<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-22575
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0257497
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
10590 NORTH TANTAU AVENUE
CUPERTINO, CALIFORNIA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 342-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [_] NO [X]
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of March 31, 1998, was 14,176,633.
================================================================================
-1-
<PAGE>
CONCENTRIC NETWORK CORPORATION
PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997................................................ 3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1998 and 1997...................... 4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1998 and 1997...................... 5
Notes to Unaudited Condensed Consolidated Financial Statements... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9-16
PART II-OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities and Use of Proceeds........................ 17
Item 3. Defaults Upon Senior Securities.................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................. 18
</TABLE>
-2-
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 63,707 $ 119,959
Current portion of restricted cash................................................ 19,125 19,125
Accounts receivable, net.......................................................... 6,542 4,549
Goodwill and other intangible assets.............................................. 3,240 --
Other current assets.............................................................. 5,185 5,139
--------- ---------
Total current assets........................................................... 97,799 148,772
Property and equipment, net........................................................ 53,916 53,710
Restricted cash, net of current portion............................................ 34,148 33,400
Goodwill and other intangible assets, net of current portion....................... 8,796 --
Other assets....................................................................... 8,211 8,607
--------- ---------
Total assets....................................................................... $ 202,870 $ 244,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 16,141 $ 10,144
Accrued compensation and other employee benefits.................................. 1,219 1,577
Other current liabilities......................................................... 9,916 4,917
Current portion of capital lease obligations...................................... 6,911 15,326
Deferred revenue.................................................................. 1,970 1,435
--------- ---------
Total current liabilities...................................................... 36,157 33,399
Capital lease obligations, net of current portion.................................. 8,879 33,595
Notes payable...................................................................... 145,688 145,577
Commitments
Stockholders' equity:
Common stock...................................................................... 183,083 182,721
Accumulated deficit............................................................... (169,761) (149,534)
Deferred compensation............................................................. (1,176) (1,269)
--------- ---------
Total stockholders' equity......................................................... 12,146 31,918
--------- ---------
Total liabilities and stockholders' equity......................................... $ 202,870 $ 244,489
========= =========
</TABLE>
See accompanying notes.
-3-
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue............................................................... $ 16,484 $ 9,154
Costs and expenses:
Cost of revenue...................................................... 17,724
15,744
Development.......................................................... 1,507
1,025
Marketing and sales.................................................. 8,494 4,936
General and administrative........................................... 1,852 1,060
Amortization of goodwill and other intangible assets................. 506 --
Write off of in-process technology................................... 5,200 --
-------- --------
Total costs and expenses.............................................. 35,283 22,765
-------- --------
Loss from operations.................................................. (18,799) (13,611)
Net interest expense and other........................................ 4,470 1,070
-------- --------
Loss before extraordinary item........................................ (23,269) (14,681)
Extraordinary gain on early retirement of debt........................ 3,042 --
Net loss.............................................................. $(20,227) $(14,681)
======== ========
Loss per share (historical 1998, pro-forma 1997):
Loss before extraordinary item....................................... (1.64) (2.17)
Extraordinary gain................................................... 0.21 --
-------- --------
Net loss.............................................................. $ (1.43) $(2.17)
======== ========
Shares used in computing net loss per share:
Historical 1998, pro-forma 1997....................................... 14,157 6,767
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................................. $(20,227) $(14,681)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation............................................................................ 5,282 3,629
Amortization of deferred interest, cost of revenue and marketing and sales.............. 304 193
related to issuance of warrants
Amortization of goodwill and other intangible assets.................................... 506 --
Amortization of deferred interest related to Senior Notes............................... 127 --
Amortization of other deferred assets................................................... 451 --
Amortization of deferred compensation................................................... 93 18
Gain on retirement of debt.............................................................. (3,042) --
Write-off of in-process technology...................................................... 5,200 --
Changes in current assets and liabilities:............................................... --
Accounts receivable..................................................................... (475) (474)
Other current assets.................................................................... (81) 16
Prepaid expenses........................................................................ (16) 33
Accounts payable........................................................................ 93 624
Accrued compensation and other employee benefits........................................ (559) (143)
Deferred revenue........................................................................ (66) (57)
Other current liabilities............................................................... 3,995 (282)
-------- --------
Net cash used in operating activities................................................... (8,415) (11,124)
INVESTING ACTIVITIES
Additions of property and equipment...................................................... (1,543) (2,495)
Increase in restricted cash.............................................................. (748) --
Cash investment in network services business............................................. (15,452) --
-------- --------
Net cash used in investing activities.................................................... (17,743) (2,495)
FINANCING ACTIVITIES
Repayment of notes payable............................................................... (1,960) --
Repayment of lease obligations to a related party........................................ (3,079) (1,972)
Repayment of lease obligations to a related party-early retirement of debt............... (24,750) --
Repayment of lease obligations........................................................... (344)
(504)
Proceeds from issuances of stock and warrants............................................ 362 1,119
Deferred financing costs................................................................. (163) --
-------- --------
Net cash used in financing activities.................................................... (30,094) (1,197)
-------- --------
Decrease in cash and cash equivalents.................................................... (56,252) (14,816)
Cash and cash equivalents at beginning of period......................................... 119,959 17,657
-------- --------
Cash and cash equivalents at end of period............................................... $ 63,707 $ 2,841
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred with a related party.................................. $ 1,285 $ 6,435
Capital lease obligations incurred....................................................... $ 19 $
Reduction of accounts payable through capital lease obligations incurred................. $ --- $ 1,726
</TABLE>
See accompanying notes.
-5-
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements and the
related footnote information have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the Company's
management, the accompanying unaudited interim condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
The results for the interim period ended March 31, 1998 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1998 or future operating periods.
2. NET LOSS PER SHARE, HISTORICAL AND PRO FORMA
Basic and Diluted Net Loss Per Share (Historical)
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements.
Except as noted below, net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common stock
equivalent shares from convertible preferred stock and from stock options and
warrants are not included for loss periods as the effect is antidilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
98 (SAB No. 98) which was issued in February 1998, common and common equivalent
shares issued by the Company for nominal consideration during any of the periods
for which a statement of operations was presented in the Company's initial
public offering registration statement have been included in the calculation of
basic and diluted net loss per share for all such periods in a manner similar to
a stock split. The net loss per share calculations have been restated for all
periods presented in accordance with SAB No. 98 which replaced SAB No. 83.
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that automatically converted upon the closing of the
Company's initial public offering (using the as-if-converted method).
-6-
<PAGE>
The following table sets forth the computation of basic and diluted
loss per share, on an historical and pro forma basis (in thousands except per
share amounts.)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
NUMERATOR:
Net loss before extraordinary item................................................................. $ (23,269) $ (14,681)
Extraordinary gain on early retirement of debt..................................................... 3,042 --
----------- ----------
Numerator for basic and diluted loss per share..................................................... (20,227) (14,681)
=========== ==========
DENOMINATOR
Denominator for basic and diluted earnings per share - - weighted average shares (historical)...... 14,157,000 1,394,000
=========== ==========
Adjustments to reflect the effect of the assumed conversion of convertible preferred
stock from the date of issuance............................................................... 5,373,000
----------
Denominator for basic and diluted earnings per share - weighted average shares (pro forma)........ 6,767,000
==========
Basic and diluted net loss per share (historical):
Loss before extraordinary item............................................................. $ (1.64) $ (10.53)
----------- ----------
Extraordinary gain......................................................................... .21 --
----------- ----------
Net loss................................................................................... $ (1.43) $ (10.53)
=========== ==========
Basic and diluted net loss per share (pro forma).................................................. $ -- $ (2.17)
=========== ==========
</TABLE>
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130,
"Reporting Comprehensive Income" (FAS 130). Statement 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income.
There was no effect on the Company's financial statements in
connection with adopting FAS 130.
4. ACQUISITION
On February 5, 1998, the Company acquired all of the outstanding stock
of InterNex Information Services, Inc. (InterNex). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
-7-
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of the purchase price allocation is as follows (in
thousands):
<TABLE>
<S> <C>
Current and other assets....................................... $ 1,348
Computer and telecommunications equipment...................... 4,784
Goodwill....................................................... 9,496
Other intangible assets........................................ 3,080
Write-off of in process technology............................. 5,200
-------
Total purchase price allocation................... $23,908
=======
</TABLE>
Goodwill is being amortized over five years. Other intangible assets
include developed technology, assembled workforce and customer lists and are
being amortized over their useful lives ranging from two to four years.
5. EARLY RETIREMENT OF DEBT
On March 31, 1998 the Company retired a portion of debt in the form of
capital lease obligations to a related party. The Company paid $24.8 million for
extinguishment of debt and has a remaining liability of $1.5 million for related
sales taxes which is classified as accounts payable. The Company recognized
an extraordinary gain of $3.0 million in connection with this transaction.
6. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" ("FAS 109"). No provision for income taxes is
expected for 1998 as the Company expects to incur a net loss for the year and
does not meet the criteria for recognizing an income tax benefit under the
provisions of FAS 109.
7. LITIGATION
In late April and early May, 1997, three putative securities class
action complaints were filed in the United States District Court, Central
District by certain stockholders of Diana Corporation (Diana), the parent
corporation of Sattel Communications, LLC (Sattel), alleging securities fraud
related to plaintiffs' purchase of shares of Diana Common Stock in reliance upon
allegedly misleading statements made by defendants, Diana, Sattel and certain of
their respective affiliates, officers and directors. The Company was named as a
defendant in the complaint in connection with certain statements made by Diana
and officers of Diana related to Concentric's purchase of network switching
equipment from Diana's Sattel subsidiary. The plaintiffs seek unspecified
compensatory damages. A trial date has not yet been determined.
While the ultimate outcome of such litigation is uncertain, the
Company believes it has meritorious defenses to the claims and intends to
conduct a vigorous defense. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition, even
if the ultimate outcomes are resolved in favor of the Company, the defense of
such litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations.
8. COMMITMENTS
The Company renewed the lease on its executive offices in Cupertino,
California. The lease expires in April 2003. The average annual rent expense
over the term of the lease is approximately $1.2 million per year.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited interim condensed financial statements and related notes thereto
included in Part 1- Item 1 of this Quarterly Report.
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those
predicted in the forward looking statements due to a number of factors including
but not limited to the risks set forth in the following discussion, and in
particular, the risks discussed below under the caption "Additional Factors that
Could Affect Operating Results." Readers are also encouraged to refer to the
Company's Form 10-K for the year ended December 31, 1997 for a further
discussion of the Company's business and the risks attendant thereto.
OVERVIEW
The Company was founded in 1991. From 1991 to mid-1993, the Company
conducted development and network services planning activities and realized no
revenues. Initially, the Company was focused on providing consumers with direct
dial-up connectivity to bulletin board services. On-line gaming and
entertainment services for consumers were commenced in July 1993 through the
utilization of a third party network infrastructure. The Company commenced
operation of its own network in late 1994. In May 1995, new management led by
Henry R. Nothhaft redefined and broadened the Company's strategy to provide a
range of Internet and tailored, value-added Internet Protocol-based network
services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying Virtual Private Networks and providing dedicated
network access and Web hosting services for enterprise customers. Contracts with
enterprise customers typically have a term ranging from one to three years. The
Company expects enterprise-related revenue to represent an increasing portion of
total revenue in future periods. The foregoing expectation is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
as a result of a number of factors including the Company's operating results,
the results and timing of the Company's launch of new products and services,
governmental or regulatory changes, the ability of the Company to meet product
and project demands, the success of the Company's marketing efforts, competition
and acquisitions of complementary businesses, technologies or products.
In February 1998, the Company acquired InterNex Information Services,
Inc., a California corporation and provider of network services, colocation
services and Web-hosting facilities to enterprise customers ("InterNex")
pursuant to a Share Acquisition Agreement between the Company, InterNex and the
sole shareholder of InterNex. This acquisition was accounted for using the
purchase method of accounting. Accordingly, the Company's historical financial
statements do not include results of operations, financial position or cash
flows of Internex prior to its acquisition in February 1998. In addition, as a
result of the acquisition, the Company has incurred charges relating to the cost
of acquired in-process technology of $5.2 million and recorded an aggregate of
$12.5 million of goodwill and other intangible assets, which will be amortized
on a straight-line basis over their useful lives ranging from two to five years
(see Note 4 of Notes to Financial Statements). If the Company were to incur
additional charges for acquired in-process technology and amortization of
goodwill with respect to any future acquisitions, the Company's business,
operating results and financial condition could be materially and adversely
affected. See "Liquidity and Capital Resources" and "Additional Factors That
Could Affect Operating Results--Risks Associated with Acquisitions."
-9-
<PAGE>
The Company has incurred net losses and experienced negative cash flow
from operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through the remainder of 1998. The
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenue base and achieve other operating efficiencies. The Company experienced
net losses of approximately $22.0 million, $66.4 million and $55.6 million for
the years ended December 31, 1995, 1996 and 1997, respectively and $20.2 million
for the three months ended March 31, 1998. There can be no assurance that the
Company will be able to achieve or sustain revenue growth, profitability or
positive cash flow on either a quarterly or an annual basis.
The Company's operating results have fluctuated in the past and may in
the future fluctuate significantly, depending upon a variety of factors,
including the timely deployment and expansion of the Concentric network and new
network architectures, the incurrence of related capital costs, the receipt of
new value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
pricing and mix of services offered by the Company; customer retention rate;
market acceptance of new and enhanced versions of the Company's services;
changes in pricing policies by the Company's competitors; the Company's ability
to obtain sufficient supplies of sole- or limited-source components; user demand
for network and Internet access services; balancing of network usage over a 24-
hour period; general access services; the ability to identify, acquire and
integrate successfully suitable acquisition candidates; and charges related to
acquisitions. In response to competitive pressures, the Company may take certain
pricing or marketing actions that could have a material adverse effect on the
Company's business. As a result, variations in the timing and amounts of
revenues could have a material adverse effect on the Company's quarterly
operating results. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and investors,
the trading price of the Company's Common Stock would likely be materially and
adversely affected.
The Company expects to focus in the near term on building and
increasing its revenue base, which will require it to significantly increase its
expenses for personnel, marketing, network infrastructure and the development of
new services, and may adversely impact short term operating results. As a
result, the Company believes that it will incur losses in the near term and
there can be no assurance that the Company will be profitable on a quarterly
basis in the future.
RESULTS OF OPERATIONS
Revenue. Revenue totaled approximately $16.5 million for the three
months ended March 31, 1998, a $7.3 million increase over revenue of
approximately $9.2 million for the three months ended March 31, 1997. This
increased revenue reflects growth in revenue from the Company's broadened
product offerings to its enterprise customers and through the Company's
leveraged marketing arrangements with its strategic partners, continued growth
in revenue derived from Internet access customers and two months of revenue
generated from InterNex which was acquired in February 1998. For the three
months ended March 31, 1998, revenue from WebTV Networks, Inc. ("WNI")
declined to 30.8% of the Company's net revenue from 32.7% for the three months
ended March 31, 1997. The Company expects revenue from WNI to decrease as a
percentage of revenue. The foregoing expectation is a forward looking statement
that involves risks and uncertainties and the actual results could vary
materially as a result of a number of factors including those set forth below
under the caption "Additional Factors That Could Affect Operating Results --
Customer Concentration."
Cost of Revenue. Cost of revenue consists primarily of personnel
costs to maintain and operate the Company's network, access charges from local
exchange carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the three
month period ended March 31, 1998 was approximately $17.7 million, an increase
of $2.0 million from cost of revenue of $15.7 million in the first quarter of
1997. This increase is attributable to the overall growth in the size of the
network. As a percentage of revenue, such costs declined to 107.5% of revenue in
the three months ended March 31, 1998, down from 172.0% of revenue in the year
earlier period, due to increased network utilization associated with the
Company's revenue growth and lower per port costs of the Company's network
architecture. The Company expects its cost of revenue to continue to increase in
dollar amount, while declining as
-10-
<PAGE>
a percentage of revenue as the Company expands its customer base. The foregoing
expectation is a forward looking statement that involves risks and uncertainties
and the actual results could vary materially as a result of a number of factors,
including those set forth below under the caption "Additional Factors That Could
Affect Operating Results --Limited Operating History; Continuing Operating
Losses," "--Management of Potential Growth and Expansion" and "-- Dependence
Upon New and Uncertain Markets."
Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $1.5 million and
$1.0 million for the three months ended March 31, 1998 and 1997, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. Development expense as a percentage of revenue declined to 9.1% for
the three months ended March 31, 1998 from 11.2% in the year earlier period as a
result of the Company's increased revenue. The Company expects its development
spending to continue to increase in dollar amount, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking statement
that involves risks and uncertainties and the actual results could vary
materially as a result of a number of factors, including those set forth below
under the caption "Additional Factors that Could Affect Operation Results --
Limited Operating History; Continuing Operating Losses" and "--Dependence Upon
New and Enhanced Services."
Marketing and Sales. Marketing and sales expense consists primarily
of personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately $8.5
million and $4.9 million for the three months ended March 31, 1998 and 1997,
respectively. The $3.6 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations necessary
to support the Company's expanded customer base. This increase also reflects a
growth in subscriber acquisition costs, related to both increased direct
marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects marketing efforts related to the
introduction and expansion of enterprise products and services. Marketing and
sales expense as a percentage of revenue declined to 51.5% for the three months
ended March 31, 1998 from 53.9% in the year earlier period as a result of the
Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking statement
that involves risks and uncertainties and the actual results could vary
materially as a result of a number of factors including those set forth under
"Additional Factors that Could Affect Operating Results -- Dependence on New and
Uncertain Markets," "-- Management of Potential Growth and Expansion."
General and Administrative. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.9 million and $1.1 million for the
three months ended March 31, 1998 and 1997, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business. General
and administrative expense as a percentage of revenue declined to 11.2% for the
three months ended March 31, 1998 from 11.6% in the year earlier period as a
result of the Company's increased revenue. The Company expects general and
administrative expense to increase in dollar amount, reflecting its growth in
operations and costs associated with being a publicly held entity, but to
decline as a percentage of revenue. The foregoing expectation is a forward
looking statement that involves risks and uncertainties and the actual results
could vary materially as a result of a number of factors including those set
forth under "Additional Factors that Could Affect Operating Results --
Dependence on New and Uncertain Markets," "-- Management of Potential Growth and
Expansion."
Amortization of Goodwill and Other Intangible Assets. During the
three months ended March 31, 1998 the Company recorded amortization of goodwill
and other intangible assets of $506,000 resulting from the acquisition of
InterNex in February 1998 (see Note 4 of Notes to Financial Statements).
Write-off of In-Process Technology. In the quarter ended March 31,
1998 the Company wrote-off $5.2 million of in-process technology related to the
InterNex acquisition (see Note 4 of Notes to Financial Statements).
-11-
<PAGE>
Net Interest Expense. Net interest expense was approximately $4.5
million and $1.1 million for the quarters ending March 31, 1998 and 1997,
respectively. The increase is primarily due to interest related to the $150.0
million principal amount of 12 3/4% Senior Notes issued in December 1997 (the
Senior Notes).
Extraordinary Gain. During the three months ended March 31, 1998 the
Company realized an extraordinary gain of $3.0 million related to the early
retirement of debt in the form of capital lease obligations (see Note 5 of Notes
to Financial Statements).
Net Loss. The Company's net loss increased to approximately $20.2
million for the quarter ended March 31, 1998 as compared to approximately $14.7
million for the same quarter of 1997. The net loss in 1998 included a one-time
charge of $5.2 million for the write-off of in process technology and an
extraordinary gain of $3.0 million for the early retirement of debt (see Notes 4
and 5 of Notes to Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily
through capitalized lease financings, the sale of capital stock and debt
financings. The Company's principal uses of cash are to fund working capital
requirements and capital expenditures, to service its capital lease financing
obligations, to finance and fund the InterNex acquisition and to provide for the
early retirement of debt. Net cash used in operating activities for the three
months ended March 31, 1998 and 1997 was approximately $8.4 million and $11.1
million, respectively. Cash used in operating activities in both periods was
primarily affected by the net losses, caused by increased costs relating to the
expansion of the Company's network and organizational infrastructure.
Net cash used in investing activities for the three months ended March
31, 1998 and 1997 was approximately $17.7 million and $2.5 million,
respectively. Investing activities primarily consisted of a cash payment of
$15.5 million for the InterNex acquisition in the first quarter of 1998 and
purchases of capital equipment in both periods.
For the three months ended March 31, 1998 net cash of approximately
$30.1 million was used in financing activities, of which $24.8 million was used
for the early retirement of capital lease obligations. For the three months
ended March 31, 1997, net cash used in financing activities was $1.2 million
relating to principal payments on lease obligations.
The net cash decrease for the three month period ended March 31, 1998
was $56.3 million. This included a cash payment of approximately $15.5 million
associated with the acquisition of InterNex and the related payment of $3.5
million of certain assumed liabilities and $24.8 million used for the early
retirement of debt. The net cash decrease for the three months ended March 31,
1997 was $14.8 million. At March 31, 1998 the Company had cash and cash
equivalents of approximately $63.7 million and working capital of $61.6 million.
The Company expects to incur additional operating losses and will
rely primarily on the net proceeds from the Senior Notes and financing available
under a network equipment lease agreement that currently has no maximum
borrowing limit. The Company believes that such financing will be sufficient to
meet its anticipated cash needs for working capital and for the acquisition of
capital equipment through at least the end of 1998. However, there can be no
assurance that the Company will not require additional financing within this
time frame. The Company's forecast of the period of time through which its
financial resources will be adequate to support its operations is a forward-
looking statement that involves risks and uncertainties, and actual results
could vary materially as a result of number of factors, including those set
forth below under the caption "Additional Factors That Could Affect Operating
Results -- Future Capital Needs; Uncertainty of Additional Financing." The
Company may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all.
-12-
<PAGE>
ADDITIONAL FACTORS THAT COULD AFFECT OPERATING RESULTS
The following factors, together with other risk factors discussed in
the "Overview" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations and other information contained elsewhere
herein, should be considered carefully in evaluating the Company and its
business.
Substantial Indebtedness; Ability to Service Debt. The Company is and
will continue to be highly leveraged, with significant debt service
requirements. The ability of the Company to meet its debt service obligations
will depend on the future operating performance and financial results of the
Company, which will be subject in part to factors beyond the control of the
Company. Although the Company believes that its cash flow will be adequate to
meet its interest payments, there can be no assurance that the Company will
continue to generate sufficient cash flow in the future to meet its debt service
requirements.
Limited Operating History; Continuing Operating Losses. The Company
was incorporated in 1991, commenced network operations in 1994 and completed
initial deployment of its current network architecture and use of an advanced
ATM backbone network in late 1996. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
its network services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks and the failure to
do so could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has incurred net losses and experienced negative cash flow
from operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through 1998, although the Company's
ability to substantially grow its revenue base and achieve other operating
efficiencies. The Company experienced net losses of approximately $22.0
million, $66.4 million and $55.6 million for the years ended December 31, 1995,
1996, and 1997, respectively. At March 31, 1998, the Company had an
accumulated deficit of approximately $169.8 million. There can be no assurance
that the Company will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or an annual basis.
Customer Concentration. The Company currently derives a substantial
portion of its total revenue from a single customer. For the three months ended
March 31, 1998 and March 31, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 30.8% and 32.7%, respectively, of the Company's
revenue. The Company's current agreement to provide services to WebTV is
terminable at will after October 1, 1999. While the Company expects revenue from
WNI to decrease as a percentage of revenue in future periods, the Company
believes that revenue derived from a limited number of current and future
customers may continue to represent a significant portion of its revenue. As a
result, the loss of one or more of the Company's major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that revenue from
customers that have accounted for significant revenue in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period.
Management of Potential Growth and Expansion. The growth and
expansion of the Company's business and its service offerings have placed, and
are expected to continue to place, a significant strain on the Company's
management, operational and financial resources. The Company has recently
expanded and upgraded its network to use an ATM backbone. The Company plans to
continue to substantially expand its network in the future. There can be no
assurance that the Company will be able to add services at the rate or according
to the schedule presently planned by the Company. To manage its growth, the
Company must, among other things, (i) continue to implement and improve its
operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (ii) hire and train additional qualified
personnel; and (iii) continue to expand and upgrade
-13-
<PAGE>
its network infrastructure. Further, demands on the Company's network
infrastructure and technical support resources have grown rapidly with the
Company's expanding customer base, and the Company may in the future experience
difficulties meeting the demand for its access services and technical support.
Any failure of the Company to manage its growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated With Acquisitions. The Company completed the
InterNex Acquisition in February 1998 and may seek to acquire additional assets
or businesses complementary to its operations. The InterNex Acquisition and any
subsequent acquisitions would be accompanied by the risks commonly encountered
in acquisitions of companies. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of InterNex or such
other acquired companies, the additional financial resources that may need to be
applied to fund the operations of InterNex or such other acquired companies, the
potential disruption of the Company's business, the inability of the Company's
management to maximize the financial and strategic position of the Company by
the incorporation of acquired technology or businesses into the Company's
service offerings, the difficulty of maintaining uniform standards, controls,
procedures and policies, the potential loss of key employees of acquired
companies, and the impairment of relationships with employees and customers as a
result of changes in management. No assurance can be given that InterNex will
be successfully integrated in the Company's operations. Likewise, no assurance
can be given that any other acquisitions by the Company will or will not occur,
that if an acquisition does occur it will not materially and adversely affect
the Company or that any such acquisition will be successful in enhancing the
Company's business. If the Company proceeds with additional significant
acquisitions in which the consideration consists of cash, a substantial portion
of the Company's available cash could be used to consummate the acquisitions.
If the Company were to consummate one or more acquisitions in which the
consideration consisted of stock, stockholders of the Company could suffer
significant dilution of their interests in the Company. In addition, the
Internex acquisition has been accounted for using the purchase method of
accounting. Because the acquisitions of companies of the type that the Company
is targeting, such as InterNex, typically involve the purchase of significant
amounts of intangible assets, acquisitions of such businesses also result in
goodwill and potentially significant amortization charges for acquired
technology. For example, as a result of the Internex acquisition, the Company
incurred charges relating to in-process technology of $5.2 million for the three
months ended March 31, 1998 and has recorded an aggregate of $12.5 million of
goodwill and other intangible assets, which will be amortized on a straight line
basis over their useful lives ranging from two to five years (see Note 4 of
Notes to Financial Statements). If the Company were to incur additional charges
for acquired in-process technology and amortization of goodwill with respect to
future acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected.
Dependence upon New and Uncertain Markets. The markets for tailored,
value-added network services for businesses and consumers offered by the
Company, including Internet access, are in the early stages of development.
Since these markets are relatively new and because current and future
competitors are likely to introduce competing services or products, it is
difficult to predict the rate at which the market will grow, if at all, or
whether new or increased competition will result in market saturation. Certain
critical issues concerning commercial use of tailored, value-added services and
Internet services, including security, reliability, ease and cost of access and
quality of service, remain unresolved and may impact the growth of such
services. If the markets for the services offered by the Company, including
Internet access, fail to grow, grow more slowly than anticipated, or become
saturated with competitors, the Company's business, financial condition and
results of operations would be materially adversely affected.
Dependence upon New and Enhanced Services. The Company has recently
introduced new enterprise service offerings, including the introduction of
value-added, IP-based communication services to enterprises and a new line of
DSL services in limited areas. The failure of these services to gain market
acceptance in a timely manner, or at all, or the failure of DSL service in
particular to achieve significant market coverage, could have a material
adverse effect on the business, financial condition and results of operations of
the Company. Introduction by the Company of new or enhanced services with
reliability, quality or compatibility problems could significantly delay or
hinder market acceptance of such services, which could adversely affect the
Company's ability to attract new customers and subscribers. The Company's
services may contain undetected errors or defects when first introduced or as
enhancements are introduced. There can be no assurance that, despite testing by
the Company or its customers, errors will not be found in new services after
commencement of commercial deployment, resulting in additional development
costs, loss of, or delays in, market acceptance, diversion of technical and
-14-
<PAGE>
other resources from the Company's other development efforts and the loss of
credibility with the Company's customers and subscribers. Any such event could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence upon Suppliers; Sole and Limited Sources of Supply. The
Company relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality demanded by the Company, are
available only from sole or limited sources. Expansion of network
infrastructures by the Company and others is placing, and will continue to
place, a significant demand on the Company's suppliers, some of which have
limited resources and production capacity. In addition, certain of the
Company's suppliers, in turn, rely on sole or limited sources of supply of
components included in their products. The Company's inability to obtain
sufficient quantities of sole or limited source components or to develop
alternative sources if required could result in delays and increased costs in
expanding and overburdening of the Company's network infrastructure, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company from time to time has experienced delays
in receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the time
frames required by the Company at an affordable cost, or at all. Any failure to
obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence upon Network Infrastructure. The Company's success will
depend upon the capacity, reliability and security of its network
infrastructure. The Company currently derives a significant portion of its
revenue from customer subscriptions. The Company must continue to expand and
adapt its network infrastructure as the number of users and the amount of
information they wish to transfer increase, and as customer requirements change.
The expansion and adaptation of the Company's network infrastructure will
require substantial financial, operational and management resources. There can
be no assurance that the Company will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing requirements
on a timely basis, at a commercially reasonable cost, or at all. In addition, if
demand for usage of the Concentric network were to increase faster than
projected or were to exceed the Company's current forecasts, the network could
experience capacity constraints, which would adversely affect the performance of
the system. Any failure of the Company to expand its network infrastructure on a
timely basis or adapt it to either changing customer requirements or evolving
industry standards, or capacity constraints experienced by the Concentric
network for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. Currently, the Company
has a transit agreement with network MCI, Inc. to support the exchange of
traffic between the Concentric network and the Internet. With the acquisition
of InterNex, the Company is expanding its Internet connectivity to include not
only private transit with MCI, Sprint and UUNet, but also private peering with
other network providers as well as public peering with multiple smaller internet
service providers. The Company is still in the process in integrating the
InterNex network resources, including the Sprint and UUNet private transit and
public peering arrangements, and has yet to determine if it can successfully
execute its private/public Internet connection strategy. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of the Company's data centers, or any other link
in the delivery chain, or the inability of the Company to successfully integrate
the InterNex network resources into the Company's existing infrastructure, and
resulting interruption in the Company's operations would have a material adverse
effect on the Company's business, financial condition and results of operations.
Future Capital Needs; Uncertainty of Additional Financing. The
Company currently anticipates that its available cash resources, including
existing lease and credit facilities, and funds from operations will be
sufficient to meet its anticipated working capital and capital expenditure
requirements through at least the end of 1998. However, there can be no
assurance that such resources will be sufficient for its anticipated working
capital and capital expenditure requirements. The Company may need to raise
additional funds through public or private debt or equity financings in order to
take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies, or to develop new products or otherwise respond to unanticipated
competitive pressures. The Company may also raise additional funds through
public or private debt or equity financings if such financings become available
on favorable terms. If additional funds are raised, there can be no assurance
that additional financing will be available on terms favorable to the Company,
or at all. If adequate funds are not available or are not available on
acceptable
-15-
<PAGE>
terms, the Company may not be able to take advantage of unanticipated
opportunities, develop new products or otherwise respond to unanticipated
competitive pressures. Such inability could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward looking statement that
involves risks and uncertainties, and actual results could vary materially as a
result of a number of factors, including those set forth above in this
paragraph.
Competition. The market for tailored value-added network services is
extremely competitive. There are no substantial barriers to entry, and the
Company expects that competition will intensify in the future. Many of the
Company's current and prospective competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. Increased price or other
competition could result in erosion of the Company's market share and could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.
Risks of Technological Change and Evolving Industry Standards. The
markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changing customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing customer
needs; to advertise and market its services; and to influence and respond to
emerging industry standards and other technological changes in a timely and
cost-effective basis. There can be no assurance that the Company will be
successful in effectively using new technologies, developing new services or
enhancing its existing services on a timely basis, or that such new technologies
or enhancements will achieve market acceptance.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company commenced its initial public offering on August 1, 1997
pursuant to a Registration Statement on Form S-1 which was declared effective by
the Securities and Exchange Commission on July 31, 1997. The net proceeds to
the Company in the public offering were $54.1 million. From July 31, 1997, the
effective date of the Registration Statement, to March 31, 1998, the ending date
of the reporting period, the approximate amount of net offering proceeds used
were $26.3 million for the purchase of equipment, network services and related
operational expenses, $2.7 million for capital expenditures associated with
expanding the Company's network and data center operations, $12.4 million to pay
certain capital lease obligations and expenses, $3.5 million to pay license fees
to certain strategic partners, $2.0 million to repay promissory notes issued to
certain stockholders of the Company, $4.4 million to settle a lawsuit with
Sattel Communications, Inc. and $2.2 million to repurchase common stock from
certain stockholders of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.54 Lease by and between Spieker Properties, L.P., a
California limited partnership and the Company.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated February 5,
1998 to report under Item 2 the acquisition of InterNex
Information Services, Inc.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 CONCENTRIC NETWORK CORPORATION
By /s/ Henry R. Nothhaft,
--------------------------------
Henry R. Nothhaft,
President, Chief Executive
Officer and Director
By /s/ Michael F. Anthofer,
--------------------------------
Michael F. Anthofer,
Senior Vice President and
Chief Financial Officer
-18-
<PAGE>
Exhibit 10.54
BASIC LEASE INFORMATION
INDUSTRIAL NET
LEASE DATE: February 22, 1998
(same as date in first
paragraph of Lease)
TENANT: Concentric Network Corporation, Inc.
TENANT'S NOTICE ADDRESS: 10590 N. Tantau Avenue, Cupertino, California
TENANT'S BILLING ADDRESS: 10590 N. Tantau Avenue, Cupertino, California
TENANT CONTACT: Peter Bergeron PHONE NUMBER: 408-342-2812
LANDLORD: Spieker Properties, L.P., a California
limited partnership
LANDLORD'S NOTICE ADDRESS: 2180 Sand Hill Road, Suite 100, Menlo Park
California
LANDLORD'S REMITTANCE ADDRESS: P.O. Box 45587, Department 10161,
San Francisco, California
PROJECT
DESCRIPTION: That two (2) building complex totaling
approximately 64,680 square feet situated on
4.46 acres of land commonly known as the
Cupertino Business Center, Cupertino,
California. The Project is outlined in green
on Exhibit "A"
BUILDING
DESCRIPTION: That approximate 41,151 square foot one story
building commonly known as 10590 N. Tantau
Avenue. The building is outlined in blue on
Exhibit "A".
PREMISES: That entire approximate 41,151 square foot
building commonly known as 10590 N. Tantau
Avenue. The Premises are outlined in red on
Exhibit "A"
PERMITTED USE: General office use.
PARKING DENSITY: Non-exclusive use of 164 parking spaces.
SCHEDULED TERM COMMENCEMENT DATE: May 1, 1998
LENGTH OF TERM: Sixty (60) months
-----------------
RENT:
BASE RENT: $ 94,647.30 PER MONTH
-----------
(subject to adjustment as provided in
Paragraph 38.A. hereof)
ESTIMATED FIRST YEAR
OPERATING EXPENSES: $ 8075.00 PER MONTH
-----------
SECURITY DEPOSIT: $110,723.95
-----------
TENANT'S PROPORTIONATE SHARE:
OF BUILDING: 100.0%
OF PROJECT: 63.62%
The foregoing Basic Lease Information is incorporated into and made a part of
this Lease. Each reference in this Lease to any of the Basic Lease Information
shall mean the respective information above and shall be construed to
incorporate all of the terms provided under the particular Lease paragraph
pertaining to such information. In the event of any conflict between the Basic
Lease Information and the Lease, the latter shall control.
INDUSTRIAL NET LEASE
<PAGE>
TABLE OF CONTENTS
Page
Basic Lease Information..................................................1
Table of Contents........................................................2
1. Premises.................................................................3
2. Possession and Lease Commencement........................................3
3. Term.....................................................................3
4. Use......................................................................3
5. Rules and Regulations....................................................4
6. Rent.....................................................................4
7. Operating Expenses.......................................................4
8. Insurance and Indemnification............................................6
9. Waiver of Rights.........................................................7
10. Landlord's Repairs and Maintenance.......................................7
11. Tenant's Repairs and Maintenance.........................................7
12. Alterations..............................................................8
13. Signs....................................................................8
14. Inspection/Posting Notices...............................................8
15. Utilities................................................................8
16. Subordination............................................................8
17. Financial Statements.....................................................9
18. Estoppel Certificate.....................................................9
19. Security Deposit.........................................................9
20. Tenant's Remedies........................................................9
21. Assignment and Subletting................................................9
22. Authority of Tenant......................................................10
23. Condemnation.............................................................10
24. Casualty Damage..........................................................10
25. Holding Over.............................................................11
26. Default..................................................................11
27. Liens....................................................................12
28. Substitution.............................................................12
29. Transfers by Landlord....................................................13
30. Right of Landlord to Perform Tenant's Covenants..........................13
31. Waiver...................................................................13
32. Notices..................................................................13
33. Attorney's Fees..........................................................13
34. Successors and Assigns...................................................13
35. Force Majeure............................................................13
36. Surrender of Premises....................................................14
37. Miscellaneous............................................................14
38. Additional Provisions....................................................14
Signatures...............................................................15
Exhibits:
Exhibit A..................................... Site Plan, Property Description
Exhibit B...............................Tenant Improvements and Specifications
Additional Exhibits as Required
2
<PAGE>
LEASE
THIS LEASE is made as of the 22st day of February, 1998, by and between Spieker
Properties, L.P., a California limited partnership (hereinafter called
"LANDLORD"), and Concentric Network Corporation, Inc. (hereinafter called
"TENANT").
1. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and
conditions hereinafter set forth, those premises (the "PREMISES") outlined in
red on EXHIBIT A and described in the Basic Lease Information. The Premises
shall be all or part of a building (the "BUILDING") and of a project (the
"PROJECT") which may consist of more than one building, as described in the
Basic Lease Information. The Building and Project are outlined in blue and
green respectively on EXHIBIT A. Additionally, the number of buildings which
constitute the Project may change from time to time. Tenant accepts the area of
the Premises as specified in this Lease as the approximate area of the Premises,
and acknowledges and agrees that Tenant shall in no event be entitled to a
recalculation of the square footage of the Premises and that no such
recalculation shall reduce Tenant's obligations under this Lease in any manner,
including without limitation the amount of Base Rent payable by Tenant or
Tenant's Proportionate Share of the Building and of the Project.
2. POSSESSION AND LEASE COMMENCEMENT
A. EXISTING IMPROVEMENTS. Tenant acknowledges that Tenant has inspected and
accepts the Premises in their present condition, broom clean, "as is," and as
suitable for the purpose for which the Premises are leased and for Tenant's
intended use of the Premises. Tenant agrees that the Premises and other
improvements are in good and satisfactory condition as of when possession was
taken. Tenant further acknowledges that no representations as to the condition
or repair of the Premises nor promises to alter, remodel or improve the Premises
have been made by Landlord or any agents of Landlord unless such are expressly
set forth in this Lease.
B. [CROSSED OUT]
3. TERM
The term of this Lease (the "TERM") shall commence on May 1, 1998 ("Term
Commencement Date") and continue in full force and effect for the number of
months specified as the Length of Term in the Basic Lease Information or until
this Lease is terminated as otherwise provided herein. If the Term Commencement
Date is a date other than the first day of the calendar month, the Term shall be
the number of months of the Length of Term in addition to the remainder of the
calendar month following the Term Commencement Date.
4. USE
A. GENERAL. Tenant shall use the Premises for the permitted use specified in
the Basic Lease Information ("PERMITTED USE") and for no other use or purpose.
Tenant shall control Tenant's employees, agents, customers, visitors, invitees,
licensees, contractors, assignees and subtenants (collectively, "TENANT'S
PARTIES") in such a manner that Tenant and Tenant's Parties cumulatively do not
exceed the parking density specified in the Basic Lease Information (the
"PARKING DENSITY") at any time. Tenant and Tenant's Parties shall have the
nonexclusive right to use, in common with other parties occupying the Building
or Project, the parking areas, driveways and other common areas of the Building
and Project, subject to such rules and regulations as Landlord may from time to
time prescribe.
B. LIMITATIONS. Tenant shall not permit any odors, smoke, dust, gas,
substances, noise or vibrations to emanate from the Premises or from any portion
of the common areas as a result of Tenant's or any Tenant's Party's use thereof,
nor take any action which would constitute a nuisance or would disturb, obstruct
or endanger any other tenants or occupants of the Building or Project or
interfere with their use of their respective premises or common areas. Storage
outside the Premises of materials, vehicles or any other items is prohibited.
Tenant shall not use or allow the Premises to be used for any immoral, improper
or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance
in, on or about the Premises. Tenant shall not commit or suffer the commission
of any waste in, on or about the Premises. Tenant shall not allow any sale by
auction upon the Premises, or place any loads upon the floors, walls or ceilings
which endanger the structure, or place any harmful substances in the drainage
system of the Building or Project. No waste, materials or refuse shall be
dumped upon or permitted to remain outside the Premises except in trash
containers placed inside exterior enclosures designated for that purpose by
Landlord. Landlord shall not be responsible to Tenant for the non-compliance by
any other tenant or occupant of the Building or Project with any of the above-
referenced rules or any other terms or provisions of such tenant's or occupant's
lease or other contract.
3
<PAGE>
C. COMPLIANCE WITH REGULATIONS. By entering the Premises, Tenant accepts the
Premises in the condition existing as of the date of such entry. Tenant shall
at its sole cost and expense strictly comply with all existing or future
applicable municipal, state and federal and other governmental statutes, rules,
requirements, regulations, laws and ordinances, including zoning ordinances and
regulations, and covenants, easements and restrictions of record governing and
relating to the use, occupancy or possession of the Premises, to Tenant's use of
the common areas, or to the use, storage, generation or disposal of Hazardous
Materials (hereinafter defined) (collectively "REGULATIONS"). Tenant shall at
its sole cost and expense obtain any and all licenses or permits necessary for
Tenant's use of the Premises. Tenant shall at its sole cost and expense
promptly comply with the requirements of any board of fire underwriters or other
similar body now or hereafter constituted. Tenant shall not do or permit
anything to be done in, on, under or about the Project or bring or keep anything
which will in any way increase the rate of any insurance upon the Premises,
Building or Project or upon any contents therein or cause a cancellation of said
insurance or otherwise affect said insurance in any manner. Tenant shall
indemnify, defend, protect and hold Landlord harmless from and against any loss,
cost, expense, damage, attorneys' fees or liability arising out of the failure
of Tenant to comply with any Regulation. Tenant's obligations pursuant to the
foregoing indemnity shall survive the expiration or earlier termination of this
Lease.
D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall
include, but not be limited to, hazardous, toxic and radioactive materials and
those substances defined as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or other similar designations in any
Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause,
any Hazardous Materials to be used, generated, stored or disposed of on or about
the Premises, the Building or the Project or surrounding land or environment in
violation of any Regulations. Tenant must obtain Landlord's written consent
prior to the introduction of any Hazardous Materials onto the Project.
Notwithstanding the foregoing, Tenant may handle, store, use and dispose of
products containing small quantities of Hazardous Materials for "general office
purposes" (such as toner for copiers) to the extent customary and necessary for
the Permitted Use of the Premises; provided that Tenant shall always handle,
store, use, and dispose of any such Hazardous Materials in a safe and lawful
manner and never allow such Hazardous Materials to contaminate the Premises,
Building, or Project or surrounding land or environment. Tenant shall
immediately notify Landlord of any Hazardous Materials' contamination of any
portion of the Project of which Tenant becomes aware, whether or not caused by
Tenant. Landlord shall have the right at all reasonable times to inspect the
Premises and to conduct tests and investigations to determine whether Tenant is
in compliance with the foregoing provisions, the costs of all such inspections,
tests and investigations to be borne by Tenant. Tenant shall indemnify, defend,
protect and hold Landlord harmless from and against all liabilities, losses,
costs and expenses (including attorneys' and consultants' fees), demands, causes
of action, claims or judgments directly or indirectly arising out of the use,
generation, storage, release, or disposal of Hazardous Materials by Tenant or
any of Tenant's Parties in, on or about the Premises, the Building or the
Project or surrounding land or environment, excluding any contamination which
---------------------------------
may have been caused by any prior tenants. The foregoing indemnity shall
- ---------------------------------------------------------
include, without limitation, damages for personal or bodily injury, property
damage, damage to the environment or natural resources occurring on or off the
Premises, losses attributable to diminution in value or adverse effects on
marketability, the cost of any investigation, monitoring, government oversight,
repair, removal, remediation, restoration, abatement, and disposal, and the
preparation of any closure or other required plans, whether such action is
required or necessary prior to or following the expiration or earlier
termination of this Lease. Neither the consent by Landlord to the use,
generation, storage, release or disposal of Hazardous Materials nor the strict
compliance by Tenant with all laws pertaining to Hazardous Materials shall
excuse Tenant from Tenant's obligation of indemnification pursuant to this
Paragraph 4.D. Tenant's obligations pursuant to the foregoing indemnity shall
survive the expiration or earlier termination of this Lease
5. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with any rules and regulations and
any modifications or additions thereto which Landlord may from time to time
prescribe in writing for the purpose of maintaining the proper care,
cleanliness, safety, traffic flow and general order of the Premises or the
Building or Project. Tenant shall cause Tenant's Parties to comply with such
rules and regulations. Landlord shall not be responsible to Tenant for the non-
compliance by any other tenant or occupant of the Building or Project with any
of such rules and regulations, any other tenant's or occupant's lease or any
Regulations.
6. RENT
A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive, without
notice or demand throughout the Term, Base Rent as specified in the Basic Lease
Information, payable in monthly installments in advance on or before the first
day of each calendar month, in lawful money of the United States, without
deduction or offset whatsoever, at the Remittance Address specified in the Basic
Lease Information or to such other place as Landlord may from time to time
designate in writing. Base Rent for the first full month of the Term shall be
paid by Tenant upon Tenant's execution of this Lease. If the obligation for
payment of Base Rent commences on other than the first day of a month, then Base
Rent shall be prorated and the prorated installment shall be paid on the first
day of the calendar month next succeeding the Term Commencement Date. The Base
Rent payable by Tenant hereunder is subject to adjustment as provided in addenda
appended to this Lease (if referred to in Paragraph 38.A.). As used herein, the
term "Base Rent" shall mean the Base Rent specified in the Basic Lease
Information as it may be so adjusted from time to time. See Addendum 1.
--------------
B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by
Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of
Operating Expenses, as specified in Paragraph 7 of this Lease, the interest and
late charge described in Paragraphs 26.C. and D., and any monies spent by
Landlord pursuant to Paragraph 30, shall be considered additional rent
("ADDITIONAL RENT"). "RENT" shall mean Base Rent and Additional Rent.
7. OPERATING EXPENSES
A. OPERATING EXPENSES. In addition to the Base Rent required to be paid
hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate Share, as
defined in the Basic Lease Information, of Operating Expenses (defined below) in
the manner set forth below. Tenant shall pay the applicable Tenant's
Proportionate Share of each such Operating Expenses. Landlord and Tenant
acknowledge that if the number of buildings which constitute the Project
increases or decreases, Landlord shall reasonably adjust Tenant's Proportionate
Share of the Project to reflect the change. Landlord's determination of
Tenant's Proportionate Share of the Building and of the Project shall be
conclusive so long as it is reasonably and consistently applied. "OPERATING
EXPENSES" shall mean all expenses and costs of every kind and nature which
Landlord shall pay or become obligated to pay, because of or in connection with
the ownership, management, maintenance, repair, preservation, replacement and
operation of the Building or Project and its supporting facilities (as
determined in a reasonable manner) other than those expenses and costs which are
specifically attributable to Tenant or which are expressly made the financial
responsibility of Landlord pursuant to this Lease. Operating Expenses shall
include, but are not limited to, the following:
(1) TAXES. All real property taxes and assessments, possessory interest
taxes, sales taxes, personal property taxes, business or license taxes or
fees, gross receipts taxes, service payments in lieu of such taxes or fees,
annual or periodic license or use fees, excises, transit charges, and other
impositions, general and special, ordinary and extraordinary, unforeseen as
well as foreseen, of any kind (including fees "in-lieu" of any such tax or
assessment) which are now or hereafter assessed, levied, charged,
confirmed, or imposed by any public authority upon the Building or Project,
its operations or the Rent (or any portion or component thereof), or any
tax, assessment or fee imposed in substitution, partially or totally, of
any of the above. Operating Expenses shall also include any taxes,
assessments, or other fees or impositions with respect to the development,
leasing,
4
<PAGE>
management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises or any portion thereof, or upon this transaction or
any document creating or transferring an interest in the Premises. Taxes
-----
shall not include any estate or inheritance tax. In the event that it
-----------------------------------------------
shall not be lawful for Tenant to reimburse Landlord for all or any part of
such taxes, the monthly rental payable to Landlord under this Lease shall
be revised to net Landlord the same net rental after imposition of any such
taxes by Landlord as would have been payable to Landlord prior to the
payment of any such taxes.
(2) INSURANCE. All insurance premiums and costs, including, but not limited
to, any deductible amounts, premiums and other costs of insurance incurred
by Landlord, including for the insurance coverage set forth in Paragraph
8.A. herein.
(3) COMMON AREA MAINTENANCE
(a) Repairs, replacements, and general maintenance of and for the
Building and Project and public and common areas of the Building and
Project, including, but not limited to, the roof, pest extermination,
landscaped areas, parking and service areas, driveways, truck staging
areas, rail spur areas, fire sprinkler systems, sanitary and storm
sewer lines, utility services, electric and telephone equipment and
wiring servicing, exterior lighting, and any other items or areas
which affect the operation or exterior appearance of the Building or
Project, which determination shall be at Landlord's discretion, except
for: those items expressly made the financial responsibility of
Landlord pursuant to Paragraph 10 hereof; those items to the extent
paid for by the proceeds of insurance; and those items attributable
solely or jointly to specific tenants of the Building or Project.
(b) Repairs, replacements, and general maintenance shall include the
cost of any capital improvements made to or capital assets acquired
for the Project or Building that in Landlord's discretion may reduce
any other Operating Expenses, including present or future repair work,
are reasonably necessary for the health and safety of the occupants of
the Building or Project, or are required under any governmental law or
regulation, such costs or allocable portions thereof to be amortized
over such reasonable period as Landlord shall determine, together with
interest on the unamortized balance at the "prime rate" charged by
Wells Fargo Bank, N.A. (San Francisco) or its successor at the time
such improvements or capital assets are constructed or acquired, plus
two (2) percentage points, but in no event more than the maximum rate
permitted by law.
(c) Payment under or for any easement, license, permit, operating
agreement, declaration, restrictive covenant or instrument relating to
the Building or Project.
(d) All expenses related to services and costs of supplies and
equipment used in maintaining the Premises, Building and Project, the
equipment therein and the adjacent sidewalks, driveways, parking and
service areas, including, without limitation, expenses related to
service agreements regarding security and fire and other alarm
systems, janitorial services to the extent not addressed in Paragraph
11 hereof, window cleaning, elevator maintenance, Building exterior
maintenance, landscaping and expenses related to the administration,
management and operation of the Project, including without limitation
salaries, wages and benefits.
(4) UTILITIES. The cost of supplying any utilities which benefit all or a
portion of the Premises, Building or Project to the extent not addressed in
Paragraph 15 hereof.
(5) MANAGEMENT FEE. A management and accounting cost recovery fee equal to
three percent (3%) of the sum of Base Rent.
In the event that the Building and/or Project is not fully occupied during
any fiscal year of the Term as determined by Landlord, an adjustment shall be
made in computing the Operating Expenses for such year so that Tenant pays its
---
proportionate share of all variable items (i.e. component expenses that are
- -------------------
affected by variations in occupancy levels) of Operating Expenses, as reasonably
determined by Landlord; provided, however, that in no event shall Landlord be
entitled to collect in excess of one hundred percent (100%) of the total
Operating Expenses from all of the tenants in the Building or Project, as the
case may be.
Operating Expenses shall not include specific costs incurred for the
account of, separately billed to and paid by specific tenants. Notwithstanding
anything herein to the contrary, in any instance wherein Landlord, in Landlord's
reasonable discretion, deems Tenant to be responsible for any amounts greater
- ----------
than Tenant's Proportionate Share, Landlord shall have the right to allocate
costs in any manner Landlord deems appropriate.
The above enumeration of services and facilities shall not be deemed to
impose an obligation on Landlord to make available or provide such services or
facilities except to the extent Landlord has specifically agreed elsewhere in
this Lease to make the same available or provide the same. Without limiting the
generality of the foregoing, Tenant acknowledges and agrees that it shall be
responsible for providing adequate security for its use of the Premises and
Project and that Landlord shall have no obligation or liability with respect
thereto, except to the extent Landlord has specifically agreed elsewhere in this
Lease to provide the same.
B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES" for
any particular year shall mean Landlord's estimate of the Operating Expenses for
such fiscal year made with respect to such fiscal year as hereinafter provided.
Landlord shall have the right from time to time to revise its fiscal year and
interim accounting periods so long as the periods as so revised are reconciled
with prior periods in a reasonable manner. During the last month of each fiscal
year during the Term, or as soon thereafter as practicable, Landlord shall give
Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal
year. Tenant shall pay Tenant's Proportionate Share of the Estimated Operating
Expenses with installments of Base Rent for the fiscal year to which the
Estimated Operating Expenses applies in monthly installments on the first day of
each calendar month during such year, in advance. If at any time during the
course of the fiscal year, Landlord determines that Operating Expenses are
projected to vary from the then Estimated Operating Expenses by more than ten
percent (10%), Landlord may, by written notice to Tenant, revise the Estimated
Operating Expenses for the balance of such fiscal year, and Tenant's monthly
installments for the remainder of such year shall be adjusted so that by the end
of such fiscal year Tenant has paid to Landlord Tenant's Proportionate Share of
the revised Estimated Operating Expenses for such year.
C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE ADJUSTMENT"
shall mean the difference between Estimated Operating Expenses and actual
Operating Expenses for any fiscal year determined as hereinafter provided.
Within one hundred twenty (120) days after the end of each fiscal year, as
determined by Landlord, or as soon thereafter as practicable, Landlord shall
deliver to Tenant a statement of actual Operating Expenses for the fiscal year
just ended, accompanied by a computation of Operating Expense Adjustment. If
such statement shows that Tenant's payment based upon Estimated Operating
Expenses is less than Tenant's Proportionate Share of Operating Expenses, then
Tenant shall pay to Landlord the difference within twenty (20) days after
receipt of such statement. If such statement shows that Tenant's payments of
Estimated Operating Expenses exceed Tenant's Proportionate Share of Operating
Expenses, then (provided that Tenant is not in default under this Lease)
Landlord shall pay to Tenant the difference within twenty (20) days after
delivery of such statement to Tenant. If this Lease has been terminated or the
Term hereof has expired prior to the date of such statement, then the Operating
Expense Adjustment shall be paid by the appropriate party within twenty (20)
days after the date of delivery
5
<PAGE>
of the statement. Should this Lease commence or terminate at any time other than
the first day of the fiscal year, Tenant's Proportionate Share of the Operating
Expense Adjustment shall be prorated by reference to the exact number of
calendar days during such fiscal year that this Lease is in effect.
D. NET LEASE. This shall be a triple net Lease and Base Rent shall be paid to
Landlord absolutely net of all costs and expenses, except as specifically
provided to the contrary in this Lease. The provisions for payment of Operating
Expenses and the Operating Expense Adjustment are intended to pass on to Tenant
and reimburse Landlord for all costs and expenses of the nature described in
Paragraph 7.A. incurred in connection with the ownership, management,
maintenance, repair, preservation, replacement and operation of the Building
and/or Project and such additional facilities now and in subsequent years as may
be determined by Landlord to be necessary to the Building and/or Project.
E. TENANT AUDIT. In the event that Tenant shall dispute the amount set forth
in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant
shall have the right, not later than twenty (20) days following receipt of such
statement and upon the condition that Tenant shall first deposit with Landlord
the full amount in dispute, to cause Landlord's books and records with respect
to Operating Expenses for such fiscal year to be audited by certified public
accountants selected by Tenant and subject to Landlord's reasonable right of
approval. The Operating Expense Adjustment shall be appropriately adjusted on
the basis of such audit. If such audit discloses a liability for a refund in
excess of ten percent (10%) of Tenant's Proportionate Share of the Operating
Expense Adjustment previously reported, the cost of such audit shall be borne by
Landlord; otherwise the cost of such audit shall be paid by Tenant. If Tenant
shall not request an audit in accordance with the provisions of this Paragraph
7.E. within twenty (20) days after receipt of Landlord's statement provided
pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding
for all purposes hereof.
8. INSURANCE AND INDEMNIFICATION
A. LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for the
sole benefit of Landlord and under Landlord's sole control.
(1) PROPERTY INSURANCE. Landlord agrees to maintain property insurance
insuring the Building against damage or destruction due to risks including
fire, vandalism, and malicious mischief in an amount not less than the
replacement cost thereof, in the form and with deductibles and endorsements
as selected by Landlord. At its election, Landlord may instead obtain "All
Risk" coverage, and may also obtain earthquake, pollution, and/or flood
insurance in amounts selected by Landlord.
(2) OPTIONAL INSURANCE. Landlord, at Landlord's option, may also carry
insurance against loss of rent, in an amount equal to the amount of Base
Rent and Additional Rent that Landlord could be required to abate to all
Building tenants in the event of condemnation or casualty damage for a
period of twelve (12) months. Landlord may also carry such other insurance
as Landlord may deem prudent or advisable, including, without limitation,
liability insurance in such amounts and on such terms as Landlord shall
determine. Landlord shall not be obligated to insure any furniture,
machinery, goods, inventory or supplies, or other personal property or
fixtures which Tenant may keep or maintain in the Premises, or any
leasehold improvements, additions or alterations within the Premises.
B. TENANT'S INSURANCE.
(1) PROPERTY INSURANCE. Tenant shall procure at Tenant's sole cost and
expense and keep in effect from the date of this Lease and at all times
until the end of the Term, insurance on all personal property and fixtures
of Tenant and all improvements, additions or alterations made by or for
Tenant to the Premises on an "All Risk" basis, insuring such property for
the full replacement value of such property.
(2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost and
expense and keep in effect from the date of this Lease and at all times
until the end of the Term Commercial General Liability insurance applying
to the use and occupancy of the Premises and the Project, and any part of
either, and any areas adjacent thereto, and the business operated by Tenant
or by any other occupant of the Premises. Such insurance shall include
Broad Form Contractual Liability insurance coverage insuring all of
Tenant's indemnity obligations under this Lease. Such coverage shall have
a minimum combined single limit of liability of at least Two Million
Dollars ($2,000,000.00), and a minimum general aggregate limit of Three
Million Dollars ($3,000,000.00), with an "Additional Insured Managers or
Lessors of Premises Endorsement" and the "Amendment of the Pollution
Exclusion Endorsement." All such policies shall be written to apply to all
bodily injury, property damage or loss, personal injury and other covered
loss, however occasioned, occurring during the policy term, shall be
endorsed to add Landlord and any party holding an interest to which this
Lease may be subordinated as an additional insured, and shall provide that
such coverage shall be "PRIMARY" and non-contributing with any insurance
maintained by Landlord, which shall be excess insurance only. Such
coverage shall also contain endorsements: (i) deleting any employee
exclusion on personal injury coverage; (ii) including employees as
additional insureds; and (iii) providing for coverage of employer's
automobile non-ownership liability. All such insurance shall provide for
the severability of interests of insureds; and shall be written on an
"OCCURRENCE" basis, which shall afford coverage for all claims based on
acts, omissions, injury and damage, which occurred or arose (or the onset
of which occurred or arose) in whole or in part during the policy period.
Tenant shall also procure at Tenant's sole cost and expense and keep in
effect during the Term of this Lease, Legal Liability Insurance covering
direct physical damage and loss of use of the Building for which Tenant is
legally obligated in an amount of the full replacement value of the
Building.
(3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Tenant shall
carry Workers' Compensation Insurance as required by any Regulation,
throughout the Term at Tenant's sole cost and expense. Tenant shall also
carry Employers' Liability Insurance in amounts not less than One Million
Dollars ($1,000,000) each accident for bodily injury by accident; One
Million Dollars ($1,000,000) policy limit for bodily injury by disease; and
One Million Dollars ($1,000,000) each employee for bodily injury by
disease, throughout the Term at Tenant's sole cost and expense. (4)
COMMERCIAL AUTO LIABILITY INSURANCE. Tenant shall procure at Tenant's sole
cost and expense and keep in effect from the date of this Lease and at all
times until the end of the Term commercial auto liability insurance with a
combined limit of not less than One Million Dollars ($1,000,000) for bodily
injury and property damage for each accident. Such insurance shall cover
liability relating to any auto (including owned, hired and non-owned
autos).
(5) GENERAL INSURANCE REQUIREMENTS. All coverages described in this
Paragraph 8.B. shall be endorsed to (i) provide Landlord with thirty (30)
days' notice of cancellation or change in terms; and (ii) waive all rights
of subrogation by the insurance carrier against Landlord. If at any time
during the Term the amount or coverage of insurance which Tenant is
required to carry under this Paragraph 8.B. is, in Landlord's reasonable
judgment, materially less than the amount or type of insurance coverage
typically carried by owners or tenants of properties located in the general
area in which the Premises are located which are similar to and operated
for similar purposes as the Premises or if Tenant's use of the Premises
should change with or without Landlord's consent, Landlord shall have the
right to require Tenant to increase the amount or change the types of
insurance coverage required under this Paragraph 8.B. All insurance
policies required to be carried under this Lease shall be written by
6
<PAGE>
companies rated A VIII or better in "Best's Insurance Guide" and authorized
to do business in the State of California. In any event deductible amounts
shall not exceed Five Thousand Dollars ($5,000.00). Tenant shall deliver to
Landlord on or before the Term Commencement Date, and thereafter at least
thirty (30) days before the expiration dates of the expired policies,
certified copies of Tenant's insurance policies, or a certificate
evidencing the same issued by the insurer thereunder; and, in the event
Tenant shall fail to procure such insurance, or to deliver such policies or
certificates, Landlord may, at Landlord's option and in addition to
Landlord's other remedies in the event of a default by Tenant hereunder,
procure the same for the account of Tenant, and the cost thereof shall be
paid to Landlord as Additional Rent.
(6) INDEMNIFICATION. Landlord shall indemnify, defend by counsel reasonably
acceptable to Tenant, protect and hold Tenant harmless from and against any
and all claims, liabilities, losses, costs, damages, injuries or expenses,
including reasonable attorneys' fees and court costs, arising out of or
related to the gross negligence or willful misconduct of Landlord (or its
----- ------
agents, employees or contractors) or Landlord's breach of this Lease.
--------------------------------------------------------------------
Notwithstanding the foregoing or anything to the contrary contained in this
Lease, Landlord shall in no event be liable and Tenant hereby waives all
claims against Landlord for any loss, damage, injury or death to or of any
person or property (including without limitation personal property) caused
by theft, fire, rain or water leakage, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, HVAC or lighting fixtures, electrical or other systems, or by
acts of God (including without limitation flood or earthquake), acts of a
public enemy, riot, strike, insurrection, war, court order, requisition or
order of governmental body or authority or for any damage or inconvenience
which may arise through repair, except as expressly otherwise provided in
Paragraph 10, regardless of Landlord's gross negligence or misconduct (or
--
its agents, employees or contractors) or Landlord's breach of this Lease.
------------------------------------------------------------------------
In addition, Landlord shall in no event be liable for injury to Tenant's
business or any loss of income or profit therefrom or for consequential
damages, regardless of Landlord's gross negligence or misconduct (or its
------
agents, employees or contractors) or Landlord's breach of this Lease.
--------------------------------------------------------------------
Tenant shall indemnify, defend by counsel reasonably acceptable to
Landlord, protect and hold Landlord harmless from and against any and all
claims, liabilities, losses, costs, loss of rents, liens, damages, injuries
or expenses, including reasonable attorneys' fees and court costs, arising
out of or related to: (1) claims of injury to or death of persons or damage
to property occurring or resulting directly or indirectly from the use or
occupancy of the Premises by Tenant or Tenant's Parties, or from activities
of Tenant or Tenant's Parties; (2) claims arising from work or labor
performed, or for materials or supplies furnished to or at the request of
Tenant in connection with performance of any work done for the account of
Tenant within the Premises or Project; (3) claims arising from any breach
or default on the part of Tenant in the performance of any covenant
contained in this Lease; and (4) claims arising from the negligence or
intentional acts or omissions of Tenant or Tenant's Parties. The foregoing
indemnity by Tenant shall not be applicable to claims to the extent arising
from the gross negligence or willful misconduct of Landlord (or its agents,
----- -------------
employees or contractors) or Landlord's breach of this Lease. The
------------------------------------------------------------
provisions of this Paragraph shall survive the expiration or earlier
termination of this Lease.
9. WAIVER OF SUBROGATION
To the extent permitted by law and without affecting the coverage provided by
insurance to be maintained hereunder or any other rights or remedies, Landlord
and Tenant each waive any right to recover against the other for: (a) damages
for injury to or death of persons; (b) damages to property, including personal
property; (c) damages to the Premises or any part thereof; and (d) claims
arising by reason of the foregoing due to hazards covered by insurance to the
extent of proceeds recovered therefrom. This provision is intended to waive
fully, any rights and/or claims arising by reason of the foregoing, but only to
the extent that any of the foregoing damages and/or claims referred to above are
covered, and only to the extent of such coverage, by insurance actually carried
by either Landlord or Tenant. This provision is also intended to waive fully,
and for the benefit of each party, any rights and/or claims which might give
rise to a right of subrogation on any insurance carrier. Subject to all
qualifications of this Paragraph 9, Landlord waives its rights as specified in
this Paragraph 9 with respect to any subtenant that it has approved pursuant to
Paragraph 21 but only in exchange for the written waiver of such rights to be
given by such subtenant to Landlord. Each party shall cause each insurance
policy obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by any policy.
10. LANDLORD'S REPAIRS AND MAINTENANCE
Landlord shall at Landlord's expense maintain in good repair, reasonable wear
and tear excepted, the structural soundness of the roof, foundations, and
exterior walls of the Building. The term "exterior walls" as used herein shall
not include windows, glass or plate glass, doors, dock bumpers or dock plates,
special store fronts or office entries. Any damage caused by or repairs
necessitated by any act of Tenant or Tenant's Parties may be repaired by
Landlord at Landlord's option and Tenant's expense. Tenant shall immediately
give Landlord written notice of any defect or need of repairs in such components
of the Building after which Landlord shall have a reasonable opportunity and the
right to enter the Premises at all reasonable times to repair same. Landlord's
liability with respect to any defects, repairs, or maintenance for which
Landlord is responsible under any of the provisions of this Lease shall be
limited to the cost of such repairs or maintenance, and there shall be no
abatement of rent and no liability of Landlord by reason of any injury to or
interference with Tenant's business arising from the making of repairs,
alterations or improvements in or to any portion of the Premises or Project or
to fixtures, appurtenances or equipment in the Building, except as provided in
Paragraph 24. By taking possession of the Premises, Tenant accepts them as
being in good order, condition and repair and the condition in which Landlord is
obligated to deliver them.
11. TENANT'S REPAIRS AND MAINTENANCE
Tenant shall at all times during the Term at Tenant's expense maintain all
parts of the Premises in a first-class, good, clean and secure condition and
promptly make all necessary repairs and replacements, as determined by Landlord,
including but not limited to, all windows, glass, doors, walls, including
demising walls, and wall finishes, floors and floor covering, heating,
ventilating and air conditioning systems, ceiling insulation, truck doors,
hardware, dock bumpers, dock plates and levelers, plumbing work and fixtures,
downspouts, entries, skylights, smoke hatches, roof vents, electrical and
lighting systems, and fire sprinklers, with materials and workmanship of the
same character, kind and quality as the original. Tenant shall at Tenant's
expense also perform regular removal of trash and debris. If Tenant uses rail
and if required by the railroad company, Tenant agrees to sign a joint
maintenance agreement governing the use of the rail spur, if any. Tenant shall,
at Tenant's own expense, enter into a regularly scheduled preventative
maintenance/service contract with a maintenance contractor for servicing all hot
water, heating and air conditioning systems and equipment within or serving the
Premises. The maintenance contractor and the contract must be approved by
Landlord. The service contract must include all services suggested by the
equipment manufacturer within the operation/maintenance manual and must become
effective and a copy thereof delivered to Landlord within thirty (30) days after
the Term Commencement Date. Landlord may, upon notice to Tenant, enter into
such a service contract on behalf of Tenant or perform the work and in either
case charge Tenant the cost thereof along with a reasonable amount for
Landlord's overhead. Notwithstanding anything to the contrary contained herein,
Tenant shall, at its expense, promptly repair any damage to the Premises or the
Building or Project resulting from or caused by any act of Tenant or Tenant's
Parties.
7
<PAGE>
12. ALTERATIONS
A. Tenant shall not make, or allow to be made, any alterations, physical
additions, improvements or partitions, including without limitation the
attachment of any fixtures or equipment, in, about or to the Premises
("ALTERATIONS") exceeding $5,000 in any single instance or exceed $15,000 in any
----------------------------------------------------------------
given year without obtaining the prior written consent of Landlord, which
- ----------
consent shall not be unreasonably withheld with respect to proposed Alterations
which: (a) comply with all applicable Regulations; (b) are, in Landlord's
opinion, compatible with the Project and its mechanical, plumbing, electrical,
heating/ventilation/air conditioning systems; and (c) will not interfere with
the use and occupancy of any other portion of the Building or Project by any
other tenant or its invitees. Specifically, but without limiting the generality
of the foregoing, Landlord shall have the right of written consent for all plans
and specifications for the proposed Alterations, construction means and methods,
all appropriate permits and licenses, any contractor or subcontractor to be
employed on the work of Alterations, and the time for performance of such work,
and may impose rules and regulations for contractors and subcontractors
performing such work. Tenant shall also supply to Landlord any documents and
information reasonably requested by Landlord in connection with Landlord's
consideration of a request for approval hereunder. Tenant shall cause all
Alterations to be accomplished in a first-class, good and workmanlike manner,
and to comply with all applicable Regulations. Tenant shall at Tenant's sole
expense, perform any additional work required under applicable Regulations due
to the Alterations hereunder. No consent by Landlord to any proposed Alteration
or additional work shall constitute a waiver of Tenant's obligations under this
Paragraph 12. Tenant shall reimburse Landlord for all costs which Landlord may
incur in connection with granting approval to Tenant for any such Alterations,
including any costs or expenses which Landlord may incur in electing to have
outside architects and engineers review said plans and specifications. All such
Alterations shall remain the property of Tenant until the expiration or earlier
termination of this Lease, at which time they shall be and become the property
of Landlord if Landlord so elects. At the time of approval, Landlord will
--------------------------------------
notify Tenant if Landlord will require that Tenant, at Tenant's expense, remove
- ------------------------------
any or all Alterations made by Tenant and restore the Premises by the expiration
or earlier termination of this Lease, to their condition existing prior to the
construction of any such Alterations. All such removals and restoration shall
be accomplished in a good and workmanlike manner so as not to cause any damage
to the Premises or Project whatsoever. If Tenant fails to remove such
Alterations or Tenant's trade fixtures or furniture, Landlord may keep and use
them or remove any of them and cause them to be stored or sold in accordance
with applicable law, at Tenant's sole expense. In addition to and wholly apart
from Tenant's obligation to pay Tenant's Proportionate Share of Operating
Expenses, Tenant shall be responsible for and shall pay prior to delinquency any
taxes or governmental service fees, possessory interest taxes, fees or charges
in lieu of any such taxes, capital levies, or other charges imposed upon, levied
with respect to or assessed against its personal property, on the value of
Alterations within the Premises, and on Tenant's interest pursuant to this
Lease, or any increase in any of the foregoing based on such Alterations. To
the extent that any such taxes are not separately assessed or billed to Tenant,
Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.
B. In compliance with Paragraph 27 hereof, at least ten (10) business days
before beginning construction of any Alteration, Tenant shall give Landlord
written notice of the expected commencement date of that construction to permit
Landlord to post and record a notice of non-responsibility. Upon substantial
completion of construction, Tenant shall cause a timely notice of completion to
be recorded in the office of the recorder of the county in which the Building is
located.
13. SIGNS
All signs, notices and graphics of every kind or character, visible in or from
public view or corridors, the common areas or the exterior of the Premises,
shall be subject to Landlord's prior written approval, which Landlord shall have
the right to withhold in its absolute and sole discretion. Tenant shall not
place or maintain any banners whatsoever or any window decor in or on any
exterior window or window fronting upon any common areas or service area or upon
any truck doors or man doors without Landlord's prior written approval which
Landlord shall have the right to withhold in its absolute and sole discretion.
Any installation of signs or graphics on or about the Premises or Project shall
be subject to any Regulations and to any other requirements imposed by Landlord.
Tenant shall remove all such signs or graphics by the termination of this Lease.
Such installations and removals shall be made in such manner as to avoid injury
to or defacement of the Premises, Building or Project and any other improvements
contained therein, and Tenant shall repair any injury or defacement including
without limitation discoloration caused by such installation or removal.
14. INSPECTION/POSTING NOTICES
After reasonable notice, except in emergencies where no such notice shall be
required, Landlord and Landlord's agents and representatives, shall have the
right to enter the Premises to inspect the same, to clean, to perform such work
as may be permitted or required hereunder, to make repairs or alterations to the
Premises or Project or to other tenant spaces therein, to deal with emergencies,
to post such notices as may be permitted or required by law to prevent the
perfection of liens against Landlord's interest in the Project or to exhibit the
Premises to prospective tenants, purchasers, encumbrancers or to others, or for
any other purpose as Landlord may deem necessary or desirable; provided,
however, that Landlord shall use reasonable efforts not to unreasonably
interfere with Tenant's business operations. Tenant shall not be entitled to
any abatement of Rent by reason of the exercise of any such right of entry. At
any time within six (6) months prior to the expiration of the Term or following
any earlier termination of this Lease or agreement to terminate this Lease,
Landlord shall have the right to erect on the Premises and/or Project a suitable
sign indicating that the Premises are available for lease.
15. UTILITIES
Tenant shall pay directly for all water, gas, heat, air conditioning, light,
power, telephone, sewer, sprinkler charges and other utilities and services used
on or from the Premises, together with any taxes, penalties, surcharges or the
like pertaining thereto, and maintenance charges for utilities and shall furnish
all electric light bulbs, ballasts and tubes. If any such services are not
separately metered to Tenant, Tenant shall pay a proportion, as determined by
Landlord, of all charges jointly serving other premises. Landlord shall not be
liable for any damages directly or indirectly resulting from nor shall the Rent
or any monies owed Landlord under this Lease herein reserved be abated by reason
of: (a) the installation, use or interruption of use of any equipment used in
connection with the furnishing of any such utilities or services; (b) the
failure to furnish or delay in furnishing any such utilities or services when
such failure or delay is caused by acts of God or the elements, labor
disturbances of any character, or any other accidents or other conditions beyond
the reasonable control of Landlord; or (c) the limitation, curtailment,
rationing or restriction on use of water, electricity, gas or any other form of
energy or any other service or utility whatsoever serving the Premises or
Project. Landlord shall be entitled to cooperate voluntarily and in a
reasonable manner with the efforts of national, state or local governmental
agencies or utility suppliers in reducing energy or other resource consumption.
The obligation to make services available hereunder shall be subject to the
limitations of any such voluntary, reasonable program.
16. SUBORDINATION
Without the necessity of any additional document being executed by Tenant for
the purpose of effecting a subordination, the Lease shall be subject and
subordinate at all times to: (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Premises and/or the land
upon which the Premises and Project are situated, or both; and (b) any mortgage
or deed of trust which may now exist or be placed upon the Building, the Project
and/or the land upon which the Premises or the Project are situated, or said
ground leases or underlying leases, or Landlord's interest or estate in any of
said items which is specified as security.
8
<PAGE>
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any such
liens to this Lease. In the event that any ground lease or underlying lease
terminates for any reason or any mortgage or deed of trust is foreclosed or a
conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of the
successor in interest to Landlord and Tenant shall not be disturbed in its
possession under this Lease by such successor in interest so long as Tenant is
not in default under this Lease. Within ten (10) days after request by Landlord,
Tenant shall execute and deliver any additional documents evidencing Tenant's
attornment or the subordination of this Lease with respect to any such ground
leases or underlying leases or any such mortgage or deed of trust, in the form
requested by Landlord or by any ground landlord, mortgagee, or beneficiary under
a deed of trust, subject to such nondisturbance requirement.
17. FINANCIAL STATEMENTS
At the request of Landlord from time to time, Tenant shall provide to Landlord
Tenant's and any guarantor's current financial statements or other information
discussing financial worth of Tenant and any guarantor, which Landlord shall use
solely for purposes of this Lease and in connection with the ownership,
management, financing and disposition of the Project.
18. ESTOPPEL CERTIFICATE
Tenant agrees from time to time, within ten (10) days after request of Landlord,
to deliver to Landlord, or Landlord's designee, an estoppel certificate stating
that this Lease is in full force and effect, that this Lease has not been
modified (or stating all modifications, written or oral, to this Lease), the
date to which Rent has been paid, the unexpired portion of this Lease, that
there are no current defaults by Landlord or Tenant under this Lease (or
specifying any such defaults), and such other matters pertaining to this Lease
as may be reasonably requested by Landlord. Failure by Tenant to execute and
deliver such certificate shall constitute an acceptance of the Premises and
acknowledgment by Tenant that the statements included are true and correct
without exception. Tenant agrees that if Tenant fails to execute and deliver
such certificate within such ten (10) day period, Landlord may execute and
deliver such certificate on Tenant's behalf and that such certificate shall be
binding on Tenant. Landlord and Tenant intend that any statement delivered
pursuant to this Paragraph may be relied upon by any mortgagee, beneficiary,
purchaser or prospective purchaser of the Project or any interest therein. The
parties agree that Tenant's obligation to furnish such estoppel certificates in
a timely fashion is a material inducement for Landlord's execution of the Lease,
and shall be an event of default if Tenant fails to fully comply or makes any
material misstatement in any such certificate.
19. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord upon execution of this Lease, a Security
Deposit as stated in the Basic Lease Information, which sum shall be held by
Landlord, without obligation to pay interest, as security for the performance of
Tenant's covenants and obligations under this Lease. The Security Deposit is
not an advance rental deposit or a measure of damages incurred by Landlord in
case of Tenant's default. Upon the occurrence of any event of default by
Tenant, Landlord may from time to time, without prejudice to any other remedy
provided herein or provided by law, use such fund to the extent necessary to
make good any arrears of Rent or other payments due to Landlord hereunder, and
any other damage, injury, expense or liability caused by such event of default,
and Tenant shall pay to Landlord, on demand, the amount so applied in order to
restore the Security Deposit to its original amount. Although the Security
Deposit shall be deemed the property of Landlord, any remaining balance of such
deposit shall be returned by Landlord to Tenant at such time after termination
of this Lease that all of Tenant's obligations under this Lease have been
fulfilled. Landlord may use and commingle the Security Deposit with other funds
of Landlord.
20. TENANT'S REMEDIES
The obligations and liability of Landlord to Tenant for any default by Landlord
under the terms of this Lease are not personal obligations of Landlord or of the
individual or other partners of Landlord or its or their partners, directors,
officers, or shareholders, and Tenant agrees to look solely to Landlord's
interest in the Project for the recovery of any amount from Landlord, and shall
not look to other assets of Landlord nor seek recourse against the assets of the
individual or other partners of Landlord or its or their partners, directors,
officers or shareholders. Any lien obtained to enforce any such judgment and
any levy of execution thereon shall be subject and subordinate to any lien,
mortgage or deed of trust on the Project.
21. ASSIGNMENT AND SUBLETTING
A. (1) GENERAL. Tenant shall not assign or pledge this Lease or sublet the
Premises or any part thereof, whether voluntarily or by operation of law, or
permit the use or occupancy of the Premises or any part thereof by anyone
other than Tenant, or suffer or permit any such assignment, pledge,
subleasing or occupancy, without Landlord's prior written consent except as
provided herein. If Tenant desires to assign this Lease or sublet any or all
of the Premises, Tenant shall give Landlord written notice (the "TRANSFER
NOTICE") at least forty-five (45) days prior to the anticipated effective
----------
date of the proposed assignment or sublease, which shall contain all of the
information reasonably requested by Landlord to address Landlord's decision
criteria specified hereinafter. Landlord shall then have a period of fifteen
-------
(15) days following receipt of the Transfer Notice to notify Tenant in
writing that Landlord elects either: (1) to terminate this Lease as to the
space so affected as of the date so requested by Tenant; or (2) to consent
to the proposed assignment or sublease, subject, however, to Landlord's
prior written consent of the proposed assignee or subtenant and of any
related documents or agreements associated with the assignment or sublease.
If Landlord should fail to notify Tenant in writing of such election within
said period, Landlord shall be deemed to have waived option (1) above, but
written consent by Landlord of the proposed assignee or subtenant shall be
required. If Landlord does not exercise option (1) above, Landlord's consent
to a proposed assignment or sublet shall not be unreasonably withheld.
(2) CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other instances
in which it may be reasonable for Landlord to withhold Landlord's consent to
an assignment or subletting, Landlord and Tenant acknowledge that it shall
be reasonable for Landlord to withhold Landlord's consent in the following
instances: the use of the Premises by such proposed assignee or subtenant
would not be a Permitted Use or would violate any exclusivity arrangement
which Landlord has with any other tenant or occupant or would increase the
Parking Density of the Building or Project; the proposed assignee or
subtenant is not of sound financial condition as determined by Landlord in
Landlord's sole discretion; the proposed assignee or subtenant is a
governmental agency; the proposed assignee or subtenant does not have a good
reputation as a tenant of property; the proposed assignee or subtenant is a
person with whom Landlord is negotiating to lease space in the Project or is
a present tenant of the Project ; the assignment or subletting would entail
any Alterations which would lessen the value of the leasehold improvements
in the Premises; or Tenant is in default of any obligation of Tenant under
this Lease, or Tenant has defaulted under this Lease on three (3) or more
occasions during any twelve (12) months preceding the date that Tenant shall
request consent. Failure by Landlord to consent to a proposed assignee or
subtenant shall not cause a termination of this Lease. Upon a termination
under Paragraph 21.A.(1), Landlord may lease the Premises to any party,
including parties with whom Tenant has negotiated an assignment or sublease,
without incurring any liability to Tenant. At the option of Landlord, a
surrender and termination of this Lease shall operate as an assignment to
Landlord of some or all subleases or subtenancies. Landlord shall exercise
this option by giving notice of that assignment to such subtenants on or
before the effective date of the surrender and termination.
9
<PAGE>
B. BONUS RENT. Any Rent or other consideration realized by Tenant under any
such sublease or assignment in excess of the Rent payable hereunder, after
amortization of a reasonable brokerage commission incurred by Tenant, shall be
divided and paid, fifty percent (50%) to Tenant,fifty percent (50%) to Landlord.
----- -- ----- --
In any subletting or assignment undertaken by Tenant, Tenant shall diligently
seek to obtain the maximum rental amount available in the marketplace for
comparable space available for primary leasing.
C. CORPORATION. Notwithstanding the provisions of this Paragraph 21, Tenant
- -----------------------------------------------------------------------------
may assign this Lease or sublet any portion of the Premises to any corporation
- ------------------------------------------------------------------------------
which controls, is controlled by or is under common control with, Tenant (each,
- ------------------------------------------------------------------------------
a "PERMITTED TENANT AFFILIATE"), provided that the Permitted Tenant Affiliate
- -----------------------------------------------------------------------------
assumes, in full, the obligations of Tenant under this Lease (or assumes, in the
- --------------------------------------------------------------------------------
case of a sublease of a portion of the Term of the Premises, the obligations of
- -------------------------------------------------------------------------------
Tenant with respect to such portion) and has a net worth at least equal to
- --------------------------------------------------------------------------
Tenant's net worth immediately before the assignment or subletting. If Tenant
- ------------------------------------------------------------------------------
is a corporation, a dissolution of the corporation or a transfer (by one (1) or
- -------------------------------------------------------------------------------
more transactions) of a majority of the voting stock of Tenant shall be deemed
- ------------------------------------------------------------------------------
to be an assignment of this Lease subject to the provisions of this Paragraph
- -----------------------------------------------------------------------------
21; provided, however, that the provisions of this sentence shall not apply to
- ------------------------------------------------------------------------------
transactions with a corporation into or with which Tenant is merged or
- ----------------------------------------------------------------------
consolidated or to which substantially all of Tenant's assets are transferred
- -----------------------------------------------------------------------------
(each, a "surviving corporation") where (i) the surviving corporation has a net
- -------------------------------------------------------------------------------
worth at least equal to Tenant's net worth immediately before the merger,
- -------------------------------------------------------------------------
consolidation or asset transfer and (ii) the surviving corporation assumes, in
- ------------------------------------------------------------------------------
full, the obligations of Tenant under this Lease (or assumes, in the case of a
- ------------------------------------------------------------------------------
sublease of a portion of the Term or the Premises, the obligations of Tenant
- ----------------------------------------------------------------------------
with respect to such portion).
- ----------------------------
D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture,
unincorporated limited liability company or other unincorporated business form,
a transfer of the interest of persons, firms or entities responsible for
managerial control of Tenant by sale, assignment, bequest, inheritance,
operation of law or other disposition, so as to result in a change in the
present control of said entity and/or a change in the identity of the persons
responsible for the general credit obligations of said entity shall constitute
an assignment for all purposes of this Lease.
E. LIABILITY. No assignment or subletting by Tenant, permitted or otherwise,
shall relieve Tenant of any obligation under this Lease or alter the primary
liability of the Tenant named herein for the payment of Rent or for the
performance of any other obligations to be performed by Tenant, including
obligations contained in Paragraph 25 with respect to any assignee or subtenant.
Any assignment or subletting which conflicts with the provisions hereof shall be
void.
22. AUTHORITY
Landlord represents and warrants that it has full right and authority to
enter into this Lease and to perform all of Landlord's obligations hereunder and
that all persons signing this Lease on its behalf are authorized to do. Tenant
represents and warrants that it has full right and authority to enter into this
Lease and to perform all of Tenant's obligations hereunder and that all persons
signing this Lease on its behalf are authorized to do.
23. CONDEMNATION
A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any substantial part
of the Project of which the Premises are a part should be taken or condemned for
any public use under governmental law, ordinance or regulation, or by right of
eminent domain, or by private purchase in lieu thereof, and the taking would
prevent or materially interfere with the Permitted Use of the Premises, this
Lease shall terminate and the Rent shall be abated during the unexpired portion
of this Lease, effective when the physical taking of said Premises shall have
occurred.
B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the Project of
which the Premises are a part should be taken or condemned for any public use
under governmental law, ordinance or regulation, or by right of eminent domain,
or by private purchase in lieu thereof, and the taking materially interferes
with the Permitted Use of the Premises, and this Lease is not terminated as
provided in Paragraph 23.A. above, the Rent payable hereunder during the
unexpired portion of the Lease shall be reduced, beginning on the date when the
physical taking shall have occurred, to such amount as may be fair and
reasonable under all of the circumstances.
C. AWARD. Landlord shall be entitled to any and all payment, income, rent,
award or any interest therein whatsoever which may be paid or made in connection
with such taking or conveyance and Tenant shall have no claim against Landlord
or otherwise for the value of any unexpired portion of this Lease.
Notwithstanding the foregoing, any compensation specifically and separately
awarded Tenant for Tenant's personal property and moving costs, shall be and
remain the property of Tenant.
D. WAIVER OF CCP(S)1265.130. Each party waives the provisions of California
Civil Code Procedure Section 1265.130 allowing either party to petition the
superior court to terminate this Lease as a result of a partial taking.
24. CASUALTY DAMAGE
A. GENERAL. If the Premises or Building should be damaged or destroyed by
fire, tornado, or other casualty (collectively, "CASUALTY"), Tenant shall give
immediate written notice thereof to Landlord. Within thirty (30) days after
Landlord's receipt of such notice, Landlord shall notify Tenant whether in
Landlord's estimation material restoration of the Premises can reasonably be
made either: (1) within ninety (90) days; (2) in more than ninety (90) days but
within one hundred eighty (180) days; or (3) in more than one hundred eighty
(180) days from the date of such notice and receipt of required permits for such
restoration. Landlord's determination shall be binding on Tenant.
B. WITHIN 90 DAYS. If the Premises or Building should be damaged by Casualty
to such extent that material restoration can in Landlord's estimation be
reasonably completed within ninety (90) days after the date of such damage and
receipt of required permits for such restoration, this Lease shall not
terminate. Provided that insurance proceeds are received by Landlord to fully
repair the damage, Landlord shall proceed to rebuild and repair the Premises in
the manner determined by Landlord, except that Landlord shall not be required to
rebuild, repair or replace any part of the Alterations which may have been
placed on or about the Premises by Tenant. If the Premises are untenantable in
whole or in part following such damage, the Rent payable hereunder during the
period in which they are untenantable shall be abated proportionately, but only
to the extent of rental abatement insurance proceeds received by Landlord during
the time and to the extent the Premises are unfit for occupancy.
C. GREATER THAN 90 DAYS. If the Premises or Building should be damaged by
Casualty to such extent that rebuilding or repairs can in Landlord's estimation
be reasonably completed in more than ninety (90) days but within one hundred
eighty (180) days after the date of such damage and receipt of required permits
for such rebuilding or repair, then Landlord shall have the option of either:
(1) terminating this Lease effective upon the date of the occurrence of such
damage, in which event the Rent shall be abated during the unexpired portion of
this Lease; or (2) electing to rebuild or repair the Premises in the manner
determined by Landlord. Notwithstanding the above,
10
<PAGE>
Landlord shall not be required to rebuild, repair or replace any part of the
Alterations which may have been placed, on or about the Premises by Tenant. If
the Premises are untenantable in whole or in part following such damage, the
Rent payable hereunder during the period in which they are untenantable shall be
abated proportionately, but only to the extent of rental abatement insurance
proceeds received by Landlord during the time and to the extent the Premises are
unfit for occupancy. In the event that Landlord should fail to complete such
repairs and rebuilding within one hundred eighty (180) days after the date upon
which Landlord is notified by Tenant of such damage and receipt of required
permits, such period of time to be extended for delays caused by the fault or
neglect of Tenant or otherwise by Tenant or because of acts of God, acts of
public agencies, labor disputes, strikes, fires, freight embargoes, rainy or
stormy weather, inability to obtain materials, supplies or fuels, or delays of
the contractors or subcontractors or any other causes or contingencies beyond
the reasonable control of Landlord, Tenant may at Tenant's option within ten
(10) days after the expiration of such one hundred eighty (180) day period (as
such may be extended), terminate this Lease by delivering written notice of
termination to Landlord as Tenant's exclusive remedy, whereupon all rights
hereunder shall cease and terminate thirty (30) days after Landlord's receipt of
such termination notice.
D. GREATER THAN 180 DAYS. If the Premises or Building should be so damaged by
Casualty that rebuilding or repairs cannot in Landlord's estimation be completed
one hundred eighty (180) days after such damage and receipt of required permits
for such rebuilding or repair, this Lease shall terminate and the Rent shall be
abated during the unexpired portion of this Lease, effective upon the date of
the occurrence of such damage.
E. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if the
Premises or any other portion of the Building are damaged by Casualty resulting
from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's
Parties, Base Rent and Additional Rent shall not be diminished during the repair
of such damage and Tenant shall be liable to Landlord for the cost and expense
of the repair and restoration of the Building caused thereby to the extent such
cost and expense is not covered by insurance proceeds.
F. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary, in the
event that the Premises or Building are damaged or destroyed and are not fully
covered by the insurance proceeds received by Landlord or in the event that the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Premises requires that the insurance proceeds be applied to such indebtedness,
then in either case Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within thirty (30) days after
the date of notice to Landlord that said damage or destruction is not fully
covered by insurance or such requirement is made by any such holder, as the case
may be, whereupon all rights and obligations hereunder shall cease and
terminate.
G. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy in
the event of damage or destruction to the Premises or the Building. As a
material inducement to Landlord entering into this Lease, Tenant hereby waives
any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil
Code of California with respect to any destruction of the Premises, Landlord's
obligation for tenantability of the Premises and Tenant's right to make repairs
and deduct the expenses of such repairs, or under any similar law, statute or
ordinance now or hereafter in effect.
H. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction of
the Premises or the Building, under no circumstances shall Landlord be required
to repair any injury or damage to, or make any repairs to or replacements of,
Tenant's personal property.
25. HOLDING OVER
Unless Landlord expressly consents in writing to Tenant's holding over, Tenant
shall be only a Tenant at sufferance, whether or not Landlord accepts any Rent
from Tenant or any other person while Tenant is holding over without Landlord's
written consent. If Tenant shall retain possession of the Premises or any
portion thereof without Landlord's consent following the expiration of this
Lease or sooner termination for any reason, then Tenant shall pay to Landlord
for each day of such retention one hundred fifty percent (150%) the amount of
-------------------------------
daily rental as of the last month prior to the date of expiration or earlier
termination. Tenant shall also indemnify, defend, protect and hold Landlord
harmless from any loss, liability or cost, including reasonable attorneys' fees,
resulting from delay by Tenant in surrendering the Premises, including, without
limitation, any claims made by the succeeding tenant founded on such delay.
Acceptance of Rent by Landlord following expiration or earlier termination shall
not constitute a renewal of this Lease, and nothing contained in this Paragraph
25 shall waive Landlord's right of reentry or any other right. Additionally, in
the event that upon expiration or earlier termination of this Lease, Tenant has
not fulfilled its obligation with respect to repairs and cleanup of the Premises
or any other Tenant obligations as set forth in this Lease, then Landlord shall
have the right to perform any such obligations as it deems necessary at Tenant's
sole cost and expense, and any time required by Landlord to complete such
obligations shall be considered a period of holding over and the terms of this
Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any
expiration or earlier termination of this Lease.
26. DEFAULT
A. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an event of default on the part of Tenant:
(1) ABANDONMENT. Abandonment or vacation of the Premises for a continuous
period in excess of five (5) days. Tenant waives any right to notice
Tenant may have under Section 1951.3 of the Civil Code of the State of
California, the terms of this Paragraph 26.A. being deemed such notice to
Tenant as required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any other
amount due and payable hereunder upon the date when said payment is due.
(3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or
covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing
for fifteen (15) days after written notice of such failure.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit of
creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of thirty (30)
days. In the event that under applicable law, the trustee in bankruptcy or
Tenant has the right to affirm this Lease and continue to perform the
obligations of Tenant hereunder, such trustee or Tenant shall, in such time
period as may be permitted by the bankruptcy court having jurisdiction,
cure all defaults of Tenant hereunder outstanding as of the date of the
affirmance of this Lease and provide to Landlord such adequate assurances
as may be necessary to ensure Landlord of the continued performance of
Tenant's obligations under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or the Premises, if such appointment
remains undismissed or undischarged for a period of ten (10) days after the
order therefor.
11
<PAGE>
(7) ATTACHMENT. The attachment, execution or other judicial seizure of all
or substantially all of Tenant's assets or the Premises, if such attachment
or other seizure remains undismissed or undischarged for a period of ten
(10) days after the levy thereof.
B. REMEDIES UPON DEFAULT.
(1) TERMINATION. In the event of the occurrence of any event of default,
Landlord shall have the right to give a written termination notice to
Tenant, and on the date specified in such notice, Tenant's right to
possession shall terminate, and this Lease shall terminate unless on or
before such date all Rent in arrears and all costs and expenses incurred by
or on behalf of Landlord hereunder shall have been paid by Tenant and all
other events of default of this Lease by Tenant at the time existing shall
have been fully remedied to the satisfaction of Landlord. At any time
after such termination, Landlord may recover possession of the Premises or
any part thereof and expel and remove therefrom Tenant and any other person
occupying the same, by any lawful means, and again repossess and enjoy the
Premises without prejudice to any of the remedies that Landlord may have
under this Lease, or at law or equity by any reason of Tenant's default or
of such termination. Landlord hereby reserves the right to recognize the
continued possession of any subtenant.
(2) CONTINUATION AFTER DEFAULT. Even though an event of default may have
occurred, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under Paragraph 26.B.(1) hereof,
and Landlord may enforce all of Landlord's rights and remedies under this
Lease and at law or in equity, including without limitation, the right to
recover Rent as it becomes due, and Landlord, without terminating this
Lease, may exercise all of the rights and remedies of a landlord under
Section 1951.4 of the Civil Code of the State of California or any
successor code section. Acts of maintenance, preservation or efforts to
lease the Premises or the appointment of a receiver under application of
Landlord to protect Landlord's interest under this Lease or other entry by
Landlord upon the Premises shall not constitute an election to terminate
Tenant's right to possession.
(3) INCREASED SECURITY DEPOSIT. If Tenant is in default under Paragraph
26.A.(2) hereof and such default remains uncured for ten (10) days after
such occurrence or such default occurs more than three times in any twelve
(12) month period, Landlord may require that Tenant increase the Security
Deposit to the amount of three times the current month's Rent at the time
of the most recent default.
C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant to the
provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights and
remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State
of California, or any successor code sections. Upon such termination, in
addition to any other rights and remedies to which Landlord may be entitled
under applicable law or at equity, Landlord shall be entitled to recover from
Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts
which had been earned at the time of termination, (2) the worth at the time of
award of the amount by which the unpaid Rent that would have been earned after
the date of termination until the time of award exceeds the amount of such Rent
loss that Tenant proves could have been reasonably avoided; (3) 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 the award exceeds the amount of such Rent loss that the Tenant
proves could be reasonably avoided; and (4) any other amount and court costs
necessary to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform Tenant's obligations under this Lease or which, in
the ordinary course of things, would be likely to result therefrom. The "worth
at the time of award" as used in (1) and (2) above shall be computed at the
lesser of the "prime rate," as announced from time to time by Wells Fargo Bank,
N.A. (San Francisco) or its successor, plus five (5) percentage points, or the
maximum interest rate allowed by law ("APPLICABLE INTEREST RATE"). The "worth
at the time of award" as used in (3) above shall be computed by discounting such
amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco
at the time of the award plus one percent (1%). If this Lease provides for any
periods during the Term during which Tenant is not required to pay Base Rent or
if Tenant otherwise receives a Rent concession, then upon the occurrence of an
event of default, Tenant shall owe to Landlord the full amount of such Base Rent
or value of such Rent concession, plus interest at the Applicable Interest Rate,
calculated from the date that such Base Rent or Rent concession would have been
payable.
D. LATE CHARGE. In addition to its other remedies, Landlord shall have the
right without notice or demand to add to the amount of any payment required to
be made by Tenant hereunder, and which is not paid and received by Landlord on
or before the first day of each calendar month, an amount equal to five percent
----
(5%) of the delinquency for each month or portion thereof that the delinquency
-
remains outstanding to compensate Landlord for the loss of the use of the amount
not paid and the administrative costs caused by the delinquency, the parties
agreeing that Landlord's damage by virtue of such delinquencies would be
extremely difficult and impracticable to compute and the amount stated herein
represents a reasonable estimate thereof. Any waiver by Landlord of any late
charges shall not constitute a waiver of other late charges or any other
remedies available to Landlord.
E. REMEDIES CUMULATIVE. All rights, privileges and elections or remedies of
the parties are cumulative and not alternative, to the extent permitted by law
and except as otherwise provided herein.
27. LIENS
Tenant shall at all times keep the Premises and the Project free from liens
arising out of or related to work or services performed, materials or supplies
furnished or obligations incurred by Tenant or in connection with work made,
suffered or done by or on behalf of Tenant in or on the Premises or Project. In
the event that Tenant shall not, within ten (10) days following the imposition
of any such lien, cause the same to be released of record by payment or posting
of a proper bond, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to cause the same
to be released by such means as Landlord shall deem proper, including payment of
the claim giving rise to such lien. All sums paid by Landlord on behalf of
Tenant and all expenses incurred by Landlord in connection therefor shall be
payable to Landlord by Tenant on demand with interest at the Applicable Interest
Rate. Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law, or which Landlord shall deem
proper, for the protection of Landlord, the Premises, the Project and any other
party having an interest therein, from mechanics' and materialmen's liens, and
Tenant shall give Landlord not less than ten (10) business days prior written
notice of the commencement of any work in the Premises or Project which could
lawfully give rise to a claim for mechanics' or materialmen's liens to permit
Landlord to post and record a timely notice of non-responsibility.
12
<PAGE>
28. TRANSFERS BY LANDLORD
In the event of a sale or conveyance by Landlord of the Building or a
foreclosure by any creditor of Landlord, the same shall operate to release
Landlord from any liability upon any of the covenants or conditions, express or
implied, herein contained in favor of Tenant, first arising and accruing after
--------------------------
the passing of title to Landlord's successor-in-interest. In such event, Tenant
agrees to look solely to the responsibility of the successor-in-interest of
Landlord under this Lease with respect to the performance of the covenants and
duties of "Landlord" to be performed first arising and accruing after the
--------------------------
passing of title to Landlord's successor-in-interest. This Lease shall not be
affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee. Landlord's successor(s)-in-interest shall not have liability to
Tenant with respect to the failure to perform any of the obligations of
"Landlord," to the extent required to be performed prior to the date such
successor(s)-in-interest became the owner of the Building.
29. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
All covenants and agreements to be performed by Tenant under any of the terms of
this Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any abatement of Rent. If Tenant shall fail to pay any sum of money,
other than Base Rent, required to be paid by Tenant hereunder or shall fail to
perform any other act on Tenant's part to be performed hereunder, including
Tenant's obligations under Paragraph 11 hereof, and such failure shall continue
for fifteen (15) days after notice thereof by Landlord, in addition to the other
rights and remedies of Landlord, Landlord may make any such payment and perform
any such act on Tenant's part. In the case of an emergency, no prior
notification by Landlord shall be required. Landlord may take such actions
without any obligation and without releasing Tenant from any of Tenant's
obligations. All sums so paid by Landlord and all incidental costs incurred by
Landlord and interest thereon at the Applicable Interest Rate, from the date of
payment by Landlord, shall be paid to Landlord on demand as Additional Rent.
30. WAIVER
If either Landlord or Tenant waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant or
condition contained herein. The acceptance of Rent by Landlord shall not
constitute a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, regardless of Landlord's knowledge of such preceding
breach at the time Landlord accepted such Rent. Failure by Landlord to enforce
any of the terms, covenants or conditions of this Lease for any length of time
shall not be deemed to waive or decrease the right of Landlord to insist
thereafter upon strict performance by Tenant. Waiver by Landlord of any term,
covenant or condition contained in this Lease may only be made by a written
document signed by Landlord.
31. NOTICES
Each provision of this Lease or of any applicable governmental laws, ordinances,
regulations and other requirements with reference to sending, mailing, or
delivery of any notice or the making of any payment by Landlord or Tenant to the
other shall be deemed to be complied with when and if the following steps are
taken:
A. RENT. All Rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at Landlord's Remittance Address set
forth in the Basic Lease Information, or at such other address as Landlord may
specify from time to time by written notice delivered in accordance herewith.
Tenant's obligation to pay Rent and any other amounts to Landlord under the
terms of this Lease shall not be deemed satisfied until such Rent and other
amounts have been actually received by Landlord.
B. OTHER. All notices, demands, consents and approvals which may or are
required to be given by either party to the other hereunder shall be in writing
and either personally delivered, sent by commercial overnight courier, or
mailed, certified or registered, postage prepaid, and addressed to the party to
be notified at the Notice Address for such party as specified in the Basic Lease
Information or to such other place as the party to be notified may from time to
time designate by at least fifteen (15) days notice to the notifying party.
Notices shall be deemed served upon receipt or refusal to accept delivery.
Tenant appoints as its agent to receive the service of all default notices and
notice of commencement of unlawful detainer proceedings the person in charge of
or apparently in charge of occupying the Premises at the time, and, if there is
no such person, then such service may be made by attaching the same on the main
entrance of the Premises.
32. ATTORNEYS' FEES
In the event that Landlord places the enforcement of this Lease, or any part
thereof, or the collection of any Rent due, or to become due hereunder, or
recovery of possession of the Premises in the hands of an attorney, Tenant shall
pay to Landlord, upon demand, Landlord's reasonable attorneys' fees and court
costs, whether incurred at trial, appeal or review. In any action which
Landlord or Tenant brings to enforce its respective rights hereunder, the
unsuccessful party shall pay all costs incurred by the prevailing party
including reasonable attorneys' fees, to be fixed by the court, and said costs
and attorneys' fees shall be a part of the judgment in said action.
33. SUCCESSORS AND ASSIGNS
This Lease shall be binding upon and inure to the benefit of Landlord, its
successors and assigns, and shall be binding upon and inure to the benefit of
Tenant, its successors, and to the extent assignment is approved by Landlord as
provided hereunder, Tenant's assigns.
34. FORCE MAJEURE
If performance by a party of any portion of this Lease is made impossible by any
prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts
of God, inability to obtain services, labor, or materials or reasonable
substitutes for those items, government actions, civil commotions, fire or other
casualty, or other causes beyond the reasonable control of the party obligated
to perform, performance by that party for a period equal to the period of that
prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent,
however, is not excused by this Paragraph 34.
13
<PAGE>
35. SURRENDER OF PREMISES
Tenant shall, upon expiration or sooner termination of this Lease,
surrender the Premises to Landlord in the same condition as existed on the date
Tenant originally took possession thereof, including, but not limited to, all
interior walls cleaned, all interior painted surfaces repainted in the original
color, all holes in walls repaired, all carpets shampooed and cleaned, all HVAC
equipment in operating order and in good repair, and all floors cleaned, waxed,
and free of any Tenant-introduced marking or painting, all to the reasonable
satisfaction of Landlord. Tenant shall remove all of its debris from the
Project. At or before the time of surrender, Tenant shall comply with the terms
of Paragraph 12.A. hereof with respect to Alterations to the Premises and all
other matters addressed in such Paragraph. If the Premises are not so
surrendered at the expiration or sooner termination of this Lease, the
provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any
part thereof shall be surrendered to Landlord upon expiration or sooner
termination of the Term. Tenant shall give written notice to Landlord at least
thirty (30) days prior to vacating the Premises and shall meet with Landlord for
a joint inspection of the Premises at the time of vacating. In the event of
Tenant's failure to give such notice or participate in such joint inspection,
Landlord's inspection at or after Tenant's vacating the Premises shall
conclusively be deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration.
36. MISCELLANEOUS
A. GENERAL. The term "Tenant" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their respective successors, executors,
administrators and permitted assigns, according to the context hereof.
B. TIME. Time is of the essence regarding this Lease and all of its
provisions.
C. CHOICE OF LAW. This Lease shall in all respects be governed by the laws of
the State of California.
D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, contains all the
agreements of the parties hereto and supersedes any previous negotiations.
There have been no representations made by the Landlord or its agents or
understandings made between the parties other than those set forth in this Lease
and its Exhibits.
E. MODIFICATION. This Lease may not be modified except by a written instrument
signed by the parties hereto.
F. SEVERABILITY. If, for any reason whatsoever, any of the provisions hereof
shall be unenforceable or ineffective, all of the other provisions shall be and
remain in full force and effect.
G. RECORDATION. Tenant shall not record this Lease or a short form memorandum
hereof.
H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not
constitute an option or offer to lease and this Lease is not effective otherwise
until execution and delivery by both Landlord and Tenant.
I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount than the
total Rent due nor any endorsement on any check or letter accompanying any check
or payment of Rent shall be deemed an accord and satisfaction of full payment of
Rent, and Landlord may accept such payment without prejudice to Landlord's right
to recover the balance of such Rent or to pursue other remedies.
J. EASEMENTS. Landlord may grant easements on the Project and dedicate for
public use portions of the Project without Tenant's consent; provided that no
such grant or dedication shall materially interfere with Tenant's Permitted Use
of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and
deliver to Landlord documents, instruments, maps and plats necessary to
effectuate Tenant's covenants hereunder.
K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that this
Lease has been agreed to by both the parties, that both Landlord and Tenant have
consulted with attorneys with respect to the terms of this Lease and that no
presumption shall be created against Landlord because Landlord drafted this
Lease. Except as otherwise specifically set forth in this Lease, with respect
to any consent, determination or estimation of Landlord required or allowed in
this Lease or requested of Landlord, Landlord's consent, determination or
estimation shall be given or made solely by Landlord in Landlord's good faith
opinion, whether or not objectively reasonable.
L. EXHIBITS. The Exhibits attached hereto are hereby incorporated herein by
this reference.
M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light,
air or view by any structure which may be erected on lands adjacent to or in the
vicinity of the Building shall in no way affect this Lease or impose any
liability on Landlord.
N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord and
Tenant and nothing herein is intended to create any third party benefit.
O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the
observance and performance of all of the other covenants, terms and conditions
on Tenant's part to be observed and performed, Tenant shall peaceably and
quietly hold and enjoy the Premises for the term hereby demised without
hindrance or interruption by Landlord or any other person or persons lawfully or
equitably claiming by, through or under Landlord, subject, nevertheless, to all
of the other terms and conditions of this Lease. Landlord shall not be liable
for any hindrance, interruption, interference or disturbance by other tenants or
third persons, nor shall Tenant be released from any obligations under this
Lease because of such hindrance, interruption, interference or disturbance.
P. COUNTERPARTS. This Lease may be executed in any number of counterparts,
each of which shall be deemed an original.
Q. MULTIPLE PARTIES. If more than one person or entity is named herein as
Tenant, such multiple parties shall have joint and several responsibility to
comply with the terms of this Lease.
37. ADDITIONAL PROVISIONS
A. ADDENDA. Exhibits A and Addenda 1 attached hereto are hereby incorporated
into and made a part of this Lease as though fully set forth herein.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and the year first above written.
LANDLORD
Spieker Properties, L.P.,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By: /s/
------------------------------------
Its: Regional Sr. V.P.
-------------------------------
Date: 3/3/98
---------------------------------------
TENANT
Concentric Network Corporation, Inc.
------------------------------------
A Delaware corporation
------------------------------------
[type of entity]
By: /s/ Henry R. Nothhaft
---------------------------------
Its: CEO
----------------------------
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 82,832 0
<SECURITIES> 0 0
<RECEIVABLES> 6,911 0
<ALLOWANCES> 369 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 97,799 0
<PP&E> 81,828 0
<DEPRECIATION> 27,912 0
<TOTAL-ASSETS> 202,870 0
<CURRENT-LIABILITIES> 36,157 0
<BONDS> 0 0
0 0
0 0
<COMMON> 183,083 0
<OTHER-SE> (170,937) 0
<TOTAL-LIABILITY-AND-EQUITY> 202,870 0
<SALES> 16,484 9,154
<TOTAL-REVENUES> 16,484 9,154
<CGS> 17,724 15,744
<TOTAL-COSTS> 35,283 22,765
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,470 1,070
<INCOME-PRETAX> (23,269) (14,681)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,269) (14,681)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 3,042 0
<CHANGES> 0 0
<NET-INCOME> (20,227) (14,681)
<EPS-PRIMARY> (1.43) (2.17)
<EPS-DILUTED> (1.43) (2.17)
</TABLE>
