenses with respect to the same (and Sublandlord shall not be incurring any Operating Expenses to be passed through to Subtenant with respect to the same except to the extent that Sublandlord is reasonably likely to be exposed to criminal or civil liability for any failure by Subtenant to perform any maintenance or repairs as determined in Sublandlord's reasonable discretion, in which case Sublandlord may perform such repairs or maintenance following five (5) days advance written notice to Subtenant if such repairs or maintenance have not been performed within such 5-day period). If any Operating Expenses incurred by Sublandlord are incurred with respect to the entire Land (and not just the Excluded Area), then Subtenant's share of such Operating Expenses shall be in the ratio that the acreage included within the Excluded Area bears to the acreage included within the entire Land; provided, however, if the Premises, the Subtenant Improvements and other buildings, structures or improvements located on the Excluded Area are separately assessed from any other buildings, structures or improvements situated on the Land, then Subtenant shall be obligated to pay one hundred percent (100%) of all Taxes levied or assessed with respect to the Premises and other buildings, structures or improvements located on the Excluded Area and which become due or accrue during the term of this Sublease. If Sublandlord subdivides or parcelizes the Land into two or more legal parcels (one of which is the Excluded Area), and the Excluded Area and the buildings, structures and improvements situated thereon are assessed separately from the balance of the Land and the buildings, structures or improvements situated on such balance of the Land, then Subtenant shall pay, as an Operating Expense, one hundred percent (100%) of all necessary Operating Expenses incurred by Sublandlord in connection with the Premises and the buildings, structures and other improvements located on the Excluded Area and the Excluded Area (including, without limitation, Taxes levied or assessed with respect to or against the Excluded Area and Taxes allocable to the Premises, Subtenant Improvements and all leasehold improvements, constructed or installed therein) and the buildings, structures, and other improvements located on the Excluded Area. Notwithstanding anything to the contrary contained in this Sublease, within one hundred eighty (180) days after receipt by Subtenant of Sublandlord's statement of Operating Expenses prepared pursuant to Paragraph 10(a) hereof for any prior annual period during the Sublease Term, Subtenant or its authorized representative shall have the right to inspect the books of Sublandlord during the business hours of Sublandlord at Sublandlord's office or, at Sublandlord's option, such other location as Sublandlord reasonably may specify, for the purpose of verifying the information contained in the statement. Unless Subtenant asserts specific errors within one hundred eighty (180) days after receipt of the statement, the statement shall be deemed correct as between Sublandlord and Subtenant, except as to individual components subsequently determined within one (1) year to be in error by future audit. (b) Payment of Operating Expenses by Subtenant. Prior to the Commencement Date, and annually thereafter, Sublandlord shall deliver to Subtenant an estimate of necessary Operating Expenses incurred by Sublandlord (and not otherwise incurred by Subtenant) for the succeeding year. Subtenant's payment of Operating Expenses shall be based -15- 56 upon Sublandlord's estimate of Operating Expenses and shall be payable in equal monthly installments in advance on the first day of each calendar month commencing on the Commencement Date and continuing throughout the Sublease Term. (c) Exclusions From Operating Expenses. Notwithstanding anything to the contrary contained in this Sublease, in no event shall Subtenant have any obligation to perform, to pay directly, or to reimburse Sublandlord for, all or any portion of the following costs and expenses (collectively, "Costs"): (i) the cost of any work performed (such as preparing a tenant's space for occupancy, for renovating an existing tenant's premises, including painting and decorating) or services provided (such as separately metered electricity) for any tenant (including Subtenant) at such tenant's cost or provided by Sublandlord without charge; (ii) the expenses and salaries of Sublandlord's officers, partners, agents and employees or any general corporate overhead and administrative expense of Sublandlord; (iii) the cost of any items for which Sublandlord is actually reimbursed by insurance proceeds, condemnation awards, or another tenant or occupant of another building located on the Land; (iv) any advertising or promotional expenses; (v) any costs representing an amount paid to a related or affiliated person of Sublandlord which is in excess of the amount which would have been paid in the absence of such relationship; (vi) any expenses for repairs or maintenance unless permitted under Paragraph 11(a) hereof or unless otherwise agreed to in writing by Subtenant or which are actually reimbursed through warranties or guaranties (excluding any mandatory deductibles); (vii) any electric power or other utility costs or expenses for which Subtenant directly contracts with the local public service company; (viii) any costs, including without limitation, attorneys' fees associated with the operation of the business of the entity which constitutes Sublandlord, including accounting and legal matters, costs of selling, syndicating, financing, mortgaging or hypothecating any of Sublandlord's interest in the Premises or the Land or any part thereof, costs of any dispute between Sublandlord and its employees, disputes of Sublandlord with project management or personnel or outside fees paid in connection with disputes with other tenants; (ix) the cost of any work or services performed for any tenant (including Subtenant) at such tenant's cost; (x) any reserves of any kind, including without limitation, replacement reserves or reserves for bad debts or lost rent; (xi) depreciation of the Premises or any improvements, buildings or structures on the Land; (xii) cost of repairs, replacements or other work occasioned by the exercise by governmental authorities of the right of eminent domain; (xiii) the cost of repairs arising out of the gross negligence or willful misconduct of Sublandlord or any of its agents, employees or contractors; (xiv) any management fees, costs, or expenses incurred by Sublandlord; (xv) costs of selling, syndicating, financing, mortgaging or hypothecating any of Lessor's interest in the Premises or any other buildings, structures or improvements on the Land; and (xvi) costs incurred for the investigation and remediation of a Release of Hazardous Materials occurring prior to the Commencement Date. (d) Inspection of Records. Sublandlord agrees that any Operating Expense statements submitted by Sublandlord shall be reasonably detailed and certified as true and correct by Sublandlord. Sublandlord further agrees to make available its books and records relating to Operating Expenses for Subtenant's audit, upon reasonable notice, at Sublandlord's office. If such audit discloses any errors, appropriate adjustments shall be made, and if such errors are in excess of five percent (5%) of the amount charged to Subtenant, Sublandlord shall pay for the reasonable costs of such audit within thirty (30) days of demand. -16- 57 (e) Betterments. With respect to betterments or other extraordinary or special assessments that may be included in the definition of Taxes, Subtenant's obligations shall apply only to the extent such assessments are payable during and in respect of the Sublease Term if paid over the longest period permitted by law. (f) Right to Contest. Subtenant at its cost shall have the right, at any time, to seek a reduction in the assessed valuation of the Premises, or other improvements located on the Excluded Area, and/or the Excluded Area, or to contest any Taxes that are to be paid by Subtenant. If Subtenant seeks a reduction or contests the Taxes, Subtenant shall continue to pay its share of any such Taxes during such proceedings. Sublandlord shall not be required to join in any proceedings or contest brought by the Subtenant unless the provisions of any law require that the proceeding or contest be brought by or in the name of Sublandlord or any owner of the premises. In that case Sublandlord shall join in the proceeding or contest or permit it to be brought in Sublandlord's name as long as Sublandlord is not required to bear any cost. Subtenant, on final determination of the proceeding or contest, shall immediately pay or discharge all costs, charges, interest, and penalties incidental to the decision or judgment. 12. Repairs and Maintenance. (a) [Intentionally Omitted] (b) Subtenant's Repairs. Subtenant shall, at its sole cost, be responsible for the repair and maintenance of the Premises (and the interior improvements located therein) and all buildings, structures and improvements located on the Excluded Area. Subtenant shall not allow the Premises or the other buildings, structures or improvements located on the Excluded Area to fall into such disrepair as to constitute a health or safety risk. Subtenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Sublandlord acknowledges that it is the responsibility of Subtenant (subject to the provisions of Paragraph 32 below) to demolish the Premises and the other buildings, structures and improvements located on the Excluded Area at or following the expiration of the Sublease Term and, therefore, Sublandlord shall not require Subtenant to maintain the Premises or other buildings, structures or improvements located on the Excluded Area in good condition or repair during the Sublease Term, except to the extent (1) Sublandlord reasonably determines any maintenance to be necessary to avoid criminal or civil liability for any failure by Subtenant to maintain or repair the Premises or any improvements thereto, in which case Subtenant shall be obligated to take all actions reasonably required by Landlord to address such potential liability arising therefrom or (2) Subtenant's failure to maintain or repair the Premises exacerbates any environmental condition or contamination in, on or about the Premises or the Excluded Property. Should Subtenant fail to keep the Premises or any other buildings, structures or improvements located on the Excluded Area in safe condition within fifteen (15) days after notice from Sublandlord or should Subtenant fail thereafter to diligently perform its obligations under this Paragraph 12(b), Sublandlord, in addition to all other remedies available hereunder or by law and without waiving any alternative remedies, may take such reasonable steps as to make -17- 58 the Premises or other buildings, structures or improvements on the Excluded Area safe, and in that event, Subtenant shall reimburse Sublandlord as Additional Rent for the reasonable costs so incurred by Sublandlord within fifteen (15) days of written demand by Sublandlord. Sublandlord shall have no maintenance or repair obligations whatsoever with respect to the Premises or any buildings, structures or improvements located thereon. Subtenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Sublandlord as provided in Section 1942 of said Civil Code. 13. Alterations. (a) Limitations. Subtenant shall not make, or suffer to be made, any structural alterations, improvements or additions in, on, about or to the Premises or any other buildings, structure or improvements located on the Excluded Area, or any part thereof, without the prior consent of Sublandlord (which consent shall not be unreasonably withheld, conditioned or delayed as long as Subtenant provides Sublandlord with additional rent in an amount equal to the additional costs of demolition and removal associated with such improvements valued in excess of Ten Thousand Dollars ($10,000)) and without a valid building permit issued by the appropriate governmental authority. Sublandlord's consent shall not be required for interior nonstructural alterations within the Premises or any other buildings, structures or improvements located on the Excluded Area as long as subtenant provides Sublandlord with additional rent in an amount equal to the additional cost of demolition and removal associated with such improvements valued in excess of Ten Thousand Dollars ($10,000). Subtenant shall give written notice to Sublandlord five (5) business days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises or any other buildings, structures or improvements located on the Excluded Area, and prior to the commencement of any work of improvement on the Premises or any other buildings, structures or improvements located on the Excluded Area. All alterations or improvements made to the Premises by Subtenant shall be made in accordance with applicable Laws and in a workmanlike manner. At the time Subtenant requests Sublandlord's consent to any structural alterations or improvements, Sublandlord shall notify Subtenant in writing whether Sublandlord will require Subtenant, at Subtenant's expense, to remove any such structural alterations or improvements and restore the Premises or other improvements located on the Excluded Area to their prior condition at the expiration or earlier termination of this Sublease. All non-structural alteration or improvements made by Subtenant to the Premises or other improvements located on the Excluded Area during the Sublease Term, including, without limitation, movable furniture and trade fixtures not affixed to the Premises or other improvements located on the Excluded Area, shall be removed from the Excluded Area by Subtenant, at Subtenant's sole cost and expense, upon the expiration or earlier termination of the Sublease. 14. Default. (a) Events of Default. A breach of this Sublease by Subtenant shall exist if any of the following events (hereinafter referred to as "Event of Default") shall occur: -18- 59 (i) Default in the payment when due of any Monthly Installment of rent, Additional Rent or other payment required to be made by Subtenant hereunder, where such default shall not have been cured within ten (10) days after written notice of its default is given to Subtenant; (ii) Subtenant's failure to perform any other term, covenant or condition contained in this Sublease where such failure shall have continued for thirty (30) days after written notice of such failure is given to Subtenant; provided, however, Subtenant shall not be deemed in default if Subtenant commences to cure such failure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion within a period not to exceed six (6) months thereafter; (iii) Subtenant's assignment of its assets for the benefit of its creditors; (iv) The sequestration of, attachment of, or execution on, any substantial part of the property of Subtenant or on any property essential to the conduct of Subtenant's business, shall have occurred and Subtenant shall have failed to obtain a return or release of such property within sixty (60) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; (v) Subtenant hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; (vi) Subtenant shall take any corporate action to authorize any of the actions set forth in clause (v) above; (vii) Any case, proceeding or other action against Subtenant shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (a) results in the entry of an order for relief against it which is not fully stayed within ten (10) business days after the entry thereof or (b) remains undismissed for a period of sixty (60) days; or (viii) Subtenant's failure to maintain any of the insurance it is required to maintain pursuant to Section 9(c) above where such failure has not been cured within three (3) business days after written notice is given to Subtenant. (b) Remedies. Upon any Event of Default, Sublandlord shall have the following remedies, in addition to all other rights and remedies provided by law, to which Sublandlord may resort cumulatively, or in the alternative: -19- 60 (i) Recovery of Rent. Sublandlord shall be entitled to keep this Sublease in full force and effect (whether or not Subtenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Sublease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 31 below) from the due date of each installment of rent or other sum until paid. (ii) Termination. Sublandlord may terminate this Sublease by giving Subtenant written notice of termination. On the giving of the notice all of Subtenant's rights in the Premises and the Excluded Area shall terminate. Upon the giving of the notice of termination, Subtenant shall surrender and vacate the Premises and the Excluded Area in the condition required by Paragraph 32, and Sublandlord may reenter and take possession of the Premises and all the remaining improvements or property and eject Subtenant or any of Subtenant's subtenants, assignees or other person or persons claiming any right under or through Subtenant or eject some and not others or eject none. This Sublease may also be terminated by a judgment specifically providing for termination. Any termination under this Paragraph shall not release Subtenant from the payment of any sum then due Sublandlord or from any claim for damages or rent previously accrued or then accruing against Subtenant. In no event shall any one or more of the following actions by Sublandlord constitute a termination of this Sublease: (A) Maintenance and preservation of the Premises (or any other improvements, buildings, or structures located on the Excluded Area) or the Excluded Area; (B) Efforts to relet the Premises; (C) Appointment of a receiver in order to protect Sublandlord's interest hereunder; (D) Consent to any subletting of the Premises or any other buildings, structures or improvements located thereon or assignment of this Sublease by Subtenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or (E) Any other action by Sublandlord or Sublandlord's agents intended to mitigate the adverse effects from any breach of this Sublease by Subtenant. (iii) Damages. In the event this Sublease is terminated pursuant to Subparagraph 14(b)(ii) above, or otherwise, Sublandlord shall be entitled to damages in the following sums: (A) The worth at the time of award of the unpaid rent which has been earned at the time of termination; plus (B) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Subtenant proves could have been reasonably avoided; plus -20- 61 (C) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Subtenant proves could be reasonably avoided; and (D) Any other amount necessary to compensate Sublandlord for all detriment proximately caused by Subtenant's failure to perform Subtenant's obligations under this Sublease, or which in the ordinary course of things would be likely to result therefrom. (E) The "worth at the time of award" of the amounts referred to in Subparagraphs (A) and (B) of this Subparagraph 14(b)(iii), is computed by allowing interest at the Permitted Rate. The "worth at the time of award" of the amounts referred to in Subparagraph (C) of this Subparagraph 14(b)(iii) is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent," as used in this Paragraph 14, shall include all sums required to be paid by Subtenant to Sublandlord pursuant to the terms of this Sublease. (c) Sublandlord shall be in default under this Sublease hereunder if Sublandlord breaches an agreement, or fails to perform an obligation required of Sublandlord within ten (10) days after notice in the case of a monetary obligation, or thirty (30) days after notice in the case of a nonmonetary obligation; provided, however, that if the nature of a nonmonetary obligation of Sublandlord is such that more than thirty (30) days are reasonably required for performance, then Sublandlord shall not be in default if Sublandlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. If Sublandlord breaches any agreement in this Sublease or fails to make any payment or perform any other act on its part to be performed under this Sublease, provided that Subtenant has delivered to Sublandlord (and Sublandlord's Lender, if required) written notice of such default and Sublandlord (or Sublandlord's Lender, if required) has failed to cure such default within the time period required under this Section 14(c), Subtenant may make such payment or cure such performance or breach to the extent Subtenant deems desirable and, in connection therewith, pay reasonable expenses and employ counsel. All sums reasonably advanced by Subtenant on Sublandlord's behalf, any delinquent sums owed by Sublandlord to Subtenant under any provision of this Sublease, and all penalties, interest and other costs in connection therewith, including reasonable attorneys' fees and collection costs, shall be due and payable by Sublandlord on written demand, together with interest thereon from the date of delinquency at the Permitted Rate. 15. Destruction. (a) Restoration or Maintain in Safe Condition. If the Premises or Subtenant Improvements is damaged by any peril after the Commencement Date of this Sublease such that Subtenant cannot reasonably run its normal business operations in the Premises, Subtenant shall either (i) restore the same, or, (ii) as reasonably agreed upon by Sublandlord and Subtenant, either (A) remove the Main Building and related leasehold improvements in accordance with the terms and conditions of Paragraph 32 hereof, and all Subtenant Improvements (except for those Subtenant Improvements described in subparagraphs (viii), (x) and (xvi) of Section 2(a)), or (B) -21- 62 place the damaged improvements or Excluded Area, as the case may be, in safe condition; provided, however, that Sublandlord's and Subtenant's election under clause (B) of the preceding sentence shall not be permitted unless the Sublease is terminated by Tenant pursuant to Subparagraph 15(b). If a Release of Hazardous Materials placed, stored, transported or used by Subtenant and/or Subtenant's Agents in, on or about the Property occurs as a result of such peril, Subtenant shall investigate and clean up any contaminated soil and/or groundwater contaminated by such Release to levels established by all appropriate governmental agencies. All insurance proceeds available from the property damage insurance carried by Subtenant pursuant to Paragraph 9(c)(v) of this Sublease shall be paid to and become the property of Subtenant. If this Sublease is not terminated by Subtenant as provided in Subparagraph 15(b), then upon the issuance of all necessary governmental permits, Subtenant shall either commence and diligently prosecute to completion the restoration of the damaged Premises or Subtenant Improvements, to the extent then allowed by Law, to substantially the same condition in which the damaged Premises or Subtenant Improvements was immediately prior to such damage, or remove the rubble generated from such damage, if any, from the Excluded Area and cause such Excluded Area to be placed in a safe condition. In the event of such damage to the Premises or the Subtenant Improvements, Sublandlord shall have no obligation to rebuild or restore the same (unless such damage was caused by the acts, negligence or willful misconduct of Sublandlord) and Sublandlord shall have no obligation to rebuild or restore any trade fixtures and/or personal property and/or alterations, additions or other improvements constructed or installed by Subtenant in the Premises. (b) Subtenant's Right to Terminate. If the Premises or Subtenant Improvements, or any portion thereof, is damaged by any peril, then as soon as reasonably practicable, Subtenant shall obtain and deliver to Sublandlord an opinion of Subtenant's architect or construction consultant as to when the restoration work may be completed. Subtenant shall have the option to terminate this Sublease in the event any of the following occurs, which option may be exercised only by delivery to Sublandlord of a written notice of election to terminate within sixty (60) days after Subtenant receives from Sublandlord the estimate of the time needed to complete such restoration: (i) The Premises or Subtenant Improvements, or any portion thereof, is damaged by any peril and, in the reasonable opinion of Subtenant's architect or construction consultant, the restoration of the damaged improvements cannot be substantially completed within one hundred twenty (120) days of the peril causing such damage. (ii) The Premises or Subtenant Improvements is damaged by any peril within twelve (12) months of the last day of the Sublease Term, and, in the reasonable opinion of Subtenant's architect or construction consultant, the restoration work cannot be substantially completed within the earlier of (1) ninety (90) days after the date of such damage, or (2) sixty (60) days prior to the expiration of the Sublease Term. (c) Abatement of Rent. In the event of damage to the Premises or Subtenant improvements which does not result in the termination of this Sublease, all Rentals shall be temporarily abated, but only to the extent such amount is covered and paid for from the proceeds of business interruption insurance carried by Subtenant, during the period of restoration, in proportion to the degree to which Subtenant's use of the Premises and Subtenant Improvements -22- 63 is impaired by such damage. All other Rentals due hereunder shall continue unaffected during such period. Subtenant shall not be entitled to any compensation from Sublandlord for loss of Subtenant's property or leasehold improvements or loss to Subtenant's business or income caused by such damage or restoration. Subtenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law, hereinafter enacted. 16. Condemnation. (a) Definition of Terms. For the purposes of this Sublease, the term (1) "Taking" means a taking of the Premises or Excluded Area or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or entire Excluded Area or so much of the Premises or Excluded Area as to prevent or substantially impair the use thereof by Subtenant for the uses herein specified; (3) "Partial Taking" means a Taking which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises or Excluded Area, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. (b) Rights. The parties agree that in the event of a Taking all rights between them or in and to an Award shall be as set forth herein and Subtenant shall have no right to any Award except as set forth herein. (c) Total Taking. In the event of a Total Taking during the term hereof, (1) the rights of Subtenant under the Sublease and the leasehold estate of Subtenant in and to the Premises and the Excluded Area (and the Subtenant Improvements) shall cease and terminate as of the Date of Taking; (2) Sublandlord shall refund to Subtenant any prepaid rent; (3) Subtenant shall pay Sublandlord any rent or charges due Sublandlord under the Sublease, each prorated as of the Date of Taking; (4) Subtenant shall satisfy all obligations of Sublandlord with respect to Subtenant's Use of Hazardous Materials, as may be imposed by the condemning authority pursuant to such taking (provided that Lessor or Sublandlord, as Lessor's agent, uses its good faith efforts to include Subtenant in any negotiations or discussions about the Total Taking with the applicable authority); (5) Subtenant shall receive from the Award those portions of the Award attributable to trade fixtures of Subtenant and for moving expenses of Subtenant; and (6) the remainder of the Award shall be paid to and be the property of Sublandlord. (d) Partial Taking. In the event of a Partial Taking during the term hereof, (1) at Subtenant's election, either (A) the rights of Subtenant under this Sublease and the leasehold estate of Subtenant in and to the portion of the Premises or Excluded Area taken shall cease and terminate as of the Date of Taking or (B) Subtenant may terminate this Sublease in accordance with Section 32; (2) from and after the Date of Taking the Monthly Installment of Basic Rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Premises after the Taking and the denominator of which is the number of -23- 64 square feet contained in the Premises prior to the Taking; (3) Subtenant shall receive from the Award the portions of the Award attributable to the Subtenant Improvements and other Subtenant trade fixtures of Subtenant; and (4) the remainder of the Award shall be paid to and be the property of Landlord and Sublandlord. In the event of a Partial Taking, Subtenant shall, unless Subtenant elects to terminate this Sublease in accordance with Section 32 hereof and to the extent solely from any severance award received by Sublandlord, promptly commence repairing or restoring the Premises to an architecturally completed unit and diligently prosecute such repair or restoration to completion. 17. Mechanics' Liens. Subtenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Subtenant or any contractor employed by Subtenant with respect to the Premises or the Subtenant Improvements (or any leasehold improvements constructed or installed by or for Subtenant); (B) indemnify, defend, protect and hold Lessor and Sublandlord, the Premises and the Excluded Area harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Subtenant or any contractor employed by Subtenant with respect to the Premises (and/or any leasehold improvements constructed or installed by or for Subtenant); and (C) permit Sublandlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof in the event Subtenant is required to post an improvement bond with a public agency in connection with the above, Subtenant agrees to include Lessor and Sublandlord as an additional obligee. 18. Inspection of the Premises. Subtenant shall permit Lessor, Sublandlord and their respective agents to enter the Premises or Excluded Area at any reasonable time for the purpose of inspecting the same, protecting the interests of Sublandlord in the Premises, performing Sublandlord's maintenance and repair responsibilities, if any (upon one (1) business day's prior notice except in an emergency), posting a notice of non-responsibility for alterations, additions or repairs, posting a "For Sale" sign or signs, and at any time within nine (9) months prior to expiration of this Sublease, to place upon the Premises or Excluded Area, ordinary "For Sublease" signs. Sublandlord shall have the right to use any and all reasonable means under the circumstance to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Sublandlord in an emergency shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Subtenant from the Premises. 19. Compliance With Laws. Subtenant covenants and agrees to conform and comply with all Laws and with all requirements of any public body or officers having jurisdiction over the Premises and with the requirements or regulations of any Board of Fire Underwriters or insurance company insuring the Premises, all at Subtenant's own expense without reimbursement from Sublandlord. Subtenant need not, however, comply with any such Law or requirement of public authority so long as Subtenant shall be contesting the validity thereof, or the applicability thereof to the Premises. 20. Subordination. This Sublease is subject and subordinate to any and all underlying leases, deeds of trust, assignments of leases and rents or other security instruments existing as of the date of execution of this Sublease and disclosed to Subtenant or which hereafter may be made -24- 65 and/or to any renewal, modification, replacement, extension or expansion hereafter or any consolidation or spreader thereof theretofore or hereinafter made (collectively, a "Security Instrument"); provided, however, that notwithstanding any provisions with respect to the subordination of this Sublease to any Security Instrument which now exists or may hereafter be made or to any renewal, modification, replacement or extension hereafter of any Security Instrument, or to any consolidation or spreader of any Security Instrument, heretofore or hereafter made, any such subordination is subject to the express conditions that so long as this Sublease is in full force and effect and no Event of Default by Subtenant exists under this Sublease, (a) Subtenant shall not be evicted from the Premises or the Excluded Area, nor shall Subtenant's continuing use and occupancy of the Premises or the Excluded Area be interrupted, restricted or impaired, nor shall any of Subtenant's rights under this Sublease be affected in any way by reason of any default under such Security Instrument; and (b) Subtenant's leasehold estate under the Sublease shall not be terminated or disturbed by reason of any default under such Security Instrument which does not arise from a default by Subtenant hereunder, and this Sublease and Subtenant's rights hereunder, including any rights of offset, shall be recognized by the lender or Lessor. Sublandlord agrees to procure, execute and deliver to Subtenant and Subtenant agrees to execute the same, all concurrently with the execution of this Sublease, the written agreement of Lessor and Agent, on behalf of each Lender, substantially in the form of Exhibit "C" attached hereto (the "SNDA"). In the event of a default under any Security Instrument, Subtenant shall become a subtenant of and attorn, to the successor-in-interest to Sublandlord upon the same terms and conditions contained in this Sublease and shall execute any instrument reasonably required by Sublandlord's successor for that purpose provided such successor in interest assumes the Sublandlord's obligations under this Sublease accruing from and after the date such party becomes the successor in interest. Subtenant shall also, upon written request of Sublandlord, execute and deliver all instruments as may be reasonably required from time to time to subordinate the rights of Subtenant under this Sublease to any underlying lease or any deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above). If the SNDA is not tendered to Subtenant, in addition to any other rights and remedies available to Subtenant, Subtenant may, at its option, cancel this Sublease on the date ten (10) days following such notice, and the Sublease and the term and estate hereby granted shall then terminate at noon of such cancellation date as if such cancellation date were the expiration date, unless all of such agreements shall have been tendered meanwhile. Upon any such cancellation, Sublandlord shall have no further obligation to Subtenant hereunder except to return any moneys theretofore paid by Subtenant to Sublandlord as Rent under this Sublease. 21. Notices. Any notice required or desired to be given under this Sublease shall be in writing with copies directed as indicated below and shall be personally served or given by mail. Any notice given by mail shall be deemed to have been given when seventy-two (72) hours have elapsed from the time such notice was deposited in the United States mails, certified and postage prepaid, return receipt requested, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this paragraph. At the date of execution of this Sublease, the address of Sublandlord is: -25- 66 Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones with a copy to: Brobeck, Phleger & Harrison LLP 550 West "C" Street, Suite 1300 San Diego, California 92101 Attn: Todd Anson, Esq. and the address of Subtenant is: Fairchild Semiconductor Corporation of California 333 Western Avenue South Portland, ME 04106 Attn: Dan Boxer, Esq. with copy to: Berliner Cohen 10 Almaden Blvd., Suite 1100 San Jose, CA. 95113 Attn: Sam Farb 22. Attorneys' Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Sublease, to recover rent or possession of the Premises or the Excluded Area, to terminate this Sublease, or to enforce, interpret, protect or establish any term or covenant of this Sublease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including reasonable attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 23. Subleasing and Assignment. (a) Sublandlord's Consent Required. Subtenant's interest in this Sublease is not assignable, by operation of law or otherwise (except as may be required for security purposes), nor shall Subtenant have the right to sublet the Premises or the Excluded Area, transfer any interest of Subtenant therein or permit any use of the Premises by another party, without the prior written consent of Lessor and Sublandlord to each such assignment, subletting, transfer or use, which consent Sublandlord may withhold in its sole discretion. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or -26- 67 subletting without such consent shall be void and shall, at the option of Sublandlord, terminate this Sublease. Lessor's or Sublandlord's waiver or consent to any assignment or subletting hereunder shall not relieve Subtenant from any obligation under this Sublease unless the consent shall so expressly provide in writing. (b) Transfers to an Affiliate. Notwithstanding the foregoing, Subtenant may, without Lessor's or Sublandlord's prior written consent, assign its interest in the Sublease or sublet the Premises or Excluded Area, or a portion thereof to (i) a subsidiary, affiliate, division or corporation controlled by or under common control with Subtenant; provided that (a) Sublandlord receives written notice of the name and address of the proposed transferee, (b) the transferee assumes the obligations of the Subtenant under this Sublease in a written instrument, in form and substance reasonably satisfactory to Sublandlord, which shall be delivered to Sublandlord as a condition precedent to the effectiveness of such assignment; and (c) the transfer or tenant remains liable as a primary obligor for the obligations of Subtenant under this Sublease. 24. Successors. The covenants and agreements contained in this Sublease shall be binding on the parties hereto and on their respective heirs, successors and assigns (to the extent the Sublease is assignable). 25. Mortgagee Protection. In the event of any default on the part of Sublandlord, Subtenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been previously furnished to Subtenant. So long as such beneficiary or mortgagee is making reasonable efforts to cure the default, including, but not limited to, obtaining possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure, Subtenant shall not have the right to terminate this Sublease. 26. Estoppel Certificate. Subtenant agrees within fifteen (15) business days following reasonable request by Sublandlord to execute and deliver to Sublandlord any documents, including estoppel certificates presented to Subtenant by Sublandlord, (1) certifying that this Sublease is unmodified and in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to Subtenant's knowledge, any uncured defaults on the part of Sublandlord hereunder, or specifying the defaults, if any, and (3) evidencing the status of the Sublease as may be required either by a Lender making a loan or any other advance to Sublandlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Sublandlord. 27. Surrender of Sublease Not Merger. The voluntary or other surrender of this Sublease by Subtenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Sublandlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Sublandlord of any or all such subleases or subtenants. 28. Waiver. The waiver by Sublandlord or Subtenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant -27- 68 or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. Any waiver shall be in writing and signed by both Sublandlord and Subtenant. 29. General. (a) Captions. The captions and Paragraph headings used in this Sublease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Sublease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Sublease. As used in this Sublease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. (b) Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Sublease. (c) Severability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Sublease, but this Sublease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Sublease shall be construed and enforced in accordance with the laws of the State of California. (d) Quiet Enjoyment. Upon Subtenant paying the rent for the Premises (and the use of the Excluded Area) observing and performing all of the covenants, conditions and provisions on Subtenant's part to be observed and performed hereunder, Subtenant shall have quiet possession of the Premises (and the use of the Excluded Area) for the entire term hereof subject to all of the provisions of this Sublease. (e) Law. As used in this Sublease, the term "Law" or "Laws" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Sublease or the Premises or both, in effect at the Commencement Date of this Sublease or any time during the Sublease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). (f) Agent. As used in this Sublease, the term "Agent" shall mean, with respect to either Sublandlord, Subtenant or any Lender, its respective agents, employees, contractors (and their subcontractors), and invitees (and in the case of Subtenant, its subtenants). (g) Lender. As used in this Sublease, the term "Lender" shall mean any beneficiary, mortgagee, secured party or other holder of any Security Instrument. 30. Sign. Subtenant shall have the right at its cost to maintain its name on signage within or on the Premises or on the Excluded Area, provided any such signage placed by Subtenant on the Main Building or on the Excluded Area shall be in compliance with all applicable laws, ordinances, rules and regulations. -28- 69 31. Interest on Past Due Obligations. Any Monthly Installment of Rent due from Subtenant, or any other sum due under this Sublease from Subtenant, which is received by Sublandlord after the date ten (10) days following the date written notice is given by Sublandlord to Subtenant that such sum has not been paid when due, shall bear interest from said due date until paid, at an annual rate equal to the greater of (the "Permitted Rate"): (1) ten percent (10%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Subtenant. In addition, Subtenant shall pay all costs and attorneys' fees incurred by Sublandlord in collection of such amounts. 32. Surrender of the Premises. (a) Removal of Property. On the last day of the Sublease Term, or on the sooner termination of this Sublease, Subtenant shall surrender the Premises and the Excluded Area to Sublandlord in their then existing condition existing except as otherwise provided in this Paragraph 32. Not later than the expiration or earlier termination of the Sublease Term, Subtenant shall remove all of Subtenant's personal property and trade fixtures (including, without limitation, all machinery and equipment) from the Main Building, and all property not so removed shall be deemed abandoned by Subtenant and may be removed by Sublandlord at Subtenant's sole cost and expense. Anything herein to the contrary notwithstanding, at the expiration or earlier termination of the Sublease Term, Subtenant shall not be obligated to remove from the Excluded Area any "Remediation Equipment" as such term is defined in that certain Grant of Easements, Restriction and Indemnity Agreement dated December 24, 1997, executed by Raytheon Semiconductor, Inc., a Delaware corporation, as grantor, and Raytheon Company, as grantee, and recorded in the Official Records of Santa Clara County on December 30, 1997, as Document No.: 13994862 (the "Easements Agreement"). (b) Demolition of Main Building and Related Improvements. (i) The parties hereto agree that Subtenant shall (A) complete the demolition of the Main Building and related structures and improvements including, without limitation, the Subtenant Improvements (except for those items set forth in subparagraphs (viii), (x) and (xvi) of Paragraph 2(a) of this Sublease) on the Excluded Area and the Main Building foundation, (B) complete, at Subtenant's cost, the remediation of any contaminated soil underlying the Main Building or related improvements (as further discussed in Paragraph 32(d) below) either (i) to levels at or below the cleanup level or standards established by the United States Environmental Protection Agency Record of Decision for the Raytheon facility, or (ii) to levels acceptable to the environmental agency or agencies having jurisdiction over such cleanup or remediation (such levels described in clauses (i) or (ii) above being referred to hereinafter as the "Soil Remediation Standard") and (C) obtain, at Subtenant's cost, an "environmental closure" pertaining to the operations of Subtenant within the Main Building and related facilities, as required by all applicable governmental agencies having jurisdiction over such closure (the items set forth in subparagraphs (A), (B) and (C) of this subparagraph are collectively referred to as the "Demolition") on or before January 1, 2001 (such date is referred to herein as the "Departure Deadline"), without any liability of Sublandlord or Lessor, as the case may be, for overtime or -29- 70 additional labor resulting from Subtenant's failure, if applicable, to correctly estimate the time necessary for completion of the Demolition. For purposes of this Paragraph 32(b), Subtenant shall be deemed to have completed the soil contamination remediation referred to above, if applicable, at such time as (Y) Subtenant's environmental consultant overseeing such remediation confirms or states in writing that soil contamination under the Main Building, if any, has been remediated to levels that meet the Soil Remediation Standard, or (Z) Subtenant causes, at Subtenant's cost, an environmental assessment of the soil under the demolished Main Building to be performed by an environmental consultant and such assessment indicates that the soil under the demolished Main Building and related improvements does not contain Hazardous Materials in violation of the Soil Remediation Standard. The environmental consultant referred to in the preceding sentence shall be selected by Subtenant and approved by Sublandlord and Lessor, which approval shall not be unreasonably withheld. Sublandlord and Lessor shall approve or disapprove of the environmental consultant selected by Subtenant within five (5) days of receipt of such contractor's identity as well as written information about the contractor's experience and credentials. If Sublandlord or Lessor fail to disapprove such contractor within such five (5) day period, Sublandlord and Lessor shall be deemed to have approved such contractor. Any report prepared by such contractor shall be addressed to the Financing Parties. Alternatively, such contractor shall provide the Financing Parties with a signed statement that they may rely on such report. (ii) Subtenant shall use commercially reasonable efforts to complete the Demolition in an expeditious manner following the expiration or earlier termination of the Sublease Term in order to permit Sublandlord or Lessor, as the case may be, to commence development of the Excluded Area. Sublandlord, in its own capacity or as construction agent of Lessor, agrees to reasonably cooperate with Subtenant in Subtenant's efforts to cause the applicable governmental agency or agencies to respond in a timely manner to Subtenant's plan for removal of any contaminated soil from under the Main Building or the related improvements. Sublandlord and Lessor agree to reasonably cooperate with Subtenant with regard to the Demolition and not to unreasonably interfere with, delay or impair Subtenant's efforts to complete the Demolition in an expeditious manner. If, however, Subtenant fails to complete the Demolition on or before the Departure Deadline, then Subtenant shall pay to Sublandlord, as Sublandlord's sole and exclusive remedy for such delay in the completion of the Demolition, liquidated damages in a per day amount equal to the Monthly Installment of rent paid by Subtenant for the month immediately preceding the expiration or earlier termination of the Sublease Term divided by thirty (30) for each day from and after the Departure Deadline until the Demolition is completed. Nothing within the preceding sentence shall prelude Sublandlord or Lessor from exercising any rights or remedies against Subtenant under the Purchase Agreement (to the extent such remedies survive the close of escrow thereunder) or that certain Environmental Indemnity Agreement by and between Sublandlord and Subtenant (the "Indemnity Agreement"). (iii) Notwithstanding the provisions of subparagraph 32(b)(ii) above, if Subtenant fails to complete the Demolition on or before the Departure Deadline due to Subtenant's failure to use commercially reasonable efforts to complete the Demolition in an expeditious manner, Subtenant shall pay Sublandlord, as Sublandlord's sole and exclusive remedy for Subtenant's failure to complete the Demolition on or before the Departure Deadline, -30- 71 liquidated damages in the amount of Seven Thousand Five Hundred Dollars ($7,500) per day for each day that Subtenant fails to complete the Demolition by or after the Departure Deadline due to Subtenant's breach of its obligation under the first sentence of subparagraph 32(b)(ii). Nothing within the preceding sentence shall preclude Sublandlord from exercising any remedies against Subtenant under the Purchase Agreement (to the extent such remedies survive the close of escrow thereunder) or the Indemnity Agreement. Notwithstanding the foregoing, Subtenant shall only be obligated to pay liquidated damages in the amount set forth in this subparagraph 32(b)(iii) (instead of the amount set forth in subparagraph 32(b)(ii) above) for each day after the Departure Deadline that the Demolition has not been completed and Sublandlord or Lessor, as the case may be, is ready to commence grading or the construction of improvements on the Excluded Area or any portion thereof; provided, however, that if the condition of the Excluded Area prevents or delays the Sublandlord's ability to commence grading or construction thereon, the condition set forth in this sentence shall not apply. (iv) The parties hereto acknowledge and agree that Sublandlord's carrying costs, lost opportunity costs and other expenses incurred by Sublandlord as a result of not having full and unrestricted access to the Excluded Area by the Departure Deadline are impracticable or extremely difficult to ascertain. The parties hereto agree that the amounts of liquidated damages set forth in subparagraph 32(b)(ii) and 32(b)(iii) are reasonable estimates of the damages that will be incurred by Sublandlord in the event Subtenant is not able to complete the Demolition by the Departure Deadline. By executing this paragraph below, the parties hereto agree to the provisions of these liquidated damages provisions. Subtenant:_______________ Sublandlord:________________________ (c) Remediation of Contaminated Soil. If contaminated soil is discovered under the approximately 119,000 square foot Main Building and/or related improvements following the demolition of the same by Subtenant, then such contaminated soil shall not be treated or remediated by Subtenant on the Excluded Area after the Departure Deadline. If Subtenant has not disposed of or remediated any such contaminated soil underlying the Main Building and/or related improvements by the Departure Deadline, then Subtenant agrees to dispose or treat, or cause to be disposed or treated, such soil contamination off-site at a registered hazardous waste disposal site (if legally required) or off-site as required by applicable environmental Laws, with Subtenant or Raytheon Company named on all permits and manifests with respect to such contaminated soil as the party responsible for such disposal or treatment (i.e., the generator). Sublandlord acknowledges and agrees that if contaminated soil is discovered under the Main Building and/or related improvements following the demolition of such Main Building and related improvements, and if Subtenant reasonably believes that Raytheon Company is responsible for the clean up or remediation. of such contaminated soil (or for the cost of clean up or remediation), then Subtenant will promptly notify Raytheon Company of such contamination and request that Raytheon Company undertake the disposal or treatment of such contaminated soil as provided above. Subtenant shall have no liability to Sublandlord or Lessor for the clean up or remediation of such contaminated soil if Raytheon Company accepts responsibility for the clean up or remediation of such contaminated soil in accordance with the terms set forth above and disposes of or treats such contamination such that it is removed or remediated in accordance with applicable environmental laws and regulations by the Departure -31- 72 Deadline. The parties agree that any contaminated soil discovered under the Main Building or the related improvements shall be remediated or treated by Subtenant, at Subtenant's sole cost (except as set forth in the preceding sentence), to levels that meet the Soils Remediation Standard. Subtenant shall not be obligated to remove any contaminated soil or other Hazardous Materials discovered under the Main Building or related improvements (or on or under the Excluded Area) if the same is remediated or treated to levels that meet the Soil Remediation Standard. (d) Costs of Demolition. (i) Prior to vacating the Main Building (which shall occur not later than December 31, 2000), Subtenant shall contract with a licensed contractor to demolish, at Lessor's cost (to the extent the funding requirements set forth in that certain Participation Agreement dated April __, 1999 among Lessor, Sublandlord and others (the "Participation Agreement") and that certain Agency Agreement dated April __, 1999 between Lessor and Sublandlord (the "Agency Agreement") are satisfied), the Main Building (and certain related structures and improvements located on the Excluded Area), including, without limitation, the foundation of the Main Building. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being at Lessor's costs shall be at Sublandlord's cost. Subtenant shall have the right to select the contractor to perform such demolition work. The contractor shall be selected through a bid process in which Subtenant shall obtain bids from not less than three licensed contractors selected by Subtenant and approved by Sublandlord, as Lessor's agent, which such approval shall not be unreasonably withheld. Based on such bids and any other information that the Subtenant may reasonably consider, Subtenant shall select the contractor to perform the demolition and such contractor selected by Subtenant shall be subject to the approval of Sublandlord and Lessor (which such approval shall not be unreasonably withheld). Subtenant's contract with such contractor shall contain terms that are commercially reasonable for such a contract. Sublandlord and Lessor shall provide the approvals or disapprovals set forth in this subparagraph within five (5) days of receipt of the information about the contractors selected by Subtenant to make bids or the bids and the identity of the contractor selected by Subtenant to perform the work. If Sublandlord or Lessor fails to disapprove such contractor(s) within such five (5) day period, Sublandlord and Lessor shall be deemed to have approved such contractor(s). If Sublandlord or Lessor reasonably disapproves any bidders or contractor selected by Subtenant, then, concurrently with notifying Subtenant of its disapproval, Sublandlord or lessor, as the case may be, shall provide Subtenant in writing with the name, address and telephone number of a replacement bidder or contractor, as the case may be, acceptable to Sublandlord and Lessor. (ii) Lessor shall pay (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) one hundred percent (100%) of the cost of demolishing and removing from the Property the Main Building and related structures and improvements located on the Excluded Area, including the foundation of the Main Building (and the cost of removing such demolished Main Building, foundations, structures and improvements from the Property). If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being paid by Lessor shall be paid by Sublandlord, except as set forth below. Notwithstanding the foregoing, Subtenant shall be responsible for (A) the cost of -32- 73 removal of any Hazardous Materials, including asbestos, located within the Main Building, (B) the cost of removal (or remediation as provided above) in compliance with applicable Laws of any asbestos or other Hazardous Materials located under the Main Building to levels that meet the Soils Remediation Standard (except Subtenant shall not be responsible hereunder for removal of any groundwater contamination under the Main Building) and (C) the cost of demolishing/removing the improvements constructed after the Commencement Date of this Sublease by or on behalf of Subtenant identified in Paragraph 13(a) above. The cost to be borne by Lessor (the "Cost to Lessor") (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) for demolishing the Main Building and related structures and improvements on the Excluded Area shall be net of the cost of health and safety plans and procedures incurred by Subtenant and/or Subtenant's affiliates, agents, employees or contractors for demolition and removal of the improvements, and the cost of protective measures for construction workers incurred by Subtenant and/or Subtenant's affiliates, agents, employees or contractors relating to any Hazardous Materials within or under the Main Building, which shall be at Subtenant's (or Raytheon's) cost. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being at Lessor's costs shall be at Sublandlord's cost. Except as provided in this Paragraph 32(d)(ii), all costs of Demolition shall be borne by Subtenant. (iii) Upon Sublandlord's selection of a contractor, Sublandlord shall cause Lessor (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) to deposit into an interest bearing escrow account as quickly as practicable under the Financing Documents, but in no event more than forty (40) days after Sublandlord's approval of the contractor as set forth in subparagraph 32(d)(ii) above, an amount equal to such contractor's estimated Cost to Lessor. If Sublandlord or Lessor fails to cause such amount to be deposited into the escrow account as provided herein, Subtenant shall not be required to demolish the Main Building and related improvements or remediate any soil contamination under the Main Building, if any, or remove any asbestos from the Main Building or any of the related improvements. Upon Subtenant's submission to the escrow holder of reasonably detailed documentation with respect to costs actually incurred with respect to the Demolition which are Costs to Lessor, the escrow holder shall promptly disburse from the escrow account to Subtenant or Subtenant's designees funds sufficient to pay such Costs to Lessor. In the event the total Costs to Lessor are less than the amount held in escrow, all remaining amounts held in the escrow account shall be returned to Sublandlord, as agent for Lessor. In the event the total Costs to Lessor exceed the amount held in escrow, Lessor shall promptly reimburse Subtenant (to the extent the funding requirements set forth in the Participation Agreement and the Agency Agreement are satisfied) such additional costs. If the funding requirements set forth in the Participation Agreement and the Agency Agreement are not satisfied, the items identified in the preceding sentence as being reimbursed by Lessor shall be reimbursed by Sublandlord. (iv) The parties hereto agree that Subtenant or Raytheon Company shall be identified as the party responsible for the proper disposal of any Hazardous Materials within the Main Building (e.g., asbestos) or contaminated soil to be removed from the Excluded Area as part of the demolition and removal obligations referred to in this paragraph, and in the -33- 74 event Subtenant or Raytheon Company fails to timely and completely perform such asbestos and contaminated soil removal or remediation as provided above, Sublandlord, in addition to Sublandlord's other remedies under this Sublease, may, as Lessor's agent, elect to do so (with Subtenant named on all permits and manifests relating to such asbestos and contaminated soil removal) and, in such event, Subtenant shall reimburse, or cause Raytheon Company to reimburse, Lessor for its reasonable costs incurred in removing such asbestos and contaminated soil from or under the Main Building and related structures as provided above. Such reimbursement shall be required to be made within thirty (30) days following receipt of a written notice or statement setting forth in reasonable detail such costs to be reimbursed. (e) Relocation of Remediation Well Sites and Equipment. Subtenant agrees to reasonably cooperate with Sublandlord, as Lessor's agent, promptly to engineer and relocate, on Sublandlord's reasonable request and at Subtenant's cost, any existing soil or water remediation well sites and equipment (as further set forth in Section 9.1(g) of the Purchase Agreement) which Subtenant is not required to remove pursuant to Paragraph 32 herein. Sublandlord agrees to reasonably cooperate with Subtenant with respect to the engineering and relocation of such items. Such cooperation shall include, without limitation, the prompt delivery to Subtenant of any development plans for the Property and Sublandlord's participation in good faith and timely discussions with Subtenant regarding the relocation of such items. (f) Survival. The obligations of Lessor, Subtenant and Sublandlord under this Paragraph 32 shall survive the expiration or earlier termination of this Sublease. 33. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Sublease on behalf of Sublandlord and Subtenant, respectively. 34. Brokers. Sublandlord and Subtenant each represent and warrant to the other that it has not dealt with any broker respecting this transaction other than Cornish & Carey Commercial ("CRC"); however, no commission shall be owing to C&C based on the parties hereto entering into this Sublease. Each party hereto agrees to indemnify and hold the other harmless from and against damages, losses, liabilities, claims, demands, costs or expenses suffered or incurred by the other in the event of any breach by such party of any representation, warranty or covenant set forth in this Paragraph 34. 35. Consent. Wherever in this Sublease it is provided that either party shall not unreasonably withhold consent or approval, such consent or approval (collectively referred to as "consent") shall also not be unreasonably withheld, conditioned or delayed. If a party considers that the other party has unreasonably withheld or delayed a consent, it shall so notify the other party within ten (10) days after receipt of notice of denial of the requested consent or, in case notice of denial is not received, within twenty (20) days after giving the first-mentioned notice, may submit the question of whether the withholding or delaying of such consent is unreasonable to determination by arbitration. 36. Right of Sublandlord to Perform. Except as provided otherwise herein, all covenants and agreements to be performed by Subtenant under this Sublease shall be performed at Subtenant's sole cost and expense and without any abatement of rent or right of set-off. If -34- 75 Subtenant fails to pay any sum of money, other than rent, or fails to perform any other act on its part to be performed under this Sublease, and the failure continues beyond any applicable grace or cure period set forth herein then in addition to any other available remedies, Sublandlord may, at its election make the payment or perform the other act on Subtenant's part. Sublandlord's election to make the payment or perform the act on Subtenant's part shall not give rise to any responsibility of Sublandlord to continue making the same or similar payments or performing the same or similar acts. Subtenant shall, promptly upon demand by Sublandlord, reimburse Sublandlord for all reasonable sums paid by Sublandlord and all necessary incidental costs, together with interest at the Permitted Rate or two percent (2%) above the prime rate announced by Bank of America from time to time, whichever is greater from the date of payment by Sublandlord. Sublandlord shall have the same rights and remedies if Subtenant fails to pay those amounts as Sublandlord would have in the event of a default by Subtenant in the payment of rent. Sublandlord shall provide Subtenant with written notice and the appropriate cure period provided in the Lease before performing any act on behalf of Subtenant and will provide Subtenant with written request for any reimbursement payable hereunder. 37. Expenses and Legal Fees. All sums reasonably incurred by Sublandlord in connection with any Event of Default by Subtenant under this Sublease or holding over of possession by Subtenant after the expiration or earlier termination of this Sublease, including without limitation all reasonable costs, expenses and reasonable accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable by Subtenant to Sublandlord on demand, and shall bear interest at the Permitted Rate. Should either Sublandlord or Subtenant bring any action in connection with this Sublease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts. 38. WAIVER OF JURY TRIAL. SUBLANDLORD AND SUBTENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. 39. Satisfaction of Judgement. The obligations of Sublandlord and Subtenant do not constitute the personal obligations of the directors, officers or shareholders of Sublandlord or its constituent partners. Should Subtenant recover a money judgment against Sublandlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Sublandlord in the Property and out of the rent, insurance proceeds or other income from such property receivable by Sublandlord or out of consideration received by Sublandlord from the sale or other disposition of all or any part of Sublandlord's right, title or interest in the Property, and no action for any deficiency may be sought or obtained by Subtenant. -35- 76 40. Changes Required by Accounting Rules. If, in connection with obtaining synthetic lease financing for the acquisition and development of the Property, Sublandlord is required to make modifications to this Sublease in order to comply with all applicable accounting requirements for such financing, Subtenant will not unreasonably withhold or delay its consent, provided that the modifications do not increase the obligations of Subtenant or impair Subtenant's rights under this Sublease. 41. Security Measures. Subtenant hereby acknowledges that Sublandlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Property. Subtenant assumes all responsibility for the protection of Subtenant, its agents, invitees and property from acts of third parties. IN WITNESS WHEREOF, the parties have executed this Sublease on the dates set forth below. SUBTENANT: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation DATED:_______, 1999 By:______________________________________ Name:____________________________________ Title:___________________________________ SUBLANDLORD: VERITAS SOFTWARE CORPORATION, a Delaware corporation DATED:_______, 1999 By:______________________________________ Name:____________________________________ Title:___________________________________ By:______________________________________ Name:____________________________________ Title:___________________________________ -36- 77 CONSENT OF LESSOR The undersigned Lessor under that certain Lease Agreement dated as of April __, 1999 by and between Lessor and Lessee hereby consents to the subletting of the Premises by Subtenant on the terms and conditions contained in this Sublease including, without limitation, the terms and conditions set forth in Paragraph 32, and Lessor agrees to be bound by its obligations under Paragraph 32. This consent shall apply only to this Sublease and shall not be deemed to be a consent to any other subleases. LESSOR By:______________________________________ Name:____________________________________ Title:___________________________________ -37- 78 EXHIBIT "A" [EXHIBIT MAP] 79 EXHIBIT B [GENERAL SITE PLAN] 80 EXHIBIT B 350 ELLIS STREET BUILDING [FLOOR PLAN] 81 EXHIBIT B [540 PRICE AVENUE MAP] 82 EXHIBIT "C" SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RECORDING REQUESTED BY, AND ) WHEN RECORDED, RETURN TO: ) Berliner Cohen ) Ten Almaden Boulevard, 11th Floor ) San Jose, California 95113-2233 ) (408) 286-5800 ) Attn: Samuel L. Farb, Esq. ) (Space Above for Recorder's Use) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into this____ day of April, 1999, by and among (1) FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation ("Subtenant"), (2) VERITAS SOFTWARE CORPORATION, a Delaware corporation ("Sublandlord"), (3) VS TRUST 1999-1, a __________________ ("Owner") and (3)_________________________ , as agent for the Financing Parties (as defined below) ("Agent"). The defined term "Agent" shall include any successors and assigns of Agent. R E C I T A L S: WHEREAS, Sublandlord executed a Sublease (the "Sublease") dated as of April 1999, in favor of Subtenant, covering a certain premises therein described (the "Premises") and (2) a portion of certain real property legally described on Exhibit A attached hereon (the "Land"). WHEREAS, Sublandlord has entered into a financing and lease transaction (the "Financing Transaction") with Owner and the other parties to that certain Participation Agreement dated as of April __,1999 (such other parties are referred to herein as the "Financing Parties" pursuant to which (1) Owner has purchased the Land and all improvements thereon, (2) Owner has leased the Land to Sublandlord pursuant to that certain Lease Agreement dated April ___, 1999 among Owner and Sublandlord (the "Lease"), (3) Sublandlord, as Owner's agent, has agreed to manage the construction of certain improvements on the Land and (4) Owner and C-1 83 Sublandlord have each entered into various other agreements to secure their respective obligations under the Financing Transaction. WHEREAS, in order to induce the Financing Parties to provide the financing called for by the Financing Transaction, the Financing Parties have requested that the Sublease be subordinate to any and all underlying leases, deeds of trust or other security instruments existing as of the date of execution of this Agreement or which hereafter may be made and/or to any renewal, modification, replacement, extension or expansion hereafter or any consolidation or spreader thereof heretofore or hereinafter made (collectively, the "Security Instruments"). WHEREAS, in order to induce Subtenant to subordinate its interest in the Sublease to the Security Instruments, the parties hereto desire to assure Subtenant's possession and control of the Premises under the Sublease upon the terms and conditions therein contained; NOW, THEREFORE, for and in consideration of the mutual covenants and premises herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and confessed by the parties hereto, the parties hereto do hereby agree as follows: AGREEMENT: 1. Subject to the non-disturbance covenants set forth herein, the Sublease is and shall be subordinate to the Security Instruments. 2. Should default under the Security Instruments occur such that (a) Sublandlord's rights under the Sublease are assigned to the Agent, (b) the Agent becomes the owner of the Land or any portion thereof and/or (c) the Land or any portion thereof is sold by reason of foreclosure, transferred by deed in lieu of foreclosure, or sold under a trustee's sale, (x) Subtenant shall not be evicted from the Premises or the Excluded Area, nor shall Subtenant's continuing use and occupancy of the Premises or the Excluded Area be interrupted, restricted or impaired, nor shall any of Subtenant's rights under this Sublease be affected in any way by reason of any default under such Security Instrument; and (y) Subtenant's leasehold estate under the Sublease shall not be terminated or disturbed by reason of any default under such Security Instrument which does not arise from a default by Subtenant hereunder, and this Sublease and Subtenant's rights hereunder, including any rights of offset, shall be recognized by the Agent or Lessor. Subtenant does hereby agree to attorn to Agent or to any such owner as its Sublandlord after Subtenant's receipt of written notice from Agent provided Agent or Lessor, as the case may be, assume the obligations of Sublandlord under the Sublease, and Agent or any such owner hereby agree that it will accept such attornment. 3. In the event the Lease terminates prior to the date (a) the Sublease term expires or earlier terminates or (b) Subtenant completes Demolition as described in Paragraph 32(b) of the Sublease, then Sections 2(x) and (y) above shall apply, and Subtenant shall attorn to Owner as its Sublandlord after Subtenant's receipt of written notice provided Owner assumes the obligations of Sublandlord under the Sublease, and Owner hereby agrees that it will accept such attornment. C-2 84 4. Notwithstanding any other provision of this Agreement, Agent shall not be (a) liable for any default of any sublandlord under the Sublease (including Sublandlord), (b) subject to any offsets or defenses which have accrued prior to the date of foreclosure which shall be the earliest to occur of (1) delivery of a trustee's deed following a non-judicial foreclosure, (2) delivery of a marshal's deed upon sale of the property following entry of judgment in a judicial foreclosure and/or (3) delivery of a deed in lieu of foreclosure, unless Subtenant shall have delivered to Agent written notice of the default which gave rise to such offset or defense and permitted Agent the same right to cure such default as permitted Sublandlord under the Sublease; (c) bound by any rent that Subtenant may have paid under the Sublease more than one month in advance; (d) bound by any amendment or modification of the Sublease hereafter made without Agent's prior written consent which shall be Sublandlord's obligation to request and obtain; or (e) responsible for the return of any security deposit delivered to Sublandlord under the Sublease and not subsequently received by Agent. 5. If Agent sends written notice to Subtenant to direct its rent payments under the Sublease to Agent instead of Sublandlord, then Subtenant agrees to follow the instructions set forth in such written instructions and deliver rent payments to Agent; however, Sublandlord and Agent agrees that Subtenant shall be credited under the Sublease for any rent payments sent to Agent pursuant to such written notice. 6. Subtenant shall give Agent or any successor in interest of Agent such notices and cure rights as are required under Section 14(c) of the Sublease. 7. If any legal action, arbitration or other proceeding is commenced to enforce any provision of this Agreement, the prevailing party shall be entitled to an award of its actual expenses, including without limitation, expert witness fees, actual attorneys' fees and disbursements. 8. This Agreement may not be modified other than by an agreement in writing, signed by the parties hereto or by their respective successors in interest. Except as herein modified all of the terms and provisions of the Sublease shall remain in full force and effect. Nothing in this Agreement shall in any way impair or affect the lien created by the Security Instruments or the other lien rights of Agent. 9. All notices which may or are required to be sent under this Agreement shall be in writing and shall be sent by Federal Express (or similar overnight delivery service) or first-class, certified U.S. mail, postage prepaid, return receipt requested, and sent to the party at the address appearing below or such other address as any party shall hereafter inform the other party by written notice given as set forth below: C-3 85 SUBTENANT: OWNER _____________________________ _________________________________________ _____________________________ _________________________________________ _____________________________ _________________________________________ Attn:________________________ Attn:____________________________________ AGENT: SUBLANDLORD: _____________________________ _________________________________________ _____________________________ _________________________________________ _____________________________ _________________________________________ Attn:________________________ Attn:____________________________________ 10. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors in interest, heirs and assigns and any subsequent owner of the Property. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. OWNER: SUBTENANT: _____________________ _____________________________ By:__________________________ By:______________________________________ Its:_________________________ Its:_____________________________________ AGENT: SUBLANDLORD: _____________________ _____________________________ By:__________________________ By:______________________________________ Its:_________________________ Its:_____________________________________ C-4 86 STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) On_________________________, before me,__________________________, Notary Public, personally appeared____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________________[SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) On___________________________, before me,__________________________, Notary Public, personally appeared_______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________________[SEAL] C-5 87 STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) On___________________________, before me,______________________________, Notary Public, personally appeared__________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signatures) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________________[SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) On______________________________, before me,__________________________, Notary Public, personally appeared______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________________[SEAL] C-6 88 EXHIBIT A All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: All of Lot 23, as shown upon that certain Map entitled, "Tract No. 2724 Ellis-Middlefield Industrial Park", which Map was filed for Record in the Office of the Recorder of the County of Santa Clara, State of California, on June 16, 1960 in Book 121 of Maps, at Pages 40, 41, 42, 43 and 44. C-A-1 89 EXHIBIT C Recording Requested By and When Recorded Return To: Veritas Software Corporation 1600 Plymouth Street Mountain View, CA. 94043 Attn: Jay L. Jones ENVIRONMENTAL INDEMNITY AGREEMENT THIS ENVIRONMENTAL INDEMNITY AGREEMENT ("Agreement") is made this 1999 ("Execution Date") by and between Veritas Software Corporation, a corporation ("Veritas"), and Fairchild Semiconductor Corporation of California, a Delaware corporation ("Fairchild"): Recitals A. This Agreement is entered into pursuant to that Agreement of Purchase and Sale dated March __, 1999 (the "Purchase Agreement"), between Veritas, as purchaser, and Fairchild, as seller, covering the property more particularly described in Exhibit A to this Agreement (the "Property"). B. The Property is subject to certain requirements pursuant to which Raytheon Company, a Delaware corporation, is performing remediation. C. The "Contamination" is any and all Hazardous Materials (as defined below), soil and groundwater pollution and groundwater plume or plumes that exist partially or entirely beneath the Property or emanated from the Property or in any building or improvement located on the Property as of the date hereof. As used in this Agreement, the term "Hazardous Materials" shall mean any chemical, substance, waste or material which has been or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including, without limitation, those substances included within the definitions of hazardous substances, hazardous materials, toxic substances or solid wastes under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Hazardous Materials Transportation Act, as amended, and in the regulations promulgated pursuant to said laws; those substances defined as hazardous wastes in Section 25117 of the California Health & Safety Code, or as hazardous substances in Section 25316 of the California Health & Safety Code, as amended, and in the regulations promulgated pursuant to said laws; those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or designated by the Environmental Protection Agency (or -1- 90 any successor agency) as hazardous substances (see, e.g., 40 CFR Part 302 and amendments thereto); such other substances, materials and wastes which are or become regulated or become classified as hazardous or toxic under any laws, including without limitation, the California Health & Safety Code, Division 20, and Title 26 of the California Code of Regulations; and any material, waste, substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a hazardous substance pursuant to Section 311 of the Clean Water Act of 1977, 33 U.S.C. sections 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. Section 1317), as amended; (v) flammable explosives; (vi) radioactive materials; or (vii) radon gas. D. Raytheon Company and Raytheon Semiconductor, Inc., a Delaware corporation, the predecessor of Fairchild, entered into a Grant of Easements, Restriction and Indemnity Agreement dated December 24, 1997 concerning the remediation being performed by Raytheon Company ("1997 Raytheon Agreement"). Pursuant to the 1997 Raytheon Agreement, as well as the terms of the acquisition of Raytheon Semiconductor by Fairchild, Raytheon Company has agreed to indemnify and hold harmless Fairchild from any claims or liabilities related to the Contamination which first occurred, existed or arose prior to December 24, 1997. E. Fairchild and Veritas (or its designee) have entered into that certain Sublease Agreement dated ______________, 1999 (the "Sublease"), pursuant to which Veritas (or its designee) has agreed to sublease to Fairchild that certain portion of the Property described therein. For good and valuable consideration, the parties agree as follows: Agreement 1. Indemnification. It is the intent of the parties hereto that Veritas not be responsible or liable for any Contamination or the existence of any hazardous or toxic substances which were first released, discharged or diagnosed on, in, under or at the Property, or which otherwise existed thereon, therein or thereunder, prior to the close of escrow under the Purchase Agreement (unless such environmental condition is exacerbated by the negligent acts or omissions or willful misconduct of Veritas or any of its agents, employees, contractors, subcontractors, successors, assigns or other authorized representatives, provided that construction or other development activities by Veritas on the Property that are performed in accordance with due care shall not be considered "exacerbation" of any pre-existing condition). In addition to Fairchild's remediation and indemnification obligations pursuant to the Sublease, which Fairchild covenants and agrees to abide by, Fairchild shall, subject to the terms and conditions of this Agreement, indemnify, hold harmless, and defend (with counsel selected by Fairchild) Veritas, and its successors and assigns, and any entity holding legal title to the Property or improvements thereon ("Owner Entities"), and any entity providing financing to any Owner Entity secured by a mortgage or deed of trust on the Property, any entity participating in any such financing, any entity holding any beneficial interest in any trust for which the holder of legal title to the Property serves as trustee, and any entity acting as agent for any of the foregoing entities -2- 91 and any successor or assign of any of the foregoing entities (collectively, the "Financing Parties"), from and against any and all claims, damages, liabilities, costs (including, without limitation, reasonable fees and expenses of attorneys and expert consultants, investigation and remedial costs), fines, judgments, penalties, or expenses asserted against or incurred or suffered by any Owner Entities arising out of or related to (i) the Contamination first occurring before the close of escrow under the Purchase Agreement, (ii) the release or discharge of hazardous or toxic materials or wastes in, on, under or from the Property or improvements located thereon first occurring after the date of this Agreement to the extent such release or discharge is caused as a result of the activities of Fairchild in its use, occupancy or operation of the Property (including, without limitation, any exacerbation by Fairchild of the pre-existing Contamination in, on, under or about the Property which adversely affects or eliminates Raytheon Company's indemnity obligations under the 1997 Raytheon Agreement (and then such indemnity, defense and hold harmless obligation of Fairchild hereunder shall apply only to the extent of such exacerbation of such pre-existing Contamination), and (iii) the cost or expense of any remediation action covered by the 1997 Raytheon Agreement if such cost or expense is incurred by Veritas as a result of Fairchild's breach of such 1997 Raytheon Agreement and such breach is not caused, or contributed to, by Veritas, any other Owner Entity or any Financing Party or any of their respective agents, employees, contractors, subcontractors or other authorized representatives (collectively, "Liabilities"); provided, however, Fairchild shall have no obligation to clean up or remediate any Contamination existing on, in or under the Property as of the close of escrow under the Purchase Agreement unless required to do so by a governmental agency, board or authority having jurisdiction over such clean up or remediation or except as required under the Sublease. The foregoing indemnity, defense and hold harmless obligation of Fairchild shall not apply to the extent any Liability arises out of or results from (i) hazardous or toxic materials or wastes which are released, discharged, brought upon, or are permitted or suffered to be brought upon, the Property by any person or persons other than Fairchild or its agents, employees, contractors or subcontractors after the close of escrow under the Purchase Agreement and are first released or discharged into the environment on, in, under or from the Property after such close of escrow under the Purchase Agreement by a person or persons other than Fairchild, or its agents, employees, contractors, and subcontractors, or (ii) hazardous or toxic materials or wastes in, on, under, from, or from the Property to the extent such are exacerbated by the negligent acts or omissions or willful misconduct of Veritas, any other Owner Entities, any Financing Parties or any other third party (other than any agents, employees, contractors or subcontractors of Fairchild) or any of their respective agents, employees, contractors, subcontractors, successors, assigns or other authorized representatives following the close of escrow under the Purchase Agreement, provided that construction or other development activities by Veritas on the Property that are performed in accordance with due care shall not be considered "exacerbation" of any pre-existing condition. In no event shall Fairchild have any liability to Veritas, any Owner Entities or any Financing Parties or their respective successors and assigns (collectively, "Indemnitees") for any consequential damages, loss of profits, perceived loss of profits, reduction in value or perceived loss of value of the Property, inability to sell, Sublease or finance the Property or any part thereof or inability to use the Property for any purposes due to (i) the mere existence of the Contamination, (ii) any remedial work or clean up obligation now or hereafter imposed on the Property by -3- 92 any environmental agency having jurisdiction over the clean up or remediation of the Property, or (iii) any of the matters subject to the foregoing indemnity obligation of Fairchild. In addition, in no event (other than as provided in the Sublease or as provided in the immediately following sentence) shall Fairchild be liable to Veritas or any other Indemnitees or any party claiming by or through any Indemnitees for any claim, loss, cost, damage or expense, including consequential damages, incurred by any Indemnitee or such party as a result of construction delays caused by the performance of any remedial or clean up work required to satisfy Fairchild's obligations under this Agreement. The preceding sentence notwithstanding, Fairchild shall indemnify and hold harmless Veritas from and against any and all losses caused by any interruption of the initial construction of improvements on the Property, or any portion thereof, by Veritas caused by any Contamination that is not known by Veritas to exist in, on or under the Property or that has not been disclosed to Veritas in any environmental reports or studies delivered or made available to Veritas prior to or as of the close of escrow under the Purchase Agreement, but such indemnification and hold harmless obligation under this sentence shall apply only to the extent that such newly discovered Contamination poses a significant health or safety risk to construction workers or, based on sound engineering and construction practices, initial construction of improvements on the Property by Veritas cannot be completed until such newly discovered Contamination is remediated or removed from the Property. Anything in this paragraph above the contrary notwithstanding, Fairchild also shall indemnify and hold harmless Veritas from and against any and all losses caused by any interruption of business conducted on the Property by Veritas caused by any Contamination that is not known by Veritas to exist in, on or under the Property or that has not been disclosed to Veritas in any environmental reports or studies delivered or made available to Veritas prior to or as of the close of escrow under the Purchase Agreement, but such indemnification and hold harmless obligation under this sentence shall apply only to the extent that Veritas is required by any governmental agency having jurisdiction to vacate improvements constructed the Property to allow clean up or remediation of such newly discovered Contamination to be commenced and completed. The benefits of the two (2) immediately preceding sentences shall be personal to Veritas and its Financing Parties, shall not run with the Property and shall not be enforceable against Fairchild by any person or entity other than Veritas or its Financing Parties. 2. Release. Except for the obligations of Fairchild set forth in this Agreement, in the Sublease or in the Purchase Agreement (to the extent such obligations survive the close of escrow thereunder), by taking title to the Property, Veritas (and all Owner Entities and Financing Parties) shall be deemed to have waived, for itself, and its successors and assigns, any and all claims it may have against Fairchild with respect to the existence of the Contamination, including any and all claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et. seq., as amended, any other federal, state, or local law, rule, ordinance, or regulation pursuant to which Veritas may have a claim or cause of action against Fairchild due to the presence of the Contamination. Veritas expressly waives the benefits of Section 1542 of the Civil Code of the State of California, 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 -4- 93 the release, which, if known by him, must have materially affected his settlement with the debtor. The foregoing release expressly excludes any claims Veritas may have against Fairchild for breach by Fairchild of its obligations under this Agreement or the Sublease or for breach by Fairchild of its obligations under the Purchase Agreement that expressly survive the close of escrow thereunder. 3. Remediation. Solely with respect to any Contamination existing on, in or under the Property as of the close of escrow under the Purchase Agreement (and which is not exacerbated (as described above) by any activities or negligent omissions of Veritas (or its assignee or affiliate) or any future Owner Entities or any third party other than Fairchild or any of Fairchild's agents, employees, contractors or subcontractors, provided that construction or other development activities by Veritas on the Property that are performed in accordance with due care shall not be considered "exacerbation" of any pre-existing Contamination), Fairchild shall have the obligation and responsibility to either perform (at Fairchild's cost) or to cause Raytheon Company to perform (at Raytheon's cost) all investigation, monitoring, remediation, cleanup, removal, or other environmental response action with respect to the Contamination existing on or beneath the Property or in any building or improvement located on the Property as of the date of this Agreement which currently is or may in the future be required of Raytheon Company, Fairchild or of or any other Owner Entity by any federal, state, or local agency, court, or tribunal, with Fairchild or Raytheon Company to be named on all permits and manifests for any materials removed from the Property pursuant to such remediation or clean up (collectively, "Remedial Action"). All Remedial Action shall be performed on the Property in a good, safe, professional, and workmanlike manner, in compliance with all applicable laws, ordinances and regulations and after obtaining all requisite permits and licenses, and in a manner which does not interfere unreasonably with any Owner Entity's use of the property. Fairchild shall, following completion of such Remedial Action, restore or cause to be restored the Property as close as practicable to the condition in which it existed prior to the performance of the Remedial Action, Nothing in this Paragraph 3 above shall constitute a waiver or release of Fairchild's rights or remedies available to it under the 1997 Raytheon Agreement or any other agreement pursuant to which Fairchild acquired Raytheon Semiconductor, Inc. if any Contamination is discovered on or under the Property, or any portion thereof, following the date hereof and such Contamination is covered by the 1997 Raytheon Agreement, then, Fairchild shall have no liability to Veritas or any Owner Entity under paragraph 1 or 2 of this Agreement so long as Raytheon Company is performing its obligations under the 1997 Raytheon Agreement with respect to such discovered Contamination. Veritas and all Owner Entities shall provide Fairchild and/or Raytheon Company and their consultants and contractors reasonable access to the Property to maintain and operate all remedial systems. Maintenance and operation of such remedial systems shall not unreasonably interfere with the use and operation of the Property by Veritas or any Owner Entity where reasonableness is determined by the conduct of a reasonable, prudent person responsible for both the operations of the business and the conduct of the remedial activities; provided, however, in -5- 94 no event shall the maintenance and operation of such remedial systems require Veritas or any Owner Entity to demolish, modify or relocate any buildings, structures, or paved areas or other improvements to the Property constructed or placed by Veritas or a successor Owner Entity on the Property (collectively, "Future Improvements") so long as (i) such Future Improvements are not initially placed or constructed on or over an area where remedial systems are then located, and (ii) such Future Improvements are not constructed or placed within that portion of the Property lying within the area which is of a uniform distance of fifty (50) feet laterally from and along the top of the subsurface bentonite slurry wall located around the approximate perimeter of the Property (unless steps are taken at Veritas' or such successor Owner Entity's expense, subject to Fairchild's reasonable approval, to protect the slurry wall). If any additional groundwater or extraction wells, related equipment or other remediation equipment are required by any environmental agency or agencies having jurisdiction over the clean up or remediation of the Property, Fairchild shall consult and cooperate with Veritas to locate such facilities in a location on the Property that does not unreasonably interfere with the use of the Property by Veritas while at the same time satisfying the requirements of the environmental agency imposing such requirements. Veritas and all Owner Entities agree not to take any action that would result in a breach or default of any of the Grantee's obligations under the 1997 Raytheon Agreement, provided that such actions shall not include Veritas' reasonable activities relating to its development of the Property as a corporate campus facility. Veritas and the Owner Entities agree to indemnify, defend and hold harmless Fairchild and its agents, employees, directors, officers, shareholders, affiliates, successors and assigns, from and against any and all damages, losses, claims, liabilities, actions, causes of action, costs and expenses (including, without limitation, attorneys' fees and costs) arising out of or related to any breach or default by Veritas or any of the Owner Entities of any of the Grantee's obligations under the 1997 Raytheon Agreement. 4. Notice of Intent to Commence Remedial Work. So long as Fairchild and Raytheon Company are in compliance with all remedial work obligations imposed by the environmental agency or agencies having jurisdiction over the Property with respect to the Contamination, Veritas covenants not to voluntarily undertake any remedial work with respect to such Contamination. If the applicable environmental agency or agencies having jurisdiction over the remediation of Contamination on, in or under the Property requires Veritas to perform such remedial work, Veritas shall give prompt written notice of such requirement to Fairchild in accordance with Paragraph 9 below, enclosing a copy of the notice imposing the remedial work obligation upon Veritas. If Fairchild thereafter fails to perform, or cause to be performed, the remedial work obligation with respect to such Contamination within the time period imposed by the applicable environmental agency or agencies, then Veritas may give written notice of its intent to perform the remedial work obligation within sixty (60) days from the date of such notice, or, if a shorter period of time is required by the applicable environmental agency or agencies for performance of such obligation, within a reasonable time after the date of such notice. Veritas may undertake the remedial work obligation if Fairchild has failed to perform or to commence to perform and thereafter diligently prosecute the remedial work obligation within said sixty (60) day period or such shorter reasonable period of time, as applicable. If Veritas performs a remedial work obligation imposed upon Veritas (with respect to the Contamination) -6- 95 by the applicable environmental agency or agencies after (i) satisfying the notice requirements set forth in this Paragraph 4, and (ii) Fairchild's failure to perform or commence to perform the remedial work obligation within the applicable time period set forth above, then Fairchild shall indemnify, defend, and hold Veritas harmless from the cost of performance of such remedial work. All reasonable sums paid or incurred by Veritas pursuant to the terms of the immediately preceding sentence which are not repaid or reimbursed by Fairchild within thirty (30) days following receipt by Fairchild of written notice of the amounts required to be repaid (plus documentation evidencing the sums so paid or incurred by Veritas and the nature of remediation work performed by or for Veritas) shall bear interest, commencing at the expiration of the aforementioned thirty day period until repaid, at the per annum rate of two percent (2%) in excess of the prime interest rate or reference rate for the then current calendar month, as of the first day of such calendar month, which is quoted, published or announced from time to time by Bank of America. 5. Retention of Rights to Negotiate or Contest Liabilities. As between Fairchild and the Owner Entities, Fairchild shall have the sole right to negotiate and/or contest, on behalf of itself and/or any of the Owner Entities, any Liabilities that are within the scope of the indemnity in paragraph 1 above, provided that upon notice of the Liabilities, Fairchild shall have timely acknowledged in writing its obligations to indemnify, protect, hold harmless and defend the Owner Entities with respect to such Liabilities. Any such negotiation or defense against a Liability within the scope of the indemnity in Paragraph 1 or in Paragraph 4 above shall not be a breach of this Agreement provided that Fairchild's negotiations or defense is in good faith and not unreasonable and Fairchild indemnifies, protects, holds harmless and defends the Owner Entities against any Liabilities which may become enforceable against the Owner Entities. 6. Subsequent Owner Entities. With respect to future fee owners of the Property, or any portion thereof, notwithstanding anything in this Agreement to the contrary, the obligations of Fairchild under this Agreement shall only inure to the benefit of, and exist in favor of, those future fee owners of the Property, or any portion thereof, who have executed this Agreement at or about the time of their purchase of the Property, indicating their assumption of the obligations of Veritas hereunder and agreement to be bound by the terms of this Agreement, including the release of claims set forth in Paragraph 2 above. Any other Owner Entity who makes a claim or seeks a benefit under this Agreement shall be deemed to have agreed to all terms of this Agreement from the time it obtained its Owner Entity status. 7. No Waiver of Rights Against Third Parties. Each party and any Owner Entities reserve their rights to pursue any claims for damages or other relief which they may have against third parties, including parties under the 1997 Raytheon Agreement, arising from any release of Hazardous Materials within the scope of the indemnity in Paragraph 1 above. 8. Regulatory Notices. The parties shall cooperate in the sharing of notices or other communication from or to any governmental authority related to any release of hazardous or toxic materials within the scope of the indemnity in Paragraph 1. -7- 96 9. Notice. In the event that for any reason notice of any fact or event relating to this Agreement is given by one party to another party, such notice (a) shall be given to all other parties to this Agreement, (b) shall be in writing, (c) shall be effective upon personal delivery or upon delivery by overnight delivery service providing receipted delivery, and (d) shall be sent to the parties, with postage or delivery charge prepaid, addressed as follows: TO VERITAS: TO FAIRCHILD: Veritas Software Company Fairchild Semiconductor Corporation 1600 Plymouth Street of California Mountain View, CA. 94043 333 Western Avenue Attn: Jay L. Jones South Portland, ME 04106 Attn: Dan Boxer, Esq. Any party designated to receive notices hereunder may change its recipient by providing written notice to the other parties. Any Owner Entity, other than the fee owner, may also add its name and address to this notice list by providing notice to all parties listed in this Paragraph. 10. Effectuation of Agreement. Veritas and Fairchild represent, warrant and agree to execute all documents and to do all things reasonably necessary to fully effectuate the terms of this Agreement. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which together shall be deemed one and the same instrument. 12. Severability. Veritas, Owner Entities, Financing Parties and Fairchild agree that the provisions of this Agreement are severable and, should any portion hereof be deemed unenforceable, the remaining provisions shall remain in full force and effect. 13. Disclosure. Veritas and each subsequent owner of the Property shall disclose this Agreement to any person to whom they sell the Property before such agreement of sale is concluded. 14. Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes all prior or contemporaneous negotiations, correspondence, understandings and agreements between the parties regarding the subject matter of this Agreement. It is expressly understood and agreed that this Agreement may not be altered, amended, modified or otherwise changed in any respect whatsoever except by a writing duly executed by each of the parties hereto. 15. Waivers. No waiver or indulgence of any breach or series of breaches of this Agreement shall be construed as a waiver of any other breach of the same or any other provision hereof or affect the enforceability of any part or all of this Agreement, and no waiver shall be valid unless executed in writing by the waiving party. -8- 97 16. Representations. Veritas and Fairchild represent, warrant and agree that no promise or agreement not expressed herein has been made to them; that this Agreement contains the entire agreement between the parties relating to the subject matter hereof, that this Agreement supersedes any and all prior agreements or understandings between the parties concerning the subject matter of this Agreement; that all terms of this Agreement are contractual; and that in executing this Agreement, no party is relying on any statement or representation made by another party or another party's representatives concerning the subject matter, except as expressed herein. 17. Authority to Execute. Each of the undersigned declares and represents that she or he is competent to execute this instrument and that she or he is duly authorized, and has the full right and authority, to execute this Agreement on behalf of the party for whom she or he is signing. 18. Third Party Beneficiaries. The parties hereto expressly acknowledge and agree that any and all Financing Parties are intended third party beneficiaries of this Agreement and may rely upon its provisions as if each of them were a party hereto. So long as any loan (secured by the Property) made by any Financing Party to Veritas is outstanding, this Agreement may not be terminated, revoked, amended or otherwise modified, in whole or in part, without the prior written consent of the Financing Party or Financing Parties providing Veritas with such financing. -9- 98 IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed as of the date first set forth above. FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By:______________________________________ Its___________________________________ By:______________________________________ Its___________________________________ VERITAS SOFTWARE CORPORATION, a Delaware corporation By:______________________________________ Its___________________________________ By:______________________________________ Its___________________________________ -10- 99 EXHIBIT "A" LEGAL DESCRIPTION OF REAL PROPERTY The land referred to herein is situated in the State of California, County of Santa Clara, City of Mountain View, described as follows: LOT 23, as shown on that certain Map entitled, "Tract No. 2724 Ellis-Middlefield Industrial Park," which Map was filed for record in the Office of the Recorder of Santa Clara County, State of California, on June 16, 1960, in Book 121 of Maps at Pages 40, 41, 42, 43 and 44, and being known as 350 Ellis Street APN: 160-53-003 JPN: 159-41-13 -1- 100 STATE OF CALIFORNIA ) ) ss. COUNTY OF _________ ) On _________________, before me, __________________, personally appeared __________________________________. [ ] personally known to me - OR - [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by this/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ----------------------------------------- SIGNATURE OF NOTARY STATE OF CALIFORNIA ) ) ss. COUNTY OF _________ ) On _________________, before me, _______________________, personally appeared ________________________________________________________________. [ ] personally known to me - OR - [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ---------------------------------------- SIGNATURE OF NOTARY CAPACITY CLAIMED BY SIGNER Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] INDIVIDUAL [ ] CORPORATE OFFICERS(S) ---------------------------- Title(s) [ ] PARTNER(S) [ ] LIMITED [ ] GENERAL [ ] ATTORNEY-IN-FACT [ ] TRUSTEE(S) [ ] GUARDIAN/CONSERVATOR [ ] OTHER: ___________________ SIGNER IS REPRESENTING: Name of Person(s) or Entity(ies) - -------------------------------- - -------------------------------- CAPACITY CLAIMED BY SIGNER Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] INDIVIDUAL [ ] CORPORATE OFFICERS(S) ----------------------------- Title(s) [ ] PARTNER(S) [ ] LIMITED [ ] GENERAL [ ] ATTORNEY-IN-FACT [ ] TRUSTEE(S) [ ] GUARDIAN/CONSERVATOR [ ] OTHER: ___________________ SIGNER IS REPRESENTING: Name of Person(s) or Entity(ies) - -------------------------------- - -------------------------------- -1- 101 EXHIBIT D DOCUMENT: 13994842 Titles / Pages: 12 Fees . . . . 40.00 Taxes . . . RECORDING REQUESTED BY AND Copies . . . WHEN RECORDED RETURN TO: AMT PAID 40.00 --------------------------------------- Ronald L. Jacobson BRENDA DAVIS RDE #437 Cooley Godward SANTA CLARA COUNTY RECORDER 12/30/1997 5 Palo Alto Square Recorded at the request of 3000 El Camino Real Grantor Palo Alto, CA 94306-2155 - -------------------------------------------------------------------------------- (Space above this line for Recorder's use) GRANT OF EASEMENTS, RESTRICTION AND INDEMNITY AGREEMENT THIS GRANT OF EASEMENTS, RESTRICTION AND INDEMNITY AGREEMENT ("Agreement") is made this 24th day of December 1997 by and between Raytheon Semiconductor, Inc., a Delaware corporation, as grantor ("Grantor") and RAYTHEON COMPANY, a Delaware corporation ("Grantee"), as grantee. WITNESSETH WHEREAS, a wholly-owned subsidiary of Grantee contemporaneously with the recordation of this Agreement is conveying to Grantor that certain real property consisting of land and the improvements thereon, located in the City of Mountain View, County of Santa Clara, State of California, commonly known as Assessor's Parcel Number 160-53-003, as more particularly described in Exhibit A attached hereto (the "Grantor Property"); and WHEREAS, due to the alleged presence of certain conditions subject to regulation or enforcement under state or federal laws such conditions hereinafter collectively referred to as "Contamination)" Grantee has conducted certain investigation, testing, remediation activities, and other response actions ("Remedial Activities") on certain portions of the Grantor Property, some of which activity is required by the United States Environmental Protection Agency ("EPA"); and WHEREAS, Grantor has agreed to grant certain easements to Grantee with respect to the Grantor Property for the purpose of permitting Grantee to continue to conduct such Remedial Activities; and WHEREAS, Grantor has further agreed to restrict the use of certain portions of the Grantor Property as set forth herein in order to avoid a potentially unsafe condition due to the potential for subsidence in soils along the northerly border of the Grantor Property. 1 102 NOW, THEREFORE, for good and valuable consideration, including the conveyance by Grantee to Grantor of the Grantor Property, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Grantee and Grantor hereby agree as follows: 1. Grant of Easements. Grantor hereby grants and conveys to Grantee, and its successors and assigns, and their respective agents, consultants, contractors and invitees involved in the Remedial Activities (collectively "Agents"), and the EPA, the following irrevocable easements, which shall be subject to the limitations on use set forth in Paragraph 2: a. an exclusive easement in, over and under the Grantor Property for the drilling, installation, location, operation, repair and replacement of ???? and extraction wells for both groundwater and soil vapor extraction, and related treatment and support systems, utilities, piping, equipment devices, fences, ???? walls and structure ("Remediation Equipment"), excluding the surface and above surface portions thereof on which are located buildings and other structures (other than the existing tunnel underlying 350 Ellis Street Building), the locations of which excluded portions are set forth in Exhibit B attached hereto ("Excluded Area"), provided that (i) each access does not unreasonably interfere with Grantor's use of the Property, and (ii) if requested by Grantor, the Remediation Equipment shall be subject to alteration, modification or relocation at the expense of Grantor, subject to governmental approval; b. a non-exclusive easement for pedestrian and vehicular ingress and egress as reasonably required in connection with easements granted in subparagraphs a, c, and d of this Paragraph 1, to and over those areas of the Grantor Property as are generally used for such purpose, provided such access does not unreasonably interfere with Grantor's use of the Property; c. an exclusive easement for the installation, location, operation, repair and replacement of a pipeline in, under and over that area of the Grantor Property depicted in Exhibit ? attached hereto for purposes of transmission of ground water, provided that, if requested by Grantor, such pipeline and such easement shall be subject to movement or relocation at the expense of Grantor, subject to governmental approval, but no such movement or relocation shall impair the ability of such pipeline to connect with the continuation of such pipeline within the existing easement of Grantee on property contiguous with and southerly of the Grantor Property; and d. an exclusive easement in and over the Grantor Property, or any portion thereof, excluding the Excluded Area, for the purpose of implementing and effectuating any additional testing or remediation work required by any governmental agency having jurisdiction, provided that, if requested by Grantor, such work and easement shall be subject to movement or relocation at Grantor's expense, subject to governmental approval. 2 103 2. Exercise a. Grantee shall exercise its rights under Paragraph 1 in a manner that (i) does not increasingly interfere with the use and occupancy of the Grantor Property by Grantor or its tenants where reasonableness is determined by the conduct of a reasonable, prudent person responsible for both the operations of the [ILLEGIBLE] and the conduct of the Remedial Activities, and (ii) complies with the participations of governmental authority. Grantor shall obtain the written consent of Grantee, which shall not be [ILLEGIBLE] delayed or withheld, prior to making any improvements or [ILLEGIBLE] to the Grantor Property that should adversely affect any Remedial Activities or Remediation Equipment. Prior to entry onto the Grantor Property, Grantor shall provide the then owner reasonable written notice of its proposed entry prior to commencement of any work, and Grantee agrees to reasonably cooperate with the Grantor's and its transferees' reasonable plans for the future not of the Grantor's property by offering, modifying or relocating Remediation Equipment, subject to governmental approval and provided that the Grantor or its transferees, as applicable, will be responsible for the cost of such alteration, modification or relocation. b. Notwithstanding the use of the term "exclusive" in Paragraph 1.a.c. and d., Grantor may make such use of the current areas (including performing any remediation for which Grantee is not responsible, and implementing any emergency [ILLEGIBLE] activities reasonably necessary on the account of Grantee to abide as imminent threat of harm) described in Paragraph 1 as does not unreasonably interfere with or pose a significant risk to Grantee's reasonable exercise of its rights hereunder (including, if required, the grant of reasonable utility [ILLEGIBLE]), and Grantor shall reasonably cooperate with Grantee in Grantee's exercise of its rights of access in those areas; provided Grantee shall not exercise its rights in a fashion which would cause the Grantor Property to violate applicable laws and regulations, including, without [ILLEGIBLE], those relating to [ILLEGIBLE] and land use. 3. Grant of Negative Easement and Restriction. Notwithstanding anything herein to the contrary, Grantor covenants and agrees, on behalf of itself and its successors and assigns to the Grantor Property or any portion thereof, and hereby grants and conveys the Grantor, its successors and assigns, a negative easement that at no time shall there be constructed, enacted or placed any building, structure, or other improvement within that portion of the Property lying within the area which is of a uniform distance of fifty (50) feet laterally from and along the top of the subsurface [ILLEGIBLE] [ILLEGIBLE] wall located around the approximate perimeter of the Grantor Property in the location set forth on Exhibit E, unless steps are taken at Grantor's expense, subject to Grantee's reasonable approval, to protect the [ILLEGIBLE] wall, and any required approval of applicable governmental authority, provided that; landscaping in the form of plants, trees and other vegetation; paving; parking; walkways; and fencing shall be permitted, except that in no event shall the soil be disturbed to a depth of more than two (2) feet below present grade). 3 104 4. Indemnity. a. Grantee shall (i) repair any damage to the Grantor Property or improvements thereon caused by the exercise by Grantee of its rights under Paragraph 1, and (ii) defend, indemnify and hold Grantor harmless from any claims, costs, reasonable attorneys' fees, liabilities, damages, causes of action, demands or expenses for personal injury and property damage and for the costs of repairs to the Grantor Property or improvements thereon that are caused by the exercise by Grantee of its rights under Paragraph 1. b. Grantee shall indemnify, defend and hold Grantor harmless from any damages, claims, losses, expenses, costs, obligations and liabilities, including, without limitation, liabilities for all reasonable attorneys', accountants' and experts' fees and expenses asserted against or incurred or suffered by Grantor arising out of or related to environmental conditions (i) which first occurred, existed or arose prior to the date of this Agreement and (ii) which arose or resulted from the release of hazardous substances in, on, under, from, or at the Grantor Property, except to the extent such act exacerbated by activities of negligent omissions of Grantor or any third party (other than any Agents acting on behalf of Grantee in the performance of Remedial Activities) on or after the date of this Agreement. 5. Nature of Rights and Obligations; Termination. a. The easements and restrictions set forth in Paragraphs 1, 2 and 3 of this Agreement (i) burden and run with the Grantor Property, and (ii) are granted by Grantor for the personal benefit of Grantee, its successors and assigns, in gross. The obligations of Grantee, as set forth in this Agreement, including the indemnities set forth in Paragraph 4, benefit and run with the Grantor Property. b. Grantee shall be obligated to terminate the easements set forth in Paragraph 1 (but not the easement and restriction set forth in Paragraph 3) of this Agreement upon the ????? to occur of (i) five (5) years following the date of final determination by the relevant federal, state and other applicable governmental agencies that no further Remedial Activities at the Grantor Property or any adjacent property is required in respect of the Contamination (which is to be evidenced by such documentation as is reasonably satisfactory to the parties) or (ii) termination of Grantee's obligations under Paragraph 4. Upon such obligation of Grantee to terminate such easements, Grantee shall (i) promptly remove all Remediation Equipment which Grantor, in its reasonable discretion, requests to have removed, including, without limitation, the closure and sealing of any groundwater monitoring wells and removal of piping (but excluding the ????? walls) in compliance with all applicable laws and regulations, and (ii) execute, acknowledge and record with the Santa Clara County Recorder a quitclaim deed by which, upon such recording, such easements set forth in Paragraph 1 and all remaining obligations of Grantee set forth in this Agreement thereupon shall be extinguished without further act or deed. 4 105 6. No Admission. No provision of this Agreement constitutes an admission of Grantee or Grantor that any condition at or arising from the Grantor Property constitutes Contamination or requires clean-up under any applicable law. No provision of this Agreement constitutes an admission by Grantee or Grantor that it is liable for the clean-up of, or otherwise responsible for, any Contamination or Hazardous Materials at Grantor Property. Nothing in this Agreement obligates Grantee or Grantor to conduct any activities on the Grantor Property. 7. Notices. Any notice, report or demand required or desired to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given or served for all purposes if it is delivered (i) personally, (ii) by generally recognized overnight courier or (iii) by United States Postal Service registered or certified mail, return receipt requested, postage prepaid, to the parties at the addresses shown below or at such other address as the perspective parties may from time to time designate by like notice. Each such notice shall be effective upon delivery. Such addresses shall be as follows: If to Grantor: Dr. Sam Lee Raytheon Semiconductor, Inc. 350 Ellis Street Mountain View, CA 94043 Tel: (650) 966-7772 And to: Daniel E. Boxer, Esq. Executive Vice President and General Counsel Fairchild Semiconductor Corporation 333 Western Ave., M.S. 01-00 South Portland, Maine 04106 If to Grantee: Raytheon Company 141 Spring Street Lexington, MA 02173 Attn.: Office of the General Counsel 8. Miscellaneous. a. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors, assigns and transferees. b. Recording. This Easement and Restriction Agreement shall be recorded in the office of the Recorder of Deeds in and for the County of Santa Clara, State of California. c. Captions. The captions of the actions of this Agreement are for conveniences only and shall not be considered or referred to in resolving questions of interpretation and construction. 5 106 d. Governing Law. This Easement and Restriction Agreement shall be construed, interpreted and applied in accordance with the internal laws of the State of California, without regard to principles of conflicts of law. e. Integration Amendment. This Agreement may not be altered, modified, amended or terminated unless by an instrument in writing duly executed by each of the parties then bound by this Agreement. This Agreement contains all of the agreements and understandings of the parties concerning the subject matter contained herein and supersedes all prior oral or written agreements or understandings. Grantor has entered into this Agreement in reliance upon its own investigation of the Grantor Property and not in reliance upon any representations and warranties made by Grantee or anyone acting on Grantee's behalf. f. No Partnership. This Agreement is not intended, nor shall it be construed, as constituting a partnership or joint venture between the parties hereto, or as constituting any party the agent of any other party, or render any party liable for the debts or obligations of any other party. g. Severability. The provisions of this Agreement shall be deemed independent and severable, and the invalidity or unenforceability of any portion or portions thereof shall not affect the enforceability or validity of any other provisions or portion thereof. h. Assignment. Grantee shall have the right to assign all or any portion of this Agreement or any of its interests herein, but shall not be released from its obligations hereunder without the consent of the then owner of the Grantor Property. i. Governmental Approval. Wherever in this Agreement the term "subject to governmental approval," "in compliance with requirement of governmental authority" or variant thereof is used, the same shall mean the approval of, compliance with the requirements of or consent of any and all applicable United States federal and California legal, administrative and regulatory authority (including political subdivisions), including, without limitation, the United States Environmental Protection Agency and the California Environmental Protection Agency. j. Relocation. Wherever in this Agreement Grantor or its transferees is provided the right to request Grantee to alter, modify or relocate Remediation Equipment (i) Grantor or its transferees, as applicable, and Grantee shall enter into an appropriate amendment of this Agreement by which the new location of the easements designated herein is specified and (ii) Grantor and its transferees shall be responsible for any incremental cost to Grantee of the Remedial Activities thereafter incurred as a consequence of all alterations, modifications and improvements (in addition to the cost of such alterations, modifications or improvements). 6 107 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first shown written. RAYTHEON SEMICONDUCTOR, INC., a Delaware corporation By: /s/ [Signature Illegible] ----------------------------------- Name: [Name Illegible] ----------------------------------- Title: President ----------------------------------- RAYTHEON COMPANY, A DELAWARE CORPORATION By: /s/ SAM LEE ----------------------------------- Name: Sam Lee ----------------------------------- Title: Vice President ----------------------------------- STATE OF CALIFORNIA COUNTY OF SAN DIEGO On , 1997, before me Martha C. Gomez, Notary Public, personally appeared [Name Illegible] , WITNESS by my hand and official seal, [NOTARY SEAL] /s/ MARTHA C. GOMEZ - ------------------------------------ Signature 108 STATE OF MASSACHUSETTS ) CAPACITY CLAIMED BY SIGNER ) ss. [COPY ILLEGIBLE] COUNTY OF MIDDLESEX ) [COPY ILLEGIBLE] [COPY ILLEGIBLE] [COPY ILLEGIBLE] On December 29, before me, Jerry L. Callwood previously appeared David S. [ILLEGIBLE] [ ] [ILLEGIBLE] [ ] Corporate Officer Vice President [ ] [COPY ILLEGIBLE] [ ] [ILLEGIBLE] [ ] [ILLEGIBLE] [COPY ILLEGIBLE] [ ] [ILLEGIBLE] [X] [COPY ILLEGIBLE] [ ] Attorney-in-Fact to be the [ILLEGIBLE] [ ] [ILLEGIBLE] [COPY ILLEGIBLE] [ ] [ILLEGIBLE] [COPY ILLEGIBLE] [ ] Other: _______________________ [COPY ILLEGIBLE] ______________________________ [COPY ILLEGIBLE] [COPY ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] Witness my hand and [ILLEGIBLE] __________________________________ /s/ [SIGNATURE ILLEGIBLE] __________________________________ _________________________________________________ My Commission Expires [ILLEGIBLE] Signature of [ILLEGIBLE] ____________________________________________________________________________________________________________________________ This certificate must be attached to the document described at right: Title or Type of Document: ____________________________________________________ Number of Pages: __________ Date of Document: _________________________________ Signature other than names above: _____________________________________________ [COPY ILLEGIBLE]
109 EXHIBIT A LEGAL DESCRIPTION OF GRANTOR PROPERTY All that certain Real Property in the City of Mountain View, County of Santa Clara, State of California, described as follows: Order No.: 393018E1 The land referred to herein is [illegible] in the State of California, County of Santa Clara, City of Mountain View, described as follows: LOT 23, as shown on that certain Map entitled, "Tract No. 2724 Ellis-Middlefield Industrial Park," which map was filed for record in the Office of the Recorder of Santa Clara County, State of California, on June 16, [illegible], in Book 121 of Maps at Pages 40, 41, 42, 43 and 44, and being known as 350 Ellis Street. APN: 160-53-003 IPN: 159-41-13 110 [STREET MAP] APN 180 53 DO3 RAYTHEON COMPANY B 932 OR 591 111 [MAP OF EXCLUDED AREA BUILDINGS AND STRUCTURES] 112 [MAP] 113 any schedules or attachments thereto) that are required pursuant to Treas. Reg. Section 1.338-I or Treas. Reg. Section 1.338(h)(10)-I. (h) "Section 338(h)(10) Election" means an election described in Section 338(h)(10) of the Code with respect to Seller's sale of the Shares to Buyer pursuant to this Agreement. Section 338(h)(10) Election shall include any corresponding election under any other relevant Tax Laws for which a separate election is permissible with respect to Buyer's acquisition of the Shares from Seller under this Agreement. (i) "Tax Benefit" means the tax effect of any item of loss, deduction or credit or any other item which decreases Taxes paid or payable or increases tax basis including any interest with respect thereto or interest that would have been payable but for such item. (j) "Tax Detriment" means the tax effect of any item of income or other item that increases Taxes paid or payable or decreases tax basis, including any interest with respect thereto or interest that would have been payable but for such item. (k) "Taxes" means all taxes (whether federal, state, local or foreign) based upon or measured by income and any other tax whatsoever, including, but not limited to, gross receipts, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, employment, excise or property taxes, together with any interest or penalties imposed with respect thereto. (l) "Tax Laws" means the Code, federal, state, county, local or foreign laws relating to Taxes and any regulations or official administrative pronouncements released thereunder. (m) "Taxing Authority" means any Governmental Authority, domestic or foreign, having jurisdiction over the assessment, determination, collection or other imposition of Tax. Article VIII. Environmental Matters Section 8.1. Environmental Liabilities. (a) The parties acknowledge that the Mountain View Facility is listed on the National Priorities List and has been the subject of Remediation by Raytheon with oversight by the United States Environmental Protection Agency ("EPA"). Raytheon shall retain all responsibility and liability following Closing, with such consultants and contractors as it may select in its sole discretion, for dealing with EPA and undertaking and completing Remediation of conditions at or originating from the Mountain View Facility which arose prior to the Closing Date or were created by Releases of Hazardous Substances that first occurred prior to the Closing Date, to the extent required by Environmental Law or any Order, taking into consideration the current industrial use of the Mountain View Facility (the "Mountain View Environmental Liabilities"). Raytheon shall retain all rights under insurance policies and all rights to recover from 40 114 responsible parties with respect to the Mountain View Environmental Liabilities. Raytheon shall bear no responsibility for any conditions which may arise on or after the Closing Date as a result of any Post-Closing Release of Hazardous Substances by Buyer or any third party (except Raytheon's consultants or contractors or any Person acting for, on behalf of or at the direction of Raytheon, including, without limitation, in connection with the performance of the Remediation of the Mountain View Facility ("Raytheon Parties")), provided that any leaking, leaching, migration or similar movement of Hazardous substances which existed in soil or ground water prior to the Closing Date shall not be considered a Release by Buyer except to the extent such is exacerbated by activities or negligent omissions of Buyer or any third party (other than any Raytheon Parties) on or after the Closing Date. (b) In connection with such Remediation of the Mountain View Environmental Liabilities by Raytheon, Raytheon shall conduct all Remediation required by EPA or any other Governmental Authority with jurisdiction (subject to Raytheon's right to contest any such requirement by appropriate proceedings), and Buyer shall, upon prior written notice, provide Raytheon, its consultants and contractors access to the Mountain View Facility and shall permit them to install, operate and maintain remedial treatment systems and to conduct all other Remediation which Raytheon determines to be necessary or appropriate. Buyer will cause any successor owners of the Facility to afford Raytheon the same rights to access and to conduct Remediation (which access shall only be to the extent necessary to conduct the Remediation and shall terminate upon the completion of the Remediation), and Buyer agrees to record an appropriate acknowledgement of such rights in the Registry of Deeds upon Raytheon's request. Raytheon shall use commercially reasonable efforts not to interfere unreasonably with Buyer's operation of the Company (where reasonableness is determined by the conduct of a reasonably prudent person responsible for both the operations and the business and the conduct of the Remediation) and Raytheon shall indemnify and hold harmless Buyer Indemnified Parties (as defined in Section 11.2) for any damage to the Mountain View Facility and against any liability to third persons to the extent such damage or liability is caused by Raytheon's Remediation; provided, however, as a condition to such indemnity, that upon the request of Raytheon, the Buyer Indemnified Party first assigns, subrogates or otherwise effectively transfers to Raytheon its rights against the Persons causing such damage or liability. Raytheon agrees to reasonably cooperate with the Buyer's reasonable plans for the future use of the Mountain View Facility by relocating or modifying equipment used in connection with the Remediation; provided, however, that Buyer will be responsible for the cost of such relocation or modification. (c) In addition to the foregoing, from and after the Closing Date, Raytheon shall indemnify, defend and hold Buyer Indemnified Parties (as defined in Section 11.2) harmless from and against any and all Covered Liabilities asserted against or incurred or suffered by Buyer Indemnified Parties arising out of or related to: (i) environmental conditions first occurring, existing or arising prior to the Closing Date arising out of or resulting from the Release of Hazardous Substances in, on, under, from, or at the Mountain View Facility and any real property formerly (but not currently) owned, operated or leased by the Company or any of its predecessors except to the extent such is exacerbated by activities or negligent omissions of Buyer or any third party (other than any Raytheon Parties) on or after the Closing Date or (ii) the off-site transportation, disposal, recycling, treatment or storage prior to the Closing Date of 41 115 Hazardous Substances generated by the Company or Raytheon in connection with the Semiconductor Division Business prior to the Closing Date. (d) Notwithstanding the foregoing, nothing contained in this Section 8.1 shall be interpreted to waive any claims which Raytheon may have against Buyer in the absence of this transaction and Raytheon does not indemnify or hold harmless Buyer with respect to any Covered Liabilities for which Buyer would be responsible in the absence of this transaction. Section 8.2 Indemnities by Buyer. Buyer shall indemnify and hold harmless Raytheon against all Covered Liabilities asserted against or incurred or suffered by Raytheon arising out of or relating to the Release first occurring on or after the Closing Date of any Hazardous Substance in, on, under or from any portion of a facility owned, operated or leased by the Company after the Closing Date (except in each case from an off-site source and provided that any leaking, leaching, migration or similar movement of Hazardous Substances which existed in soil or ground water prior to the Closing Date shall not be considered a Release by Buyer except to the extent such is exacerbated by activities or negligent omission of Buyer or anyone other than Raytheon Parties post-Closing on the Company's property); provided, however, that Buyer may, at its election, control the defense and, if required, Remediation in connection with any such Covered Liabilities. Except as set forth in Section 8.1(b), Buyer shall also indemnify and hold harmless Raytheon against (a) all claims and liabilities caused by any refusal by Buyer or successor owners to allow Remediation by Raytheon or any unreasonable interference with the conduct, management or control of Remediation by Raytheon and (b) all claims and liabilities arising from or related in any way to the Remediation by Buyer or any third party, including any Governmental Authority, or additional Remediation required of Raytheon, in connection with or as a result of any changes to the existing use of the Mountain View Facility. Section 8.3 Remediation for Releases after Closing. If any Remediation required by Environmental Law with respect to Releases of Hazardous Substances at, on, in or under any portion of the Mountain View Facility is required in part by Releases before the Closing Date and in party by Releases first occurring on or after the Closing Date (provided that any leaking, leaching, migration or similar movement of Hazardous Substances which existed in soil or ground water prior to the Closing Date shall in no event be considered a post-Closing Date Release), the costs for such cleanup or other response shall be divided between Raytheon and Buyer according to their respective degree of responsibility in connection with such Releases. To determine Buyer's portion of the costs for such cleanup or other response, Raytheon shall deliver to Buyer its good faith estimate of the allocation of responsibility. Within 30 days after Raytheon's delivery of such estimate, Buyer shall be entitled to provide notice to Raytheon that it is of the view that Raytheon's allocation of responsibility was not accurate and shall provide Buyer's good faith estimate of the allocation of responsibility in reasonable detail. Thereupon, Raytheon and Buyer shall meet to resolve their differences concerning such allocation. If Raytheon and Buyer cannot agree within 30 days of the date of such notice, such allocation of fault shall be promptly resolved by submitting, at either party's request, such dispute to final and binding arbitration. The Arbitrator shall be a retired Judge from JAMS/End Dispute ("JAMS") selected by the JAMS office in Boston, Massachusetts. The arbitration location shall be decided by the parties jointly, or if no agreement is reached, the arbitration shall be held at a location 42 116 selected by JAMS. Each party shall bear its own expenses and will share equally in the arbitrator's fees and related expenses, provided that once an arbitration judgment is entered, the prevailing party shall be entitled to recover attorneys' and or expert fees and related costs. The arbitrator will determine what discovery, if any, is appropriate. Judgment on the award rendered by the arbitrator may be entered in a court having competent jurisdiction. The judgment awarded by the Arbitrator shall be final, binding and nonappealable. Section 8.4. OSHA Matters. (a) Set forth on Schedule 8.4 hereto is a list of certain conditions and operations observed by Buyer at the Mountain View Facility and separately with respect to each, the sections under the Occupational Safety and Health Act, as amended ("OSHA"), and each of the specific regulations adopted pursuant thereto deemed applicable by Buyer to each such condition or operation. Raytheon has reviewed Schedule 8.4 and considers that no actions are necessary to conform such conditions and operations with the requirements of such sections of OSHA and such regulations as are set forth for each listed item on Schedule 8.4 hereto. (b) From and after the date hereof and until Raytheon takes such actions as are required to bring any item listed on Schedule 8.4 hereto into reasonable conformity (to the extent such item was not already in reasonable conformity) with the sections of OSHA and regulations thereunder cited on Schedule 8.4 hereto, or until such item is in reasonable conformity therewith, Raytheon shall indemnify and hold harmless Buyer and the Company from and against any and all Covered Liabilities (as defined in Section 11.2 hereof), suffered, incurred by or asserted, directly or indirectly, against Buyer or the Company by reason or arising out of an item identified on Schedule 8.4 hereto not in reasonable conformity with OSHA and the regulations thereunder. Claims for indemnity by Buyer in this Section 8.4 may be asserted until 60 days after the running of the applicable statute of limitations. The indemnity provided pursuant to this paragraph shall be void and of no effect unless Buyer grants Raytheon reasonable access to the Mountain View Facility for purposes of remedying or alleviating any condition or operation listed on Schedule 8.4. Buyer agrees that when requested by Raytheon to acknowledge that a condition or operation specified in Schedule 8.4 has been brought into or is in reasonable conformity with the sections of OSHA and the regulations thereunder specified on Schedule 8.4, it will do so promptly after reasonable inquiry. Section 8.5 Wastewater Treatment. Raytheon agrees that, without the proper consent of Buyer (which consent shall be granted at Buyer's discretion), it will not accept or treat pollutants, including wastewater or groundwater, from any property other than the Mountain View Facility except for pollutants from other properties the treatment of which is (i) within the existing capacity of the treatment facilities of the Mountain View Facility and footprint, and (ii) which are either (A) currently being transported for treatment to the Mountain View Facility via existing pipeline, or (B) contemplated to be transported for treatment to the Mountain View Facility from the properties located at 365 and 415 East Middlefield Road along a pipeline routing proposed by Raytheon, provided, however, that, Raytheon shall indemnify and hold harmless Buyer Indemnified Parties for Covered Liabilities suffered, incurred by or asserted, directly or indirectly, against Buyer Indemnified Parties by reason or arising out of such 43 117 the consummation of all or any portion of the Stock Purchase, and no Law shall have been enacted by any Governmental Authority which prevents consummation of the Stock Purchase. Article XI. Survival; Indemnification Section 11.1. Survival Periods. Except as provided in Section 11.4, all representations and warranties contained or made in, or in connection with, this Agreement or in any Schedule, or any certificate, document or other instrument delivered in connection herewith, shall survive the Closing for a period of eighteen months. Section 11.2. Indemnification by Seller. From and after the Closing Date, Raytheon shall indemnify and hold harmless Buyer, the Company, their Affiliates, each of their directors, officers, employees and agents, and each of the heirs, executors, successors, transferees and assigns of any of the foregoing (collectively, the "Buyer Indemnified Parties") from and against any and all damages, claims, losses, expenses, costs, obligations and liabilities, including without limitation liabilities for all reasonable attorneys', accountants', and experts' fees and expenses including those incurred to enforce the terms of this Agreement (collectively, "Covered Liabilities"), suffered, incurred by or asserted, directly or indirectly, against the Buyer Indemnified Parties by reason or arising out of (i) any breach of any representation or warranty, covenant or agreement of Raytheon or Seller contained herein (each of which for purposes of this paragraph shall be read as though none of them contains any Adverse Affect, Change or Effect or other materiality qualifier), or (ii) any Retained Liability; provided, however, that, except for a breach of any representation or warranty in Section 3.15, Raytheon shall not be required to indemnify the Buyer Indemnified Parties with respect to any claim for indemnification pursuant to clause (i) of this Section 11.2 unless and until the aggregate amount of all claims against Raytheon under this Section 11.2 exceeds $1,000,000 and then only to the extent such aggregate amount exceeds such amount, and; provided, further, that, except for a breach of any representation or warranty in Section 3.15, in no event shall Raytheon be required to pay or otherwise be liable for an amount in excess of $40,000,000 with respect to claims made under clause (i) of this Section. Section 11.3. Indemnification by Buyer. From and after the Closing Date, Buyer shall indemnify and hold harmless Raytheon, its Affiliates, each of their directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "Raytheon Indemnified Parties") from and against any and all Covered Liabilities suffered, incurred by or asserted, directly or indirectly, against by the Raytheon Indemnified Parties by reason or arising out of (i) any breach of any representation or warranty, covenant or agreement of Buyer contained herein (each of which for purposes of this paragraph shall be read as though none of them contains any Adverse Affect, Change or Effect or other materiality qualifier), or (ii) any Assumed Liability; provided, however, that Buyer shall not be required to indemnify the Raytheon Indemnified Parties with respect to any claim made for indemnification pursuant to clause (i) of this Section 11.3 unless and until the aggregate amount of all claims against Buyer under this Section 11.3 exceeds $1,000,000 and then only to the 46 EX-10.28 13 FIRST AMENDMENT DATED APRIL 14, 1999 1 EXHIBIT 10.28 FIRST AMENDMENT TO AGREEMENT OF PURCHASE AND SALE This First Amendment to Agreement of Purchase and Sale Agreement ("First Amendment") is made effective as of April 14, 1999, by and between FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation ("Seller") and VERITAS SOFTWARE CORPORATION, a Delaware corporation ("Purchaser"). Recitals This First Amendment is entered into on the basis of the following facts, understandings and intentions of the parties: A. Seller and Purchaser have entered into an Agreement of Purchase and Sale dated March 29, 1999 (the "Purchase Agreement"), pursuant to which Seller agreed to sell to Purchaser, and Purchaser has agreed to purchase from Seller, that certain real property, consisting of approximately 19.61 acres, more or less, commonly referred to as 350 Ellis Street, Mountain View, California, together with the Improvements located thereon and Appurtenances thereto, all as more particularly described in the Purchase Agreement. B. Under the terms of Section 6.1 of the Purchase Agreement, escrow was originally scheduled to close under the Purchase Agreement on April 15, 1999, subject to extension of such closing date to April 19, 1999 if all conditions to closing have been satisfied but Purchaser's synthetic lease financing is not ready to close due to the lender thereunder completing its financing documents. Purchaser has requested that Seller extend the Closing Date (as defined in Section 6.1 of the Purchase Agreement) to April 23, 1999, to allow Purchaser's lender additional time to complete the paperwork associated with Purchaser's synthetic lease financing of the acquisition of the Property, and Seller is willing to so extend the Closing Date, subject to the terms and conditions set forth below. NOW THEREFORE, in consideration of the mutual covenants and agreements set forth below, and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Recitals. The Recitals set forth above are true and correct and are incorporated herein by reference. 2. Capitalized Terms. Except as otherwise defined herein, the capitalized terms set forth in this First Amendment shall have the meanings ascribed to them in the Purchase Agreement. 3. Close of Escrow. (a) The definition of the "Closing Date" referred to in Section 1.1(f) of the Purchase Agreement is hereby amended, in relevant part, to delete the second sentence in Section 1.1(f) and to substitute in place thereof the following: "The Closing Date under this Agreement shall be not later than 5:00 p.m., Pacific Time, on April 23, 1999. -1- 2 (b) The first sentence of Section 6.1 of the Purchase Agreement is hereby deleted in its entirety and the following is substituted in place thereof: "The close of escrow under this Agreement shall occur, subject to satisfaction of the conditions set forth in this Agreement (or waiver by the party for whose benefit such condition exist), not later than 5:00 p.m., Pacific Time, on April 23, 1999 (the "Closing Date")." (c) Purchaser acknowledges that Seller shall not be obligated to grant to Purchaser any further extensions of the Closing Date beyond 5:00 p.m., Pacific Time, on April 23, 1999. If escrow does not close under the Purchase Agreement for any reason (other than a failure of any of the conditions set forth in paragraph 4 of this First Amendment below to be satisfied) on or before 5:00 p.m., Pacific Time, on April 23, 1999, then Purchaser shall be in breach or default under the Purchase Agreement and Seller shall be entitled to receive the Earnest Money (in the amount of One Million Dollars ($1,000,000)) as liquidated damages. 4. Outstanding Conditions to Purchaser's Obligation to Close. Seller and Purchaser each acknowledge and agree that all of Purchaser's conditions to closing escrow under the Purchase Agreement have been satisfied or waived by Purchaser other than the following: (a) The conveyance of title to the Property by Seller to Purchaser at the close of escrow subject to the Permitted Exceptions; (b) The Title Company's willingness to issue to Purchaser at the close of escrow the ALTA Form B Owner's Policy of Title Insurance (or other form required by state law) or CLTA Standard Form Owner's Policy of Title Insurance, as the case may be, as required under Section 2.3 of the Purchase Agreement as well as Seller's obligation to deliver an indemnity as described in Section 3.1(c) (to the extent the Title Company requires an indemnity from Seller in order to issue any mechanic's lien endorsement to Purchaser at Closing); (c) Seller shall have entered into the Sublease as of the close of escrow under the Purchase Agreement; (d) The delivery by Seller into escrow of the documents referred to in Section 6.3 of the Purchase Agreement; it being understood and agreed, however, that Seller and Purchaser have agreed on the provisions of the documents referred to in Section 6.3(a)-(e) and 6.3(h) of the Purchase Agreement (and the form of the assignment agreement referred to in Section 9.1(g) of the Purchase Agreement). Attached to this First Amendment are copies of (i) the form of Grant Deed, (ii) the form of Certificate Re: Representations and Warranties to be executed by Seller, (iii) the form of the Non-Foreign Affidavit to be executed by Seller, (iv) the form of the California Withholding Exemption Certificate for Real Estate Sales to be executed by Seller, (v) the form of Assignment to be executed by Seller, (vi) the form of escrow instructions to be executed by Seller and Purchaser covering the retention and disbursement of $500,000, and (vii) the form of escrow instructions to be executed by Seller and Purchaser covering the retention and disbursement of $3,500,000. -2- 3 (e) The deposit by Seller at Closing of the sum of $500,000 as the Holdback Funds pursuant to the terms of Section 6.3(i) of the Purchase Agreement; it being understood and agreed, however, that Seller and Purchaser have agreed on the terms of the escrow instructions covering the retention and disbursement of such $500,000; (f) The deposit at Closing of the sum of $3,500,000 as the FAR funds pursuant to the terms of Section 6.3(j) of the Purchase Agreement; it being understood and agreed, however, that Seller and Purchaser have agreed on the terms of the escrow instructions covering the retention and disbursement of such $3,500,000; (g) Seller's obligation to pay its share of closing costs as required under Section 7.2 of the Purchase Agreement; (h) Seller's obligation to pay real estate commissions to Cornish & Carey Commercial and EY Kenneth Leventhal Real Estate Group, in the total sum of $1,330,000 as provided in Section 7.3 of the Purchase Agreement; (i) The performance by Seller of all of its obligations under the Purchase Agreement accruing from the date of this First Amendment to the Closing Date (unless such obligations are excused due to a breach or default by Purchaser under the Purchase Agreement); (j) The conditions set forth in Section 3.1(e) of the Purchase Agreement; and (k) The conditions set forth in Section 6.2(c) and 6.2(f) of the Purchase Agreement. 5. No Seller Default or Breach. Purchaser hereby acknowledges and agrees that Seller has performed all of its obligations under the Purchase Agreement required to be performed up to the date of this First Amendment. Purchaser further acknowledges and agrees that Seller is not in breach or default of any obligations under the Purchase Agreement (and no event has occurred which with the giving of notice or passage of time would constitute a breach or default by Seller under the Purchase Agreement). 6. Delivery of Closing Documents by Seller. Section 6.3 of the Purchase Agreement is hereby amended to delete therefrom the words "At least three business days prior to the Closing Date," and to substitute in place thereof the words "At least one business day prior to the Closing Date." 7. Delivery of Closing Documents by Purchaser. Section 6.4 of the Purchase Agreement is hereby amended to delete therefrom the words "at least three business days prior to the Closing Date" and to substitute in place thereof the words "at least one business day prior to the Closing Date". 8. Seller's Environmental Indemnity Agreement. Section 9.3 of the Purchase Agreement is hereby amended to delete therefrom the words "At least three business days prior to the close of escrow hereunder," and to substitute in place thereof the words "At least one business -3- 4 day prior to the Closing Date,". 9. Modification of Purchase Agreement. Except as modified above, the terms and conditions of the Purchase Agreement shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms of this First Amendment and the terms of the Purchase Agreement, the terms of this First Amendment shall control. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date and year first written above. SELLER: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By: ------------------------------ Its: ----------------------------- By: ------------------------------ Its: ----------------------------- PURCHASER: VERITAS SOFTWARE CORPORATION, a Delaware corporation By: /s/ JAY A. JONES ------------------------------ Jay A. Jones SVP AND CHIEF Its: ADMINISTRATIVE OFFICER ----------------------------- By: ------------------------------ Its: ----------------------------- -4- 5 conditions of the Purchase Agreement shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms of this First Amendment and the terms of the Purchase Agreement, the terms of this First Amendment shall control. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date and year first written above. SELLER: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, a Delaware corporation By: /s/ DANIEL E. BOXER ------------------------------ Its: Exec. Vice President ----------------------------- By: /s/ JOSEPH R. MARTIN ------------------------------ Its: Exec. VP ----------------------------- PURCHASER: VERITAS SOFTWARE CORPORATION, a Delaware corporation By: ------------------------------ Its: ----------------------------- By: ------------------------------ Its: ----------------------------- -4- EX-10.29 14 AGENCY AGREEMENT 1 EXHIBIT 10.29 - -------------------------------------------------------------------------------- AGENCY AGREEMENT Dated as of April 23, 1999 between VERITAS SOFTWARE CORPORATION, as the Construction Agent and FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 as the Lessor - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS; RULES OF USAGE 2 1.1 Definitions....................................................... 2 1.2 Interpretation.................................................... 2 ARTICLE II APPOINTMENT OF THE CONSTRUCTION AGENT.......................... 2 2.1 Appointment and Acceptance........................................ 2 2.2 [Intentionally Omitted]........................................... 5 2.3 Term.............................................................. 5 2.4 Scope of Authority................................................ 5 2.5 Delegation of Duties.............................................. 7 2.6 Covenants of the Construction Agent............................... 7 ARTICLE III THE PROPERTIES................................................ 9 3.1 Construction...................................................... 9 3.2 Amendments; Modifications......................................... 9 3.3 Failure to Complete Construction Period Properties................ 10 ARTICLE IV PAYMENT OF FUNDS............................................... 10 4.1 Right to Receive Construction Cost................................ 10 ARTICLE V EVENTS OF DEFAULT............................................... 11 5.1 Events of Default................................................. 11 5.2 Damages........................................................... 12 5.3 Remedies; Remedies Cumulative..................................... 12 ARTICLE VI THE LESSOR'S RIGHTS............................................ 14 6.1 Exercise of the Lessor's Rights................................... 14 6.2 The Lessor's Right to Cure the Construction Agent's Defaults...... 14 ARTICLE VII MISCELLANEOUS................................................. 14 7.1 Notices........................................................... 14 7.2 Successors and Assigns............................................ 14 7.3 GOVERNING LAW..................................................... 15 7.4 SUBMISSION TO JURISDICTION; VENUE; WAIVERS........................ 15 7.5 Amendments and Waivers............................................ 15 7.6 Counterparts...................................................... 15 7.7 Severability...................................................... 15 7.8 Headings and Table of Contents.................................... 15 7.9 WAIVER OF JURY TRIAL.............................................. 16
3 AGENCY AGREEMENT THIS AGENCY AGREEMENT, dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Agreement"), between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association ("FSB"), not individually, but solely as Owner Trustee under the VS Trust 1999-1 (the "Lessor"), and VERITAS SOFTWARE CORPORATION, a Delaware corporation (the "Construction Agent"). PRELIMINARY STATEMENT A. The Lessor and the Construction Agent are parties to that certain Lease Agreement dated as of even date herewith (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Lease"), pursuant to which the Construction Agent, as lessee (in such capacity, the "Lessee") has agreed to lease certain Land, Improvements and Equipment from the Lessor. B. In connection with the execution and delivery of the Participation Agreement, the Lease and the other Operative Agreements, and subject to the terms and conditions hereof, (i) the Lessor desires to appoint the Construction Agent as its sole and exclusive agent in connection with the identification and acquisition of the Properties (provided, title to the Properties shall be held in the name of the Lessor) and the development, acquisition, installation, construction and testing of the Improvements and the Equipment in accordance with the Plans and Specifications and pursuant to the applicable construction contract and (ii) the Construction Agent desires, for the benefit of the Lessor, to identify and acquire the Properties and to cause the development, acquisition, installation, construction and testing of the Improvements, the Equipment and the other components of the Properties in accordance with the Plans and Specifications and to undertake such other liabilities and obligations as are herein set forth. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS; RULES OF USAGE 1.1 DEFINITIONS. For purposes of this Agreement, capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in Appendix A to that certain Participation Agreement dated as of April 23, 1999 (as amended, modified, extended, 4 supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof, the "Participation Agreement") among the Construction Agent, the various parties thereto from time to time, as Guarantors, the Lessor, the various banks and lending institutions parties thereto from time to time, as Holders, the various banks and lending institutions parties thereto from time to time, as Lenders, and NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. Unless otherwise indicated, references in this Agreement to articles, sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in this Agreement. 1.2 INTERPRETATION. The rules of usage set forth in Appendix A to the Participation Agreement shall apply to this Agreement. ARTICLE II APPOINTMENT OF THE CONSTRUCTION AGENT 2.1 APPOINTMENT AND ACCEPTANCE. Subject to the terms and conditions hereof, the Lessor hereby irrevocably designates and appoints the Construction Agent as its exclusive agent and as general contractor, and the Construction Agent accepts such appointment, in connection with the identification and acquisition from time to time of the Properties (provided, title to the Properties shall be held in the name of the Lessor) and the development, acquisition, installation, construction and testing of the Improvements, the Equipment and the other components of the Properties in accordance with the Plans and Specifications on the Land, and pursuant to the terms of the Operative Agreements. Notwithstanding any provisions hereof or in any other Operative Agreement to the contrary, the Construction Agent acknowledges and agrees that the Lessor shall advance no more than the sum of the aggregate Commitment of the Lenders plus the aggregate amount of the Holder Commitments of the Holders in regard to the Properties (including without limitation for any and all Advances in the aggregate from the Lenders under the Credit Agreement and from the Holders under the Trust Agreement). After the Construction Agent gains knowledge or a reasonable expectation that the costs for any Property shall exceed the original Construction Budget (or exceed the Construction Budget as modified in accordance with the Operative Agreements) for such Property or that Completion for any Property shall not occur on or prior to the Construction Period Termination Date, the Construction Agent shall promptly (and in any event within five (5) Business Days of gaining such knowledge or expectation) notify the Agent in writing of the same. If at any time prior to the Construction Period Termination Date, the Lessor or the Agent shall have (x) determined in its respective reasonable good faith judgment that (i) the sum of the Available Commitments and the Available Holder Commitments shall be less than the amounts necessary for Completion of all Properties or (ii) Completion of one or more Properties shall not occur on or prior to the Construction Period Termination Date or (y) 2 5 received any notice from the Construction Agent as referenced in the preceding provisions of this paragraph, then in any such case Lessor shall have the option (at the direction of the Agent) to replace the Construction Agent with a new construction agent selected by the Lessor (at the direction of the Agent) to finalize the Completion of the Properties. The cost and expense incurred to finalize the Completion of the Properties as referenced in the preceding sentence shall be the responsibility of the Construction Agent and shall be payable by the Construction Agent on demand; provided, in no event shall the obligations of the Construction Agent for such costs and expenses exceed the Maximum Amount; provided, further, amounts expended by the Lessor to finalize the Completion of the Properties as referenced in the preceding sentence shall be added to the Property Cost. Costs in excess of each original Construction Budget (or the Construction Budget as modified in accordance with the Operative Agreements) in each case as previously delivered to the Agent for each Property shall not be the responsibility of the Construction Agent but instead shall be paid by the Lenders and the Holders to the extent, but only to the extent, that (after taking into account such excess costs and any other items of excess cost which are then known to the Construction Agent or are reasonable for the Construction Agent to expect) the conditions precedent set forth in Section 5.4 of the Participation Agreement are satisfied. Subject to the Lenders and the Holders not agreeing to continue making Advances in accordance with the provisions of the next paragraph and in the event from time to time (a) the Construction Agent gains knowledge or a reasonable expectation that the costs for any Property shall exceed the original Construction Budget (or exceed the Construction Budget as modified in accordance with the Operative Agreements) or that Completion for any Property shall not occur on or prior to the Construction Period Termination Date or (b) the Lessor or the Agent shall have determined in its respective reasonable good faith judgment that the sum of the Available Commitments and the Available Holder Commitments shall be less than the amounts necessary for Completion of all Properties or that Completion of one or more Properties shall not occur on prior to the Construction Period Termination Date, the Construction Agent shall elect and comply (within ten (10) days of the Construction Agent gaining such knowledge or expectation or within ten (10) days of the Lessor or the Agent making such determination and giving written notice of the same to the Construction Agent, as referenced in subsections (a) and (b) above of this paragraph) with one of the options set forth in the following subsections (i) or (ii) (collectively, the "Construction Agent Options"): (i) the Construction Agent shall pay to the Lessor, on a date designated by the Lessor, an aggregate amount equal to (A) the Termination Value for all, but not less than all, the Properties plus (B) any and all fees and expenses incurred by or on behalf of the Lessor or the Agent in connection with the Properties (including without limitation the transfer thereof) and on such date the Lessor shall transfer and convey to the Construction Agent all right, title and interest of the Lessor in and to the Properties or (ii) the Construction Agent shall pay to the Lessor, on a date designated by the Lessor, an aggregate amount equal to the Maximum Amount and on and after such date, the Construction Agent shall be irrevocably deemed, without any further action, to have relinquished all right, title and interest in and to all, but not less than all, the Properties and to have transferred and conveyed all such right, title and interest to the Lessor. In connection with any transfer of the Properties as referenced above in this Section 2.1 by the Lessor to the Construction Agent, the Lessor shall 3 6 execute and deliver to the Construction Agent, at the cost and expense of the Construction Agent (subject to the limitations described in the next sentence), each of the following: (w) special or limited warranty Deeds conveying each Property to the Construction Agent free and clear of the Lien of the Lease, the Lien of the Credit Documents and any Lessor Liens; (x) a Bill of Sale conveying each Property (to the extent it is personal property) to the Construction Agent free and clear of the Lien of the Lease, the Lien of the Credit Documents and any Lessor Liens; (y) any real estate tax affidavit or other document required by law to be executed and filed in order to record the applicable Deed; and (z) FIRPTA affidavits. The Lessor (at the discretion of the Agent) shall elect whether the out-of-pocket fees and expenses associated with the transfer of the Properties shall be paid by either (i) sales proceeds from the Properties, (ii) the Lessor (but only to the extent amounts are available therefor with respect to the Available Commitments and the Available Holder Commitments or each Lender and each Holder approves the necessary increases in the Available Commitments and the Available Holder Commitments to fund such fees and expenses) or (iii) the Construction Agent; provided, if the Construction Agent funds such fees and expenses (as referenced in subsection (iii)) then the Maximum Amount will be reduced accordingly, as more specifically described in the definition of "Maximum Amount". Amounts funded by the Lenders and the Holders with respect to the foregoing shall be added to the Property Cost. All of the foregoing documentation must be in form and substance reasonably satisfactory to the Lessor. Subject to the foregoing, all, but not less than all, the Properties shall be conveyed to the Construction Agent "AS-IS", "WHERE-IS" and in then present physical condition. In the event the costs in excess of any original Construction Budget previously delivered to the Agent for any Property are not funded by the Lenders and the Holders because (after taking into account such excess costs and any other items of excess cost which are then known to the Construction Agent or are reasonable for the Construction Agent to expect) the conditions precedent set forth in Section 5.4 of the Participation Agreement are not satisfied, then if, but only if, all the Holders and all the Lenders agree at such time, (a) such excess costs shall be funded and (b) the Holder Commitments and the Lender Commitments shall be increased accordingly. 2.2 [INTENTIONALLY OMITTED]. 2.3 TERM. This Agreement shall commence on the date hereof and, unless the Lessor (in its sole discretion) elects otherwise, this Agreement shall terminate on the Construction Period Termination Date. If this Agreement expires prior to the Completion of all, but not less than all, the Properties, then the Lessor may either (i) hire a new construction agent (at the direction of the Agent) to finalize the Completion of all Properties or (ii) require the Construction Agent to continue to perform hereunder and to achieve Completion of all Properties. The cost and expense incurred to finalize the Completion of the Properties as referenced in the preceding sentence shall be the responsibility of the Construction Agent and shall be payable by the Construction Agent on demand; provided, in no event shall the obligations of the Construction Agent for such costs and expenses exceed the Maximum Amount; provided, further, amounts 4 7 expended by the Lessor to finalize the Completion of the Properties as referenced in the preceding sentence shall be added to the Property Cost. 2.4 SCOPE OF AUTHORITY. (a) The Lessor hereby expressly authorizes the Construction Agent, or any agent or contractor of the Construction Agent, and the Construction Agent unconditionally agrees for the benefit of the Lessor, subject to Section 2.4(b), to take all action necessary or desirable for the performance and satisfaction of any and all of the Lessor's obligations under any construction agreement and to fulfill all of the obligations of the Construction Agent including without limitation: (i) the identification and assistance with the acquisition of Properties in accordance with the terms and conditions of the Participation Agreement; (ii) all design and supervisory functions relating to the development, acquisition, installation, construction and testing of the related Improvements, Equipment and other components of the applicable Property and performing all engineering work related thereto; (iii) (A) negotiating, entering into, performing and enforcing all contracts and arrangements to acquire the Properties and to procure the equipment necessary to construct the Properties and (B) negotiating, executing, performing and enforcing all contracts and arrangements to develop, acquire, install, construct and test the Improvements, the Equipment and the other components of the Properties on such terms and conditions as are customary and reasonable in light of local and national standards and practices and the businesses in which the Lessee is engaged; (iv) obtaining all necessary permits, licenses, consents, approvals, entitlements and other authorizations, including without limitation all of the foregoing required for the Properties and the use and occupancy thereof and those required under applicable Law (including without limitation Environmental Laws), from all Governmental Authorities in connection with the development, acquisition, installation, construction and testing of the Improvements, the Equipment and the other components of the Properties substantially in accordance with the Plans and Specifications; (v) maintaining all books and records with respect to the Properties and the construction, operation and management thereof; (vi) performing any other acts necessary in connection with the identification and acquisition of the Properties and the development, acquisition, installation, construction and testing of the related Improvements, Equipment and 5 8 all other additional components of the Properties in accordance with the Plans and Specifications; (vii) the right to submit notices pursuant to Section 2.3 of the Credit Agreement and to receive the proceeds of Advances directly from the Agent; (viii) the right to contest all mechanics' and materialmens' liens in accordance with the requirements for Permitted Liens; and (ix) the right to bring or defend any claims or seek resolution of disputes arising from Construction Agent's performance of any of the foregoing actions. (b) Neither the Construction Agent nor any of its Affiliates or agents shall enter into any contract or consent to any contract in the name of the Lessor without the Lessor's prior written consent, such consent to be given or withheld in the exercise of the Lessor's reasonable discretion; provided, however, that (i) no such contract will increase the obligations of the Lessor beyond the obligations of the Lessor as are expressly set forth in the Operative Agreements and (ii) each such contract shall expressly limit recourse against the Lessor to the assets of the VS Trust 1999-1 and shall otherwise be non-recourse to the Lessor on terms and conditions that are reasonably acceptable to the Lessor. (c) Subject to the terms and conditions of this Agreement and the other Operative Agreements, the Construction Agent shall have sole management and control over the installation, construction and testing means, methods, sequences and procedures with respect to the Properties. 2.5 DELEGATION OF DUTIES The Construction Agent may execute any of its duties under this Agreement by or through agents, contractors, employees or attorneys-in-fact; provided, however, that no such delegation shall limit or reduce in any way the Construction Agent's duties and obligations under this Agreement. 2.6 COVENANTS OF THE CONSTRUCTION AGENT. The Construction Agent hereby covenants and agrees that it will: (a) following the Construction Commencement Date for each Property, cause the development, acquisition, installation, construction and testing of such Property to be prosecuted in a good and workmanlike manner, and respecting each Property in accordance with the applicable Plans and Specifications, the Construction Budget, the applicable contracts relating to the Improvements, the Equipment, other components of such Property and procurement of construction materials, the applicable construction 6 9 contracts, the applicable construction schedule, prevalent industry practices and otherwise in accordance with Section 3.1 hereof; (b) [Intentionally Omitted]; (c) cause the Completion Date for any Improvements to occur on or before the earlier of (i) the date that is twenty-four (24) months after the Initial Closing Date or (ii) the Construction Period Termination Date, in each case free and clear (by removal or bonding) of Liens or claims for materials supplied or labor or services performed in connection with the development, acquisition, installation, construction or testing thereof, except for Permitted Liens, provided, that the failure to cause the Completion for any Property by such date shall not be deemed a breach hereunder if such delay is caused by a Force Majeure Event and Completion is accomplished within three (3) months of the date otherwise applicable but for this proviso; provided, further, to the extent such failure to complete is caused by a Force Majeure Event extending beyond such three (3) month period, the Construction Agent shall elect one of the Construction Agent Options set forth in Section 2.1 and, if such election is not made within ten (10) Business Days of the end of such three (3) month period, the Construction Agent shall be deemed to have elected to purchase all the Properties for the Termination Value in accordance with the provisions of Section 2.1; (d) use its good faith efforts to cause all outstanding punch list items with respect to such Improvements to be completed promptly following the Completion Date; (e) at all times subsequent to the initial Advance respecting a Property (i) cause good and marketable title to the applicable Property to vest in the Owner Trustee (ii) cause a valid, perfected, first priority Lien on the applicable Property to be in place in favor of the Agent (for the benefit of the Lenders and the Holders), (iii) file all necessary documents under the applicable real property law and Article 9 of the Uniform Commercial Code to perfect such title and Liens and (iv) subject to the terms of Article XIII of the Lease relating to Permitted Contests, not permit Liens (other than Permitted Liens and Lessor Liens) to be filed or maintained respecting the applicable Property; (f) no less than five (5) Business Days prior to the scheduled date for the initial Construction Advance to be made in connection with any Property, the Construction Agent shall deliver to the Agent (for the benefit of the Lessor) true, complete and correct copies of the Construction Budget therefor. Thereafter, the Construction Agent, on a monthly basis, shall deliver to the Lessor true, correct and complete copies of any material modifications of the Construction Budget and progress reports regarding the development, acquisition, installation, construction and testing of the Properties; (g) procure insurance for the Properties during the Construction Period in accordance with the provisions of Article XIV of the Lease; and 7 10 (h) on or before the Construction Period Termination Date (which date shall be subject to extension pursuant to the provisions of Section 2.1 in the sole and absolute discretion of the Lenders and the Holders), cause the Rent Commencement Date to occur with respect to all Properties or purchase any such Properties for an amount equal to the sum referenced in Section 5.3(b) hereof and otherwise in compliance with the other terms and provisions of the Operative Agreements. ARTICLE III THE PROPERTIES 3.1 CONSTRUCTION. The Construction Agent shall cause the Improvements, the Equipment and all other components of the Properties to be developed, acquired, installed, constructed and tested in compliance with all Legal Requirements, all Insurance Requirements, all manufacturer's specifications and standards and the standards maintained by the Construction Agent for similar properties owned or operated by the Construction Agent, unless non-compliance, individually or in the aggregate, shall not have and could not be reasonably expected to have a Material Adverse Effect. 3.2 AMENDMENTS; MODIFICATIONS. (a) The Construction Agent may at any time revise, amend or modify (i) the Plans and Specifications without the consent of the Lessor; provided, that any such amendment to the Plans and Specifications does not (x) result in the Completion Date of the Improvements occurring on or after the Construction Period Termination Date or (y) result in the cost of all Improvements exceeding the amount specified in the Construction Budget, as amended from time to time, or an amount equal to the sum of the then Available Commitments plus the then Available Holder Commitments (reduced by the amount, if any, necessary to pay for the cost of construction and development of Improvements on other Properties which are currently under construction but have not yet been completed (such amount the "Unfunded Amount")), and (ii) the Construction Budget and enter into any related amendments, modifications or supplements without the consent of the Lessor; provided, that such revisions, amendments or modifications to the Plans and Specifications or related amendments, modifications or supplements to the Construction Budget do not result in any increase in total Property Costs greater than the amount specified in the Construction Budget, as amended from time to time, or the then Available Commitments and Available Holder Commitment (reduced by the Unfunded Amount). (b) The Construction Agent agrees that it will not implement any revision, amendment or modification to the Plans and Specifications for any Property if the aggregate effect of such revision, amendment or modification, when taken together with 8 11 any previous or contemporaneous revision, amendment or modification to the Plans and Specifications for any Property, would cause a reduction in the fair market value of the Properties below the Termination Value therefor when completed, unless such revision, amendment or modification is required by Legal Requirements or Section 9.1 of the Lease. 3.3 FAILURE TO COMPLETE CONSTRUCTION PERIOD PROPERTIES. Until termination of the Lease Agreement and the Agency Agreement, the Construction Agent shall promptly and diligently complete the development, acquisition, refinancing, installation, construction and testing of such Construction Period Property substantially in accordance with the Plans and Specifications and with the terms hereof and cause the Completion Date with respect to such Construction Period Property to occur on or prior to the Construction Period Termination Date. If, prior to the Completion Date with respect to any particular Property, the Construction Agent shall abandon or permanently discontinue the construction and development of one or more Construction Period Properties (which abandonment or permanent discontinuance shall be deemed to have occurred if no work at any such Construction Period Property site is undertaken or completed during a period of thirty (30) days or more after construction has commenced for reasons other than a Force Majeure Event), then the Construction Agent shall pay to the Lessor, on a date designated by the Lessor, an aggregate amount equal to the Termination Value of the Properties, and on such date Lessor shall transfer and convey to the Construction Agent all right, title and interest of Lessor in and to the Properties, at the cost and expense of the Construction Agent. The Lessor shall convey such property "AS IS," "WHERE-IS" and in its then present physical condition to the Construction Agent or its designee free and clear of Lessor Liens. If Lessor does not require the Construction Agent to pay such amount, the Construction Agent shall promptly and diligently complete the development, acquisition, refinancing, installation, construction and testing of the Construction Period Properties in substantial accordance with the Plans and Specifications and with the terms hereof and cause the Completion Date with respect to the Construction Period Properties to occur on or before the Construction Period Termination Date. ARTICLE IV PAYMENT OF FUNDS 4.1 RIGHT TO RECEIVE CONSTRUCTION Cost. (a) In connection with the development, acquisition, installation, construction and testing of any Property and during the course of the construction of the Improvements on any Property, the Construction Agent may request that the Lessor advance funds for the payment of Property Acquisition Costs or other Property Costs, and the Lessor will comply with such request to the extent provided for under the Participation Agreement. 9 12 The Construction Agent and the Lessor acknowledge and agree that the Construction Agent's right to request such funds and the Lessor's obligation to advance such funds for the payment of Property Acquisition Costs or other Property Costs is subject in all respects to the terms and conditions of the Participation Agreement and each of the other Operative Agreements. Without limiting the generality of the foregoing it is specifically understood and agreed that in no event shall the aggregate amounts advanced by the Lenders and the Holders for Property Acquisition Costs or other Property Costs and any other amounts due and owing hereunder or under any of the other Operative Agreements exceed the sum of the aggregate Commitment of the Lenders plus the aggregate amount of the Holder Commitments, including without limitation such amounts owing for (i) development, acquisition, installation, construction and testing of the Properties or (ii) additional amounts which accrue or become due and owing under the Credit Agreement or Trust Agreement as obligations of the Lessor prior to any Completion Date. (b) The proceeds of any funds made available to the Lessor to pay Property Acquisition Costs or other Property Costs shall be made available to the Construction Agent in accordance with the Requisition relating thereto and the terms of the Participation Agreement. The Construction Agent will use such proceeds only to pay the Property Acquisition Costs or other Property Costs set forth in the Requisition relating to such funds. ARTICLE V EVENTS OF DEFAULT 5.1 EVENTS OF DEFAULT. If any one (1) or more of the following events (each an "Event of Default") shall occur: (a) the Construction Agent fails to apply any funds paid by the Lessor to the Construction Agent in a manner consistent with the requirements of the Operative Agreements and as specified in the applicable Requisition for the development, acquisition, installation, construction and testing of the Properties and related improvements and Equipment or otherwise respecting the Properties to the payment of Property Acquisition Costs or other Property Costs; (b) the Construction Agent shall fail to make any payment required pursuant to the terms of this Agreement (including without limitation pursuant to Sections 2.1 and 3.3) within three (3) Business Days after the same has become due and payable; (c) any Event of Default (as such term is defined in Appendix A to the Participation Agreement) shall have occurred and not be cured within any cure period expressly permitted under the terms of the applicable Operative Agreement; and 10 13 (d) the Construction Agent shall fall to observe or perform any term, covenant or condition of any Operative Agreement other than as set forth in paragraphs (a), (b) or (c) of this Section 5.1 and such failure to observe or perform any such term, covenant or condition shall continue for more than thirty (30) days after the earlier of an officer of the Construction Agent becoming aware of such default or notice thereof by the Lessor; provided, however, that if such failure is of a nature that is not capable of being cured within such thirty (30) day period, and the Construction Agent promptly commences appropriate steps to cure such failure within such thirty (30) day period and continues to pursue such cure with diligence and good faith thereafter, unless Lessor shall determine that such delay could reasonably be expected to have a Material Adverse Effect, such thirty (30) day period shall be extended for an additional sixty (60) days; then, in any such event, the Lessor may, in addition to the other rights and remedies provided for in this Agreement, terminate this Agreement by giving the Construction Agent three (3) days written notice of such termination and upon the expiration of the time fixed in such notice and the payment of all amounts owing by the Construction Agent hereunder (including without limitation any amounts specified under Section 5.3 hereof), this Agreement shall terminate. The Construction Agent shall pay all costs and expenses incurred by or on behalf of the Lessor, including without limitation fees and expenses of counsel, as a result of any Event of Default hereunder. 5.2 DAMAGES. The termination of this Agreement pursuant to Section 5.1 shall in no event relieve the Construction Agent of its liability and obligations hereunder, all of which shall survive any such termination. 5.3 REMEDIES; REMEDIES CUMULATIVE. (a) If an Event of Default hereunder shall have occurred and be continuing, the Lessor shall have all rights available to the Lessor under the Lease and the other Operative Agreements and all other rights otherwise available at law, equity or otherwise. (b) Upon the occurrence of an Event of Default, the Lessor shall have (in addition to its rights otherwise described in this Agreement or existing at law, equity or otherwise) the option (and shall be deemed automatically, and without any further action, to have exercised such option upon the occurrence of any Lease Event of Default arising under Sections 17.1(g), (h) (i) or (j) of the Lease) to transfer and convey to the Construction Agent upon a date designated by the Lessor all right, title and interest of the Lessor in and to any Property or Properties (including without limitation any Land and/or any Improvements, any interest in any Improvements, any Equipment and any Property then under construction) for which the Rent Commencement Date has not yet occurred (a "Construction Period Property"). On any transfer and conveyance date specified by the Lessor pursuant to this Section 5.3(b), (i) the Lessor shall transfer and convey (at the cost 11 14 of the Construction Agent) all right, title and interest of the Lessor in and to any or all such Construction Period Properties free and clear of the Lien of the Lease and all Lessor Liens, (ii) the Construction Agent hereby covenants and agrees that it will accept such transfer and conveyance of right, title and interest in and to the respective Construction Period Property or Construction Period Properties and (iii) the Construction Agent hereby promises to pay to the Lessor, as liquidated damages (it being agreed that it would be impossible accurately to determine actual damages), an aggregate amount equal to the Termination Value of such Construction Period Properties plus other costs and expenses described in Section 2.1 hereof. The Construction Agent specifically acknowledges and agrees that its obligations under this Section 5.3(b), including without limitation its obligations to accept the transfer and conveyance of Construction Period Properties and its payment obligations described in subparagraph (iii) of this Section 5.3(b), shall be absolute and unconditional under any and all circumstances and shall be performed and/or paid, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. Notwithstanding the foregoing provisions of this Section 5.3(b), the Lessor shall have the right in its sole discretion to rescind any exercise of its option under this Section 5.3(b) upon the giving of its written confirmation of such rescission to the Construction Agent on or prior to the earlier to occur of (a) the actual date of transfer and (b) the date one hundred and twenty (120) days after the date the Lessor has given notice of its intent to transfer and convey any Property to the Construction Agent as referenced above in this Section 5.3(b). (c) The Construction Agent shall have the right to cure an Event of Default hereunder with respect to any given Property by purchasing such Property from the Lessor (to the extent such Event of Default is no longer continuing with respect to any other Property remaining subject to this Agreement after such purchase) for an amount equal to the liquidated damages amount set forth in Section 5.3(b) of this Agreement. (d) No failure to exercise and no delay in exercising, on the part of the Lessor, any right, remedy, power or privilege under this Agreement or under the other Operative Agreements shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided in this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12 15 ARTICLE VI THE LESSOR'S RIGHTS 6.1 EXERCISE OF THE LESSOR'S RIGHTS. Subject to the Excepted Payments, the Construction Agent and the Lessor hereby acknowledge and agree that, subject to and in accordance with the terms of the Security Agreement made by the Lessor in favor of the Agent, the rights and powers of the Lessor under this Agreement have been assigned to the Agent. 6.2 THE LESSOR'S RIGHT TO CURE THE CONSTRUCTION AGENT'S DEFAULTS. The Lessor, without waiving or releasing any obligation or Event of Default, may (but shall be under no obligation to) remedy any Event of Default for the account of and at the sole cost and expense of the Construction Agent. All out-of-pocket costs and expenses so incurred (including without limitation fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by the Lessor, shall be paid by the Construction Agent to the Lessor on demand. ARTICLE VII MISCELLANEOUS 7.1 NOTICES. All notices required or permitted to be given under this Agreement shall be in writing and delivered as provided in Section 12.2 of the Participation Agreement. 7.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the Lessor, the Construction Agent and their respective successors and the assigns of the Lessor. The Construction Agent may not assign this Agreement or any of its rights or obligations hereunder or with respect to any Property in whole or in part to any Person without the prior written consent of the Agent, the Lenders, the Holders and the Lessor. 7.3 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 13 16 7.4 SUBMISSION TO JURISDICTION; VENUE; WAIVERS. THE PROVISIONS OF THE PARTICIPATION AGREEMENT RELATING TO SUBMISSION TO JURISDICTION AND VENUE ARE HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS. 7.5 AMENDMENTS AND WAIVERS. This Agreement may not be terminated, amended, supplemented, waived or modified except in accordance with the provisions of Section 12.4 of the Participation Agreement. 7.6 COUNTERPARTS. This Agreement may be executed in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one (1) and the same instrument. 7.7 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.8 HEADINGS AND TABLE OF CONTENTS. The headings and table of contents contained in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.9 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, THE LESSOR AND THE CONSTRUCTION AGENT IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND ANY COUNTERCLAIM THEREUNDER. [signature page follows] 14 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. VERITAS SOFTWARE CORPORATION, as the Construction Agent By: /s/ KENNETH E. LONCHAR ------------------------------------- Name: KENNETH E. LONCHAR ----------------------------------- Title: SENIOR VICE PRESIDENT ---------------------------------- FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as Owner Trustee under the VS Trust 1999-1, as the Lessor By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. VERITAS SOFTWARE CORPORATION, as the Construction Agent By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as Owner Trustee under the VS Trust 1999-1, as the Lessor By: /s/ VAL T. ORTON ------------------------------------- Name: VAL T. ORTON ----------------------------------- Title: VICE PRESIDENT ---------------------------------- EX-10.30 15 MASTER LEASE AGREEMENT DATED APRIL 23, 1999 1 EXHIBIT 10.30 - -------------------------------------------------------------------------------- MASTER LEASE AGREEMENT Dated as of April 23, 1999 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, as Lessor and VERITAS SOFTWARE CORPORATION, as Lessee - -------------------------------------------------------------------------------- This Master Lease Agreement is subject to a security interest in favor of NationsBank, N.A., as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent") under a Security Agreement dated as of April 23, 1999, between First Security Bank, National Association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 and the Agent, as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Agreement may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. 2 TABLE OF CONTENTS
ARTICLE I................................................................. 1 1.1 Definitions..................................................... 1 1.2 Interpretation.................................................. 2 ARTICLE II................................................................ 2 2.1 Property........................................................ 2 2.2 Lease Term...................................................... 2 2.3 Title........................................................... 3 2.4 Lease Supplements............................................... 3 ARTICLE III............................................................... 3 3.1 Rent............................................................ 3 3.2 Payment of Basic Rent........................................... 4 3.3 Supplemental Rent............................................... 4 3.4 Performance on a Non-Business Day............................... 5 3.5 Rent Payment Provisions......................................... 5 ARTICLE IV................................................................ 5 4.1 Taxes; Utility Charges.......................................... 5 ARTICLE V................................................................. 6 5.1 Quiet Enjoyment................................................. 6 ARTICLE VI................................................................ 6 6.1 Net Lease....................................................... 6 6.2 No Termination or Abatement..................................... 7 ARTICLE VII............................................................... 7 7.1 Ownership of the Properties..................................... 7 ARTICLE VIII.............................................................. 9 8.1 Condition of the Properties..................................... 9 8.2 Possession and Use of the Properties............................ 9 8.3 Integrated Properties........................................... 11 ARTICLE IX................................................................ 11 9.1 Compliance With Legal Requirements, Insurance Requirements and Manufacturer's Specifications and Standards..................... 11 ARTICLE X................................................................. 11 10.1 Maintenance and Repair; Return.................................. 11 10.2 Environmental Inspection........................................ 13 ARTICLE XI................................................................ 13 11.1 Modifications................................................... 13 ARTICLE XII............................................................... 15 12.1 Warranty of Title............................................... 15 ARTICLE XIII.............................................................. 16 13.1 Permitted Contests Other Than in Respect of Indemnities......... 16 13.2 Impositions, Utility Charges, Other Matters; Compliance with Legal Requirements.............................................. 16 ARTICLE XIV............................................................... 17 14.1 Public Liability and Workers' Compensation Insurance............ 17
i 3
14.2 Permanent Hazard and Other Insurance Coverage to be Maintained by Other......................................... 17 14.3 Coverage...................................................... 18 14.4 Additional Insurance Requirements............................. 20 ARTICLE XV............................................................... 20 15.1 Casualty and Condemnation..................................... 20 15.2 Environmental Matters......................................... 23 15.3 Notice of Environmental Matters............................... 26 ARTICLE XVI.............................................................. 26 16.1 Termination Upon Certain Events............................... 26 16.2 Procedures.................................................... 26 ARTICLE XVII............................................................. 27 17.1 Lease Events of Default....................................... 27 17.2 Surrender of Possession....................................... 31 17.3 Reletting..................................................... 31 17.4 Damages....................................................... 31 17.5 Power of Sale................................................. 32 17.6 Final Liquidated Damages...................................... 32 17.7 Environmental Costs........................................... 33 17.8 Waiver of Certain Rights...................................... 33 17.9 Assignment of Rights Under Contracts.......................... 33 17.10 Remedies Cumulative........................................... 34 ARTICLE XVIII............................................................ 34 18.1 Lessor's Right to Cure Lessee's Lease Defaults................ 34 ARTICLE XIX.............................................................. 35 19.1 Provisions Relating to Lessee's Exercise of its Purchase Option...................................................... 35 19.2 [Intentionally Omitted]....................................... 35 ARTICLE XX............................................................... 35 20.1 Purchase Option or Sale Option - General Provisions........... 35 20.2 Lessee Purchase Option........................................ 36 20.3 Third Party Sale Option....................................... 37 ARTICLE XXI.............................................................. 38 21.1 [Intentionally Omitted]....................................... 38 ARTICLE XXII............................................................. 38 22.1 Sale Procedure................................................ 38 22.2 Application of Proceeds of Sale............................... 41 22.3 Indemnity for Excessive Wear.................................. 41 22.4 Appraisal Procedure........................................... 42 22.5 Certain Obligations Continue.................................. 42 ARTICLE XXIII............................................................ 43 23.1 Holding Over.................................................. 43 ARTICLE XXIV............................................................. 43 24.1 Risk of Loss.................................................. 43 ARTICLE XXV.............................................................. 44 25.1 Assignment.................................................... 44
ii 4 25.2 Subleases........................................................ 44 ARTICLE XXVI................................................................ 45 26.1 No Waiver........................................................ 45 ARTICLE XXVII............................................................... 45 27.1 Acceptance of Surrender.......................................... 45 27.2 No Merger of Title............................................... 45 ARTICLE XXVIII.............................................................. 46 28.1 [RESERVED]....................................................... 46 ARTICLE XXIX................................................................ 46 29.1 Notices.......................................................... 46 ARTICLE XXX................................................................. 46 30.1 Miscellaneous.................................................... 46 30.2 Amendments and Modifications..................................... 46 30.3 Successors and Assigns........................................... 46 30.4 Headings and Table of Contents................................... 46 30.5 Counterparts..................................................... 47 30.6 GOVERNING LAW.................................................... 47 30.7 Calculation of Rent.............................................. 47 30.8 Memoranda of Lease and Lease Supplements......................... 47 30.9 Allocations between the Lenders and the Holders.................. 48 30.10 Limitations on Recourse.......................................... 48 30.11 WAIVERS OF JULY TRIAL............................................ 48 30.12 Exercise of Lessor Rights........................................ 48 30.13 SUBMISSION TO JURISDICTION; VENUE................................ 49 30.14 USURY SAVINGS PROVISION.......................................... 49 EXHIBITS EXHIBIT A - Lease Supplement No. ____ EXHIBIT B - Memorandum of Lease and Lease Supplement No. ____
iii 5 MASTER LEASE AGREEMENT THIS MASTER LEASE AGREEMENT dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, this "Lease") is between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, having its principal office at 79 South Main Street, Salt Lake City, Utah 84111, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, as lessor (the "Lessor"), and VERITAS SOFTWARE CORPORATION, a Delaware corporation, having its principal place of business at 1600 Plymouth Street, Mountain View, California 94043, as lessee (the "Lessee"). WITNESSETH: A. WHEREAS, subject to the terms and conditions of the Participation Agreement and the Agency Agreement, Lessor will (i) purchase certain real property, some of which will (or may) have existing Improvements thereon, from one (1) or more third parties designated by Lessee and (ii) fund the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties by the Construction Agent; and B. WHEREAS, the Basic Term shall commence with respect to each Property upon the Property Closing Date with respect thereto; provided, Basic Rent with respect thereto shall not be payable until the applicable Rent Commencement Date; and C. WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor, each Property; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1 DEFINITIONS. For purposes of this Lease, capitalized terms used in this Lease and not otherwise defined herein shall have the meanings assigned to them in Appendix A to that certain Participation Agreement dated as of April 23, 1999 (as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof, the "Participation Agreement") among Lessee, the various parties thereto from time to time, as the Guarantors, Lessor, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, and NationsBank, N.A., 6 as agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. Unless otherwise indicated, references in this Lease to articles, sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in this Lease. 1.2 INTERPRETATION. The rules of usage set forth in Appendix A to the Participation Agreement shall apply to this Lease. ARTICLE II 2.1 PROPERTY. Subject to the terms and conditions hereinafter set forth and contained in the respective Lease Supplement relating to each Property, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each Property. 2.2 LEASE TERM. The basic term of this Lease with respect to each Property (the "Basic Term") shall begin upon the Property Closing Date for such Property (in each case the "Basic Term Commencement Date") and shall end on the fifth (5th) annual anniversary of the Initial Closing Date (the "Basic Term Expiration Date"), unless the Basic Term is earlier terminated or the term of this Lease is renewed (as described below) in accordance with the provisions of this Lease. Notwithstanding the foregoing, Lessee shall not be obligated to pay Basic Rent until the Rent Commencement Date with respect to such Property. Upon the written request of Lessee and with the consent of all of the Financing Parties, in their sole discretion, the term of this Lease for each Property may be extended for up to two (2) additional terms each of one (1) year's duration from the Basic Term Expiration Date (each, a "Renewal Term"); provided, that the expiration date for the final Renewal Term for each Property shall not be later than the seventh (7th) annual anniversary of the Initial Closing Date, unless such later expiration date has been expressly agreed to, at the request of Lessee, in writing by each of Lessor, the Agent, the Lenders and the Holders in their sole discretion. 2.3 TITLE. Each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession (if any), the existing state of title (including without limitation the Permitted Liens) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in Lessor's title to any Property or any interest of Lessee therein other than for Lessor Liens. 2 7 2.4 LEASE SUPPLEMENTS. On or prior to each Basic Term Commencement Date, Lessee and Lessor shall each execute and deliver a Lease Supplement for the Property to be leased effective as of such Basic Term Commencement Date in substantially the form of Exhibit A hereto. ARTICLE III 3.1 RENT. (a) Lessee shall pay Basic Rent in arrears on each Payment Date, and on any date on which this Lease shall terminate with respect to any or all Properties during the Term; provided, however, with respect to the Properties in the aggregate Lessee shall have no obligation to pay Basic Rent until the Rent Commencement Date (notwithstanding that Basic Rent for such Property shall accrue from and including the Scheduled Interest Payment Date immediately preceding such Rent Commencement Date). (b) Each payment of Rent payable by Lessee to Lessor under this Lease or any other Operative Agreement shall be made by Lessee to the Agent as the designee of Lessor under Section 5.8 of the Participation Agreement to such account or accounts as the Agent may designate from time to time prior to 12:00 p.m., Charlotte, North Carolina time, in immediately available funds consisting of lawful currency of the United States of America on the date when such payment shall be due. Payments received after 12:00 p.m., Charlotte, North Carolina time, on the date due shall, for the purpose of Section 17.1 hereof be deemed received on such day; provided, however, that for the purposes of the second sentence of Section 3.3 hereof, such payments shall be deemed received on the next succeeding Business Day and, unless the Agent is otherwise able to invest or employ such funds on the date received, subject to interest at the Overdue Rate. (c) Lessee's inability or failure to take possession of all or any portion of any Property when delivered by Lessor, whether or not attributable to any act or omission of Lessor, the Construction Agent, Lessee or any other Person or for any other reason whatsoever, shall not delay or otherwise affect Lessee's obligation to pay Rent for such Property in accordance with the terms of this Lease. (d) On or prior to each Payment Date, Lessor shall deliver, or cause to be delivered, to Lessee a notice of the exact amount of the Basic Rent due on such date (the "Invoice"). For the purposes of this Section 3.1(d), delivery of the Invoice by facsimile transmission, receipt confirmed, will be sufficient. 3 8 3.2 PAYMENT OF BASIC RENT. Basic Rent shall be paid absolutely net to Lessor or its designee, so that this Lease shall yield to Lessor the full amount thereof, without setoff, deduction or reduction. 3.3 SUPPLEMENTAL RENT. Lessee shall pay to the Person entitled thereto any and all Supplemental Rent when and as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent within three (3) days after the same is due, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. All such payments of Supplemental Rent shall be in the full amount thereof, without setoff, deduction or reduction. Lessee shall pay to the appropriate Person, as Supplemental Rent due and owing to such Person, among other things, on demand, (a) any and all payment obligations (except for amounts payable as Basic Rent) owing from time to time under the Operative Agreements by any Person to the Agent, any Lender, any Holder or any other Person, (b) interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due (subject to the applicable grace period) for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the appropriate Person (subject to any applicable grace period) for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid and (c) amounts referenced as Supplemental Rent obligations pursuant to Section 8.3 of the Participation Agreement. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. During the Construction Period, such Impositions and utility charges shall be included in the Property Cost to be paid by Lessor; provided, however the Lessor shall pay such amounts described in this Section 3.3 only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment. 3.4 PERFORMANCE ON A NON-BUSINESS DAY. If any Basic Rent is required hereunder on a day that is not a Business Day, then such Basic Rent shall be due on the corresponding Scheduled Interest Payment Date. If any Supplemental Rent is required hereunder on a day that is not a Business Day, then such Supplemental Rent shall be due on the next succeeding Business Day. 3.5 RENT PAYMENT PROVISIONS. Lessee shall make payment of all Basic Rent and Supplemental Rent when due (subject to the applicable grace periods) regardless of whether any of the Operative Agreements pursuant to which same is calculated and is owing shall have been rejected, avoided or 4 9 disavowed in any bankruptcy or insolvency proceeding involving any of the parties to any of the Operative Agreements. Such provisions of such Operative Agreements and their related definitions are incorporated herein by reference and shall survive any termination, amendment or rejection of any such Operative Agreements. ARTICLE IV 4.1 TAXES; UTILITY CHARGES. Subject to Lessee's rights of permitted contest pursuant to Section 13.1, Lessee shall pay or cause to be paid all Impositions with respect to the Properties and/or the use, occupancy, operation, repair, access, maintenance or operation thereof and all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents, utilities and operating expenses of any kind or type used in or on any Property and related real property during the Term. Upon Lessor's request, Lessee shall provide from time to time Lessor with evidence of all such payments referenced in the foregoing sentence. Lessee shall be entitled to receive any credit or refund with respect to any Imposition or utility charge paid by Lessee. Unless an Event of Default shall have occurred and be continuing, the amount of any credit or refund received by Lessor on account of any Imposition or utility charge paid by Lessee, net of the costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for Impositions or utilities imposed with respect to any Property for a period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for such party's pro rata share thereof. During the Construction Period, the costs of Impositions and all other utility and other charges or expenses referenced in this Section 4.1 shall be paid by Lessor; provided, however, the Lessor shall pay such amounts described in this Section 4.1 only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment. ARTICLE V 5.1 QUIET ENJOYMENT. Subject to the rights of Lessor contained in Sections 17.2, 17.3 and 20.3 and the other terms of this Lease and the other Operative Agreements and so long as no Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the applicable Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor (other than Lessee) with respect to any matters arising from and after the applicable Basic Term Commencement Date. 5 10 ARTICLE VI 6.1 Net Lease. This Lease shall constitute a net lease, and the obligations of Lessee hereunder are absolute and unconditional. Lessee shall pay all operating expenses arising out of the use, operation and/or occupancy of each Property. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) for any reason whatsoever, including without limitation by reason of: (a) any damage to or destruction of any Property or any part thereof; (b) any taking of any Property or any part thereof or interest therein by Condemnation or otherwise; (c) any prohibition, limitation, restriction or prevention of Lessee's use, occupancy or enjoyment of any Property or any part thereof, or any interference with such use, occupancy or enjoyment by any Person or for any other reason; (d) any title defect, Lien or any matter affecting title to any Property; (e) any eviction by paramount title or otherwise; (f) any default by Lessor hereunder; (g) any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding relating to or affecting the Agent, any Lender, Lessor, Lessee, any Holder or any Governmental Authority; (h) the impossibility or illegality of performance by Lessor, Lessee or both; (i) any action of any Governmental Authority or any other Person, Lessee's acquisition of ownership of all or part of any Property (except for any such acquisition of ownership pursuant to and in accordance with the terms of this Lease); (k) breach of any warranty or representation with respect to any Property or any Operative Agreement; (1) any defect in the condition, quality or fitness for use of any Property or any part thereof; or (m) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. Notwithstanding the foregoing provisions, nothing contained in this Section 6.1 shall provide Lessor with any right to payment by Lessee under this Lease prior to the Completion Date which is contrary to Lessor's remedies under the Agency Agreement; it being the express intention of the parties hereto that Lessee's liability hereunder shall not exceed the liability of the Construction Agent under the Agency Agreement prior to the Completion Date. The parties intend that the obligations of Lessee hereunder shall be covenants, agreements and obligations that are separate and independent from any obligations of Lessor hereunder and shall continue unaffected unless such covenants, agreements and obligations shall have been modified or terminated in accordance with an express provision of this Lease. Lessor and Lessee acknowledge and agree that the provisions of this Section 6.1 have been specifically reviewed and subjected to negotiation. 6.2 NO TERMINATION OR ABATEMENT. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting any Person or any Governmental Authority, or any action with respect to this Lease or any Operative Agreement which may be taken by any trustee, receiver or liquidator of any Person or 6 11 any Governmental Authority or by any court with respect to any Person, or any Governmental Authority. Lessee hereby waives all right (a) to terminate or surrender this Lease (except as permitted hereunder or under the terms of the Operative Agreements) or (b) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. ARTICLE VII 7.1 OWNERSHIP OF THE PROPERTIES. (a) Lessor and Lessee intend that for federal and all state and local income tax purposes, bankruptcy purposes, regulatory purposes, commercial law and real estate purposes and all other purposes (A) this Lease will be treated as a financing arrangement, (B) Lessee will be treated as the beneficial owner of the Properties and will be entitled to all tax benefits ordinarily available to owners of property similar to the Properties for such tax purposes and (C) this Lease will be treated as an operating lease for financial statement reporting purposes. Notwithstanding the foregoing, neither party hereto has made, or shall be deemed to have made, any representation or warranty as to the availability of any of the foregoing treatments under applicable accounting rules, tax, bankruptcy, regulatory, commercial or real estate law or under any other set of rules. Lessee shall claim the cost recovery deductions associated with each Property, and Lessor shall not, to the extent not prohibited by Law, take on its tax return a position inconsistent with Lessee's claim of such deductions. (b) For all purposes described in Section 7.1 (a), Lessor and Lessee intend this Lease to constitute a finance lease and not a true lease. In order to secure the obligations of Lessee now existing or hereafter arising under any and all Operative Agreements, Lessee hereby conveys, grants, assigns, transfers, hypothecates, mortgages and sets over to Lessor, for the benefit of all Financing Parties, a first priority security interest (but subject to the security interest in the assets granted by Lessee in favor of the Agent in accordance with the Security Agreement) in and lien on all right, title and interest of Lessee (now owned or hereafter acquired) in and to all Properties to the extent such is personal property and irrevocably grants and conveys a lien, deed of trust and mortgage on all right, title and interest of Lessee (now owned or hereafter acquired) in and to all Properties to the extent such is a real property. Lessor and Lessee further intend and agree that, for the purpose of securing the obligations of Lessee and/or the Construction Agent now existing or hereafter arising under the Operative Agreements, (i) this Lease shall be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code respecting each of the Properties and all proceeds (including without limitation insurance proceeds thereof) to the extent such is personal 7 12 property and an irrevocable grant and conveyance of a lien, deed of trust and mortgage on each of the Properties and all proceeds (including without limitation insurance proceeds thereof) to the extent such is real property; (ii) the acquisition of title by Lessor in each Property referenced in Article II constitutes a grant by Lessee to Lessor of a security interest, lien, deed of trust and mortgage in all of Lessee's right, title and interest in and to each Property and all proceeds (including without limitation insurance proceeds thereof) of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, and an assignment of all rents, profits and income produced by each Property; and (iii) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such lien, security interest, mortgage lien and deed of trust under applicable law. Lessee shall promptly take such actions as Lessor may reasonably request (including without limitation the filing of Uniform Commercial Code Financing Statements, Uniform Commercial Code Fixture Filings and memoranda (or short forms) of this Lease and the various Lease Supplements) to ensure that the lien, security interest, lien, mortgage lien and deed of trust in each Property and the other items referenced above will be deemed to be a perfected lien, security interest, mortgage lien and deed of trust of first priority under applicable law and will be maintained as such throughout the Term. ARTICLE VIII 8.1 CONDITION OF THE PROPERTIES. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING EACH PROPERTY "AS-IS WHERE-IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR (EXCEPT THAT LESSOR SHALL KEEP EACH PROPERTY FREE AND CLEAR OF LESSOR LIENS) AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF (IF ANY), (C) ANY STATE OF FACTS REGARDING ITS PHYSICAL CONDITION OR WHICH AN ACCURATE SURVEY MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF AND/OR THE DATE OF THE APPLICABLE LEASE SUPPLEMENT. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) (EXCEPT THAT LESSOR SHALL KEEP EACH PROPERTY FREE AND CLEAR OF LESSOR LIENS) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT 8 13 TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREON OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. LESSEE HAS OR PRIOR TO THE BASIC TERM COMMENCEMENT DATE WILL HAVE BEEN AFFORDED FULL OPPORTUNITY TO INSPECT EACH PROPERTY AND THE IMPROVEMENTS THEREON (IF ANY), IS OR WILL BE (INSOFAR AS LESSOR, THE AGENT, EACH LENDER AND EACH HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING SENTENCE, AS BETWEEN LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE HAND, AND LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE. 8.2 POSSESSION AND USE OF THE PROPERTIES. (a) At all times following the Completion Date, the Properties in the aggregate shall constitute a Permitted Facility and shall be used by Lessee in the ordinary course of its business. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties as contemplated by this Lease. Lessee shall not commit or permit any waste of the Properties or any part thereof. (b) The address stated in Section 6.2(i) of the Participation Agreement is the principal place of business and chief executive office of Lessee (as such terms are used in Section 9-103(3) of the Uniform Commercial Code of any applicable jurisdiction), and Lessee will provide Lessor with prior written notice of any change of location of its principal place of business or chief executive office. Regarding a particular Property, each Lease Supplement correctly identifies the initial location of the related Equipment (if any) and Improvements (if any) and contains an accurate legal description for the related parcel of Land. The Equipment and Improvements respecting each particular Property will be located only at the location identified in the applicable Lease Supplement. (c) Lessee will not attach or incorporate any item of Equipment to or in any other item of equipment or personal property or to or in any real property in a manner that could give rise to the assertion of any Lien (in favor of a third party that is prior to the Liens thereon created by the Operative Agreements) on such item of Equipment by reason of such attachment or the assertion of a claim that such item of Equipment has become a fixture and is subject to a Lien in favor of a third party that is prior to the Liens thereon created by the Operative Agreements. (d) On the Basic Term Commencement Date for each Property, Lessor and Lessee shall execute a Lease Supplement in regard to such Property which shall contain an Equipment Schedule that has a general description of the Equipment (if any) which 9 14 shall comprise the Property, an Improvement Schedule that has a general description of the Improvements (if any) which shall comprise the Property and a legal description of the Land (if any) which shall comprise the Property. Simultaneously with the execution and delivery of each Lease Supplement, such Equipment, Improvements, Land, all additional Equipment and all additional Improvements which are financed under the Operative Agreements after the Basic Term Commencement Date and the remainder of such Property shall be deemed to have been accepted by Lessee for all purposes of this Lease and to be subject to this Lease. (e) At all times during the Term with respect to each Property, Lessee will comply with all obligations under and (to the extent no Event of Default exists and provided that such exercise will not impair the value, utility or remaining useful life of such Property) shall be permitted to exercise all rights and remedies under, all operation and easement agreements and related or similar agreements applicable to such Property. 8.3 INTEGRATED PROPERTIES. On the Rent Commencement Date for each Property, Lessee shall, at its sole cost and expense, cause all Properties in the aggregate to constitute (and for the duration of the Term shall continue to constitute) all of the equipment, facilities, rights, other personal property and other real property necessary or appropriate to operate, utilize, maintain and control a Permitted Facility in a commercially reasonable manner. ARTICLE IX 9.1 COMPLIANCE WITH LEGAL REQUIREMENTS, INSURANCE REQUIREMENTS AND MANUFACTURER'S SPECIFICATIONS AND STANDARDS. Subject to the terms of Article XIII relating to permitted contests, Lessee, at its sole cost and expense, shall (a) comply with all applicable Legal Requirements (including without limitation all Environmental Laws (except as set forth in Section 15.2)) and all Insurance Requirements relating to the Properties, (b) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties and (c) comply with all manufacturer's specifications and standards, including without limitation the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties, whether or not compliance therewith shall require structural or extraordinary changes in any Property or interfere with the use and enjoyment of any Property, unless the failure to procure, maintain and comply with such items identified in subparagraphs (b) and (c), individually or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect. Lessor agrees to take such actions as may be reasonably requested by Lessee in connection with the compliance by Lessee of its obligations under this Section 9.1. Notwithstanding the foregoing, Lessee shall be deemed to be in compliance with all 10 15 Environmental Laws for purposes of this Lease notwithstanding any Environmental Violation if the severity of such Environmental Violation is less than federal, state and local standards requiring remediation or removal or, if such standards are exceeded, remediation or removal is proceeding in accordance with all applicable Environmental Laws. ARTICLE X 10.1 MAINTENANCE AND REPAIR; RETURN. (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition, repair and working order (ordinary wear and tear excepted) and make all necessary repairs thereto and replacements thereof, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by Section 9.1 and on a basis consistent with the operation and maintenance of properties or equipment comparable in type and function to the applicable Property, such that such Property is capable of being immediately utilized by a third party and in compliance with standard industry practice subject, however, to the provisions of Article XV with respect to Casualty and Condemnation. (b) Lessee shall not use or locate any component of any Property outside of the Approved State therefor. Lessee shall not move or relocate any component of any Property beyond the boundaries of the Land described in the Lease Supplement with regard to the Land, except for the temporary removal of Equipment and other personal property for repair or replacement. (c) If any component of any Property becomes worn out, lost, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, Lessee, at its own expense, will within a reasonable time replace such component with a replacement component which is free and clear of all Liens (other than Permitted Liens and Lessor Liens) and has a value, utility and useful life at least equal to the component replaced (assuming the component replaced had been maintained and repaired in accordance with the requirements of this Lease). Except as otherwise provided in Section 11.1, all components which are added to any Property shall immediately become the property of (and title thereto shall vest in) Lessor and shall be deemed incorporated in such Property and subject to the terms of this Lease as if originally leased hereunder. (d) Upon reasonable advance notice, Lessor and its agents shall have the right to inspect each Property and all maintenance records with respect thereto at any reasonable time during normal business hours but shall not, in the absence of an Event of Default, materially disrupt the business of Lessee. (e) Lessee shall cause to be delivered to Lessor (at Lessee's sole expense) one or more additional Appraisals (or reappraisals of Property) as Lessor may request if any 11 16 one of Lessor, the Agent, the Trust Company, any Lender or any Holder is required pursuant to any applicable Legal Requirement to obtain such Appraisals (or reappraisals) and upon the occurrence of any Event of Default. (f) Lessor shall under no circumstances be required to build any improvements or install any equipment on any Property, make any repairs, replacements, alterations or renewals of any nature or description to any Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenant, condition or restriction at any time in effect. (g) Lessee shall, upon the expiration or earlier termination of this Lease with respect to a Property, if Lessee shall not have exercised its Purchase Option with respect to such Property and purchased such Property, surrender such Property (i) pursuant to the exercise of the applicable remedies upon the occurrence of a Lease Event of Default, to Lessor or (iii) pursuant to the second paragraph of Section 22.1(a) hereof, to Lessor or the third party purchaser, as the case may be, subject to Lessee's obligations under this Lease (including without limitation the obligations of Lessee at the time of such surrender under Sections 9.1, 10.1(a) through (f), 10.2, 11.1, 12.1, 22.1 and 23.1). 10.2 ENVIRONMENTAL INSPECTION. If Lessee has not given notice of exercise of its Purchase Option on the Expiration Date pursuant to Section 20.1 or for whatever reason Lessee does not purchase a Property in accordance with the terms of this Lease, then not more than one hundred twenty (120) days nor less than sixty (60) days prior to the Expiration Date, Lessee shall cause to be delivered to Lessor environmental site assessments recently prepared (no more than thirty (30) days prior to the date of delivery) by an independent recognized professional reasonably acceptable to Lessor, and in form, scope and content reasonably satisfactory to Lessor. The cost incurred respecting such environmental site assessments shall be paid for in accordance with the provisions set forth in Section 20.3(b). ARTICLE XI 11.1 MODIFICATIONS. (a) Lessee at its sole cost and expense, at any time and from time to time without the consent of Lessor may make modifications, alterations, renovations, improvements and additions to any Property or any part thereof and substitutions and replacements therefor (collectively, "Modifications"), and Lessee shall make any and all Modifications required to be made pursuant to all Legal Requirements, Insurance 12 17 Requirements and manufacturer's specifications and standards; provided, that: (i) no Modification shall materially impair the value, utility or useful life of any Property from that which existed immediately prior to such Modification; (ii) each Modification shall be done expeditiously and in a good and workmanlike manner; (iii) no Modification shall adversely affect the structural integrity of any Property; (iv) to the extent required by Section 14.2(a), Lessee shall maintain builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article XIII relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens arising with respect to any Modification; (vi) each Modification shall comply with the requirements of this Lease (including without limitation Sections 8.2 and 10.1); and (vii) except as otherwise contemplated or provided in any Operative Agreement, no Improvement shall be demolished or otherwise rendered unfit for use unless Lessee shall finance the proposed replacement Modification outside of this lease facility; provided, further, Lessee shall not make any Modification (unless required by any Legal Requirement) to the extent any such Modification, individually or in the aggregate, shall have or could reasonably be expected to have a Material Adverse Effect. Lessee shall not remove or attempt to remove any Modification from any Property. Title to each Modification shall vest in Lessee to the extent such Modification (a) is not financed pursuant to the Operative Agreements, (b) is not a fixture or other real estate interest, (c) is readily removable without causing material damage to any Property, (d) is not required in order for the applicable Property to comply with any Legal Requirement, any Insurance Requirement or any requirement of Section 8.3 of this Lease and (e) is not necessary to conform to any applicable manufacturer's specification and/or standard. Title to all other Modifications shall immediately and without further action upon their incorporation into the applicable Property (1) become property of Lessor, (2) be subject to this Lease and (3) be titled in the name of Lessor. Lessee at its sole cost and expense shall repair in a good and workmanlike manner any and all damage done to any Property due to the removal, detachment, attempted removal or attempted detachment of any Modification from a Property and all such repairs shall be completed by the earlier of (a) thirty (30) days after such removal, detachment, attempted removal or attempted detachment of the applicable Modification from the applicable Property and (b) the Expiration Date. Lessee shall not remove, detach or attempt to remove or detach any Modification from any Property except in accordance with the provisions of this Section 11.1. The Lessor acknowledges Lessee's right to finance and to secure under the Uniform Commercial Code, inventory, furnishings, furniture, equipment, machinery, leasehold improvements and other personal property located at the Properties, other than the Equipment and modifications required to be titled in the name of Lessor and excluding in all cases fixtures, and Lessor agrees, at Lessee's cost and expenses, to execute Lessor waiver forms, releases of Lessor Liens and other similar documentation (in form and substance reasonably satisfactory to Lessor and the Agent) in favor or any purchase money seller, lessor or lender who has financed or may finance in the future such items. (b) The construction process provided for in the Agency Agreement is acknowledged by Lessor to be consistent with and in compliance with the terms and provisions of this Article XI. 13 18 appurtenance thereto is the subject of a Condemnation; provided, however, if a Material Default or an Event of Default shall have occurred and be continuing or if such award, compensation or insurance proceeds shall exceed $1,000,000, then such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor and held in accordance with the terms of this Article XV or, if applicable. applied to the repayment of the Property Cost in accordance with Section 16 on the Termination Date. All amounts held by Lessor hereunder on account of any award, compensation or insurance proceeds either paid directly to Lessor or turned over to Lessor shall be held as security for the performance of Lessee's obligations hereunder and under the other Operative Agreements and when all such obligations of Lessee with respect to such matters (and all other obligations of Lessee which should have been satisfied pursuant to the Operative Agreements as of such date) have been satisfied, all amounts so held by Lessor shall be paid over to Lessee. (b) Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof; provided, that during the Construction Period, such expenses shall be paid by Lessor; provided, further the Lessor shall pay such amounts described in this Section 15.1(b) only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment; provided, that during the Construction Period, such expenses shall be paid by Lessor; provided, further, the Lessor shall pay such amounts described in this Section 15.1(b) only if funds are made available by the Lenders and the Holders in an amount sufficient to allow such payment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessee shall receive notice of a Casualty or a Condemnation of a Property or any interest therein where damage to the affected Property is estimated to equal or exceed twenty-five percent (25%) of the Property Cost of such Property, Lessee shall give notice thereof to Lessor promptly after Lessee's receipt of such notice. In the event such a Casualty or Condemnation occurs (regardless of whether Lessee gives notice thereof), then Lessee shall be deemed to have delivered a Termination Notice to Lessor and the provisions of Sections 16.1 and 16.2 shall apply. (d) In the event of a Casualty or a Condemnation (regardless of whether notice thereof must be given pursuant to paragraph (c)), this Lease shall terminate with respect to the applicable Property in accordance with Section 16.1 if Lessee, within thirty (30) days after such occurrence, delivers to Lessor a notice to such effect. (e) If pursuant to this Section 15.1 this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected Property, 14 19 Lessee shall, at its sole cost and expense (subject to reimbursement in accordance with Section 15.1(a)) promptly and diligently repair any damage to the applicable Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1. using the as-built Plans and Specifications or manufacturer's specifications for the applicable Improvements, Equipment or other components of the applicable Property (as modified to give effect to any subsequent Modifications, any Condemnation affecting the applicable Property and all applicable Legal Requirements). so as to restore the applicable Property to the same or a greater remaining economic value, useful life, utility, condition, operation and function as existed immediately prior to such Casualty or Condemnation (assuming all maintenance and repair standards have been satisfied). In such event, title to the applicable Property shall remain with Lessor. Lessor shall make disbursements from time to time of any award, compensation or insurance proceeds held by it to Lessee for application to the cost of restoration subject to the satisfaction of the following conditions: (1) Lessor shall have received a fully executed counterpart of a requisition therefor (in form and substance reasonably satisfactory to Lessor), requesting funds in an amount not exceeding the cost of work completed or insured since the last disbursement, together with reasonably satisfactory evidence of the state of completion and of performance of the work in a good and workman-like manner and in accordance with the as-built Plans and Specifications, (ii) at the time of any such disbursement, no Lease Default or Lease Event of Default shall have occurred and be continuing, and no mechanic's or materialmen's liens shall have been filed and remain undischarged, except those discharged by the disbursement of the requested funds or which are otherwise bonded, (iii) Lessor shall be reasonably satisfied that sufficient funds are available to complete such restoration and (iv) Lessor shall have good and marketable title to all Properties, subject only to Permitted Liens. Provided no Lease Default or Lease Event of Default shall have occurred and be continuing, any award, compensation or insurance proceeds remaining after restoration of any Property as herein provided shall be paid to Lessee. (f) In no event shall a Casualty or Condemnation affect Lessee's obligations to pay Rent pursuant to Article III. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term with respect to a Property a Casualty occurs with respect to such Property or Lessee receives notice of a Condemnation with respect to such Property, and following such Casualty or Condemnation, the applicable Property cannot reasonably be restored, repaired or replaced on or before the day one hundred eighty (180) days prior to the Expiration Date or the date nine (9) months after the occurrence of such Casualty or Condemnation (if such Casualty or Condemnation occurs during the Term) to the same or a greater remaining economic value, useful life, utility, condition, operation and function as existed immediately prior to such Casualty or Condemnation (assuming all maintenance and repair standards have been satisfied) or on or before such day such Property is not in fact so restored, repaired or replaced, then Lessee shall be required to exercise its Purchase Option for such Property on the next Payment Date (notwithstanding the limits on such exercise contained in Section 20.2) and pay Lessor 15 20 the Termination Value for such Property; provided, if any Default or Event of Default has occurred and is continuing, Lessee shall also promptly (and in any event within three (3) Business Days) pay Lessor any award, compensation or insurance proceeds received on account of any Casualty or Condemnation with respect to any Property; provided, further, that if no Material Default or Event of Default has occurred and is continuing, any Excess Proceeds shall be paid to Lessee. If a Material Default or an Event of Default has occurred and is continuing and any Loans, Holder Advances or other amounts are owing with respect thereto, then any Excess Proceeds (to the extent of any such Loans, Holder Advances or other amounts owing with respect thereto) shall be paid to Lessor, held as security for the performance of Lessee's obligations hereunder and under the other Operative Agreements and applied to such obligations upon the exercise of remedies in connection with the occurrence of an Event of Default, with the remainder of such Excess Proceeds in excess of such Loans, Holder Advances and other amounts owing with respect thereto being distributed to the Lessee. (h) The provisions of Sections 15.1(a) through 15.1(g) shall not apply to any Property until after the Construction Period Termination Date applicable to such Property and the applicable provisions of the Agency Agreement shall apply to a Casualty or Condemnation affecting a Construction Period Property. 15.2 ENVIRONMENTAL MATTERS. (a) Lessee hereby acknowledges and confirms that, as of the Property Closing Date, the Property (which includes Land) is contaminated by Hazardous Substances including, but not limited to, the Pre-Existing Hazardous Substances semiconductor related contamination ("TCE") and ten other compounds (the "Pre-Existing Hazardous Substances") in concentrations and conditions that constitute an Environmental Violation. In particular, Lessee acknowledges and confirms the following facts with regard to the Property (which includes the Land); provided remediation plans are in effect with respect thereto which bring such Property (which includes the Land) into compliance with the applicable Environmental Laws: (i) In 1984, the California Regional Water Quality Control Board issued cleanup orders to Raytheon, Fairchild Semiconductor Corporation, Intel Corporation, NEC Electronics, Inc. and Siltec Corporation with respect to PreExisting Hazardous Substance contamination in the regional site known as the Middlefield-Ellis-Whisman (MEW) site (of which the Property (which includes the Land) is a part). Three (3) Superfund sites exist within the MEW area. The Environmental Protection Agency ("EPA") is currently overseeing cleanup measures that are being conducted on the Property (which includes the Land) and neighboring properties. The Property (which includes the Land) has been identified in EPA Orders as containing sources of contamination including underground and aboveground storage tanks for chemical products and wastes, pH neutralization systems and industrial wastewater treatment systems. The Property (which includes the Land) is listed on the National Priorities List. 16 21 (iii) In April 1985, the EPA issued a "Request for Information" pursuant to Section 106(c) of CERCLA and took over as the lead agency at the Property (which includes Land). Raytheon, Fairchild Semiconductor Corporation and Intel Corporation entered an Administrative order on Consent with the EPA on August 15, 1985 to conduct Remedial Investigation/Feasibility Studies ("RI/FS") at the regional site referred to above. The RI/FS was finalized in 1988. The EPA issued a Record of Decision ("ROD") in May 1989. The ROD. which was later modified in September 1990 and April 1996, established specific cleanup concentrations for the Pre-Existing Hazardous Substances, and required the implementation of site-specific source control remediation measures and a regional groundwater remediation program. Raytheon and Intel Corporation entered into a Consent Decree ("CD") with the EPA in May 1991 that was entered by the United States District Court, Northern District of California on April 10. 1992. (iii) The CD referred to above provides that Raytheon will perform groundwater and soil remediation for the sites it occupied and operated within the MEW area, including, but not limited to, the Property (which includes the Land). The facility specific work at the Property (which includes the Land) is now in the operation and maintenance phase. (iv) In 1987, a soil-bentonite, subsurface, slurry wall was installed by Raytheon around the perimeter of the Property (which includes the Land) enclosing the soil and water bearing zones as part of the remedial measures. Groundwater is extracted from the water bearing zones by Raytheon within the area enclosed by the slurry wall maintaining an inward and upward groundwater flow gradient to keep contaminated groundwater from flowing away from the Property (which includes the Land). (v) The groundwater extraction and treatment system was installed in 1987. Groundwater is extracted from several wells located both within the Property (which includes the Land) boundaries and from adjacent property. The groundwater extraction system is a long term remedial measure that Raytheon is required to maintain. The groundwater extraction system, soil vapor extraction system referred to below and groundwater monitoring are ongoing at the Property (which includes the Land) to remediate and monitor TCE and other Pre-Existing Hazardous Substances. (vi) A soil vapor extraction system was installed by Raytheon in 1996 to remediate the contaminated soils in or under the Property (which includes the Land). This system covers a surface area of approximately four (4) acres and proceeds to a depth of approximately 15 to 18 feet. The system is composed of eighty-eight (88) shallow and deep soil vapor extraction wells and one soil vapor 17 22 extraction treatment system. Raytheon has petitioned and obtained approval from the EPA for closure for part of the soil vapor remedial system. (b) In light of the environmental condition of the Property (which includes the Land) existing as of the Property Closing Date (the "Pre-Existing Environmental Conditions"), the presence of Pre-Existing Hazardous Substances on the Property (which includes the Land) shall not violate the terms of this Lease. Responsibility for the cleanup and/or remediation of the Pre-Existing Environmental Conditions shall be allocated pursuant to the terms of the Purchase Agreement and the Indemnity Agreement: provided, notwithstanding any of the provisions of the Lease or any of the Operative Agreements, to the extent any Pre-Existing Environmental Condition is not addressed by, any third party pursuant to the Purchase Agreement and/or the Indemnity Agreement so as to remediate such Pre-Existing Environmental Condition in accordance with the applicable Environmental Laws (and to indemnify the Financing Parties in accordance with the requirements of the Participation Agreement), then Lessee shall be responsible for (i) the cleanup and/or remediation of such Pre-Existing Environmental Condition in accordance with the applicable terms of the Operative Agreements including without limitation Section 15.2(c) and (ii) the environmental indemnification of the Financing Parties in accordance with the Participation Agreement. (c) Notwithstanding the foregoing, promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of any Property or Properties (other than the Pre-Existing Environmental Conditions) in concentrations and conditions that constitute an Environmental Violation and which, in the reasonable opinion of Lessee, the cost to undertake any legally required response, clean up, remedial or other action will or might result in a cost to Lessee of more than $50,000, Lessee shall notify Lessor in writing of such condition. In the event of any Environmental Violation (regardless of whether notice thereof must be given), Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor a Termination Notice with respect to the applicable Property or Properties pursuant to Section 16. 1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake and diligently complete any response, clean up, remedial or other action (including without limitation the pursuit by Lessee of appropriate action against any off-site or third party source for contamination) necessary to remove. cleanup or remediate the Environmental Violation in accordance with all Environmental Laws; provided, notwithstanding the foregoing provision of this sentence, Lessee shall only be responsible for Pre-Existing Environmental Conditions to the extent set forth in Section 15.2(b) and the other applicable provisions of the Operative Agreements. Any such undertaking shall be timely completed in accordance with prudent industry standards. If Lessee does not deliver a Termination Notice with respect to such Property pursuant to Section 16.1, Lessee shall., upon completion of remedial action by Lessee, cause to be prepared by a reputable environmental consultant acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full compliance with applicable 18 23 Environmental Law. Not less than sixty (60) days prior to any time that Lessee elects to cease operations with respect to any Property or to remarket any Property pursuant to Section 20.1 hereof or any other provision of any Operative Agreement, Lessee at its expense shall cause to be delivered to Lessor environmental site assessments respecting such Property recently prepared (no more than thirty (30) days prior to the date of delivery) by an independent recognized professional acceptable to Lessor in its reasonable discretion and in form, scope and content satisfactory to Lessor in its reasonable discretion. Notwithstanding any other provision of any Operative Agreement, if Lessee fails to comply with the foregoing obligation regarding the environmental site assessments, Lessee shall be obligated to purchase such Property for its Termination Value and shall not be permitted to exercise (and Lessor shall have no obligation to honor any such exercise) any rights under any Operative Agreement regarding a sale of such Property to a Person other than Lessee. 15.3 NOTICE OF ENVIRONMENTAL MATTERS. Promptly, but in any event within five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with any Property or Properties other than notices (provided to Lessor prior to the Initial Closing Date) relating to the Pre-Existing Environmental Conditions. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within five (5) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with any Property. Lessee shall also promptly provide such detailed reports of any such material environmental claims as may reasonably be requested by Lessor. ARTICLE XVI 16.1 TERMINATION UPON CERTAIN EVENTS. If Lessee has delivered, or is deemed to have delivered, written notice of a termination of this Lease with respect to the applicable Property to Lessor in the form described in Section 16.2(a) (a "Termination Notice") pursuant to the provisions of this Lease, then following the applicable Casualty, Condemnation or Environmental Violation (Provided, no such Termination Notice shall be deemed delivered with respect to any Pre-Existing Environmental Condition), this Lease shall terminate with respect to the affected Property on the applicable Termination Date. 16.2 PROCEDURES. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a Payment Date not more than sixty (60) days 19 24 after Lessor's receipt of such Termination Notice (the "Termination Date"); and (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value for the applicable Property and purchase such Property on such Termination Date. (b) On each Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, and Lessor shall convey such Property or the remaining portion thereof, if any, to Lessee (or Lessee's designee), all in accordance with Section 20.2. ARTICLE XVII 17.1 LEASE EVENTS OF DEFAULT. If any one (1) or more of the following events (each a "Lease Event of Default") shall occur: (a) Lessee shall fail to make payment of (i) any Basic Rent (except as set forth in clause (ii)) within three (3) days after the same has become due and payable or (ii) any Termination Value, on the date any such payment is due and payable, or any payment of Basic Rent or Supplemental Rent due on the due date of any such payment of Termination Value, or (iii) any amount due on the Expiration Date; (b) Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in Section 17. 1 (a)(ii)) or any other Credit Party shall fail to make any payment of any amount under any Operative Agreement which has become due and payable within three (3) days after receipt of notice that such payment is due; (c) (i) Lessee shall fail to maintain insurance as required by Article XIV of this Lease or (ii) Lessee shall fail to deliver any requisite ACCORD Evidence of Insurance or certified copy of any insurance policy required thereunder when due under the terms hereof and such failure to deliver shall continue unremedied for a period of ten (10) days after an officer of Lessee becoming aware of such failure to deliver, or notice from the Agent of such failure to deliver; (d) Any representation or warranty made by Lessee set forth in this Lease or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way when made; (e) An Agency Agreement Event of Default shall have occurred and be continuing; 20 25 (f) Any Credit Party or any Subsidiary of any Credit Party shall default (beyond applicable periods of grace and/or notice and cure) in the payment when due of any principal of or interest on any Indebtedness having an outstanding principal amount of at least $10,000,000; or any other event or condition shall occur which results in a default of any such Indebtedness or enables the holder of any such Indebtedness or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) The liquidation or dissolution of any Credit Party, or the suspension of the business of any Credit Party, or the filing by any Credit Party of a voluntary petition or an answer seeking reorganization, arrangement, readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, or any other action of any Credit Party indicating its consent to, approval of or acquiescence in, any such petition or proceeding; the application by any Credit Party for, or the appointment by consent or acquiescence of any Credit Party of a receiver, a trustee or a custodian of any Credit Party for all or a substantial part of its property; the making by Lessee of any assignment for the benefit of creditors; the admission by any Credit Party in writing of its inability to pay its debts as they mature or is generally not paying its debts and other financial obligations as they become due and payable; or any Credit Party taking any corporate action to authorize any of the foregoing; (h) The filing of an involuntary petition against any Credit Party in bankruptcy or seeking reorganization, arrangement, readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing; or the involuntary appointment of a receiver, a trustee or a custodian of any Credit Party for all or a substantial part of its property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of any Credit Party, and the continuance of any of such events for ninety (90) days undismissed or undischarged; (i) The adjudication of any Credit Party as bankrupt or insolvent; (j) The entering of any order in any proceedings against any Credit Party or any Subsidiary of any Credit Party decreeing the dissolution, divestiture or split-up of any Credit Party or any Subsidiary of any Credit Party, and such order remains in effect for more than sixty (60) days; (k) Any report, certificate, financial statement or other instrument delivered to Lessor by or on behalf of any Credit Party pursuant to the terms of this Lease or any other Operative Agreement is false or misleading in any material respect when made or delivered; (l) The Lessee or any other Credit Party shall 21 26 (i) default in the due performance or observance of any term, covenant or agreement contained in Sections 8.3A(b), 8.3A(h), 8.3A(i) or 8.3B(a) through 8.3B(o) of the Participation Agreement, inclusive; (ii) default in the due performance or observance of any term, covenant or agreement contained in Sections 8.3A(a)(i), (ii), (iii) or (iv) of the Participation Agreement and such default shall continue unremedied for a period of at least five (5) days after the earlier of an officer of such Credit Party becoming aware of such default or notice thereof by the Agent; or (iii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b), (c), (l)(i) or (l)(ii) of this Section 17.1) contained in this Lease or any other Operative Agreement and such default shall continue unremediated for a period of at least thirty (30) days after the earlier of an officer of such Credit Party becoming aware of such default or notice thereof by the Agent; provided, however, that if such default is of a nature that is not capable of being cured within such thirty (30) day period, and the Lessee or any other such Credit Party promptly commences appropriate steps to cure such default within such thirty (30) day period and continues to pursue such cure with diligence and good faith thereafter, unless the Agent shall determine that such delay could reasonably be expected to have a Material Adverse Effect, such thirty (30) day period shall be extended for an additional sixty (60) days; (m) A final Judgment or judgments for the payment of money shall be rendered by a court or courts against any Credit Party or any Subsidiary of any Credit Party or any of their assets in excess of $10,000,000 in the aggregate, and (i) the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof, or (ii) any Credit Party or any such Subsidiary shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, or (iii) such judgment or judgments shall not be discharged (or provisions shall not be made for such discharge) within thirty (30) days after a decision has been reached with respect to such appeal and the related stay has been lifted; (n) Any Credit Party or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay to the PBGC or to a Pension Plan under Title IV of ERISA; or notice of intent to terminate a Pension Plan or Pension Plans having aggregate Unfunded Liabilities in excess of $5,000,000 shall be filed under Title IV of ERISA by any Credit Party or any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Pension Plan or Pension Plans or a proceeding shall be instituted by a fiduciary of any such Pension Plan or Pension Plans against any Credit Party or any member of the Controlled Group to 22 27 enforce Section 515 or 4219(c)(5) of ERISA; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Pension Plan or Pension Plans must be terminated; (o) Any Change of Control shall occur; (p) Any Operative Agreement shall cease to be in full force and effect; or (q) Except as to any Credit Party which is released in connection with the Operative Agreements, the guaranty given by any Guarantor under the Participation Agreement or any material provision thereof shall cease to be in full force and effect, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty, or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any guaranty; then, in any such event, Lessor may, in addition to the other rights and remedies provided for in this Article XVII and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination (provided, notwithstanding the foregoing, this Lease shall be deemed to be automatically terminated without the giving of notice upon the occurrence of a Lease Event of Default under Sections 17.1 (g), (h) or (i), and this Lease shall terminate, and all rights of Lessee under this Lease shall cease. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all reasonable costs and expenses incurred by or on behalf of Lessor or any other Financing Party, including without limitation reasonable fees and expenses of counsel, as a result of any Lease Event of Default hereunder. A POWER OF SALE HAS BEEN GRANTED IN THIS LEASE. A POWER OF SALE MAY ALLOW LESSOR TO TAKE THE PROPERTIES AND SELL THE PROPERTIES WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON THE OCCURRENCE OF A LEASE EVENT OF DEFAULT. 17.2 SURRENDER OF POSSESSION. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Properties. Lessor may enter upon and repossess the Properties by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Properties. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. Upon the written demand of Lessor, Lessee shall return the Properties promptly to Lessor, in the manner and condition required by, and otherwise in accordance with the provisions of, Section 22.1(c) hereof. 23 28 17.3 RELETTING. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet any or all of the Properties, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet any Property or for any failure to collect any rent due upon such reletting. 17.4 DAMAGES. Neither (a) the termination of this Lease as to all or any of the Properties pursuant to Section 17.1; (b) the repossession of all or any of the Properties; nor (c) the failure of Lessor to relet all or any of the Properties, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Rent and other sums due and payable hereunder to and including without limitation the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term hereof or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of any Property or any portion thereof; provided, that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.6. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, any Holder's, the Agent's and any Lender's reasonable expenses in connection therewith, including without limitation repossession costs, brokerage or sales commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. Lessee specifically acknowledges and agrees that its obligations under this Section 17.4 shall be absolute and unconditional under any and all circumstances and shall be paid and/or performed, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 24 29 17.5 POWER OF SALE. Without limiting any other remedies set forth in this Lease, Lessor and Lessee agree that Lessee has granted, pursuant to Section 7.1 (b) hereof and each Lease Supplement, a Lien against the Properties WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Properties. 17.6 FINAL LIQUIDATED DAMAGES. Subject to the limitations of the Agency Agreement, if a Lease Event of Default shall have occurred and be continuing, whether or not this Lease shall have been terminated pursuant to Section 17.1 and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.4, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 11 of the Participation Agreement (which, if requested, shall be paid concurrently), and in lieu of all current liquidated damages beyond the date of such demand (it being agreed that it would be impossible accurately to determine actual damages) the Termination Value. Upon payment of the amount specified pursuant to the first sentence of this Section 17.6, Lessee shall be entitled to receive from Lessor, either at Lessee's request or upon Lessor's election, in either case at Lessee's cost, an assignment of Lessor's entire right, title and interest in and to the Properties, Improvements, Fixtures, Modifications, Equipment and all components thereof, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease (including without limitation the release of any memoranda of Lease and/or the Lease Supplement recorded in connection therewith) and any Lessor Liens. The Properties shall be conveyed to Lessee "AS-IS, WHERE-IS" and in their then present physical condition. Concurrent with such conveyance, Lessor shall assign (free and clear of all Lessor Liens but subject to any and all other Liens) to Lessee all right, title and interest of Lessor in and to the Indemnity Agreement regarding matters and events arising from and after the date of such assignment (provided, Lessor shall retain its right, title and interest in and to the Indemnity Agreement regarding matters and events arising during the period when Lessor held title to any Property). If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided, however, Lessee shall not be entitled to receive an assignment of Lessor's interest in the Properties, the Improvements, Fixtures, Modifications, Equipment or the components thereof unless Lessee shall have paid in full the Termination Value. Lessee specifically acknowledges and agrees that its obligations under this Section 17.6 shall be absolute and unconditional under any and all circumstances and shall be paid and/or performed, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 25 30 17.7 ENVIRONMENTAL COSTS. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall pay directly to any third party (or at Lessor's election, reimburse Lessor) for the cost of any environmental testing and/or remediation work undertaken respecting any Property (subject to the provisions of Section 15.2(b)), as such testing or work is deemed appropriate in the reasonable judgment of Lessor, and shall indemnify and hold harmless Lessor and each other Indemnified Person therefrom. Lessee shall pay all amounts referenced in the immediately preceding sentence within ten (10) days of any request by Lessor for such payment. The provisions of this Section 17.7 shall not limit the obligations of Lessee under any Operative Agreement regarding indemnification obligations, environmental testing, remediation and/or work. 17.8 WAIVER of Certain Rights. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by Law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or possession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article XVII. 17.9 ASSIGNMENT OF RIGHTS UNDER CONTRACTS. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties (including without limitation all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties or any of them. 17.10 REMEDIES CUMULATIVE. Lessor shall be entitled to enforce payment of all amounts and performance of obligations evidenced hereby and to exercise all rights and powers under this instrument or under any of the other Operative Agreements or other agreement or any laws now or hereafter in force, notwithstanding some or all of the obligations evidenced hereby may now or hereafter be otherwise secured, whether by mortgage, security agreement, pledge, lien, assignment or otherwise. Neither the acceptance of this instrument nor its enforcement, shall prejudice or in any manner affect Lessor's right to realize upon or enforce any other security now or hereafter held by the Lessor, it being agreed that Lessor shall be entitled to enforce this instrument and any other security now or hereafter held by Lessor in such order and manner as Lessor may 26 31 determine in its absolute discretion. No remedy herein conferred upon or reserved to Lessor is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Operative Agreements to Lessor or to which it may otherwise be entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by Lessor. In no event shall Lessor, in the exercise of the remedies provided in this instrument, be deemed a "mortgagee in possession," and Lessor shall not In any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies. ARTICLE XVIII 18.1 LESSOR'S RIGHT TO CURE LESSEE'S LEASE DEFAULTS. Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including without limitation the failure by Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property, and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of any lessee. All out-of-pocket costs and expenses so incurred (including without limitation fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand. ARTICLE XIX 19.1 PROVISIONS RELATING TO LESSEE'S EXERCISE OF ITS PURCHASE OPTION. Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option, upon the date on which this Lease is to terminate with respect to any Property, and upon tender by Lessee of the amounts set forth in Sections 16.2(b) or 20.2, as applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment (by deed or other appropriate instrument) of Lessor's entire interest in such Property, in each case in recordable form and otherwise in conformity with local custom and free and clear of any Lessor Liens attributable to Lessor but without any other warranties (of title or otherwise) from Lessor. Such Property shall be conveyed to Lessee "AS-IS, "WHERE-IS" and in then present physical condition. 19.2 [INTENTIONALLY OMITTED] 27 32 ARTICLE XX 20.1 PURCHASE OPTION OR SALE OPTION-GENERAL PROVISIONS. Not less than one hundred twenty (120) days and no more than one hundred eighty (180) days prior to the Expiration Date or (respecting the Purchase Option only) any Payment Date, Lessee may give Lessor irrevocable written notice (the "Election Notice") that Lessee is electing to exercise either (a) the option to purchase all, but not less than all, the Properties on the Expiration Date or on the Payment Date specified in the Election Notice or in accordance with the Parcel Sale Requirements, the option to purchase at least one year prior to the Expiration Date one or more, but less than all, the Properties (or a portion of any Property) on the Payment Date specified in the Election Notice for purchase (the "Purchase Option") or (b) with respect to an Election Notice given in connection with the Expiration Date only, the option to remarket all, but not less than all, the Properties to a Person other than Lessee or any Affiliate of Lessee and cause a sale of such Properties to occur on the Expiration Date pursuant to the terms of Section 22.1 (the "Sale Option"). Regarding the purchase of one or more, but less than all, the Properties (or a portion of any Property), at Lessee's option and without the consent of any Financing Party, Lessee may provide irrevocable written notice to Lessor not less than one hundred twenty (120) days and no more than one hundred eighty days prior to any Payment Date (in all cases at least one year prior to the Expiration Date) that Lessee desires to purchase one or more, but less than all, the Properties (or a portion of any Property), if (i) such Property or portion of any Property to be purchased by Lessee has a separate legal and tax parcel, (ii) the conveyance of such Property or portion of such Property will not impair the access, use, occupancy or fair market value of the Properties remaining in the Trust, (iii) the Properties remaining in the Trust (A) shall constitute one or more legal and tax parcels, (B) shall contain at least one building, (C) shall be viable as a separate property in compliance with Legal Requirements and (D) shall have a fair market value of 100% or more of the Property Cost allocable to such remaining Properties and (iv) at the time of sale to Lessee of such Property or portion of any Property, no Default or Event of Default shall have occurred and be continuing (other than those that will be cured by the payment of the Termination Value for such Property (or a portion of any Property)) (the terms referenced in the foregoing subsections (i), (ii), (iii) and (iv), may be referred to as the "Parcel Sale Requirements"). To the extent the Parcel Sale Requirements are satisfied, Lessor shall sell such Property or portion of such Property to Lessee. If Lessee does not give an Election Notice indicating the Purchase Option or the Sale Option at least one hundred twenty (120) days and not more than one hundred eighty (180) days prior to the Expiration Date, then, unless such Expiration Date is the final Expiration Date to which the Term may be extended, the term of this Lease shall be extended in accordance with Section 2.2 hereof; if such Expiration Date is the final Expiration Date, then Lessee shall be deemed to have elected the Purchase Option. If Lessee shall either (i) elect (or be deemed to have elected) to exercise the Purchase Option or (ii) elect the Sale Option and fail to cause all, but not less than all, the Properties to be sold in accordance with the terms of Section 22.1 on the Expiration Date, then in either case Lessee shall pay to Lessor on the date on which such purchase or sale is scheduled to occur an amount equal to the Termination Value for all, but not less than all, the Properties (which the parties do not intend to be a "bargain" purchase price) and, upon receipt of such amounts and satisfaction of such obligations, Lessor shall transfer to Lessee all of Lessor's 28 33 right, title and interest in and to all, but not less than all, the Properties in accordance with Section 20.2. 20.2 LESSEE PURCHASE OPTION. Provided, no Default or Event of Default shall have occurred and be continuing (other than those that will be cured by the payment of the Termination Value for all the Properties) and provided, that the Election Notice has been appropriately given specifying the Purchase Option, Lessee shall purchase all the Properties (or if applicable, and upon satisfaction of all Parcel Sale Requirements, one or more, but less than all, the Properties or a portion of any Property pursuant to a notice provided in accordance with Section 20.1) on the Expiration Date or Payment Date at a price equal to the Termination Value for such Properties (which the parties do not intend to be a "bargain" purchase price). Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option, upon the date on which this Lease is to terminate with respect to a Property or all of the Properties, and upon tender by Lessee of the amounts set forth in Section 16.2(b) or this Section 20.2, as applicable, Lessor shall execute, acknowledge (where required) and deliver to Lessee, at Lessee's cost and expense, each of the following: (a) a special or limited warranty Deed conveying each Property to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (b) a Bill of Sale conveying each Property (to the extent it is personal property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (c) any real estate tax affidavit or other document required by law to be executed and filed in order to record the applicable Deed; and (d) FIRPTA affidavits. All of the foregoing documentation must be in form and substance reasonably satisfactory to Lessor. The applicable Property shall be conveyed to Lessee "AS-IS, WHERE-IS" and in then present physical condition. If any Property is the subject of remediation efforts respecting Hazardous Substances at the Expiration Date (other than with respect to Pre-Existing Environmental Conditions then being addressed by Raytheon or Fairchild, pursuant to the Indemnity Agreement or the Purchase Agreement) which could materially and adversely impact the Fair Market Sales Value of such Property (with materiality determined in each case in Lessor's reasonable discretion), then Lessee shall be obligated to purchase each such Property pursuant to Section 20.2. On the Expiration Date and/or any Payment Date on which Lessee has elected to exercise its Purchase Option, Lessee shall pay (or cause to be paid) to Lessor, the Agent and all other parties, as appropriate, the sum of all costs and expenses incurred by any such party in connection with the election by Lessee to exercise its Purchase Option and all Rent and all other amounts then due and payable or accrued under this Lease and/or any other Operative Agreement. 29 34 20.3 THIRD PARTY SALE OPTION. (a) Provided, that (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Election Notice has been appropriately given specifying the Sale Option. Lessee shall undertake to cause a sale of the Properties on the Expiration Date (all as specified in the Election Notice) in accordance with the provisions of Section 22.1 hereof. (b) In the event Lessee exercises the Sale Option then, as soon as practicable and in all events not less than sixty (60) days prior to the Expiration Date, Lessee shall cause to be delivered to Lessor environmental site assessments for each of the Properties recently prepared (no more than thirty (30) days old prior to the Sale Date) by an independent recognized professional reasonably acceptable to Lessor and in form, scope and content reasonably satisfactory to Lessor. Lessor (at the direction of the Agent) shall elect whether the costs incurred respecting the above-referenced environmental site assessments shall be paid by either (i) sales proceeds from the Properties, (ii) Lessor (but only the extent amounts are available therefor with respect to the Available Commitments and the Available Holder Commitments or each Lender and each Holder approves the necessary increases in the Available Commitments and the Available Holder Commitments to fund such costs) or (iii) Lessee; provided, amounts funded by the Lenders and the Holders with respect to the foregoing shall be added to the Property Cost of each applicable Property; provided, further, amounts funded by Lessee with respect to the foregoing shall be a part of (and limited by) the Maximum Residual Guarantee Amount. In the event that Lessor shall not have received such environmental site assessments by the date sixty (60) days prior to the Expiration Date or in the event that such environmental assessment shall reveal the existence of any material violation of Environmental Laws, other material Environmental Violation or potential material Environmental Violation (with materiality determined in each case by Lessor in its reasonable discretion) other than the Pre-Existing Environmental Conditions, then Lessee on the Expiration Date shall pay to Lessor an amount equal to the Termination Value for all the Properties and any and all other amounts due and owing hereunder. Upon receipt of such payment and all other amounts due under the Operative Agreements, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to all the Properties in accordance with Section 19.1. ARTICLE XXI 21.1 [INTENTIONALLY OMITTED]. 30 35 ARTICLE XXII 22.1 SALE PROCEDURE. (a) During the Marketing Period, Lessee, on behalf of Lessor, shall obtain bids for the cash purchase of all the Properties in connection with a sale to one (1) or more third party purchasers to be consummated on the Expiration date or such earlier date as is acceptable to the Agent and the Lessee (the "Sale Date") for the highest price available, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for each such Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. On the Sale Date, all Properties then subject to this Lease shall be sold for one aggregate cash price amount for all such Properties, without differentiation of such amount on a Property-by-Property basis. All such prospective purchasers must be Persons other than Lessee or any Affiliate of Lessee. On the Sale Date, Lessee shall pay (or cause to be paid) to Lessor and all other parties, as appropriate, all Rent and all other amounts then due and payable or accrued under this Lease and/or any other Operative Agreement and Lessor (at the direction of the Agent) shall elect whether the costs and expenses incurred by Lessor and/or the Agent respecting the sale of one or more Properties shall be paid by either (i) sales proceeds from the Properties, (ii) Lessor (but only the extent amounts are available therefor with respect to the Available Commitments and the Available Holder Commitments or each Lender and each Holder approves the necessary increases in the Available Commitments and the Available Holder Commitments to fund such costs and expenses) or (iii) Lessee; provided, amounts funded by the Lenders and the Holders with respect to such costs and expenses shall be added to the Property Cost of each applicable Property; provided, further, amounts funded by Lessee with respect to such costs and expenses shall be a part of (and limited by) the Maximum Residual Guarantee Amount. Lessor may reject any and all bids and may solicit and obtain bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may not reject any bid submitted by Lessee if such bid, in the aggregate, is greater than or equal to the sum of the Limited Recourse Amount for all the Properties, and represents a bona fide offer from one (1) or more third party purchasers. If the highest price which a prospective purchaser or the prospective purchasers shall have offered to pay for all the Properties on the Sale Date is less than the sum of the Limited Recourse Amount for all the Properties or if such bids do not represent bona fide offers from one (1) or more third parties or if there are no bids, Lessor may elect to retain one or more of the Properties by giving Lessee at least five (5) Business Days prior written notice of Lessor's election to retain the same, and promptly upon receipt of such notice, Lessee shall surrender, or cause to be surrendered, each of the Properties specified in such notice in accordance with the terms and conditions of Section 10.1. If Lessor does not elect to retain all the Properties, then Lessee shall cause the sale of all of the Properties to be completed on the Sale Date in accordance with this Section 22.1 and the 31 36 maximum liability of the Lessee with respect thereto shall be as provided pursuant to Section 22.1(b). Upon acceptance of any bid. Lessor agrees, at Lessee's request and expense, to execute a contract of sale with respect to such sale, so long as the same Is consistent with the terms of this Article 22 and provides by its terms that it is nonrecourse to Lessor. Unless Lessor shall have elected to retain one or more of the Properties, pursuant to the provisions of the preceding paragraph, Lessee shall arrange for Lessor to sell all the Properties free and clear of the Lien of this Lease and any Lessor Liens, without recourse or warranty (of title or otherwise), for cash on the Sale Date to the purchaser or purchasers offering the highest cash sales price, as identified by Lessee or Lessor, as the case may be. To effect such transfer and assignment, Lessor shall execute, acknowledge (where required) and deliver to the appropriate purchaser each of the following: (a) special or limited warranty Deeds conveying each such Property (to the extent it is real property titled to Lessor) to the appropriate purchaser free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (b) a Bill of Sale conveying each such Property (to the extent it is personal property) titled to Lessor to the appropriate purchaser free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (c) any real estate tax affidavit or other document required by law to be executed and filed in order to record each Deed; and (d) FIRPTA affidavits, as appropriate. All of the foregoing documentation must be in form and substance reasonably satisfactory to Lessor. Lessee shall surrender the Properties so sold or subject to such documents to each purchaser in the condition specified in Section 10.1, or in such other condition as may be agreed between Lessee and such purchaser. Neither Lessor nor Lessee shall take or fail to take any action which would have the effect of unreasonably discouraging bona fide third party bids for any Property. If each of the Properties is not either (i) sold on the Sale Date in accordance with the terms of this Section 22.1, or (ii) retained by Lessor pursuant to an affirmative election made by Lessor pursuant to the second sentence of the second paragraph of this Section 22.1 (a), then (x) Lessee shall be obligated to pay Lessor on the Sale Date an amount equal to the aggregate Termination Value for all the Properties less any sales proceeds received by the Lessor, and (y) Lessor shall transfer each applicable Property to Lessee in accordance with Section 20.2. (b) If the Properties are sold on a Sale Date to one (1) or more third party purchasers in accordance with the terms of Section 22.1(a) and the aggregate purchase price paid for all the Properties is less than the sum of the aggregate Property Cost for all the Properties (hereinafter such difference shall be referred to as the "Deficiency Balance"), then Lessee hereby unconditionally promises to pay to Lessor on the Sale Date all Rent and all other amounts then due and owing pursuant to the Operative Agreements and the lesser of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for all the Properties. On a Sale Date if (x) Lessor receives the aggregate Termination Value for all the Properties from one (1) or more third party purchasers, (y) Lessor and such other parties receive all other amounts specified in the last sentence of the first paragraph of Section 22.1(a) and (z) the aggregate purchase price paid for all the 32 37 Properties on such date plus the amount paid by Lessee to Lessor pursuant to the terms of this Section 22.(b) exceeds the sum of the aggregate Property Cost for all the Properties, then Lessor shall promptly pay Lessee such excess. The obligation to pay any such excess to Lessee shall survive the termination of this Lease. If one or more of the Properties are retained by Lessor pursuant to an affirmative election made by Lessor pursuant to the provisions of Section 22.1(a), then Lessee hereby unconditionally promises to pay to Lessor on the Sale Date all Rent and all other amounts then due and owing pursuant to the Operative Agreements and an amount equal to the Maximum Residual Guarantee Amount for the Properties so retained. Any payment of the foregoing amounts described in this Section 22.1(b) shall be made together with a payment of all other amounts referenced in the last sentence of the first paragraph of Section 22.1 (a). (c) In the event that all the Properties are either sold to one (1) or more third party purchasers on the Sale Date or retained by Lessor in connection with an affirmative election made by Lessor pursuant to the provisions of Section 22.1(a), then in either case on the applicable Sale Date Lessee shall provide Lessor or such third party purchaser (unless otherwise agreed by such third party purchaser) with (i) all non-proprietary permits, certificates of occupancy, governmental licenses and authorizations necessary to use, operate, repair, access and maintain each such Property for the purpose it is being used by Lessee, and (ii) such non-proprietary manuals, permits, easements, licenses, intellectual property, know-how, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, operation, repair, access to or maintenance of each such Property for its intended purpose or otherwise as Lessor or such third party purchaser(s) shall reasonably request (and a royalty-free license or similar agreement to effectuate the foregoing on terms reasonably agreeable to Lessor or such third party purchasers), as applicable). All such assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this paragraph (c) shall be in form reasonably satisfactory to Lessor or such third party purchaser(s), as applicable, and shall be fully assignable (including without limitation both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. 22.2 APPLICATION OF PROCEEDS OF SALE. In the event Lessee receives any proceeds of sale of any Property, such proceeds shall be deemed to have been received in trust on behalf of Lessor and Lessee shall promptly remit such proceeds to Lessor. Lessor shall apply the proceeds of sale of any Property in the following order of priority: (a) FIRST, to pay or to reimburse Lessor (and/or the Agent, as the case may be) for the payment of all reasonable costs and expenses incurred by Lessor (and/or the Agent, as the case may be) in connection with the sale (to the extent Lessee has not satisfied its obligation to pay such costs and expenses); 33 38 (b) SECOND, so long as the Credit Agreement is in effect and any Loans or Holder Advances or any amount is owing to the Financing Parties under any Operative Agreement, to the Agent to be applied pursuant to intercreditor provisions among Lessor, the Lenders and the Holders contained in the Operative Agreements; and (c) THIRD, to Lessee. 22.3 INDEMNITY FOR EXCESSIVE WEAR. If the proceeds of the sale described in Section 22.1 with respect to the Properties shall be less than the Limited Recourse Amount with respect to the Properties, and at the time of such sale it shall have been reasonably determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Properties shall have been impaired by greater than normal and expected wear and tear during the term of the Lease, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Sale Proceeds Shortfall, whichever amount is less. 22.4 APPRAISAL PROCEDURE. For determining the Fair Market Sales Value of the Properties or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor and Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure under the applicable section of the Lease, and if they cannot agree within ten (10) days, then two (2) qualified appraisers, one (1) chosen by Lessee and one (1) chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two (2) appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two (2) appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three (3) appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two (2) shall be discarded and such average shall be binding on Lessor and Lessee; provided, that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of the appraiser appointed by Lessee shall be paid by Lessee; the fees and expenses of the appraiser appointed by Lessor shall be paid by Lessor (such fees and expenses not being indemnified pursuant to Section 11 of the Participation Agreement); and the fees and expenses of the third appraiser shall be divided equally between Lessee and Lessor. 34 39 22.5 CERTAIN OBLIGATIONS CONTINUE. During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Properties (including without limitation the installment of Basic Rent due on the Expiration Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, if any, the Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any, and all other amounts due to Lessor or any other Person with respect to all Properties or any Operative Agreement. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. ARTICLE XXIII 23.1 HOLDING OVER. If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease as to such Property (unless such Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to such Property and Lessee shall continue to pay Basic Rent at the lesser of the highest lawful rate and one hundred ten percent (110%) of the last payment of Basic Rent due with respect to such Property prior to such expiration or earlier termination of this Lease. Such Basic Rent shall be payable from time to time upon demand by Lessor and such additional amount of Basic Rent shall be applied by Lessor ratably to the Lenders and the Holders based on their relative amounts of the then outstanding aggregate Property Cost for all Properties. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue their occupancy and use of such Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property (unless such Property is conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of such Property or exercising any other remedy available to Lessor at law or in equity. ARTICLE XXIV 24.1 RISK OF LOSS. Subject to the terms and limitations of the Agency Agreement, during the Term, unless Lessee shall not be in actual possession of any Property in question solely by reason of Lessor's exercise of its remedies of dispossession under Article XVII, the risk of loss or decrease in the enjoyment and beneficial use of such Property as a result of the damage or destruction 35 40 thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor, except for Lessor's obligation to advance in accordance with the terms of this Lease insurance proceeds received by Lessor pursuant to the coverages referenced in Article XIV. ARTICLE XXV 25.1 ASSIGNMENT. (a) Lessee may not assign this Lease or any of its rights or obligations hereunder or with respect to any Property in whole or in part to any Person (other than to a wholly-owned Subsidiary of Lessee or the Parent) without the prior written consent of the Agent, the Lenders, the Holders and Lessor. (b) No assignment by Lessee (referenced in this Section 25.1 or otherwise) or other relinquishment of possession to any Property shall in any way discharge or diminish any of the obligations of Lessee to Lessor hereunder and Lessee shall remain directly and primarily liable under the Operative Agreements as to any rights or obligations assigned by Lessee or regarding any Property in which rights or obligations have been assigned or otherwise transferred. 25.2 SUBLEASES. (a) Promptly, but in any event within five (5) Business Days, following the execution and delivery of any sublease permitted by this Article XXV, Lessee shall notify Lessor of the execution of such sublease and shall collaterally assign such sublease to the Lessor as security for Lessee's obligations hereunder and under any other Operative Agreement. Any such collateral assignment shall be in form and substance reasonably acceptable to the Lessor and the Agent. As of the date of each Lease Supplement, Lessee shall lease the respective Properties described in such Lease Supplement from Lessor, and any existing tenant respecting such Property shall automatically be deemed to be a subtenant of Lessee and not a tenant of Lessor. (b) Without the prior written consent of the Agent, any Lender, any Holder or Lessor and subject to the other provisions of this Section 25.2, Lessee may sublet (i) any Property or portion thereof to any wholly-owned Subsidiary of Lessee and (ii) up to 50% of the Properties (based on the square footage of the Improvements constituting a Permitted Facility) then subject to this Lease to any Person which is not an Affiliate of Lessee. Except as referenced in the immediately preceding sentence, no other subleases shall be permitted unless consented to in writing by Lessor which consent shall not be unreasonably withheld or delayed. All subleasing shall be done on market terms and shall in no way diminish the fair market value or useful life of any applicable Property. 36 41 (c) No sublease (referenced in this Section 25.2 or otherwise) or other relinquishment of possession to any Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or diminish the fair market value of any Property. Lessee shall remain directly and primarily liable under this Lease as to such Property, or portion thereof, so sublet. During the Basic Term, the term of any such sublease shall not extend beyond the Basic Term. During any Renewal Term, the term of any such sublease shall not extend beyond such Renewal Term. Each sublease shall be expressly subject and subordinate to this Lease. ARTICLE XXVI 26.1 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVII 27.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of all or any portion of any Property or of any part of any thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. 27.2 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) any right, title or interest in any Property, (c) any Notes, or (d) a beneficial interest in Lessor. ARTICLE XXVIII 28.1 [RESERVED] 37 42 ARTICLE XXIX 29.1 NOTICES. All notices required or permitted to be given under this Lease shall be in writing and delivered as provided in the Participation Agreement. ARTICLE XXX 30.1 MISCELLANEOUS. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any provision of this Lease shall be held to be unenforceable in any Jurisdiction, such unenforceability shall not affect the enforceability of any other provision of this Lease and such jurisdiction or of such provision or of any other provision hereof in any other jurisdiction. 30.2 AMENDMENTS AND MODIFICATIONS. Neither this Lease nor any Lease Supplement may be amended, waived, discharged or terminated except in accordance with the provisions of Section 12.4 of the Participation Agreement. 30.3 SUCCESSORS AND ASSIGNS. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4 HEADINGS AND TABLE OF CONTENTS. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof 30.5 COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one (1) and the same instrument. 30.6 GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE 38 43 OF NEW YORK, EXCEPT TO THE EXTENT THE LAWS OF THE STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED TO APPLY. 30.7 CALCULATION OF RENT. All calculation of Rent payable hereunder shall be computed based on the actual number of days elapsed over a year of three hundred sixty (360) days or, to the extent such Rent is based on the Prime Lending Rate, three hundred sixty-five (365) (or three hundred sixty-six (366), as applicable) days. 30.8 MEMORANDA OF LEASE AND LEASE SUPPLEMENTS. This Lease shall not be recorded; provided, Lessor and Lessee shall promptly record (a) a memorandum of this Lease and the applicable Lease Supplement (in substantially the form of Exhibit B attached hereto) or a short form lease (in form and substance reasonably satisfactory to Lessor) regarding each Property promptly after the acquisition thereof in the local filing office with respect thereto and as required under applicable law to sufficiently evidence this Lease and any such Lease Supplement in the applicable real estate filing records. Lessor (at the direction of the Agent) shall elect whether the costs and expenses incurred by Lessor and/or the Agent respecting the recordation of the above-referenced items shall be paid by either (i) Lessor (but only the extent amounts are available therefor with respect to the Available Commitments and the Available Holder Commitments or each Lender and each Holder approves the necessary increases in the Available Commitments and the Available Holder Commitments to fund such costs and expenses) or (ii) Lessee; provided, amounts funded by the Lenders and the Holders with respect to such costs and expenses shall be added to the Property Cost of each applicable Property; provided, further, amounts funded by Lessee with respect to such costs and expenses shall be a part of (and limited by) the Maximum Residual Guarantee Amount. 30.9 ALLOCATIONS BETWEEN THE LENDERS AND THE HOLDERS. Notwithstanding any other term or provision of this Lease to the contrary, the allocations of the proceeds of the Properties and any and all other Rent and other amounts received hereunder shall be subject to the inter-creditor provisions between the Lenders and the Holders contained in the Operative Agreements (or as otherwise agreed among the Lenders and the Holders from time to time). 30.10 LIMITATIONS ON RECOURSE. Notwithstanding anything contained in this Lease to the contrary, Lessee agrees to look solely to Lessor's estate and interest in the Properties, the proceeds of any sale thereof, any insurance proceeds from insurance coverage required pursuant to the Lease or any condemnation or similar proceeds received by Lessor in connection with any Property (and in no circumstance to the Agent, the Lenders, the Holders or otherwise to Lessor) for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of 39 44 Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Lessee under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Properties or any other liability of Lessor to Lessee; provided, that Lessor shall be liable in its individual capacity for (a) its own willful misconduct or gross negligence and (b) breach of any of its representations and warranties or covenants under the Operative Agreements. Nothing in this Section shall be interpreted so as to limit the terms of Sections 6.1 or 6.2 or the provisions of Section 12.9 of the Participation Agreement. 30.11 WAIVERS OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LEASE AND FOR ANY COUNTERCLAIM THEREIN. 30.12 EXERCISE OF LESSOR RIGHTS. Lessee hereby acknowledges and agrees that the rights and powers of Lessor under this Lease have been assigned to the Agent pursuant to the terms of the Security Agreement and the other Operative Agreements. Lessor and Lessee hereby acknowledge and agree that (a) the Agent shall, in its discretion, direct and/or act on behalf of Lessor pursuant to the provisions of Sections 8.2(h) and 8.6 of the Participation Agreement, (b) all notices to be given to Lessor shall be given to the Agent and (c) all notices to be given by Lessor may be given by the Agent, at its election. 30.13 SUBMISSION TO JURISDICTION; VENUE. THE PROVISIONS OF THE PARTICIPATION AGREEMENT RELATING TO SUBMISSION TO JURISDICTION AND VENUE ARE HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS. 30.14 USURY SAVINGS PROVISION. IT IS THE INTENT OF THE PARTIES HERETO TO CONFORM TO AND CONTRACT IN STRICT COMPLIANCE WITH APPLICABLE USURY LAW FROM TIME TO TIME IN EFFECT. TO THE EXTENT ANY RENT OR PAYMENTS HEREUNDER ARE HEREINAFTER CHARACTERIZED BY ANY COURT OF COMPETENT JURISDICTION AS THE REPAYMENT OF PRINCIPAL AND INTEREST THEREON, THIS SECTION 30.14 SHALL APPLY. ANY SUCH RENT OR PAYMENTS SO CHARACTERIZED AS INTEREST MAY BE REFERRED TO HEREIN AS "INTEREST." ALL AGREEMENTS AMONG THE PARTIES HERETO ARE HEREBY LIMITED BY THE PROVISIONS OF THIS PARAGRAPH WHICH SHALL OVERRIDE AND CONTROL ALL SUCH 40 45 AGREEMENTS, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER WRITTEN OR ORAL. IN NO WAY, NOR IN ANY EVENT OR CONTINGENCY (INCLUDING WITHOUT LIMITATION PREPAYMENT OR ACCELERATION OF THE MATURITY OF ANY OBLIGATION), SHALL ANY INTEREST TAKEN, RESERVED, CONTRACTED FOR, CHARGED, OR RECEIVED UNDER THIS LEASE OR OTHERWISE. EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMISSIBLE UNDER APPLICABLE LAW. IF, FROM ANY POSSIBLE CONSTRUCTION OF ANY OF THE OPERATIVE AGREEMENTS OR ANY OTHER DOCUMENT OR AGREEMENT, INTEREST WOULD OTHERWISE BE PAYABLE IN EXCESS OF THE MAXIMUM NONUSURIOUS AMOUNT, ANY SUCH CONSTRUCTION SHALL BE SUBJECT TO THE PROVISIONS OF THIS PARAGRAPH AND SUCH AMOUNTS UNDER SUCH DOCUMENTS OR AGREEMENTS SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED UNDER APPLICABLE LAW, WITHOUT THE NECESSITY OF EXECUTION OF ANY AMENDMENT OR NEW DOCUMENT OR AGREEMENT. IF LESSOR SHALL EVER RECEIVE ANYTHING OF VALUE WHICH IS CHARACTERIZED AS INTEREST WITH RESPECT TO THE OBLIGATIONS OWED HEREUNDER OR UNDER APPLICABLE LAW AND WHICH WOULD, APART FROM THIS PROVISION, BE IN EXCESS OF THE MAXIMUM LAWFUL AMOUNT, AN AMOUNT EQUAL TO THE AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE INTEREST SHALL, WITHOUT PENALTY, BE APPLIED TO THE REDUCTION OF THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL AND NOT TO THE PAYMENT OF INTEREST, OR REFUNDED TO LESSEE OR ANY OTHER PAYOR THEREOF, IF AND TO THE EXTENT SUCH AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE EXCEEDS THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL. THE RIGHT TO DEMAND PAYMENT OF ANY AMOUNTS EVIDENCED BY ANY OF THE OPERATIVE AGREEMENTS DOES NOT INCLUDE THE RIGHT TO RECEIVE ANY INTEREST WHICH HAS NOT OTHERWISE ACCRUED ON THE DATE OF SUCH DEMAND, AND LESSOR DOES NOT INTEND TO CHARGE OR RECEIVE ANY UNEARNED INTEREST IN THE EVENT OF SUCH DEMAND. ALL INTEREST PAID OR AGREED TO BE PAID TO LESSOR SHALL, TO THE EXTENT PERMITTED BY APPLICABLE LAW, BE AMORTIZED, PRORATED, ALLOCATED, AND SPREAD THROUGHOUT THE FULL STATED TERM (INCLUDING WITHOUT LIMITATION ANY RENEWAL OR EXTENSION) OF THIS LEASE SO THAT THE AMOUNT OF INTEREST ON ACCOUNT OF SUCH PAYMENTS DOES NOT EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED BY APPLICABLE LAW. [signature page follows] 41 46 IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, as Lessor By: /s/ VAL T. ORTON ------------------------------------ Name: Val T. Orton ------------------------------------ Title: Vice President ---------------------------------- VERITAS SOFTWARE CORPORATION, as Lessee By: ------------------------------------ Name: ------------------------------------ Title: ---------------------------------- Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof NATIONSBANK, N.A., as the Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 47 IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, as Lessor By: ------------------------------------ Name: ------------------------------------ Title: ---------------------------------- VERITAS SOFTWARE CORPORATION, as Lessee By: /s/ KENNETH E. LONCHAR ------------------------------------ Name: Kenneth E. Lonchar ------------------------------------ Title: Senior Vice President ---------------------------------- Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof NATIONSBANK, N.A., as the Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 48 EXHIBIT A TO THE LEASE LEASE SUPPLEMENT NO. _ THIS LEASE SUPPLEMENT NO. _ (this "Lease Supplement") dated as of _____________, 1999 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, as lessor (the "Lessor"), and VERITAS SOFTWARE CORPORATION, a Delaware corporation, as lessee (the "Lessee"). WHEREAS, Lessor is the owner or will be the owner of the Property described on Schedule 1 hereto (the "Leased Property") and wishes to lease the same to Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; RULES OF Usage. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix A to the Participation Agreement, dated as of April 23, 1999, among Lessee, the various parties thereto from time to time, as the Guarantors, Lessor, not individually, except as expressly stated therein, but solely as the Owner Trustee under the VS Trust 1999-1, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, and NationsBank, N.A., as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and Holders, to the extent of their interests, as such may be amended, modified, extended, supplemented, restated and/or replaced from time to time. SECTION 2. THE PROPERTIES. Attached hereto as Schedule 1 is the description of the Leased Property, with an Equipment Schedule attached hereto as Schedule 1-A, an Improvement Schedule attached hereto as Schedule 1-B and a legal description of the Land attached hereto as Schedule 1-C. Effective upon the execution and delivery of this Lease Supplement by Lessor and Lessee, the Leased Property shall be subject to the terms and provisions of the Lease. Without further action, any and all additional Equipment funded under the Operative Agreements and any and all additional Improvements made to the Land shall be deemed to be titled to the Lessor and subject to the terms and conditions of the Lease and this Lease Supplement. SECTION 3. USE OF PROPERTY. At all times during the Term with respect to each Property, Lessee will comply with all obligations under and (to the extent no Event of Default exists and provided, that such exercise will not impair the value of such Property) shall be permitted to exercise all rights and remedies under, all operation and easement agreements and related or similar agreements applicable to such Property. 49 SECTION 4. RATIFICATION; INCORPORATION by REFERENCE. Except as specifically modified hereby, the terms and provisions of the Lease and the Operative Agreements are hereby ratified and confirmed and remain in full force and effect. The Lease is hereby incorporated herein by reference as though restated herein in its entirety. SECTION 5. ORIGINAL LEASE SUPPLEMENT. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the original executed counterpart of this Lease Supplement (the "Original Executed Counterpart"). To the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 6. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THE LAWS OF THE STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED TO APPLY. SECTION 7. COUNTERPART EXECUTION. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one (1) and the same instrument. SECTION 8. MAXIMUM RESIDUAL GUARANTEE AMOUNT. The Maximum Residual Guarantee Amount shall mean an amount equal to [THE LAND COST] [THE PRODUCT OF THE AGGREGATE PROPERTY COST FOR ALL OF THE LEASED PROPERTY TIMES ____ PERCENT ( _%)]. For purposes of the provisions of this Lease Supplement concerning this Lease Supplement constituting a security agreement and fixture filing, the addresses of the debtor (Lessee herein) and the secured party (Lessor herein), from whom information may be obtained about this Lease Supplement, are as set forth on the signature pages hereto. [The remainder of this page has been intentionally left blank.] 2 50 IN, WITNESS WHEREOF, each of the parties hereto has caused this Lease Supplement to be duly executed by an officer thereunto duly authorized as of the date and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not Individually, but solely as the Owner Trustee under the VS Trust 1999-1, as Lessor By:_______________________________________ Name:_____________________________________ Title:____________________________________ First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President VERITAS SOFTWARE CORPORATION, as Lessee By:_______________________________________ Name:_____________________________________ Title:____________________________________ Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones Receipt of this original counterpart of the foregoing Lease Supplement is hereby acknowledged as the date hereof NATIONSBANK, N.A., as the Agent By:_________________________________ Name:_______________________________ Title:______________________________ NationsBank, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Ms. Sharon Ellis 51 STATE OF ______________ ) ) ss: COUNTY OF _____________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _______________ this ____ day of ________, 1999, by ___________________, as _________________ of FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, on behalf of the Owner Trustee. [Notarial Seal] ---------------------------------- Notary Public My commission expires: ____________ STATE OF ______________ ) ) ss: COUNTY OF _____________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _______________ this ____ day of ________, 1999, by ___________________, as _________________ of VERITAS SOFTWARE CORPORATION, a Delaware corporation, on behalf of the corporation. [Notarial Seal] ---------------------------------- Notary Public My commission expires: ____________ STATE OF ______________ ) ) ss: COUNTY OF _____________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _______________ this ____ day of ________, 1999, by ___________________, as _________________ of NATIONSBANK, N.A., a national banking association, as the Agent. [Notarial Seal] ---------------------------------- Notary Public My commission expires: ____________ 52 SCHEDULE I TO LEASE SUPPLEMENT NO.__ (Description of the Leased Property) 53 SCHEDULE 1-A TO LEASE SUPPLEMENT NO.__ (Equipment) 54 SCHEDULE 1-B TO LEASE SUPPLEMENT NO. __ (Improvements) 55 SCHEDULE I-C TO LEASE SUPPLEMENT NO. __ (Land) 56 EXHIBIT B TO THE LEASE [MODIFY OR SUBSTITUTE SHORT FORM LEASE AS NECESSARY FOR LOCAL LAW REQUIREMENTS] Recording Requested By CHICAGO TITLE COMPANY. and When Recorded Return to: MOORE & VAN ALLEN, PLLC 100 North Tryon Street, Floor 47 Charlotte, North Carolina 28202-4003 Attention: Todd Caraway, Esq. MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. AND DEED OF TRUST dated as of April __, 1999 among VERITAS SOFTWARE CORPORATION, as the Lessee, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually but solely as Owner Trustee under the VS Trust 1999-1, as the Lessor, and CHICAGO TITLE COMPANY, as Trustee Location of Premises: County of Santa Clara State of California 57 THIS MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. __ AND DEED OF TRUST ("Memorandum"), dated as of April ____________, 1999, is by and among FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the VS Trust 1999-1, with an office at 79 South Main Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Lessor"), VERITAS SOFTWARE CORPORATION, a Delaware corporation, with an office at 1600 Plymouth Street, Mountain View, California 94043 (hereinafter referred to as "Lessee") and CHICAGO TITLE COMPANY, a __________ corporation, with an office at 110 West Taylor Street, San Jose, California 95110 (hereinafter referred to as "Trustee"). WITNESSETH: That for value received, Lessor and Lessee do hereby covenant, promise and agree as follows: 1. CERTAIN DEFINITIONS AND REFERENCE TERMS. To the extent any capitalized term is not defined herein, such term shall have the meaning set forth in Appendix A to that certain Participation Agreement dated as of April 23, 1999 by and among the Grantor, Veritas Software Corporation, a Delaware corporation, the various parties thereto from time to time, as the Guarantors, the various banks and other lending institutions which are parties thereto from time to time, as Holders and Lenders, and NationsBank, N.A., as Agent for the Lenders and the Holders. 2. DEMISED PREMISES AND DATE OF LEASE. Lessor has leased to Lessee, and Lessee has leased from Lessor, for the Term (as hereinafter defined), certain real property and other property located in Santa Clara County, California which is described in the attached Schedule I (the "Property"), pursuant to the terms of a Master Lease Agreement between Lessor and Lessee dated as of April 23, 1999 (as such may be amended, modified, extended, supplemented, restated and/or replaced from time to time, "Lease") and a Lease Supplement No. __ between Lessor and Lessee dated as of April __, 1999 (the "Lease Supplement") 3. TERM, RENEWAL, EXTENSION AND PURCHASE OPTION. The term of the Lease for the Property ("Term") commenced as of _________ __, 1999 and shall end as of 19__, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. The Lease contains provisions for renewal and extension. The tenant has a purchase option under the Lease. 4. TAX PAYER NUMBERS. Lessor's tax payer number:____________ Lessee's tax payer number:____________ 58 5. DEED OF TRUST; POWER OF SALE. (a) It is the intent of the parties that: (i) the Lease constitutes an operating lease from Lessor to the Lessee for purposes of the Lessee's financial reporting, (ii) the Lease and other transactions contemplated hereby preserve ownership of the Properties in the Lessee for federal and state income tax and bankruptcy purposes, (ii) the Lease grants to Lessor a Lien on the Property covered thereby, and (iv) the obligations of the Lessee to pay Basic Rent and any part of the Termination Value shall be treated as payments of interest and principal, respectively, for federal and state income tax and bankruptcy purposes. Lessor shall be deemed to have a valid and binding security interest in and Lien on the Property, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Agreements (it being understood and agreed that the Lessee does hereby grant a Lien, and convey, transfer, assign, mortgage and warrant to Lessor and its successors, transferees and assigns, the Property and any proceeds or products thereof, to have and hold the same as collateral security for the payment and performance of the obligations of the Lessee under the Operative Agreements) each of the parties hereto agrees that it will not, nor will it permit any Affiliate to at any time, take any action or fail to take any action with respect to the preparation or filing or any income tax return, including an amended income tax return, to the extent that such action or such failure to take action would be inconsistent with the intention of the parties expressed in this Section 5. (b) Specifically, without limiting the generality of Section 5(a), the parties hereto intend and agree that in the event of any insolvency or receivership proceeds or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting Lessee or Lessor or any collection actions, the transactions evidenced by the Lease and the Operative Agreements shall be regarded as loans made by the Lenders and the Holders to the Lessee. (c) Specifically, without limiting the generality of Section 5(b), the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of the exercise of remedies under the Operative Agreements, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any state or commonwealth thereof affecting the Lessee and the Lessor, or any enforcement or collection actions, the transactions evidenced by the Lease are loans made by the Lenders and the Holders as unrelated third party lenders to the Lessee secured by the Property (it being understood that the Lessee hereby mortgages, grants, bargains, sells, releases, confirms, conveys, assigns, transfers and sets over to the Lessor, and grants a security interest in, the Property (consisting of a leasehold deed of trust with respect to all right, title and interest of the Lessee in and to the Land and a fee deed of trust with respect to all right, title and interest of Lessee in and to the fee title to, and reversionary interest in, the Property) and a leasehold deed of trust on the Lessee's leasehold estate under the Lease, all to secure such loans, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease and the other Operative Agreements shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void. 2 59 As additional security for the Rent, the Termination Value and all other sums owed to the Lessor by the Lessee under the Lease, the Lessee does hereby grant, bargain, sell, transfer and convey unto the Trustee, its successors in trust and assigns, IN TRUST, WITH POWER OF SALE, all of the Lessee's right, title and interest in and to the Property, together with all of the right, power and authority of the Lessee to alter, modify or change the terms, conditions and provisions of the Lease and any other lease pertaining to the Property, to consent to any request made by a tenant or landlord pursuant thereto, or to surrender, cancel or terminate the same or to accept any surrender, cancellation or termination of the same, together with all of the options, rights, powers and privileges of the Lessee under any lease pertaining to the Property, whether heretofore or hereafter existing, including, without limitation, the rights and options to purchase the Property contained in Articles XIX and XX of the Lease, and all present and future right, title and interest of the Lessee in and to (i) all refunds, tax abatement agreements, rebates, reserves, deferred payments, deposits, cost; savings, awards and payments of any kind due from or payable by (a) any Governmental Authority, or (b) any insurance or utility company, in each case under clause (a) or (b) above in respect of the Property, and (ii) all refunds, rebates and payments of any kind due from or payable by any Governmental Authority for any taxes, assessments, or governmental or quasi-governmental charges or levies imposed upon the Lessee in respect of the Property, and all plans and specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Property or any construction on the Property, all proceeds (including claims and demands therefor) of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including without limitation the proceeds of insurance and condemnation awards in respect of the Property or any portion thereof, all additional estates, rights and interests hereafter acquired by the Lessee in the Property, or any portion thereof, together with all proceeds of the conversion, whether voluntary or involuntary, of any of the Property into cash or other liquid claims, including without limitation, all awards, payments or proceeds, including interest thereon, and the right to receive the same, which may be made as a result of any casualty, any exercise of the right of eminent domain or deed in lieu thereof, any injury to the Property and any defect in title in the Property or other matter insured under any policy of title insurance, together with attorney's fees, costs and disbursements incurred by the Lessor in connection with the collection of such awards, payments and proceeds, and the Lessee further grants to the Lessor, pursuant to the California Uniform Commercial Code (the "UCC"), a security interest in all present and future right, title and interest of the Lessee in and to any portion of the foregoing property for which a security interest may be created under the UCC. To have and to hold the same whether now owned or held or hereafter acquired unto the Trustee, its successors-in-trust forever, IN TRUST, WITH POWER OF SALE, to secure to the Lessor the payment of the Rent, the Termination Value and all other sums owing to the Lessor under the Lease and the performance and observance of the terms, covenants, warranties, conditions, agreements and obligations under the Lease. If the Lessee shall pay all sums due under the Lease when due according to the terms thereof and shall otherwise fully and properly perform and comply with all of the obligations, agreements, terms and conditions of the Lease, then this conveyance shall become null and void. 3 60 In the event of the occurrence of a Lease Event of Default, then the Lessor shall have all rights and remedies set forth in the Lease including, without limitation the right to foreclose its interest (or cause such interest to be foreclosed) in any or all of the Property in accordance with applicable law. The Trustee and the Lessor and each of them are authorized prior or subsequent to the institution of any foreclosure proceedings to enter upon the Property or any part thereof and to take possession of the Property and exercise without interference from the Lessee, any and all rights which the Lessee has with respect to the management, possession, operation, protection or preservation of the Property: provided, however, that Lessee shall be entitled, up to 30 days after the termination of the Lessee's occupancy of the Property to enter the Property during normal business hours for the purpose of removing its personal property and trade fixtures therefrom at its expense, provided that such personal property and trade fixtures are not Improvements and Lessee repairs any damage to the Improvements caused by such removal. It is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE LESSEE UNDER THIS INSTRUMENT. The proceeds of any sale held by Trustee or Lessor or any receiver or public officer in foreclosure of the liens and security interests evidenced hereby shall be applied first to all costs and expenses of the sale, including but not limited to, reasonable Trustee's fees and then as provided in Section 22.2 of the Lease. If the Lessor so elects, the Trustee may sell any personal property covered by this instrument at one or more separate sales in any manner permitted by the UCC. One or more exercises of the powers herein granted shall not extinguish nor exhaust such powers until the entire Property is sold or until the entire amounts evidenced and/or secured by the Lease and the Operative Agreements is paid in full. (d) Specifically, but without limiting the generality of Section 5(b), the Lessor and the Lessee further intend and agree that, with respect to that portion of the Property constituting personal property, for the purpose of securing the Lessee's obligations for the repayment, of the above-described obligations to the Lessor, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the UCC; (ii) the conveyance provided for hereby shall be deemed to be a grant by the Lessee to the Lessor of a lien and security interest in all of the Lessee's present and future right, title and interest in and to such portion of the Property, including but not limited to the Lessee's leasehold estate therein and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property to secure such obligations, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns, forever, provided always that these presents are upon the express condition that, if all amounts due under the Lease shall have been paid and satisfied in full, then this instrument and the estate hereby granted shall cease and become void; (iii) the possession by the Lessor of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be 4 61 "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the UCC: and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. The Lessor and the Lessee shall, to the extent consistent with this Memorandum, take such actions and execute, deliver, file and record such other documents, Financing statements, mortgages and deeds of trust as may be necessary to ensure that. if the Lease were deemed create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest with priority over all Liens other than Permitted Liens, under applicable law and will be maintained as such throughout the Term. 6. EFFECT OF MEMORANDUM. The purpose of this instrument is to give notice of the Lease and the Lease Supplement and their respective terms, covenants and conditions to the same extent as if the Lease and the Lease Supplement were fully set forth herein. This Memorandum shall not modify in any mariner the terms, conditions or intent of the Lease or the Lease Supplement and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or the Lease Supplement or determine the intent of the parties under the Lease or the Lease Supplement. 7. PURCHASE OPTION IN FAVOR OF Lessee. Lessee has a Purchase Option (as such term is defined in Section 20.1 of the Lease) respecting the Property pursuant to and in accordance with the terms and provisions of the Lease. 8. RATIFICATION. The terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. In the event of any conflict between the terms of the Lease and the terms of this Memorandum, the terms of the Lease shall control. 9. GOVERNING LAW. THE LEASE AND THIS MEMORANDUM SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF EXCEPT TO THE EXTENT THE LAWS OF CALIFORNIA ARE REQUIRED TO APPLY WITH RESPECT TO THE RECORDING AND ENFORCEMENT OF THIS MEMORANDUM. 10. COUNTERPART EXECUTION. This Memorandum may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. 11. FUTURE ADVANCES; REVOLVING CREDIT. In the event a court of competent jurisdiction rules that this instrument constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties pursuant to Section 5 hereof, then this instrument will be deemed given to secure not only existing financing, but also future advances made pursuant to or as provided in the Lease, whether such advances are obligatory or to be made at the option of the Lessor, or otherwise, to the same extent as if such future advances were made on the date of 5 62 execution of this instrument, although there may be no advance made at the time of execution hereof, and although there may be no financing outstanding at the time any advance is made. To the fullest extent permitted by law, the lien of this instrument shall be valid as to all such amounts, including all future advances, from the time this instrument is recorded. [The remainder of this page has been intentionally left blank.] 6 63 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the VS Trust 1999-1 By:______________________________________ Name:____________________________________ Title:___________________________________ First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attn: Val T. Orton Vice President LESSEE: VERITAS SOFTWARE CORPORATION By:______________________________________ Name:____________________________________ Title:___________________________________ Veritas Software Corporation 1600 Plymouth Street Mountain View, California 94043 Attn: Jay Jones 64 STATE OF____________________ COUNTY OF___________________ On_________________before me,________________________, Notary Public in and for said County and State, personally appeared__________________________ as ______________________of First Security Bank, National Association, not individually but solely as Owner Trustee under the VS Trust 1999-1 personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted executed the instrument. WITNESS my hand and official seal. Signature___________________________ (Seal) 65 STATE OF____________________ COUNTY OF___________________ On_____________________ before me,__________________________, Notary Public in and for said County and State, personally appeared___________________________ , as_________________________ of Veritas Software Corporation, a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted executed the instrument. WITNESS my hand and official seal. Signature___________________________ (Seal) 66 SCHEDULE 1 (Description of Property) B-1 EX-23.01 16 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 27, 1999 in Amendment No. 2 to the Registration Statement (Form S-1) and related Prospectus of Veritas Software Corporation for the registration of shares of its common stock. /s/ Ernst & Young LLP San Jose, California August 4, 1999 EX-23.02 17 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.02 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated September 21, 1998 (except for the second paragraph of the Summary of Significant Accounting Policies footnote, as to which the date is April 8, 1999), with respect to the combined financial statements of the Network & Storage Management Group included in the Amendment No. 2 to Registration Statement (Form S-1) and related Prospectus of Veritas Software Corporation for the registration of shares of its common stock. /s/ Ernst & Young LLP San Jose, California August 4, 1999 EX-23.03 18 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23.03 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors VERITAS Software Corporation We consent to the use of our report dated February 5, 1999 with respect to the balance sheets of TeleBackup Systems Inc. as at December 31, 1997 and 1998, and the related statements of operations and deficit and changes in financial position for each of the years in the three year period ended December 31, 1998, which report appears in Amendment No. 2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 5, 1999, and to the reference to our firm under the heading "Experts" in the Registration Statement. Chartered Accountants Calgary, Canada August 5, 1999 -----END PRIVACY-ENHANCED MESSAGE-----