<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 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 [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common Stock,
$0.001 par value, as of June 30, 1998, was 14,471,154.
================================================================================
<PAGE>
CONCENTRIC NETWORK CORPORATION
PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997................... 3
Condensed Consolidated Statements of Operations for the three and six month periods ended
June 30, 1998 and 1997......................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1998 and 1997......................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements................................. 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10-18
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 19
Item 2. Changes in Securities and Use of Proceeds...................................................... 19
Item 3. Defaults Upon Senior Securities................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
Item 5. Other Information.............................................................................. 19
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
Signatures................................................................................................... 21
</TABLE>
-2-
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 191,691 $ 119,959
Current portion of restricted cash............................................... 19,125 19,125
Accounts receivable, net......................................................... 8,291 4,549
Goodwill and other intangible assets............................................. 3,239 --
Other current assets............................................................. 5,169 5,139
--------- ---------
Total current assets........................................................... 227,515 148,772
Property and equipment, net....................................................... 58,408 53,710
Restricted cash, net of current portion........................................... 25,272 33,400
Goodwill and other intangible assets, net of current portion...................... 7,987 --
Other assets...................................................................... 6,913 8,607
--------- ---------
Total assets...................................................................... $ 326,095 $ 244,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 17,022 $ 10,144
Accrued compensation and other employee benefits................................. 1,906 1,577
Other current liabilities........................................................ 5,065 4,917
Current portion of capital lease obligations..................................... 6,342 15,326
Deferred revenue................................................................. 2,289 1,435
--------- ---------
Total current liabilities...................................................... 32,624 33,399
Capital lease obligations, net of current portion................................. 12,442 33,595
Notes payable..................................................................... 145,799 145,577
Commitments
Redeemable exchangeable preferred stock........................................... 145,527 --
Stockholders' equity (deficit):
Common stock..................................................................... 184,483 182,721
Accumulated deficit.............................................................. (193,697) (149,534)
Deferred compensation............................................................ (1,083) (1,269)
--------- ---------
Total stockholders' equity (deficit).............................................. (10,927) 31,918
--------- ---------
Total liabilities and stockholders' equity (deficit).............................. $ 326,095 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................... $ 19,662 $ 10,814 $ 36,146 $ 19,968
Costs and expenses:
Cost of revenue.......................................... 20,204 14,913 37,928 30,657
Development.............................................. 1,798 1,200 3,305 2,225
Marketing and sales...................................... 9,291 6,094 17,785 11,030
General and administrative............................... 2,412 1,127 4,264 2,187
Amortization of goodwill and other intangible assets..... 843 -- 1,349 --
Acquisition related charges.............................. 1,291 -- 1,291 --
Write off of in-process technology....................... -- -- 5,200 --
-------- -------- -------- --------
Total costs and expenses.................................. 35,839 23,334 71,122 46,099
-------- -------- -------- --------
Loss from operations...................................... (16,177) (12,520) (34,976) (26,131)
Net interest expense and other............................ 4,025 384 8,495 1,454
-------- -------- -------- --------
Loss before extraordinary item............................ (20,202) (12,904) (43,471) (27,585)
Extraordinary gain on early retirement of debt............ -- -- 3,042 --
-------- -------- -------- --------
Net loss.................................................. (20,202) (12,904) (40,429) (27,585)
Preferred stock dividends and accretion................... (1,277) -- (1,277) --
-------- -------- -------- --------
Net loss attributable to common stockholders.............. $(21,479) $(12,904) $(41,706) $(27,585)
======== ======== ======== ========
Loss per share (historical 1998, pro-forma 1997):
Loss before extraordinary item........................... (1.40) (1.86) (3.04) (4.03)
Extraordinary gain....................................... -- -- 0.21 --
-------- -------- -------- --------
Net loss................................................. (1.40) (1.86) (2.83) (4.03)
Preferred stock dividends and accretion.................. (0.09) -- (0.09) --
-------- -------- -------- --------
Net loss attributable to common stockholders............. $ (1.49) $ (1.86) $ (2.92) $ (4.03)
======== ======== ======== ========
Shares used in computing net loss per share:
Historical 1998, pro-forma 1997........................... 14,438 6,930 14,297 6,849
======== ======== ======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities
Net loss................................................................................................ $(41,706) $(27,585)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation........................................................................................... 10,980 7,961
Amortization of deferred interest, cost of revenue and marketing and sales related to issuance
of warrants........................................................................................... 608 593
Amortization of goodwill and other intangible assets................................................... 1,349 --
Amortization of deferred financing costs related to Senior Notes....................................... 258 --
Amortization of other deferred assets.................................................................. 875 --
Amortization of deferred compensation.................................................................. 186 45
Preferred stock dividends and accretion................................................................ 1,277 --
Gain on retirement of debt............................................................................. (3,042) --
Write-off of in-process technology..................................................................... 5,200 --
Changes in current assets and liabilities:
Accounts receivable.................................................................................... (1,812) (1,989)
Other current assets................................................................................... 593 --
Prepaid expenses....................................................................................... (15) (4,174)
Accounts payable....................................................................................... 153 3,496
Accrued compensation and other employee benefits....................................................... (146) 260
Deferred revenue....................................................................................... (234) 211
Other current liabilities.............................................................................. (706) 3,652
-------- --------
Net cash used in operating activities................................................................... (26,182) (17,530)
INVESTING ACTIVITIES
Additions of property and equipment..................................................................... (6,279) (4,494)
Net change in restricted cash........................................................................... 8,128 --
Cash investment in network services business............................................................ (15,452) --
-------- --------
Net cash used in investing activities................................................................... (13,603) (4,494)
FINANCING ACTIVITIES
Proceeds from notes payable............................................................................. -- 5,000
Repayment of notes payable.............................................................................. (1,960) --
Repayment of lease obligations to a related party....................................................... (5,148) (1,972)
Repayment of lease obligations to a related party-early retirement of debt.............................. (24,750) --
Repayment of lease obligations.......................................................................... (1,297) (803)
Proceeds from issuances of stock and warrants........................................................... 622 5,606
Proceeds from issuances of redeemable exchangeable preferred stock...................................... 144,250 --
Deferred financing costs................................................................................ (200) --
-------- --------
Net cash provided by financing activities............................................................... 111,517 7,831
-------- --------
Increase (decrease) in cash and cash equivalents........................................................ 71,732 (14,193)
Cash and cash equivalents at beginning of period........................................................ 119,959 17,657
-------- --------
Cash and cash equivalents at end of period.............................................................. $191,691 $ 3,464
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred with a related party................................................. $ 5,119 $ 14,097
Capital lease obligations incurred...................................................................... $ 19 $ 274
Reduction of accounts payable through capital lease obligations incurred................................ $ -- $ 1,726
Issuance of warrants.................................................................................... $ 930
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid........................................................................................... $ 11,924 $ 1,299
</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 June 30, 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>
CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss before extraordinary item................................. $ (20,202) $ (12,904) $ (43,471) $ (27,585)
Extraordinary gain on early retirement of debt..................... -- -- 3,042 --
----------- ---------- ----------- ----------
Net loss........................................................... (20,202) (12,904) (40,429) (27,585)
=========== ========== =========== ==========
Preferred stock dividends and accretion............................ (1,277) -- (1,277) --
----------- ---------- ----------- ----------
Numerator for basic and diluted loss per share..................... $ (21,479) $ (12,904) $ (41,706) $ (27,585)
=========== ========== =========== ==========
DENOMINATOR:
Denominator for basic and diluted earnings per share - weighted
14,438,000 1,396,000 14,297,000 1,395,000
average shares (historical)...................................... =========== ========== =========== ==========
Adjustments to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance............ 5,534,000 5,454,000
========== ==========
Denominator for basic and diluted earnings per share - weighted
average shares (pro forma)....................................... 6,930,000 6,849,000
========== ==========
Basic and diluted net loss per share (historical):
Loss before extraordinary item................................ $ (1.40) $ (9.24) $ (3.04) $ (19.77)
----------- ---------- ----------- ----------
Extraordinary gain............................................ -- -- .21 --
----------- ---------- ----------- ----------
Net loss...................................................... $ (1.40) $ (9.24) $ (2.83) $ (19.77)
=========== ========== =========== ==========
Preferred stock dividends and accretion....................... (0.09) -- (0.09) --
----------- ---------- ----------- ----------
Net loss attributable to common stockholders.................. $ (1.49) $ (9.24) $ (2.92) $ (19.77)
=========== ========== =========== ==========
Basic and diluted net loss per share (pro forma)................... $ -- $ (1.86) $ -- $ (4.03)
=========== ========== =========== ==========
</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.
4. BUSINESS COMBINATIONS
In February 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>
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.
In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet") in a transaction that was accounted for as a pooling of interests.
The Company issued approximately 226,000 shares of its common stock to DeltaNet
shareholders in exchange for all outstanding DeltaNet shares. The Company also
assumed outstanding DeltaNet options and warrants which were converted to
options and warrants to purchase approximately 98,000 and 7,000 shares,
respectively, of the Company's common stock. The results of operations of
DeltaNet for the three month period ended June 30, 1998 are included in the
consolidated results of operations. The Company's historical consolidated
financial statements prior to the combination have not been restated to reflect
the financial results of DeltaNet as these results are not material.
The consolidated results of operations for the three month period ended
June 30, 1998 include an acquisition related charge of $1.3 million primarily
related to severance costs, redundant facilities and assets and professional
fees related to the acquisition.
5. EARLY RETIREMENT OF DEBT
In March 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. The Company recognized an extraordinary gain of $3.0
million in connection with this transaction.
6. REDEEMABLE EXCHANGEABLE PREFERRED STOCK
In June 1998 the Company completed a $150 million private placement of 13
1/2% Series A Senior Redeemable Exchangeable Preferred Stock due 2010
("Preferred Stock"). Each share of Preferred Stock has a liquidation preference
of $1,000 per share. Dividends on the Preferred Stock accrue at a rate of 13
1/2% per annum of the liquidation preference thereof and are payable quarterly
in arrears commencing on September 1, 1998. Dividends are payable in cash,
except that on each dividend payment date occurring on or prior to June 1, 2003,
dividends may be paid, at the Company's option, by the issuance of additional
shares of Preferred Stock having an aggregate liquidation preference equal to
the amount of such dividends.
The Preferred Stock is redeemable at the option of the Company, in whole or
in part, at any time on or after June 1, 2003, at redemption rates commencing
with 106.75% declining to 100% on June 1, 2008, plus accumulated and unpaid
dividends to the date of redemption. In addition, prior to June 1, 2001, the
Company may, at its option, redeem up to a maximum of 35% of the initially
issued Preferred Stock from the net proceeds of one or more public equity
offerings or the sale of common stock to a strategic investor. The Preferred
Stock is subject to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends on June 1, 2010.
The Company may, at its option, exchange in whole but not in part the
then outstanding shares of Preferred Stock for 13 1/2% Exchange Debentures with
a principal amount equal to the aggregate liquidation preference of the
Preferred Stock. The Exchange Debentures mature on June 1, 2010. Interest on
the Exchange Debentures is payable semi-annually in arrears. Interest payable
on or prior to June 1, 2003 may be paid in the form of additional Exchange
Debentures valued at the principal amount thereof.
The Company is accreting the Preferred Stock to its liquidation preference
through the due date of the Preferred Stock. The accretion for the quarter and
year-to-date period ended June 30, 1998 was approximately $1,237,000. In
connection with the issuance of Preferred Stock, the Company incurred
approximately $5,750,000 of
-8-
<PAGE>
issuance costs. These costs are being amortized over 12 years and the expense
for the quarter and year-to-date period ended June 30, 1998 was approximately
$40,000.
7. 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.
8. 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.
9. COMMITMENTS
In the quarter ended March 31, 1998, 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.
In June 1998, the Company signed an agreement to lease space in a building
in Chicago, Illinois for a data center. The lease expires in June 2008. The
average annual rental expense over the term of the lease is approximately
$177,000 per year.
In July 1998, the Company signed an agreement to lease a building in San
Jose, California, which is intended for the consolidation of all Silicon Valley
employees and data centers. The lease commences in February 1999 and expires in
January 2006. The initial rental expense is $2.4 million per year and the
average annual rental expense over the term of the lease is approximately $2.8
million per year.
-9-
<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).
In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet"), a California corporation located in Anaheim and provider of dial-
up and dedicated access services, Web hosting services and Web application
development and design. This transaction was accounted for as a pooling of
interests. Results of DeltaNet's operations for the three month period ended
June 30, 1998 are included in the consolidated results of operations. The
Company's historical consolidated financial statements prior to the combination
have not been restated to reflect the financial results of DeltaNet as these
results are not material. In addition, as a result of the acquisition, the
Company has incurred charges of approximately $1.3 million in transaction costs
consisting primarily of severance costs, redundant facilities and assets and
professional fees related to the acquisition (see Note 4 of Notes to Financial
Statements).
-10-
<PAGE>
If the Company were to incur additional charges for acquired in-process
technology, amortization of goodwill and acquisition costs 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."
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 $41.7
million for the six months ended June 30, 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, variability and length
of the sales cycle associated with the Company's product and service offerings,
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 $19.7 million for the three months
ended June 30, 1998, an $8.9 million increase over revenue of approximately
$10.8 million for the three months ended June 30, 1997. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to its
enterprise customers, continued growth in revenue from Internet access customers
and revenue derived from acquisitions. For the three months ended June 30,
1998, revenue from WebTV Networks, Inc. ("WNI") declined to 25.1% of the
Company's net revenue from 37.9% for the three months ended June 30, 1997.
Revenue for the six months ended June 30, 1998 was $36.1 million, an increase of
$16.1 million over revenue of $20.0 million for the six month period ended June
30, 1997. WNI accounted for approximately 27.7% of net revenue for the six
months ended June 30, 1998 as compared to 35.5% for the comparable period in
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."
-11-
<PAGE>
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 June 30, 1998 was approximately $20.2 million, an increase of $5.3 million
from cost of revenue of $14.9 million in the second quarter of 1997. This
increase is attributable to the overall growth in the size of the network and
costs associated with acquired operations. As a percentage of revenue, such
costs declined to 102.8% of revenue in the three months ended June 30, 1998,
down from 137.9% 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. Cost of revenue for the six months
ended June 30, 1998 was approximately $37.9 million compared with $30.7 million
for the six months ended June 30, 1997. As a percentage of revenue, costs
declined to 104.9% of revenue in the six months ended June 30, 1998 from 153.5%
of revenue in the year earlier period. The Company expects its cost of revenue
to continue to increase in dollar amount, while declining as 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 $1.8 million and
$1.2 million for the three months ended June 30, 1998 and 1997, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings, to manage the overall growth in the
network and from acquired operations. Development expense as a percentage of
revenue declined to 9.1% for the three months ended June 30, 1998 from 11.1% in
the year earlier period as a result of the Company's increased revenue.
Development expense for the six month periods ending June 30, 1998 and 1997 was
approximately $3.3 million and $2.2 million, respectively. As a percentage of
revenue, development expense declined to 9.1% for the six months ended June 30,
1998 from 11.1% for the six months ended June 30, 1997. 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 $9.3
million and $6.1 million for the three months ended June 30, 1998 and 1997,
respectively. The $3.2 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations necessary
to support the Company's expanded and acquired customer base. This increase also
reflects a growth in subscriber acquisition costs and marketing efforts related
to the introduction and expansion of enterprise products and services. Marketing
and sales expense as a percentage of revenue declined to 47.3% for the three
months ended June 30, 1998 from 56.4% in the year earlier period as a result of
the Company's increased revenue. For the six months ended June 30, 1998 and
1997, marketing and sales expense was approximately $17.8 million and $11.0
million, representing 49.2% and 55.2% of revenue, respectively. 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 $2.4 million and $1.1 million for the three months
ended June 30, 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 increased to 12.3% for the
three months ended June 30, 1998 from 10.4% in the year earlier period as a
result of the Company's increased personnel expense and professional fees,
reflecting growth in operations, costs associated with being a publicly held
entity and acquisitions. For the six months ended June 30, 1998 and 1997,
general and administrative expenses were approximately $4.3 million and $2.2
million,
-12-
<PAGE>
respectively. General and administrative expense as a percentage of revenue
increased to 11.8% in the six months ended June 30, 1998 as compared to 11.0%
for the comparable period in 1997. 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. The Company
also expects general and administrative costs to increase as a percentage of
revenue due primarily to increased professional fees through the third quarter
of 1998, but to decrease as a percentage of revenue thereafter. 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
month and six month periods ended June 30, 1998 the Company recorded
amortization of goodwill and other intangible assets of approximately $843,000
and $1,349,000, respectively, resulting from the acquisition of InterNex in
February 1998 (see Note 4 of Notes to Financial Statements).
Acquisition Related Charges. In the quarter ended June 30, 1998 the Company
wrote off $1.3 million of costs incurred related to the DeltaNet acquisition
(see Note 4 of Notes to Financial Statements).
Write-off of In-Process Technology. In the six months ended June 30, 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).
Net Interest Expense and Other. Net interest expense and other expense was
approximately $4.0 million and $384,000 for the three month periods ending June
30, 1998 and 1997, respectively. For the six months ended June 30, 1998 and
1997, net interest expense and other expense was $8.5 million and $1.5 million,
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 six months ended June 30, 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).
Preferred Stock Dividends and Accretions. During the three and six months
ended June 30, 1998, the Company recorded dividend and stock accretion costs of
$1.3 million related to the Redeemable Exchangeable Preferred Stock issued in
June 1998 (see Note 6 of Notes to Financial Statements).
Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $21.5 million for
the three months ended June 30, 1998 as compared to approximately $12.9 million
for the same period of 1997. For the six months ended June 30, 1998 the net loss
attributable to common stockholders was $41.7 million as compared to $27.6
million for the six months ended June 30, 1997. For comparative purposes, the
net loss attributable to common stockholders for the six month period ended June
30, 1998 included expenses related to financing and acquisitions of $1.3 million
of acquisition charges resulting from the acquisition of DeltaNet, $1.3 million
of dividends and accretion related to the Preferred Stock, $10.0 million
interest expense and amortization of debt issuance costs and warrants related to
the Senior Notes, $5.2 million write-off of in-process technology and $1.3
million of amortization of goodwill and other intangibles relating to the
acquisition of InterNex which were partially offset by an extraordinary gain of
$3.0 million on early retirement of debt. (see Notes 4, 5 and 6 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 and debt financing
obligations, to finance and fund acquisitions and to provide for the early
retirement of debt. Net cash used in operating activities for the six months
ended June 30, 1998 and 1997 was approximately $26.1 million and $17.5 million,
respectively. Cash used in operating
-13-
<PAGE>
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 six months ended June 30,
1998 and 1997 was approximately $13.6 million and $4.5 million, respectively.
Investing activities primarily consisted of release of restricted cash of $9.6
million for the interest payment due on Senior Notes in June 1998, 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 six months ended June 30, 1998, net cash of approximately $111.5
million was generated from financing activities, of which $144.3 million was the
net proceeds from the issuance of Redeemable Exchangeable Preferred Stock and
$24.8 million was used for the early retirement of capital lease obligations.
For the six months ended June 30, 1997, net cash provided by financing
activities was $7.8 million, principally related to the issuance of notes
payable of $5.0 million and the issuance of common and preferred stock of $5.6
million.
The net cash increase for the six month period ended June 30, 1998 was
$71.7 million. This included net proceeds from the issuance of Redeemable
Exchangeable Preferred Stock of $144.3 million partially offset by a semi-annual
interest payment on Senior Notes of $9.6 million, 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 six months
ended June 30, 1997 was $14.2 million. At June 30, 1998 the Company had cash and
cash equivalents of approximately $191.7 million and working capital of $194.9
million.
The Company expects to incur additional operating losses and will rely
primarily on the net proceeds from the Senior Notes, the Redeemable Exchangeable
Preferred Stock 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, purchases of capital equipment and funding of acquisitions
through 1999. 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.
-14-
<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 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 approximately $41.7 million
for the six month period ended June 30, 1998. At June 30, 1998, the Company had
an accumulated deficit of approximately $193.7 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 six months ended June 30,
1998 and June 30, 1997, revenue from WebTV Networks, Inc. ("WNI") represented
approximately 27.7% and 35.5%, 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 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 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.
-15-
<PAGE>
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, the DeltaNet acquisition in May 1998 and may seek
to acquire additional assets or businesses complementary to its operations. The
InterNex and DeltaNet acquisitions 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 acquired companies, the additional financial resources that may
need to be applied to fund the operations of 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 and DeltaNet 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. The DeltaNet acquisition was accounted for as a pooling of
interests and the Company incurred significant expenses related to this
acquisition. If the Company were to incur additional charges for acquired in-
process technology, amortization of goodwill and acquisition costs 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
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.
-16-
<PAGE>
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
transit agreements with MCI, Inc., Sprint, UUNet, AOL and other network
providers to support the exchange of traffic between the Concentric network and
the Internet as well as public peering arrangements with multiple smaller
internet service providers. The Company 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 its acquired 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 1999. 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 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
-17-
<PAGE>
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.
-18-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 3, 1998, the Company issued 150,000 shares of its 13 1/2% Series A
Senior Redeemable Exchangeable Preferred Stock due 2010 (the "Series A Preferred
Stock"). The aggregate purchase price for the Series A Preferred Stock was
$150,000,000 and the Company paid $5,250,000 in discounts to the initial
purchasers of the Series A Preferred Stock. The securities were offered and
sold only to "qualified institutional buyers" (as defined in Rule 144 of the
Securities Act) in reliance on the exemption from the registration requirements
of the Securities Act provided by Rule 144A.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 20, 1998 at which the
following matters were submitted to a vote of the stockholders:
1. An election was held with Gordon C. Martin being elected to the Board
of Directors as a Class I director with 9,429,441 shares voting in
favor and 8,526 shares withheld.
The following individuals' term of office as director continued after
the meeting:
Gary E. Rieschel
Vinod Khosla
Franco Regis
Henry R. Nothhaft
2. A proposal to amend the Company's 1997 Stock Plan to increase the
number of shares available for issuance thereunder by 750,000 shares
to an aggregate of 2,250,000 was approved with 6,444,529 shares voting
for, 1,514,790 shares voting against, 11,737 shares abstaining and
1,466,911 broker non-votes.
3. A proposal to amend the Company's 1997 Employee Stock Purchase Plan to
provide for an annual increase in the number of shares reserved for
issuance thereunder equal to the lesser of (i) 400,000 shares, (ii) 2%
of the outstanding shares of common stock of the Company or (iii) a
number of shares determined by the Board of Directors was approved
with 7,043,944 shares voting in favor, 915,512 shares voting against,
11,601 shares abstaining and 1,466,910 broker non-votes.
4. A proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the Company for the fiscal year ending
December 31, 1998 was approved with 9,425,825 shares voting in favor,
6,292 shares voting against and 5,850 shares abstaining.
ITEM 5. OTHER INFORMATION
Not applicable.
-19-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits.
4.1*** Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional and Other
Special Rights and Qualifications, Limitations and Restrictions
of 13 1/2% Series A and Series B Redeemable Exchangeable
Preferred Stock, due 2010 of the Registrant.
4.2*** Form of Series A Preferred Stock Certificate.
4.3*** Form of Series B Preferred Stock Certificate.
10.55 Lease between the Sobrato Group and the Company, dated May 15,
1998.
10.56*** Purchase Agreement, dated as of June 3, 1998, by and among
the Registrant and Initial Purchasers.
10.57*** Registration Rights Agreement, dated as of June 8, 1998, by and
among the Registrant and the Initial Purchasers.
10.58*** Form of Indenture for Exchange Debentures.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated June 11,
1998, to report under Item 5 the offering to sell 150,000 shares
of 13 1/2% Senior Redeemable Exchangeable Preferred Stock due
2010.
- -------------------------
*** Incorporated by reference from Registrant's Registration Statement on
Form S-4 (File No. 333-58641), as declared effective by the Securities and
Exchange Commission ("SEC") on August 11, 1998.
-20-
<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: August 13, 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
-21-
<PAGE>
EXHIBIT 10.55
LEASE BETWEEN
THE SOBRATO GROUP AND CONCENTRIC NETWORK CORPORATION
<TABLE>
<CAPTION>
Section Page #
- ------- ------
<S> <C>
Parties 1
Premises 1
Use 1
Permitted Uses 1
Uses Prohibited 1
Advertisements and Signs 1
Covenants, Conditions and Restrictions 1
Term and Rental 1
Base Monthly Rent 2
Late Charges 2
Security Deposit 2
Construction 3
Acceptance of Possession and Covenants to Surrender 4
Delivery and Acceptance 4
Condition Upon Surrender 4
Failure to Surrender 5
Alterations and Additions 5
Tenant's Alterations 5
Free From Liens 6
Compliance With Governmental Regulations 6
Maintenance of Premises 7
Landlord's Obligations 7
Tenant's Obligations 7
Excluded Costs 7
Waiver of Liability 8
Hazard Insurance 8
Tenant's Use 8
Landlord's Insurance 8
Tenant's Insurance 9
Waiver 9
Taxes 9
Utilities 10
Toxic Waste and Environmental Damage 10
Tenant's Responsibility 10
Tenant's Indemnity Regarding Hazardous Materials 10
Actual Release by Tenant 11
Environmental Monitoring 12
No Responsibility 12
Landlord's Representation and Indemnity 12
Notification 13
Environmental Studies 13
Tenant's Default 13
Remedies 13
Right to Re-enter 14
Abandonment 14
No Termination 14
Non-Waiver 14
Performance by Landlord 15
Habitual Default 15
</TABLE>
Page 1
<PAGE>
<TABLE>
<S> <C>
Landlord's Liability 15
Limitation on Landlord's Liability 15
Limitation on Tenant's Recourse 15
Indemnification of Landlord 16
Destruction of Premises 16
Landlord's Obligation to Restore 16
Limitations on Landlord's Restoration Obligation 16
Condemnation 17
Assignment or Sublease 17
Consent by Landlord 17
Assignment or Subletting Consideration 18
No Release 18
Reorganization of Tenant 18
Permitted Transfers 18
Effect of Default 19
Effects of Conveyance 19
Successors and Assigns 19
Option to Extend the Lease Term 19
Grant and Exercise of Option 19
Determination of Fair Market Rental 20
Resolution of a Disagreement over the Fair Market Rental 20
Personal to Tenant 21
Condition Precedent to Lease 21
General Provisions 21
Attorney's Fees 21
Authority of Parties 21
Brokers 21
Choice of Law 22
Dispute Resolution 22
Entire Agreement 22
Entry by Landlord 22
Estoppel Certificates 23
Exhibits 23
Interest 23
No Presumption Against Drafter 23
Notices 23
Property Management 24
Rent 24
Representations 24
Rights and Remedies 24
Severability 24
Submission of Lease 24
Subordination 24
Approvals 25
Reasonable Expenditures 25
Survival of Indemnities 25
Time 25
Waiver of Right to Jury Trial 25
Memorandum of Lease 25
Quiet Enjoyment 26
EXHIBIT A - Premises 28
</TABLE>
Page 2
<PAGE>
1. PARTIES: THIS LEASE, is entered into on this 15th day of May, 1998, between
The Sobrato Group, a California Limited Partnership, whose address is 10600
North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and Concentric Network
Corporation, a Delaware Corporation, whose address is 10590 North Tantau Avenue,
Cupertino, California, 95014 hereinafter called respectively Landlord and
Tenant.
2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord
those certain Premises with the appurtenances, situated in the City of San Jose,
County of Santa Clara, State of California, commonly known and designated as
1400 Parkmoor Avenue, including a building consisting of 102,848 rentable square
feet ("Building") and exclusive parking for approximately 340 cars, as outlined
in red on Exhibit "A". Unless expressly provided otherwise, the term Premises as
-----------
used herein shall include the Tenant Improvements (defined in Section 5.B)
constructed by Tenant pursuant to Section 5.B.
3. USE:
A. PERMITTED USES: Tenant shall use the Premises only for the following
purposes and shall not change the use of the Premises without the prior written
consent of Landlord: Office, research and development, marketing, light
manufacturing, other legally permitted uses, ancillary storage and other
incidental uses. Tenant shall use only the number of parking spaces allocated to
Tenant. Landlord makes no representation or warranty that any specific use of
the Premises desired by Tenant is permitted pursuant to any Laws.
B. USES PROHIBITED: Tenant shall not commit or suffer to be committed on the
Premises any waste, nuisance, or other act or thing which may disturb the quiet
enjoyment of any other tenant in or around the Premises, nor allow any sale by
auction or allow the Premises to be used for any unlawful purpose. Tenant shall
not (i) damage or overload the electrical, mechanical or plumbing systems of the
Premises, (ii) attach, hang or suspend anything from the ceiling, walls or
columns of the Building if it would endanger the structural integrity of the
Building or set any load on the floor in excess of the load limits for which
such items are designed if it would endanger the structural integrity of the
Building, or (iii) generate dust, fumes or waste products which create a fire or
health hazard or damage the Premises or in the soils surrounding the Building.
No materials, supplies, equipment, finished products or semi-finished products,
raw materials or articles of any nature, or any waste materials, refuse, scrap
or debris, shall be stored upon or permitted to remain on any portion of the
Premises outside of the Building other than within designated trash enclosure
areas without Landlord's prior approval, which approval may be withheld in its
sole discretion.
C. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed upon
or about the Premises any signs not approved by the city or other governing
authority. Any sign placed on the Premises shall be removed by Tenant, at its
sole cost, prior to the Expiration Date or promptly following the earlier
termination of the Lease, and Tenant shall repair, at its sole cost, any damage
or injury to the Premises caused thereby, and if not so removed, then Landlord
may have same so removed at Tenant's expense. Landlord shall cooperate with
Tenant in acquiring required permits for the signage desired by Tenant;
provided, however, that Landlord shall not be required to incur out-of-pocket
costs in connection therewith.
D. COVENANTS, CONDITIONS AND RESTRICTIONS: This Lease is subject to the effect
of (i) any covenants, conditions, restrictions, easements, mortgages or deeds of
trust, ground leases, rights of way of record and any other documents of record;
and (ii) any zoning laws of the city, county and state where the Building is
situated (collectively referred to herein as "Restrictions") and Tenant will
conform to and will not violate the terms of any such Restrictions.
4. TERM AND RENTAL:
A. BASE MONTHLY RENT: The term ("Lease Term") shall be for eighty four (84)
months, commencing on February 1, 1999 (the "Commencement Date") and ending
January 31, 2006, ("Expiration Date"). In addition to all other
Page 3
<PAGE>
sums payable by Tenant under this Lease commencing on the Commencement Date
(which may be extended as set forth in Section 6 of this Lease), Tenant shall
pay as base monthly rent ("Base Monthly Rent") for the Premises according to the
following schedule:
Months 01 - 12: $200,554.00 per month
Months 13 - 24: $208,576.00 per month
Months 25 - 36: $216,919.00 per month
Months 37 - 48: $225,596.00 per month
Months 49 - 60: $234,619.00 per month
Months 61 - 72: $244,004.00 per month
Months 73 - 84: $253,764.00 per month
Base Monthly Rent shall be due in advance on or before the first day of each
calendar month during the Lease Term. All sums payable by Tenant under this
Lease shall be paid to Landlord in lawful money of the United States of America,
without offset or deduction (except as specifically set forth in this Lease) and
without prior notice or demand, at the address specified in Section 1 of this
Lease or at such place or places as may be designated in writing by Landlord
during the Lease Term. Base Monthly Rent for any period less than a calendar
month shall be a pro rata portion of the monthly installment based on a thirty
(30) day month. On or before July 15, 1998, Tenant shall pay Landlord the sum
of Two Hundred Thousand Five Hundred Fifty Four and No/100 Dollars ($200,554.00)
as prepaid rent for the first month of the Lease.
B. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which is
extremely difficult to ascertain. Such costs include but are not limited to:
administrative, processing, accounting, and late charges which may be imposed on
Landlord by the terms of any contract, revolving credit, mortgage, or trust deed
covering the Premises. Accordingly, if any installment of Base Monthly Rent or
other sum due from Tenant shall not be received by Landlord or its designee
within ten (10) days after the rent is due, Tenant shall pay to Landlord a late
charge equal to five (5%) percent of such overdue amount, which late charge
shall be due and payable on the same date that the overdue amount was due. The
parties agree that such late charge represents a fair and reasonable estimate of
the costs Landlord will incur by reason of late payment by Tenant, excluding
interest and attorneys fees and costs. If any rent or other sum due from Tenant
remains delinquent for a period in excess of thirty (30) days then, in addition
to such late charge, Tenant shall pay to Landlord interest on any rent that is
not paid when due at the Agreed Interest Rate specified in Section 20.J
following the date such amount became due until paid; provided, however, that
interest shall not accrue on any late charge. Acceptance by Landlord of such
late charge shall not constitute a waiver of Tenant's default with respect to
such overdue amount nor prevent Landlord from exercising any of the other rights
and remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments of
Base Monthly Rent, then the Base Monthly Rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwithstanding any provision
of this Lease to the contrary.
C. SECURITY DEPOSIT: Prior to the July 31, 1998, Tenant shall deposit with
Landlord the sum of One Million Two Hundred Thousand and No/100 Dollars
($1,200,000.00) ("Security "Deposit"). Notwithstanding the foregoing, Landlord
agrees that in lieu of a cash security deposit, Tenant may deposit a letter of
credit or certificate of deposit ("CD") in a form reasonably acceptable to
Landlord. Landlord shall be entitled to draw against the letter of credit or CD
at any time that Tenant has committed a material default and breach of this
Lease as defined in Section 13 of this Lease, provided only that Landlord
certifies to the issuer of the letter of credit or CD under penalty of perjury
that Tenant is in default (beyond any applicable notice and applicable cure
period) under the Lease. Tenant shall keep the letter of credit or CD in effect
during the entire Lease Term, as the same may be extended or terminated, plus a
period of four (4) weeks after expiration or sooner termination of the Lease
Term. At least thirty (30) days prior to expiration of any letter of credit or
CD, the term
Page 4
<PAGE>
thereof shall be renewed or extended for a period of at least one (1) year.
Tenant's failure to so renew or extend the letter of credit or CD shall be a
material default of this Lease by Tenant. In the event Landlord draws against
the letter of credit or CD, Tenant shall replenish the existing letter of credit
or CD or cause a new letter of credit or CD to be issued such that the aggregate
amount of letters of credit or CD available to Landlord at all times during the
Lease Term is the amount of the original security deposit, less any deductions
thereof permitted under this Section 4.C.. Notwithstanding the foregoing,
provided Tenant has not been in monetary default (beyond any required written
notice and applicable cure period) under the Lease during the previous 12 month
period, Tenant shall be entitled to reduce the amount of the Security Deposit
annually by Two Hundred Thousand and No/100 Dollars ($200,000.00). In no case,
however, shall the amount of the Security Deposit ever be reduced to less than
Two Hundred Thousand Dollars ($200,000.00) in total. Landlord shall not be
deemed a trustee of the Security Deposit, may use the Security Deposit in
business, and shall not be required to segregate it from its general accounts.
Tenant shall not be entitled to interest on the Security Deposit. If Tenant
defaults (beyond any applicable cure period) with respect to any provisions of
the Lease, including but not limited to the provisions relating to payment of
Base Monthly Rent or other charges, Landlord may, to the extent reasonably
necessary to remedy Tenant's default, use any or all of the Security Deposit
towards payment of the following: (i) Base Monthly Rent or other charges in
default; (ii) any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default including, but not limited to. Tenant's
failure to restore or clean the Premises following vacation thereof as required
under this Lease; and (iii) any other loss or damage which Landlord may suffer
by reason of Tenant's default. Tenant waives the provisions of California Civil
Code Section 1950.7, and all other provisions of law now in force or that become
in force after the date of execution of this Lease, that provide that Landlord
may claim from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of Rent, to repair damage caused by Tenant, or to clean
the Premises. Landlord and Tenant agree that Landlord may, in addition, claim
those sums reasonably necessary to compensate Landlord for any other foreseeable
or unforeseeable loss or damage caused by the act or omission of Tenant or
Tenant's agents, employees, contractors and invitees ("Tenant's Agents"). Tenant
may not assign or encumber the Security Deposit without the consent of Landlord.
Any attempt to do so shall be void and shall not be binding on Landlord. The
Security Deposit shall be returned to Tenant within thirty (30) days after the
Expiration Date or earlier termination of the Lease and surrender of the
Premises to Landlord, less any amount deducted in accordance with this Section,
together with Landlord's written notice itemizing the amounts and purposes for
such deduction. In the event of termination of Landlord's interest in this
Lease, Landlord may deliver or credit the Security Deposit to Landlord's
successor in interest in the Premises and thereupon be relieved of further
responsibility with respect to the Security Deposit.
5. CONSTRUCTION:
Tenant intends to make certain interior improvements ("Tenant Improvements") to
the Premises prior to the Lease Commencement Date. As an inducement for Tenant
to enter into this Lease, Landlord has agreed to provide Tenant a work allowance
to be utilized for the cost of Tenant Improvements to be constructed by Tenant
("Work Allowance") in an amount of up to Three Hundred Fifty Thousand and No/100
Dollars ($350,000.00). The Work Allowance shall be paid by Landlord to Tenant
as payments become due by Tenant to its general contractor(s) performing the
Tenant Improvements. The Tenant Improvements shall not be removed or altered by
Tenant without the prior written consent of Landlord as provided in Section 7.
Tenant shall have the right to depreciate and claim and collect any Investment
tax credits in the Tenant Improvements during the Lease Term. Upon expiration of
the Lease term or any earlier termination of the Lease, the Tenant Improvements
shall become the property of Landlord and shall remain upon and be surrendered
with the Premises, and title thereto shall automatically vest in Landlord
without any payment therefore.
Notwithstanding anything to the contrary in this Lease, the following Tenant
Improvements to be made to the Premises shall at all times remain Tenant's
property and Tenant shall be entitled to all depreciation, amortization and
other tax
Page 5
<PAGE>
benefits with respect thereto: data center installed by Tenant, all
telecommunications and cabling systems ("Tenant's Property"). Notwithstanding
anything to the contrary in the Lease, Tenant may remove Tenant's Property from
the Premises or alter Tenant's Property at any time, provided (i) Tenant, at
Tenant's expense, repairs any damage caused by such removal and (ii) the
alteration or removal of Tenant's Property does not affect the functionality of
the Building for a typical office/research and development tenant. Tenant's
repair obligations pursuant this Article shall include (i) patching holes and
repainting wall surfaces, (ii) replacing floor coverings, and (iii)
reconfiguring the electrical, mechanical, and plumbing systems in such a manner
so that the location of the Tenant's Property removed is no longer apparent to
Landlord. Under no circumstances will Tenant be required to remove any of the
Tenant Improvements from the Premises upon the expiration or sooner termination
of the Lease Term or any extension thereof. The Term "Alterations" as used in
this Lease does not include the Tenant Improvements.
6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:
A. DELIVERY AND ACCEPTANCE: Landlord shall deliver possession of the Premises
to Tenant on January 1, 1999 (the "Early Possession Date") for the purpose of
constructing the Tenant Improvements. Tenant shall not be required to pay Base
Monthly Rent or any additional rent for the Premises until the Commencement
Date. If Landlord fails to deliver possession of the Premises to Tenant on the
Early Possession Date, then the Commencement Date shall be delayed by one (1)
day for each day that the Early Possession Date is delayed beyond January 1,
1999 so that in all cases, Tenant has a period of thirty (30) days between the
Early Possession Date and the Commencement Date. If Landlord is unable to
deliver possession of the Premises to Tenant by March 31, 1999, Tenant may
terminate this Lease by written notice to the Landlord, whereupon any monies
previously paid by Tenant to Landlord, including prepaid rent and Security
Deposit, shall be returned to Tenant. Tenant, its agents, employees,
representatives and contractors shall have the right to enter and use the
Premises on and after the Early Possession Date. By the Commencement Date,
Landlord agrees to deliver the Premises in good operating condition and repair,
including the parking lot, roof membrane, HVAC, electrical and plumbing systems.
Tenant shall thereafter accept the Premises as being in good and sanitary order,
condition and repair and accepts the Premises and other improvements in said
condition. Notwithstanding anything to the contrary in this Lease, Landlord
represents and warrants to Tenant that on the Commencement Date, the Premises
and all improvements thereon (with the exception of Tenant Improvements
constructed by Tenant) shall: (i) be free from material defects; and (ii) comply
with all applicable laws, regulations, conditions, covenants and restrictions,
or other promulgations of lawful governmental authority including, without
limitation, Title 24 of the California Administative Code and the Americans with
Disabilities Act. The only exception to the foregoing shall be any compliance
necessitated because of Tenant's construction of Tenant Improvements. Landlord
further warrants that as of the Commencement Date, the HVAC, plumbing,
mechanical, electrical, sewer and heating systems which Tenant will be required
to maintain under the terms of the Lease are in good operating condition and
repair. Landlord hereby assigns to Tenant all warranties with respect to the
Premises which would reduce Tenant's maintenance obligations under the Lease and
shall cooperate with Tenant to enforce all such warranties. Except as otherwise
specifically provided herein, Tenant agrees to accept possession of the Premises
in said condition, subject to all Restrictions and without further
representation or warranty by Landlord beyond those in the Lease.
B. CONDITION UPON SURRENDER: Tenant further agrees on the Expiration Date or
on the sooner termination of this Lease, to surrender the Premises to Landlord
in good condition and repair, normal wear and tear, acts of God, casualties,
condemnation, Tenant Improvements, Hazardous Materials as defined in Section 12
hereof (other than those used , stored or disposed of in or about the Premises
in violation of "Governmental Regulations" (as defined in Section 7.D) and
Alterations as defined in Section 7.A. made by Tenant which Landlord has
indicated that Tenant shall not be required to remove, excepted. In this regard,
"normal wear and tear" shall be construed to mean wear and
Page 6
<PAGE>
tear caused to the Premises by the natural aging process which occurs in spite
of prudent application of the best standards for maintenance, repair
replacement, and janitorial practices, and does not include items of neglected
or deferred maintenance. In any event, Tenant shall cause the following to be
done prior to the Expiration Date or sooner termination of this Lease: (i) all
interior walls shall be painted or cleaned so that they appear freshly painted,
(ii) all tiled floors shall be cleaned and waxed, (iii) all carpets shall be
cleaned and shampooed, (iv) all broken, marred and stained acoustical ceiling
tiles, and any non-conforming replacements thereof by Tenant shall be replaced,
(v) all cabling placed above the ceiling by Tenant or Tenant's contractors shall
be removed, (vi) all windows shall be washed; (vii) the HVAC system shall be
serviced by a reputable and licensed service firm and left in "good operating
condition and repair" as so certified by such firm, and (viii) the plumbing and
electrical systems and lighting shall be placed in good order and repair,
including replacement of any burned out, discolored or broken light bulbs,
ballasts, or lenses. On or before the Expiration Date or sooner termination of
this Lease, Tenant shall remove all its personal property and trade fixtures
from the Premises. All property and fixtures not so removed shall be deemed as
abandoned by Tenant. Tenant shall ascertain from Landlord within ninety (90)
days before the end of the Lease Term whether Landlord will require Tenant to
remove any Alterations made by Tenant at the Premises; provided that Landlord
shall not require Tenant to remove any Alteration which Landlord has previously
indicated may remain at the Premises. If Landlord shall so require, Tenant
shall, at Tenant's sole cost and expense, remove such Alterations as Landlord
requires and shall repair and restore said Premises or such parts thereof before
the Expiration Date to the condition and configuration as of the Commencement
Date or upon the completion of the Tenant Improvements; provided, however, that
Tenant may remove from the Premises all of Tenant's Property (as defined in the
Lease), Tenant's personal property, Tenant's trade fixtures, and any Alterations
which Landlord requires Tenant to remove. Such repair and restoration shall
include causing the Premises to be brought into compliance with all applicable
building codes and laws in effect at the time of the removal to extent such
compliance is necessitated due to Tenant's removal.
C. FAILURE TO SURRENDER: If the Premises are not surrendered at the Expiration
Date or sooner termination of this Lease in the condition required by this
Section 6, Tenant shall be deemed in a holdover tenancy pursuant to this Section
6.C and Tenant shall indemnify, defend, and hold Landlord harmless against loss
or liability resulting from delay by Tenant in so surrendering the Premises
including, without limitation, any claims made by any succeeding tenant founded
on such delay and costs incurred by Landlord in returning the Premises to the
required condition, plus interest at the Agreed Interest Rate. Any holding over
after the termination or Expiration Date with Landlord's express written
consent, shall be construed as month-to-month tenancy, terminable on thirty (30)
days written notice from either party, and Tenant shall pay as Base Monthly Rent
to Landlord a rate equal to one hundred twenty five percent (125%) of the Base
Monthly Rent due in the month preceding the termination or Expiration Date, plus
all other amounts payable by Tenant under this Lease, which other amounts shall
be paid based on the same formula and schedule as during the Lease Term. Any
holding over shall otherwise be on the terms and conditions herein specified,
except those provisions relating to the Lease Term and any options to extend or
renew, which provisions shall be of no further force and effect following the
expiration of the applicable exercise period. If Tenant remains in possession of
the Premises after expiration or earlier termination of this Lease without
Landlord's consent, Tenant's continued possession shall be on the basis of a
tenancy at sufferance and Tenant shall pay as rent during the holdover period an
amount equal to two hundred percent (200%) of the Base Monthly Rent due in the
month preceding the termination or Expiration Date, plus all other amounts
payable by Tenant under this Lease, which other amounts shall be paid based on
the same formula and schedule as during the Lease Term. Any holding over shall
otherwise. This provision shall survive the termination or expiration of the
Lease.
7. ALTERATIONS AND ADDITIONS:
A. TENANT'S ALTERATIONS: Tenant shall not make, or suffer to be made, any
alteration or
Page 7
<PAGE>
addition to the Premises ("Alterations"), or any part thereof, without obtaining
Landlord's prior written consent and delivering to Landlord the proposed
architectural and structural plans for all such Alterations at least fifteen
(15) days prior to the start of construction. If such Alterations affect the
structure of the Building, Tenant additionally agrees to reimburse Landlord its
reasonable out-of-pocket costs incurred in reviewing Tenant's plans, not to
exceed One Thousand Dollars ($1,000.00) per Alteration. Landlord's consent shall
not be unreasonably withheld and if Landlord does not notify Tenant in writing
of its reasonable disapproval of such Alteration within fourteen (14) days
following Tenant's written request for approval and delivery to Landlord of the
proposed plans, then Landlord shall be deemed to have approved the proposed
Alteration. Upon the request of Tenant, Landlord shall, within the 14-day
period, advise Tenant in writing as to whether Landlord shall require removal of
any Alteration in question upon the expiration or earlier termination of the
Lease Term. After obtaining Landlord's consent, Tenant shall not proceed to make
such Alterations until Tenant has obtained all required governmental approvals
and permits, and if requested by Landlord, provides Landlord with a lien and
completion bond, in form reasonably approved by Landlord, to protect Landlord
against mechanics' lien claims. Tenant agrees to provide Landlord written notice
of the anticipated and actual start-date of the work, and a complete set of
half-size (15" X 21") vellum as-built drawings. All Alterations shall be
constructed in compliance with applicable buildings codes and laws. Any
Alterations, except movable furniture and trade fixtures, shall become at once a
part of the realty and belong to Landlord but shall nevertheless be subject to
removal by Tenant as provided in Section 6 above. Alterations which are not
deemed as trade fixtures include heating, lighting, electrical systems, air
conditioning, walls, carpeting, or any other installation which has become an
integral part of the Premises. All Alterations shall be maintained, replaced or
repaired by Tenant at its sole cost and expense.
The foregoing notwithstanding, Any Alterations made or paid for by Tenant which
are not permanently attached to the Premises shall remain the property of Tenant
and Tenant shall be entitled to all depreciation, amortization and other tax
benefits with respect thereto. Tenant may remove such Alterations at the
Expiration Date, provided (i) Tenant, at Tenant's expense, repairs any damage
caused by such removal and (ii) the removal of the Alteration does not affect
the functionality of the Building for a typical office/research and development
tenant. Tenant's repair obligations pursuant this Article shall include (i)
patching holes and repainting wall surfaces, (ii) replacing floor coverings, and
(iii) reconfiguring the electrical, mechanical, and plumbing systems in such a
manner so that the location of the Alterations removed is no longer apparent to
Landlord. Landlord shall have no lien or interest whatsoever in any item of
Tenant's Property, Tenant's personal property or Tenant's trade fixtures located
in the Premises or elsewhere, and Landlord hereby waives all such liens and
interests.
B. FREE FROM LIENS: Tenant shall keep the Premises free from all liens arising
out of work performed, materials furnished, or obligations incurred by Tenant or
claimed to have been performed for Tenant. In the event Tenant fails to
discharge any such lien within ten (10) days after receiving notice of the
filing, Landlord shall be entitled to discharge the lien at Tenant's expense and
all resulting costs reasonably incurred by Landlord, including reasonable
attorney's fees shall be due from Tenant as additional rent. Notwithstanding
anything to the contrary in this Lease, Tenant may, in good faith, elect to
contest any such lien provided Tenant shall furnish a bond or other security
reasonably acceptable to Landlord within said thirty (30) day period. Upon
furnishing such bond or other security, Landlord shall take no action to
discharge the lien and Tenant shall not then be deemed in default of this Lease.
C. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: The term Governmental Regulations
shall include all federal, state, county, city or governmental agency laws,
statutes, ordinances, standards, rules, requirements, or orders now in force or
hereafter enacted, promulgated, or issued. The term also includes government
measures regulating or enforcing public access, traffic mitigation,
occupational, health, or safety standards for employers, employees, landlords,
or tenants. Except as otherwise set forth in Section 8 of the Lease, Tenant, at
Tenant's sole expense shall make all repairs, replacements, alterations, or
Page 8
<PAGE>
improvements to the Premises needed to comply with all Governmental Regulations
to the extent such repairs, replacements, alterations or improvements are
necessitated due to Tenant's specific and particular use of the Premises or
Tenant's Alterations to the Premises. The judgment of any court of competent
jurisdiction or the admission of Tenant in any action or proceeding against
Tenant (whether Landlord be a party thereto or not) that Tenant has violated any
such law, regulation or other requirement in its use of the Premises shall be
conclusive of that fact as between Landlord and Tenant.
8. MAINTENANCE OF PREMISES:
A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall
maintain in good condition, order, and repair, and replace as and when
necessary, the foundation, exterior load bearing walls and roof structure of the
Building.
B. TENANT'S OBLIGATIONS: Subject to Landlord's obligations set forth in this
Lease and the amortization of capital items as set forth in Section 8, Tenant
shall clean, maintain, repair and replace when necessary the Premises and every
part thereof through regular inspections and servicing, including but not
limited to: (i) all plumbing and sewage facilities, (ii) all heating ventilating
and air conditioning facilities and equipment, (iii) all fixtures, interior
walls floors, carpets and ceilings, (iv) all windows, door entrances, plate
glass and glazing systems including caulking, and skylights, (v) all electrical
facilities and equipment, (vi) all automatic fire extinguisher equipment, (vii)
the parking lot and all underground utility facilities servicing the Premises,
(viii) all elevator equipment, (ix) the roof membrane system, and (x) all
waterscape, landscaping and shrubbery. All wall surfaces and floor tile are to
be maintained in an as good a condition as when Tenant took possession free of
holes, gouges, or defacements. With respect to items (ii), (viii) and (ix)
above, Tenant shall provide Landlord a copy of a service contract between Tenant
and a licensed service contractor providing for periodic maintenance of all such
systems or equipment in conformance with the manufacturer's recommendations.
Tenant shall provide Landlord a copy of such preventive maintenance contracts
and paid invoices for the recommended work for which Tenant is responsible if
requested by Landlord.
C. EXCLUDED COSTS: Notwithstanding anything to the contrary in this Lease, in
no event shall Tenant have any obligation to perform or to pay directly, or to
reimburse Landlord for, all or any portion of the following repairs,
maintenance, improvements, replacements, premiums, claims losses, fees, charges,
costs and expenses (collectively "Costs"), all of which shall be the
responsibility of Landlord.
i. LOSSES CAUSED BY LANDLORD: Costs occasioned by the act, omission or
violation by Landlord or its agents, employees, contractors, subcontractors,
tenants, or invitees of Governmental Regulations; or a misrepresentation or
breach of this Lease by Landlord or its agents, employees, contractors,
subcontractors, tenants, or invitees.
ii. CASUALTIES AND CONDEMNATIONS: Costs occasioned by fire, acts of God, or
other casualties or by the exercise of the power of eminent domain, provided
that Tenant will pay insurance deductibles in accordance with Section 9 of this
Lease.
iii. REIMBURSABLE EXPENSES: Costs for which Landlord has a right of
reimbursement from others or for which Landlord actually receives reimbursement.
iv. CONSTRUCTION DEFECTS AND COMPLIANCE WITH LAW: Costs (i) relating to a
failure of the Premises to conform to all Restrictions, underwriters'
requirements or Governmental Regulations as of the Commencement Date; or (ii)
relating to construction defects.
v. HAZARDOUS MATERIALS: Except to the extent caused by the disposal, release,
emission or storage of the Hazardous Materials in question by Tenant, its
agents, employees, invitees or contractors in violation of Governmental
Regulations, costs incurred to investigate the presence of any Hazardous
Materials, costs to respond to any claim of Hazardous Material contamination or
damage, costs to remove any Hazardous Material from the Premises, judgments or
other costs incurred in connection with any Hazardous Materials exposure or
releases, or any other cost associated with a Hazardous Material.
Page 9
<PAGE>
vi. CAPITAL IMPROVEMENTS: If Tenant's maintenance or repair obligations as
set forth in this Lease would require Tenant to perform or pay for any
individual item which would be properly capitalized under generally accepted
accounting principles and costs in excess of Sixty Thousand Dollars
($60,000.00), then Landlord shall perform such repair or make such replacement
promptly after notification by Tenant and the cost of such item or improvement
shall be allocated as follows: Landlord and Tenant shall establish the useful
life of the item in question based upon generally accepted accounting
principles. Tenant shall pay a portion of the cost equal to the actual cost of
such improvement or item paid by Landlord to the third party contractor
performing the maintenance or furnishing the replacement times a fraction, the
numerator of which is the number of months remaining in the initial Lease Term,
and the denominator of which is the useful life of the improvement in months.
Tenant shall make such payment to Landlord within five (5) days after written
demand by Landlord.
Notwithstanding the foregoing, the preceding paragraph shall not apply in cases
where Tenant's obligation to perform or pay for such maintenance or repair is
largely due to Tenant's failure to properly maintain and regularly repair or
service such item.
D. WAIVER OF LIABILITY: Failure by Landlord to perform any defined services,
or any cessation thereof, when such failure is caused by accident, breakage,
repairs, strikes, lockout or other labor disturbances or labor disputes of any
character or by any other cause, similar or dissimilar, shall not render
Landlord liable to Tenant in any respect, including damages to either person or
property, nor be construed as an eviction of Tenant, nor cause an abatement of
rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof.
Should any equipment or machinery utilized in supplying the services listed
herein break down or for any cause cease to function properly, upon receipt of
written notice from Tenant of any deficiency or failure of any services,
Landlord shall use reasonable diligence to repair the same promptly, but Tenant
shall have no right to terminate this Lease and shall have no claim for rebate
of rent or damages on account of any interruptions in service occasioned thereby
or resulting therefrom. Tenant waives the provisions of California Civil Code
Sections 1941 and 1942 concerning the Landlord's obligation of tenantability and
Tenant's right to make repairs and deduct the cost of such repairs from the
rent. Except due to the active negligence or willful misconduct of Landlord,
its, agents, employees or contractors, Landlord shall not be liable for a loss
of or injury to person or property, however occurring, through or in connection
with or incidental to furnishing, or its failure to furnish, any of the
foregoing.
9. HAZARD INSURANCE:
A. TENANT'S USE: Tenant shall not use or permit the Premises, or any part
thereof, to be used for any unlawful purpose; and no use of the Premises shall
be made or permitted, nor acts done, which will cause an increase in premiums
for the insurance to be maintained by Landlord (unless Tenant agrees to pay the
cost of such increase) or a cancellation of any insurance policy covering the
Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept,
or used in or about the Premises, any article prohibited by the standard form of
fire insurance policies. Tenant shall, at its sole cost, comply with all
reasonable requirements of any insurance company or organization necessary for
the maintenance of reasonable fire and public liability insurance covering the
Premises, excluding structural improvements or alterations not related to
Tenant's specific and particular use.
B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in force fire
and extended coverage insurance in so-called "all risk" form in an amount equal
to the replacement cost of the Building (and all Tenant Improvements but not
including any of Tenant's Property or Alterations paid for by Tenant from
sources other than the Work Allowance) as determined by Landlord's insurance
company's appraisers. If required by Tenant or the holder of the first deed of
trust on the property, such fire and property damage insurance may be endorsed
to cover loss caused by earthquake and/or flood, and shall contain reasonable
deductibles which, in the case of earthquake and flood insurance may be up to
15% of the replacement value of the property. Additionally Landlord may maintain
a policy of (i) commercial general liability insurance insuring
Page 10
<PAGE>
Landlord (and such others designated by Landlord) against liability for personal
injury, bodily injury, death and damage to property occurring or resulting from
an occurrence in, on or about the Premises or Project in an amount as Landlord
determines is reasonably necessary for its protection, and (ii) rental lost
insurance for the Premises covering a twelve (12) month period. Tenant agrees to
pay Landlord as additional rent, on demand, the full cost of said insurance as
evidenced by insurance billings to Landlord, and in the event of damage covered
by said insurance, the amount of any deductible under such policy. Payment shall
be due to Landlord within twenty (20) days after written invoice to Tenant. It
is understood and agreed that Tenant's obligation under this Section will be
prorated to reflect the Lease Commencement and Expiration Dates. Notwithstanding
the foregoing, with respect to earthquake insurance for the Premises, Tenant
shall reimburse Landlord for premiums only if such coverage is: (i) requested by
Tenant, or (ii) required by the lender in whose favor a first deed of trust of
the Premises has been granted and is also generally required by institutional
lenders on similar properties in Santa Clara County.
C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure its personal
property and Alterations for their full replacement value (without depreciation)
and to obtain worker's compensation and public liability and property damage
insurance. Tenant shall also maintain commercial general liability insurance for
occurrences within the Premises with a combined single limit of not less than
Five Million Dollars ($5,000,000.00). Tenant's commercial general liability
insurance shall be primary insurance containing a cross-liability endorsement,
and shall provide coverage on an "occurrence" rather than on a "claims made"
basis. Tenant shall name Landlord and Landlord's lender as an additional insured
on Tenant's commercial general liability policy and shall deliver a copy of the
policies and renewal certificates to Landlord. All such policies shall provide
for thirty (30) days' prior written notice to Landlord of any cancellation,
termination, or reduction in coverage.
D. WAIVER: Notwithstanding anything to the contrary in this Lease, Landlord
and Tenant hereby waive any rights each may have against the other on account of
any loss or damage sustained by Landlord or Tenant, as the case may be, or to
the Premises or its contents, that is caused or results from a risk which is
actually insured against, which is required to be insured against under this
Lease, or which would normally be covered by a standard form of full replacement
value "all risk" policy of casualty insurance, regardless of whether such loss
or damage is due to the negligence of Landlord or Tenant or of their respective
agents, employees, subtenants, contractors, assignees, invitees or any other
cause. Each party shall use its reasonable best efforts to obtain from their
respective insurance companies a waiver of any right of subrogation which said
insurance company may have against Landlord or Tenant, as the case may be. If
such insurance policy cannot be obtained with such waiver of subrogation or if
such waiver of subrogation is only available at additional cost and the party
for whose benefit the waiver is not obtained does not pay such additional cost,
then the party obtaining such insurance shall immediately notify the other party
of that fact.
10. TAXES: Tenant shall be liable for and shall pay as additional rental (to
the extent not paid by Tenant directly to the taxing authority), prior to
delinquency, the following: (i) all taxes and assessments levied against
Tenant's personal property and trade or business fixtures; (ii) all real estate
taxes and assessment installments or other impositions or charges which may be
levied on the Premises or upon the occupancy of the Premises, including any
substitute or additional charges which may be imposed applicable to the Lease
Term; and (iii) real estate tax increases due to an increase in assessed value
resulting from a sale, transfer or other change of ownership of the Premises as
it appears on the City and County tax bills during the Lease Term. Tenant's
obligation under this Section shall be prorated to reflect the Lease
Commencement and Expiration Dates. Tenant shall pay such taxes on the later of:
twenty (20) days after written notice from Landlord (which notice shall contain
a copy of the tax bill in question); or (ii) thirty (30) days before the tax
delinquency date. If, at any time during the Lease Term a tax, excise on rents,
business license tax or any other tax, however described, is levied or assessed
against Landlord as a substitute or addition, in whole or in part, for real
estate taxes assessed or
Page 11
<PAGE>
imposed on land or Buildings, Tenant shall pay and discharge its pro rata share
of such tax or excise on rents or other tax before it becomes delinquent. In the
event that a tax is placed, levied, or assessed against Landlord and the taxing
authority takes the position that Tenant cannot pay and discharge its pro rata
share of such tax on behalf of Landlord, then at Landlord's sole election,
Landlord may increase the Base Monthly Rent by the exact amount of such tax and
Tenant shall pay such increase. If by virtue of any application or proceeding
brought by or on behalf of Landlord, there results a reduction in the assessed
value of the Premises during the Lease Term, Tenant agrees to reimburse Landlord
for all costs incurred by Landlord in connection with such application or
proceeding up to the amount of tax saving experienced by Tenant as a consequence
thereof. Notwithstanding anything to the contrary herein, Tenant shall not be
required to pay any portion of any tax or assessment: (i) levied on Landlord's
rental income, unless such tax or assessment is imposed in lieu of real property
taxes; (ii) in excess of the amount which would be payable if such tax or
assessment were paid in installments over the longest possible term; (iii)
imposed on land and improvements other than the Premises; or (iv) attributable
to Landlord's net income, inheritance, gift, transfer, franchise or estate
taxes. Tenant may in good faith contest any real property taxes provided that
Tenant indemnifies Landlord from any loss or liability in connection therewith.
11. UTILITIES: Tenant shall pay directly to the providing utility all water,
gas, electric, telephone, and other utilities supplied to the Premises. Landlord
shall not be liable for loss of or injury to person or property, however
occurring, through or in connection with or incidental to furnishing or the
utility company's failure to furnish utilities to the Premises, and Tenant shall
not be entitled to abatement or reduction of any portion of Base Monthly Rent or
any other amount payable under this Lease so long as any failure to provide and
furnish the utilities to the Premises is due to a cause beyond Landlord's
reasonable control.
12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:
A. TENANT'S RESPONSIBILITY: Without the prior written consent of Landlord,
Tenant shall not bring, use, or permit upon the Premises, or generate, create,
release, emit, or dispose (nor permit any of the same) from the Premises any
chemicals, toxic or hazardous gaseous, liquid or solid materials or waste,
including without limitation, material or substance having characteristics of
ignitability, corrosivity, reactivity, or toxicity or substances or materials
which are listed on any of the Environmental Protection Agency's lists of
hazardous wastes or which are identified in Division 22 Title 26 of the
California Code of Regulations as the same may be amended from time to time or
any wastes, materials or substances which are or may become regulated by or
under the authority of any applicable local, state or federal laws, judgments,
ordinances, orders, rules, regulations, codes or other governmental
restrictions, guidelines or requirements. ("Hazardous Materials"). In order to
obtain documentation, Tenant shall deliver to Landlord its written proposal
describing the toxic material to be brought onto the Premises, measures to be
taken for storage and disposal thereof, safety measures to be employed to
prevent pollution of the air, ground, surface and ground water. Landlord's
approval shall not be unreasonably withheld. In the event Landlord consents to
Tenant's use of Hazardous Materials on the Premises, Tenant represents and
warrants that it shall comply with all Governmental Regulations applicable to
the use, generation, emission and disposal of Hazardous Materials by Tenant at
the Premises, including doing the following: (i) adhere to all reporting and
inspection requirements imposed by Federal, State, County or Municipal laws,
ordinances or regulations and will provide Landlord a copy of any such reports
or agency inspections; (ii) obtain and provide Landlord copies of all necessary
permits required for the use and handling of Hazardous Materials on the
Premises; (iii) enforce Hazardous Materials handling and disposal practices
consistent with industry standards; (iv) surrender the Premises free from any
Hazardous Materials arising from Tenant's bringing, using, permitting,
generating, creating, releasing, emitting or disposing of Hazardous Materials;
and (v) properly close the facility with regard to Hazardous Materials used,
generated, emitted or disposed of by Tenant at the Premises, including the
removal or decontamination of any process piping, mechanical ducting, storage
tanks, containers, or trenches which have come into contact with such Hazardous
Materials and obtain a closure
Page 12
<PAGE>
certificate from the local administering agency prior to the Expiration Date.
B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at its sole
cost and expense, comply with all laws pertaining to, and shall with counsel
reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord
and Landlord's shareholders, directors, officers, employees, partners,
affiliates, and agents from, any claims, liabilities, costs or expenses incurred
or suffered by Landlord arising from the bringing, using, permitting,
generating, emitting or disposing of Hazardous Materials by Tenant or a third
party through the surface soils of the Premises during the Lease Term or the
violation of any Governmental Regulation or environmental law, by Tenant or
Tenant's Agents. Tenant's indemnification and hold harmless obligations include,
without limitation, the following: (i) claims, liability, costs or expenses
resulting from or based upon administrative, judicial (civil or criminal) or
other action, legal or equitable, brought by any private or public person under
common law or under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of
1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or
regulation; (ii) claims, liabilities, costs or expenses pertaining to the
identification, monitoring, cleanup, containment, or removal of Hazardous
Materials from soils, riverbeds or aquifers, including the provision of an
alternative public drinking water source; and (iii) all costs of defending such
claims; (iv) losses attributable to diminution in the value of the Premises or
the Building; (v) loss or restriction of use of rentable space in the Building:
(vi) adverse effect on the marketing of any space in the Building; and (vi) all
other liabilities, obligations, penalties, fines, claims, actions (including
remedial or enforcement actions of any kind and administrative or judicial
proceedings, orders or judgments), damages (including consequential and punitive
damages), and costs (including attorney, consultant, and expert fees and
expenses) resulting from the release or violation. This indemnification shall
survive the expiration or termination of this Lease.
C. ACTUAL RELEASE BY TENANT: Tenant agrees to notify Landlord of any lawsuits
or orders which relate to the remedying of or actual release of Hazardous
Materials on or into the soils or ground water at or under the Premises. Tenant
shall also provide Landlord all notices required by Section 25359.7(b) of the
Health and Safety Code and all other notices required by law to be given to
Landlord in connection with Hazardous Materials. Without limiting the foregoing,
Tenant shall also deliver to Landlord, within twenty (20) days after receipt
thereof, any written notices from any governmental agency alleging a material
violation of, or material failure to comply with, any federal, state or local
laws, regulations, ordinances or orders, the violation of which of failure to
comply with poses a foreseeable and material risk of contamination of the ground
water or injury to humans (other than injury solely to Tenant, Tenant's Agents
and employees within the Building).
In the event of any release on or into the Premises or into the soil or
ground water under the Premises, the Building or the Project of any Hazardous
Materials used, treated, stored or disposed of by Tenant, Tenant agrees to
comply, at its sole cost, with all laws, regulations, ordinances and orders of
any federal, state or local agency relating to the monitoring or remediation of
such Hazardous Materials. In the event of any such release of Hazardous
Materials Tenant shall immediately give verbal and follow-up written notice of
the release to Landlord, and Tenant agrees to meet and confer with Landlord and
its Lender to attempt to eliminate and mitigate any financial exposure to such
Lender and resultant exposure to Landlord under California Code of Civil
Procedure Section 736(b) as a result of such release, and promptly to take
reasonable monitoring, cleanup and remedial steps given, inter alia, the
historical uses to which the Property has and continues to be used, the risks to
public health posed by the release, the then available technology and the costs
of remediation, cleanup and monitoring, consistent with acceptable customary
practices for the type and severity of such contamination and all applicable
laws. Nothing in the preceding sentence shall eliminate, modify or reduce the
obligation of Tenant under 12.B of this Lease to indemnify and hold Landlord
harmless from any claims liabilities, costs or expenses incurred or suffered by
Landlord. Tenant shall provide Landlord prompt written notice of Tenant's
monitoring, cleanup and remedial steps.
Page 13
<PAGE>
In the absence of an order of any federal, state or local governmental or
quasi-governmental agency relating to the cleanup, remediation or other response
action required by applicable law, any dispute arising between Landlord and
Tenant concerning Tenant's obligation to Landlord under this Section 12.C
concerning the level, method, and manner of cleanup, remediation or response
action required in connection with such a release of Hazardous Materials shall
be resolved by mediation and/or arbitration pursuant to the provisions of
Section 19.E of this Lease.
D. ENVIRONMENTAL MONITORING: Landlord and its agents shall have the right to
inspect, investigate, sample and monitor the Premises including any air, soil,
water, ground water or other sampling or any other testing, digging, drilling or
analysis to determine whether Tenant is complying with the terms of this Section
12. If Landlord discovers that Tenant is not in compliance with the terms of
this Section 12, any such costs incurred by Landlord in connection with such
violation, including attorneys' and consultants' fees, shall be due and payable
by Tenant to Landlord within five (5) days following Landlord's written demand
therefore. Notwithstanding the foregoing, Landlord's investigations and/or
monitoring to initially determine whether Tenant is in compliance with this
Section 12 shall not unreasonably interfere with Tenant's intended use of the
Premises.
E. NO RESPONSIBILITY: Notwithstanding the foregoing or anything in this Lease,
Tenant shall have no responsibility to Landlord, Landlord's employees,
contractors, officers, agents or partners or to any third party for any
Hazardous Material which was not released, stored, disposed of, emitted, or
discharged by Tenant, its agents, invitees, employees and contractors in or
about the Premises and which is or comes to be, present on or about the
Premises, or the soil or groundwater thereof, at any time. Landlord, at its sole
expense, shall promptly comply with all Governmental Regulations, orders,
injunctions, judgments, mandates and directives of any applicable governmental
authority concerning the investigation, removal, monitoring or remediation of
any Hazardous Materials present on the Premises or the groundwater thereof,
except to the extent that the Hazardous Material in question was released,
stored, disposed of, emitted or discharged by Tenant or its employees, invitees,
agents, or contractors in or about the Premises. Landlord hereby waives all
claims, liabilities, costs, expenses or obligations, known or unknown, against
Tenant with respect to Hazardous Materials present on the Premises as of the
Commencement Date or which come to be present on the Premises after the
Commencement Date, except to the extent that the Hazardous Materials in question
were released, emitted, or discharged onto the Premises by Tenant or its
employees, agents, contractors, subcontractors or invitees. In this regard,
Landlord acknowledges that it is aware of and hereby waives the provisions of
California Civil Code Section 1542 (or any similar or successor statute) which
provides as follows:
"A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor, at the time of executing the release, which if
known by him must have materially affected the settlement with the debtor."
F. LANDLORD'S REPRESENTATION AND INDEMNITY: Landlord represents and
warrants, to the best of its knowledge: (i) that as of the Commencement Date,
there do not exist any Hazardous Materials on the Premises or the soil or
groundwater on or beneath the property on which the Premises are a part, and
(ii) no litigation has been brought or threatened, nor any settlements reached
with any governmental or private party, concerning the actual or alleged
presence of Hazardous Materials on or about the Premises, nor has Landlord
received any notice of any violation or any alleged violation of any Hazardous
Materials Laws, pending claims or pending investigations with respect to the
presence of Hazardous Materials on or about the Premises. Except to the extent
that the Hazardous Material in question was released, emitted, used, stored,
manufactured, transported or discharged by Tenant, or its agents, employees,
invitees or contractors in or about the Premises, Landlord shall indemnify and
hold Tenant, its agents, employees, officers, directors, subtenants and assigns
harmless from any claims, liabilities, costs or expenses incurred or suffered by
Tenant related to the removal, investigation, monitoring or remediation of
Hazardous Materials which are present or which
Page 14
<PAGE>
come to be present on the Premises except to the extent the presence of such
Hazardous Materials is caused by Tenant or by Tenant's failure to prevent a
third party from dumping Hazardous Materials through the surface of the
Premises. Landlord's indemnification and hold harmless obligations include,
without limitation, (i) claims, liability, costs or expenses resulting from or
based upon administrative, judicial (civil or criminal) or other action, legal
or equitable, brought by any private or public person under common law or under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any
other Federal, State, County or Municipal law, ordinance or regulation, (ii)
claims, liabilities, costs or expenses pertaining to the identification,
monitoring, cleanup, containment, or removal of Hazardous Materials from soils,
riverbeds or aquifers including the provision of an alternative public drinking
water source, (iii) all costs of defending such claims, and (vi) all other
liabilities, obligations, penalties, fines, claims, actions (including remedial
or enforcement actions of any kind and administrative or judicial proceedings,
orders or judgments), damages (including consequential and punitive damages),
and costs (including attorney, consultant, and expert fees and expenses)
resulting from the release or violation. This indemnification shall survive the
expiration or termination of this Lease. In no event shall Landlord be liable
for any consequential damages suffered or incurred by Tenant as a result of any
such contamination.
G. NOTIFICATION: Landlord and Tenant shall notify the other of the existence
of any reports, recommendations or studies prepared in connection with any
investigation for the presence of Hazardous Materials on or about the Premises
and shall give written notice to the other as soon as reasonably practicable of
(i) any communication received from any governmental authority concerning any
Hazardous Materials which relates to the Premises, and (ii) any contamination of
the Premises by Hazardous Materials which constitutes a violation of any
Hazardous Materials Laws.
H. ENVIRONMENTAL STUDIES: Tenant shall have the right to conduct a baseline
environmental study at the Premises, including the right to bore holes and take
soils samples, if Tenant so elects.
13. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant: (i) Tenant's failure to pay
any rent including additional rent or any other payment due under this Lease by
the date such rent is due, (ii) the abandonment of the Premises by Tenant; (iii)
Tenant's failure to observe and perform any other required provision of this
Lease, where such failure continues for twenty-eight (28) days after written
notice from Landlord of such failure; provided, however, that if the nature of
such default is such that the same cannot reasonably be cured within such
twenty-eight (28) day period, Tenant shall not be deemed to be in default if
Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion; (iv) Tenant's making of any general assignment
for the benefit of creditors; (v) the filing by or against Tenant of a petition
to have Tenant adjudged a bankrupt or of a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within thirty (30) days
after the filing); (vi) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where possession is not restored to Tenant
within sixty (60) days; or (vii) the attachment, execution or other judicial
seizure of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where such seizure is not discharged within
sixty (60) days.
A. REMEDIES: In the event of any such default by Tenant, then in addition to
other remedies available to Landlord at law or in equity, Landlord shall have
the immediate option to terminate this Lease and all rights of Tenant hereunder
by giving written notice of such intention to terminate. In the event Landlord
elects to so terminate this Lease, Landlord may recover from Tenant all the
following: (i) the worth at time of award of any unpaid rent which had been
earned at the time of such termination; (ii) the worth at time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss for the same
period that Tenant proves could have been
Page 15
<PAGE>
reasonably avoided; (iii) the worth at time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award exceeds
the amount of such rental loss that Tenant proves could be reasonably avoided;
(iv) any other amount necessary to compensate Landlord for all detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease, or which in the ordinary course of things would be likely to result
therefrom; including the following: (x) expenses for repairing, altering or
remodeling the Premises for purposes of reletting, (y) broker's fees,
advertising costs or other expenses of reletting the Premises, and (z) costs of
carrying the Premises such as taxes, insurance premiums, utilities and security
precautions. and (v) at Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted by applicable California law.
The term "rent", as used herein, is defined as the minimum monthly installments
of Base Monthly Rent and all other sums required to be paid by Tenant pursuant
to this Lease, all such other sums being deemed as additional rent due
hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be
computed by allowing interest at a rate equal to the discount rate of the
Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used
in (iii) above, "worth at the time of award" shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one (1%) percent.
B. RIGHT TO RE-ENTER: In the event of any such default by Tenant, Landlord
shall have the right, after terminating this Lease, to re-enter the Premises and
remove all persons and property. Such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant, and
disposed of by Landlord in any manner permitted by law.
C. ABANDONMENT: If Landlord does not elect to terminate this Lease as provided
in Section 13.A or 13.B above, then the provisions of California Civil Code
Section 1951.4, (Landlord may continue the lease in effect after Tenant's breach
and abandonment and recover rent as it becomes due if Tenant has a right to
sublet and assign, subject only to reasonable limitations) as amended from time
to time, shall apply and Landlord may from time to time, without terminating
this Lease, either recover all rental as it becomes due or relet the Premises or
any part thereof for such term or terms and at such rental or rentals and upon
such other terms and conditions as Landlord in its sole discretion may deem
advisable, with the right to make alterations and repairs to the Premises. In
the event that Landlord elects to so relet, rentals received by Landlord from
such reletting shall be applied in the following order to: (i) the payment of
any indebtedness other than Base Monthly Rent due hereunder from Tenant to
Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of
the cost of any alterations and repairs to the Premises; and (iv) the payment of
Base Monthly Rent due and unpaid hereunder. The residual rentals, if any, shall
be held by Landlord and applied in payment of future Base Monthly Rent as the
same may become due and payable hereunder. In the event the portion of rentals
received from such reletting which is applied to the payment of rent hereunder
during any month be less than the rent payable during that month by Tenant
hereunder, then Tenant shall pay such deficiency to Landlord immediately upon
demand. Such deficiency shall be calculated and paid monthly. Tenant shall also
pay to Landlord, as soon as ascertained, any costs and expenses incurred by
Landlord in such reletting or in making such alterations and repairs not covered
by the rentals received from such reletting.
D. NO TERMINATION: Landlord's re-entry or taking possession of the Premises
pursuant to 13.B or 13.C shall not be construed as an election to terminate this
Lease unless written notice of such intention is given to Tenant or unless the
termination is decreed by a court of competent jurisdiction. Notwithstanding any
reletting without termination by Landlord because of any default by Tenant,
Landlord may at any time after such reletting elect to terminate this Lease for
any such default.
E. NON-WAIVER: Landlord may accept Tenant's payments without waiving any
rights under this Lease, including rights under a previously served notice of
default. No payment by Tenant or receipt by Landlord of a lesser amount than any
installment of rent due shall be deemed as other than payment on account of the
amount due. If Landlord accepts payments after serving a notice of default,
Landlord may nevertheless commence and pursue an action to
Page 16
<PAGE>
enforce rights and remedies under the previously served notice of default
without giving Tenant any further notice or demand except as expressly required
by this Lease or applicable law. Furthermore, the Landlord's acceptance of rent
from the Tenant when the Tenant is holding over without express written consent
does not convert Tenants Tenancy from a tenancy at sufferance to a month to
month tenancy. No waiver of any provision of this Lease shall be implied by any
failure of Landlord to enforce any remedy for the violation of that provision,
even if that violation continues or is repeated. Any waiver by Landlord of any
provision of this Lease must be in writing. Such waiver shall affect only the
provision specified and only for the time and in the manner stated in the
writing. No delay or omission in the exercise of any right or remedy by Landlord
shall impair such right or remedy or be construed as a waiver thereof by
Landlord. No act or conduct of Landlord, including, without limitation, the
acceptance of keys to the Premises, shall constitute acceptance of the surrender
of the Premises by Tenant before the Expiration Date. Only written notice from
Landlord to Tenant of acceptance shall constitute such acceptance of surrender
of the Premises. Landlord's consent to or approval of any act by Tenant which
requires Landlord's consent or approvals shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation required
under this Lease or by law or governmental regulation and does not cure such
default within any cure period allowed in this Section 13, Landlord in its sole
discretion may, without further notice, without waiving any rights or remedies
and without releasing Tenant from its obligations hereunder, perform such
obligation, in which event Tenant shall pay Landlord as additional rent all sums
paid by Landlord in connection with such substitute performance, including
interest at the Agreed Interest Rate within ten (10) days of Landlord's written
notice for such payment.
G. HABITUAL DEFAULT: The provisions of Section 13 notwithstanding, the parties
agree that if Tenant shall have defaulted in the performance of any (but not
necessarily the same) term or condition of this Lease for five or more times
during any twelve (12) month period during the Lease Term, then such conduct
shall, at the election of the Landlord, represent a separate event of default
which cannot be cured by Tenant. Tenant acknowledges that the purpose of this
provision is to prevent repetitive defaults by Tenant, which work a hardship
upon Landlord and deprive Landlord of Tenant's timely performance under this
Lease.
14. LANDLORD'S LIABILITY:
A. LIMITATION ON LANDLORD'S LIABILITY: In the event of Landlord's failure to
perform any of its covenants or agreements under this Lease, Tenant shall give
Landlord written notice of such failure and shall give Landlord thirty (30) days
to cure or commence to cure such failure prior to any claim for breach or
resultant damages; provided, however, that if the nature of the default is such
that it cannot reasonably be cured within the 30-day period, Landlord shall not
be deemed in default if it commences within such period to cure, and thereafter
diligently prosecutes the same to completion. In addition, upon any such failure
by Landlord, Tenant shall give notice by registered or certified mail to any
person or entity with a security interest in the Premises ("Mortgagee") that has
provided Tenant with written notice of its interest in the Premises, and shall
provide Mortgagee a reasonable opportunity to cure such failure, including such
time to obtain possession of the Premises by power of sale or judicial
foreclosure, if such should prove necessary to effectuate a cure. Tenant agrees
that each of the Mortgagees to whom this Lease has been assigned is an expressed
third-party beneficiary hereof. Tenant waives any right under California Civil
Code Section 1950.7 or any other present or future law relating to the
collection of any payment or deposit from Mortgagee or any purchaser at a
foreclosure sale of Mortgagee's interest unless Mortgagee or such purchaser
shall have actually received and not refunded the applicable payment or deposit.
Tenant Further waives any right to terminate this Lease and to vacate the
Premises on Landlord's default under this Lease. Tenant's sole remedy on
Landlord's default is an action for damages or injunctive or declaratory relief.
B. LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation trust,
partnership, joint venture, unincorporated association or other form
Page 17
<PAGE>
of business entity: (i) the obligations of Landlord shall not constitute
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, or other principals or representatives
except to the extent of their interest in the Premises. Tenant shall have
recourse only to the interest of Landlord in the Premises or for the
satisfaction of the obligations of Landlord and shall not have recourse to any
other assets of Landlord for the satisfaction of such obligations.
C. INDEMNIFICATION OF LANDLORD: As a material part of the consideration
rendered to Landlord, Tenant hereby waives all claims against Landlord for
damages to goods, wares and merchandise, and all other personal property in,
upon or about said Premises and for injuries to persons in or about said
Premises, from any cause arising at any time to the fullest extent permitted by
law, and Tenant shall indemnify and hold Landlord exempt and harmless from any
damage or injury to any person, or to the goods, wares and merchandise and all
other personal property of any person, arising from the use of the Premises,
Building, and/or Project by Tenant and Tenant's Agents or from the failure of
Tenant to keep the Premises in good condition and repair as herein provided,
except to the extent due to the active negligence or willful misconduct of
Landlord. Further, in the event Landlord is made party to any litigation due to
the acts or omission of Tenant and Tenant's Agents. Tenant will indemnify,
defend (with counsel reasonably acceptable to Landlord) and hold Landlord
harmless from any such claim or liability including Landlord's costs and
expenses and reasonable attorney's fees incurred in defending such claims except
to the extent of the active negligence or willful misconduct of Landlord or its
agents, employees, tenants, contractors, subcontractors or invitees or a breach
of this Lease by Landlord.
15. DESTRUCTION OF PREMISES:
A. LANDLORD'S OBLIGATION TO RESTORE: In the event of a damage to or
destruction of the Building or the Premises or any portion thereof by any
casualty during the Lease Term, Landlord shall repair the same to the
approximate condition which existed prior to such destruction provided such
casualty is of a type required to be insured against by Landlord under the terms
of this Lease or actually insured against by Landlord (herein collectively
referred to as an "Insured Casualty").
In the event of damage or destruction of the Premises by a casualty of a type
which is not required to be insured against by Landlord under this Lease, and
which is not actually insured against by Landlord (herein referred to as an
"Uninsured Casualty"), Landlord shall restore the Premises to the same condition
as they were in immediately before such destruction and this Lease shall not
terminate; unless in the case of such Uninsured Casualty the cost of restoration
exceeds ten percent (10%) of the then replacement cost of the Building, in which
case, Landlord may elect to terminate this Lease by giving written notice to
Tenant within fifteen (15) days after determining the replacement cost and
furnishing reasonable evidence thereof to Tenant. If Landlord so elects to
terminate this Lease, Tenant, within fifteen (15) days after receiving
Landlord's notice to terminate, can elect to pay to Landlord at the time Tenant
notifies Landlord of its election, the difference between ten percent (10%) of
the replacement cost of the Building and the actual cost of restoration, in
which case Landlord shall restore the Premises and this Lease shall not
terminate. If Landlord so elects to terminate this Lease and Tenant does not
elect to contribute the cost of restoration as provided herein, this Lease shall
terminate. Tenant shall be entitled to a proportionate reduction of Base
Monthly Rent and additional rent during the period of damage and while repairs
are being made, such proportionate reduction to be based upon the extent to
which the repairs interfere with Tenant's business in the Premises, as
reasonably determined by Landlord. Landlord's obligations to repair and restore
the Premises or any part therof as set forth in this Lease shall include repair
and restoration of the Tenant Improvements (excluding Tenant's Property). In no
event shall Landlord be required to replace or restore Alterations, Tenant's
Property, Tenant's fixtures or personal property. With respect to a destruction
which Landlord is obligated to repair or may elect to repair under the terms of
this Section, Tenant waives the provisions of Section 1932, and Section 1933,
Subdivision 4, of the Civil Code of the State of California, and any other
similarly enacted statute, and the provisions of this Section 15 shall govern in
the case of such destruction.
Page 18
<PAGE>
B. LIMITATIONS ON LANDLORD'S RESTORATION OBLIGATION: Notwithstanding the
provisions of Section 15.A, Landlord shall have no obligation to repair, or
restore the Premises if any of the following occur: (i) if the repairs cannot be
made in 180 days from the date of receipt of all governmental approvals
necessary under the laws and regulations of State, Federal, County or Municipal
authorities, as reasonably determined by Landlord, (ii) if the holder of the
first deed of trust or mortgage encumbering the Building elects not to permit
the insurance proceeds payable upon damage or destruction to be used for such
repair or restoration, (iii) the damage or destruction is not fully covered by
the insurance maintained by Landlord, (iv) the damage or destruction occurs in
the last twenty four (24) months of the Lease Term, (v) Tenant is in default
pursuant to the provisions of Section 13, or (vi) Tenant has vacated the
Premises for more than ninety (90) days. In any such event Landlord may elect
either to (i) complete the repair or restoration, or (ii) terminate this Lease
by providing Tenant written notice of its election within sixty (60) days
following the damage or destruction.
16. CONDEMNATION: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and only a part thereof remains which is susceptible
of occupation hereunder, this Lease shall, as to the part so taken, terminate as
of the day before title vests in the condemnor or purchaser ("Vesting Date") and
Base Monthly Rent and additional rent payable hereunder shall be adjusted so
that Tenant is required to pay for the remainder of the Lease Term only such
portion of Base Monthly Rent and additional rent as the value of the part
remaining after such taking bears to the value of the entire Premises prior to
such taking; but in such event, Tenant shall have the option to terminate this
Lease as of the Vesting Date if the taking or condemnation of the Premises is
such that the remaining space unaffected by the taking or condemnation is not
reasonably suitable for Tenant's use or the conduct of Tenant's business. If
part or all of the Premises be taken, all compensation awarded upon such taking
shall go to Landlord, and Tenant shall have no claim thereto; provided, however,
that nothing contained herein shall be deemed to waive or release Tenant's
interest in any separate award for (i) loss of or damage to Tenant's trade
fixtures, Alterations, or personal property; (ii) interruption of Tenant's
business; (iii) Tenant's loss of goodwill; (iv) Tenant's moving cost; (v)
Tenant's interest in any Tenant Improvements; or (vi) any separate award made to
Tenant for whatever purpose. In the event that this Lease is not terminated by
reason of the condemnation, Landlord at its expense shall repair any damage to
the Premises caused by such condemnation. Tenant hereby waives the provisions of
California Code of Civil Procedures Section 1265.130 and any other similarly
enacted statue, and the provisions of this Section 16 shall govern in the case
of such taking.
17. ASSIGNMENT OR SUBLEASE:
A. CONSENT BY LANDLORD: Except as specifically provided in this Section 17 and
except with respect to a permitted transfer pursuant to Section 17.E below,
Tenant may not assign, sublet, hypothecate, or allow a third party to use the
Premises without the express written consent of Landlord. In the event Tenant
desires to assign this Lease or any interest herein including, without
limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or
any part thereof, Tenant shall deliver to Landlord (i) executed counterparts of
any agreement and of all ancillary agreements with the proposed
assignee/subtenant, (ii) current financial statements of the transferee covering
the preceding three years (or such shorter period, if three years are not
available), (iii) the nature of the proposed transferee's business to be carried
on in the Premises, (v) all consideration to be given on account of the
Transfer, and (vi) a current financial statement of Tenant. Landlord may
condition its approval of any Transfer to a certification from both Tenant and
the proposed transferee of all consideration to be paid to Tenant in connection
with such Transfer. At Landlord's request, Tenant shall also provide additional
information reasonably required by Landlord to determine whether it will consent
to the proposed assignment or sublease. Landlord shall have a ten (10) day
period following receipt of all the foregoing within which to notify Tenant in
writing that Landlord elects to: (i) terminate this Lease as to the space so
affected as of the date so specified by Tenant, in which case Tenant will be
relieved of all further obligations as to such
Page 19
<PAGE>
space; (ii) permit Tenant to assign or sublet such space to the named
assignee/subtenant on the terms and conditions set forth in the notice; or (iii)
refuse consent. If Landlord should fail to notify Tenant in writing of such
election within the 10-day period, Landlord shall be deemed to have elected
option (iii) above. In the event Landlord elects option (i) above, this Lease
shall expire with respect to such part of the Premises on the date upon which
the proposed sublease was to commence, and from such date forward, Base Monthly
Rent and Tenant's Allocable Share of all other costs and charges shall be
adjusted based upon the proportion that the rentable area of the Premises
remaining bears to the total rentable area of the Premises. In the event
Landlord elects option (ii) above, Landlord's written consent to the proposed
assignment or sublease shall not be unreasonably withheld, provided and upon the
condition that: (i) the proposed assignee or subtenant is engaged in a business
that is limited to the use expressly permitted under this Lease; (ii) the
proposed assignee or subtenant is a company with sufficient financial worth and
management ability to undertake the financial obligation of this Lease and
Landlord has been furnished with reasonable proof thereof; (iii) the proposed
assignment or sublease is in form reasonably satisfactory to Landlord; and (iv)
Tenant reimburses Landlord on demand for any reasonable costs that may be
incurred by Landlord in connection with said assignment or sublease, including
the costs of making investigations as to the acceptability of the proposed
assignee or subtenant and legal costs incurred in connection with the granting
of any requested consent. In the event all or any one of the foregoing
conditions are not satisfied, Landlord shall be considered to have acted
reasonably if it withholds its consent.
B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other economic
consideration actually realized by Tenant under any sublease and assignment, in
excess of the rent payable hereunder and reasonable subletting and assignment
costs incurred by Tenant in connection with the assignment or sublease including
attorney's fees, brokerage commissions and remodeling costs incurred as a direct
result of the sublease, shall be divided and paid fifty percent (50%) to
Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay Landlord
such percentage constitutes an obligation for additional rent hereunder. The
above provisions relating to Landlord's right to terminate the Lease and
relating to the allocation of bonus rent are independently negotiated terms of
the Lease which constitute a material inducement for the Landlord to enter into
the Lease, and are agreed by the parties to be commercially reasonable. No
assignment or subletting by Tenant shall relieve it of any obligation under this
Lease. Any assignment or subletting which conflicts with the provisions hereof
shall be void.
C. NO RELEASE: Any assignment or sublease shall be made only if and shall not
be effective until the assignee or subtenant shall execute, acknowledge, and
deliver to Landlord an agreement, in form and substance satisfactory to
Landlord, whereby the assignee or subtenant shall be subject to all the
covenants, agreements, terms, provisions and conditions in this Lease and in the
event of an assignment, the assignee assume all the obligations of this Lease on
the part of Tenant to be performed or observed. Notwithstanding any such
sublease or assignment and the acceptance of rent by Landlord from any subtenant
or assignee, Tenant and any guarantor shall remain fully liable for the payment
of Base Monthly Rent and additional rent due, and to become due hereunder, for
the performance of all the covenants, agreements, terms, provisions and
conditions contained in this Lease on the part of Tenant to be performed and for
all acts and omissions of any licensee, subtenant, assignee or any other person
claiming under or through any subtenant or assignee that shall be in violation
of any of the terms and conditions of this Lease, and any such violation shall
be deemed a violation by Tenant. Tenant shall indemnify, defend and hold
Landlord harmless from and against all losses, liabilities, damages, costs and
expenses (including reasonable attorney fees) resulting from any claims that may
be made against Landlord by the proposed assignee or subtenant or by any real
estate brokers or other persons claiming compensation in connection with the
proposed assignment or sublease.
D. REORGANIZATION OF TENANT: If Tenant is a corporation, the following shall
be deemed an assignment of Tenant's interest in this Lease governed by the
provisions of this Section 17: (i) any dissolution, merger, consolidation, or
other
Page 20
<PAGE>
reorganization of or affecting Tenant, whether or not Tenant is the surviving
corporation, or (ii) the sale or transfer to one other person or entity (or to
any group of related persons or entities) stock possessing more than 50% of the
total combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for the election of directors.
E. PERMITTED TRANSFERS: Notwithstanding anything contained in this Section 17,
so long as Tenant otherwise complies with the provisions of this Article, Tenant
may enter into any of the following transfers (a "Permitted Transfer") without
Landlord's prior consent, and Landlord shall not be entitled to terminate the
Lease or to receive any part of any subrent resulting therefrom that would
otherwise be due pursuant to Sections 17.A and 17.B. Tenant may sublease all or
part of the Premises or assign its interest in this Lease to (i) any corporation
which controls, is controlled by, or is under common control with the original
Tenant to this Lease by means of an ownership interest of more than 50%; (ii) a
corporation which results from a merger, consolidation or other reorganization
in which Tenant is not the surviving corporation, so long as the surviving
corporation has a net worth at the time immediately following such assignment
that is equal to or greater than the net worth of Tenant immediately prior to
such transaction; and (iii) a corporation which purchases or otherwise acquires
all or substantially all of the assets of Tenant so long as such acquiring
corporation has a net worth at the time immediately following such assignment
that is equal to or greater than the net worth of Tenant immediately prior to
such transaction. Except as provided in Section 17.D, the sale of Tenant's
capital stock shall not be deemed an assignment, subletting or any other
transfer of the Lease or the Premises.
F. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant hereby assigns
all rents due from any assignment or subletting to Landlord as security for
performance of its obligations under this Lease, and Landlord may collect such
rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents
unless a default occurs as described in Section 13 above. A Lease termination
due to Tenant's default shall not automatically terminate an assignment or
sublease then in existence; rather at Landlord's election, such assignment or
sublease shall survive the Lease termination, the assignee or subtenant shall
attorn to Landlord, and Landlord shall undertake the obligations of Tenant under
the sublease or assignment; except that Landlord shall not be liable for prepaid
rent, security deposits or other defaults of Tenant to the subtenant or
assignee, or for any acts or omissions of Tenant and Tenant's Agents.
G. CONVEYANCE BY LANDLORD: As used in this Lease, the term "Landlord" is
defined only as the owner for the time being of the Premises, so that in the
event of any sale or other conveyance of the Premises or in the event of a
master lease of the Premises, Landlord shall be entirely freed and relieved of
all its covenants and obligations hereunder, and it shall be deemed and
construed, without further agreement between the parties and the purchaser at
any such sale or the master tenant of the Premises, that the purchaser or master
tenant of the Premises has assumed and agreed to carry out any and all covenants
and obligations of Landlord hereunder; provided that such transferor shall
transfer and deliver Tenant's security deposit to the purchaser at any such sale
or the master tenant of the Premises, and thereupon the transferor shall be
discharged from any further liability in reference thereto.
F. SUCCESSORS AND ASSIGNS: Subject to the provisions of this Section 17, the
covenants and conditions of this Lease shall apply to and bind the heirs,
successors, executors, administrators and assigns of all parties hereto; and all
parties hereto shall be jointly and severally liable hereunder.
18. OPTION TO EXTEND THE LEASE TERM:
A. GRANT AND EXERCISE OF OPTION: Landlord grants to Tenant, subject to the
terms and conditions set forth in this Section 18.A, one (1) option ("Option")
to extend the Lease Term for an additional term (the "Option Term"). The Option
Term shall be for a period of sixty (60) months and shall be exercised, if at
all, by written notice to Landlord no earlier than eighteen (18) months prior to
the Expiration Date but no later than nine (9) months prior to the Expiration
Date. If Tenant exercises the Option, all of the terms, covenants and conditions
of this Lease except this Section shall apply during the Option Term, except
that the Base Monthly Rent for the
Page 21
<PAGE>
Premises payable by Tenant during the Option Term shall be the greater of either
the average Base Monthly Rent paid by Tenant during the initial Lease Term, or
Ninety Five percent (95%) of the Fair Market Rental as hereinafter defined.
Notwithstanding anything herein to the contrary, if Tenant is in monetary or
material non-monetary default beyond any required written notice and applicable
cure period under any of the terms, covenants or conditions of this Lease either
at the time Tenant exercises the Option or at any time thereafter prior to the
commencement date of the Option Term, Landlord shall have, in addition to all of
Landlord's other rights and remedies provided in this Lease, the right to
terminate the Option upon notice to Tenant, in which event the expiration date
of this Lease shall be and remain the Expiration Date. As used herein, the term
"Fair Market Rental" is defined as the rental and all other monetary payments,
including any escalations and adjustments thereto (including without limitation
Consumer Price Indexing) that Landlord could obtain during the Option Term from
a third party desiring to lease the Premises, based upon the current use and
other potential uses of the Premises in its then condition and under then
applicable laws, rules and regulations, as determined by the rents then being
obtained for new leases of space comparable in age and quality to the Premises
in the locality of the Building. Fair Market Rental shall further take into
account that Tenant is in occupancy and making functional use of the Premises in
its then existing condition. The parties acknowledge that they have agreed to so
set the rent at 95% of the then Fair Market Rent in recognition of and in
consideration for the fact that Landlord shall not incur brokerage commissions,
vacancy costs, and costs for the installation of new tenant improvements
(including recarpeting and repainting) along with other savings, if Tenant
elects to extend the term of this Lease, and that such discount of the full Fair
Market Rent is a reasonable estimate of the savings to be so realized by
Landlord.
B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option,
Landlord shall send Tenant a notice setting forth the Fair Market Rental for the
Option Term within thirty (30) days following the Exercise Date. If Tenant
disputes Landlord's determination of Fair Market Rental for the Option Term,
Tenant shall, within thirty (30) days after the date of Landlord's notice
setting forth Fair Market Rental for the Option Term, send to Landlord a notice
stating that Tenant either elects to terminate its exercise of the Option, in
which event the Option shall lapse and this Lease shall terminate on the
Expiration Date, or that Tenant disagrees with Landlord's determination of Fair
Market Rental for the Option Term and elects to resolve the disagreement as
provided in Section 18.C below. If Tenant does not send Landlord a notice as
provided in the previous sentence, Landlord's determination of Fair Market
Rental shall be the basis for determining the Base Monthly Rent payable by
Tenant during the Option Term. If Tenant elects to resolve the disagreement as
provided in Section 18.C and such procedures are not concluded prior to the
commencement date of the Option Term, Tenant shall pay to Landlord as Base
Monthly Rent the Fair Market Rental as determined by Landlord in the manner
provided above. If the Fair Market Rental as finally determined pursuant to
Section 18.C is greater than Landlord's determination, Tenant shall pay Landlord
the difference between the amount paid by Tenant and the Fair Market Rental as
so determined in Section 18.C within thirty (30) days after such determination.
If the Fair Market Rental as finally determined in Section 18.C is less than
Landlord's determination, the difference between the amount paid by Tenant and
the Fair Market Rental as so determined in Section 18.C shall be credited
against the next installments of rent due from Tenant to Landlord hereunder.
C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement
regarding Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to Landlord's notice
setting forth the Fair Market Rental, Landlord and Tenant shall meet at least
two (2) times at a mutually agreeable time and place, in an attempt to resolve
the disagreement.
2. If within the 30-day period referred to above, Landlord and Tenant
cannot reach agreement as to Fair Market Rental, each party shall select one
appraiser to determine Fair Market Rental. Each such appraiser shall arrive at
a determination of Fair Market Rental and submit their conclusions to Landlord
and Tenant
Page 22
<PAGE>
within thirty (30) days after the expiration of the 30-day consultation period
described above.
3. If only one appraisal is submitted within the requisite time period, it
shall be deemed as Fair Market Rental. If both appraisals are submitted within
such time period and the two appraisals so submitted differ by less than ten
percent (10%), the average of the two shall be deemed as Fair Market Rental. If
the two appraisals differ by more than 10%, the appraisers shall immediately
select a third appraiser who shall, within thirty (30) days after his selection,
make and submit to Landlord and Tenant a determination of Fair Market Rental.
This third appraisal will then be averaged with the closer of the two previous
appraisals and the result shall be Fair Market Rental.
4. All appraisers specified pursuant to this Section shall be members of
the American Institute of Real Estate Appraisers with not less than ten (10)
years experience appraising office and industrial properties in the Santa Clara
Valley. Each party shall pay the cost of the appraiser selected by such party
and one-half of the cost of the third appraiser.
D. PERSONAL TO TENANT: All Options provided to Tenant in this Lease are
personal and granted to Concentric Network Corporation and any assignees not
requiring Landlord's consent pursuant to Section 17 and are not exercisable by
any third party should Tenant assign or sublet all or a portion of its rights
under this Lease, unless Landlord consents to permit exercise of any option by
any assignee or subtenant, in Landlord's sole and absolute discretion. In the
event Tenant has multiple options to extend this Lease, a later option to extend
the Lease cannot be exercised unless the prior option has been so exercised.
19. CONDITION PRECEDENT TO LEASE: Landlord and Tenant hereby acknowledge that
Cisco Systems ("Cisco") is currently occupying the Premises as the tenant under
that certain lease between Landlord and Cisco dated February 12, 1990 (the
"Cisco Lease"). Under the Cisco Lease, Cisco has the option ("Option") to extend
the term of the Cisco Lease until December 31, 2003, which Option must be
exercised by Cisco on or before June 30, 1998. If Cisco fails to exercise its
Option, the Cisco Lease will expire December 31, 1998. Notwithstanding anything
to the contrary in this Leases, Landlord and Tenant's obligations under this
Lease are conditioned upon Cisco not exercising its Option. If Cisco exercises
its Option, this Lease shall be null and void and Landlord shall immediately
return to Tenant all monies (including any prepaid rent and any security
deposit) paid by Tenant to Landlord in connection with this Lease. If Cisco
exercises its Option, Landlord shall immediately notify Tenant in writing of
that fact. If Landlord fails to notify Tenant definitively in writing that Cisco
has properly exercised its option to extend the Cisco Lease or that Cisco has
properly waived its right to extend the Cisco Lease on or before July 30, 1998,
Tenant may terminate this Lease within five (5) days thereafter. Upon such
termination, Landlord shall immediately return any prepaid rent and the security
deposit to Tenant.
20. GENERAL PROVISIONS:
A. ATTORNEY'S FEES: In the event a suit or alternative form of dispute
resolution is brought for the possession of the Premises, for the recovery of
any sum due hereunder, to interpret the Lease, or because of the breach of any
other covenant herein; then the losing party shall pay to the prevailing party
reasonable attorney's fees including the expense of expert witnesses,
depositions and court testimony as part of its costs which shall be deemed to
have accrued on the commencement of such action. The prevailing party shall also
be entitled to recover all costs and expenses including reasonable attorney's
fees incurred in enforcing any judgment or award against the other party. The
foregoing provision relating to post-judgment costs is severable from all other
provisions of this Lease.
B. AUTHORITY OF PARTIES: Tenant represents and warrants that it is a duly
formed corporation and in good standing, and is duly authorized to execute and
deliver this Lease on behalf of said corporation, in accordance with a duly
adopted resolution of the Board of Directors of said corporation or in
accordance with the by-laws of said corporation, and that this Lease is binding
upon said corporation in accordance with its terms. At Landlord's request,
Tenant shall provide Landlord with corporate resolutions or other proof in a
form acceptable to Landlord,
Page 23
<PAGE>
authorizing the execution of the Lease. The individuals executing this Lease on
Landlord's behalf represent and warrant that they have the requisite authority
to sign this Lease and that this Lease is binding on Landlord. Landlord
represents that it owns the Premises and is duly empowered to sign this Lease,
and that the consent of no other party is required to make this Lease binding on
Landlord.
C. BROKERS: Landlord and Tenant represent they have not utilized or contacted
any real estate broker or finder with respect to this Lease other than Spallino-
Reid Corporate Real Estate Services ("Broker") and Landlord and Tenant each
agree to indemnify, defend and hold the other harmless against any claim, cost,
liability or cause of action asserted by any other broker or finder claiming
through the acts or conduct of the indemnifying party. Landlord shall pay a real
estate commission to Broker pursuant to a separate agreement between Landlord
and Broker.
D. CHOICE OF LAW: This Lease shall be governed by and construed in accordance
with California law. Venue shall be Santa Clara County.
E. DISPUTE RESOLUTION: Landlord and Tenant and any other party that may become
a party to this Lease or be deemed a party to this Lease including any
subtenants agree that, except for any claim by Landlord for unlawful detainer or
any claim within the jurisdiction of the small claims court (which for such
claims the parties agree shall be the sole court of competent jurisdiction), any
controversy, dispute, or claim of whatever nature arising out of, in connection
with or in relation to the interpretation, performance or breach of this Lease,
including any claim based on contract, tort, or statute, shall be resolved at
the request of any party to this agreement through a two-step dispute resolution
process administered by J. A. M. S. or another judicial mediation service
mutually acceptable to the parties located in Santa Clara County. The dispute
resolution process shall involve first, mediation, followed, if necessary, by
final and binding arbitration administered by and in accordance with the then
existing rules and practices of J. A. M. S. or other judicial mediation service
selected. in the event of any dispute subject to this provision, either party
may initiate a request for mediation and the parties shall use reasonable
efforts to promptly select a J. A. M. S. mediator and commence the mediation. in
the event the parties are not able to agree on a mediator within thirty (30)
days, J. A. M. S. or another judicial mediation service mutually acceptable to
the parties shall appoint a mediator. The mediation shall be confidential and in
accordance with California Evidence Code (s) 1152.5. The mediation shall be held
in Santa Clara County and in accordance with the existing rules and practice of
J. A. M. S. (or other judicial and mediation service selected). The parties
shall use reasonable efforts to conclude the mediation within sixty (60) days of
the date of either party's request for mediation. The mediation shall be held
prior to any arbitration or court action (other than a claim by Landlord for
unlawful detainer or any claim within the jurisdiction of the small claims court
which are not subject to this mediation/arbitration provision and may be filed
directly with a court of competent jurisdiction). Should the prevailing party in
any dispute subject to this Section 20.E attempt an arbitration or a court
action before attempting to mediate, THE PREVAILING PARTY SHALL NOT BE ENTITLED
TO ATTORNEY'S FEES THAT MIGHT OTHERWISE BE AVAILABLE TO THEM IN A COURT ACTION
OR ARBITRATION AND IN ADDITION THERETO, THE PARTY WHO IS DETERMINED BY THE
ARBITRATOR TO HAVE RESISTED MEDIATION, SHALL BE SANCTIONED BY THE ARBITRATOR OR
JUDGE.
If a mediation is conducted but is unsuccessful, it shall be followed by final
and binding arbitration administered by and in accordance with the then existing
rules and practices of J. A. M. S. or the other judicial and mediation service
selected, and judgment upon any award rendered by the arbitrator(s) may be
entered by any state or federal court having jurisdiction thereof. The parties
to the arbitration shall have those rights of discovery that the arbitrator(s)
deem necessary (after application to the arbitrator(s)) to a full and fair
hearing of the matter. However, in no event shall the parties be entitled to
propound interrogatories or request for admissions during the arbitration
process. The arbitrator shall be a retired judge or a licensed California
attorney. The venue for any such arbitration or mediation shall be in Santa
Clara County, California.
Page 24
<PAGE>
F. ENTIRE AGREEMENT: This Lease and the exhibits attached hereto contains all
of the agreements and conditions made between the parties hereto with respect to
the lease of the Premises and may not be modified orally or in any other manner
other than by written agreement signed by all parties hereto or their respective
successors in interest. This Lease supersedes and revokes all previous
negotiations, letters of intent, lease proposals, brochures, agreements,
representations, promises, warranties, and understandings, whether oral or in
writing, between the parties or their respective representatives or any other
person purporting to represent Landlord or Tenant relating to the lease of the
Premises.
G. ENTRY BY LANDLORD: Upon twenty-four (24) hours' advance written notice to
Tenant (except in the event of an emergency where no such prior notice shall be
required) and provided that Landlord does not unreasonably interfere with
Tenant's use of the Premises, and subject to Tenant's reasonable safety and/or
security regulations, Tenant shall permit Landlord and his agents to enter into
and upon the Premises at all reasonable times, and except as set forth in this
Lease, without any rent abatement or reduction or any liability to Tenant for
any loss of occupation or quiet enjoyment of the Premises thereby occasioned,
for the following purposes: (i) inspecting and maintaining the Premises; (ii)
making repairs or alterations to the Premises as may be required to fulfill
Landlord's obligations under this Lease; and (iii) performing any obligations of
Landlord under this Lease including remediation of hazardous materials if
determined to be the responsibility of Landlord. Tenant shall permit Landlord
and his agents, at any time within one hundred eighty (180) days prior to the
Expiration Date (or at any time during the Lease if Tenant is in default beyond
any required written notice and applicable cure period hereunder), to place upon
the Premises "For Lease" signs and exhibit the Premises to real estate brokers
and prospective tenants at reasonable hours.
H. ESTOPPEL CERTIFICATES: At any time during the Lease Term, each party shall,
within ten (10) business days following receipt of written notice from the other
party, execute and deliver to the requesting party a written statement
certifying, if true, the following: (i) that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such
modification); (ii) the date to which rent and other charges are paid in
advance, if any; (iii) acknowledging that there are not, to said party's actual
knowledge, any uncured defaults on the other party's part hereunder (or
specifying such defaults if they are claimed); and (iv) such other information
as such party may reasonably request. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises or a
purchaser of Tenant's assets or leasehold interest. Landlord or Tenant's failure
to deliver such statement within such time shall be conclusive upon the party
not providing the statement that this Lease is in full force and effect without
modification, except as may be represented by the requesting party, and that
there are no uncured defaults in the requesting party's performance. Tenant
agrees to provide, within five (5) business days after receipt of a written
request from Landlord, Tenant's most recent three (3) years audited financial
statements subject to the following: (i) Landlord shall only require such
statements in connection with Landlord's proposed sale or refinance of the
Premises; and (ii) Landlord and any person or entity to whom such financial
statements are provided shall agree in writing to hold such statements in the
strictest confidence.
I. EXHIBITS: All exhibits referred to are attached to this Lease and
incorporated by reference.
J. INTEREST: All rent due hereunder, if not paid when within thirty (30) days
after it is due, shall bear interest at the rate of the Reference Rate published
by Bank of America, San Francisco Branch, plus two percent (2%) per annum from
that date until paid in full ("Agreed Interest Rate"). This provision shall
survive the expiration or sooner termination of the Lease. Despite any other
provision of this Lease, the total liability for interest payments shall not
exceed the limits, if any, imposed by the usury laws of the State of California.
Any interest paid in excess of those limits shall be refunded to Tenant by
application of the amount of excess interest paid against any sums owing to
Landlord under this Lease in any order that Landlord requires. If the amount of
excess interest paid exceeds the sums outstanding, the portion exceeding those
sums shall be refunded in cash to Tenant by Landlord. To ascertain whether any
Page 25
<PAGE>
interest payable exceeds the limits imposed, any non-principal payment(including
late charges) shall be considered to the extent permitted by law to be an
expense or a fee, premium, or penalty rather than interest.
K. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand, agree and
acknowledge that this Lease has been freely negotiated by both parties; and that
in any controversy, dispute, or contest over the meaning, interpretation,
validity, or enforceability of this Lease or any of its terms or conditions,
there shall be no inference, presumption, or conclusion drawn whatsoever against
either party by virtue of that party having drafted this Lease or any portion
thereof.
L. NOTICES: All notices, demands, requests, or consents required or permitted
to be given under this Lease shall be sent in writing by U.S. certified mail,
return receipt requested, or by personal delivery, or by a reputable commercial
overnight courier addressed to the party to be notified at the address for such
party specified in Section 1 of this Lease, or to such other place as the party
to be notified may from time to time designate by at least fifteen (15) days
prior written notice to the notifying party. Notices given shall be deemed
received (i) if given by certified mail, return-receipt requested, upon receipt
or rejection, (ii) if given by personal delivery, upon signed acknowledgment of
receipt, or (iii) if given by overnight courier, the next business day after
deposit with the courier. When this Lease requires service of a notice, that
notice shall replace rather than supplement any equivalent or similar statutory
notice, including any notices required by Code of Civil Procedure Section 1161
or any similar or successor statute. when a statute requires service of a notice
in a particular manner, service of that notice (or a similar notice required by
this lease) shall replace and satisfy the statutory service-of-notice
procedures, including those required by Code of Civil Procedure Section 1162 or
any similar or successor statute.
M. PROPERTY MANAGEMENT: In addition, Tenant agrees to pay Landlord along with
the expenses to be reimbursed by Tenant a monthly fee for management services
rendered by either Landlord or a third party manager engaged by Landlord (which
may be a party affiliated with Landlord), in the amount of three percent (3%) of
the Base Monthly Rent.
N. RENT: All monetary sums due from Tenant to Landlord under this Lease,
including, without limitation those referred to as "additional rent", shall be
deemed as rent.
O. REPRESENTATIONS: Tenant acknowledges that except as set forth in this
Lease, neither Landlord nor any of its employees or agents have made any
agreements, representations, warranties or promises with respect to the Premises
or with respect to present or future rents, expenses, operations, tenancies or
any other matter. Except as expressly set forth in this Lease, Tenant relied on
no statement of Landlord or its employees or agents for that purpose.
P. RIGHTS AND REMEDIES: All rights and remedies hereunder are cumulative and
not alternative to the extent permitted by law, and are in addition to all other
rights and remedies in law and in equity.
Q. SEVERABILITY: If any term or provision of this Lease is held unenforceable
or invalid by a court of competent jurisdiction, the remainder of the Lease
shall not be invalidated thereby but shall be enforceable in accordance with its
terms, omitting the invalid or unenforceable term.
R. SUBMISSION OF LEASE: Submission of this document for examination or
signature by the parties does not constitute an option or offer to lease the
Premises on the terms in this document or a reservation of the Premises in favor
of Tenant. This document is not effective as a lease or otherwise until executed
and delivered by both Landlord and Tenant.
S. SUBORDINATION: This Lease is subject and subordinate to ground and
underlying leases, mortgages, deeds of trust and security instruments
(collectively "Encumbrances") which may now affect the Premises, to any
covenants, conditions or restrictions of record, and to all renewals,
modifications, consolidations, replacements and extensions thereof; provided,
however, if the holder or holders of any such Encumbrance ("Holder") require
that this Lease be prior and superior thereto, within ten (10) days after
written request of Landlord to Tenant, Tenant shall execute, have acknowledged
and
Page 26
<PAGE>
deliver all reasonable documents or instruments, in the form presented to
Tenant, which Landlord or Holder reasonably deems necessary or desirable to make
the Lease superior thereto. Landlord shall have the right to cause this Lease to
be and become and remain subject and subordinate to any and all Encumbrances
which are now or may hereafter be executed covering the Premises or any
renewals, modifications, consolidations, replacements or extensions thereof, for
the full amount of all advances made or to be made thereunder and without regard
to the time or character of such advances, together with interest thereon and
subject to all the terms and provisions thereof; provided only, that in the
event of termination of any such lease or upon the foreclosure of any such
mortgage or deed of trust, Holder agrees to recognize Tenant's rights under this
Lease as long as Tenant is not then in default (as defined in Section 13 of this
Lease) and continues to pay Base Monthly Rent and additional rent and observes
and performs all provisions of this Lease required to be performed by Tenant.
Within ten (10) days after Landlord's written request, Tenant shall execute any
reasonable documents required by Landlord or the Holder to make this Lease
subordinate to any lien of the Encumbrance. If Tenant fails to do so, then in
addition to such failure constituting a default by Tenant, it shall be deemed
that this Lease is so subordinated to such Encumbrance. Notwithstanding anything
to the contrary in this Section, Tenant hereby attorns and agrees to attorn to
any entity purchasing or otherwise acquiring title to the Premises at any sale
or other proceeding or pursuant to the exercise of any other rights, powers or
remedies under such encumbrance.
Landlord shall cause the existing lender, First California Mortgage, to furnish
to Tenant, within sixty (60) days of the date of both parties' execution of this
Lease, with a written agreement providing for (i) recognition by the lender of
all of the terms and conditions of this Lease, and (ii) continuation of this
Lease upon foreclosure of existing lender's security interest in the Premises.
In the event that Landlord is unable to provide such agreement, Tenant's sole
remedy shall be termination of the Lease, which election shall be made within
fourteen (14) days following the expiration of such sixty (60) day period.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed if Tenant is not in default under this Lease (as
defined in Section 13 of this Lease). Notwithstanding anything to the contrary
in the Lease, subordination of Tenant's leasehold interest to an Encumbrance,
and Tenant's attornment to any party, is conditioned upon Tenant's concurrent
receipt from the lender or ground lessor or Holder in question of an express
written agreement in a form reasonably satisfactory to Tenant providing for (i)
the recognition of all of the terms and conditions of this Lease and providing
for continuation of this Lease upon foreclosure of the Encumbrance or
termination of the ground lease and (ii) the written agreement by such successor
to perform all of the obligations to be performed by Landlord under the Lease on
and after the date of the foreclosure or termination of the ground lease.
T. APPROVALS: Except as specifically excepted in this Lease, whenever the
Lease requires an approval, consent, designation, determination or judgment by
either Landlord or Tenant, such approval, consent, designation, determination or
judgment shall not be unreasonably withheld or delayed and in exercising any
right or remedy hereunder, each party shall at all times act reasonably and in
good faith.
U. REASONABLE EXPENDITURES: Any expenditure by a party permitted or required
under the Lease, for which such party is entitled to demand and does demand
reimbursement from the other party, shall be limited to the fair market value of
the goods and services involved, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by the
other party or its representative during normal business hours.
V. Survival of Indemnities: All indemnification, defense, and hold harmless
obligations of Landlord and Tenant under this Lease shall survive the expiration
or sooner termination of the Lease.
W. TIME: Time is of the essence hereunder.
X. WAIVER OF RIGHT TO JURY TRIAL: Landlord and Tenant waive their respective
rights to trial by jury of any contract or tort claim, counterclaim, cross-
complaint, or cause of action in any action, proceeding, or hearing brought by
either party
Page 27
<PAGE>
against the other on any matter arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, or Tenant's use or occupancy of
the Premises, including any claim of injury or damage or the enforcement of any
remedy under any current or future law, statute, regulation, code, or ordinance.
Y. MEMORANDUM OF LEASE: At Tenant's option, a memorandum of this Lease shall
be recorded in a form acceptable to Tenant in the Official Records of Santa
Clara County, California. Landlord agrees to duly execute and acknowledge such
memorandum.
Z QUIET ENJOYMENT: Provided Tenant is not in default beyond any required
written notice and applicable cure period, Tenant shall quietly have and hold
the Premises for the Lease Term and any extensions thereof without interference
by Landlord or any party claiming by or through Landlord.
Page 28
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.
LANDLORD: The Sobrato Group, TENANT: Concentric Network Corporation,
a California Limited Partnership a Delaware Corporation
By: /s/ John Sobrato By: /s/ Henry R. Nothhaft
------------------------------ --------------------------------
Its: General Partner Its: Chief Executive Officer
---------------------------- --------------------------------
Page 29
<PAGE>
EXHIBIT "A" - PREMISES
Page 30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 210,816 210,816
<SECURITIES> 0 0
<RECEIVABLES> 8,649 8,649
<ALLOWANCES> 358 358
<INVENTORY> 0 0
<CURRENT-ASSETS> 227,515 227,515
<PP&E> 89,547 89,547
<DEPRECIATION> 31,139 31,139
<TOTAL-ASSETS> 326,095 326,095
<CURRENT-LIABILITIES> 32,624 32,624
<BONDS> 0 0
145,527 145,527
0 0
<COMMON> 184,483 184,483
<OTHER-SE> (194,780) (194,780)
<TOTAL-LIABILITY-AND-EQUITY> 326,095 326,095
<SALES> 19,662 36,146
<TOTAL-REVENUES> 19,662 36,146
<CGS> 20,204 37,928
<TOTAL-COSTS> 34,548 64,631
<OTHER-EXPENSES> 1,291 6,491
<LOSS-PROVISION> 76 112
<INTEREST-EXPENSE> 4,025 8,495
<INCOME-PRETAX> (21,479) (44,748)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (21,479) (44,748)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 3,042
<CHANGES> 0 0
<NET-INCOME> (21,479) (41,706)
<EPS-PRIMARY> (1.49) (2.92)
<EPS-DILUTED> (1.49) (2.92)
</TABLE>
