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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22575
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CONCENTRIC NETWORK CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 65-0257497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1400 Parkmoor Avenue, San Jose, CA 95126-3429
(Address of principal executive offices) (zip code)
(408) 817-2800
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
27, 2000 as reported on the National Market of The Nasdaq Stock Market, was
approximately $2,227,512,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 27, 2000, registrant had
outstanding 51,593,378 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for Registrant's Annual Meeting of
Stockholders.
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The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risks Related
to Concentric's Business".
PART I
ITEM 1. BUSINESS
Concentric provides tailored, value-added IP-based network services
primarily targeted to small-to-medium sized enterprises. To provide these
services, the Company utilizes its low/fixed latency, high-throughput network,
employing its advanced network architecture, data centers and the Internet.
Concentric's service offerings for enterprises include Virtual Private
Networks, high-speed Internet access and Web hosting. These services enable
enterprises to take advantage of standard Internet tools such as browsers and
high-performance servers for customized data communications within an
enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks. Among the current
distribution partners are Intuit, SBC and WebTV.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed
its name to Concentric Network Corporation and reincorporated into Delaware in
1997.
In January 2000, Concentric agreed to be acquired by NEXTLINK
Communications, Inc. ("Nextlink"), a provider of a variety of voice services
and high speed Internet access to the business market. As a combined company,
we expect to be able to offer a complete, single source communications
solution to our customers by combining our Internet business, data center and
application service provider services with the full array of products from
Nextlink's voice and data services. The transaction is subject to approval of
our stockholders and other customary closing conditions, and is expected to
close in the second quarter of 2000. The foregoing statements regarding the
pending acquisition of Concentric by Nextlink and the expectations for the
combined entity are forward looking statements subject to a number of risks
and uncertainties including the factors set forth below in "Management's
Discussion and Analysis of Financial Results--Risks Related to Concentric's
Business--The Proposed Merger Involves Risks and Uncertainties and May Not be
Completed". Also, please refer to "Management's Discussion and Analysis of
Financial Results--Overview" for a discussion of the terms of the acquisition.
Industry Background
Development of Private Networks
Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private WANs to provide network-based services, such
as transaction processing, to their customers and to coordinate operations
between employees, suppliers and business partners. Such private WANs were
frequently customized to specific applications, business practices and user
communities. As a result, these private WANs had the capability of providing
organizations and users with tailored performance and features, security,
reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.
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Despite the attractive capabilities of private networks, limitations of
many private WANs have impeded or reduced the effectiveness of their use.
These networks, which traditionally have required the use of leased telephone
lines with bandwidth dedicated solely to this purpose and the purchase of
vendor-specific networking equipment, are inherently expensive to set up,
operate and maintain. Private WANs often require the development and
maintenance of proprietary software and lack cost-effective access. These
aspects of developing, deploying and maintaining such private WANs have
conflicted with the increased focus of many businesses on their core
competencies, which has prompted the outsourcing of many non-core functions.
The Company believes that many businesses have viewed as unacceptable the
costs of maintaining a private WAN infrastructure and the risks of investing
in new technologies in the absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including email, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to explore opportunities to provide
IP-based applications and services within their organization, and to customers
and business partners outside the enterprise.
Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
email. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet. On the
Internet, latency is frequently relatively high and variable, making it sub-
optimal for these emerging applications. Although private networks are capable
of offering lower and more stable latency levels, providers of these emerging
applications also desire a network that will offer their customers full access
to the Internet. As a result, these businesses and applications providers
require a network that combines the best features of the Internet, such as
openness, ease of access and low cost made possible by the IP standard, with
the advantages of a private network, such as high security, low/fixed latency
and customized features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to Infonetics Research industry analysts, the total
market for virtual private network ("VPN") products and services could reach
approximately $30 billion by the end of year 2003. The majority of the
enterprise customers are expected to outsource such services due to lack
expertise and high internal costs, outlining security as one of their biggest
concerns.
Business Strategy
The Company's objective is to become the leading supplier of e-business
services worldwide. In order to achieve this goal, the Company is implementing
a business strategy focused on the following key principles:
Primary Focus on Small-to-Medium Sized Enterprise Market. The Company
focuses its sales and marketing effort under its own brand on the small-to-
medium sized enterprise market selling DSL and web-hosting as the lead-in
products. The Company believes that the small-to-medium sized enterprise
market, while competitive, is under-served in general and represents a good
opportunity for the Company. The company intends to sell additional value-
added e-business services after the initial network service or web hosting
sale.
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Optimize Network Utilization. Given the fixed cost nature of
Concentric's network infrastructure, the Company strives to increase total
network utilization and to optimize this utilization by targeting both
daytime business and evening-intensive consumer users to balance the
network's usage throughout a 24-hour period. Accordingly, while the
Company's current strategic focus is on providing e-business services to
small-to-medium sized enterprises, the Company intends to continue
partnering with multi-channel distributors to acquire and maintain a base
of consumer subscribers who access the Concentric network predominantly
during non-business hours.
Acquire Complementary Assets, Technologies and Businesses. The Company
is actively seeking to identify and acquire assets, technologies and
businesses complementary to the Company's value-added enterprise network
service strategy. Such acquisition efforts are targeted at businesses that
offer the potential to expand the Company's revenue base, increase the
scalability of the Company's network infrastructure and value-added service
offerings, as well as optimize the utilization of the Company's network. As
part of this strategy, the Company completed three acquisitions in 1998,
one acquisition in 1999 and one acquisition in 2000. The Company acquired
InterNex, a Tier 1 provider of network services, co-location service and
Web-hosting facilities to enterprise customers, in February 1998. The
Company acquired DeltaNet, a provider of network services, colocation and
managed dedicated hosting services, in May 1998. The Company acquired
AnaServe, a provider of shared hosting and managed dedicated hosting
services, in August 1998. The Company acquired 9Net Avenue, a provider of
shared hosting and managed dedicated hosting services, in October 1999 and
the assets of Internet Technology Group, Plc, a London, U.K. based Internet
service provider in January 2000.
Employ Leveraged Marketing Through Strategic Partners. The Company
actively seeks to form alliances with certain software developers and
telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company
and that have a large installed customer base. These alliances facilitate
the cost-effective acquisition of consumer and business customers and
increase Concentric's network utilization. These marketing relationships
are developed and enhanced through the bundling of Concentric's IP-based
network services with the products and services offered by the strategic
partners. These relationships may involve customized browsers, registration
services and specialized pricing, commissions and billing programs.
Concentric has established such strategic relationships with a number of
companies, including WebTV, SBC, Williams, Covad, Northpoint, Intuit and
Register.Com.
Deploy Network Services Internationally. The Company believes that the
competitive nature of the marketplace will increasingly require it to offer
network services on a global basis. To date, the Company has launched the
following initiatives to provide global solutions to its customers:
Acquisition of Internet Technology Group. Pursuant to an agreement
signed in September 1999, the Company has acquired Internet Technology
Group, Plc ("ITG"). The acquisition of ITG gives the Company a local UK
network presence and customer base as well as sales, marketing, network
engineering and other staff local to the UK market. The Company believes
that the local presence is important to international expansion.
Roaming Services in Japan. The Company entered into a roaming services
agreement in June 1997 with NTT PC, a leading provider of IP services in
Japan. The roaming services agreement allows Concentric customers to use
the NTT PC network to access their Internet accounts in Japan and allows
members of the NTT PC network to access their Internet accounts in the
United States and Canada.
GRIC Roaming Alliance. The Company executed a roaming services agreement
with GRIC International in October 1998. GRIC International is an alliance
of 400 ISPs and telecommunication companies that together form a worldwide
network of 2,700 POPs. The GRIC International alliance allows the Company's
customers to access the Internet through these worldwide POPs while
traveling outside of the United States.
While the Company expects to generate a minority of its revenue from
deployment of international network services in the year 2000, the Company
believes that the ability to deliver network solutions globally will be a
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key competitive factor in its industry. 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 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Operating Results--
Concentric Faces Risks Associated with International Expansion."
Services
Concentric provides Internet business solutions for small- and medium-sized
enterprises, including DSL access, Web hosting and e-commerce. The Company
also offers data center services, virtual private networks ("VPN"s), dedicated
access, and application infrastructure services for delivering applications
over the Internet or a VPN. To provide these services, the Company operates a
nationwide backbone IP network, extensive public and private Internet peering,
and data centers nationwide.
Enterprise Solutions
The Company has developed a set of enterprise services including VPNs,
high-speed Internet access, which includes dedicated access facilities and
digital subscriber line services, wireless access services and applications
hosting services. These services are marketed to Concentric's enterprise
customers.
Virtual Private Network Services. Concentric's custom VPN solutions enable
its customers to deploy tailored, IP-based mission-critical business
applications for internal enterprise, business-to-business and business-to-
customer data communications on the Concentric network while also affording
high-speed access to the Internet. Concentric offers its customers a secure
network on which to communicate and access information between an
organization's geographically dispersed locations; collaborate with external
groups or individuals, including customers, suppliers, and other business
partners and use the Web to access information on the Internet and communicate
with other Web users.
The Company's VPN solutions allow the enterprise customer to tailor the
type of access, services and information that various users of the VPN are
afforded according to the specific needs of the enterprise. Key benefits
include rapid implementation time, lower operating and maintenance costs,
minimal capital investment, higher quality of service overall and 24-hour
network and customer support. For example, starting in October 1995 the
Company created and now maintains the VPN used by Intuit customers using a
customized version of the Netscape Navigator browser bundled with Quicken for
Windows and Macintosh, Quickbooks, ProTax and TurboTax/MacInTax. The bundled
software allows a Quicken customer to click on an icon that launches Netscape,
and takes the user directly to Quicken Financial Network Website. On the Web
page Quicken customers will find useful financial advice, information from
Intuit's bank and financial institution partners, answers to commonly asked
technical questions and tips on how to tap the full potential of Intuit's
financial products.
In addition to the custom VPNs that Concentric has developed and delivered,
the following distinct VPN products are now offered by the Company:
Concentric CustomLink. Concentric CustomLink provides a complete,
private-labeled dial-up VPN service for customers. In addition, CustomLink
permits the customer to segment its users, and apply various levels of
services, such as Web access, email, and file transfer protocol to each
customer group. CustomLink includes dial-up network access, customized and
customer-branded client software, and private labeled help desk services.
The dial-up network access offerings include local access and toll-free
access.
Enterprise VPN. The Company's Enterprise VPN service includes security
hardware (such as firewalls and encryptors) and software, high speed
network access, network connectivity, customer premise routing equipment
and customer support services. The Enterprise VPN service is targeted at
customers seeking to create a secure, outsourced WAN for intranet and
extranet applications. Installation support for the customer premise
located routing and security equipment is also provided. Concentric can
also provide management services for firewall and packet encryption
equipment if desired by the customer.
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Secure Remote Access. Concentric's Secure Remote Access product is an
extension of the Enterprise VPN service offeringthat provides fully managed
and secure remote access for the corporation's remote users or
telecommuters. Secure Remote Access utilizes an easy-to-use web based
interface to allow for administration of users by the customer. Secure
Remote Access uses internationally accepted IPSEC standards in its client
softwareand interfaces with the same security gateway used in the
Enterprise VPN. Secure Remote Access is transport independent and may also
be deployed over DSL lines.
Business Dial. The company's latest dial offering provides for business
class remote access using a variety of services. Business Dial provides a
web based interface for user administration and can be set up to support
value-added dial access features such as Toll free (800), IP Filtering,
Radius Proxy, client software customization, L2TP and international
roaming. This product is intended to meet the needs of our enterprise
customers with varying levels of dial access requirements.
Concentric performs around-the-clock monitoring of network performance.
Concentric also enables its customers to monitor their network through the
Company's Nethealth software. Concentric Nethealth is a Web-based network
management tool which allows a customer to monitor usage on a circuit by
circuit basis.
Dedicated Access Facilities. In January 1997, the Company began offering
DAFs as an Internet Access product targeted at businesses that desire single
or multipoint high-speed, dedicated connections to the Internet or to
distributed locations such as regional offices, warehouses, manufacturing
facilities, or suppliers. DAF products are primarily targeted at providing
fully dedicated access to Concentric's high speed ATM backbone and the
Internet, using dedicated private line technology. The product can also be
used to provide Intranet connectivity among distributed enterprise locations
with the additional benefit of Internet access if desired by the customer. DAF
is also used as the underlying product in many of Concentric's higher end,
value add services such as EVPN and Secure Remote Access, ConcentricAIP, and
DSL Teleworker. The Company provides a full range of connectivity options,
allowing the customer to order the appropriate amount of bandwidth to meet its
networking requirements. In addition, Concentric offers its multiple DAF
customers robust Service Level Agreements that guarantee network availability,
packet loss, and latency. Furthermore, Concentric offers several different
billing plans for DAF customers that allow customers to choose to be billed on
a flat rate, or usage sensitive basis.
Concentric's DAF offering consists of the following product lines:
FullChannel Price Protected T-1, FullChannel Usage Based T-1, FullChannel
Price Protected T3, FullChannel Usage Based T3, FlexChannel T1 (i.e.:
"fractional" T1), FlexChannel T3 (i.e.: "fractional" T3), ConcentricIMUX, and
LECFrame Relay. The speeds range from 56 Kbps up to 45 Mbps, with a
comprehensive range of speeds in between. In select markets, the Company has
also begun providing key customers much higher transit services up to OC3 (155
Mbps).
FullChannel Usage Based T-1 and Full Channel Usage Based T3 pricing is
based on a one-time set-up fee and a pricing structure which charges customers
only for the bandwidth that they use in a given month. The customer's usage is
measured at five-minute intervals throughout the month. Concentric then bills
the customer according to the industry standard 95% peak billing utilization
model. The one time set-up fee for FullChannel T-1 service is $3,000 and the
monthly fee ranges from $1,095 to $2,695 depending on usage. The one time set-
up fee for FullChannel DS3 service is $5,000 and the monthly fee ranges from
$6,000 to $40,500 depending on usage. FullChannel T-1 and DS3 pricing is the
appropriate choice for those customers who have fluctuating and/or uncertain
bandwidth consumption patterns.
FullChannel Price Protected T-1 gives a customer a fixed price for a full
1.5 Mbps of Internet connectivity. The one time set-up fee is $3,000 and the
monthly fee is is as low as $995. This is an economical choice for those
customers who recognize in advance that their bandwidth throughput
requirements will equal T-1 levels. FullChannel Price Protected T3 provides
customers a fixed price for a full 45Mbps of Internet connectivity.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 or DS3 for a fixed monthly fee. The set up fee is the same as
for FullChannel pricing but the monthly fee ranges from $895 to $1,895 for
FlexChannel T-1 service and from $5,900 to $40,500 for FlexChannel DS3
pricing. FlexChannel T-1 and DS3 pricing is the appropriate choice for the
customers who know that their bandwidth requirements are going to be
consistently less than a full T-1 or DS3.
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LECFrame Relay is based on various LECs' Frame Relay facilities. The
customer selects the port speed and "Committed Information Rate" of its
choice. Concentric guarantees the speed of the Committed Information Rate.
Concentric charges a one time set-up fee of $2,000 LECFrame Relay services and
monthly fees ranging from $395 to $1,195 depending on the port and CIR
combination that the customer selects.
In October 1999, Concentric introduced its ConcentricIMUX service. This
service utilizes Inverse Multiplexing technology to "bond" multiple T1
connections together to form one discrete, logical channel. This service is
available at the following speeds: 3Mbps, 4.5Mbps, and 6Mbps. This service
provides "fractional" T3 equivalent bandwidth levels, while avoiding the
potentially large monthly expense of a T3 local loop.
Digital Subscriber Lines. In December 1997, Concentric began offering
Internet and intranet connectivity using DSL technology. DSL and its variants
are a new dedicated access technology being deployed by telephone companies
that allow high speed digital service over regular telephone lines. To expand
its DSL service area, the Company has formed relationships with a number of
CLECs, including Covad Communications Group, Inc. and NorthPoint
Communications, Inc., as well as SBC's California subsidiary, Pacific Bell.
Concentric's DSL service offerings are currently available in the following
geographical markets: the San Francisco Bay Area, Los Angeles, Sacramento,
Orange County, San Diego, Seattle, Portland, Denver, Dallas, Houston, Miami,
Atlanta, Boston, New York, Philidelphia, Washington, D.C., Baltimore, Detroit
and Chicago. The Company's DSL service offerings include a wide range of
dedicated access speeds, from 144 Kbps to 1.5 Mbps symmetric DSL, as well as
asymmetric DSL options from 608 Kbps/128 Kbps to 1.5 Mbps/384 Kbps.
Concentric DSL services are targeted at the small-to-medium sized business,
telecommuter and home office/residential markets. As of January 31, 2000, all
ConcentricDSL customers also get access to Concentric Gateway which provides
an online view of the customer's DSL order status as well as access to a
number of value-added services that enhance DSL service, including firewalls,
virus protection services, backup services and hosted applications.
ConcentricDSL customers' Concentric Gateway account also comes complete with a
ConcentricHost account which provides 5 domain-based e-mail accounts and Web-
hosting services.
Pricing for ConcentricDSL service is low relative to traditional dedicated
access services, making it attractive to small-to-medium sized businesses,
while at the same time broadening the market to reach small businesses who
previously could not justify the expense of dedicated Internet service. The
"dedicated access feature" of DSL services combined with its high speed and
low flat rate pricing is also designed to appeal to the large installed base
of ISDN users.
Pricing is based on the bandwidth of the DSL circuit, and is a flat rate
monthly fee ranging from $69 to $499 depending on the service speed.
Concentric provides complete installation services including all the customer
premise equipment necessary to provide the DSL service at fees ranging from
$99 to $725.
Wireless Access Services. In October 1998, the Company introduced
ConcentricWireless in the San Francisco Bay Area as an alternative to
traditional access lines, particularly in areas where DSL is not yet
available. ConcentricWireless is priced competitively with ISDN and DSL
services and significantly lower than T-1 services. Concentric is currently
evaluating second generation products on an expanded basis to continue
evolution of this product line.
Applications Hosting Services. The Company offers a range of high-
performance applications hosting services, including Concentric Server
Solutions, a suite of sophisticated high-end hosting and Web site traffic
management solutions for Internet-centric businesses, and ConcentricHost, a
suite of Web hosting, e-commerce, and streamed media services designed for
small-to-medium sized businesses. The Company's other applications hosting
services include a private-label version of ConcentricHost and a Windows NT-
based hosting solution. The high performance of the Company's applications
hosting services is enabled by Concentric's network architecture and its
combination of public and private peering arrangements.
Together, these applications hosting services manage a company's Web-based
infrastructure and operational needs allowing customers to focus on their Web-
based content. By outsourcing its Web hosting to Concentric, an
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enterprise can increase the reliability and performance of its Web
applications and reduce its costs by taking advantage of Concentric's high
quality data centers with back-up power, multiple high bandwidth network
connections and Tier 1 Internet peering arrangements. In addition to state-of-
the-art hosting facilities, Concentric provides server management tools and
services to completely manage customers' servers for them.
For reliable, high performance flow of traffic between customer's Web
servers and worldwide networks, Concentric has combined public peering and
private peering arrangements to provide improved performance to users.
Concentric strives to route most of its Internet bound traffic through private
peering points with other large Internet providers. In doing this, Concentric
can improve network performance by utilizing higher speed, higher performance
dedicated connections directly to its larger peering partners. This avoids
congestion which sometimes occurs at the "public" peering points. Concentric
supplements its private peering with a large number of public peering
arrangements as well. Concentric currently operates data centers in Santa
Clara, Cupertino, and Los Angeles, California, Chicago, Illinois and Secaucus,
New Jersey. Each Concentric data center is connected via multiple DS3 (45
Mbps) or OC3 (155 Mbps) high-speed links to geographically dispersed points in
its private ATM backbone as well as to key public and private Internet
exchange points. This architecture provides diversity and redundancy and high
performance to customers while minimizing user costs. See "--The Concentric
Network."
ConcentricHost Hosting Services. The Company offers a range of high-
performance hosting services, including Dedicated Hosting Solutions, a suite
of sophisticated high-end hosting and Web site traffic management solutions
for Internet-centric businesses, and ConcentricHost shared hosting services
for Web hosting and e-commerce for small-to-medium sized businesses. The
Company's other hosting services include a private-label version of
ConcentricHost and application infrastructure hosting for Application Service
Providers. The high performance of the Company's hosting services is enabled
by Concentric's network architecture and its combination of public and private
peering arrangements.
Together, these hosting services manage a company's applications or Web-
based infrastructure and operational needs, allowing customers to focus on
their Web-based applications and content. By outsourcing its hosting to
Concentric, an enterprise can increase the reliability and performance of its
Web applications and reduce its costs by taking advantage of Concentric's high
quality data centers with back-up power, multiple high bandwidth network
connections and Tier 1 Internet peering arrangements. In addition to state-of-
the-art hosting facilities, Concentric provides server management tools and
services to completely manage customers' servers for them.
Dedicated Hosting Solutions. In February 1998, Concentric announced the
availability of Concentric Server Solutions, a line of Managed Servers
designed for companies who require outsourced maintenance, management,
bandwidth and housing for their Internet or extranet Web servers. Unlike
colocation services that simply provide rack space in a data center and
bandwidth, Concentric Server Solutions provide high-performance Internet
access from state-of-the-art data centers, skilled technicians and systems
administrators, maintenance programs that monitor servers 24 hours a day,
seven days a week, and scalability to address the needs of companies as their
businesses become increasingly reliant on the Web. In addition to Managed
Servers and regular colocation service, the Company has other enhanced
dedicated hosting services:
Distributed Server Environment. In September 1998, Concentric launched the
Distributed Server Environment ("DSE") platform designed to manage distributed
applications for content, media and Web-centric businesses. These businesses
typically require high availability, fault tolerance and scalability for
distributed hosted sites. DSE offers local and global load balancing and fail-
over services. Load balancing allows for the intelligent distribution of user
requests over multiple server resources to avoid transmission congestion and
bottlenecks among Web servers.
ConcentricAIP Services. In August 1999, the Company introduced Concentric
AIP, its application infrastructure provider, which provides independent
software vendors and application service providers with a comprehensive,
outsourced infrastructure for securely delivering applications and Web-based
services over the
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Internet or a VPN. This complete, flexible infrastructure allows independent
software vendors and application service providers to outsource the
operational infrastructure components below the application layer, thus
avoiding the costly and time intensive task of developing and deploying a
comparable infrastructure internally.
ConcentricHost Shared Hosting. ConcentricHost Shared Hosting is a suite of
domain parking, domain e-mail, Web-hosting and e-commerce services designed to
provide comprehensive Internet solutions to small-to-medium-sized business.
ConcentricHost is designed to enable small businesses without technical staff
to take advantage of the Internet, from registering a domain name through
conducting e-commerce with real time credit card transactions on the Web, all
through a user-friendly interface. Packages, which include Web hosting,
multiple email IDs and optional dial-up Internet access range from $19.95 to
$375.95 per month depending on features such as the number of email accounts
and the amount of disk space and bandwidth provided to the customer. These
packages also offer security for e-commerce. Customers who would like to
conduct e-commerce via an online catalog with either online or off-line
transactions can subscribe to one of the ConcentricHost e-commerce plans which
range in price from $44.95 to $149.95 per month. ConcentricHost also includes
Site Builder, a feature that allows customers to build a Web site using only a
browser by taking advantage of Concentric's server-side tools. Alternatively,
ConcentricHost customers can build Web sites using popular Web authoring
software such as Microsoft FrontPage or NetObjects Fusion. Other features
include access to 24 hours a day, seven days a week toll free telephone and
email based customer support and built-in self administration tools that allow
the customer to buy more features online in real time as well as to analyze
Web activity online in near real time. The system automatically notifies
customers when they are approaching the allocation limits of their account
encouraging them to upgrade online.
In June 1998, Concentric enhanced ConcentricHost with the introduction of
the Virtual Development Environment , which provides Web developers high level
security and performance on the ConcentricHost shared server hosting platform.
At the same time, the Virtual Development Environment offers maximum freedom
to Web developers by providing them with their own virtually dedicated
operating and file systems. These virtually dedicated systems provide Web
developers the freedom to create complex Common Gateway Interface scripts
without security and stability risks and without requiring them to be reviewed
and approved prior to installation.
ConcentricHost is provided on Concentric's proprietary Metra platform.
Metra is a fault tolerant, load balancing cluster of UNIX servers that is
designed to provide high performance and reliability and complete real time
customer control of their own service.
ConcentricHost Private Label. In November 1998, Concentric launched a
private label hosting solution targeted at companies looking to quickly and
cost-effectively add fully featured domain e-mail, Web hosting, and e-commerce
services to their small business portfolio. The ConcentricHost Private Label
solution is a hosted application that can be either co-branded or private
labeled that allows service providers, small business retailers, and other
resellers to leverage Concentric's proven applications hosting technology.
This approach allows customers to avoid much of the time, equipment expense,
and information services resources required to internally develop a Web
hosting service. Concentric Private Label customers include SBC, Great Plains
Software, and many others.
Windows NT Hosting. The Company also has a line of Windows NT-based hosting
and e-commerce services targeted at small-to-medium sized businesses.
Concentric also offers Windows NT-based hosting services with its Concentric
Small Business Server Internet Suite service which includes Internet email
exchange and Internet access services designed to be used with Microsoft's
Small Business Server.
Concentric Gateway: Applications and Services for Small Businesses
In January 2000 Concentric launched Concentric Gateway, an online business
solution and Internet service management center. Concentric Gateway provides a
single place for Concentric customers to both access a collection of best-of-
breed online services provided by third party partners as well as to order and
manage Concentric services. Concentric Gateway's online services were
carefully selected to enable small-to-medium
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<PAGE>
sized businesses to improve their efficiency, increase their productivity and
grow their businesses through task-specific online applications. Accessible
from www.concentric.com, Concentric Gateway provides services that enable
customers to get the most out of their Web sites and DSL services, to launch
marketing campaigns and to increase their overall productivity. Concentric
Gateway is enabled by the powerful Concentric Metra platform, the industry's
first integrated platform for Internet services ordering and management.
Taking advantage of the Metra platform's unique architecture, Concentric
Gateway provides integrated service management that allows users to manage
their dial-up, Web hosting, e-commerce, and DSL services all from a single
platform.
Residential and Small Business Dial-Up Access Services
Concentric provides the small office/home office and residential market a
broad range of dial-up Internet access services. Concentric Dial-Up Access
Service offers individual residential and multi-user small office/home office
access accounts at speeds up to 56 Kbps across the United States and Canada
from over 450 access numbers. Consumer features include email, a 5MB personal
homepage, 24-hour customer support, online chat, and a free software package
and guide to using the Internet, along with optional Priority Queue and HTML
Consulting Queue customer support. Users can choose from local, long distance
800-number and International dial-up services and Concentric provides the user
a choice of the Netscape Navigator or Microsoft Internet Explorer browser when
they sign up.
Dial-Up Internet Access Pricing
<TABLE>
<CAPTION>
Plan Monthly Fee Additional Time
---- ----------- ---------------
<C> <C> <S>
Starter Plan........... $ 7.95 Includes 5 hours and $1.95 per
additional hour.
6 Month Prepay......... $17.95 No charges for additional time.
Unlimited active access for a one-time
upfront fee of $107.70
Unlimited Access Plan.. $19.95 No charges for additional time.
Unlimited active access for one monthly
fee.
800-number Plan........ $10.00 Includes 2 hours and $5 per additional
hour.
</TABLE>
The Company also offers consumers value-added services, including a
collection of premium products targeted to vertical segments such as the
family and small office/home office market. This includes the upselling of
discounted products and services in such areas as retail products, software,
hardware, telephony services with such partners as Amazon.com, Inc., Connected
OnLine Backup, Match.com, PeopleLink, MailCall and GRIC, Inc. Such
arrangements not only provide an additional monthly revenue stream but also
increase customer satisfaction and retention. Additional value-added products
and services being reviewed by the Company for potential introduction include
hosted applications, education research, virus protection, and fax services.
Concentric offers small office/home office a variety of Dial-Up Access
upgrade plans with pricing ranging between $24.95 to $39.95. Features include
multiple domain or sub-domain based email(s), domain parking, up to 10MB of
Web site, using optional Concentric Site Builder or other Web authoring tool
(e.g., Microsoft Front Page), 24 hour customer support, and access to the
Concentric Gateway and its many value-added partners and services for small
businesses.
10
<PAGE>
Customers
The following is a representative list of the Company's customers during
the last 12 months, each of which accounted for more than $50,000 in revenues.
<TABLE>
<C> <S>
3Com Corporation Kleiner Perkins Caufield & Byers
Adforce Macromedia, Inc.
United Guaranty Corp., an AIG Corp. Microsoft Corporation
Amdahl Corporation Netpulse Communications, Inc.
American Greetings Corporation Netscape Communications Corporation
Avery Dennison Corp. Nortel Networks
Bloomberg, L.P. NTT PC Communications, Inc.
Church of the Brethren Benefit Trust OnCommand Corporation
Citizens Communications, L.P. OzeMail Interline Pty, Ltd.
Clear Communications Ltd. Peapod L.P.
Corio, Inc. PictureTel Corporation
Covad Communications Company Pierce Leahy Corporation
Cyberstar LP PointCast Incorporated
Dacom America, Inc. Qwest Communications Corporation
EmployOn.com Real Networks, Inc.
Express Personnel Services Redback Networks, Inc.
First USA Corporation SBC Communications, Inc.
Fish King Processors, Inc. Standard and Poor's
Flycast Communications Corporation Teligent, Inc.
Furst Staffing Services VYVX, a subsidiary of Williams
Graybar Electric Company, Inc. Wawa Inc.
Gymboree Corp. WebTV Networks, Inc.
Hitachi Metals America, Ltd. Williams Communications Inc.
Intuit Inc. World Savings & Loan Association
Juno Online Services, L.P.
</TABLE>
Revenue from WebTV accounted for 25.2% of the Company's revenue during the
year ended December 31, 1999 and 26.8% of the Company's revenue during the
year ended December 31, 1998.
Strategic Business Alliances
The Company aggressively pursues strategic business alliances with a
variety of companies. Through these partners, the Company seeks to expand its
enterprise and consumer customer base and increase the 24-hour utilization of
the Concentric network. The following is a summary of selected strategic
relationships:
WebTV Networks Inc. WebTV provides the world's first high-quality Internet
solution for television. In the fall of 1996, WebTV's licensees, Sony
Electronics, Inc. and Philips Electronics introduced a plug-and-play set-top
box that enables Internet browsing from a television. As part of the WebTV
service, Concentric and WebTV jointly designed and implemented a national
virtual private dial-up network solution to connect WebTV NetworkTM users to
the Internet, utilizing Concentric's network. The WebTV Internet terminal,
combined with the virtual private network, allows anyone to browse the
Internet from the comfort of their living room.
SBC Communications Inc. In October 1998, SBC and the Company agreed to
integrate Concentric's Internet-based business data services and technology
into SBC's portfolio of data products and services for business customers.
Concentric and SBC plan to deploy a complete suite of packet-switched, IP-
based services such as VPNs, Web hosting, shared software and electronic
commerce for business customers. SBC continues to deploy private labeled
offerings from Concentric in all of the above described areas.
11
<PAGE>
As part of this relationship, SBC agreed in October 1998 to acquire
1,813,358 shares of Concentric's common stock either on the open market or
from the Company. In December 1998, SBC purchased 200,000 shares of common
stock in two open market purchases. The remaining 1,613,358 shares were
purchased from the Company in January 1999 for an aggregate purchase price of
approximately $19.5 million. We also issued SBC a warrant to purchase
1,813,358 shares of Concentric common stock at an exercise price of $10.50 per
share.
Williams Communications Group, Inc. Concurrent with the closing of the
Company's initial public offering of common stock in August 1997, the Company
entered into a strategic relationship with Williams Communications Group,
Inc., a subsidiary of the Williams Companies, Inc. (together, "Williams") and
Williams made an equity investment in the Company of approximately $15.0
million which closed in August 1997.
Williams provides a full range of enterprise network solutions,
communications services and advanced applications to businesses, including
equipment and services for data, voice and video, international satellite and
fiber-optic transmission services, telemarketing services, and multipoint
video- and audio-conferencing. As part of the strategic business relationship,
Williams has made available, and the Company has agreed to purchase from
Williams, a total of $21.2 million in telecommunications equipment and
services through the five year period ending in 2002. At the election of
Williams, $2.0 million of the minimum purchase commitment was paid in January
2000 by the issuance of Common Stock by the Company at the then-current fair
market value. Additionally, Williams and the Company have entered into a
reseller agreement and an agency agreement through which Williams is able to
sell the Company's products and services for an initial term of two years.
Covad. In January 1999, the Company entered into a strategic relationship
with Covad to combine Concentric's value-added IP services with Covad's high
speed DSL local loop services. This strategic relationship allows Concentric
to resell Covad's DSL local loop services to Concentric's customers. The
companies also will co-market DSL in approximately 20 major metropolitan areas
in the United States and jointly fund product development efforts in 1999 and
2000. Additionally, Concentric invested approximately $10.0 million in Covad,
purchasing 833,334 shares of Covad's common stock. In February 2000, the
Company sold 833,334 shares of Covad common stock for total proceeds of
approximately $70.8 Million. Concentric also has a warrant to purchase 150,000
shares of Covad's common stock.
Intuit. Intuit, a financial software and Web-based services company, is a
market leader in personal and small business financial software. Intuit views
its Websites as a key channel for communicating with its customers, and as a
vehicle to provide personal finance, investment and tax related financial
information. Concentric and Intuit partnered in October 1995 to launch
integrated Internet access to the Quicken Financial Network and the Internet.
The Internet access capability included both a virtual private network service
designed to provide Intuit customers subsidized access to select Intuit Web
sites and the ability to upgrade to full access to the Internet. Intuit has
bundled tailored versions of the Netscape Navigator browser in its fiscal year
1998 and 1999 releases and the Microsoft Explorer browser in its 1998 and 1999
releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed and
implemented tailored registration and network access software to provide
Intuit customers with seamless, subsidized access to select Intuit Web sites.
Concentric provides an easy, Web-based upgrade process for customers desiring
full Internet access and email services. Customers are billed for network time
through Concentric's billing systems. In addition, Concentric provides
private-labeled customer service to Intuit customers with full network access
on a twenty-four hour a day, seven day a week basis. Intuit uses Concentric's
high performance network primarily to enable customers to send electronic tax
filings and software product registration.
Northpoint. The Company signed a co-marketing and distribution agreement
with Northpoint Communications in April 1999 whereby the Company and
Northpoint cooperate to market, through various channel and sales efforts, DSL
services which combine the Company's value added IP services and Northpoint's
DSL local loop services. The Company invested $5 Million in Northpoint in
April 1999, purchasing 277,840 shares of Class B common stock.
12
<PAGE>
Register.Com. The Company entered into a co-marketing and distribution
agreement with Register.Com in June 1999. Register.Com, an independent domain
name registrar, granted a semi-exclusive position to the Company as a
preferred web hosting provider for the customers of Register.Com. The
agreement includes the provision for payment of a marketing placement fee by
the Company to Register.Com and the payment of certain Market Development
Funds by Register.Com to the Company. The Company agreed to use Register.Com
for substantially all of its domain name registrar needs. The Company invested
$5 Million in Register.Com in June 1999, purchasing 1,458,335 shares of Series
A Convertible Preferred Stock. Additionally, Concentric has a warrant to
purchase 291,669 shares of common stock.
The Concentric Network
The Concentric network employs an advanced, geographically dispersed ATM,
frame relay and private leased line backbone, with SuperPOPs in 25 major
metropolitan areas plus a total of 143 secondary and tertiary POPs in other
cities, allowing local analog dial-up access to the network to users in the
U.S. and Canada. In addition, the Company can provide frame relay, fractional
T-1, T-1, fractional DS3, DS3 and OC3 access to the network. Concentric has
completed deployment 56.6 Kbps modems throughout its network. The backbone
further provides connectivity to DSL customers and between Concentric's 4
major data centers. This planned deployment is a forward looking statement and
is subject to a number of risks and uncertainties and the actual results could
differ materially as a result of a number of factors including those set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Operating Results--We Depend Upon
New and Enhanced Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Operating
Results--We Depend Upon Our Network Infrastructure."
The Concentric network is managed via a centralized network control center
in St. Louis, Missouri. Two data centers (located in Chicago, Illinois and San
Jose, California) house the servers that support log on/authentication,
billing, email, Internet access, Web services and other shared network
services. The Company continues to expand its Internet connectivity strategy
by including not only private transit with Cable and Wireless, Sprint and
UUNet, but also private peering with other network providers as well as public
peering with multiple smaller Internet service providers. The Company's hybrid
private/public Internet connectivity strategy is designed to allow Concentric
to offer superior Internet connectivity performance by avoiding congestion,
sometimes referred to as packet loss, that may occur when connecting to
certain network providers at many public peering points.
The Concentric SuperPOPs are designed to support dial-up, DSL and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
Dedicated access services and DSLs from customer locations in a region are
terminated in the SuperPOP as well. Typically, Fractional T-1, T-1, and DS3
circuits are terminated directly into SuperPOP router equipment or via a
channelized DS3 connected to a competitive access provider. Frame access is
terminated via aggregated LEC Frame Access circuit(s). DSL is terminated via a
multiplexed DS3 connection to a CLEC metropolitan area or regional DSL
network. Both dial-up and dedicated traffic is then aggregated by the
routers/switches in the SuperPOP and directed to the Concentric core backbone
via one or more DS3 ATM links. In the case of larger SuperPOPs the connection
may be via OC3 private leased connections.
The Concentric network has been extended into Europe with the addition of
the ITG (CNC Europe) network. This network is connected to the Concentric US
network via STM1 connections. The pan European
13
<PAGE>
network has STM1 connections between three sites in the UK, two sites in the
Netherlands, Paris, Frankfurt and Stockholm. Within the domestic UK network
multiple sites are connected using fiber facilities and utilizing an
innovative Sonet architecture to support local points of presence for direct
connections in 32 cities. The network supports large capacities of dial-up
connections, leased line Internet access and hosting facilities.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features colocation of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient backbone, dual data processing centers, and redundancy within data
centers to substantially enhance its performance.
The Concentric Web Hosting services utilize the capacities of the four
major Concentric data centers to house customer shared and dedicated hosting
facilities. Customers can opt for unmanaged or managed oversight of their
hosting servers to meet their specific needs. The data centers are built to
hardened standards and direct connections to the Concentric core network. The
connection to the Concentric network provides direct access for Concentric's
private line customer's, dial access and DSL customers. The network connection
also provides diverse connectivity to most significant US peering points and
via Concentric's private peering connections to domestic and international
Internet users. The data centers are hardened by providing power duplication
and protection systems, fire protection systems and access security systems
and procedures. The data centers are pre-built to provide high capacity
virtual local area networks, equipment spaces and Internet access to minimize
customer start up time.
Network managers, customer service and technical support staffs require
near real-time access to information about the performance and quality of
their networks. In traditional private networks, this information is provided
by network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to enterprise customers to allow a customer's network manager to
monitor network performance and quality and to adequately support inquiries
for help from their users. Web browsers and file transfer tools are used to
provide access to much of this information. In some cases, custom integration
of Concentric's network management and trouble tracking/reporting systems will
be provided to customers.
Sales and Marketing
The Company focuses on marketing its services to two distinct market
segments: enterprises (primarily small-and-medium sized businesses) and
consumers. By attracting enterprise customers who use the network primarily
during the daytime, and consumer customers who use the network primarily at
night, the Company is able to utilize its network infrastructure more cost
effectively. The Company pursues these customers through a multi-tiered sales
strategy consisting of leveraged third party distribution channels, inbound
and outbound telesales, value-added resellers, original equipment
manufacturers and a direct sales force. As of December 31, 1999, the Company
employed 210 persons in sales and marketing.
Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 98 and with WebTV's Internet access devices. Additionally, the Company
is one of the Internet services providers listed on the Netscape Navigator and
Microsoft Internet Explorer browser registration servers.
14
<PAGE>
Telesales. The Company employs separate telesales groups to generate
inbound leads in three market sectors. The consumer telesales group sells
Internet connectivity and shared hosting to the consumer market. The Company's
Southern California and New Jersey sales groups are focused on both shared and
dedicated hosting, electronic commerce, and DSL solutions for the small
business sector. The inside enterprise sales group, located in San Jose, CA,
offers business solutions including T-1 connectivity and dedicated hosting
products to enterprise customers. In addition, an outbound group, also located
in San Jose, CA, is dedicated to generating leads for field sales and
resellers, managing the customer installed base in the pursuit of upgrades and
contract renewals, and managing Concentric's small-to-medium sized enterprise
channel partners.
Value-Added Resellers. The Company has established sales channels and
significant market coverage through value-added resellers without incurring
the commensurate costs of a large direct sales force. These resellers are
categorized into four groups, network integrators, colocation and shared
hosting resellers, and DSL resellers. In the enterprise market, these
companies sell both network equipment and full service network/Internet
solutions, including design, installation and maintenance. Williams
Communications Solutions is a national network integrator whose trained sales
and support professionals are compensated for selling Concentric's enterprise
connectivity, VPN and dedicated hosting solutions. Concentric solicits small-
to-medium sized enterprise shared hosting developers and resellers, and DSL
resellers through a combination of on line advertising and direct telesales,
direct mail, and partnerships with 3COM and Netopia.
Private-Label Sales. Concentric aggressively pursues private-label
opportunities that enable national telecommunications infrastructure providers
to offer a full suite of private labeled IP-based consumer and enterprise
network services. Concentric's private-label partners, such as Qwest, Compaq
and SBC, sell Concentric's services through their large sales forces into
established customer bases.
Direct Sales Force. The Company employs 35 field sales people located in
San Jose, Orange County, Los Angeles, Dallas, Washington, D.C., the New York
metropolitan area, Atlanta, Chicago, and Boston to sell and support complex
enterprise VPN solutions and web hosting, and to acquire, support, train and
retain channel partners. The Company's field sales force is supported by
inside sales/account managers, project and program managers and systems
engineers.
Concentric markets its enterprise services to marketing and information
service professionals, enabling companies to take full advantage of IP-based
WAN, intranet and extranet applications. The Company uses print advertising in
targeted industry publications, end-user seminars and media spot
advertisements specifically to build awareness and acquire leads for its VARs
and its direct sales team.
In the consumer market, the Company focuses on direct mail to targeted
audiences, establishment of customer referral programs and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented online customer retention programs, such
as a Website "home" where they can learn how to use the service, how to use
the Internet and how to find information quickly.
The Company employs in-house public relations personnel and contracts with
an outside public relations agency to provide broad coverage in network
computer and vertical industry publications. The Company also participates in
industry trade shows with and without its strategic marketing partners and
conducts numerous seminar "road shows" for market awareness and lead
generation.
Internet Technology Group, Plc
In January 2000 Concentric completed the purchase of Internet Technology
Group Plc ("ITG"), headquartered in London, UK. It is now known as Concentric
Network Europe, which markets products and services in the UK and The
Netherlands. The combination of the growing base of leased line and web
hosting customers and extensive dial-up operations sold through the Global
Internet and FreeNet Name brands, makes Concentric Network Europe one of the
largest carrier-independent ISPs in the UK.
15
<PAGE>
Concentric's European strategy is to provide a range of Internet and
networking services to business clients across Europe. Concentric plans to
expand further into Europe to provide services in the key Northern European
markets where it will offer sophisticated services, such as virtual private
networks, on its European infrastructure. The strategy is to use high
bandwidth transmission facilities sourced from a number of different providers
to interconnect POPs owned by Concentric in the UK and Europe. The foregoing
contains forward looking statements and Concentric's ability to provide
expanded services in key Northern European markets is subject to a number of
risks and uncertainties, including those described in "Management's Discussion
and Analysis of Financial Results--Factors Affecting Operating Results--
Concentric's Acquisition Strategy Poses Several Risks", "--Concentric Faces
Risks Associated with Internaltional Expansion" and "--Concentric Depends on
New and Uncertain Markets".
Concentric serves the enterprise market in the UK and in the Netherlands.
Products and services are sold through a field sales team. Solutions are built
around high bandwidth, flexible Internet connections, and value added
services, as well as commercial web hosting products. By taking advantage of
the company's high quality data centers with back-up power, multiple network
connections and peering arrangements, Concentric can serve the most stringent
demands of business.
Concentric's Business Services Group provides ISDN Internet access and web
hosting products sold through a specialized telesales group, providing small-
to-medium sized enterprise customers with the appropriate product for their
network needs. Services sold under the Global Internet brand are subscription
based and are targeted at small-to-medium sized enterprise, small office/home
office and serious consumer Internet users, differentiated through the
addition of value added services. Additional services include subscription-
free consumer Internet access services: Dial-Start and Freenetnames. The
latter offers consumers a choice of their own personalized domain name for the
email address and website. Concentric maintains a customer support center in
London offering full support for all of its products and services.
As of January 2000, Concentric had 378 employees in the UK and the
Netherlands.
Customer Service
The Concentric Network Customer Relations Team is dedicated to providing
seamless, world-class support to all customers. Concentric believes a high
level of customer support is critical to attract and retain small-to-medium
sized business customers and large enterprise accounts. The Company's customer
support strategy is based on the following principles:
. technical expertise in devising cost-effective support solutions for
customers;
. rapid development and flexibility in meeting customer expectations
through effective knowledge sharing, innovative use of resources and the
implementation of new technologies;
. monitoring of customer satisfaction levels and effective account
management.
Concentric maintains customer support contact centers in Saginaw, Michigan
and Secaucus, New Jersey. Concentric offers several levels of customer
support; all of which are available 24 hours per day, seven days per week.
Customer support is provided for all of Concentric's products. Concentric also
offers support on a contracted basis to private-label partners.Customer
support is provided by email, telephone, Website and online chat. As of
December 31, 1999, the Company employed 268 people in customer support.
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. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the ability to attract and retain a skilled
workforce; the capacity, reliability, low latency and security of network
16
<PAGE>
infrastructure; technical expertise and functionality, performance and quality
of services; customization; ease of access to and navigation of the Internet;
the pricing policies of its competitors; the variety of services; the timing
of introductions of new services by the Company and its competitors; customer
support; the Company's ability to support industry standards; and industry and
general economic trends.
The Company's current and prospective competitors generally may be divided
into four groups. These groups and examples of key competitors in each group
are listed below:
<TABLE>
<C> <S>
.telecommunications companies....... AT&T
MCI WorldCom
Sprint Qwest
Level 3 Communications, Inc.
the RBOCs and other LECs
various cable companies
.online service providers........... America Online, Inc.
CompuServe Corporation
MSN, the Microsoft Network
Prodigy Communications Corporation
.Internet service providers......... BBN Corporation, a subsidiary of GTE
EarthLink Network, Inc.
PSINet Inc.
Verio Inc.
other national and regional providers
.Web hosting providers.............. AboveNet Communications
Exodus Communications
Global Center
Globix
Verio
</TABLE>
Many of these 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 than can the Company. In addition, various organizations, including
certain of those identified above, have entered into or are forming joint
ventures or consortiums to provide services similar to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online,
Earthlink, PSINet and Verio have also obtained or expanded their Internet
access products and services as a result of acquisitions. Such acquisitions
may permit the Company's competitors to devote greater resources to the
development and marketing of new competitive products and services and the
marketing of existing competitive products and services. In addition, the
ability of some of the Company's competitors to bundle other services and
products with VPN and consumer network services could place the Company at a
competitive disadvantage. Certain companies are also exploring the possibility
of providing high-speed data services using alternative delivery methods such
as over the cable television infrastructure, through direct broadcast
satellite technology and by wireless cable. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Operating Results--Concentric's Market Is
Extremely Competitive" For a further discussion of the competitive factors
affecting the Company.
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<PAGE>
Proprietary Rights
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that protective
measures have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, we cannot assure you that third parties will not
assert such claims against the Company in the future or that such claims will
not be successful. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Operating Results--
Third Parties May Claim Concentric Infringed Their Proprietary Rights" for a
further discussion of the risks related to the Company's proprietary rights.
Employees
As of December 31, 1999, Concentric had 776 employees and 101 independent
contractors, including 210 persons in sales and marketing, 262 persons in
network operations and development, 268 in customer support and 137 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and we cannot
assure you that the Company will be able to identify, attract, and retain such
personnel in the future. None of the Company's employees is represented by a
labor union, and management believes its employee relations are good.
18
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Executive Officers, Directors and Senior Management
The following table sets forth certain information as of December 31, 1999,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Henry R. Nothhaft..... Chairman, President, Chief Executive Officer and
55 Director
John K. Peters........ 51 Executive Vice President, Corporate Strategy and
Business Development
Michael F. Anthofer... 47 Senior Vice President and Chief Financial Officer
Eileen A. Curtis...... 51 Senior Vice President of Customer Relations
William C. Etheredge.. 53 Senior Vice President of Sales
Mark W. Fisher........ 39 Senior Vice President of Marketing
Les Hamilton.......... Senior Vice President of Network Operations and
55 Engineering
Donn Dobkin........... 38 Vice President, Engineering Products and Systems
James L. Isaacs....... 39 Vice President of Business Development
Randy H. Katz(1)...... 44 Director
Vinod Khosla(2)....... 45 Director
Franco Regis(1)....... 43 Director
Peter C. Waal(2)...... 67 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and was appointed a Director of the Company in August 1995
and Chairman of the Board in January 1998. From 1989 to August 1994, Mr.
Nothhaft was President, Chief Executive Officer and a Director of David
Systems, Inc., a networking company. From 1983 to 1989, Mr. Nothhaft held
various positions with DSC Communications Corporation, including President of
the Business Network Systems Group, President of the Digital Switch
Corporation subsidiary, Senior Vice President of Marketing and a Corporate
Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice President of
Domestic Marketing and Vice President of Sales for GTE Telenet Communications
Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in Information Systems
Technology from George Washington University and a B.S. from the U.S. Naval
Academy, and is a former officer in the U.S. Marine Corps.
John K. Peters was named Executive Vice President and General Manager,
Network Services Applications Division in June 1995. In June 1998, Mr. Peters
became Executive Vice President and General Manager, Network Services
Application Division. Since October 1999, Mr. Peters served as Executive Vice
President, Corporate Strategy and Business Development. From 1993 to August
1995, Mr. Peters served as President of Venture Development Consulting, a
consulting firm specializing in new communications and information services.
From 1988 to 1993, Mr. Peters was Vice President and Chief Operating Officer
of Pacific Bell Information Services, Inc. Prior to that, Mr. Peters spent
three years as Vice President of Application Services for Telestream
Corporation. In 1981, Mr. Peters co-founded Integrated Office Systems, Inc., a
communications and information systems company. From 1976 to 1980, Mr. Peters
was Vice President of Advanced Network Services for GTE Telenet Communications
Corporation. Mr. Peters has an M.B.A. from Stanford Graduate School of
Business and a B.S. in Statistics from Stanford University. Mr. Peters
resigned from his position effective February 2000.
Michael F. Anthofer joined the Company in January 1996 as Vice President
and Chief Financial Officer and became a Senior Vice President in November
1996. From January 1991 to December 1995, Mr. Anthofer served as an Executive
Vice President and Chief Financial Officer, as well as a member of the Board
of Directors, of
19
<PAGE>
Shared Resource Exchange, Inc., a privately held digital switching platform
and PBX supplier. Prior to 1991, Mr. Anthofer held various executive positions
at DSC Communications Corporation including Vice President, Corporate Business
Planning, Vice President, Business Network Group and Vice President, Network
Products Group. Mr. Anthofer has an M.B.A. and a B.S. from the University of
California, Berkeley.
Eileen A. Curtis became Customer Relations Manager in January 1995,
Director of Customer Relations in September 1995, Vice President, Customer
Relations in November 1996 and Senior Vice President of Customer Relations in
October 1999. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has an MBA and a B.S. from Central Michigan
University.
William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. from Bowling Green University and a B.A. from
Westminster College.
Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing and was promoted to Senior Vice President and General
Manager, Network Services Division in July 1998. Since October 1999, Mr.
Fisher has served as Senior Vice President of Marketing. From July 1996 to
June 1997, Mr. Fisher was General Manager and Vice President, Marketing of
Pacific Bell Internet Services, a wholly owned subsidiary of Pacific Bell.
From June 1995 to August 1996, Mr. Fisher was Vice President, Marketing of
Pacific Bell Internet Services. From 1989 to May 1995, Mr. Fisher held various
data product marketing and data center operations positions at Pacific Bell.
Mr. Fisher has an M.B.A. from the University of California, Berkeley and a
B.S. in mechanical engineering from the U.S. Naval Academy.
Les Hamilton joined the Company in April 1999 as Senior Vice President of
Network Operations and Engineering. From 1993 to 1999, Mr. Hamilton held
various positions at Infonet Services Corp. including Vice President of
Network Services, Director of Engineering Operations, Manager of New
Technology and Manager of Backbone Services. From 1968 to 1993, Mr. Hamilton
held various positions at TRW Information Services and British Aerospace Corp.
Mr. Hamilton holds a B.S. degree in mechanical engineering from Teesside
University in England and an Executive M.B.A. from the Peter Drucker School of
Management at Claremont University.
Donn Dobkin joined the Company in February 1996 as Director of Financial
Planning, was promoted to Vice President of Information Systems in March 1999
and then to Vice President of Engineering Products and Systems in October
1999. From 1991 to 1996, Mr. Dobkin held various positions at Silicon
Graphics, Inc., including Division Controller and Marketing Operations
Manager. He held various positions at DSC Communications Corporation from 1987
to 1991, and at Hewlett-Packard from 1984 to 1987. Mr. Dobkin has a B.A.
degree in Business-Economics from the University of California, Santa Barbara.
James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management and in November 1997 he was appointed Vice President of Business
Development. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. from the University of California, Berkeley
and an A.B. from Stanford University.
Randy H. Katz has been a Director of the Company since May 1999. Dr. Katz
is the Chair of the Electrical Engineering and Computer Science Department at
the University of California, Berkeley and holds the United Microelectronics
Corporation Distinguished Professorship. Dr. Katz has a B.A. degree in
computer science and mathematics from Cornell University and M.S. and Ph.D.
degrees in computer science from the University of California, Berkeley.
20
<PAGE>
Vinod Khosla has been a Director of the Company since April 1995. Mr.
Khosla has been a General Partner with the venture capital firm of Kleiner
Perkins Caufield & Byers from February 1986 to the present. Mr. Khosla was a
co-founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Asera, Corio Inc.,
Corvis Corporation, BigVine.com, Juniper Networks, Redback and QWEST
Communications. He has a B.S.E. from the Indian Institute of Technology in New
Delhi, an M.S.E. from Carnegie Mellon University, and an M.B.A. from the
Stanford Graduate School of Business.
Franco Regis has been a Director of the Company since October 1996. Since
1997, Mr. Regis has been an Executive in the International Division of Telecom
Italia, SpA, the telephone operating company of Italy and since 1999 he has
been responsible for the European Area. From 1992 to 1997, Mr. Regis was a
Director of Planning, Budget and Control for the Business Division of Telecom
Italia. Mr. Regis has an engineering degree from the Rome State University.
Peter C. Waal has been a Director of the Company since May 1999. Mr. Waal
is a private consultant and was most recently Vice President of Strategic
Planning and Business Development for DSC Communications Corporation. He has
held various positions with GTE Telenet Communications Corporation, Applied
Data Research, Inc., and Bell & Howell Corporation. Mr. Waal has a B.S. degree
in electrical engineering from the University of Wisconsin and is a member of
the IEEE.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company
has entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of
such person to the fullest extent authorized, permitted or allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee
that reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, Amended and Restated 1996 Stock Plan, 1997 Stock
Plan, 1997 Employee Stock Purchase Plan and 1999 Non-Statutory Stock Option
Plan. The Compensation Committee currently consists of Messrs. Khosla and
Waal.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the external audits of the
Company, reviews and approves material accounting policy changes, monitors
internal accounting controls, recommends engagement of independent auditors,
reviews related-party transactions and performs other duties as prescribed by
the Board of Directors. The Audit Committee currently consists of Messrs. Katz
and Regis.
ITEM 2. PROPERTIES
The Company's executive offices are located in San Jose, California, under
a lease expiring on February 1, 2006. The Company also leases network
operations facilities in Bay City, Michigan, under a lease expiring on
21
<PAGE>
August 31, 2000, data centers in Chicago, Illinois, under a lease expiring on
June 30, 2008, in Santa Clara, California, under a lease expiring on May 31,
2000, in Irvine, California, under a lease expiring on June 30, 2004, in
Secaucus, New Jersey, under a lease expiring on March 1, 2006, in Hazelwood,
Missouri, under a lease expiring on March 31, 2002 and a customer support
facility in Saginaw, Michigan under a lease expiring in December 2001.
ITEM 3. LEGAL PROCEEDINGS
Concentric has been named as a defendant in a lawsuit filed in New Jersey
state court on November 1, 1999. The complaint seeks statutory damages, treble
damages, and injunctive relief under the Telephone Consumer Protection Act of
1991 and alleges that, in or about March and June 1999, 9Net Avenue, Inc.
("9Net Avenue") transmitted unsolicited facsimiles advertising its services.
The suit has been brought as a purported class action on behalf of all
recipients of the allegedly unsolicited faxes. Concentric purchased the assets
of 9Net Avenue in October 1999 and plaintiff contends that Concentric has
succeeded to any liability 9Net Avenue incurred in connection with the alleged
faxes. Concentric intends to vigorously defend the claims against it; however,
there can be no guarantee that it will be successful or that this litigation
will not have a material adverse impact on its operations. In addition,
Concentric has received a subpoena from the New Jersey Attorney General
seeking information concerning the alleged transmission of unsolicited
facsimile advertising by 9Net Avenue and additional marketing materials
distributed by 9Net Avenue.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol "CNCX" since our initial public offering on August 1, 1997. All share
and per share information presented herein has been retroactively restated to
reflect a two-for-one stock split of the Company's common stock on May 21,
1999, paid in the form of a stock dividend, to holders of record on April 30,
1999. The following table sets forth, for the periods indicated, the high and
low sale prices for our common stock as reported by the Nasdaq National
Market:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1997:
Third Quarter (from August 1, 1997)......................... $ 8.00 $ 5.69
Fourth Quarter.............................................. 7.50 3.94
Fiscal Year Ended December 31, 1998:
First Quarter............................................... $10.19 $ 4.44
Second Quarter.............................................. 15.75 9.31
Third Quarter............................................... 20.50 7.13
Fourth Quarter.............................................. 18.63 7.25
Fiscal Year Ending December 31, 1999:
First Quarter............................................... $40.13 $16.38
Second Quarter.............................................. 52.25 25.06
Third Quarter............................................... 39.75 17.88
Fourth Quarter.............................................. 34.38 17.25
Fiscal Year Ended December 31, 2000:
First Quarter (through March 17, 2000)...................... $57.44 $28.25
</TABLE>
On March 17, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $53.94 per share. As of March 17, 2000, there were
approximately 2,652 holders of record and the Company estimates over 23,109
beneficial owners of the common stock.
The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1996 1997 1998(1) 1999(1)
-------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue..................... $ 2,483 $ 15,648 $ 45,457 $ 82,807 $ 147,060
Cost of revenue............. 16,168 47,945 61,439 85,352 133,922
Network equipment write-
off(2)..................... -- 8,321 -- -- --
Development................. 837 2,449 4,850 7,734 10,907
Marketing and sales......... 3,899 16,609 24,622 39,793 54,288
General and administrative.. 2,866 3,445 4,790 10,398 15,441
Amortization of goodwill and
other intangible assets.... -- -- -- 3,842 7,913
Acquisition-related
charges.................... -- -- -- 1,291 --
Write-off of in-process
technology................. -- -- -- 5,200 --
-------- -------- -------- -------- ---------
Total costs and expenses.. 23,770 78,769 95,701 153,610 222,471
-------- -------- -------- -------- ---------
Loss from operations........ (21,287) (63,121) (50,244) (70,803) (75,411)
Other income (expense)...... -- -- 1,233 (750) (663)
Net interest expense........ (721) (3,260) (6,571) (13,595) (9,011)
-------- -------- -------- -------- ---------
Loss before extraordinary
item....................... (22,008) (66,381) (55,582) (85,148) (85,085)
Extraordinary gain on early
retirement of debt......... -- -- -- 3,042 --
-------- -------- -------- -------- ---------
Net loss.................... (22,008) (66,381) (55,582) (82,106) (85,085)
-------- -------- -------- -------- ---------
Preferred stock dividends
and accretion.............. -- -- -- (11,958) (26,697)
-------- -------- -------- -------- ---------
Net loss attributable to
common stockholders........ $(22,008) $(66,381) $(55,582) $(94,064) $(111,782)
======== ======== ======== ======== =========
Net loss per share
attributable to common
stockholders(3) ........... $ (6.73) $ (2.82) $ (3.23) $ (2.76)
======== ======== ======== =========
Shares used in computing net
loss per share attributable
to common stockholders(3)
........................... 9,874 19,744 29,094 40,473
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1996 1997 1998(1) 1999(1)
------- ------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ....... $19,054 $17,657 $119,959 $ 98,988 $ 25,891
Short term investments .......... -- -- -- 52,226 80,095
Restricted cash(4) .............. -- -- 52,525 36,238 144,060
Property and equipment, net ..... 16,289 47,927 53,710 64,268 82,894
Total assets .................... 37,235 70,722 244,489 298,257 497,794
Notes payable and capital lease
obligations, net of current
portion ........................ 11,047 30,551 179,172 156,455 153,416
Redeemable exchangeable preferred
stock .......................... -- -- -- 156,105 179,521
Convertible redeemable preferred
stock .......................... -- -- -- -- 41,339
Total stockholders' equity
(deficit) ...................... 9,763 2,925 31,918 (56,875) 62,154
</TABLE>
- --------
(1) During 1998, the Company acquired InterNex, DeltaNet and AnaServe, the
effects of which have been included in the 1998 financial results. In
1999, the Company acquired 9Net Avenue, the effects of which have been
included in the 1999 financial results. See Note 13 of Notes to
Consolidated Financial Statements.
24
<PAGE>
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3 of Notes to Consolidated Financial
Statements.
(3) Net loss per share and shares used in computing net loss per share
attributable to common stockholders are presented on a pro forma basis for
the years ended December 31, 1996 and 1997 and on an historical basis for
the years ended December 31, 1998 and 1999. See Note 1 of Notes to
Consolidated Financial Statements.
(4) Restricted cash consists of $18.8 million of funds held in escrow to pay
interest relating to the Company's 12 3/4% Senior Notes, and $125.3
million of funds held in escrow for the pending acquisition of Internet
Technology Group Plc. See Note 5 of Notes to Consolidated Financial
Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Risks Related to
Concentric's Business". The following discussion of the financial condition
and results of operations of the Company should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere in this
Report.
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. Online 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.
In January 2000, Concentric agreed to be acquired by Nextlink. In this
transaction, both Nextlink and Concentric will merge into a newly-formed
company, to be renamed Nextlink Communications, Inc., which will assume all of
Concentric's and Nextlink's outstanding debt obligations. In the transaction,
each outstanding share of Nextlink's Class A common stock and Class B common
stock would be converted into one share of Class A common stock or Class B
common stock, as applicable, of the corporation surviving the merger, which
stock will be substantially identical to Nextlink's Class A and Class B common
stock. Each share of outstanding Concentric common stock will be converted
into $45 of surviving corporation Class A common stock, subject to a collar
which adjusts based upon the average NEXTLINK stock price prior to the merger.
Pursuant to the collar, between 0.650 (if the average NEXTLINK stock price
prior to the merger is $69.23 or less) and 0.495 (if the average NEXTLINK
stock price prior to the merger is $90.91 or greater) shares of surviving
corporation Class A common stock will be issued for each share of Concentric
common stock converted in the merger. The transaction is subject to approval
of our stockholders and other customary closing conditions, and is expected to
close in the second quarter of 2000.
In connection with the anticipated merger, on March 24, 2000, Concentric
and NEXTLINK successfully completed a consent solicitation of holders of
Concentric's 12 2/3% Senior Notes due 2007 and 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010. In the consent solicitation,
holders of a majority of the outstanding principal amount of the notes and a
majority of the outstanding shares of the preferred stock consented to amend
certain covenants in the indenture governing the notes and the certificate of
designations governing the preferred stock to conform to corresponding
covenants in the indenture governing NEXTLINK's 10 1/2% Senior Notes. The
amendments will become effective upon consummation of the merger.
The Company's revenue prior to 1996 was primarily generated from providing
Internet access to consumers. The Company provides complete Internet business
solutions for small- and medium-sized enterprises, including
25
<PAGE>
DSL access, Web hosting, and e-commerce. The Company also offers data center
services, virtual private networks, dedicated access, and application
infrastructure services for delivering applications over the Internet or a
virtual private network. The Company focuses its sales and marketing effort
under its own brand on the small-to-medium enterprise market selling DSL and
web-hosting as the lead-in products. 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, a provider of network
services, collocation services and Web hosting facilities to enterprise
customers. 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 incurred a charge of $5.2 million relating to
acquired in-process technology and recorded an aggregate of $12.6 million of
goodwill and other intangible assets, which will be amortized on a straight-
line basis over their estimated useful lives ranging from two to five years.
In May 1998, the Company acquired DeltaNet, a 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 period beginning April 1,
1998 through December 31, 1998 are included in the consolidated results of
operations. 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.
In August 1998, the Company acquired AnaServe, a provider of Web hosting
services. This acquisition was accounted for using the purchase method of
accounting. The Company's historical financial statements do not include
results of operations, financial position or cash flows of AnaServe prior to
its acquisition. As a result of the acquisition, the Company has recorded an
aggregate of $12.0 million of goodwill and other intangible assets, which will
be amortized on a straight-line basis over their useful lives ranging from one
to five years.
In October 1999, the Company acquired 9Net Avenue, a provider of domain
parking, Web hosting, e-commerce, dedicated hosting and co-location services.
This acquisition was accounted for using the purchase method of accounting.
The Company's historical financial statements do not include results of
operations, financial position or cash flows of 9Net Avenue prior to its
acquisition in October 1999. As a result of the acquisition, the Company has
recorded an aggregate of $58.0 million of goodwill and other intangible
assets, which will be amortized on a straight-line basis over their useful
lives ranging from three to five years.
In February 2000, the Company acquired Internet Technology Group, Plc, a
provider of Internet access and hosting services in the UK and Europe. This
transaction will result in additional charges for goodwill. The Company may
acquire other complementary products, technology and businesses. 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 "Factors Affecting
Operating Results--Concentric's Acquisition Strategy Poses Several Risks" and
"--Liquidity and Capital Resources."
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 2000. 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 attributable to common stockholders of approximately $55.6 million,
26
<PAGE>
$94.1 million and $111.8 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We cannot assure you 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. At December 31, 1999, the Company had
approximately $125.0 million of gross deferred tax assets comprised primarily
of net operating loss carry-forwards. The Company believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets such that a
full valuation allowance has been recorded. These factors include the
Company's history of net losses since its inception and the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that, based
on the current available evidence, it is more likely than not that the Company
will not generate taxable income through 2000, and possibly beyond, and
accordingly will not realize the Company's deferred tax assets through 2000,
and possibly beyond. The Company will continue to assess the realizability of
the deferred tax assets based on actual and forecasted operating results. In
addition, the utilization of net operating losses may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization. See "Factors Affecting Operating Results--Concentric Has Incurred
Net Losses and Experienced Negative Cash Flow From Operations Since Inception
and Expects to Have Continuing Operating Losses."
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 we cannot
assure you that the Company will be profitable in the future.
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; the ability
to manage potential growth and expansion; 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 affect
on the Company's business. As a result, variations in the timing and amounts
of revenues could have a material adverse affect 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
decline.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenue. Revenue totaled approximately $147.1 million for the year ended
December 31, 1999, a $64.3 million increase over revenue of approximately
$82.8 million for the year ended December 31, 1998. This increase reflects
growth in revenue from:
. the Company's broadened product offerings to its enterprise customers;
. the Company's marketing arrangements with its strategic partners; and
. revenues from acquired operations
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The Company expects revenue growth from Internet access customers to
flatten over time as it de-emphasizes this sector of its business. Revenue
from WebTV declined to 25.2% of the Company's net revenue for the year ended
December 31, 1999 compared to 26.8% for the year ended December 31, 1998. The
Company expects revenue from WebTV 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 under the caption "Factors
Affecting Operating Results--The Loss of Any of Concentric's Major Customers
Could Severely Impact Its Business."
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 year
ended December 31, 1999 was approximately $133.9 million, an increase of $48.5
million from cost of revenue of $85.4 million for the year ended December 31,
1998. 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 91.0% of revenue in the year ended December
31, 1999, down from 103.1% of revenue in the prior year, due to increased
network utilization associated with the Company's revenue growth and lower per
port costs of the Company's network architecture. The Company expects its cost
of revenue to continue to increase in dollar amount, while declining as 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 under the captions "Factors
Affecting Operating Results--Concentric Has Incurred Net Losses and
Experienced Negative Cash Flow From Operations Since Inception and Expects to
Have Continuing Operating Losses", "Factors Affecting Operating Results--
Concentric's Growth and Expansion May Strain Its Resources" and "Factors
Affecting Operating Results--Concentric Depends Upon New and Uncertain
Markets."
Development Expense. 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 $10.9 million
and $7.7 million for the years ended December 31, 1999 and 1998, 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 7.4% for the year ended December 31, 1999 from 9.3% for
the year ended December 31, 1998 as a result of the Company's increased
revenue. The Company expects its development spending to continue to increase
in dollar amount, but to decline as a percentage of revenue. The foregoing
expectation is a forward looking statement that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors, including those set forth below under the captions "Factors
Affecting Operating Results-- Concentric Has Incurred Net Losses and
Experienced Negative Cash Flow From Operations Since Inception and Expects to
Have Continuing Operating Losses" and "Factors Affecting Operating Results--
Concentric Depends Upon New and Enhanced Services."
Marketing and Sales Expense. 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
$54.3 million for the year ended December 31, 1999 and $39.8 million for the
year ended December 31, 1998. The $14.5 million increase in 1999 reflects a
substantial investment in the customer support, marketing and sales
organizations necessary to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Marketing and sales expense as a percentage of revenue
declined to 36.9% for the year ended December 31, 1999 from 48.1% in the year
earlier period as a result of the Company's increased revenue. The Company
expects marketing and sales expenditures to continue to increase in dollar
amount, but to decline as a percentage of revenue. The foregoing expectation
is a forward looking statement that involves risks and uncertainties and the
actual results could vary materially as a result of a number of factors
including those set forth under the captions "Factors Affecting Operating
Results--Concentric Depends on New and Uncertain Markets" and "Factors
Affecting Operating Results--Concentric's Growth and Expansion May Strain Its
Resources."
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General and Administrative Expense. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $15.4 million for the year ended
December 31, 1999 and $10.4 million for the year ended December 31, 1998. This
higher level of expense reflects an increase in personnel and professional
fees necessary to manage the financial, legal and administrative aspects of
the business. General and administrative expense as a percentage of revenue
declined to 10.5% for the year ended December 31, 1999 from 12.6% in the prior
year as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations, 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 the captions "Factors
Affecting Operating Results--Concentric Depends on New and Uncertain Markets"
and "Factors Affecting Operating Results--Concentric's Growth and Expansion
May Strain Its Resources."
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets was approximately $7.9 million for the
year ended December 31, 1999 and $3.8 million for the year ended December 31,
1998. The increase is primarily due to a full year of goodwill amortization
from the acquisition of AnaServe in August 1998 and goodwill amortization
associated with the acquisition of 9Net Avenue in October 1999.
Acquisition-Related Charges. For the year ended December 31, 1998 the
Company charged to operations one-time acquisition costs of $1.3 million
related to the DeltaNet acquisition. Those costs principally related to
professional fees, reserves for redundant assets and facilities and employee
severance packages.
Write-off of In-Process Technology. For the year ended December 31, 1998,
the Company wrote-off $5.2 million of in-process technology related to the
acquisition of InterNex. This acquisition provided technology and expertise
that the Company is using to enhance and expand the breadth of its product and
service offerings to its customers.
Other Income (Expense). During the year ended December 31, 1999, the
Company wrote off $504,000 related to the issuance of warrants to TMI. The
remainder of other expense was primarily due to the amortization of consent
fees related to the amendment of the terms of the Company's 12 3/4% Senior
Notes due 2007 and 13 1/2% Series B Redeemable Exchangeable Preferred Stock
due 2010. During the year ended December 31, 1998, the Company recorded
$750,000 of other expense in connection with the settlement of certain
litigation with the shareholders of Diana Corporation.
Net Interest Expense. Net interest expense was approximately $9.0 million
and $13.6 million for the years ended December 31, 1999 and 1998,
respectively. The decrease is primarily due to the early retirement of debt in
the form of capital lease obligations in March 1998 and higher levels of cash,
cash equivalents and short-term investments in 1999.
Extraordinary Gain. For the year ended December 31, 1998, the Company
realized an extraordinary gain of $3.0 million related to the early retirement
of debt in the form of capital lease obligations.
Preferred Stock Dividends and Accretions. Preferred stock dividends and
accretions are related to the Series A 13 1/2% Redeemable Exchangeable
Preferred Stock due 2010 ("Series A Preferred") issued in June 1998, the
Series B 13 1/2% Redeemable Exchangeable Preferred Stock due 2010 ("Series B
Preferred") issued in September 1998 in exchange for all outstanding shares of
Series A Preferred and the Series C 7% Convertible Redeemable Preferred Stock
due 2010 ("Series C Preferred") issued in June 1999. For the years ended
December 31, 1999 and 1998, the Company recorded dividends and stock
accretions of $26.7 million and $12.0 million, respectively. The increase is
due to the Series C Preferred stock dividends and accretions and a full year
of dividends and accretions of Series A Preferred and Series B Preferred in
1999.
Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $111.8 million
for the year ended December 31, 1999 as compared to
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approximately $94.1 million for the year ended December 31, 1998. For
comparative purposes, the net loss attributable to common stockholders for the
year ended December 31, 1999 included $26.7 million of dividends and
accretions related to the Series A, Series B and Series C Preferred Stock, an
increase of $14.7 million over the prior year. Additionally, amortization of
goodwill and other intangible assets increased $4.1 million due to the
acquisition of Anaserve in August 1998 and 9Net Avenue in October 1999. The
net loss attributable to common stockholders for the year ended December 31,
1998 included expenses related to financing and acquisition charges of $1.3
million resulting from the acquisition of DeltaNet and $5.2 million write-off
of in-process technology. These losses were partially offset by an
extraordinary gain of $3.0 million on early retirement of debt.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenue. Revenue totaled approximately $82.8 million for the year ended
December 31, 1998, a $37.3 million increase over revenue of approximately
$45.5 million for the year ended December 31, 1997. This increase reflects
growth in revenue from:
. the Company's broadened product offerings to its enterprise customers;
. the Company's marketing arrangements with its strategic partners;
. continued growth in revenue derived from Internet access customers;
. revenue generated from network, colocation and Web hosting services
provided by the Company's wholly-owned subsidiary, InterNex, which was
acquired in February 1998; and
. revenues from DeltaNet and AnaServe which were acquired in May and
August 1998, respectively.
Revenue from WebTV declined to 26.8% of the Company's net revenue for the
year ended December 31, 1998 compared to 33.4% for the year ended December 31,
1997.
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 year
ended December 31, 1998 was approximately $85.4 million, an increase of $24.0
million from cost of revenue of $61.4 million for the year ended December 31,
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 103.1% of revenue in the year ended December
31, 1998, down from 135.2% of revenue in the prior year, due to increased
network utilization associated with the Company's revenue growth and lower per
port costs of the Company's network architecture.
Development Expense. 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 $7.7 million
and $4.9 million for the years ended December 31, 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 9.3% for the year ended December 31, 1998 from 10.7%
for the year ended December 31, 1997 as a result of the Company's increased
revenue.
Marketing and Sales Expense. 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
$39.8 million for the year ended December 31, 1998 and $24.6 million for the
year ended December 31, 1997. The $15.2 million increase in 1998 reflects a
substantial investment in the customer support, marketing and sales
organizations necessary to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Marketing and sales expense as a percentage of revenue
declined to 48.1% for the year ended December 31, 1998 from 54.2% in the year
earlier period as a result of the Company's increased revenue.
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General and Administrative Expense. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $10.4 million for the year ended
December 31, 1998 and $4.8 million for the year ended December 31, 1997. 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 12.6% for the year ended December 31, 1998 from 10.5% in the
prior year as a result of the Company's increased facilities costs and
expenses related to updating the Company's information systems.
Amortization of Goodwill and Other Intangible Assets. For the year ended
December 31, 1998, the Company recorded amortization of goodwill and other
intangible assets of $3.8 million resulting from the acquisition of InterNex
in February 1998 and AnaServe in August 1998.
Acquisition-Related Charges. For the year ended December 31, 1998 the
Company charged to operations one-time acquisition costs of $1.3 million
related to the DeltaNet acquisition. Those costs principally related to
professional fees, reserves for redundant assets and facilities and employee
severance packages.
Write-off of In-Process Technology. For the year ended December 31, 1998,
the Company wrote-off $5.2 million of in-process technology related to the
acquisition of InterNex. This acquisition provided technology and expertise
that the Company is using to enhance and expand the breadth of its product and
service offerings to its customers.
Other Income (Expense). During the year ended December 31, 1998, the
Company recorded $750,000 of other expense in connection with the settlement
of certain litigation with the shareholders of Diana Corporation. During the
year ended December 31, 1997, upon settlement of the Sattel litigation, the
Company recorded $970,000 of other income related to the reversal of
previously established reserves. Additionally, the Company recorded $425,000
of other income related to the re-negotiation of a third party services
agreement.
Net Interest Expense. Net interest expense was approximately $13.6 million
and $6.6 million for the years ended December 31, 1998 and 1997, respectively.
The increase is primarily due to interest related to $150.0 million principal
amount of 12 3/4% Senior Notes issued in December 1997.
Extraordinary Gain. For the year ended December 31, 1998, the Company
realized an extraordinary gain of $3.0 million related to the early retirement
of debt in the form of capital lease obligations.
Preferred Stock Dividends and Accretions. For the year ended December 31,
1998, the Company recorded dividend and stock accretion of $12.0 million
related to the preferred stock issued in June 1998.
Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $94.1 million
for the year ended December 31, 1998 as compared to approximately $55.6
million for the year ended December 31, 1997. For comparative purposes, the
net loss attributable to common stockholders for the year ended December 31,
1998 included expenses related to financing and acquisition charges of $1.3
million resulting from the acquisition of DeltaNet, $12.0 million of dividends
and accretion related to the preferred stock issued in June 1998, $19.9
million of interest expense and amortization of debt issuance costs related to
the 12 3/4% Senior Notes and warrants, $5.2 million write-off of in-process
technology and $3.8 million of amortization of goodwill and other intangibles
relating to the acquisitions of InterNex and AnaServe. These losses were
partially offset by an extraordinary gain of $3.0 million on early retirement
of debt.
Liquidity and Capital Resources
To date, the Company has satisfied its cash requirements primarily through
the sale of capital stock, debt financings and capitalized lease 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
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fund acquisitions, to provide for the early retirement of debt and to finance
equity investments in strategic partners. Net cash used in operating
activities for the years ended December 31, 1999 and 1998 was approximately
$61.1 million and $46.6 million, respectively. Cash used in operating
activities in both periods was primarily affected by the net losses, caused by
increased costs related to the expansion of the Company's network, marketing
programs and organizational infrastructure.
Net cash used in investing activities for the years ended December 31, 1999
and 1998 was approximately $238.1 million and $101.9 million, respectively.
Net cash used in investing activities for the year ended December 31, 1999
consisted primarily of approximately $41.7 million used to purchase capital
equipment to support the Company's expanded network infrastructure, restricted
cash of $124.9 million placed in escrow for the Internet Technology Group, Plc
acquisition, equity investments in strategic partners totaling $27.1 million,
$27.9 million of cash used to purchase short term investments, $16.0 million
loan to Internet Technology Group, Plc and $800,000 of cash used to acquire
9Net Avenue. For the year ended December 31, 1998, net cash used in investing
activities consisted primarily of $52.2 million used to purchase short term
investments, $23.5 million used for purchase of capital equipment to support
the Company's expanded network infrastructure and $25.1 million of cash used
to acquire InterNex and AnaServe.
For the year ended December 31, 1999, net cash of $226.1 million was
provided from financing activities. Net proceeds from the public stock
offering in February 1999 was $119.4 million. Net proceeds from the issuance
of Series C Preferred was $50.0 million. Net proceeds from the sale of common
stock to SBC was $19.5 million. Additionally, net proceeds from other stock
issuances, including the sale of stock to stockholders exercising warrants,
was approximately $29.6 million. $5.8 million of cash was used for repayment
of capital lease obligations and restricted cash of $17.1 million was used to
pay interest on the 12 3/4% Senior Notes. For the year ended December 31, 1998
net cash of approximately $127.6 million was provided from financing
activities, primarily reflecting $144.1 million of net proceeds from the
issuance of preferred stock in June 1998 less $24.8 million used for the early
retirement of capital lease obligations, $10.2 million used for repayment of
other capital lease obligations and restricted cash of $16.3 million used to
pay interest on the 12 3/4% Senior Notes. The net cash decrease for the year
ended December 31, 1999 was $73.1 million as compared to a net cash decrease
for the year ended December 31, 1998 of $21.0 million.
At December 31, 1999, the Company had cash and cash equivalents of
approximately $25.9 million, short term investments of $80.1 million,
restricted cash of $144.1 million and working capital of $245.6 million. The
Company expects to incur additional operating losses and will rely primarily
on its available cash resources, the net proceeds from the sale of certain
equity investments and financing available under a network equipment lease
agreement (that currently has no maximum borrowing limit) to meet its
anticipated cash needs for working capital and for the acquisition of capital
equipment through at least the end of 2000. However, we cannot assure you 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 a number of factors, including those set forth on under the
caption "Factors Affecting Operating Results--Concentric May Need Additional
Capital in the Future and Such Additional Financing May Not Be Available." The
Company may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. We cannot assure you
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all.
In February 2000, the Company sold all of its investment in Covad
Communications Group, Inc. and received proceeds of approximately $70.8
million.
In March 2000, the Company used approximately $5.0 million to purchase
570,082 shares of Asia Online, Inc. Series C Preferred Stock.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance on the recognition, presentation,
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and disclosure of revenue in financial statements of all public registrants.
Any change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting
principle in the quarter ending March 31, 2000. While the Company has not
fully assessed the impact of the adoption of SAB 101, it believes that
implementation of SAB 101 will not have a material adverse impact on its
existing revenue recognition policies or its reported results of operations
for fiscal 2000.
Risks Related to Concentric's Business
As described by the following factors, the past financial performance of
Concentric should not be considered a reliable indicator of the future
performance of Concentric and investors should not use historical trends to
anticipate results or trends in future periods.
The Proposed Merger Involves Risks and Uncertainties and May Not Be Completed
Concentric has recently entered into an agreement with Nextlink under which
both Nextlink and Concentric will merge into a newly-formed company, to be
renamed Nextlink Communications, Inc. Details of the merger and the related
risks and uncertainties will be described in a proxy statement which will be
mailed in the future to all Concentric stockholders. The merger is subject to
a number of conditions which must be satisfied or waived before the merger can
take place, including approval by Nextlink and Concentric stockholders.
Concentric cannot assure you that the merger will occur or that the
performance of the combined company will be favorable to Concentric
stockholders, and that the pendency of the merger will not have an adverse
effect on Concentric in the interim. The factors which could affect the
success of the combined companies include, but are not limited to, the
combined company's ability to successfully market its products and services to
current and new customers in a competitive marketplace, to design and
construct fiber optic networks, install cable facilities, including switching
electronics and to develop, install and provision wireless equipment to
customers and on satisfactory terms and conditions. Additional factors which
could adversely impact the success of the combined operations include the
companies' ability to successfully integrate their operations, products and
services, and to timely obtain the regulatory and stockholder approvals that
are conditions to closing the proposed transaction.
Concentric Has Incurred Net Losses and Experienced Negative Cash Flow From
Operations Since Inception and Expects to Have Continuing Operating Losses
Concentric expects to continue to operate at a net loss and experience
negative cash flow at least through 2000. Its ability to achieve profitability
and positive cash flow from operations is dependent upon its ability to
substantially grow its revenue base and achieve other operating efficiencies.
Concentric experienced net losses attributable to common stockholders of
approximately $55.6 million for the year ended December 31, 1997, $94.1
million for the year ended December 31, 1998 and $111.8 million for the year
ended December 31, 1999. On December 31, 1999, Concentric had an accumulated
deficit of approximately $357.8 million. Concentric cannot assure you that it
will be able to achieve or sustain revenue growth, profitability or positive
cash flow on either a quarterly or an annual basis. Concentric's estimates of
the periods of time in which it expects to continue to operate at a net loss,
experience negative cash flow and not generate taxable income are forward-
looking statements that involve risks and uncertainties. Actual results could
vary materially as a result of a number of factors, including those set forth
in this section.
Concentric's Operating Results Fluctuate and Could Decline
Concentric's operating results have fluctuated in the past and may
fluctuate significantly in the future. Concentric's operating results
fluctuate due to a variety of factors, including the following:
. timely deployment and expansion of its network and new network
architectures;
. the incurrence of capital costs related to network expansion;
. variability and length of the sales cycle associated with its product
and service offerings;
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. the introduction of new services by Concentric and its competitors; the
pricing and mix of services offered by Concentric;
. Concentric's customer retention rate;
. market acceptance of new and enhanced versions of Concentric's services;
. changes in pricing policies by Concentric's competitors;
. Concentric's ability to obtain sufficient supplies of sole- or limited-
source equipment and services;
. user demand for network and Internet access services;
. balancing of network usage over a 24-hour period;
. the ability to manage potential growth and expansion;
. the ability to identify, acquire and successfully integrate suitable
acquisition candidates; and
. charges related to acquisitions.
Due to the foregoing factors, Concentric believes that period-to-period
comparisons of its operating results are not necessarily meaningful. Such
comparisons cannot be relied upon as indicators of future performance. If
Concentric's operating results in any future period fall below the
expectations of securities analysts and investors, the market price of its
securities would likely decline.
The Loss of Any of Concentric's Major Customers Could Severely Impact Its
Business
Concentric currently derives a substantial portion of its total revenue
from WebTV. Revenue from WebTV accounted for approximately, 33.4% of its
revenue for the year ended December 31, 1997, 26.8% of its revenue for the
year ended December 31, 1998 and 25.2% of its revenue for the year ended
December 31, 1999. WebTV may terminate its current agreement at will after
December 31, 2002. While Concentric expects revenue from WebTV to decrease as
a percentage of revenue in future periods, Concentric believes that revenue
derived from a limited number of customers may continue to represent a
significant portion of its revenue. As a result, the loss of one or more of
Concentric's major customers could have a material adverse effect on its
business, financial condition and results of operations. In addition,
Concentric cannot assure you that revenue from customers that have accounted
for significant revenue in past periods, individually or as a group, will
continue, or will reach or exceed historical levels in any future period.
Concentric's Growth and Expansion May Strain Its Resources
Concentric's business and service offerings have grown rapidly since its
inception. The growth and expansion of Concentric's business and Concentric's
service offerings have placed, and are expected to continue to place, a
significant strain on Concentric's management, operational and financial
resources Concentric plans to continue to substantially expand its network in
2000 and future periods. To manage its growth, Concentric must, among other
things:
. continue to implement and improve its operational, financial and
management information systems, including its billing, order management,
provisioning, fixed assets and other financial management systems;
. hire, train and retain qualified personnel in a competitive labor
market; and
. continue to expand and upgrade its network infrastructure.
Concentric is currently in the process of replacing or updating its
operational, financial and management information systems. The systems being
replaced or updated include its billing, provisioning, order management and
other financial management systems. Concentric began to replace its
information systems in the fourth quarter of 1998 and these efforts continued
throughout 1999 and will continue throughout 2000. Concentric
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consolidated two facilities in Southern California into one in 1999.
Management of the transition of its information systems and of the personnel
and operational equipment neccessary to manage the new facility has placed
additional strain on its resources. Concentric cannot assure you that these
transitions will be completed successfully or on a timely basis. Concentric
cannot assure you that it will be able to expand its network or add services
at the rate or according to the schedule presently planned by it.
Additionally, Concentric has completed two acquisitions recently, 9Net Avenue,
Inc. and Internet Technology Group, Plc, during the fourth quarter of 1999 and
the first quarter of 2000, respectively. The consolidation and integration of
these two recent acquisitions will place additional strain on the resources,
information systems and management of Concentric. Concentric cannot assure you
that it will be able to effectively manage its growth in operations and
personnel. Additionally, Concentric cannot assure you that it will be able to
hire, train and retain sufficient numbers of qualified personnel to meet its
requirements.
Concentric's Expanding Customer Base Demands the Rapid Growth of its Network
Infrastructure and Technical Support Resources.
Concentric may in the future experience difficulties meeting the demand for
its access services and technical support. Concentric cannot assure you that
its technical support or other resources will be sufficient to facilitate its
growth. Concentric is striving to increase total network utilization and to
optimize this utilization by targeting both business and consumer users to
balance the network's usage throughout a 24-hour period. There will be
additional demands on its customer support and sales and marketing resources
as Concentric pursues this utilization strategy. If Concentric fails to manage
its growth effectively, its business, financial condition and results of
operations could be materially adversely affected.
Concentric's Acquisition Strategy Poses Several Risks
Concentric has completed a number of acquisitions to date, and may seek to
acquire additional assets, technologies and businesses complementary to its
operations. The completed acquisitions are and any subsequent acquisitions
would be accompanied by the risks commonly encountered in such transactions.
Such risks include, among other things:
. difficulties integrating the operations and personnel of acquired
companies;
. the additional financial resources that may be needed to fund the
operations of acquired companies;
. the potential disruption of business;
. management's ability to maximize its financial and strategic position by
the incorporation of acquired technology or businesses into its service
offerings;
. the difficulty of maintaining uniform standards, controls, procedures
and policies;
. the potential loss of key employees of acquired companies;
. the impairment of relationships with employees and customers as a result
of changes in management; and
. the incurrence of significant expenses in consummating acquisitions.
Any of the above risks could prevent Concentric from realizing significant
benefits from its acquisitions. In addition, the issuance of its common stock
in acquisitions will dilute its stockholder interests in its company, while
the use of cash will deplete its cash reserves. Finally, if Concentric is
unable to account for its acquisitions under the "pooling of interests" method
of accounting, Concentric may incur significant, one-time write-offs and
amortization charges. These write-offs and charges could decrease its future
earnings or increase its future losses.
Concentric's Future Success Depends Upon Third-Party Distribution and
Engineering Relationships
An important element of Concentric's strategy is to develop relationships
with leading companies to enhance its distribution and engineering efforts.
Concentric has a number of agreements which among these
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include an agreement with Microsoft pursuant to which Concentric distributes
and modifies their browsers. Concentric is one of the Internet Service
Providers which Microsoft features on its Internet Referral Server program and
through which Concentric obtains primarily consumer subscribers. Concentric
also has technology supply arrangements in place for key components of its web
hosting and e-commerce platform including those with Netopia and Intershop. If
any of Concentric's key technology suppliers were to experience difficulties
or shifts within their business or decided to take different strategic
directions than what the current course of their business is, then Concentric
may be adversely impacted.
Concentric has also entered into a strategic agreement with SBC for the
delivery of private-labeled services to its customers. Concentric relies on
this relationship for the acquisition of small-and-medium sized business
enterprise customers. Its inability to capitalize on this agreement, the
termination of or failure to renew any of these agreements or its inability to
enter into similar relationships with others could have a material adverse
effect on its business, financial condition and results of operations.
Termination of any of these agreements or Concentric's failure to renew any
of the agreements on terms acceptable to Concentric could have a material
adverse effect on Concentric's business, financial condition and results of
operations. For example, Concentric currently is in the process of winding
down its relationship with Teligent to deliver private label services to
Teligent's customers. Concentric expects the relationship to be terminated in
2000. If Concentric does not successfully replace the Teligent relationship,
then Concentric may have difficulty attracting new small and medium sized
enterprise customers which would have a material adverse impact on its results
of operations. Concentric has an outsourcing agreement with Williams
Technology Solutions, a subsidiary of Williams Communications Group, Inc.,
that enables Concentric to use Williams employees for the operational support
of its network. Concentric's use of Williams employees and Williams
engineering expertise was integral to the development of Concentric's network
and continues to be integral to the ongoing operation of Concentric's network
operations center. Pursuant to the agreement with Williams, all of the
Williams employees currently working for Concentric will become Concentric
employees when the agreement terminates in December 2000. Concentric cannot
assure you that it will be able to hire all of the Williams employees required
to grow and manage the network.
Concentric Depends Upon New and Uncertain Markets
Concentric offers tailored, value-added network services for enterprises
and consumers, including Internet access. These markets are in the early
stages of development. It is difficult to predict the rate at which these the
markets will grow, if at all, because these markets are relatively new and
current and future competitors are likely to introduce competing services or
products. New or increased competition may result in market saturation.
Certain critical issues concerning commercial use of tailored, value-added
services and Internet services, remain unresolved and may impact the growth of
such services. These issues include, among others, security, reliability, ease
and cost of access, and quality of service. Concentric's business, financial
condition and results of operations would be materially adversely affected if
the markets for its services, including Internet access:
. fail to grow;
. grow more slowly than anticipated; or
. become saturated with competitors.
Concentric Depends Upon Its Introduction and Acceptance of New and Enhanced
Services
Concentric has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises, expanded hosting and co-location services and DSL services in
limited areas. Concentric's failure to introduce new enterprise service
offerings or the failure of these services to gain market acceptance in a
timely manner or at all, or the failure to achieve significant market coverage
could have a material adverse effect on its business, financial condition and
results of operations. If Concentric introduces new or enhanced services with
reliability, quality or compatibility problems, then market acceptance of such
services could be significantly delayed or hindered. Such problems or delays
could adversely affect Concentric's ability to attract new customers and
subscribers.
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Concentric's New or Enhanced Services May Have Errors or Defects
Concentric's services may contain undetected errors or defects when new
services or enhancements are first introduced. Concentric cannot assure you
that, despite testing by Concentric or its customers, errors will not be found
in new services or enhancements after commencement of commercial deployment.
Such errors could result in:
. additional development costs;
. loss of, or delays in, market acceptance;
. diversion of technical and other resources from its other development
efforts;
. the loss of customers and subscribers; and
. damage to its reputation in the marketplace.
Any of these consequences could have a material adverse effect on
Concentric's business, financial condition and results of operations.
Concentric Needs to Balance Network Use to Provide Quality Service
If Concentric does not achieve balanced network utilization over a 24-hour
period, its network could become overburdened at certain periods during the
day, which could adversely affect Concentric's quality of service. Conversely,
due to the high fixed cost nature of its infrastructure, under-utilization of
its network during certain periods of the day could adversely affect
Concentric's ability to provide cost-efficient services at other times. The
failure to achieve balanced network utilization could have a material adverse
effect on Concentric's business, financial condition and results of
operations.
Concentric Depends Upon Its Suppliers and Has Sole- and Limited-Sources of
Supply for Certain Products and Services
Concentric relies on other companies to supply certain key components of
its network infrastructure. These components include critical
telecommunications services and networking equipment, which, in the quantities
and quality demanded by Concentric, are available only from sole- or limited-
sources. AT&T Corp., MCI WorldCom, Inc., PacWest Telecomm, Inc., Covad and
Williams are Concentric's primary providers of data communications facilities
and capacity. AT&T is currently the sole provider of the frame relay backbone
of Concentric's network. MCI WorldCom and Williams are currently the providers
of the ATM backbone of its network.
Concentric is also dependent upon LECs to provide telecommunications
services to it and its customers. Concentric experiences delays from time to
time in receiving telecommunications services from these suppliers. Concentric
cannot assure you that it will be able to obtain such services on the scale
and within the time frames required by us at an affordable cost, or at all.
Any failure to obtain such services on a sufficient scale, on a timely basis
or at an affordable cost would have a material adverse effect on Concentric's
business, financial condition and results of operations.
Concentric purchases its Nortel/Bay Networks, Cisco Systems, Netopia,
Lucent Technologies, Sun Microsystems, Cisco and other vendor equipment either
directly from the manufacturer or via systems integrators including Milgo
Solutions, Inc. and Williams. Some of these vendors are sole-source suppliers.
Concentric purchases these components pursuant to purchase orders placed from
time to time with its suppliers. Concentric does not carry significant
inventories of these components and has no guaranteed supply arrangements for
such components. Concentric's suppliers also sell products to Concentric's
competitors and may in the future themselves become Concentric's competitors.
Concentric cannot assure you that its suppliers will not enter into exclusive
arrangements with its competitors or stop selling their products or components
to Concentric at commercially reasonable prices, or at all.
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The Expansion of Concentric's Network Infrastructure Is Placing, and Will
Continue to Place, a Significant Demand on Concentric's Suppliers.
Some of Concentric's suppliers have limited resources and production
capacity. In addition, some of Concentric's suppliers rely on sole-or limited-
sources of supply for components included in their products. Failure of
Concentric's suppliers to meet increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by Concentric, or at all. Concentric'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, Concentric's network infrastructure.
Any such delay, increased costs or overburdening would have a material adverse
effect on Concentric's business, financial condition and results of
operations.
Concentric also depends on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards. These products and components must also inter-
operate with products and components from other vendors. Any failure of
Concentric's suppliers to provide products or components that comply with
Internet standards or that inter-operate with other products or components
used by Concentric in its network infrastructure could have a material adverse
effect on Concentric's business, financial condition and results of
operations.
Some of Concentric's suppliers, including the RBOCs and other LECs,
currently are subject to tariff controls and other price constraints that in
the future may be changed. In addition, regulatory proposals are pending that
may affect what the RBOCs and other LECs charge Concentric. Any such
regulatory changes could result in increased prices of products and services,
which could have a material adverse effect on Concentric's business, financial
condition and results of operations. Concentric's operations and revenue in
the UK and The Netherlands are dependent on the payment of interconnect fees
from the regulated telephone companies such as British Telecom in the UK. The
interconnect fees are based on the number of minutes of connect time that are
generated by the consumer dial up business in both of those countries. The
amount and terms of these fees is regulated by Oftel. There is no guarantee
that the amount, terms or conditions of these payments to Concentric will not
be changed in the future and any such change may have an adverse impact on
Concentric's business.
Concentric Depends Upon Its Network Infrastructure
Concentric's success depends upon the capacity, reliability and security of
its network infrastructure. Concentric currently derives a significant portion
of its revenue from customer subscriptions. Concentric expects that a
substantial portion of its future revenue will be derived from the provision
of tailored, value-added network services to its enterprise customers.
Concentric 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.
Concentric currently projects its network utilization will require rapid
expansion of the network capacity to avoid capacity constraints that would
adversely affect system performance. The expansion and adaptation of
Concentric's network infrastructure will require substantial financial,
operational and management resources in 2000 and future periods. Concentric
cannot assure you that it 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 network usage were to increase faster than
projected or were to exceed Concentric's current forecasts, the network could
experience capacity constraints, which would adversely affect the performance
of the system.
Concentric's business, financial condition and results of operations could
be materially adversely affected if, for any reason, it failed to:
. expand its network infrastructure on a timely basis;
. adapt its network infrastructure to changing customer requirements or
evolving industry trends; or
. alleviate capacity constraints experienced by its network
infrastructure.
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Currently, Concentric has transit or peering agreements with MCI WorldCom,
Sprint, UUNet, America Online, PSINet and other network providers to support
the exchange of traffic between Concentric's network and the Internet.
Concentric also has public peering arrangements with multiple smaller Internet
service providers. These public peering arrangements also support the exchange
of traffic between Concentric's network and the Internet. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of its data centers, or any other link in the
delivery chain, or any inability to successfully integrate new network
resources into its existing infrastructure, and resulting interruption of its
operations would have a material adverse effect on Concentric's business,
financial condition and results of operations.
Concentric's Market Is Extremely Competitive
Concentric's market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry in this market, and
Concentric expects that competition will intensify in the future. Concentric
believes that its ability to compete successfully depends upon a number of
factors, including:
. market presence;
. the capacity, reliability, low latency and security of its network
infrastructure;
. technical expertise and functionality, performance and quality of
services; customization;
. ease of access to and navigation of the Internet;
. the pricing policies of its competitors and suppliers;
. the variety of services;
. the timing of introductions of new services by us and its competitors;
. customer support;
. the ability to support industry standards; and
. industry and general economic trends.
Concentric's competitors generally may be divided into four groups:
. telecommunications companies,
. online service providers,
. Internet service providers and
. Web hosting providers.
Many of Concentric's competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel
resources than those available to Concentric. 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 Concentric.
In addition to the competitors discussed above, various organizations have
entered into or are forming joint ventures or consortiums to provide services
similar to those of Concentric. Concentric believes that new competitors will
enter the value-added network services market. Such new competitors could
include large computer hardware, software, media and other technology and
telecommunications companies. Certain telecommunications companies and online
services providers are currently offering or have announced plans to offer
Internet or online services or to expand their network services.
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Certain companies, including America Online, PSINet and Verio, have also
obtained or expanded their Internet access products and services as a result
of acquisitions. Such acquisitions may permit Concentric's competitors to
devote greater resources to the development and marketing of new competitive
products and services and the marketing of existing competitive products and
services. In addition, the ability of some of Concentric's competitors to
bundle other services and products with virtual private network services or
Internet access services could place Concentric at a competitive disadvantage.
Certain companies are also exploring the possibility of providing or are
currently providing high-speed data services using alternative delivery
methods such as over the cable television infrastructure, through direct
broadcast satellites and over wireless cable.
As a result of increased competition and vertical and horizontal
integration in the industry, Concentric could encounter significant pricing
pressure. This pricing pressure could result in significant reductions in the
average selling price of its services. For example, telecommunications
companies that compete with Concentric may be able to provide customers with
reduced communications costs in connection with their Internet access services
or private network services, reducing the overall cost of their solutions and
significantly increasing price pressures on Concentric. Concentric cannot
assure you that it will be able to offset the effects of any such price
reductions with an increase in the number of its customers, higher revenue
from enhanced services, cost reductions or otherwise.
In addition, Concentric believes that the Internet access and online
services businesses are likely to continue to encounter consolidation in the
future. Consolidation could result in increased price and other competition in
these industries and, potentially, the virtual private networks industry.
Increased price or other competition could result in erosion of Concentric's
market share and could have a material adverse effect on Concentric's
business, financial condition and results of operations. Concentric cannot
assure you that it will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.
Concentric Must Keep Up With Rapid Technological Change and Evolving Industry
Standards
The markets for Concentric's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. Concentric's
future success will depend, in part, on its ability to:
. effectively use leading technologies;
. continue to develop its technical expertise;
. enhance its current networking services;
. develop new services that meet changing customer needs;
. advertise and market its services; and
. influence and respond to emerging industry standards and other
technological changes.
All this must be accomplished in a timely and cost-effective manner.
Concentric cannot assure you that it will be successful in effectively using
new technologies, developing new services or enhancing its existing services
on a timely basis.
Concentric cannot assure you that such new technologies or enhancements
will achieve market acceptance. Concentric's pursuit of necessary
technological advances may require substantial time and expense. Concentric
cannot assure you that it will succeed in adapting its network service
business to alternate access devices and conduits as they emerge.
Concentric believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
Concentric intends to support emerging standards in the market for Internet
access, Concentric cannot assure you that industry standards will be
established. If industry standards are established, Concentric cannot
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assure you that it will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Specifically,
Concentric's services rely on the continued widespread commercial use of
TCP/IP. Alternative open protocol and proprietary protocol standards have been
or are being developed. If any of these alternative protocols become widely
adopted, there may be a reduction in the use of TCP/IP, which could render
Concentric's services obsolete and unmarketable.
In addition, Concentric cannot assure you that services or technologies
developed by others will not render its services or technology uncompetitive
or obsolete. An integral part of Concentric's strategy is to design its
network to meet the requirements of emerging standards such as DSL (Digital
Subscriber Line). If Concentric fails, for technological or other reasons, to
develop and introduce succesive enhancements to DSL technology or other
enhanced services that are compatible with industry standards and that satisfy
customer requirements, then its business, financial condition and results of
operations would be materially adversely affected.
Concentric Faces the Risk of Fundamental Changes in the Way Internet Access
is Delivered
Internet services are currently accessed primarily by computers connected
by telephone lines. Several companies have announced the development and
planned sale of cable television modems, wireless modems and satellite modems
to provide Internet access. Cable television, satellite and wireless modems
can transmit data at substantially faster speeds than the modems Concentric
and its subscribers currently use. In addition, wireless modems have the
potential to reduce the cost of network services. As the Internet becomes
accessible through these cable television, wireless and satellite modems and
by screen-based telephones, televisions or other consumer electronic devices,
or subscriber requirements change the way Internet access is provided,
Concentric will have to develop new technology or modify its existing
technology to accommodate new developments such as:
. Internet access through cable television, satellite and wireless modems;
. Internet access through screen-based telephones, televisions or other
consumer electronic devices;
. or subscriber requirements that change the way Internet access is
provided.
Concentric's pursuit of these technological advances may require
substantial time and expense. Concentric cannot assure you that it will
succeed in adapting its Internet access business to alternate access devices
and conduits.
Concentric's Network System Could Fail
Network expansion and growth in usage will place increased stress upon
Concentric's network hardware and traffic management systems. Concentric's
network has been designed with redundant backbone circuits to allow traffic
re-routing. Concentric cannot assure you, however, that it will not experience
failures relating to individual network POPs or even catastrophic failure of
the entire network.
Moreover, Concentric's operations are dependent upon its ability to protect
its network infrastructure against damage from power loss, telecommunications
failures and similar events. A significant portion of its computer equipment,
including critical equipment dedicated to its Internet access services, is
located at Concentric's facilities in Chicago, Illinois, Secaucus, New Jersey,
London, England, San Jose and Irvine, California. In addition, its modems and
routers that serve large areas of the United States are located in these
cities. Concentric's network operations center, which manages its entire
network, is in St. Louis, Missouri. Despite its precautions, a natural
disaster, such as an earthquake, or other unanticipated problem at the network
operations center, at one of its hubs (sites at which Concentric has located
routers, switches and other computer equipment that make up the backbone of
its network infrastructure) or at a number of its POPs has from time to time
in the past caused, and in the future could cause, interruptions in its
services.
In addition, Concentric's services could be interrupted if its
telecommunications providers fail to provide the data communications capacity
in the time frame required by Concentric as a result of a natural disaster or
for some other reason. Any damage or failure that causes interruptions in its
operations could have a material adverse effect on Concentric's business,
financial condition and results of operations.
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Concentric's System May Experience Security Breaches Despite the
Implementation of Network Security Measures; the core of Concentric's Network
Infrastructure is Vulnerable to Computer Viruses, Break-ins and Similar
Disruptive Problems Caused by its Customers or Internet Users
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to Concentric's
customers and subscribers. Furthermore, inappropriate use of the network by
third parties could also potentially jeopardize the security of confidential
information stored in Concentric's computer systems and its customer's
computer systems. Concentric may face liability and may lose potential
subscribers as a result. Although Concentric intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past. Concentric cannot assure you that its security
enclosures will not be circumvented in the future. The costs and resources
required to eliminate computer viruses and alleviate other security problems
may result in interruptions, delays or cessation of service to its customers
that could have a material adverse effect on its business, financial condition
and results of operations.
Concentric Has Incurred Substantial Indebtedness and May Not Be Able to
Service Its Debt
Concentric is and will continue to have a significant amount of outstanding
indebtedness. Concentric has significant debt service requirements as a result
of this indebtedness. At December 31, 1999, its total debt (including current
portion) was $214.8 million, and stockholders' equity was $62.2 million.
Interest on such indebtedness totaled approximately $22.6 million in 1999.
Concentric also issued 150,000 shares of preferred stock in June 1998 with
dividends which accrue at the rate of 13 1/2% per year and 50,000 shares of
preferred stock in June 1999 with dividends which accrue at the rate of 7% per
year. On December 31, 1999, cumulative dividends and accretion on the
preferred stock totaled approximately $38.7 million. Dividends and accretion
will total approximately $33.4 million in 2000 and are expected to grow in
each successive year. To date, Concentric has paid such dividends in shares of
preferred stock, rather than in cash. Concentric must also redeem both
issuances of the preferred stock in 2010. As a result of these and other
features, the preferred stock is substantially equivalent to debt.
Concentric's debt, including the preferred stock, has important
consequences for its company and its stockholders, including the following:
. its ability to obtain additional financing in the future, whether for
working capital, capital expenditures, acquisitions or other purposes,
may be impaired;
. a substantial portion of its cash flow from operations is dedicated to
the payment of interest on its debt, which reduces the funds available
to us for other purposes;
. its flexibility in planning for or reacting to changes in market
conditions may be limited; and
. Concentric may be more vulnerable in the event of a downturn in its
business.
Concentric's ability to meet its debt service and preferred stock dividend
obligations will depend on its future operating performance and financial
results. This ability will be subject in part to factors beyond its control.
Although Concentric believes that its cash flow will be adequate to meet its
interest and dividend payments, Concentric cannot assure you that it will
continue to generate sufficient cash flow in the future to meet its debt
service and preferred stock requirements. If Concentric is unable to generate
cash flow in the future sufficient to cover its fixed charges and is unable to
borrow sufficient funds from other sources, then Concentric may be required
to:
. refinance all or a portion of its existing debt;
. or sell all or a portion of its assets.
Concentric cannot assure you that a refinancing would be possible.
Concentric cannot assure you that any asset sales would be timely or that the
proceeds which Concentric could realize from such asset sales would be
sufficient to meet its debt service requirements. In addition, the terms of
its debt and preferred stock restrict its ability to sell its assets and its
use of the proceeds from any such asset sale.
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Concentric May Need Additional Capital in the Future and Such Additional
Financing May Not Be Available
Concentric currently anticipates that its available cash resources will be
sufficient to meet its anticipated working capital and capital expenditure
requirements through December 2000. However, Concentric cannot assure you that
such resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements. Concentric may need to raise
additional funds through public or private debt or equity financing in order
to:
. take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
. develop new products or services; or
. respond to unanticipated competitive pressures.
Concentric may also raise additional funds through public or private debt
or equity financings if such financings become available on favorable terms.
Concentric cannot assure you that any additional financing it may need will be
available on terms favorable to Concentric, or at all. If adequate funds are
not available or are not available on acceptable terms, Concentric may not be
able to take advantage of unanticipated opportunities, develop new products or
services or otherwise respond to unanticipated competitive pressures. In such
case, its business, results of operations and financial condition could be
materially adversely affected. Concentric'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.
Concentric Faces Risks Associated with International Expansion
A key component of Concentric's strategy is to expand into international
markets. The following risks are inherent in doing business on an
international level:
. unexpected changes in regulatory requirements;
. export restrictions;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates;
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
. potentially adverse tax consequences that could adversely impact the
success of its international operations.
Concentric cannot assure you that one or more of such factors will not have
a material adverse effect on its future international operations and,
consequently, on its business, financial condition and results of operations.
Concentric's experience in developing versions of its products and
marketing and distributing its products internationally is limited and its
primary efforts in this area are through its recently completed acquisition of
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Internet Technology Group PLC, an Internet network service provider in the UK
and The Netherlands. Concentric's international strategy has not developed as
rapidly as anticipated and may be further delayed if:
. Concentric cannot successfully develop satisfactory relationships with
other partners;
. Concentric cannot successfully deploy its technology over its partners'
infrastructure;
. Concentric cannot transfer its knowledge to its partners' employees; or
. Concentric's partners do not devote sufficient management, technological
or marketing resources to this project.
Concentric's business, results of operation or financial condition could be
materially adversely affected if delays in its international strategy continue
or worsen. Concentric has entered into roaming agreements with third parties
to allow its customers to access their Internet accounts from Japan and
certain other foreign countries. Concentric cannot assure you that it will be
able to successfully market, sell and deliver its products in international
markets.
Concentric Could Face Government Regulation
The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or IP-based voice messages over telecommunication facilities as
telecommunications services. Concentric provides value-added IP-based network
services, in part, through data transmissions over public telephone lines.
Operators of these types of value-added networks that provide access to
regulated transmission facilities only as part of a data services package are
classified for regulatory purposes as providers of "information services" and
are currently excluded from regulations that apply to "telecommunications
carriers." As such, Concentric is not currently subject to direct regulation
by the FCC or any other governmental agency, other than regulations applicable
to businesses generally.
However, future changes in law or regulation could result in some aspects
of its current operations becoming subject to one or more forms of
telecommunication regulation by the FCC or other regulatory agencies. The FCC
currently is reviewing its regulatory positions on data transmissions over
telecommunications networks and could seek to impose some form of
telecommunications carrier regulation on the network transport and
telecommunications functions of an enhanced or information services package.
Further, the FCC could conclude that its protocol conversions, computer
processing and interaction with customer-supplied information are insufficient
to afford Concentric with the benefits of the enhanced or information service
regulatory classification. If the FCC reaches such conclusions, it may seek to
regulate some segments of its activities as telecommunications services.
One significant example of the type of regulation some incumbent LECs would
like to have the FCC impose on IP-based services is typified by a recent
Petition for Expedited Declaratory Ruling filed by US West seeking an FCC
ruling that IP-based Telephony services provided over interchange carrier
networks not be considered information services, but telecommunications
services subject to incumbent LEC-imposed interstate access charges. While the
FCC has not taken action to date on the US West Petition, its filing indicates
that there are telecommunications carriers anxious to reclassify exempt
information services to be regulated telecommunications services.
State public utility commissions generally have declined to regulate
enhanced or information services. Some states, however, have continued to
regulate particular aspects of enhanced services in limited circumstances,
such as where they are provided by incumbent LECs that operate
telecommunications networks. Moreover, the public service commissions of some
states continue to review potential regulation of such services. Concentric
cannot assure you that regulatory authorities of states where Concentric
provides Internet access, intranet and VPN services will not seek to regulate
aspects of these activities as telecommunications services. The prices at
which Concentric may sell its services could be affected by regulatory
changes:
. in the Internet connectivity market;
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. that indirectly or directly affect telecommunications costs; or
. that increase the likelihood or scope of competition from the RBOCs.
Concentric cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business, and Concentric cannot assure you
that future regulation or regulatory changes will not have a material adverse
effect on its business, results of operations or financial condition.
Concentric Depends On Its Proprietary Technology and Technological Expertise
Concentric's success and ability to compete is dependent in part upon its
technology. In this regard, Concentric believes its success is more dependent
upon its technical expertise than its proprietary rights. Concentric relies
upon a combination of copyright, trademark and trade secret laws and
contractual restrictions to protect its proprietary technology. It may be
possible for a third party to copy or otherwise obtain and use Concentric's
products or technology without authorization or to develop similar technology
independently. Concentric cannot assure you that such measures have been, or
will be, adequate to protect its proprietary technology. Concentric's
competitors may also independently develop technologies that are substantially
equivalent or superior to Concentric's technology.
Concentric operates a material portion of its business over the Internet.
The Internet is subject to a variety of risks. Such risks include but are not
limited to the substantial uncertainties that exist regarding the system for
assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. Concentric cannot assure you that
it will continue to be able to employ its current domain names in the future
or that the loss of rights to one or more domain names will not have a
material adverse effect on its business and results of operations.
Third Parties May Claim Concentric Infringed Their Proprietary Rights
Although Concentric does not believe it infringes on the proprietary rights
of any third parties, Concentric cannot assure you that third parties will not
assert such claims against Concentric in the future or that such claims will
not be successful. Concentric could incur substantial costs and diversion of
management resources to defend any claims relating to proprietary rights,
which could have a material adverse effect on its business, financial
condition and results of operations. Furthermore, parties making such claims
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief that could effectively block Concentric's ability to
license its products in the United States or abroad. Such a judgment would
have a material adverse effect on Concentric's business, financial condition
and results of operations.
In addition, Concentric is obligated under certain agreements to indemnify
the other party for claims that Concentric infringes on the proprietary rights
of third parties. If Concentric is required to indemnify parties under these
agreements, its business, financial condition and results of operations could
be materially adversely affected. If someone asserts a claim relating to
proprietary technology or information against Concentric, Concentric may seek
licenses to such intellectual property. Concentric cannot assure you, however,
that it could obtain licenses on commercially reasonable terms, if at all. The
failure to obtain the necessary licenses or other rights could have a material
adverse effect on Concentric's business, financial condition and results of
operations.
Concentric Could Face Liability for Information Disseminated Through Its
Network
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is continuing to evolve
and remains unsettled. In the past, at least one court has ruled that Internet
service providers could be found liable for copyright infringement as a result
of information disseminated through their networks. Such claims have been
asserted against Concentric in the past and Concentric cannot assure you that
similar claims will not be asserted in the future.
45
<PAGE>
Federal laws have been enacted, however, which, under certain
circumstances, provide Internet service providers with immunity from liability
for information that is disseminated through their networks when they are
acting as mere conduits of information. A Federal Court of Appeals has
recently held that the Telecommunications Act of 1996 creates immunity from
liability on the part of Internet service providers for libel claims arising
out of information disseminated over their services by third party content
providers. In addition, the Digital Millennium Copyright Act, which was
enacted in 1998, creates a safe-harbor from copyright infringement liability
for Internet service providers that meet certain requirements. These
requirements include certain technical measures and registering with the
Copyright Office the identity of the provider's Designated Infringement Agent
who is to receive notice of any claims of copyright infringement. Concentric
cannot assure you, however, that the Digital Millennium Copyright Act or any
other legislation will protect it from copyright infringement liability.
The Child Online Protection Act of 1998 prohibits and imposes criminal
penalties and civil liability on anyone engaged in the business of selling or
transferring, by means of the World Wide Web, material that is harmful to
minors without restricting access to such material by persons under seventeen
years of age. Numerous states have adopted or are currently considering
similar types of legislation. The imposition upon Concentric, Internet service
providers or Web server hosts of potential liability for such materials
carried on or disseminated through Concentric's systems could require
Concentric to implement measures to reduce its exposure to such liability.
Such measures may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. Further, the costs of
defending against any such claims and potential adverse outcomes of such
claims could have a material adverse effect on Concentric's business,
financial condition and results of operations. The Child Online Protection Act
of 1998 has been challenged by civil rights organizations in part on the
grounds that it violates the First Amendment. The United States Supreme Court
held a similar statute unconstitutional in 1997. On February 1, 1999 a United
States District Court preliminarily enjoined enforcement of the law pending
final resolution of the case.
Concentric's Stock Price Has Been and May Continue to Be Volatile
The trading price of Concentric's common stock has been and is likely to be
highly volatile. Concentric's stock price could be subject to wide
fluctuations in response to a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by Concentric or its competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the network services market;
. its announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. other events or factors that may be beyond its control.
In addition, the stock markets in general, and the Nasdaq National Market
and the trading activity of network services and technology companies in
particular, have experienced extreme price and volume fluctuations recently.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The trading prices of many
technology companies' stocks are at or near historical highs and these trading
prices and multiples are substantially above historical levels. These trading
prices and multiples may not be sustained. These broad market and industry
factors may materially adversely affect the market price of its common stock,
regardless of its actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation often has been instituted against that company. Litigation
like this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
46
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Concentric Network Corporation
We have audited the accompanying consolidated balance sheets of Concentric
Network Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, common stock subject to rescission and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule included in Item 14. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Concentric Network Corporation at December 31, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the financial information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 21, 2000, except for Note 13,
as to which the date is March 20, 2000
47
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 98,988 $ 25,891
Short term investments................................. 52,226 80,095
Current portion of restricted cash..................... 19,125 144,060
Accounts receivable, net of allowances of $990 in 1998
and $1,419 in 1999.................................... 13,714 29,114
Note receivable........................................ -- 16,000
Prepaid expenses and other current assets.............. 3,058 10,049
--------- ---------
Total current assets................................. 187,111 305,209
Property and equipment:
Computer and telecommunications equipment.............. 89,668 121,561
Software............................................... 5,427 11,653
Furniture and fixtures and leasehold improvements...... 11,357 18,403
--------- ---------
106,452 151,617
Accumulated depreciation and amortization.............. 42,184 68,723
--------- ---------
64,268 82,894
Restricted cash, net of current portion.................. 17,113 --
Goodwill and other intangible assets..................... 20,364 70,627
Investments.............................................. -- 27,101
Other assets............................................. 9,401 11,963
--------- ---------
Total assets......................................... $ 298,257 $ 497,794
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable....................................... $ 26,342 $ 35,750
Accrued compensation and other employee benefits....... 2,024 3,866
Other current liabilities.............................. 4,559 5,655
Current portion of capital lease obligations........... 6,543 6,438
Deferred revenue....................................... 3,104 7,885
--------- ---------
Total current liabilities............................ 42,572 59,594
Capital lease obligations, net of current portion........ 10,434 6,774
Notes payable............................................ 146,021 146,642
Other liabilities........................................ -- 1,770
Commitments and contingencies
Redeemable exchangeable preferred stock.................. 156,105 179,521
Convertible redeemable preferred stock................... -- 41,339
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; issuable in series:
Authorized shares--10,000 in 1998 and 1999
Issued and outstanding shares--none in 1998 and
1999................................................ -- --
Common stock, $0.001 par value; issuable in classes:
Authorized shares--100,000 in 1998 and 1999
Issued and outstanding shares--30,288 in 1998 and
45,427 in 1999...................................... 190,076 420,515
Accumulated deficit...................................... (246,055) (357,837)
Deferred compensation.................................... (896) (524)
--------- ---------
Total stockholders' equity (deficit)................... (56,875) 62,154
--------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $ 298,257 $ 497,794
========= =========
</TABLE>
See accompanying notes.
48
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenue........................................ $ 45,457 $ 82,807 $ 147,060
Costs and expenses:
Cost of revenue.............................. 61,439 85,352 133,922
Development.................................. 4,850 7,734 10,907
Marketing and sales, including $2,600, $1,085
and $750 to a related party for the years
ended December 31, 1997, 1998 and 1999,
respectively................................ 24,622 39,793 54,288
General and administrative................... 4,790 10,398 15,441
Amortization of goodwill and other intangible
assets...................................... -- 3,842 7,913
Acquisition-related charges.................. -- 1,291 --
Write-off of in-process technology........... -- 5,200 --
-------- -------- ---------
Total costs and expenses................... 95,701 153,610 222,471
-------- --------
Loss from operations........................... (50,244) (70,803) (75,411)
Other income (expense)......................... 1,233 (750) (663)
Interest income................................ 1,217 9,975 13,558
Interest expense, including $6,197 and $1,272
to related parties for the years ended
December 31, 1997 and 1998, respectively...... (7,788) (23,570) (22,569)
-------- -------- ---------
Loss before extraordinary item................. (55,582) (85,148) (85,085)
Extraordinary gain on early retirement of
debt.......................................... -- 3,042 --
-------- -------- ---------
Net loss....................................... (55,582) (82,106) (85,085)
Preferred stock dividends and accretion ....... -- (11,958) (26,697)
-------- -------- ---------
Net loss attributable to common stockholders... $(55,582) $(94,064) $(111,782)
======== ======== =========
Net loss per share (pro-forma 1997, historical
1998 and 1999)
Loss before extraordinary item............... $ (2.82) $ (2.93) $ (2.10)
Extraordinary gain........................... -- .11 --
-------- -------- ---------
Net loss....................................... (2.82) (2.82) (2.10)
Preferred stock dividends and accretion........ -- (.41) (.66)
-------- -------- ---------
Net loss per share attributable to common
stockholders.................................. $ (2.82) $ (3.23) $ (2.76)
======== ======== =========
Shares used in computing net loss and net loss
attributable to common stockholders per share
(pro-forma 1997, historical 1998 and 1999).... 19,744 29,094 40,473
======== ======== =========
</TABLE>
See accompanying notes.
49
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
Common Stock -----------------------------------------------------------
Subject to Preferred Total
Rescission Stock Common Stock Stockholders'
------------- --------------- ---------------- Accumulated Deferred Equity
Shares Amount Shares Amount Shares Amount Deficit Compensation (Deficit)
------ ------ ------ ------- ------ -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 .................. 910 $5,150 4,901 $95,215 2,786 $ 1,850 $ (93,952) $ (188) $ 2,925
Issuance of Class A
common stock for
services .............. -- -- -- -- 10 17 -- -- 17
Conversion of Class B
common to Series A
preferred stock ....... -- -- 7 -- (14) -- -- -- --
Conversion of Series A,
B, C and D preferred to
Class A common stock
....................... -- -- (5,693) (99,604) 11,386 99,604 -- -- --
Shares issued upon the
initial public offering
(net of issuance costs)
....................... -- -- -- -- 9,890 52,757 -- -- 52,757
Shares issued in a
private placement...... -- -- -- -- 2,492 14,950 -- -- 14,950
Conversion of note to
Class A common stock... -- -- -- -- 506 3,041 -- -- 3,041
Repurchase of Class A
common stock in
connection with the
initial public offering
....................... -- -- -- -- (370) (2,217) -- -- (2,217)
Shares issued subject to
dilution ratios ....... -- -- 484 -- -- -- -- -- --
Exercise of options to
purchase stock ........ -- -- -- -- 130 243 -- -- 243
Exercise of warrants to
purchase stock ........ -- -- 301 3,281 618 1,201 -- -- 4,482
Warrants issued to
purchase stock ........ -- -- -- 1,108 -- 5,370 -- -- 6,478
Deferred compensation
resulting from grant of
options ............... -- -- -- -- -- 1,303 -- (1,303) --
Amortization of deferred
compensation .......... -- -- -- -- -- -- -- 222 222
Expiration of statutes
of limitations on
common stock subject to
rescission ............ (844) (4,602) -- -- 844 4,602 -- -- 4,602
Repurchase of shares for
cancellation in
connection with
Rescission Offer ...... (66) (548) -- -- -- -- -- -- --
Net loss ............... -- -- -- -- -- -- (55,582) -- (55,582)
---- ------ ------ ------- ------ -------- --------- ------- --------
Balance at December 31,
1997 .................. -- $ -- -- $ -- 28,278 $182,721 $(149,534) $(1,269) $ 31,918
Amortization of deferred
compensation .......... -- $ -- -- $ -- -- $ -- $ -- $ 373 $ 373
Common stock issued
under stock purchase
plan .................. -- -- -- -- 148 781 -- -- 781
Common stock issued in
acquisition of DeltaNet
Services, Inc. ........ -- -- -- -- 452 1,147 (2,457) -- (1,310)
Exercise of options to
purchase common stock.. -- -- -- -- 1,224 3,527 -- -- 3,527
Exercise of warrants for
no cash consideration.. -- -- -- -- 186 -- -- -- --
Warrants issued to
purchase stock......... -- -- -- -- -- 1,900 -- -- 1,900
Net loss................ -- -- -- -- -- -- (82,106) -- (82,106)
Preferred stock
dividends and
accretion.............. -- -- -- -- -- -- (11,958) -- (11,958)
---- ------ ------ ------- ------ -------- --------- ------- --------
Balance at December 31,
1998................... -- $ -- -- $ -- 30,288 $190,076 $(246,055) $ (896) $(56,875)
==== ====== ====== ======= ====== ======== ========= ======= ========
Amortization of deferred
compensation........... -- $ -- -- $ -- -- $ -- $ -- $ 372 $ 372
Common stock issued
under stock purchase
plan................... -- -- -- -- 247 1,660 -- -- 1,660
Common stock issued in
the acquisition of
9Net................... -- -- -- -- 2,482 50,001 -- -- 50,001
Exercise of options to
purchase common stock.. -- -- -- -- 1,856 8,626 -- -- 8,626
Warrants issued to
purchase stock......... -- -- -- -- -- 12,444 -- -- 12,444
Common stock issued in
the secondary offering
and sold to SBC
Communications, Inc.
(net of offering
costs)................. -- -- -- -- 7,274 138,509 -- -- 138,509
Exercise of warrants to
purchase common stock.. -- -- -- -- 3,280 19,199 -- -- 19,199
Net loss................ -- -- -- -- -- -- (85,085) -- (85,085)
Preferred stock
dividends and
accretion.............. -- -- -- -- -- -- (26,697) -- (26,697)
---- ------ ------ ------- ------ -------- --------- ------- --------
Balance at December 31,
1999................... -- $ -- -- $ -- 45,427 $420,515 $(357,837) $ (524) $ 62,154
==== ====== ====== ======= ====== ======== ========= ======= ========
</TABLE>
See accompanying notes.
50
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ...................................... $(55,582) $(82,106) $(85,085)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 16,852 24,442 28,404
Amortization of deferred interest, cost of
revenue and marketing and sales related to
issuance of warrants........................ 1,720 1,210 1,433
Amortization of goodwill and other intangible
assets...................................... -- 3,842 7,913
Amortization of deferred financing costs..... -- 526 721
Amortization of other deferred assets........ -- 3,025 1,989
Amortization of deferred compensation........ 658 373 373
Gain on early retirement of debt............. -- (3,042) --
Write-off of in-process technology .......... -- 5,200 --
Loss on disposal of equipment................ 162 -- --
Changes in current assets and liabilities:
Prepaid expenses and other current assets
.......................................... (3,581) 1,009 (7,765)
Accounts receivable........................ (2,700) (7,140) (16,517)
Accounts payable........................... (7,287) 7,408 3,495
Accrued compensation and other employee
benefits.................................. 863 (315) 1,538
Deferred revenue........................... 197 509 1,632
Other current liabilities.................. 2,795 (1,575) 794
-------- -------- --------
Net cash used in operating activities........... (45,903) (46,634) (61,075)
INVESTING ACTIVITIES
Net change in restricted cash................... -- -- (124,935)
Additions of property and equipment............. (6,130) (23,489) (41,719)
Proceeds from sale of property and equipment.... -- -- 135
Increase in refundable deposits................. -- (1,200) --
Decrease (increase) in note receivable.......... (370) 100 (15,830)
Net change in short term investments............ -- (52,226) (27,869)
Net change in long term investments............. -- -- (27,101)
Acquisition of InterNex Information Services,
Inc., net of cash acquired..................... -- (15,452) --
Acquisition of AnaServe, Inc., net of cash
acquired....................................... -- (9,625) --
Acquisition of 9Net Avenue Inc., net of cash
acquired....................................... -- -- (796)
-------- -------- --------
Net cash used in investing activities........... (6,500) (101,892) (238,115)
FINANCING ACTIVITIES
Proceeds from notes payable..................... 155,000 -- --
Change in restricted cash....................... (52,525) 16,287 17,113
Repayment of lease obligations to a related
party.......................................... (10,039) (3,079) --
Repayment of lease obligations to a related
party--early retirement of debt................ -- (24,750) --
Repayment of lease obligations.................. (1,517) (7,079) (5,823)
Net change in notes payable..................... (2,000) (1,960) 326
Repurchase of common stock...................... (2,765) -- --
Deferred financing costs........................ (5,006) (320) (4,021)
Proceeds from issuance of redeemable
exchangeable preferred stock, net of issuance
costs.......................................... -- 144,148 50,000
Proceeds from issuances of stock and warrants... 73,557 4,308 168,498
-------- -------- --------
Net cash provided by financing activities....... 154,705 127,555 226,093
-------- -------- --------
Increase (decrease) in cash and cash equivalents
............................................... 102,302 (20,971) (73,097)
Cash and cash equivalents at beginning of period
............................................... 17,657 119,959 98,988
-------- -------- --------
Cash and cash equivalents at end of period...... $119,959 $ 98,988 $ 25,891
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including
accrued interest .............................. $ 3,041 $ -- $ --
Capital lease obligations incurred with a
related party.................................. 3,042 1,285 --
Capital lease obligations incurred.............. -- 5,363 1,385
Reduction of accounts payable through capital
lease obligations incurred..................... 2,000 -- --
Issuance of warrants............................ 5,370 1,900 11,940
Accretion of dividends and financing costs...... -- 11,958 26,697
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid................................... $ 5,728 $ 22,609 $ 20,998
</TABLE>
See accompanying notes.
51
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in 1991 and reincorporated into Delaware in 1997. The
Company operates primarily in one business segment in the United States.
Concentric provides tailored, value-added Internet Protocol (IP) based network
services for businesses and consumers. To provide these services, the Company
utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks (VPNs), dedicated access
facilities (DAFs), digital subscriber line services (DSL), remote access and
Web hosting. These services enable enterprises to take advantage of standard
Internet tools such as browsers and high-performance servers for customized
data communications within an enterprise and between an enterprise and its
suppliers, partners and customers. These services combine the cost advantages,
nationwide access and standard protocols of public networks with the
customization, high performance, reliability and security of private networks.
Basis Of Presentation And Preparation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
All share and per share information presented herein, except as noted, and
in the Company's consolidated financial statements has been retroactively
restated to reflect a two-for-one stock split of the Company's common stock on
May 21, 1999, paid in the form of a stock dividend, to holders of record on
April 30, 1999.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Investments with maturities between three and twelve months are
considered to be short term investments. Management determines the appropriate
classification of its investments in debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date. The Company's
debt securities have been classified and accounted for as available-for-sale.
These securities are carried at fair value and unrealized gains and losses
have not been material to date. Comprehensive net loss per share is not
materially different from net loss for all years presented. Realized gains and
losses and declines in value judged to be other than temporary on available-
for-sale securities are included in interest income and have not been material
to date. Cash and cash equivalents are held primarily with three financial
institutions.
Long Term Investments
In January 1999 the Company purchased approximately $10.0 million of common
stock from Covad Communications Group, Inc. ("Covad") and certain Covad
stockholders at Covad's initial public offering price. In April 1999 the
Company purchased approximately $5.0 million of Class B Common Stock from
NorthPoint
52
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Communications Group, Inc. ("NorthPoint"). In July 1999 the Company purchased
approximately $5.0 million of Series A Convertible Preferred Stock from
Register.com, Inc. ("Register.com"). In August 1999 the Company purchased
approximately $2.0 million of Series B Preferred Stock from Asia Online, Ltd.
("Asia Online"). In October 1999 the Company purchased approximately $5.0
million of Series C Preferred Stock from Corio, Inc. ("Corio"). Long term
investments are recorded at cost.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets as follows: computer and telecommunications equipment:
three to five years; purchased software: three to five years; furniture and
fixtures: eight to ten years; and leasehold improvements: the shorter of the
remaining term of the related leases or the estimated economic useful lives of
the improvements. Equipment under capital leases is amortized over the shorter
of the expected useful life or the related lease term (see Note 3).
Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $16,852,000, $24,442,000 and $28,404,000 respectively.
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenue. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Advertising Costs
The Company expenses the costs of advertising as incurred except for
direct-response advertising costs meeting certain specific criteria. To date,
no direct-response advertising costs have been capitalized. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 were
approximately $1,532,000, $2,737,000 and $9,854,500, respectively.
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).
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share have been computed in accordance with
the Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share."
53
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included 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.
Pro forma net loss per share gives effect, even if antidilutive, to common
equivalent shares from convertible preferred shares that were automatically
converted to common shares upon the closing of the Company's initial public
offering (using the as-if-converted method). The following table sets forth
the computation of basic and diluted loss per share, on a historical and pro
forma basis:
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
(In thousands, except per
share data)
<S> <C> <C> <C>
Numerator:
Net loss before extraordinary item ............ $(55,582) $(85,148) $ (85,085)
Extraordinary gain on early retirement of debt
.............................................. -- 3,042 --
-------- -------- ---------
Net loss ...................................... (55,582) (82,106) (85,085)
======== ======== =========
Preferred stock dividends and accretion ....... -- (11,958) (26,697)
-------- -------- ---------
Numerator for basic and diluted loss per share
.............................................. $(55,582) $(94,064) $(111,782)
======== ======== =========
Denominator:
Denominator for basic and diluted earnings per
share--weighted average shares (historical) .. 13,330 29,094 40,473
======== ======== =========
Adjustments to reflect the effect of the
assumed conversion of convertible preferred
stock from the date of issuance .............. 6,414
========
Denominator for basic and diluted earnings per
share--weighted average shares (pro forma) ... 19,744
========
Basic and diluted net loss per share
(historical):
Loss before extraordinary item .............. $ (4.17) $ (2.93) $ (2.10)
-------- -------- ---------
Extraordinary gain .......................... -- .11 --
-------- -------- ---------
Net loss .................................... (4.17) (2.82) (2.10)
======== ======== =========
Preferred stock dividends and accretion ..... -- (.41) (.66)
-------- -------- ---------
Net loss attributable to common stockholders
............................................ $ (4.17) $ (3.23) $ (2.76)
======== ======== =========
Basic and diluted net loss per share (pro
forma) ....................................... $ (2.82)
========
</TABLE>
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
54
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," the Company continually reviews long-lived assets to
assess recoverability based upon undiscounted cash flow analysis. Impairments,
if any, are recognized in operating results in the period in which a permanent
diminution in value is determined.
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1997, 1998 and 1999,
revenue from WebTV Networks, Inc. represented approximately 33.4%, 26.8% and
25.2%, respectively, of the Company's total revenue.
Sole or Limited Sources of Supply
The Company relies on other companies to supply certain key components of
their network infrastructure. These components include critical
telecommunications services and networking equipment, which, in the quantities
and quality demanded by us, are available only from sole- or limited-sources.
Four companies provide the data communications facilities and capacity for the
Company. The Company is also dependent upon local exchange carriers to provide
telecommunications services to the Company and its customers. The Company has
experienced delays from time to time in receiving telecommunications services
from these suppliers. There can be no assurance that such services on the
scale and within the time frames required by the Company at an affordable cost
will be attainable. Any failure to obtain such services on a sufficient scale,
on a timely basis and at an affordable cost would have a material adverse
effect on the business, financial condition and results of operations of the
Company.
The Company purchases its network equipment primarily from five vendors.
Two companies also act as systems integrators. One company is the sole
supplier of the servers primarily used in the Company's network
infrastructure. The Company purchases these components pursuant to purchase
orders placed from time to time with these suppliers. The Company does not
carry significant inventories of these components and has no guaranteed supply
arrangements for such components. The Company's suppliers also sell products
to competitors and may in the future themselves become competitors. There can
be no assurance that suppliers will not enter into exclusive arrangements with
competitors or stop selling their products or components to the Company at
commercially reasonable prices, or at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
FAS 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. FAS 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. The Company believes
the adoption of FAS 133 will not have a material effect on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting
principle in the quarter ending March 31, 2000. While the Company has not
fully assessed the impact of the adoption of SAB 101, it believes that
implementation of SAB 101 will not have a material adverse impact on its
existing revenue recognition policies or its reported results of operations
for the year ending December 31, 2000.
55
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Cash, Cash Equivalents, Short Term Investments and Restricted Cash
The following table summarizes the Company's available-for-sale securities
at amortized cost, which approximates fair value, as of December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
U.S. Treasury securities ........................................... $26,113
U.S. Corporate securities .......................................... 53,982
-------
Total included in short-term investments ........................... $80,095
=======
</TABLE>
The Company's U.S. Corporate securities include commercial paper. The
Company's cash equivalents and short term investments have generally been held
until maturity. The Company's cash and cash equivalents at December 31, 1999
consisted primarily of money market funds.
Restricted cash at December 31, 1999 consisted of $18.8 million of funds
held in escrow to pay interest relating to the Company's 12 3/4% Senior Notes
and $125.3 million of funds held in escrow for the pending acquisition of
Internet Technology Group, Plc in February 2000.
3. Commitments
Operating Leases
The Company has an agreement with a related party through which such
related party makes available the premises at which the Company's POP sites
throughout the United States are located. POP sites are locations where
certain telecommunications switching and related equipment are installed. This
agreement expires in December 2000, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Costs of approximately $1,326,000, $1,267,000 and
$1,304,000 were incurred during the years ended December 31, 1997, 1998 and
1999, respectively, for these facilities. Additionally, the Company has
agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. Costs of approximately
$1,246,000 and $1,372,000 were incurred during the years ended December 31,
1998 and 1999, respectively, for these facilities. The expiration dates
associated with these agreements range from December 1999 to January 2002.
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through May 2012.
Total rent expense for all operating leases was approximately $2,418,000,
$4,743,000 and $7,967,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
Future minimum lease commitments for all noncancelable operating leases
with initial terms of one year or more consists of the following at December
31, 1999 are (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 8,543
2001................................................................. 8,408
2002................................................................. 6,519
2003................................................................. 5,343
2004................................................................. 4,677
Thereafter........................................................... 7,661
-------
Total.............................................................. $41,151
=======
</TABLE>
56
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $1,443,000,
$536,000 and $472,000 at December 31, 1997, 1998 and 1999, respectively. In
March 1998, the Company retired a portion of the capital lease obligations to
the related party. The Company paid $24,750,000 for the extinguishment of the
debt. The Company recognized an extraordinary gain of $3,042,000 in connection
with this transaction. Subsequent to March 1998, the related party sold its
stockholdings in the Company and is no longer considered a related party.
Assets capitalized under capital leases totaled approximately $28,068,000
and $42,018,000 at December 31, 1998 and 1999, respectively, and are included
in computer and telecommunications equipment. Accumulated amortization for
assets capitalized under capital leases totaled approximately $8,356,000 and
$14,821,000 at December 31, 1998 and 1999, respectively. Amortization of
leased assets is included in depreciation and amortization expense. The
Company has granted a security interest in all equipment under capital lease
agreements. Future minimum lease payments under capital lease obligations at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................ $ 7,259
2001................................................................ 4,921
2002................................................................ 2,388
2003................................................................ 618
-------
Total minimum lease payments...................................... 15,186
Less amount representing interest................................... 1,974
-------
Present value of net minimum lease payments......................... 13,212
Less current portion of capital leases.............................. 6,438
-------
Long-term portion of capital leases................................. $ 6,774
=======
</TABLE>
Other
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, which expired in June 1998. The Company had
incurred expenses, through the life of the agreement, of approximately
$8,100,000 and $4,143,000 for the years ended December 31, 1997 and 1998,
respectively, related to these other services. The agreement was renewed in
August 1998 and provides for minimum payments of $6.0 million per year over
its term, expiring July 2000. The Company incurred expenses of approximately
$3,042,000 related to the new agreement for the five month period ended
December 31, 1998 and approximately $9,461,000 for the year ended December 31,
1999.
In November 1995, the Company entered into a two-year service agreement
under which a third party provided substantially all of the network analysis
and deployment and maintenance of POP sites. In 1997, the third party was
purchased by Williams Communications Group, Inc. ("Williams"), a stockholder
of the
57
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company, and the agreement was extended to December 31, 2000. The Company will
reimburse Williams for its employee compensation and direct costs for services
provided. Related party payments to Williams for these services were
approximately $1,884,000, $4,848,000 and $6,460,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. At the end of the agreement,
Williams is obligated to transfer to the Company those personnel, resources,
and facilities used to support the Company's network analysis, POP site
deployment, and maintenance.
In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide
telecommunication services and equipment. The agreement provides for minimum
payments as follows: $1.2 million in 1998, $2.5 million in 1999, $7.0 million
in 2000, $6.5 million in 2001 and $4.0 million in 2002. At the election of
Williams, $2.0 million of the minimum payments may be paid by the issuance of
common stock of the Company at the then-current fair market value. The Company
made payments of approximately $4.8 million for the year ended December 31,
1998 related to this agreement, of which approximately $4.3 million related to
the purchase of equipment from Williams. For the year ended December 31, 1999,
payments were approximately $24.9 million, of which approximately $16.5
million related to the purchase of equipment.
In June 1999, the Company signed an agreement through which Microsoft
Corporation ("Microsoft") will provide services to certain of the Company's
customers and the Company will purchase $7.5 million worth of advertising
during the term of the three year agreement. The Company made payments of
approximately $1.6 million to Microsoft during the year ended December 31,
1999 for services related to this agreement.
4. Convertible Debentures and Notes Payable
Notes Payable
In December 1997, the Company issued 150,000 units (collectively, the
Units), each consisting of $1,000 principal amount of 12 3/4% Senior Notes
(the 12 3/4% Senior Notes) due 2007 and one warrant (a Warrant), each Warrant
entitling the holder thereof to purchase 12.68 shares of common stock at $5.43
per share and such Warrants expire on December 15, 2007 (see Note 7) for
aggregate cash proceeds of $150,000,000. Approximately $52,525,000 of the cash
proceeds was placed in a escrow account to fund the first six interest
payments in accordance with the Senior Note agreement which is classified as
restricted cash. As of December 31, 1999, the Company had $18,752,000
remaining in the escrow account restricted for future interest payments.
The Warrants resulted in the right of the holders to purchase 1,902,216
shares of the Company's common stock. The Company deemed the fair value of the
warrants, using the Black-Scholes method, to be approximately $4,440,000 which
was recorded as a discount on the 12 3/4% Senior Notes. The discount is being
amortized as interest expense over the term of the 12 3/4% Senior Notes.
Amortization expense was $17,000, $444,000 and $444,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
The 12 3/4% Senior Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after December 15, 2002, at the
redemption rates (expressed as a percentage of the principal amount)
commencing with 106.375% on December 15, 2002 and declining to 100% on
December 15, 2005, plus accrued interest to the date of redemption. In
addition, on or prior to December 15, 2000, the Company may redeem up to 35%
of the original aggregate principal amount of the 12 3/4% Senior Notes at a
redemption price of 112.75% of the principal amount, together with accrued and
unpaid interest to the date of redemption with the net cash proceeds of one or
more public equity offerings or the sale of common stock to a strategic
investor, provided that at least 65% of the original aggregate principal
amount of the 12 3/4% Senior Notes remain outstanding.
58
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the issuance of the 12 3/4% Senior Notes, the Company
incurred approximately $5,300,000 of debt issuance costs which are classified
as other assets. These costs are being amortized as interest expense over the
term of the 12 3/4% Senior Notes. Amortization expense was $526,000 and
$537,000 for the years ended December 31, 1998 and 1999, respectively.
5. Common Stock Subject to Rescission
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common
stock subject to rescission in the accompanying financial statements.
Additionally, options issued pursuant to the Company's 1995 Stock Incentive
Plan to Employees and Consultants and non-plan options were issued in various
states for which the Company may not have had an available exemption under
state laws. Such options are potentially subject to rescission and the Company
has included them in the Rescission Offer. As of December 31, 1997, statutes
of limitations under federal and state securities laws applicable to the
shares which may have been issued without securities laws exemptions have
lapsed and the Rescission Offer had expired. Pursuant to the Rescission Offer,
the Company offered to rescind the issuance of shares and options as to which
the applicable statute of limitations had not run. There can be no assurances
that the Company will not otherwise be subject to additional liabilities with
respect to such issuances. The Company repurchased 64,846 shares of Common
Stock subject to the Rescission Offer for $548,000 and paid related interest
charges of $125,000. Based upon the above, the Company has reclassified the
remaining rescission liability and shares into stockholders' equity.
6. Stockholders' Equity
All share and per share information presented herein, except as noted, has
been retroactively restated to reflect a two-for-one stock split of the
Company's common stock on May 21, 1999, paid in the form of a stock dividend,
to holders of record on April 30, 1999.
Public Offering
In February 1999 the Company effected a public offering of its common
stock. The Company issued and sold 11,322,000 shares at $11.13 for net
proceeds of approximately $119.4 million. Certain selling stockholders
exercised warrants to purchase directly from the Company 3,200,000 shares of
common stock having an aggregate purchase price of approximately $10.2
million, which shares were also registered and sold in the public offering by
such stockholders.
SBC Financing Agreement
In January 1999 SBC Communications Inc. purchased 1,613,358 shares of
common stock for an aggregate purchase price of approximately $19.5 million
pursuant to an agreement reached between the two companies in October 1998. In
connection with the agreement, the Company issued to SBC a warrant to purchase
an additional 1,813,358 shares. The warrant expires three years from the date
of issuance and is exercisable at $10.50 per share.
59
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company deemed the fair market value of the warrant, using the Black-
Scholes method, to be $1.9 million which is being amortized as a marketing
cost over the life of the agreement. Amortization for the year ended December
31, 1999 was approximately $633,000.
TMI Warrant
In June 1999 the Company amended an agreement with TMI Telemedia
International, Ltd. ("TMI") and in connection with the agreement, the Company
issued a warrant to purchase 50,000 shares of its common stock. The warrant
expires in January 2001 and is exercisable at $25.1875 per share. The Company
deemed the fair market value of the warrant, using the Black-Scholes method,
to be $504,000, which was written off as other expense in June 1999.
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 (Series
A Preferred). In September 1998, the Company issued 154,657 shares of its 13
1/2% Series B Senior Redeemable Exchangeable Preferred Stock due 2010
(Series B Preferred) in exchange for all outstanding shares of the Series A
Preferred pursuant to a registered exchange offer. Each share of Series B
Preferred has a liquidation preference of $1,000 per share. Dividends on the
Series B Preferred 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 Series B
Preferred having an aggregate liquidation preference equal to the amount of
such dividends. For the years ended December 31, 1998 and 1999, the Company
issued a total of 9,865 and 22,683 shares, respectively, of Series B Preferred
Stock as payment of the quarterly dividends. Series B Preferred Stock has no
voting rights.
The Series B Preferred 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
(expressed as a percentage of the liquidation preference) commencing with
106.75% on June 1, 2003 and 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 Series B Preferred from the net proceeds of one or
more public equity offerings or the sale of common stock to a strategic
investor. The Series B Preferred is subject to mandatory redemption at its
liquidation preference, plus accumulated and unpaid dividends on June 1, 2010.
On any scheduled dividend payment date, the Company may, at its option,
exchange in whole but not in part the then outstanding shares of Series B
Preferred for 13 1/2% Senior Subordinated Debentures due 2010 (Exchange
Debentures) with a principal amount equal to the aggregate liquidation
preference of the Preferred Stock. If the Exchange Debentures were issued,
they would mature on June 1, 2010. Interest on the Exchange Debentures would
be 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 Series B Preferred to its liquidation
preference through the due date of the Series B Preferred. The accretion for
the years ended December 31, 1998 and 1999 was approximately $11.7 million and
$22.9 million, respectively. In connection with the issuance of Series A
Preferred and Series B Preferred, the Company incurred approximately $5.9
million of issuance costs. These costs are being accreted over 12 years which
amounted to $282,000 for the year ended December 31, 1998 and $487, 900 for
the year ended December 31, 1999.
60
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Redeemable Preferred Stock
In June 1999, the Company issued 50,000 shares of Series C 7% Convertible
Redeemable Preferred Stock due 2010 ("Series C Preferred") to Microsoft
Corporation ("Microsoft") for $50 million. Each share of Series C Preferred
has a liquidation preference of $1,000 per share. Dividends on the Series C
Preferred accrue at the rate of 7% per annum of the liquidation preference
thereof and are payable quarterly in arrears commencing on September 1, 1999.
Dividends are payable in cash, except that on each dividend payment date
dividends may be paid, at the Company's option, by the issuance of additional
shares of Series C Preferred having an aggregate liquidation preference equal
to the amount of such dividends. For the year ended December 31, 1999, the
Company issued a total of 1,478 shares of Series C Preferred Stock as payment
of the quarterly dividends.
The Series C Preferred 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 105.125% declining to 100% on June 1, 2010. The Series C
Preferred is subject to mandatory redemption at its liquidation preference,
plus accumulated and unpaid dividends on September 1, 2010. The holder of any
Series C Preferred has the right, at its option, to convert at any time any
shares of Series C Preferred into shares of common stock at the conversion
price of $39.924.
The Company is accreting the Series C Preferred to its liquidation
preference through the due date of the Series C Preferred. The accretion for
the year ended December 31, 1999 was approximately $1.8 million.
In conjunction with the Series C Preferred issuance, the Company issued a
warrant to Microsoft to purchase 500,000 shares of its common stock. The
warrant expires four years from the date of issuance and is exercisable at
$33.27 per share. The Company deemed the fair market value of the warrants,
using the Black-Scholes model, to be approximately $11.9 million and is
accreting this value over four years. Accretion for the year ended December
31, 1999 was approximately $1.5 million.
Consent Agreements
In July 1999, the Company solicited and received consents of more than a
majority of the Company's outstanding 12 3/4% Senior Notes due 2007 ("12 3/4%
Senior Notes") and the outstanding 13 1/2% Series B Redeemable Exchangeable
Preferred Stock due 2010 ("Series B Preferred"). The consents allow the
Company to increase its permitted investments under the Indenture relating to
the 12 3/4% Senior Notes and the Certificate of Designation relating to the
Series B Preferred. In August, the Company paid consent fees of approximately
$3.8 million to the holders who delivered consents prior to the expiration
date of such consents. Amortization related to the consent fees was immaterial
for the year ended December 31, 1999.
Stock Option Plans
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provided
for the granting to employees of incentive stock options and for the granting
to employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was terminated effective October 4,
1996. As of December 31, 1999, options to purchase 81,420 shares of common
stock at a weighted exercise price of $1.88 per share were outstanding under
the 1995 plan of which 74,237 options were vested.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the Restated 1996 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (Rights). The Restated 1996 Plan has been terminated. As of December
31, 1999, options to purchase 864,154 shares of common stock at a weighted
average exercise price of $3.38 per share were outstanding of which 440,356
were vested.
61
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Restated 1996 Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of the
Company's assets or a like transaction involving the Company, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted as
described in the preceding sentence, the Restated 1996 Plan provides the
optionee or Right holder to have the right to exercise the option or Right as
to all of the optioned stock, including shares as to which it would not
otherwise be exercisable.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees of incentive stock options and for the granting
to employees, directors and consultants of nonstatutory stock options and
stock purchase rights (Rights). The 1997 Plan was approved by the Board of
Directors on June 6, 1997 and by the stockholders on June 30, 1997. An
amendment increasing the number of shares thereunder from 3,000,000 to
4,500,000 was approved by the Board of Directors on April 10, 1998, and the
Stockholders on May 20, 1998. On June 28, 1999 an amendment was approved
increasing the number of shares to 6,500,000. Unless terminated sooner, the
1997 Plan will terminate automatically in 2007. Options granted under the 1997
Plan must generally be exercised within three months of the end of optionee's
status as an employee, director or consultant of the Company, or within twelve
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term. The exercise price of
all incentive stock options granted under the 1997 Plan must be at least equal
to the fair market value of the common stock on the date of grant. The
exercise price of nonstatutory stock options and Rights granted under the 1997
Plan is determined by the 1997 Plan's Compensation Committee, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation," the exercise price must at least be equal to the fair market
value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years. A total of 6,500,000 shares of common
stock are currently reserved for issuance pursuant to the 1997 Plan. As of
December 31, 1999, options to purchase 5,511,506 shares of common stock at a
weighted average exercise price of $9.16 per share were outstanding of which
960,694 were vested, and 288,299 shares of common stock remained available for
future grants under the 1997 Plan.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the 1997 Plan provides for the optionee or Right holder to
have the right to exercise the option or Right as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was approved by the Board of
Directors on June 6, 1997 and by the stockholders on June 30, 1997. An
amendment increasing the number of shares by 605,876 shares was approved by
the Stockholders on May 20, 1998. A total of 1,605,876 shares of common stock
are currently reserved for issuance pursuant to the 1997 Plan. The 1997
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, consists of 24-month offering periods beginning on the first
trading day on or after February 15 and August 15 of each year, except for the
first such offering period, which commenced on August 4, 1997 and ended on
February 13, 1998. Each offering period contains four six-month purchase
periods. Employees are eligible to participate if they are customarily
employed by the Company or any designated subsidiary for at least 20 hours per
week and more than five months in any calendar year. The 1997 Purchase Plan
permits eligible employees to purchase common stock through payroll deductions
of up to 10% of an employee's compensation (excluding overtime, shift premium,
and other bonuses and incentive compensation), up to a maximum of $25,000 for
all
62
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
offering periods ending within the same calendar year. No employee may
purchase more than 25,000 shares in any purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the common stock at the beginning of the offering period or at the
end of the current purchase period. Employees may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with the Company. During the years ended December 31, 1998 and
1999, 148,284 shares and 247,007 shares were purchased at weighted average
prices of $5.27 and $6.72 per share, respectively.
The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option shall be assumed or an equivalent
option shall be substituted for it, or the Board of Directors or its committee
shall shorten the purchase and offering periods then in progress (so that
employees' rights to purchase stock under the Plan are exercised prior to the
merger or sale of assets). The 1997 Purchase Plan will terminate in 2007.
The Company issued options to purchase 358,600 shares of common stock in
December 1996, 80,534 shares of common stock in January 1997, 433,466 shares
of common stock in June 1997, and repriced 362,946 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $222,000,
$373,000 and $373,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. The amortization of this deferred compensation will continue
over the four year vesting period of the associated stock options.
1999 Nonstatutory Stock Option Plan. The Company's 1999 Nonstatutory Stock
Option Plan (the "1999 Plan") provides for the granting to employees,
directors and consultants of nonstatutory stock options. The 1999 Plan was
approved by the Board of Directors in January 1999, and amended in October
1999. Unless terminated sooner, the 1999 Plan will terminate automatically in
2009. A total of 2,050,000 shares of common stock are currently reserved for
issuance pursuant to the 1999 Plan. As of December 31, 1999, options to
purchase 1,810,500 shares of common stock at a weighted average price of
$21.52 per share were outstanding, of which none were vested.
The 1999 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options, including the exercise price, the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable upon such exercise. In addition, the
Administrator has the authority to amend, suspend or terminate the 1999 Plan,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1999 Plan.
Options granted under the 1999 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1999 Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. The exercise price of nonstatutory stock
options granted under the 1999 Plan is determined by the Administrator.
The 1999 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets,
each option shall be assumed or an equivalent option substituted by the
successor corporation. If the outstanding options are not assumed or
substituted, the Administrator shall provide for the Optionee to have the
right to exercise the option as to all of the optioned stock, including shares
63
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as to which it would not otherwise be exercisable for a period of fifteen (15)
days from the date of such notice, and the option will terminate upon the
expiration of such period.
The following table summarizes stock option activity under all of the
Plans:
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
---------- -------------
<S> <C> <C>
Balance at December 31, 1996 ..................... 2,258,004 $1.88-$ 16.50
Granted......................................... 2,944,676 $ 1.88-$ 5.63
Exercised....................................... (129,088) $ 1.88
Canceled........................................ (489,260) $ 1.88-$ 5.63
----------
Balance at December 31, 1997...................... 4,584,332 $1.88-$ 15.00
==========
Granted......................................... 3,767,916 $4.94-$ 37.95
Exercised....................................... (1,223,388) $1.88-$ 10.44
Canceled........................................ (495,662) $1.88-$ 37.95
----------
Balance at December 31, 1998...................... 6,633,198 $1.88-$ 37.95
==========
Granted......................................... 4,788,028 $16.75-$39.75
Exercised....................................... (1,856,213) $1.88-$ 37.95
Canceled........................................ (911,329) $1.88-$ 39.75
----------
Balance at December 31, 1999...................... 8,653,684 $1.88-$ 39.75
==========
</TABLE>
The weighted average fair value of options granted during 1997, 1998 and
1999 was $3.88, $9.96 and $28.88 respectively.
The following table summarizes information concerning currently outstanding
and exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Number Average
Number Life Exercise Exercisable Exercise
Exercise Prices Outstanding (years) Price and Vested Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.88................. 360,818 6.67 $ 1.88 253,836 $ 1.88
$3.00................. 343,571 7.37 $ 3.00 172,345 $ 3.00
$4.43-$4.65........... 322,249 7.48 $ 4.57 169,476 $ 4.58
$4.94-$5.63........... 696,436 7.86 $ 5.53 235,728 $ 5.54
$6.50-$16.75.......... 3,411,169 8.69 $12.31 714,058 $10.30
$17.25-$39.75......... 3,519,441 9.53 $28.68 13,304 $22.39
--------- ---------
Total................. 8,653,684 1,558,747
========= =========
</TABLE>
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Options granted after the Public Offering have been valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model
64
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
considers the expected volatility of the Company's stock price, determined in
accordance with FAS 123, in arriving at an option valuation. The minimum value
method does not consider stock price volatility. Further, certain other
assumptions necessary to apply the Black-Scholes model may differ
significantly from assumptions used in calculating the value of options
granted in 1995 and 1996 under the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility........................................ .250 .935 1.02
Expected life of options in years.......................... 3.3 3.5 3.5
Risk-free interest rate.................................... 6.0% 5.0% 5.5%
Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>
For pro forma purposes, the estimated minimum value of the Company's stock-
based awards to employees is amortized over the options' vesting period. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by FAS 123, net loss and
net loss per share would have increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss attributable to common
stockholders as reported.................. $(55,582) $ (94,064) $(111,782)
Net loss attributable to common
stockholders--pro forma................... $(56,224) $(100,030) $(140,280)
Net loss per share attributable to common
stockholders-- as reported................ $ (2.82) $ (3.23) $ (2.76)
Net loss per share attributable to common
stockholders-- pro forma.................. $ (2.85) $ (3.44) $ (3.47)
</TABLE>
7. Warrants to Purchase Common Stock
In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's
common stock were outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Warrants Outstanding
--------------------------
Weighted
Average
Number of Exercise Year
Exercise Prices Shares Price Expires
--------------- --------- -------- -------
<S> <C> <C> <C>
$9.75............................................ 369,858 $ 9.75 2000
$10.50-$25.19.................................... 1,863,358 $10.89 2001
$3.00-$34.15..................................... 885,689 $ 3.14 2002
$33.27........................................... 500,000 $33.27 2003
$5.43............................................ 625,605 $ 5.43 2007
---------
4,244,510
=========
</TABLE>
The above warrants were issued at various times over the last several years
in connection with service agreements, a capital lease agreement, several debt
and equity financings and a reseller agreement. The Company has deemed the
fair market value of such warrants, using the Black-Scholes method, to be
$822,000, $61,000, $5,700,000, $2,623,000 and $1,900,000, respectively. The
Company is amortizing the value of the warrants over
65
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the term of the related agreements which range from one to ten years.
Amortization expense for the years ended December 31, 1997, 1998 and 1999 was
$1,720,000, $767,000 and $989,000, respectively. The Company has reserved the
amount of shares necessary to meet the exercise of these warrants.
8. Employee Benefit Plans
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $158,000, $266,000 and $373,000 to the plan during the
years ended December 31, 1997, 1998 and 1999, respectively.
9. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $307.0 million and $177.0 million,
respectively. The net operating loss carryforwards will expire at various
dates beginning in the years 2003 through 2019, if not utilized.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1998 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ..................... $ 85,000 $ 118,000
Write-off of network equipment ....................... 4,000 4,000
Other, net ........................................... 3,000 5,000
-------- ---------
Total deferred tax assets .............................. 92,000 127,000
-------- ---------
Deferred tax liabilities:
Other, net ........................................... 2,000 2,000
-------- ---------
Net deferred tax assets ................................ 90,000 125,000
Valuation allowance .................................... (90,000) (125,000)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
2000, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 2000 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
In the future, as deferred tax assets are realized, the reversal of the
valuation allowance will result in a $1.9 million credit to paid in capital
for the tax benefit associated with disqualifying dispositions of stock
options or employee stock purchase plan shares.
66
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net valuation allowance increased by approximately $35.0 million in
1999 and $32.0 million in 1998.
10. Related Party Transactions--Other
A former officer of the Company is a majority shareholder of a vendor of
the Company. The Company incurred marketing fees to the vendor totaling
$2,600,000, $1,085,000 and $750,000 in the years ended December 31, 1997,
1998, and 1999, respectively.
11. Contingencies
Concentric has been named as a defendant in a lawsuit filed in New Jersey
state court on November 1, 1999. The complaint seeks statutory damages, treble
damages, and injunctive relief under the Telephone Consumer Protection Act of
1991 and alleges that, in or about March and June 1999, 9Net Avenue, Inc.
("9Net Avenue") transmitted unsolicited facsimiles advertising its services.
The suit has been brought as a purported class action on behalf of all
recipients of the allegedly unsolicited faxes. Concentric purchased the assets
of 9Net Avenue in October 1999 and plaintiff contends that Concentric has
succeeded to any liability 9Net Avenue incurred in connection with the alleged
faxes. Concentric intends to vigorously defend the claims against it; however,
there can be no guarantee that it will be successful or that this litigation
will not have a material adverse impact on its operations. In addition,
Concentric has received a subpoena from the New Jersey Attorney General
seeking information concerning the alleged transmission of unsolicited
facsimile advertising by 9Net Avenue and additional marketing materials
distributed by 9Net Avenue.
12. Business Combinations
On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. ("InterNex"). The transaction was
accounted for using the purchase method of accounting. The total purchase
price of approximately $23.9 million consisted of a $15.5 million cash payment
upon closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
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 arising from the acquisition is being amortized on a straight-line
basis over 5 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 period from April 1, 1998 through December 31, 1998 and
for the entire year 1999 are included in the consolidated results of
operations. The Company's historical consolidated financial statements
67
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 year ended December 31, 1998 include an
acquisition related charge of $1.3 million primarily related to severance
costs, reserves for redundant facilities and assets and professional fees.
In August 1998, the Company acquired all of the outstanding stock of
AnaServe, Inc. ("AnaServe"). The transaction was accounted for using the
purchase method of accounting. The total purchase price of approximately $13.0
million consisted of a $9.6 million cash payment upon closing and the
assumption of approximately $3.4 million of AnaServe's liabilities (including
acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets ........................................... $ 467
Computer and telecommunications equipment .......................... 497
Goodwill ........................................................... 11,630
Other intangible assets ............................................ 416
-------
Total purchase price allocation .................................. $13,010
=======
</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 one to four years.
In October 1999, the Company acquired all of the outstanding stock of 9Net
Avenue, Inc. ("9Net Avenue"). The transaction was accounted for using the
purchase method of accounting. The total purchase price of approximately $63.8
million consisted of 2,481,542 shares of Concentric common stock valued at
$50.0 million, approximately $800,000 cash payment upon closing and the
assumption of approximately $13.0 million of 9Net Avenue's liabilities
(including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets ........................................... $ 566
Computer and telecommunications equipment .......................... 5,171
Goodwill ........................................................... 58,021
-------
Total purchase price allocation................................... $63,758
=======
</TABLE>
Goodwill arising from the acquisition is being amortized on a straight-line
basis over 5 years.
The following unaudited pro forma information represents the combined
results of operations as if the acquisitions of InterNex, DeltaNet, AnaServe
and 9Net Avenue had occurred as of the beginning of the periods presented and
does not purport to be indicative of what would have occurred had the
acquisitions been made as of that date or the results which may occur in the
future.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
(In thousands, except per
share data)
<S> <C> <C> <C>
Pro forma net revenues ..................... $ 61,908 $ 92,281 $ 153,737
Pro forma net loss attributable to common
stockholders .............................. (74,049) (99,640) (121,486)
Pro forma net loss per share attributable to
common stockholders........................ (3.75) (3.42) (3.00)
</TABLE>
68
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma results include the historical operations of the Company and
the historical operations of the acquired businesses adjusted to reflect
certain pro forma adjustments. The pro forma results do not include the write-
off in 1998 of purchased research and development of $5.2 million since it is
considered a non-recurring adjustment.
13. Subsequent Event
Equity Investment
In February 2000, the Company sold all of its investment in Covad
Communications Group, Inc. for approximately $70.8 million. The Company will
record a gain on the sale of this asset of $60.8 million in the first quarter
of 2000.
In March 2000, the Company purchased approximately $5.0 million of Series C
Preferred stock from Asia OnLine, Inc. ("Asia OnLine"). The Company will
continue to record this investment at cost as the Company does not have
significant influence over Asia OnLine.
Merger
In January 2000 the Company announced that it agreed to be acquired by
NEXTLINK, a provider of a variety of voice services and high speed Internet
Access to the business market. In this transaction, both NEXTLINK and
Concentric will merge into a newly-formed company, to be renamed NEXTLINK
Communications, Inc., which will assume all of Concentric's and NEXTLINK's
outstanding debt obligations. In the transaction, each outstanding share of
NEXTLINK's Class A common stock and Class B common stock would be converted
into one share of Class A common stock or Class B common stock, as applicable,
of the corporation surviving the merger, which stock will be substantially
identical to NEXTLINK's Class A and Class B common stock. In addition, each
outstanding share of Concentric's common stock would be converted into 0.495
of a share of Class A common stock of the surviving corporation, unless the
trading price of Class A common stock at the effective time is less than or
equal to $90.91, in which case each outstanding share would be converted into
$45.00 of Class A common stock of the surviving corporation (based on the
trading price of NEXTLINK's Class A common stock prior to the effective time).
If at the effective time NEXTLINK's average stock price is less than $69.23,
each outstanding share of Concentric's common stock would covert into 0.650 of
a share of Class A common stock of the surviving corporation. The transaction
is subject to approval of Concentric stockholders and other customary closing
conditions, and is expected to close in the second quarter of 2000.
Acquisition
In February 2000 the Company acquired Internet Technology Group, Plc, a
provider of Internet access for consumers and dedicated access and hosting for
businesses in the UK and Europe. The transaction is valued at approximately
$217.0 million, consisting of 50% cash and 50% Concentric stock.
Stock Issuance
In January 2000 Williams Communications Group, Inc., a stockholder of the
Company, elected to receive 70,746 shares of common stock of the Company
valued at $2.0 million in lieu of payment pursuant to an August 1997 service
and equipment agreement.
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end
of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors--Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption,
"Executive Compensation" in the Company's Proxy Statement, which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption
"Security Ownership" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement, which information is
incorporated herein by reference.
70
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 above.
2. Financial Statement Schedule.
See Item 14(d) below.
3. Exhibits.
The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of
Registrant. (Incorporated by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-27241), as amended, declared
effective by the Securities and Exchange Commission ("SEC") on July
31, 1997).
3.2 Amended and Restated Bylaws of Registrant. (Incorporated by reference
from Registrant's Registration Statement on Form S-1 (File No. 333-
27241), as amended, declared effective by the SEC on July 31, 1997).
3.3 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 Senior Redeemable Exchangeable Preferred Stock, due 2010 of
the Registrant. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
4.1 Form of $150,000,000 12 3/4% Senior Notes due 2007. (Incorporated by
reference from Registrant's Registration Statement on Form S-4 (File
No. 333-45055), as amended, declared effective by the SEC on March
24, 1998).
4.2 Form of Warrant to purchase common stock. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
58641), as declared effective by the SEC on August 11, 1998).
10.1 Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
10.2 Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.3 Form of Director and Officer Indemnification Agreement. (Incorporated
by reference from Registrant's Registration Statement on Form S-1
(File No. 333-27241), as amended, declared effective by the SEC on
July 31, 1997).
10.4 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.5 Amended and Restated 1996 Stock Plan. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.6 1997 Stock Plan. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
10.7 1997 Employee Stock Purchase Plan. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.8* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies,
Inc., as amended on September 30, 1996, and October 23, 1996,
including Colocation Services Agreement, dated as of November 1,
1994, between the Registrant and Critical Technologies, Inc. and
amendments thereto. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
10.9* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.10* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996. (Incorporated by reference
from Registrant's Registration Statement on Form S-1 (File No. 333-
27241), as amended, declared effective by the SEC on July 31, 1997).
10.11* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation. (Incorporated by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-27241), as amended, declared effective by the SEC on July 31,
1997).
10.12* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
10.13* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to
Registrant by Assignment and Novation Agreement #2, dated as of
August 7, 1996. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333-27241), as amended,
declared effective by the SEC on July 31, 1997).
10.14* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
(Incorporated by reference from Registrant's Registration Statement
on Form S-1 (File No. 333-27241), as amended, declared effective by
the SEC on July 31, 1997).
10.15* Amended and Restated Employee Services and Staffing Agreement.
(Incorporated by reference from Registrant's Registration Statement
on Form S-1 (File No. 333-27241), as amended, declared effective by
the SEC on July 31, 1997).
10.16* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc. (Incorporated by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-27241), as amended, declared effective by the SEC on July 31,
1997).
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.17* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc. (Incorporated by reference from
Registrant's Registration Statement on Form S-1
(File No. 333-27241), as amended, declared effective by the SEC on
July 31, 1997).
10.18* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333- 27241), as amended,
declared effective by the SEC on July 31, 1997).
10.19* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between
the Corporation and Racal. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.20* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996. (Incorporated by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-27241), as amended, declared effective by the SEC on July 31,
1997).
10.21* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994. (Incorporated by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-27241), as amended, declared
effective by the SEC on July 31, 1997).
10.22 Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.23 Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley. (Incorporated by reference
from Registrant's Registration Statement on Form S-1 (File No. 333-
27241), as amended, declared effective by the SEC on July 31, 1997).
10.24* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended. (Incorporated by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-27241), as amended, declared
effective by the SEC on July 31, 1997).
10.25* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc. (Incorporated by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-27241),
as amended, declared effective by the SEC on July 31, 1997).
10.26* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation. (Incorporated by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-27241), as amended, declared effective by the SEC on July 31,
1997).
10.27 Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc.
("WCG"). (Incorporated by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-27241), as amended, declared
effective by the SEC on July 31, 1997).
10.28 Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG. (Incorporated by reference from Registrant's
Registration Statement on Form S-1
(File No. 333- 27241), as amended, declared effective by the SEC on
July 31, 1997).
10.29 $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG. (Incorporated by reference from Registrant's
Registration Statement on Form S-1
(File No. 333- 27241), as amended, declared effective by the SEC on
July 31, 1997).
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.30 Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG. (Incorporated by reference from
Registrant's Registration Statement on Form S-1
(File No. 333-27241), as amended, declared effective by the SEC on
July 31, 1997).
10.31* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape").
(Incorporated by reference from Registrant's Registration Statement
on Form S-1 (File No. 333-27241), as amended, declared effective by
the SEC on July 31, 1997).
10.32* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333- 27241), as amended,
declared effective by the SEC on July 31, 1997).
10.33* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape. (Incorporated by reference from Registrant's
Registration Statement on Form S-1 (File No. 333- 27241), as amended,
declared effective by the SEC on July 31, 1997).
10.34 Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield & Byers VII and KPCB
Information Science Zaibatsu Fund VII. (Incorporated by reference
from Registrant's Registration Statement on Form S-1 (File No. 333-
27241), as amended, declared effective by the SEC on July 31, 1997).
10.35* Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
(Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the SEC on
November 14, 1997).
10.36 Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns & Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers").
(Incorporated by reference from Registrant's Registration Statement
on Form S-4 (File No. 333-45055), as amended, declared effective by
the SEC on March 24, 1998).
10.37 Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
45055), as amended, declared effective by the SEC on March 24, 1998).
10.38 Warrant Agreement, dated as of December 18, 1997, between the
Registrant and Chase Manhattan Bank and Trust Company, National
Association, as warrant agent. (Incorporated by reference from
Registrant's Registration Statement on Form S-4 (File No. 333-45055),
as amended, declared effective by the SEC on March 24, 1998).
10.39 Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers. (Incorporated by
reference from Registrant's Registration Statement on Form S-4 (File
No. 333-45055), as amended, declared effective by the SEC on March
24, 1998).
10.40 Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
(Incorporated by reference from Registrant's Registration Statement
on Form S-4 (File No. 333-45055), as amended, declared effective by
the SEC on March 24, 1998).
10.41 Standard Industrial Lease, dated as of February 17, 1995, by and
between Tiara Computer Systems, Inc. and InterNex Information
Services, Inc. (Incorporated by reference from Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.42 Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and InterNex Information Service, Inc.
(Incorporated by reference from Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.43 Form of Warrant to purchase common stock. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
58641), as declared effective by the SEC on August 11, 1998).
10.44 Purchase Agreement, dated as of June 3, 1998, by and among the
Registrant and the Initial Purchasers. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
58641), as declared effective by the SEC on August 11, 1998).
10.45 Registration Rights Agreement, dated as of June 8, 1998, by and among
the Registrant and the Initial Purchasers. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
58641), as declared effective by the SEC on August 11, 1998).
10.46 Form of Indenture for Exchange Debentures. (Incorporated by reference
from Registrant's Registration Statement on Form S-4 (File No. 333-
58641), as declared effective by the SEC on August 11, 1998).
10.47* Carrier Agreement by and between the Registrant and MCI
Telecommunications Corporation, dated August 12, 1998. (Incorporated
by reference from Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed with the SEC on November 16,
1998).
10.48 Stock Purchase Agreement by and between the Registrant and
Southwestern Bell Internet Services, Inc., dated October 19, 1998.
(Incorporated by reference from Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, filed with the
SEC on November 16, 1998).
10.49* Amendment Number Four to Virtual Private Services Agreement between
the Registrant and WebTV, Inc., dated November 18, 1998.
(Incorporated by reference from Registrant's Registration Statement
on Form S-3 (File No. 333-71235) filed with the SEC on January 27,
1999).
10.50 Form of 1999 Non-Statutory Stock Option Plan. (Incorporated by
reference from Registrant's Annual Report on Form 10-KA for the
fiscal year ended December 31, 1998).
10.51* Definitive Agreement between SBC Operations, Inc. and the Registrant,
dated April 1, 1999. (Incorporated by reference from Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
filed with the SEC on August 14, 1999).
10.52* WebTV 2000 Pricing Term Sheet, dated June 18, 1999, between WebTV and
the Registrant. (Incorporated by reference from Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
filed with the SEC on August 14, 1999).
10.53* Agreement, dated June 18, 1999, between Microsoft Corporation and the
Registrant. (Incorporated by reference from Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, filed with
the SEC on August 14, 1999).
10.54 Sublease agreement, dated September 1999 between the Registrant and
Raytheon Company.
10.55 Lease agreement, dated May 26, 1999 between the Registrant and Haseko
Management, Inc.
10.56 Sublease agreement, dated December 22, 1999 between the Registrant and
Williams Communications, Inc.
10.57 Lease agreement, dated December 15, 1999 between the Registrant and
SSP Associates, Inc.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1+ Power of Attorney (see signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Certain information in this exhibit was omitted and filed separately with
the SEC pursuant to a confidential treatment request.
+ Previously filed.
75
<PAGE>
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October 22, 1999 to
report under Item 5 the acquisition of substantially all of the assets of 9Net
Avenue, Inc. for approximately $51.8 million and the assumption of
approximately $9.9 million of liabilities.
The Company filed a Current Report on Form 8-K dated January 12, 2000 to
report under Item 5 the Agreement and Plan of Merger and Share Exchange
Agreement under which each share of Concentric stock shall be exchanged for a
fractional share of common stock of NEXTLINK Communications, Inc.
The Company filed a Current Report on Form 8-K dated February 14, 2000 to
report under Item 2 the acquisition of all of the outstanding capital stock of
Internet Technology Group for approximately $115.4 million in cash and
4,728,130 shares of Concentric common stock.
(c) Exhibits.
See item 14(a)(3) above.
(d) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance Additions Deductions
at Charge to Uncollectable Balance at
Beginning Costs & Accounts End of
Description of Period Expenses Written Off Period
- ----------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
For the period ended December
31, 1999 ...................... $990,354 $1,021,572 $593,307 $1,418,619
For the period ended December
31, 1998 ...................... 80,049 1,455,356 545,051 990,354
For the period ended December
31, 1997 ...................... 56,000 40,000 15,951 80,049
</TABLE>
All other schedules have been omitted because the required information is
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements
including the notes thereto.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2000 CONCENTRIC NETWORK CORPORATION
/s/ Henry R. Nothhaft
By: _________________________________
Henry R. Nothhaft
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESES PRESENTS, that each person whose signature
appears below constitutes and appoints Henry R. Nothhaft and Michael F.
Anthofer and each of them singly, as true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign this Annual Report on
Form 10-K filed herewith and any or all amendments to said report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the foregoing, as to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Henry R. Nothhaft President and Chief March 29, 2000
____________________________________ Executive Officer
Henry R. Nothhaft (Principal Executive
Officer), Director,
Chairman of the Board
/s/ Michael F. Anthofer Chief Financial Officer March 29, 2000
____________________________________ (Principal Financial and
Michael F. Anthofer Accounting Officer)
/s/ Vinod Khosla Director March 29, 2000
____________________________________
Vinod Khosla
Director
____________________________________
Franco Regis
Director
____________________________________
Randy Katz
/s/ Peter C. Waal Director March 29, 2000
____________________________________
Peter C. Waal
</TABLE>
/s/ Henry R. Nothhaft
*By: __________________________
Henry R. Nothhaft
Director
March 29, 2000
77
<PAGE>
EXHIBIT 10.54
SUBLEASE
--------
THIS SUBLEASE (this "Sublease") is made and entered into this _____ day of
September, 1999, by and between Raytheon Company, a Delaware corporation
("Sublessor"), and Concentric Network Corporation, a Delaware corporation
("Sublessee").
R E C I T A L S
- - - - - - - -
A. Tiburon Systems, Inc. ("Tiburon") entered into that certain Lease dated
May 23, 1991, an option agreement dated September 18, 1991 and amendments dated
April 7, 1992 and July 28, 1992 (collectively, "Master Lease"), with The Sobrato
Group, a California limited partnership ("Master Lessor"), for the lease of that
certain real property commonly known as 1290 Parkmoor Avenue, San Jose, CA,
consisting of approximately 66,479 square feet (the "Master Premises"). A copy
of the Master Lease is attached as Exhibit "A" hereto.
B. Texas Instruments Incorporated ("TI") purchased the stock of Tiburon on
September 22, 1995 and assignment of the lease to TI was approved by the Master
Lessor on October 31, 1995.
C. TI assigned the Master Lease to Raytheon TI Systems Inc., a wholly
owned subsidiary of Sublessor and said assignment was consented to by Master
Lessor on May 27, 1997.
D. Raytheon TI Systems was merged into Sublessor on December 28, 1998.
E. Sublessor and Sublessee desire to provide for a sublease of the Master
Premises consisting of approximately 66,479 rentable square feet, (the
"Premises") pursuant to the provisions hereof.
NOW, THEREFORE, the parties agree as follows:
1. SUBLEASE. Subject and pursuant to the provisions hereof, Sublessor
--------
subleases to Sublessee, and Sublessee subleases from Sublessor, the Premises.
2. TERM. The term of this Sublease shall be for approximately Twenty Nine
----
(29) months (the "Term") commencing on the latter of November 1, 1999 or the
date on which Sublessor has delivered legal possession of the Premises to
Sublessee in the condition required hereunder (the "Commencement Date") and
ending on March 22, 2002, unless sooner terminated hereunder. If the
Commencement Date has not occurred for any reason whatsoever (other than delay
on the part of Sublessee) on or before February 28, 2000, then, Sublessee may
terminate the Sublease by written notice to Sublessor, whereupon any monies
previously paid by Sublessee to Sublessor shall be reimbursed to Sublessee or,
at Sublessee's election, the date Sublessee is otherwise obliged to commence
payment of Rent shall be delayed by one day for each day that the Commencement
Date is delayed beyond such date.
1
<PAGE>
3. RENT. During the term of this Sublease, Sublessee shall pay as rent
----
("Rent") for the Premises an amount equal to the monthly Rent under the Master
Lease, which at the commencement of this sublease is $84,999.99. The Rent shall
increase periodically during the term pursuant to the same terms and conditions
by which Rent shall increase under the Master Lease.
Rent shall be paid to Sublessor without demand, deduction, set-off or
counterclaim, in advance on the first day of each calendar month during the term
of this Sublease, and in the event of a partial rental month, rent shall be
prorated on the basis of the number of days in the month. Sublessee shall pay to
Sublessor upon the execution hereof the first full monthly installment of Rent.
In addition to the above Sublessee shall pay to Sublessor on a monthly basis as
Additional Rent all costs and expenses attributable to the Premises payable
under the Master Lease, as incorporated herein, including but not limited to
utilities, real estate taxes, insurance and other operating expenses which
Sublessor is required to pay under the Master Lease. In no event shall
Sublessee's obligation to pay Additional Rent exceed the amount attributable to
the Premises due and payable by Sublessor under the Master Lease. To the extent
paid by Sublessee, Sublessee shall be entitled to all credits, if any, given by
Master Lessor to Sublessor for Sublessor's overpayments of Additional Rent.
Payment of all Rent Additional Rent and other amounts due and payable from
Sublessee to Sublessor, shall paid in accordance with this Lease at the
following address, or such other address as the Sublessor shall instruct the
Sublessee in writing:
Raytheon Company
7700 Arlington Boulevard
Falls Church, VA 22042-2900
ATTN: Angie Rickett
4. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
----------------
Sublessee's execution hereof Eighty-five Thousand dollars ($85,000.00)
("Deposit") as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
in each case after expiration of applicable notice and cure periods Sublessor
may use, apply or retain all or any portion of the Deposit for the payment of
any rent or other charge in default or for the payment of any other sum to which
Sublessor may become obligated by reason of Sublessee's default, or to
compensate Sublessor for any loss or damage which Sublessor may suffer thereby
to the extent permitted by law. If Sublessor so uses or applies all or any
portion of the Deposit, Sublessee shall within ten (10) days after written
demand therefor deposit cash with Sublessor in an amount sufficient to restore
the Deposit to its full amount and Sublessee's failure to do so shall be a
material breach of this Sublease. Sublessor shall not be required to keep the
Deposit separate from its general accounts. If Sublessee performs all of
Sublessee's obligations hereunder, the Deposit, or so much thereof as has not
theretofore been applied by Sublessor, shall be returned, without payment of
interest or other increment for its use to Sublessee (or at Sublessor's option,
to the last assignee, if any, of Sublessee's interest
2
<PAGE>
hereunder) at the expiration of the term hereof, and after Sublessee has vacated
the Premises. No trust relationship is created herein between Sublessor and
Sublessee with respect to the Deposit. Any deposit under the Master Lease which
may be returned by the Master Lessor shall be the property of Sublessor.
5. USE. Sublessee shall use and occupy the Premises only for the purposes
---
described in Section 3 of the Master Lease and for no other purpose without the
Sublessor's and Master Lessor's prior written consent.
6. MASTER LEASE.
------------
6.01 COMPLIANCE WITH MASTER LEASE.
----------------------------
(a) Definitions. Except as otherwise expressly provided herein,
-----------
during the Term and for all subsequent periods with respect to obligations
arising prior to the termination of the Sublease, Sublessee shall comply with
and perform, for the benefit of Master Lessor and Sublessor, all of the terms,
covenants, conditions and obligations of the "tenant" or "lessee" under the
Master Lease allocable or applicable to the Premises. Such terms, covenants,
conditions and obligations shall, unless the context of the Master Lease
indicates otherwise, be applied with the terms "Sublessor" and "Sublessee"
substituted respectively for "Landlord" (or "Lessor") and "Tenant" (or "Lessee")
and with the term "Premises" under the Master Lease meaning the Premises demised
hereunder. Sublessee acknowledges that it has read the attached copy of the
Master Lease and agrees that this Sublease shall be subject and subordinate to
the provisions thereof Sublessee shall not do, permit or suffer any act,
occurrence or omission which if done, permitted or suffered by Sublessor would
be (with notice, the passage of time or both) in violation of or default by the
tenant under the Master Lease, or could lead in any respect to the termination
of the Master Lease.
(b) Consents. Sublessor shall use reasonable efforts to obtain
--------
from the Master Lessor any approvals or consents reasonably requested by
Sublessee and any work, services, repairs or other performance to be performed
by the Master Lessor under the Master Lease; provided, however, in the case of
legal proceedings requested by Sublessee to be instituted, Sublessee shall
indemnify, defend, protect and hold Sublessor harmless from and against any
legal fees and disbursements and all other costs, expenses, liabilities, claims
and obligations incurred by or asserted against Sublessor in connection with any
such proceedings.
6.02 INCORPORATION BY REFERENCE.
--------------------------
(a) Incorporation. Subject to the provisions of Section 6.01 and
-------------
this Section 6.02 and this Sublease, the provisions of the Master Lease are
hereby incorporated by this reference; provided, however, that in the event that
any provision of the Master Lease shall explicitly conflict with the provisions
of this Sublease, the provisions of this Sublease shall prevail.
(b) Deletions. Notwithstanding any provision of this Sublease
---------
to the contrary, Sublessee shall not be responsible, and does not expressly
assume, the following
3
<PAGE>
provisions of the Master Lease: Option to Lease document dated September 18,
1991, Article 5, 7, 37, 37(a), 40, 42 Exhibits B-F. References in the following
provisions to "Landlord" shall mean "Master Lessor": Articles 13, 28, 30, 31
(the first sentence only) and 43. The first reference to "Landlord" in the fifth
line of Section 19 shall mean Master Lessor. In addition, (a) Sublessor shall
not exercise its "recapture" right under Section 29 (i) unless Master Lessor
exercises such right under the Master Lease, (b) Sublessor shall not withhold
its consent to a sublease due to Section 29(d) unless Master Lessor withholds
its consent and (c) the limitation on liability in Section 41 shall apply to
Master Lessor only. Sublessor agrees that it will not extend the term of the
Master Lease, including any exercise of the option to extend in Section 37 of
the Master Lease.
As to the aforesaid provisions, Sublessor shall agree to perform and be
responsible for the same.
6.03 NO ASUMPTION BY SUBLESSOR. Sublessor does not assume the obligations
-------------------------
of the Master Lessor under the Master Lease. Sublessee acknowledges that
Sublessor's obligation to perform services, provide utilities, make repairs and
carry insurance shall be satisfied only to the extent that the Master Lessor
under the Master lease satisfies those same obligations. With respect to the
performance by Master Lessor of its obligations under the Master Lease,
Sublessor's sole obligation with respect thereto will be to request the same, on
request in writing from Sublessee, and to use reasonable efforts to obtain the
same from Landlord; provided, however, Sublessor will have no obligation to
institute legal action against Master landlord.
6.04 PERFORMANCE DIRECTLY TO LANDLORD. At any time and on reasonable prior
--------------------------------
notice to Sublessee, Sublessor may elect to require Sublessee to perform its
obligations under this Sublease directly to the Master Lessor, in which event
Sublessee will send to Sublessor from time to time copies of all notices and
other communications it will send to and receive from Master Lessor.
6.05 TERMINATION OF MASER LEASE. If the Master Lease terminates under the
--------------------------
specific provisions of the Master Lease, this Sublease will terminate, unless
the Master Lessor elects to accept this Sublease as a direct lease between the
Master Lessor and Subtenant, and the parties will be relieved from all
liabilities and obligations under this Sublease excepting obligations which have
accrued as of the date of the termination.
7. MODIFICATIONS TO CERTAIN INCORPORATED PROVISIONS. Notwithstanding the
------------------------------------------------
incorporation of the provisions of the Master Lease above provided in Paragraph
6, certain of those provisions as the same apply to this Sublease are modified
as follows:
7.01 NOTICES. In the event that Sublessor shall receive any notice from
-------
Master Lessor for any reason pertaining to the Master Lease, then, within three
(3) days from the date of such receipt, Sublessor shall send a copy of such
notice to Sublessee.
4
<PAGE>
The provisions of the Master Lease regarding the giving of notices
shall apply to the Sublease, and notices to Sublessor and Sublessee shall be
sent to the following address::
Notices To Sublessor: Raytheon Company
Office of General Counsel
141 Spring Street
Lexington, MA 02421
Attention: Robert Moore
Notices To Sublessee: Concentric Network Corporation
1400 Parkmoor Avenue
San Jose, CA 95126
Attention: Peter Bergeron
7.02 CONDITION OF PREMISES. Sublessee has inspected the Premises and
---------------------
all improvements located thereon, and has agreed to accept the Premises in an
"AS-IS" condition, in its condition existing as of the date of this Sublease
subject to all applicable municipal, county, state and federal laws, ordinances
and regulations governing and regulating the use and occupancy of the Premises,
and accepts the Sublease subject thereto and to all matters disclosed thereby,
without warranty or representation concerning the same. Sublessor hereby
acknowledges that the Premises are to be delivered to Sublessee at the
commencement of the term of the Sublease, unoccupied, and in a broom-swept
condition. Sublessee acknowledges that the taking of possession of the Premises
by Sublessee will be conclusive evidence that the Premises were in good and
satisfactory condition at the time possession was taken. Sublessee specifically
agrees that, except as specifically provided by laws in force as of the date
hereof, Sublessor has no duty to make any disclosures concerning the condition
of the Buildings or Premises and/or the fitness of the Buildings or Premises for
Sublessee's intended use.
7.03 ASSIGNMENT, SUBLETTING AND ENCUMBRANCE. Sublessee shall not
--------------------------------------
voluntarily or involuntarily assign, sublet, mortgage or otherwise encumber all
or any portion of its interest in this Sublease or in the Premises, without
obtaining the prior written consent of Sublessor thereto, which Sublessor may
grant or withhold in Sublessor's reasonable discretion. Any assignment,
subletting, mortgage or other encumbrance attempted by Sublessee to which
Sublessor has not consented in writing shall be null and void and of no effect.
7.04 ALTERATIONS.
-----------
(a) Alterations and Improvements By Sublessee. Sublessee
-----------------------------------------
shall not make any alterations, additions or improvements to the Premises
(collectively "Alterations") without obtaining the prior written consent of
Sublessor thereto, which Sublessor may grant or withhold, and to which Sublessor
may impose any conditions in Sublessor's reasonable discretion. All such
Alterations shall be constructed only after necessary permits, licenses and
approvals have been obtained from appropriate governmental agencies and all
improvements shall be constructed as to conform to all relevant codes,
regulations, and ordinances. All such Alterations shall be made at Sublessee's
sole cost and shall be diligently prosecuted to
5
<PAGE>
completion. All such alterations shall be subject to all of the terms and
conditions imposed under the Master Lease. In addition to consent of the
Sublessor, consent of the Master Lessor, if required under the Master lease
shall also be a precondition to Sublessee commencing any improvements to the
Premises.
Any contractor or person making such Alterations shall first be approved in
writing by Sublessor. Upon the expiration or earlier termination of this
Sublease, Sublessor may elect to have Sublessee either (i) surrender with the
Premises any or all of such Alterations as Sublessor shall determine (except
personal property Sublessee's equipment and trade fixtures as provided in
Subsection (b) below), in which case, such Alterations shall become the property
of Sublessor, or (ii) in the event Master Lessor requires Sublessor to remove
the Alterations under the Master Lease, Sublessee shall promptly remove any or
all of such Alterations designated by Master Lessor or Sublessor to be removed,
in which case, Sublessee shall repair and restore the Premises to its original
condition as of the Commencement Date, reasonable wear and tear, casualty and
condemnation excepted. Sublessee shall permit no mechanic's or other liens to be
recorded against the Premises. Should a lien be made or filed against the
Premises Master Premises or real property on which the Premises are situated,
Sublessee at its sole cost, shall bond against or discharge said lien within 10
days after Sublessor's or Master Lessor's request to do so. Notwithstanding
anything to the contrary herein, Sublessor shall not require Sublessee to remove
or restore any Alterations unless Master Lessor requires Sublessor to remove,
restore or pay the cost of removing or restoring such Alterations.
(b) Removal of Personal Property. All articles of personal property,
----------------------------
and all business and trade fixtures, machinery and equipment, cabinet work,
furniture and movable partitions, if any, owned or installed by Sublessee at its
expense in the Premises shall be and remain the property of Sublessee and may be
removed by Sublessee at any time, provided that Sublessee, at its expense, shall
repair any damage to the Premises caused by such removal or by the original
installation. Sublessor may elect to require Sublessee to remove all or any part
of the aforementioned property at the expiration or sooner termination of the
Sublease, in which event such removal shall be done at Sublessee's expense, and
Sublessee shall at its own expense repair any damage to the Premises caused by
such removal prior to the termination of this Sublease.
(c) At the end of the Sublease Term, Sublessee shall restore the
Premises in accordance with the Terms of Article 8 of the Master Lease to the
condition required under the Master Lease as if the Sublessee were tenant under
the Master Lease.
7.05 HOLDING OVER. If Sublessee holds over after the expiration or
------------
earlier termination of this Sublease, with or without the express or implied
consent of Sublessor, then at the option of Sublessor Sublessee shall become and
be only a holdover tenancy at a rent equal to the greater of(a) one hundred
fifty percent (150%) of the Rent payable by Sublessee immediately prior to such
expiration or termination or (b) one hundred and fifty (150%) percent of the
Fair Market Rental (as defined in the master lease), pro rated on a daily basis
and otherwise upon the terms, covenants and conditions herein specified.
Notwithstanding any provision to the contrary contained herein, (i) Sublessor
expressly reserves the right to require Sublessee to surrender possession of the
Premises upon the expiration of the Term or upon the
6
<PAGE>
earlier termination hereof and the right to assert any remedy at law or in
equity to evict Sublessee and/or collect damages in connection with any such
holding over, and (ii) Sublessee shall indemnify, defend and hold Sublessor
harmless from and against any and all claims, demands, actions, losses, damages,
obligations, costs and expenses, including, without limitation, attorneys' fees
incurred or suffered by Sublessor by reason of Sublessee's failure to surrender
the Premises on the expiration or earlier termination of this Sublease in
accordance with the provisions of this Sublease.
8. ENVIRONMENTAL MATTERS.
---------------------
8.01 HAZARDOUS MATERIAL. As used herein, the term "Hazardous Material"
------------------
means any hazardous, toxic, explosive or radioactive substance, material or
waste which is or becomes regulated by any local governmental authority, the
State of California or the United States Government, including, without
limitation, any material or substance which is (i) defined or listed as a
"hazardous waste," "extremely hazardous waste," "restricted hazardous waste,"
"hazardous substance," "hazardous material," "pollutant" or "contaminant" under
any applicable federal, state or local law or administrative code promulgated
thereunder, (ii) petroleum, (iii) asbestos, (iv) flammable explosives, (v)
radioactive materials or (vi) polychlorinated biphenyls.
8.02 SUBLESSEE'S USE OF PREMISES. Sublessee hereby agrees, represents,
---------------------------
covenants, and warrants that neither it nor its employees, agents, contractors,
sublessees, assignees, licensees and invitees, shall engage in or permit to
exist anywhere in, on, under above or about the Premises any Hazardous Material
without Sublessor's prior written consent. Notwithstanding the foregoing,
Sublessee may, but in strict compliance with all Environmental Laws, use
deminimus amounts of ordinary and customary materials such as office supplies
reasonably required in the normal course of Sublessee's use of the Premises for
general office purposes, so long as Sublessee's use of such materials does not
expose the Premises or any other adjacent property to any risk of contamination
by a Hazardous Material or expose the Landlord to any liability therefore.
8.03 INDEMNIFICATION OF SUBLESSOR. Sublessee shall indemnify, defend,
----------------------------
protect and hold Sublessor and its partners, officers, directors, employees,
trustees, successors, assigns, agents, servants, affiliates, representatives and
contractors (collectively, herein "Sublessor Affiliates") harmless from any and
all claims, actions, administrative proceedings (including informal
proceedings), judgments, damages, punitive and consequential damages, penalties,
fines, costs, liabilities, interest or losses, including reasonable attorneys'
fees and expenses, consultant fees, and expert fees, together with all other
costs and expenses of any kind or nature that arise during or after the term of
this Sublease directly or indirectly from, attributable to or in connection with
the presence, suspected presence, release or suspected release of any Hazardous
Material in or into the air, soil, surface, surface water or groundwater at, on,
about, under or within the Premises or the Master Premises, or any portion
thereof, by Sublessee, Sublessee Affiliates, or any invitee of Sublessee.
8.04 MASTER LEASE. In addition to the obligations of this Section 8,
------------
Sublessee agrees to be bound and fulfill all environmental provisions of the
Master Lease and those provisions are hereby incorporated and restated.
7
<PAGE>
8.05 SURVIVABILITY. Each of the covenants and agreements of Sublessee
-------------
set forth in this Section 8 shall survive the expiration or earlier termination
of this Sublease.
9. REPRESENTATIONS AND WARRANTIES BY SUBLESSOR. Sublessor represents and
-------------------------------------------
warrants, to the best of Sublessor's knowledge, as follows:
a. Sublessor is the "Tenant" or "Lessee" under the Master Lease, and
that no portion of the Premises have been assigned or sublet to any other person
or entity other than Sublessee;
b. The Master Lease is in full force and effect and has not been
modified, altered or amended except as herein identified and the copy of the
Master Lease attached hereto is a true, correct and complete copy of the Master
Lease;
c. Sublessor has not received any written notice of default under the
Master Lease or notice of termination of the Master Lease from Master Lessor,
nor has Sublessor received any written notice of violation or condemnation from
any federal, state, municipal or local governmental authority relating to the
Premises; and
d. Sublessor has not received a Notice of Default from Master Lessor
that remains uncured, and to the best of the actual knowledge of Sublessor,
there exists under the Master Lease no default by either Master Lessor or
Sublessor.
10. INDEMNIFICATION: EXCULPATION
----------------------------
10.01 NON-LIABILITY OF SUBLESSOR. Sublessor shall not be liable to
--------------------------
Sublessee and Sublessee hereby waives and releases all claims against Sublessor
and Sublessor Affiliates (as defined in Section 8.03 above) for injury or damage
to any person or property occurring or incurred in connection with or in any way
relating to the Premises or the Master Premises. Without limiting the foregoing,
neither Sublessor nor any of the Sublessor Affiliates shall be liable for and
there shall be no abatement of Rent for (i) any damage to Sublessee's property
stored with or entrusted to Sublessor or Sublessor Affiliates, (ii) loss of or
damage to any property by theft or any other wrongful or illegal act, or (iii)
any injury or damage to persons or property resulting from fire, explosion,
falling plaster, steam, gas, electricity, water or rain which may leak from
pipes, appliances, appurtenances or plumbing works therein or from the roof,
street or sub-surface or from any other place or resulting from dampness or any
other cause whatsoever or from the acts or omissions of other sublessees,
occupants or other visitors to the Premises or the Master Premises or from any
other cause whatsoever, or (iv) any latent or other defect in the Premises or
the Master Premises. Notwithstanding anything to the contrary herein, Sublessor
shall not be released or indemnified from any losses, damages, liabilities,
claims, attorneys' fees, costs and expenses arising from the gross negligence or
willful misconduct of Sublessor or Sublessor's Affiliates, Sublessor's violation
of any law, order or regulation, or breach of Sublessor's obligations or
representations under the Sublease.
8
<PAGE>
10.02 INDEMNIFICATION OF SUBLESSOR. Sublessee shall indemnify,
----------------------------
defend, protect and hold Sublessor harmless from and against any and all claims,
suits, judgments, losses, costs, obligations, damages, expenses, interest and
liabilities, including, without limitation, actual attorneys' fees and costs,
incurred or asserted in connection with (i) injury or damage to any person or
property whatsoever arising out of or in connection with this Sublease, the
Premises or Sublessee's activities in or about the Premises including, without
limitation, when such injury or damage has been caused in whole or in part by
the act, negligence, fault or omission of Sublessee, its agents, servants,
contractors, employees, representatives, licensees or invitees, or (ii) any
breach or default by Sublessee of its obligations under this Sublease. The
provisions of this Section 10.02 shall survive the expiration or earlier
termination of this Sublease.
10.03 MASTER LESSOR DEFAULT; CONSENTS. Notwithstanding any provision
-------------------------------
of this Sublease to the contrary, provided Sublessor performs its obligations
hereunder, (a) Sublessor shall not be liable or responsible in any way for any
loss, damage, cost, expense, obligation or liability suffered by Sublessee by
reason or as the result of any breach, default or failure to perform by the
Master Lessor under the Master Lease and (b) whenever the consent or approval of
Sublessor and Master Lessor is required for a particular act, event or
transaction (i) any such consent or approval by Sublessor shall be subject to
the consent or approval of Master Lessor and (ii) should Master Lessor refuse to
grant such consent or approval, under all circumstances, Sublessor shall be
released from any obligation to grant its consent or approval.
11. INSURANCE. Sublessee shall procure and maintain, at its own cost and
---------
expense, such insurance as is required to be carried by Sublessor under the
Master Lease as incorporated herein, naming Sublessor, as well as Master Lessor,
in the manner required therein.
12. MISCELLANEOUS.
-------------
12.01 COUNTERPARTS. This Sublease may be executed in one or more
------------
counterparts by the parties hereto. All counterparts shall be construed together
and shall constitute one agreement.
12.02 SOLE AGREEMENT. This Agreement contains all of the
--------------
understandings of the parties and all representations made by either party to
the other are merged herein.
12.03 MODIFICATION. This Agreement may not be modified in any respect
------------
except by a document in writing executed by both parties hereto or their
respective successors.
12.04 ATTORNEYS' FEES. If any party commences an action against the
---------------
other, the prevailing party shall be entitled to recover from the losing party
reasonable attorneys' fees and costs.
12.05 BINDING EFFECT. This Agreement shall be binding on and inure to
--------------
the benefit of the parties and their respective heirs, successors and assigns.
9
<PAGE>
12.06 BROKER COMMISSION. Sublessee acknowledges that Cushman &
-----------------
Wakefield of California and Spallino Reid Corporate Real Estate Services (the
"Brokers") are the only real estate brokers responsible for bringing about or
negotiating this Lease and are the only Brokers with whom Sublessee has dealt
with regarding this Lease. In addition to any other Rent or Additional Rent,
Sublessee agrees to pay Sublessor $5,659.71 per month for each month during the
term of this sublease. This payment is to reimburse Sublessor for the brokerage
commission amortized over the term of the Sublease at 8.5%. In the event that
the Sublease terminates before March 31, 2002, due in any part to a default by
Sublessee, Sublessee shall immediately pay, in additional to any other amounts
which may then be due and payable, a payment which equals the number of months
remaining from the date of termination to March 31, 2002 times $5,659.71.
12.07 SUBLESSORS OBLIGATIONS. Provided Sublessee is not in default,
----------------------
Sublessor shall not terminate or take any actions which could give rise to the
termination of the Master Lease, amend or waive any provisions under the Master
Lease or make any elections, exercise any right or remedy or give any consent or
approval under the master Lease to the extent the foregoing would have a
material adverse effect on Sublessee's rights or obligations hereunder without
in each instance, Sublessee's prior written consent not unreasonably withheld.
Sublessor, with respect to the obligations of Master Lessor under the Master
Lease, shall use Sublessor's good faith efforts to cause Master Lessor to
perform such obligations for the benefit of Sublessee, however, nothing herein
shall require Sublessor to incur any costs or expenses. Such good faith efforts
shall include: (a) upon Sublessee's written request, promptly notifying Master
Lessor of its nonperformance under the Master Lease, and requesting that Master
Lessor perform its obligations under the Master Lease; and (b) permitting
Sublessee to commence a lawsuit or other action in Sublessor's name to obtain
the performance required from Master Lessor under the Master Lease; provided,
however, that if Sublessee commences a lawsuit or other action, Sublessee shall
pay all costs and expenses incurred in connection therewith, and Sublessee shall
indemnify Sublessor against, and hold Sublessor harmless from, all costs and
expenses incurred by Sublessor in connection therewith.
12.08 ASSIGNMENT OF RIGHTS. To the extent assignable and at no cost and
--------------------
expense to Sublessor, Sublessor hereby assigns to Sublessee all warranties and
indemnities made by Master Lessor to Sublessor under the Master Lease which
would reduce Sublessee's obligations hereunder, and shall cooperate with
Sublessee to enforce all such warranties and indemnities.
12.09 SUBORDINATION. Sublessor shall use its best efforts, without
-------------
incurring any cost or expense, to obtain from any lenders or ground Sublessor of
the Premises or the building in which the Premises are located a written
agreement providing for recognition of Sublessee's interests under the Sublease
in the event of a foreclosure of the lender's security interest or termination
of the ground lease. Further, prior to Sublessor's subordination of its
leasehold interest to a ground lease or instrument of security, Sublessor shall,
without being required to incur any costs or expenses, use reasonable efforts to
obtain from any such ground lessor or lenders such a recognition agreement. The
inability of Sublessor to obtain such recognition of the Sublessee shall not
constitute a default under this Sublease.
10
<PAGE>
12.10 AUTHORIZATION TO DIRECT SUBLEASE PAYMENTS. Sublessee shall have
-----------------------------------------
the right to pay all rent and other sums owing by Sublessee to Sublessor
hereunder for those items which also are owed by Sublessor to Master Lessor
under the Master Lease directly to Master Lessor if Sublessor fails to make any
payment required to be made by Sublessor to Master Lessor under the Master
Lease. Sublessee shall provide to Sublessor concurrently with any payment to
Master Lessor reasonable evidence of such payment. Any sums paid directly by
Sublessee to Master Lessor in accordance with this paragraph shall be credited
toward the amounts payable by Sublessee to Sublessor under the Sublease.
12.11 APPROVALS. Whenever the Sublease requires an approval, consent,
---------
designation, determination, selection or judgment by either Sublessor or
Sublessee, unless another standard is expressly set forth, such approval,
consent, designation, determination, selection or judgment and any conditions
imposed thereby shall be reasonable and shall not be unreasonably withheld or
delayed.
12.12 MASTER LESSOR CONSENT. The Sublease and the obligations of the
---------------------
parties thereto are conditioned upon receipt of Master Lessor's consent to the
Sublease. In the event that Master Lessor fails to consent to the Sublease as
provided in the Master Lease, and within the time period specified under the
Master Lease, either party shall have the right to terminate the Sublease.
12.13 CORPORATE AUTHORITY. If Tenant is a corporation, Tenant
-------------------
represents and warrants that each individual executing this Sublease on its
behalf is duly authorized to execute and deliver this Sublease 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 Sublease is binding upon said corporation in
accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hand on
the date first above written.
SUBLESSOR: SUBLESSEE:
RAYTHEON COMPANY CONCENTRIC NETWORK CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ Thomas D. Hyde By: /s/ Henry R. Nothhaft
-------------------------- -------------------------
Name: Thomas D. Hyde Name: Henry R. Nothhaft
------------------------
Title: Senior Vice President Title: Chairman, President & CEO
------------------------
Secretary & General Counsel
11
<PAGE>
[LOGO]
SOBRATO
DEVELOPMENT COMPANIES
LANDLORD'S CONSENT TO SUBLEASE
The Sobrato Group ("Landlord"), as Landlord under that certain Lease (the
"Lease") dated May 23, 1991 as amended by First Amendment to Lease dated April
7, 1992, and by Second Amendment to Lease dated July 28, 1992, by and between
Landlord and Raytheon TI Systems, Inc., as successor in interest to Texas
Instruments Inc., as successor in interest to Tiburon Ssytems, Inc. ("Tenant"),
as Tenant, subject to and specifically conditioned upon the following terms and
conditions hereby grants its consent to the Sublease dated October 25, 1999 made
by and between the Tenant, as sublandlord, and Concentric Network Corporation
("Subtenant"), as subtenant, a copy of which is attached as Exhibit B ("the
Sublease"), covering that certain premises (the "Premises") commonly known as
1290 Parkmoor Avenue, San Jose, California.
As conditions to the consent of Landlord to the Sublease, it is understood and
agreed as follows:
1. No Release. This Consent to Sublease shall in no way release the Tenant or
any person or entity claiming by, through or under Tenant, including Subtenant,
from any of its covenants, agreements, liabilities and duties under the Lease,
as the same may be amended from time to time, without respect to any provision
to the contrary in the Sublease.
2. Specific Provisions of Lease and Sublease. This Consent to Sublease
consenting to a sublease to Subtenant does not constitute approval by Landlord
of any of the provisions of the Sublease document or agreement thereto or
therewith; nor shall the same be construed to amend the Lease in any respect,
any purported modifications being solely for the purpose of setting forth the
rights and obligations as between Tenant and Subtenant, but not binding
Landlord. The Sublease is, in all respects, subject and subordinate to the
Lease, as the same may be amended. Furthermore, in the case of any conflict
between the provisions of this Consent to Sublease or the Lease and the
provisions of the Sublease, the provisions of this Consent to Sublease or (as
between Landlord and Tenant) the Lease, as the case may be, shall prevail
unaffected by the Sublease.
3. Limited Consent. This Consent to Sublease does not and shall not be construed
or implied to be a consent to any other matter for which Landlord's consent is
required under the Lease, including, without limitation, any Alterations under
the Lease.
4. Tenant's Continuing Liability. Tenant shall be liable to Landlord for any
default under the Lease, whether such default is caused by Tenant or Subtenant
or anyone claiming by or through either Tenant or Subtenant, but the foregoing
shall not be deemed to restrict or diminish any right which Landlord may have
against Subtenant pursuant to the Lease, in law or in equity for violation of
the Lease or otherwise,
<PAGE>
including, without limitation, the right to enjoin or otherwise restrain any
violation of the Lease by Subtenant.
5. Default by Tenant under the Lease. If Tenant defaults under the Lease,
Landlord may elect to receive directly from Subtenant all sums due or payable to
Tenant by Subtenant pursuant to the Sublease. Upon written notice from Landlord,
Subtenant shall thereafter pay to Landlord any and all sums due or payable under
the Sublease. In such event, Tenant shall receive from Landlord a corresponding
credit for such sums against any payments then due or thereafter becoming due
from Tenant.
6. Termination of Lease. If at any time prior to the expiration of the term of
the Sublease the Lease shall terminate or be terminated for any reason, the
Sublease shall simultaneously terminate. However, Subtenant agrees, at the
election and upon written demand of Landlord, and not otherwise, to attorn to
Landlord for the remainder of the term of the Sublease, such attornment to be
upon all of the terms and conditions of the Lease, except that the Base Rent set
forth in the Sublease shall be substituted for the Base Rent set forth in the
Lease and the computation of Additional Rent as provided in the Lease shall be
modified as set forth in the Sublease. The foregoing provisions of this
paragraph shall apply notwithstanding that, as a matter of law, the Sublease may
otherwise terminate upon the termination of the Lease and shall be self-
operative upon such written demand of the Landlord, and no further instrument
shall be required to give effect to said provisions. Upon the demand of
Landlord, however, Subtenant agrees to execute, from time to time, documents in
confirmation of the foregoing provisions of this paragraph satisfactory to
Landlord in which Subtenant shall acknowledge such attornment and shall set
forth the terms and conditions of its tenancy.
7. Sublease Profits. Landlord and Tenant agree that no consideration is due in
excess of base monthly rent pursuant to section 29 of the Lease Agreement.
8. No Waiver; No Privity. Nothing herein contained shall be deemed a waiver of
any of the Landlord's rights under the Lease. In no event, however, shall
Landlord be deemed to be in privity of contract with Subtenant or owe any
obligation or duty to Subtenant under the Lease or otherwise, any duties of
Landlord under the Lease being in favor of, for the benefit of and enforceable
solely by Tenant.
9. Notices. Subtenant agrees to promptly deliver a copy to Landlord of all
notices of default and all other notices sent to Tenant under the Sublease, and
Tenant agrees to promptly deliver a copy to Landlord of all such notices sent to
Subtenant under the Sublease. All copies of any such notices shall be delivered
personally or sent by United States registered or certified mail, postage
prepaid, return receipt requested, to Landlord.
10. Additional Provisions. Landlord and Subtenant further agree as follows:
(a) In the event that the Lease terminates prior to the expiration of
the term thereof for any reason other than as a result of an event
of default by Subtenant under the Sublease shall continue in full
force and effect as a direct lease between Landlord and Subtenant
upon all of the terms,
Page 2
<PAGE>
covenants and conditions of the Sublease; provided, however, that
the rental rate thereunder shall be increased to the same per square
foot rental rate schedule as in the Lease between Landlord and
Subtenant dated May 15, 1998 for the building located at 1400
Parkmoor Avenue, San Jose, California.
(b) Notwithstanding anything to the contrary herein, the release and
waiver of subrogation in Section 12 of the Lease shall apply as
between Landlord and Subtenant.
(c) Landlord shall not exercise any recapture right it may have under
the Lease in the event Subtenant sublets the Premises or assigns the
Sublease to an entity controlling, controlled by or under common
control with Subtenant, a successor entity related to Subtenant by
merger or consolidation, or a purchaser of substantially all of
Subtenant's assets or stock. Landlord acknowledges that Subtenant
intends to sublease portions of the Premises and agrees not to
exercise any recapture right that it may have with respect to such
subletting portions of the premises in the first year of the
Sublease term.
Landlord
The Sobrato Group, a California limited Partnership
by /s/ ["ILLEGIBLE"]
------------------
its GP.
-----------------
Tenant
Raytheon TI Systems, Inc., a Delaware corporation
by_____________________
its____________________
Subtenant
Concentric Network Corporation, a Delaware corporation
by /s/ ["ILLEGIBLE"]
--------------------
its Corporate Secretary
-------------------
Page 3
<PAGE>
covenants and conditions of the Sublease; provided, however, that the
rental rate thereunder shall be increased to the same per square foot
rental rate schedule as in the Lease between Landlord and Subtenant
dated May 15, 1998 for the building located at 1400 Parkmoor Avenue,
San Jose, California.
(b) Notwithstanding anything to the contrary herein, the release and
waiver of subrogation in Section 12 of the Lease shall apply as
between Landlord and Subtenant.
(c) Landlord shall not exercise any recapture right it may have under the
Lease in the event Subtenant sublets the Premises or assigns the
Sublease to an entity controlling, controlled by or under common
control with Subtenant, a successor entity related to Subtenant by
merger or consolidation, or a purchaser of substantially all of
Subtenant's assets or stock. Landlord acknowledges that Subtenant
intends to sublease portions of the Premises and agrees not to
exercise any recapture right that it may have with respect to such
subletting portions of the premises in the first year of the Sublease
term.
Landlord
The Sobrato Group, a California limited Partnership
by________________________
its_______________________
Tenant Raytheon Company, successor by merger to
Raytheon TI Systems, Inc, a Delaware corporation
by /s/ Thomas D. Hyde
-------------------------
Thomas D. Hyde
its Senior Vice President
---------------------
Secretary and General Counsel
Subtenant
Concentric Network Corporation, a Delaware corporation
by________________________
its_______________________
Page 3
<PAGE>
[LETTERHEAD APPEARS HERE]
SECOND AMENDMENT TO LEASE
This Amendment is made this 28th day of July 1992 by and between The
Sobrato Group having an address at 10600 N. De Anza Blvd., Suite 200,
Cupertino, California 95014 ("Landlord") and Tiburon Systems, Inc., a
California corporation ("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease ("Lease") dated May 23,
1991 for the premises ("Premises") located at 1290 Parkmoor Avenue, San
Jose, California.
WHEREAS effective July 28, 1992, Landlord and Tenant wish to modify the
Lease to reflect the increase in rent by acceptance of the Tenant
Improvement costs to Tenant in the amount of $897,219.33 totaling
$232,429.33 more than the Tenant Interior Improvement Allowance of
$664,790.00 as defined in paragraph 7 of the Lease; and
WHEREAS effective July 28, 1992, Landlord and Tenant wish to document the
elimination of the Option to Lease dated September 18, 1991 by and between
The Sobraro Group and Tiburon Systems, Inc., for the Option Building;
NOW, THEREFORE, in order to effect the intent of the parties as set forth
above and for good and valuable consideration exchanged between the
pasties, the Lease is amended effective July 28, 1992 as follows:
1. The initial monthly rent shall be increased by $3,486.44 per
month to a total of $71,959.81 per month;
2. The Option to Lease dated September 18, 1991 is hereby eliminated
and a rental credit of $35,000.00 given to Tenant;
3. Except as hereby amended, the Lease and all of the terms,
covenants and conditions thereof are ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have set their hands to this
Amendment as of the day and date first above written.
LANDLORD TENANT
The Sobrato Group Tiburon Systems, Inc.,
a California corporation
BY: /s/ ["ILLEGIBLE"] BY: /s/ ["ILLEGIBLE"]
----------------- ------------------
ITS: Trustee ITS: President
-----------------
<PAGE>
[LETTERHEAD APPEARS HERE]
FIRST AMENDMENT TO LEASE
This Amendment is made this 7/th/,day of April 1992 by and between The Sobrato
Group having an address at 10600 N. De Anza Blvd., Suite 200, Cupertino,
California 95014 ("Landlord") and Tiburon Systems, Inc., a California
corporation ("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease ("Lease") dated May 23, 1991
for the premises ("Premises") located at 1290 Parkmoor Avenue, San Jose,
California; and
WHEREAS effective March 23, 1992, Landlord and Tenant wish to modify the Lease
to document the Commencement Date based on Substantial Completion of the Tenant
Improvements which occurred on March 23, 1992;
NOW, THEREFORE, in order to effect the intent of the parties as set forth above
and for good and valuable consideration exchanged between the parties, the Lease
is amended effective March 23, 1992 as follows:
1. The Commencement Date of the Lease shall be March 23, 1992.
2. Except as hereby amended, the Lease and all of the terms, covenants and
conditions thereof are ratified and confirmed.
IN WITNESS WHEREOF, the parries hereto have set their hands to this Amendment as
of the day and date first above written.
LANDLORD TENANT
The Sobrato Group Tiburon Systems, Inc.,
BY: /s/ [ILLEGIBLE]^^ BY: /s/ [ILLEGIBLE]^^
--------------------- -----------------------
ITS: Trustee ITS: Facilities Mgr.
---------------------
<PAGE>
OPTION TO LEASE
THIS AGREEMENT is entered as of the 18th day of September, 1991, by and
between THE SOBRATO GROUP, a California Limited partnership (hereinafter
collectively called "Landlord"), and TIBURON SYSTEMS, INC. (hereinafter called
"Tenant"), a California corporation.
Recitals:
A. Concurrently with the execution of this Agreement, Landlord and Tenant
are entering into a lease (" 1290 Parkmoor Lease") respecting premises (the
"Premises") located at 1290 Parkmoor, San Jose, California.
B. As part of the consideration for Tenant entering into the 1290
Parkmoor Lease, Landlord is willing to grant to Tenant an option to lease a
building on adjacent land on which Landlord has an option to purchase outlined
on Exhibit A (the "Property"). Such building currently does not exist, but
Landlord agrees to exercise its option to purchase the Property and construct
the building if Tenant exercises such option to lease. Such building and
Property is herein referred to as the "Option Building".
C. The parties now wish to document the terms of such option to lease the
Option Building.
NOW, THEREFORE, in consideration of the execution of the 1290 Parkmoor
Lease by both parties, and in consideration of the mutual covenants set forth
below, the parties agree as follows:
1. Grant of Option. Landlord hereby grants to Tenant an option to lease
the Option Building (the "Option") subject to the terms and conditions set forth
in this Agreement.
2. Term of Option. Tenant shall be entitled to exercise the Option at any
time during the period commencing on the Commencement Date of the 1290 Parkmoor
Lease (as the Commencement Date is therein defined) and ending at 5:00 p.m. June
26, 1992. Such period shall herein be referred to as the "Option Period".
3. Exercise of Option. Tenant shall exercise the Option by delivery of
written notice to Landlord within the option Period of such exercise. Tenant
shall be entitled to exercise the option only if (i) Tenant has not been in
default under the terms of the 1290 Parkmoor Lease, and (ii) Tenant's financial
condition is such that an institutional lender is willing to commit to make a
non-recourse loan to Landlord in a minimum amount equal to seventy five percent
(75%) of the value of the Option Building.
4. Lease of the Option Building. Within thirty (30) days after Tenant's
exercise of the Option, Landlord and Tenant shall enter into a written lease of
the Option Building (the "Option Building Lease"). The Option Building Lease
shall be on the same terms as the 1290 Parkmoor Lease, except as follows:
(a) The Premises shall be Option Building. References in the 1290
Parkmoor Lease format shall be changed in the Option Building Lease to refer to
Option Building.
(b) Landlord shall provide 3.4 parking spaces per 1,000 square feet
of leasable space within the option Building.
(c) The term shall commence upon the date of Substantial Completion
of Tenant Improvements for the Option Building ("Commencement Date"), and end on
the tenth (10th)
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anniversary thereof, subject to two (2) options to extend the term for five (5)
years each.
(d) Rent shall be payable beginning on the Commencement Date referred
to in paragraph 2 hereinabove. The monthly rent for the Option Building shall be
the total achieved by multiplying the same per square foot rent each month as is
applicable for the 1290 Parkmoor Lease by the number of leasable square feet for
the Option Building. Monthly rent for the Option Building shall be subject to
adjustment on the same dates as the rent under the 1290 Parkmoor Lease.
(e) The security deposit shall be equal to the rent amount for the
Option Building for the first month of the term.
(f) The Tenant Improvement Allowance shall be modified to (i) reflect
a Tenant Improvement Allowance of Twenty Five Dollars ($25.00) times the number
of leasable square feet of space in the Option Building, and (ii) require
Tenant's submission to Landlord of its Working Drawings as set forth below in
this Agreement.
(g) A default under the 1290 Parkmoor Lease shall be deemed a default
under the Option Building Lease; and a default under the Option Building Lease
shall be deemed a default under the 1290 Parkmoor Lease.
(h) Tenant may elect, prior to the Commencement Date of the Option
Building Lease, to extend the term of the 1290 Parkmoor Lease so as to be co-
terminous with the Option Building Lease. If said election is made by Tenant,
the rent for the Premises during said extension period under the 1290 Parkmoor
Lease shall be at Fair Market Value (as the term is therein defined.)
5. Construction of Shell and Tenant Improvements.
(a) Within thirty (30) days after Tenant's exercise of the Option,
Landlord shall deliver to Tenant plans and specifications for construction of
the shell of Option Building (together called the "Shell Plans"). The Shell
Plans shall contemplate construction of a building containing approximately
26,000 square feet of leasable square feet in a single story building with
parking sufficient to provide at least 3.4 parking spaces per 1,000 square feet
of leasable space in the building. "Leasable Square Feet" shall include all
square footage within the Option Building measuring from the exterior surface of
exterior building walls as to each such floor, including any covered loading
docks. The Shell Plans shall contemplate construction of a building of a design
and quality comparable to the Premises and shall include a covered walkway
connecting the Premises with the Option Building.
(b) Within ninety (90) days after Tenant's receipt of the Shell
Plans, Tenant shall submit to Landlord Working Drawings respecting Tenant
Improvements that Tenant desires Landlord to construct in the Option Building.
The respective rights and obligations of Landlord and Tenant regarding the
Tenant Improvements shall be as otherwise set forth in the 1290 Parkmoor lease.
(c) Landlord shall commence construction of Option Building as soon
as reasonably possible after Tenant's exercise of the Option, and continue
diligently to construct the same until completion thereof in accordance with the
Shell Plans. All costs of construction of the shell of Option Building shall be
borne solely by Landlord. The costs included within the shell construction shall
be as set forth on Exhibit B hereto. The costs of the Tenant Improvements
constructed therein shall be borne as set forth in the 1290 Parkmoor Lease.
6. Failure by Landlord to Purchase the Property. Tenant acknowledges that
Landlord does not own the Property as of the date of this Agreement In the event
that Tenant
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exercises the Option and Landlord is unable to purchase the Property through no
fault of Landlord, the Option shall be of no further force and effect, and
Landlord shall have no further liability to Tenant hereunder.
7. Memorandum of Option. The parties shall record within ten (10) days
after execution of this Agreement by both parties hereto a short form memorandum
of this Agreement in form reasonably satisfactory to both parties against title
to the Property.
8. Notices. All notices, consents, approvals, or other communications
desired or required to be given under this Agreement to either party shall be
given in writing personally (including by courier), or by depositing the same in
the United States mail, postage prepaid, registered or certified mail, return
receipt requested, and addressed to the parties as follows:
If to Tenant Tiburon Systems, Inc
2085 Hamilton Avenue
San Jose, CA 95125
Attention: Lynn Canda
If to Landlord: The Sobrato Group
10600 N. De Anza Blvd., Suite 200
Cupertino, CA. 95014-2031
Attn: John Michael Sobrato
All notices shall be deemed received upon actual receipt thereof; or if
given by U.S. mail, then three (3) days after the posted date of mailing. Either
party may change its address by written notice to the other party in accordance
with the provisions of this paragraph.
9. Entire Agreement. This Agreement and the 1290 Parkmoor Lease contain
all representations and the entire understanding between the parties hereto with
respect to the subject matter hereof. Any prior correspondence, memoranda or
agreements are replaced in total by this Agreement.
10. Time. Time is of the essence in the performance of the parties'
respective obligations herein contained.
11. Attorneys' Fees. In the event any dispute between the parties hereto
should result in litigation, the prevailing party shall be reimbursed for all
reasonable costs, including, but not limited to, reasonable attorney's fees.
12. Severability. If any provision of this Agreement as applied to either
party or to any circumstances shall be adjudged by a court of competent
jurisdiction to be void or unenforceable for any reason, the same shall in no
way affect (to the maximum extent permissible by law) any other provision under
circumstances different from those adjudicated by the court, or the validity or
enforceability of the Agreement as a whole.
13. Amendments. No addition to or modification of any provisions contained
in the Agreement shall be effective unless fully set forth in writing by both
Landlord and Tenant.
14. Successors. The terms and provisions hereof shall be binding upon and
inure to the benefit of the successors and assigns of the parties hereto.
However, Tenant shall not assign its interest, or any portion thereof, in this
Agreement, unless such assignment is in conjunction with and effective
concurrently with an assignment of Tenant's interest in the 1290 Parkmoor Lease.
Furthermore, Landlord shall not assign its interest under this Agreement, or
delegate any obligations hereunder, without Tenant's prior written consent,
which shall not unreasonably be withheld.
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<PAGE>
15. Quitclaim Deed. In the event Tenant does not exercise the Option
within the Option Period, then upon request to do so by Landlord, Tenant shall
execute a quitclaim deed transferring any right, rifle, or interest it may have
under this Agreement to Landlord. Such quitclaim deed shall be in form
reasonably designed to effectuate the foregoing.
16. Captions. The marginal headings or rifles to the paragraphs of this
Agreement are not a part of this Agreement and shall have no effect upon the
construction or interpretation of any part thereof.
17. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of State of California.
IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the
day and year first above written.
LANDLORD: THE SOBRATO GROUP TENANT: TIBURON SYSTEMS
a California Limited Partnership a California Corporation
BY: /s/ [ILLEGIBLE]^^ BY: /s/ [ILLEGIBLE]^^
------------------------------ ---------------------------
ITS: General Partner ITS: _________________________
-----------------------------
Page 4
<PAGE>
EXHIBIT "A"
Property
Page 5
<PAGE>
EXHIBIT "B"
Shell Definition
Building Shell Definition
The Building Shell includes the following items:
1. Site Work
a. Asphalt concrete paving, wheel stops, and striping.
b. concrete sidewalks, curbs, gutter, driveway, approaches, and planter
walls.
c. Landscaping, landscape lighting, waterscape, and irrigation.
d. Underground utilities - water, gas, fire line, sanitary line, site
storm drainage system and primary and secondary electrical line
stubbed into building.
2. Building Structure
Includes all elements necessary to provide for a completely waterproof Building
Shell including but not limited to:
a. Concrete foundation and slab on grade including all reinforcing steel
and ire mesh including loading dock if applicable.
b. Structural steel, columns and beams.
c. Wood panelized gluelam roof structure with fiberglass built-up roofing
including roof drainage plumbing.
d. Glass, glazing and perimeter roll up or hollow metal doors including
normal passage hardware.
e. Concrete tilt up or plaster on metal stud framed exterior walls.
f. Exterior painting.
Other than those items delineated above, all other costs associated with
building construction shall be included as part of the interior improvement
allowance.
<PAGE>
Annex 1
(LOGO)
Lease between
Tiburon Systems, Inc. and The Sobrato Group
<TABLE>
<S> <C>
Parties...................................................... 1
Premises..................................................... 1
Use.......................................................... 1
Term and Rental.............................................. 1
Rental Adjustment......................................... 1
Security Deposit............................................. 1
Late Charges................................................. 2
Construction and Possession.................................. 2
Acceptance of Possession and Covenants to Surrender.......... 3
Uses Prohibited.............................................. 4
Alterations and Additions.................................... 4
Maintenance of Premises...................................... 4
Hazard Insurance............................................. 5
Taxes........................................................ 5
Utilities.................................................... 6
Abandonment.................................................. 6
Free From Liens.............................................. 6
Compliance With Governmental Regulations..................... 6
Toxic Waste and Environmental Damage......................... 6
Indemnity.................................................... 7
Advertisements and Signs..................................... 7
Attorney's Fees.............................................. 7
Tenant's Default............................................. 7
Remedies.................................................. 8
Right to Re-enter......................................... 8
Abandonment............................................... 8
No Termination............................................ 8
Surrender of Lease........................................... 9
Habitual Default............................................. 9
Landlord's Default........................................... 9
Notices...................................................... 9
Entry by Landlord............................................ 9
Destruction of Premises...................................... 9
Assignment or Sublease....................................... 10
Condemnation................................................. 11
Effects of Conveyance........................................ 11
Subordination................................................ 11
Waiver....................................................... 12
Holding Over................................................. 12
Successors and Assigns....................................... 12
Estoppel Certificates........................................ 12
Option to Extend the Term.................................... 12
Resolution of a Disagreement over the Fair Market Rental.. 13
Options...................................................... 14
Quiet Enjoyment.............................................. 14
Brokers...................................................... 14
Landlord's Liability......................................... 14
Authority of Parties......................................... 14
Corporate Authority....................................... 14
Limited Partnerships...................................... 14
Transportation Demand Management Programs.................... 14
Miscellaneous Provisions..................................... 14
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Exhibit "A"....................................................... 16
Exhibit "B"....................................................... 17
Exhibit "C"....................................................... 18
Exhibit "D"....................................................... 19
Exhibit "E"....................................................... 20
Exhibit "F"....................................................... 21
</TABLE>
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<PAGE>
1. PARTIES: THIS LEASE, is entered into on this 23/RD/ day of May, 1991,
between THE SOBRATO GROUP, a California Limited Partnership, and TIBURON
SYSTEMS, INC., a California Corporation, hereinafter called respectively
Landlord and Tenant.
2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord
those certain Premises with the appurtenances, more particularly described as
follows, to-wit:
That certain real property commonly known and designated as 1290 Parkmoor
Avenue, San Jose, California, consisting of 66,479 square feet ("Building") as
outlined in red on Exhibit "A".
3. USE: 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, development, testing, light manufacturing, ancillary
warehouse, and related legal uses.
4. TERM AND RENTAL: The term shall be for One Hundred Twenty (120) months,
commencing, as adjusted pursuant to paragraph 7, on the first day of April, 1992
("Commencement Date"), and ending on the 30th day of March, 2002, at the total
rent or sum, as adjusted pursuant to paragraph 4(a), of Eight Million Two
Hundred Sixteen Thousand Eight Hundred Four and 40/100 Dollars ($8,216,804.40),
payable, without deduction or offset, in monthly installments of Sixty Eight
Thousand Four Hundred Seventy Three and 37/100 Dollars ($68,473.37), due on or
before the first day of each calendar month during the term hereof. Said rental
shall be paid in lawful money of the United States of America, without offset or
deduction, and shall be paid to Landlord at such place or places as may be
designated from time to time by Landlord. Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment.
4. (a) Rental Adjustment: Beginning thirty (30) months after the
Commencement Date, and every thirty (30) months thereafter, the then payable
monthly rent shall be subject to adjustment based on the increase, if any, in
the Consumer Price Index ("Adjustment Date"). The basis for computing the
adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistic's
Consumer Price Index for All Urban Consumers, All Items, 1982-84=100, for the
San Francisco-Oakland - San Jose area, ("Index"). The Index most recently
published preceding the commencement of the Lease (or previous Adjustment Date,
as applicable), shall be considered the "Base Index". If the Index most recently
published preceding the Adjustment Date ("Comparison Index") is greater than the
Base Index, the then payable monthly rent shall be increased by multiplying the
monthly rent by a fraction, the numerator of which is the Comparison Index and
the denominator of which is the Base Index. Notwithstanding any subsequent
decrease in the Index, the increase in the CPI for any calendar year shall never
be less than four percent (4%) per year compounded annually nor more than eight
percent (8%) per year compounded annually. Landlord's calculation of the rent
escalation shall be conclusive and binding unless Tenant objects to said
calculation within a thirty (30) day period. On adjustment of the monthly rent
Landlord shall notify Tenant by letter stating the new monthly rent. If the
Index base year is changed so that it differs from 1982-84=100, the Index shall
be converted in accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics. If the Index is
discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the index had not been
discontinued or revised.
5. SECURITY DEPOSIT: On or before December 20th, 1991, Tenant shall deposit
with Landlord the sum of Seventy Thousand and No/100 Dollars ($70,000.00) as a
security deposit. If Tenant defaults with respect to any provisions of this
Lease, including but not limited to the provisions relating to payment of rent
or other charges. Landlord may, to the extent reasonably necessary to remedy
Tenant's default, use all or any part of said deposit for the payment of rent or
other charges in default or the payment of any other payment of any other amount
which Landlord may spend or become obligated to spend by reason of Tenant's
default or to compensate Landlord
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<PAGE>
for any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said deposit is so used or applied, Tenant shall,
within ten (10) days after written demand therefor, deposit cash with Landlord
in an amount sufficient to restore said deposit to the full amount hereinabove
stated and shall pay to Landlord such other sums as shall be necessary to
reimburse Landlord for any sums paid by Landlord. Said deposit shall be returned
to Tenant within thirty (30) days after the expiration of the term hereof less
any amount deducted in accordance with this paragraph, together with Landlord's
written notice itemizing the amounts and purposes for such retention. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said deposit to Landlord's successor in interest.
Notwithstanding the foregoing provisions of this paragraph 5, Landlord agrees
that in lieu of a cash security deposit in the amounts specified above, Tenant
may deposit an irrevocable letter of credit in favor of Landlord in the initial
sum of Seventy Thousand and No/100 Dollars ($70,000.00), in a form reasonably
acceptable to Landlord. Landlord shall be entitled to draw against the letter of
credit in accordance with the preceding paragraph, provided that Landlord
certifies to the issuer of the letter of credit under penalty of perjury that
Tenant is in default under the Lease (as defined in paragraph 22 hereof). Tenant
shall keep the letter of credit in effect during the entire Lease Term, as the
same may be extended, plus a period of eight (8) weeks thereafter. At least
sixty (60) days prior to expiration of any letter of credit, the term thereof
shall be renewed or extended. Tenant's failure to so renew or extend the letter
of credit shall be a material default of this Lease by Tenant. If Landlord draws
against the letter of credit, Tenant shall replenish the existing letter of
credit or cause a new letter of credit to be issued such that the aggregate
amount of letters of credit available to Landlord at all times during the Lease
Term is the amount of the security deposit required herein
6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to,
administrative, processing, accounting charges, 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 rent or any
other sum due from Tenant shall not be received by Landlord or Landlord's
designee within ten (10) days after written notice from Landlord that such
amount is due, Tenant shall pay to Landlord a late charge equal to five (5%)
percent of such overdue amount which shall be due and payable with the payment
then delinquent. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
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 rent, then rent shall
automatically become due and payable quarterly in advance, rather than monthly,
notwithstanding any provision of this Lease to the contrary.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
7. CONSTRUCTION AND POSSESSION: The Tenant Improvements shall be constructed
by independent contractors to be employed by and under the supervision of
Landlord, as general contractor, in accordance with plans prepared by Dennis
Kobza & Associates, Inc. Landlord shall construct the Tenant Improvements in
accordance with all existing applicable municipal, local, state and federal
laws, statutes, rules, regulations and ordinances.
Landlord shall be responsible for and shall pay the cost of the Tenant
Improvements up to the amount of Six Hundred Sixty Four Thousand Seven Hundred
Ninety and No/100 Dollars ($664,790.00) ("Tenant Improvement Allowance"). In the
event the cost of Tenant Improvements is more than the Tenant Improvement
Allowance, the monthly rental under the Lease shall be increased at the rate of
Fifteen Dollars ($15.00) per month for each One Thousand Dollars ($1,000.00) of
the increase in the Tenant Improvement Allowance up to a maximum increase in the
Tenant Improvement Allowance of Three Hundred Thirty Two Thousand Three Hundred
Ninety Five and No/100 Dollars ($332,395.00). In the event the cost of Tenant
Improvements is less than
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<PAGE>
the Tenant Improvement Allowance, the monthly rental under the Lease shall be
reduced at the rate of Ten Dollars ($10.00) per month for each One Thousand
Dollars ($1,000.00) of the Tenant Improvement Allowance not used. The cost of
the Tenant Improvements including fit-up of special areas shall include a fee of
Nine percent (9%) to cover all of the following: a field superintendent,
temporary on-site facilities; home office administration, supervision, and
coordination; financing fees, and construction interest. Costs in excess of said
Tenant Improvement Allowance, if any, shall be paid for by Tenant in cash within
ten (10) days after Landlord has provided Tenant with evidence that Landlord's
progress payments to sub-contractors has exceeded said Tenant Improvement
budget. All costs for Tenant Improvements shall be fully documented to and
verified by Tenant.
Landlord and Tenant have approved the preliminary working drawings ("Preliminary
Working Drawings") attached as Exhibit "B" and the preliminary budget for the
Tenant Improvement costs ("Preliminary Budget") attached as Exhibit "C". Based
on this information, Landlord shall prepare the final working drawings ("Final
Working Drawings") attached as Exhibit "D" and final budget for the Tenant
Improvement costs ("Final Budget") attached as Exhibit "E". In the event the
Final Budget exceeds the Tenant Improvement Allowance, Landlord shall have the
right to require Tenant to post a letter to credit to secure Tenant's
reimbursement obligation for the difference between the Final Budget and the
Tenant Improvement Allowance. In the event Tenant makes any changes to the Final
Working Drawings which cause Landlord's construction schedule to be delayed, the
Commencement Date shall occur one (1) day in advance of Substantial Completion
as defined below for each day of delay.
If Landlord, for any reason whatsoever, cannot deliver possession of the said
Premises to Tenant by the Commencement Date, this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom; but in that event the Commencement Date and termination
date of the Lease and all other dates affected thereby shall be revised to
conform to the date of Landlord's delivery of possession. The term of the Lease
shall not commence until substantial completion of the Premises occurs.
"Substantial Completion" shall mean that: (i) all necessary governmental
approvals, permits, consents, and certificates have been obtained by or for
Landlord for the lawful construction by Landlord, and occupancy by Tenant, or
said Premises, excluding work attributable to any special fit-up requested or
required by Tenant, (ii) all of the Premises interior fully meet all of the
Final Working Drawings, excluding Tenant's special fit-up, (iii) all of the
Premises exterior substantially meets the applicable Final Working Drawings,
including paved parking areas, and (iv) said interior is in a "broom clean"
finished condition. If necessary, Landlord reserves the right to post a bond for
the uncompleted portion of the landscaping.
8. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: By entry hereunder,
Tenant accepts the Premises as being in good and sanitary order, condition and
repair and accepts the Building and the other improvements in their present
condition, except for the "punch list" as set forth on Exhibit "F", attached
hereto. The Tenant agrees on the last day of the term hereof, or on the sooner
termination of this Lease, to surrender the Premises to Landlord in good
condition and repair, reasonable wear and tear excepted. "Good condition" shall
mean that the interior walls, floors, suspended ceilings, and carpeting within
the Premises will be cleaned to the same condition as existed at the
commencement of the Lease, normal wear and tear excepted. Tenant agrees to
remove all phone and data cabling from the suspended ceiling and repair any
damage to the ceiling caused by such cabling. Tenant shall ascertain from
Landlord within thirty (30) days before the end of the term of this Lease
whether Landlord desires to have the Premises or any part or parts thereof
restored to their condition as of the commencement of this Lease or to cause
Tenant to surrender all post-commencement alterations, additions, and
improvements in place to Landlord. If Landlord shall so desire, then Tenant
shall remove such post-commencement alterations, additions, and improvements as
Landlord may require and shall repair and restore said Premises or such part or
parts thereof before the termination of this Lease at Tenant's sole cost and
expense. Tenant on or before the end of the term or sooner termination of this
Lease, shall remove all its personal property and trade fixtures from the
Premises, and all property not so removed shall be deemed to be abandoned by
Tenant. If the Premises are not surrendered at the end of the term or sooner
termination of this Lease, Tenant shall indemnify Landlord 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.
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<PAGE>
9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed, any
waste upon the said Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the Building or
allow any sale by auction upon the Premises, or allow the Premises to be used
for any unlawful or objectionable purpose, or place any loads upon the floor,
walls, or ceiling which endanger the structure, or use any machinery or
apparatus which will in any manner vibrate or shake the Building, or place any
harmful liquids, waste materials, or hazardous materials in the drainage system
of, or upon 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 proper without Landlord's prior approval, which approval may be
withheld in its sole discretion.
10. ALTERATIONS AND ADDITIONS: Tenant shall not make, or suffer to be made,
any alteration or addition to the said Premises, or any part thereof, without
(i) the written consent of Landlord first had and obtained, and (ii) delivering
to Landlord the proposed architectural and structural plans for all such
alterations. Any addition or alteration to the Premises, except movable
furniture and trade fixtures, shall become at once a part of the realty and
belong to Landlord. Alterations and additions which are not to be deemed as
trade fixtures shall include heating, lighting, electrical systems, air
conditioning, partitioning, carpeting, or any other installation which has
become an integral part of the Premises. After having obtained Landlord's
consent, Tenant agrees that prior to the commencement of any alterations and
additions, Tenant shall cause to be provided to Landlord, payment and
performance bonds satisfactory to Landlord, to assure timely completion of such
work and payment of all costs of such work. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work. Tenant
acknowledges Landlord's right to and hereby consents to construction of
additional building(s) on the land where the Premises are located or on adjacent
land owned by Landlord.
11. MAINTENANCE OF PREMISES: Landlord warrants that as of the date of this
Lease, the roof and the roof membrane, exterior walls, glazing, plumbing,
electrical and HVAC systems, sidewalks and parking areas, of the Premises are in
good and sanitary order, condition, and repair. Tenant shall, at its sole cost,
keep and maintain, repair and replace, said Premises and appurtenances and every
part hereof, including but not limited to, the roof membrane, glazing,
sidewalks, parking areas, plumbing, electrical and HVAC systems, and all the
Tenant Interior Improvements in good and sanitary order, condition, and repair.
Notwithstanding the foregoing, Landlord at its sole cost and expense, shall
maintain in good condition, order, and repair, and replace as and when
necessary, the foundation, exterior walls, structure and structural members, and
roof structure of the Building. Subject to the obligations of Tenant to provide
periodic routine maintenance of the Premises in accordance with the provisions
set forth in Paragraph 11 above, Landlord shall also provide a contractor's
warranty on the Tenant Improvements for a period of one (1) year from the
Commencement Date. Tenant shall provide Landlord with a copy of a service
contract between Tenant and a licensed air-conditioning and heating contractor
which contract shall provide for bimonthly maintenance of all air conditioning
and heating equipment at the Premises. Tenant shall pay the cost of all air-
conditioning and heating equipment repairs or replacements which are either
excluded from such service contract or any existing equipment warranties. Tenant
shall be responsible for the preventive maintenance of the membrane of the roof,
which responsibility shall be deemed properly discharged if (i) Tenant contracts
with a licensed roof contractor who is reasonably satisfactory to both Tenant
and Landlord, at Tenant's sole cost, to inspect the roof membrane at least every
six (6) months, with the first inspection due the sixth (6th) month after the
Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all
preventive maintenance recommendations made by such contractor within a
reasonable time after such recommendations are made. Such preventive maintenance
might include acts such as clearing storm gutters and drains, removing debris
from the roof membrane, trimming trees overhanging the roof membrane, applying
coating materials to seal roof penetrations, repairing blisters, and other
routine measures. Tenant shall provide to Landlord a copy of such preventive
maintenance contract and paid invoices for the recommended work. All vinyl 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. Tenant agrees to
limit attachments to vinyl wall surfaces exclusively to V-joints. Tenant agrees
to water, maintain and replace, when necessary, any shrubbery and landscaping.
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Notwithstanding anything to the contrary in this Lease, if Tenant's maintenance
or repair obligations as set forth in this Lease would require Tenant to perform
or pay for any item which (i) would be properly be capitalized under generally
accepted accounting principles, and (ii) costs in excess of $25,000.00 per
occurrence, then Landlord shall perform such repair or make such replacement
promptly following written notice by Tenant of the need therefor and the cost of
such item or improvement shall be allocated as follows: Tenant shall pay to
Landlord within ten (10) days after receipt of Landlord's written demand and
supporting documentation a proportion of the cost equal to the actual cost of
such improvement or item as paid by landlord to third parties 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, and Landlord shall pay the balance of such cost.
12. HAZARD INSURANCE: Tenant shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose other than that for which the said
Premises am hereby leased; and no use shall be made or permitted to be made of
the said Premises, nor acts done, which will cause an increase in premiums or a
cancellation of any insurance policy covering said Building, or any part
thereof, nor shall Tenant sell or permit to be kept, used or sold, in or about
said Premises, any article which may be prohibited by the standard form of fire
insurance policies. Tenant shall, at its sole cost and expense, comply with any
and all requirements, pertaining to said Premises, of any insurance organization
or company, necessary for the maintenance of reasonable fire and public
liability insurance, covering said Building and appurtenances. The Landlord
agrees to purchase and keep in force fire, earthquake (at Landlord's election),
and extended coverage insurance covering the Premises in amounts not to exceed
the actual insurable value of the Building as determined by Landlord's insurance
company's appraisers. The Tenant agrees to pay to the Landlord as additional
rent, on demand, the full cost of said insurance as evidenced by insurance
billings to the Landlord, and in the event of damage covered by said insurance,
the amount of any deductible under such policy. Tenant shall have the to
specify the amount of any insurance policy to be carried by Landlord under this
Lease and shall reimburse Landlord for the premiums payable with respect to
insurance policies for which Tenant is responsible containing the deductible so
specified by Tenant or on insurance policies for which Tenant fails to specify a
deductible amount within ten (10) days following Landlord's written demand for
such deductible specification. In the event of damage to the Premises covered by
Landlord's "all risk" casualty policy (and not caused by the negligence or
willful misconduct of Landlord or Landlord's employees, agents, contractors,
subcontractors, or invitees), Tenant shall pay the amount of any deductible
under such policy if this Lease is not terminated in connection with such
casualty as provided in paragraph 28. Payment shall be due to Landlord within
ten (10) days after written invoice to Tenant. Notwithstanding the foregoing,
Tenant's obligation to pay for the cost of any earthquake insurance premiums
shall be limited to an amount equal or less than four (4) times the cost of the
fire and extended coverage premiums.
In addition, Tenant agrees to insure its personal property, additions,
alterations, and improvements for their full replacement value (without
depreciation) and to obtain worker's compensation and public liability and
property damage insurance for occurrences within the Premises of $5,000,000.00
combined single limit for bodily injury and property damage. Tenant shall name
Landlord and Landlord's lender as an additional insured, shall deliver a copy of
the policies and renewal certificate to Landlord. All such policies shall
provide for thirty (30) days' prior written notice to Landlord of any
cancellation or termination. Notwithstanding the above, Landlord retains the
right to have Tenant provide other forms of insurance which may be reasonably
required to cover future risks.
It is understood and agreed that Tenant's obligation under this paragraph will
be prorated to reflect the commencement and termination dates of this Lease.
Landlord and Tenant hereby waive any rights each may have against the other on
account of any loss or damage occasioned to the Landlord or the Tenant as the
case may be, or to the Premises or its contents, and which may arise from any
risk covered by their respective insurance policies, as set forth above. The
parties shall use their best efforts to obtain from their respective insurance
companies a waiver of any right of subrogation which said insurance company may
have against the Landlord or the Tenant, as the case may be.
13. TAXES: Tenant shall be liable for all taxes levied against personal
property and trade or business fixtures, and agrees to pay, as additional
rental, all real estate taxes and special
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assessment installments levied on the Premises, upon the occupancy of the
Premises and including any substitute or additional charges which may be imposed
during, or applicable to the Lease term including real estate tax increases due
to a sale or other transfer of the Premises, as they appear on the City and
County tax bills during the Lease term, and as they be, come due. It is
understood and agreed that Tenant's obligation under this paragraph will be
prorated to reflect the commencement and termination dates of this Lease. In any
time during the term of this Lease 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 taxes assessed or imposed on
land or Buildings, Tenant shall pay and discharge his pro rata share of such tax
or excise on rents or other tax before it becomes delinquent, except that this
provision is not intended to cover income taxes, inheritance, gift or estate tax
imposed upon the Landlord. 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 his pro rata share of such tax on behalf of the
Landlord, then at the sole election of the Landlord, the Landlord may increase
the rental charged hereunder by the exact amount of such tax.
14. UTILITIES: Tenant shall pay directly to the providing utility all water,
gas, heat, light, power, telephone and other utilities supplied to the Premises.
Landlord shall not be liable for a loss of or injury to property, however
occurring, through or in connection with or incidental to furnishing or failure
to furnish any of utilities to the Premises and Tenant shall not be entitled to
abatement or reduction of any portion of the rent so long as any failure to
provide and furnish the utilities to the Premises due to any cause beyond the
Landlord's reasonable control.
15. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any time
during the term; and if Tenant shall abandon, vacate or surrender said Premises,
or be dispossessed by process of law, or otherwise, any personal property
belonging to Tenant and left on the Premises shall be deemed to be abandoned, at
the option of Landlord, except such property as may be mortgaged to Landlord.
16. FREE FROM LIENS: Tenant shall keep the Premises and the Building free from
any liens arising out of any work performed, materials furnished, or obligations
incurred by Tenant.
17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost
and expense, comply with all of the requirements of all Municipal, State and
Federal authorities now in force, or which may hereafter be in force, pertaining
to the said Premises, and shall faithfully observe in the uses of the Premises
all Municipal ordinances and State and Federal statutes now in force or which
may hereafter be in force. The judgement 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 ordinance
or statute in the use of the Premises, shall be conclusive of that fact as
between Landlord and Tenant.
18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: Without the prior written consent
of Landlord, Tenant shall not bring, use, or permit upon the Premises, or
generate, emit, or dispose 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 am
identified in Sections 66680 through 66685 of Title 22 of the California
Administrative Code as the same may be amended from time to time ("Hazardous
Materials"). Tenant shall comply, at its sole cost, with all laws pertaining to,
and shall indemnify and hold Landlord harmless from any claims, liabilities,
costs or expenses incurred or suffered by Landlord arising from such bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials.
Tenant'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, and (iii) all costs of defending such claims.
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In order to obtain consent, 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 may be withheld in its reasonable judgement. In the event Landlord
consents to Tenant's use of Hazardous Materials on the Premises. Tenant
represents and warrants that Tenant will (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 Hazardous Materials on the Premises,
(iii) enforce Hazardous Materials handling and disposal practices consistent
with industry standards, and (iv) properly close the facility with regard to
Hazardous Materials including the removal or decontamination of any process
piping, mechanical ducting, storage tanks, containers, or trenches which have
come into contact with Hazardous Materials and obtain a closure certificate from
the local administering agency. Tenant shall have the right to approve the
selection of Landlord's attorneys and the attorney's fee schedule prior to the
engagement by Landlord of any attorneys pursuant to this paragraph 18.
19. INDEMNITY: As a material part of the consideration to be 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 except due to the negligence or willful misconduct of
Landlord, and Tenant will 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 by Tenant,
or from the failure of Tenant to keep the Premises in good condition and repair,
as herein provided. Further, in the event Landlord is made party to any
litigation due to the acts or omission of Tenant, Tenant will indemnify 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.
Tenant shall have the right to approve the selection of Landlord's attorneys and
the attorney's fee schedule prior to the engagement by Landlord of any attorneys
pursuant to this paragraph 19.
20. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed,
in, upon or about the said Premises any unusual or extraordinary signs, or any
signs not approved by the city or other governing authority. The Tenant will not
place, or permit to be placed, upon the Premises, any signs, advertisements or
notices without the written consent of the Landlord as to type, size, design,
lettering, coloring and location, and such consent will not be unreasonably
withheld. Any sign so placed on the Premises shall be so placed upon the
understanding and agreement that Tenant will remove same at the termination of
the Lease and repair any damage or injury to the Premises caused thereby, and if
not so removed by Tenant then Landlord may have same so removed at Tenant's
expense.
21. ATTORNEY'S FEES: In case suit should be brought for the possession of
the Premises, for the recovery of any sum due hereunder, or because of the
breach of any other covenant herein, the losing party shall pay to the
prevailing party a reasonable attorney's fee as part of its costs which shall be
deemed to have accrued on the commencement of such action.
22. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any failure
by Tenant to pay the rental or to make any other payment required to be made by
Tenant hereunder, where such failure continues for ten (10) days after written
notice thereof by Landlord to Tenant; b) The abandonment or vacation of the
Premises by Tenant; c) A failure by Tenant to observe and perform any other
provision of this Lease to be observed or performed by Tenant, where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of such default is such that
the same cannot reasonably be cured within such thirty (30) 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; d) The
making by Tenant of any general assignment for the benefit of creditors; 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 era petition fried against Tenant, the same is
dismissed after the filing); 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
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not restored to Tenant within thirty (30) days; or 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 thirty (30) days. The notice requirements set forth herein are
in lieu of and not in addition to the notices required by California Code of
Civil Procedure Section 1161.
22.(a) Remedies: In the event of any such default by Tenant, then in
addition to any 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 shall elect to so terminate this Lease, Landlord may recover
from Tenant: a) the worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus b) the worth at the time of award
of the amount by which the unpaid rent would have been earned after termination
until the rime of award exceeds the amount of such rental loss Tenant proven
could have been reasonably avoided; plus c) the worth at the time of award of
the amount by which the unpaid rent for the balance of the term after the time
of award exceeds the amount of such rental loss that Tenant proves could Be
reasonably avoided; plus d) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform his
obligations under this Lease or which in the ordinary come of things would be
likely to result therefrom, and c) at Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable California law. The term "rent", as used herein, shall be deemed to
be and to mean the minimum monthly installments of rent and all other sums
required to be paid by Tenant pursuant to the terms of this Lease, all other
such sums being deemed to be additional rent due hereunder. As used in (a) and
(b) above, the "worth at the time of award" is computed by allowing interest at
the rate of the discount rate of the Federal Reserve Bank of San Francisco plus
five (5%) percent per annum. As used in (c) above, "worth at the time of award
is 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.
22.(b) Right to Re-enter: In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Tenant.
22.(c) Abandonment: In the event of the vacation or abandonment of the
Promises by Tenant or in the event that Landlord shall elect to re-enter as
provided in paragraph 22.(b) above or shall take possession of the Premises
pursuant to legal proceeding or pursuant to any notice provided by law, then if
Landlord does not elect to terminate this Lease as provided in paragraph 22.(a)
above, then the provisions of California Civil Coda Section 1951.4, 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
Promises 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 shall elect to so relet, then rentals
received by Landlord from such reletting shall be applied: first, to the payment
of any indebtedness other than rent due hereunder from Tenant to Landlord;
second, to the payment of any cost of such reletting; third, to the payment of
the cost of any alterations and repairs to the Premises; fourth, to the payment
of rent due and unpaid hereunder; and the residue, if any, shall be held by
Landlord and applied in payment of future rent as same may become due and
payable hereunder. Should that portion of such rentals received from such
reletting during any month, which is applied by payment of rent hereunder, be
less than the rent payable during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord immediately upon demand therefor by
Landlord. 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.
22.(d) No Termination: No re-entry or taking possession of the Premises by
Landlord pursuant to 22.(a) or 22.(c) of this Article 22 shall be construed as
an election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be 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.
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23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Building or Premises.
Instead, at the option of Landlord, Tenant's surrender may terminate all or any
existing sublease or subtenancies, or may operate as an assignment to Landlord
of any or all such subleases or subtenancies, thereby creating a direct
Landlord-Tenant relationship between Landlord and any subtenants.
24. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
paragraph 22, 22 (a) (b) (c) and (d), the parties hereto agree that if the
Tenant shall have defaulted in the performance of any (but not necessarily the
same) term or condition of this Lease for three or more times during any twelve
month period during the term hereof, then such conduct shall, at the election of
the Landlord, represent a separate event of default which cannot be cured by the
Tenant. Tenant acknowledges that the purpose of this provision is to prevent
repetitive defaults by the Tenant under the Lease, which work a hardship upon
the Landlord, and deprive the Landlord of the timely performance by the Tenant
hereunder.
25. LANDLORD'S DEFAULT: 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 or such other
reasonable opportunity to cure such failure prior to any claim for breach or for
damages resulting from such failure.
26. NOTICES: All notices required to be given under this Lease shall be sent
by U.S. certified mail, return receipt requested, or by personal delivery
addressed to the party to be notified at the address for such party specified in
paragraph 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 notice to the
notifying party.
27. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to enter
into and upon said Premises at all reasonable times subject to any security
regulations of Tenant for the purpose of inspecting the same or for the purpose
of maintaining the Premises or for the purpose of making repairs, alterations or
additions to any other portion of said Premises or for the purpose of erecting
additional building(s) and improvements on the land where the Premises are
situated, or on adjacent land owned by Landlord, including the erection and
maintenance of such scaffolding, canopies, fences and props as may be required
without any rebate of rent or without any liability to Tenant for any loss of
occupation or quiet enjoyment of the Premises thereby occasioned; and Tenant
shall permit Landlord and his agents, at any time within one hundred eighty
(180) days prior to the expiration of this Lease, to place upon the Premises any
"For Sale" or "For Lease" signs and exhibit the Premises to prospective tenants
at reasonable hours.
28. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
Premises by an insured causality during the term from any cause, Landlord shall
forthwith repair the same, provided such repairs can be made within one hundred
eighty (180) days from the date of receipt of all necessary governmental
approvals necessary under the laws and regulations of State, Federal, County or
Municipal authorities, such partial destruction shall in no way annul or void
this Lease, except that Tenant shall be entitled to a proportionate reduction of
rent while such repairs are being made, such proportionate reduction to be based
upon the extent to which the making of such repairs shall interfere with the
business carried on by Tenant in the Premises, in the reasonable judgement of
Landlord. For purposes of this paragraph "partial destruction" shall mean
destruction of no greater than one-third (1/3) of the replacement cost of the
Premises, including the replacement cost of the Tenant Improvements paid for by
Landlord. In the event the Premises are more than partially destroyed, or in the
event the repairs cannot be made in one hundred eighty (180) days, Landlord or
Tenant may elect to terminate this Lease. Landlord shall not be required to
restore additions, alterations or improvements made by Tenant or replace
Tenant's fixtures or personal property. In respect to any partial destruction
which Landlord is obligated to repair or may elect to repair under the terms of
this paragraph, the provision of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of California am waived by
Tenant.
In the event of a total or partial destruction of the Premises by an uninsured
casualty, the Lease shall automatically terminate, unless (i) Landlord elects to
rebuild, and (ii) the damage can be repaired within one hundred eighty (180)
days.
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29. ASSIGNMENT OR SUBLEASE: In the event Tenant desires to assign this Lease or
any interest therein including, without limitation, a pledge, mortgage or other
hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver
to Landlord executed counterparts of any such agreement and of all ancillary
agreements with the proposed assignee or subtenant, financial statements, and
any additional information as reasonably required to determine whether it will
consent to the proposed assignment or sublease. The notice shall give the name
and current address of the proposed assignee/subtenant, proposed use of the
Premises, rental rate and current financial statement and upon request to
Tenant, Landlord shall be given additional information as reasonably required to
determine whether it will consent to the proposed assignment or sublease.
Landlord shall then have a period of thirty (30) days following receipt of such
notice within which to notify Tenant in writing that Landlord elects (i) to
terminate this Lease as to the space to affected as of the date so specified by
Tenant in which event Tenant will be relieved of all further obligations
hereunder as to such space, (ii) to 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) to refuse consent. If Landlord should fail to notify Tenant in
writing of such election within said thirty (30) day period, Landlord shall be
deemed to have elected option (ii) above. Any rent or other economic
consideration realized by Tenant under any such sublease and assignment in
excess of the rent payable hereunder (including an allocation of the purchase
price attributable to Tenant's leasehold interest in the event of a sale of the
Tenant's business), after the net unamortized cost of the Tenant Improvements
for which Tenant has itself paid, and reasonable subletting and assignment
costs, shall be divided and paid sixty-seven percent (67%) to Landlord and
thirty-three percent (33%) to Tenant. Tenant's obligation to pay over Landlord's
portion of the consideration shall constitute 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, constitute a material inducement for the Landlord to enter
into the Lease, and are agreed as between the parties to be commercially
reasonable. No assignment or subletting by Tenant shall relieve Tenant of any
obligation under this Lease. Any assignment or subletting which conflicts with
the provisions hereof shall be void.
If Landlord exercises its option to terminate this Lease in part in the event
Tenant desires to sublet or assign part of the Premises, then (a) this Lease
shall end and expire, with respect to such part of the Premises, on the date
upon which the proposed sublease was to commence, and (b) from and after such
date, the 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.
If Landlord does not exercise its option to terminate this Lease, Landlord's
consent (which must be in writing and in form reasonably satisfactory to
Landlord) to the proposed assignment or sublease shall not be unreasonably
withheld or delayed, provided and upon condition that:
(a) The proposed assignee or subtenant is engaged in a business that is limited
to the use expressly permitted under this Lease;
(b) 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;
(c) The proposed sublease shall be in form reasonably satisfactory to Landlord;
(d) The amount of the aggregate rent to be paid by the proposed subtenant is not
less than the then current "Fair Market Value" as defined in paragraph 38 below;
(e) Tenant shall reimburse Landlord on demand for any 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; and
(f) Tenant shall not have advertised or publicized in any way the availability
of the Premises without prior notice to, and approval by Landlord.
Page 10
<PAGE>
Any assignment or transfer shall be made only if and shall not be effective
until the assignee shall execute, acknowledge and deliver to Landlord an
agreement, in form and substance satisfactory to Landlord, whereby the assignee
shall assume all of the obligations of this Lease on the part of Tenant to be
performed or observed and shall be subject to all of the covenants, agreements,
terms, provisions and conditions contained in this Lease. Notwithstanding any
such sublease or assignment and the acceptance of rent or additional rent by
Landlord from any subtenant or assignee, Tenant shall and will remain fully
liable for the payment of the rent and additional rent due, and to become due
hereunder, for the performance of all of 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 that shall be in
violation of any of the obligations of this Lease, and any such violation shall
be deemed to be a violation by Tenant. Tenant shall further indemnify, defend
and hold Landlord harmless from and against any and 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 a commission
or similar compensation in connection with the proposed assignment or sublease.
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 paragraph 22 above. The termination of this Lease due to
Tenant's default shall not automatically terminate any assignment or sublease
then in existence. At the election of Landlord, the assignee or subtenant shall
attorn to Landlord and Landlord shall undertake the obligations of the Tenant
under the sublease or assignment; provided the landlord shall not be liable for
prepaid rent, security deposits or other defaults of the Tenant to the subtenant
or assignee.
If Tenant is a corporation or partnership, all the above provisions shall apply
to a transfer (by one or more transfers) of a majority of the stock of the
corporation or the majority of ownership or control of the partnership, as if
such transfer were an assignment of this Lease.
30. 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 a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title shall vest in the condemnor or purchaser, and the rent payable
hereunder shall be adjusted so that the Tenant shall be required to pay for the
remainder of the term only such portion of such 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 Landlord shall have the option to terminate this
Lease as of the date when title to the part so taken vests in the condemnor or
purchaser. If all of the Premises, or such part thereof be taken so that there
does not remain a portion susceptible for occupation hereunder, this Lease shall
thereupon terminate. If a part or all of the Premises be taken, all compensation
awarded upon such taking shall go to the Landlord and the Tenant shall have no
claim thereto but Landlord shall cooperate with Tenant to mover compensation for
damage to or taking of any alterations, additions or improvements made by Tenant
or Tenant's moving costs. Tenant hereby waives the provisions of California Code
of Civil Procedures Section 1265.130.
31. EFFECTS OF CONVEYANCE: The term Landlord as used in this Lease, means only
the owner for the time being of the land and Building, containing the Premises,
so that, in the event of any sale of said land or Building, or in the event of a
master Lease of the Building, the Landlord shall be and hereby is entirely freed
and relieved of all covenants and obligations of the Landlord 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 Building, that the
purchaser or master tenant of the Building has assumed and agreed to carry out
any and all covenants and obligations of the Landlord hereunder. Landlord shall
transfer and deliver Tenant's security deposit, to the purchaser at any such
sale or the master tenant of the Building, and thereupon the Landlord shall be
discharged from any further liability in reference thereto.
32. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease
shall be subordinate to any ground Lease, deed of trust, or other hypothecation
for security now or
Page 11
<PAGE>
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security the, roof and to renewals,
modifications, replacements and extensions thereof. Tenant agrees to promptly
execute any documents which may be required to effectuate such subordination.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed if Tenant is not in default and so long as
Tenant shall pay the rent and observe and perform all of the provisions of this
Lease. At the request of any lender, Tenant agrees to execute and deliver any
reasonable modifications of this Lease which do not materially adversely affect
Tenant's s hereunder.
33. WAIVER: The waiver by Landlord of any breach of any term, covenant or
condition, herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
34. HOLDING OVER: Any holding over after the termination or expiration of
the said term, shall be construed to be a hold over tenancy and Tenant shall pay
rent to Landlord at a rate equal to the greater of (i) one hundred fifty percent
(150%) of the monthly rental installment due in the month preceding the
termination or expiration of the Lease, pro rated on a daily basis or (ii) one
hundred fifty percent (150%) of the Fair Market Rental (as defined in paragraph
37), pro rated on a daily basis. Any holding over shall otherwise be on the
terms and conditions herein specified, except those provisions relating to the
term and any options to extend or renew, which terms are expressly waived during
any hold over. Furthermore, no holding over shall be deemed or construed to
exercise any option to extend or renew this Lease in lieu of full and timely
exercise of any such option as required hereunder.
35. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto; and
all of the parties hereto shall be jointly and severally liable hereunder.
36. ESTOPPEL CERTIFICATES: Tenant shall at any time during the term of this
Lease, upon not less than ten (10) days prior written notice from Landlord,
execute and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification) and the date to which the rent and other charges
are paid in advance, if any, and acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Premises. Tenant's
failure to deliver such statement within such time shall be conclusive upon the
Tenant that: (a) this Lease is in full force and effect, without modification
except as may be represented by Landlord; (b) there are not uncured defaults in
Landlord's performance. Tenant also agrees to provide thee (3) years of audited
financial statements within five (5) days of a request by Landlord for
Landlord's use in financing the Premises with commercial lenders.
37. OPTION TO EXTEND THE TERM: Landlord hereby grants to Tenant, upon and
subject to the terms and conditions set forth in this paragraph, the option (the
"Option") to extend the term of this Lease for an additional term (the "Option
Term"), which option Term shall be a period of Sixty (60) months. The Option
Term shall be exercised, if at all, by written notice to Landlord on or before
the date that is six (6) months prior to the expiration date of the initial term
of the Lease. If Tenant exercises the Option, each of the terms, covenants and
conditions of this Lease except this paragraph shall apply during the Option
Term as though the expiration date of the Option Term was the date originally
set forth herein as the expiration date of the initial term, provided that the
rent to be paid shall be the greater of (i) the rent applicable to the period
immediately prior to the commencement of the Option Term, or (ii) the Fair
Market Rental, as hereinafter defined, for the Premises for the Option Term.
Anything contained herein to the contrary notwithstanding, if Tenant is in
monetary or material non-monetary default 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
Page 12
<PAGE>
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 of the
initial term. As used herein, the term "Fair Market Rental" for the Premises
shall mean the base rent that Landlord could obtain during the Option Term from
a third party desiring to lease the Premises for the Option Term, taking into
account concessions being offered on the market at that time, the age of the
Building, the quality of construction of the Building and the Premises, the
services provided under the terms of this Lease, the rental and other monetary
payments, any escalations and adjustments thereto (including without limitation
Consumer Price Indexing) then being obtained for new leases of space comparable
to the Premises in the locality of the Building, and all other factors that
would be relevant to a third party desiring to lease the Premises for the Option
Term in determining the rental such party would be willing to pay therefor. The
determination of Fair Market Value shall also take into account that (i) Tenant
is in occupancy and making functional use of the space in its then existing
condition, and (ii) no brokerage commission is payable.
If Tenant exercises the Option, Landlord shall send to Tenant a notice setting
forth the Fair Market Rental for the Premises for the Option Term, on or before
the date that is one hundred fifty (150) days prior to the expiration date of
the initial terra. If Tenant disputes Landlord's determination of the Fair
Market Rental for the Option Term, Tenant shall, within thirty (30) days after
the date of Landlord's notice setting forth the Fair Market Rental for the
Option Term, send to Landlord a notice stating that Tenant either (x) elects to
terminate its exercise of the Option, in which event the Option shall lapse and
this Lease shall terminate on the expiration date of the initial term in the
manner provided herein, or (y) disagrees with Landlord's determination of Fair
Market Rental for the Option Term and elects to resolve the disagreement as
provided in paragraph 37(a) below, If Tenant does not send to Landlord a notice
as provided in the previous sentence, Landlord's determination of the Fair
Market Rental shall be the basis for determining the rent to be paid by Tenant
hereunder during the Option Term. If Tenant elects to resolve the disagreement
as provided in paragraph 37(a) below and such procedures shall not have been
concluded prior to the commencement date of the Option Term, Tenant shall pay
rent to Landlord hereunder adjusted to reflect the Fair Market Rental as
determined by Landlord in the manner provided above. If the amount of Fair
Market Rental as finally determined pursuant to in paragraph 37(a) below is
greater than Landlord's determination, Tenant shall pay to Landlord the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in paragraph 37(a) below within thirty (30) days after the
determination. If the Fair Market Rental as finally determined in paragraph
37(a) below is less than Landlord's determination, the difference between the
amount paid by Tenant and the Fair Market Rental as so determined in paragraph
37(a) below shall be credited against the next installments of rent due from
Tenant to Landlord hereunder.
37(a). Resolution of a Disagreement over the Fair Market Rental: Any
disagreement regarding the Fair Market Rental shall be resolved as follows:
(i) Within thirty (30) days after Tenant's response to Landlord's notice to
Tenant of the Fair Market Rental, Landlord and Tenant shall meet no less than
two (2) times, at a mutually agreeable time and place, to attempt to resolve any
such disagreement.
(ii) If within the thirty (30) day period referred to in (i) above, Landlord
and Tenant can not reach agreement as to the Fair Market Rental, they shall each
select one appraiser determine the Fair Market Rental. Each such appraiser shall
arrive at a determination of the Fair Market Rental and submit their conclusions
to Landlord and Tenant within thirty (30) days after the expiration of the
thirty (30) day consultation period described in (i) above.
(iii) If only one appraisal is submitted within the requisite time period, it
shall be deemed to be the 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%) of the higher of the two, the average of the two shall be the
Fair Market Rental. If the two appraisals differ by more than ten percent (10%)
of the higher of the two, then the two appraisers shall immediately select a
third appraiser who shall within thirty (30) days after his or her selection
make a determination of the Fair Market Rental and submit such determination to
Landlord and Tenant. This third appraisal will then be averaged with the closer
of the two previous appraisals and the result shall be the Fair Market Rental.
Page 13
<PAGE>
(iv) All appraisers specified pursuant to this paragraph shall be members of
the American Institute of Real Estate Appraisers with not less than ten (10)
years experience appraising commercial 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 plus one-half of any other costs
incurred in resolving the dispute pursuant to this paragraph.
38. OPTIONS: All Options provided Tenant in this Lease are personal and granted
to original Tenant and arc 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 discretion. In the event that Tenant hereunder has any
multiple options to extend this Lease, a later option to extend the Lease cannot
be exercised unless the prior option has been so exercised. Notwithstanding the
foregoing, the option shall be transferable or assignable to any entity that
acquires either a majority of the shares of stock of Tenant or a majority of the
assets of Tenant.
39. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the
terms and covenants of the Lease, Tenant shall quietly have and hold the
Premises for the term and any extensions thereof.
40. BROKERS: Tenant represents it has not utilized or contacted a real estate
broker or finder with respect to this Lease other than Cornish & Carey
Commercial and McMillan, Moore, Buchanan, and Tenant agrees to indemnify and
hold Landlord harmless against any claim, cost, liability or cause of action
asserted by any other broker or finder claiming through Tenant.
41. LANDLORD'S LIABILITY: If Tenant should recover a money judgment against
Landlord arising in connection with this Lease, the judgment shall be satisfied
only out of Landlord's interest in the Premises including the improvements and
real property and neither Landlord or any of its partners shall be liable
personally for any deficiency.
42. AUTHORITY OF PARTIES:
42.(a) Corporate Authority: If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he 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.
42.(b) Limited Partnerships: If the Landlord herein is a limited partnership,
it is understood and agreed that any claims by Tenant on Landlord shall be
limited to the assets of the limited partnership. And furthermore, Tenant
expressly waives any and all rights to proceed against the individual partners
or the officers, directors or shareholders of any corporate partner, except to
the extent of their interest in said limited partnership.
43. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS Should a government agency or
municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant hereby agrees that the cost of TDM
imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be included
as Tenant Improvement Costs and any ongoing costs or expenses associated with a
TDM program, such as an on-site TDM coordinator, which arc required for the
Premises and not provided by Tenant shall be provided by Landlord with such
costs being included as additional rent and reimbursed to Landlord by Tenant.
44. MISCELLANEOUS PROVISIONS:
All monetary sums due from Tenant to Landlord under this Lease shall be deemed
to be rent.
Subject to the written notice and aim opportunity requirements of Paragraph 22
of this Lease, if after said notice and at the expiration of said cure period,
Tenant has failed to perform any obligation required under this Lease or by law
or governmental regulation, Landlord may in its sole discretion without notice
perform such obligation, in which event Tenant shall pay Landlord as additional
rent all sums paid by Landlord in connection with such substitute performance
within ten (10) days following Landlord's written notice for such payment.
Page 14
<PAGE>
All sums due hereunder, including rent and additional rent, if not paid when
due, shall bear interest at the maximum rate permitted under California law
accruing from the date due until the date paid to Landlord.
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.
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.
This Lease shall be governed by and construed in accordance with California law.
Time is of the essence hereunder.
This instrument contains all of the agreements and conditions made between the
parties hereto and may not be modified orally or in any other manner than by an
agreement in writing signed by all of the parties hereto or their respective
successors in interest.
Tenant acknowledges that neither Landlord or its affiliates or agents have made
any agreements, representations, warranties or promises with respect to the
demised Premises or the Building of which they are a part, or with respect to
present or future rents, expenses, operations, tenancies or any other matter.
Except as herein expressly set forth herein, Tenant relied on no statement of
Landlord or its agents for that purpose.
The headings or titles to the paragraphs of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part thereof.
IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day
and year first above written.
LANDLORD: THE SOBRATO GROUP TENANT: TIBURON SYSTEMS, INC.
a California Limited Partnership a California Corporation
BY: /s/ [ILLEGIBLE]^^ BY: /s/ [ILLEGIBLE]^^
---------------------------- ----------------------------
ITS:___________________________ ITS:___________________________
Page 15
<PAGE>
EXHIBIT "A"
Premises
[Image]
Page 16
<PAGE>
EXHIBIT "B"
Approved Preliminary Working Drawings
Page 17
<PAGE>
EXHIBIT "C"
Approved Preliminary Budget
Tiburon Preliminary Budget 5/14/91
This budget is per Kobza's drawings, sheets T-l, T-3 and T-5, dated 5/3/91.
Total square feet: 66,479
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COST
CODE DESCRIPTION VALUE PSF
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
40200 Demolition $ 12,500 $ 0.19
42200 HVAC $ 60,000 $ 0.90
42600 Fire Sprinklers $ 9,500 $ 0.14
43600 Fire Extinguishers $ 1,000 $ 0.02
43900 Electrical $183,000 $ 2.75
44600 Plumbing $ 5,000 $ 0.08
45400 Acoustical Ceiling $ 10,000 $ 0.15
46100 Drywall $ 48,000 $ 0.72
47200 Doors, Frames & Hardware $ 39,600 $ 0.60
47600 Insulation $ 2,000 $ 0.03
48300 Glass $ 4,700 $ 0.07
49100 Ceramic Tide $ 2,000 $ 0.03
50800 Cabinets & Tops $ 14,000 $ 0.21
51300 Paint $ 32,000 $ 0.48
53900 Carpet Removal, New Carpet & Base, Wt Room Floor $125,000 $ 1.88
54500 Window Coating $ 4,000 $ 0.06
55100 Computer Floor $ 45,000 $ 0.68
58500 Fencing (Chain Link) $ 7,500 $ 0.11
60800 Plan Check Fee (allowance) $ 2,000 $ 0.03
60900 Permit & Construction Tax @ 5% (allowance) $ 30,500 $ 0.46
62500 Blueprinting (allowance) $ 3,000 $ 0.05
64900 Architect Fee (Kobza) $39,4501 $ 0.59
65200 Construction Clean-up $ 10,000 $ 0.15
- --------------------------------------------------------------------------------
Subtotal: $689,750 $10.38
61000 Contingency @ 5% $ 34,488 $ 0.52
Contractor's Fee @ 10% $ 72,424 $ 1.09
- --------------------------------------------------------------------------------
TOTAL: $796,661 $11.98
- --------------------------------------------------------------------------------
</TABLE>
Qualifications:
Painting of door frames excluded
24 gauge sheetmetal at SCIF room roof
Page 18
<PAGE>
EXHIBIT "D"
Approved Final Working Drawings
Page 19
<PAGE>
EXHIBIT "E"
Approved Final Budget
Page 20
<PAGE>
EXHIBIT "F"
Punch List
Page 21
<PAGE>
[LOGO OF THERMA INC.] Quotation
Date May 13, 1991
---------- --
- --------------------------------------------------------------------------------
TO:
Sobrato Dev. Cos.
-----------------------------------------------------------------
10600 N. DeAnza Blvd. #200
-----------------------------------------------------------------
Cupertino, CA 95014
-----------------------------------------------------------------
Attention: Mr. Don Jones
-----------------------------------------------------------------
We propose to furnish you with the following material and/or service under
conditions herein stipulated
Subject: Tiburon Systems
1290 Parkmoor Ave.
Please find below, cost breakdown for the subject project.
1st Floor
Warehouse (11'-0" clear, no ceiling)
- Remove and replace 4 zones with galvanized spiral pipe (#'s 101, 102,
103, 104)
- Remove and replace half the duct of 3 zones with galvanized spiral
pipe ( #'s 109, 110, 111)
- Replace heating duct with spiral pipe an insulate
Office #132 and #133
Sput one zone into 2-offices
Office #121
Add cooling only VAV zone
FOR THE SUM OF ............ $11,000.00
Page 1 of 2
- --------------------------------------------------------------------------------
2051 Ringwood Avenue San Jose, CA 95131 (408) 433-5577 FAX: 434-0773
Contractor's State License No. 270648
TERMS OF PAYMENT: NET DUE UPON RECEIPT OF INVOICE
Sales tax, use or similar State or Federal Tax to be paid by purchaser.
We hereby accept the proposal. Respectfully Submitted for the Company.
________________________________ By____________________________
Howard Hakamura
________________________________ Approved
Dated at________________________ By____________________________
_________________ 19____________ Dated at___________ 19________
HN/tdp,to911.quo
________________________________ ________________________________
<PAGE>
May 13, 1991
Don Jones
Page 2 of 2
2nd Floor
- Office #21, 232, 233
Add cooling only VAV zone
- Office #228, 229, 230
Add cooling only VAV zone
- Office #225
Tie into existing VAV zone #215
- Office #221 and 222
Revise existing duct
- Office #218
Tie into existing zone #228
- Office #214 and 215
Add cooling only VAV zone
- Office #210, 211, 212
Add cooling only VAV zone
- Office #208 and 209
Add cooling only VAV zone
FOR THE SUM OF ........... $9,400.00
3rd Floor
- Add 3 ton split system AC-unit for SCIF area
- Add switched main for pneumatic controls around classified area.
- Add duct to AC unit #1 in shaft to supply air to 3/rd/ floor
- Office #326
Add cooling only VAV zone
- Office #327
Add one each cooling only and heating/cooling zone
- Office #328
Add cooling only VAV zone
<TABLE>
<CAPTION>
<S> <C>
FOR THE SUM OF............$20,450.00
XXX............. 800.00
Miscellaneous Work
Replace Exhaust Fans ........................................... $ 2,150.00
24 gauge metal over SCIF........................................ $ 980.00
Air balance..................................................... $15,000.00
Misc. plumbing allow............................................ $ 5,000.00
TOTAL................ $63,980.00
</TABLE>
Respectfully Submitted,
/s/ Howard Hakamura
Howard Hakamura
<PAGE>
Cupertino, CA 95014
ATTN: Mr. Don Jones
RE: Tiburon Systems
WSJCC Bldg. #5
San Jose, CA
Gentlemen,
We are pleased to quote you for the electrical work required on the above
ref. Protect as follows. Our quote is based on out meeting with Tiburon on
Monday May 6, our walk thru the bldg. With you and the new floor plan by Dennis
Kobza & Assoc. dated 5/3/91.
Lighting:
Remove:
8 - 2'x2' T- bar Fixtures
100 - 2'x4' T-bar Fixtures
28 - 4' Fluorescent Strips
5 - Exit Lights
12 - Twin Head Battery Packs
10 - Double Switches
4 - 4 Gang Switches
12 - Down Lights in T-bar
Reinstall Existing Features:
8 - 2'x2' T-bar Fixtures
72 - 2'x4' T-bar Fixtures
5 - Exit Lights
New Fixtures:
2 - 2'x2' T-bar Fixtures
24 - 8', 2-Lamp Industrial Fluorescent Fixtures
9 - Exit Lights
7 - New Batt. Packs
<PAGE>
XXX - 8' Lite Track
20 - 75 Watt Lite Track Fixtures
5 - Single Switches
41 - Double Switches
4 - 4 Gang Switches
2 - Dimmers
Lot - Replace burn out fluorescent and incandell lamps and ballasts
Lot - Replace broken and missing lenses
Power:
Remove:
230'- of existing 2000 wiremold
12 - Cord Drops
27 - Duplex Receptacles in walls
3 - 30amp Receptacles in walls
5 - Surface Mtd. Receptacles
7 - Power Poles
22 - Remove Floor Boxes
New:
73 - Duplex Receptacles
5 - Dedicated Receptacles
48 - 4 Plex Receptacles
5 - 30A, 209V, 10 Receptacles
1 - 50A, 209V, 10 Receptacles
12 - J.B.'s in Ceiling for Security Power
17 - Floor Fees for Partitions with 3-Circuits each
14 - Wall or Column Feeds for Partitions w/ 3-Circuits each
2 - Electric Screens
44 - Telephone Ring and Pull String
1 - Replace Noisey 75KVA Transformer in 3/rd/ Floor
Depot Repair:
1 - new 75 KVA Transformer and Feeder from MSB
1 - new 2- section panel w/ main and feeder from tansf.
60'- 4000 wiremold w/ 6 - 30A, 280V, 30 outlets, 3 -30A,
208V, 10 outlets, 3 -20A, 208V, 14 outlets,
6 - dedicated duplex, & 12 - STD. Duplex
<PAGE>
12 - Plex Cord Drops for work benches
1 - E.P.O Switch
1/st/ Floor Computer Room:
1 - new 42 circuit panel fed from exist. Panel
30' - 6000 wiremold under (E) computer floor of
3 - 30A, 208V, 30 outlets on 10' S.T. Flex
6 - 20A, 208V, 14 " " "
20 - 4 Plex " " "
1 - Rolm Tel. Equip. power and connection
3/rd/ Floor Computer Room:
1 - new 112 1/2 KVA Transformer, 1 -175A fused switch in MSB w/
feeder from MSB
1 - new 3 - section 400A panel w/ main breaker
2 - E.P.O. switches
400' - 40000 wiremold under computer floor w/
19 - 30A, 208V, 30 outlets on 10' S.T. Flex
5 - 30A, 208V, 10 " "
10 - 20A, 208V, 10 " "
84 - 4-Plex outlets in 10' S.T. Flex
1 - New 100AMP loadcenter for screen room w/ feeder from 3/rd/
floor computer panel
12 - connect lights in screen room
Misc:
1 - Feeder, Connection and Combo Starter for new condensing unit on
roof
1 - Feeder, Connection and Combo Starter for new fan coil in SCIF
room
1 - Feeder, Connection and Disconnet for condensate drain pump
Lot - Control wire to stat.
Lot - Replace all painted switch and receptacle plates with ivory
plates
Lot - Cut and patch concrete floor for new feeds to (E) floor boxes
in rooms 127 & 128
Lot - Core floors for partition floor feeds
<PAGE>
Our quote for the above electrical work, $183,000.00
Exclusions:
1 - Disconnection and moving of Tiburons equipment at their
existing location.
If you should have any questions please feel free to contact us.
Sinc
/s/ [ILLEGIBLE]^^
<PAGE>
EXHIBIT 10.55
OFFICE SPACE LEASE
------------------
Haseko Management, Inc.,
as agent for
SHIN-EI CO., LTD.,
a Japanese corporation
(Landlord)
CONCENTRIC NETWORK CORPORATION,
a Delaware corporation
(Tenant)
Von Karman Business Park
16842 Von Karman Avenue
Irvine, California
Suite 400 and 450
(Building and Premises)
May 26, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
BASIC LEASE INFORMATION................................................. 1
1. PREMISES.......................................................... 2
2. TERM; COMPLETION OF IMPROVEMENTS.................................. 2
3. INTENTIONALLY OMITTED............................................. 3
4. RENTAL PAYMENTS................................................... 4
5. BASE MONTHLY RENT................................................. 4
6. TENANT'S SHARE OF INCREASED COSTS................................. 4
7. USE............................................................... 6
8. SERVICES.......................................................... 6
9. TAXES PAYABLE BY TENANT........................................... 7
10. IMPROVEMENTS, REPAIRS AND ALTERATIONS............................. 8
11. LIENS............................................................. 8
12. DAMAGE AND DESTRUCTION............................................ 9
13. WAIVER OF SUBROGATION............................................. 9
14. INDEMNIFICATION................................................... 9
15. COMPLIANCE WITH LAW............................................... 10
16. INSURANCE......................................................... 10
17. ASSIGNMENT AND SUBLETTING......................................... 11
18. RULES............................................................. 12
19. ENTRY BY LANDLORD................................................. 12
20. EVENTS OF DEFAULT................................................. 12
21. TERMINATION UPON DEFAULT.......................................... 13
22. CONTINUATION AFTER DEFAULT........................................ 13
23. OTHER RELIEF...................................................... 13
24. PARKING........................................................... 13
25. INTENTIONALLY OMITTED............................................. 14
26. TRADE FIXTURES.................................................... 14
27. SUCCESSORS AND ASSIGNS............................................ 14
28. TIME.............................................................. 14
29. LANDLORD'S DEFAULT................................................ 14
30. INTENTIONALLY OMITTED............................................. 15
31. LANDLORD'S RIGHT TO CURE DEFAULTS................................. 15
32. ATTORNEYS' FEES................................................... 15
33. EMINENT DOMAIN.................................................... 15
34. SUBORDINATION..................................................... 15
35. NO MERGER......................................................... 16
36. CONVEYANCE BY LANDLORD............................................ 16
37. ESTOPPEL CERTIFICATE.............................................. 16
38. NO LIGHT, AIR OR VIEW EASEMENT.................................... 16
39. HOLDING OVER...................................................... 16
40. ABANDONMENT....................................................... 16
41. SECURITY DEPOSIT.................................................. 17
42. WAIVER............................................................ 17
43. NOTICES........................................................... 17
44. COMPLETE AGREEMENT................................................ 17
45. CORPORATE AUTHORITY............................................... 18
46. HAZARDOUS MATERIALS............................................... 18
47. ADDITIONAL PROVISIONS............................................. 18
48. MISCELLANEOUS..................................................... 18
49. EXHIBITS.......................................................... 19
50. SIGNAGE........................................................... 19
51. ANTENNA/SATELLITE DISH............................................ 19
52. RIGHT OF FIRST NEGOTIATION........................................ 19
</TABLE>
<PAGE>
BASIC LEASE INFORMATION
-----------------------
DATE: May 26, 1999
BUILDING: Von Karman Business Park, 16842 Von Karman Avenue, Irvine
LANDLORD: SHIN-EI CO., LTD., a Japanese corporation
TENANT: CONCENTRIC NETWORK CORPORATION, a Delaware corporation
LEASE SECTION
- -------------
Section 1 Premises: Suite 400 on the first (1st) floor and Suite 450 located
--------
on the second (2nd) floor, as more particularly described on Exhibit
-------
"A" attached hereto
---
Section 2 Commencement Date: June 1, 1999 as to Suite 450; July 1,
-----------------
1999 as to Suite 400
Section 2 Term Expiration: June 30, 2004
---------------
Section 4 Base Monthly Rent: $31,562.15 (to be prorated from June 1, 1999 to
-----------------
June 30, 1999 to account for the inclusion of Suite 450 only)
Section 6 Tenant's Share of Increased Costs: 21.667% (based on 100,461
---------------------------------
rentable square feet in the Building) (to be prorated from June 1,
1999 to June 30, 1999 to account for the inclusion of Suite 450
only)
Section 41 Security Deposit: $31,562.15 payable upon Lease execution
----------------
Section 43 Landlord's Address for Notices:
------------------------------
SHIN-EI Co., Ltd.
c/o HASEKO (California), Inc.
Attn: John T. Troll
350 South Figueroa Street, Suite 255
Los Angeles, California 90071
Tenant's Address for Notices;
----------------------------
Concentric Network Corporation
16842 Von Karman Avenue, Suite 400
Irvine, California 92606
with a copy to:
Concentric Network Corporation
1400 Parkmoor Drive
San Jose, California 95126-3429
Section 49 Exhibits and Rider:
------------------
EXHIBIT "A" SITE PLAN OF PREMISES
EXHIBIT "B" IMPROVEMENTS TO PREMISES
EXHIBIT "C" INTENTIONALLY OMITTED
EXHIBIT "D" RULES AND REGULATIONS
<PAGE>
OFFICE SPACE LEASE
------------------
THIS OFFICE SPACE LEASE ("Lease"), dated May 26, 1999, is entered into
by and between SHIN-EI CO., LTD., a Japanese corporation, as Landlord, and
CONCENTRIC NETWORK CORPORATION, a Delaware corporation, as Tenant.
1. PREMISES.
--------
Landlord hereby leases to Tenant, and Tenant hereby hires from
Landlord, upon the terms and conditions hereinafter set forth, those certain
premises ("Premises") outlined on Exhibit "A" attached hereto. Suite 400 of the
-----------
Premises is located on the first (1st) floor of the Building and Suite 450 of
the Premises is located on the second (2nd) floor of the Building. As used in
this Lease, the term "Building" shall mean the building described in the Basic
Lease Information attached hereto and all common areas, parking areas and
walkways serving said building and all areas adjacent to said building which are
owned by Landlord. Landlord and Tenant hereby irrevocably stipulate and agree
that the aggregate rentable area of the Premises is twenty-one thousand seven
hundred sixty-seven (21,767) square feet and the aggregate usable area of the
Premises is nineteen thousand four hundred thirty-five (19,435) square feet and
that there shall be no changes to the amount of Base Monthly Rent, the amount of
any other sums payable under this Lease, Tenant's Share of Increased Costs, the
amount of the tenant improvement allowance described in Paragraph 2.11 of
Exhibit "B" attached hereto or the amount of any other allowances based in whole
- -----------
or in part upon any measurement or re-measurement by Landlord or Tenant of the
rentable or usable areas of the Premises.
The Premises shall include the right to use, in common with others,
walkways, lobbies, entrances, stairs, elevators and other public portions of the
Building (collectively referred to as the "Common Areas"). All of the outside
walls and windows of the Premises and any space in the Premises used for shafts,
stacks, pipes, conduits, ducts, and electric or other Building facilities, and
the use thereof and access thereto through the Premises for the purposes of
operation, maintenance and repairs are reserved to Landlord.
For purposes of this Lease, the term "rentable area" shall mean 112%
of the "usable area." The term "usable area" shall mean all floor area in the
Premises, measured to the inside glass surface of the outer building walls, to
the interior side of corridors and other permanent partitions, and to the center
of partitions that separate the Premises from adjoining tenant spaces, without
deduction for columns and projections necessary to the Building.
2. TERM: COMPLETION OF IMPROVEMENTS.
--------------------------------
The term ("Term") of this Lease shall commence on June 1, 1999
("Commencement Date") as to Suite 450 and on July 1, 1999 (also, "Commencement
Date") as to Suite 400 and shall expire on June 30, 2004. If Landlord, for any
reason whatsoever, cannot deliver possession of the Premises to Tenant following
execution hereof, this Lease shall not be voidable, nor shall Landlord or its
agents be liable to Tenant for any loss or damage resulting therefrom.
Tenant shall accept the Premises in its "As-Is" condition upon
Landlord's delivery thereof to Tenant. Tenant acknowledges and agrees that
Landlord is not obligated to make any improvements to the Premises nor to
provide any allowance therefor, except as otherwise specifically provided in
Exhibit "B" attached hereto. Promptly after Landlord tenders possession of the
- -----------
Premises to Tenant, Tenant shall construct the tenant improvements in the
Premises in accordance with Exhibit "B" attached hereto using Building standard
-----------
materials (the "Tenant Improvements") except as otherwise approved in writing by
Landlord. All of the terms of this Lease, except for terms requiring the payment
of rent, shall apply to Tenant's construction of the Tenant Improvements and
occupancy of the Premises prior to the Commencement Date. Tenant hereby
acknowledges Landlord's right to enter onto the Premises for the purposes of
reviewing the construction process, compliance with the approved plans and
specifications and completion of the Tenant Improvements as set forth in Exhibit
-------
"B". Prior to commencing the Tenant improvement work, Tenant shall, at Tenant's
- ---
cost, have Tenant's contractor provide a completion bond in an amount equal to
one hundred percent (100%) of the cost of the work for which Tenant has
contracted as security for the faithful performance of the contract and also a
labor and material payment bond in
<PAGE>
an amount not less than one hundred percent (100%) of the cost of such work, as
security for the payment of persons performing labor and furnishing materials on
behalf of Tenant.
Tenant shall have one (1) option to extend the Term of the Lease, for
a period of five (5) years (the "Extension Term"), provided that Tenant is not
then in default under any of the terms or provisions of the Lease and also
provided that Tenant has not been in default on three (3) or more separate
occasions during the Term of this Lease. Tenant may exercise the extension
option by giving written notice of Tenant's intent to exercise the option to
Landlord at least two hundred ten (210) days prior to the expiration of the then
current term, but no earlier than three hundred sixty-five (365) days prior to
the expiration of the then current term. At the commencement of the Extension
Term, the Base Rent shall be adjusted to be equal to ninety-five percent (95%)
of the then fair market rental value of the Premises, but no less than the rate
in effect immediately prior to the expiration of the Term, and said adjustment
may include future adjustments to Base Rent if such future adjustments are then
being included in office lease transactions for comparable buildings. If
Landlord and Tenant cannot agree upon the fair market rental value of the
Premises within sixty (60) days after Landlord's receipt of Tenant's notice
exercising the option contained herein, Landlord and Tenant shall each appoint a
"Qualified Arbitrator" (as defined below) within seven (7) days after the
expiration of the aforementioned sixty (60) day period. Such arbitrators shall
confer and select a third Qualified Arbitrator (the "Neutral Arbitrator"), who
alone shall determine the fair market rental value of the Premises. Should the
two (2) arbitrators fail to select a Third Qualified Arbitrator to act as the
Neutral Arbitrator within seven (7) days, the Neutral Arbitrator shall be
designated pursuant to California Code of Civil Procedure Section 1281.6, as
that Section may be amended or redesignated from time to time; provided,
however, that the Neutral Arbitrator so appointed must be a Qualified
Arbitrator. The determination of the Neutral Arbitrator shall be binding upon
Landlord and Tenant. Landlord and Tenant shall bear the cost of the arbitrator
appointed by such party and shall equally bear the cost of the Neutral
Arbitrator. As used herein, the term "Qualified Arbitrator" shall mean a person
who is an appraiser or real estate broker licensed by the State of California
and who has not less than five (5) years' experience in commercial leasing or
commercial real estate appraising.
3. INTENTIONALLY OMITTED
4. RENTAL PAYMENTS.
---------------
Tenant shall pay base rent ("Base Rent") for the Premises to Landlord
throughout the Term on or before the first day of each calendar month during the
Term, without deduction or offset, in the amount(s) set forth in Section 5
hereof, as adjusted in accordance with Section 6, except that Tenant shall pay
its first twelve (12) monthly installments of Base Rent (i.e., $378,745.80)
concurrently with Tenant's execution hereof. If the Term commences on a day
other than the first day of a calendar month, then the Base Rent for the first
partial month shall be equitably prorated. All sums payable by Tenant to
Landlord hereunder shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, addressed to Landlord c/o The Real
Estate Group, 9920 South La Cienega Boulevard, Suite 905, Inglewood, California
90301, or to such other person or at such other place as Landlord may from time
to time designate in writing. If any rent (including Base Rent, Tenant's Share
of Increased Costs and any other payment required to be made by Tenant) is not
received by Landlord within ten (10) days after the date such installment is
due, Tenant shall pay a late charge equal to eight percent (8 %) of such
installment and the installment and late charge shall bear interest (i) during
the initial Term at the lesser of twelve percent (12%) per annum or the highest
rate permitted by law and (ii) thereafter at the highest rate permitted by law.
Tenant recognizes and agrees that the late charge is intended to compensate
Landlord for and is a reasonable estimate of the administrative, legal,
bookkeeping and other expenses which will result from such delinquent rent
payment, which costs and expenses would be extremely difficult and impractical
to calculate.
Any payment by Tenant or receipt by Landlord of a lesser amount than
stipulated herein for Base Rent, additional rent or any other charge hereunder
shall be deemed payment of the earliest stipulated rent, additional rent or
other charge then due. No endorsement or statement on a check and no letter
accompanying any check or payment shall be deemed an accord and satisfaction.
Landlord may accept any check or payment without prejudice to Landlord's rights
to recover the balance of rent, additional rent or other charges then due or to
pursue any other remedy set forth in this Lease or available at law or in
equity.
<PAGE>
5. BASE MONTHLY RENT.
-----------------
<TABLE>
<CAPTION>
Rent Per Rentable
Month Square Foot Base Monthly Rent
----- ----------------- -----------------
<S> <C> <C>
6/1/1999 - 5/31/2000 $1.45 $31,562.15
6/1/2000 - 5/31/2001 $1.51 $32,868.17
6/1/2001 - 5/31/2002 $1.57 $34,174.19
6/1/2002 - 5/31/2003 $1.63 $35,480.21
6/1/2003 - 6/30/2004 $1.70 $37,003.90
</TABLE>
Notwithstanding the foregoing, the Base Monthly Rent for June, 1999,
shall be prorated to include only Base Monthly Rent for Suite 450.
6. TENANT's SHARE OF INCREASED COSTS.
---------------------------------
(a) The Base Rent payable during each calendar year or part thereof
during the Term, after the calendar year 1999 (the calendar year 1999 being
hereinafter referred to as the "Base Year") shall be increased by Tenant's Share
of Increased Costs, as specified in the Basic Lease Information, of the total
dollar increase, if any, in Operating Expenses paid or incurred by Landlord in
the Base Year. As used herein "Operating Expenses" means all costs, expenses and
disbursements of any kind related to the administration, management, repair,
operation and maintenance of the Building or any portion thereof, including
without limitation, wages, salaries and other payroll costs and expenses,
janitorial maintenance, guard and other services, Building office rent or rental
value, power, water, waste disposal and other utilities, materials and supplies,
maintenance and repairs, insurance, and depreciation on personal property and
costs of making improvements to the Building or Common Areas that are required
by laws which come into effect after execution hereof, including, without
limitation, improvements required by the Americans With Disabilities Act (42
U.S.C. Section 12181 et seq.); provided, however, that Operating Expenses shall
-- ---
not include (i) taxes covered under paragraph (b) below; (ii) depreciation other
than depreciation on exterior window draperies and carpeting in public corridors
and Common Areas, if any; (iii) costs incurred for leasing, renovating,
improving or decorating vacant space or space for other tenants in the Building;
(iv) real estate brokers' commissions; (v) interest; (vi) except as set forth in
Section 6(f) below, capital items; (vii) costs arising as a result of a
violation of any law(s) applicable to the Building by Landlord, other tenants of
the Building or their respective agents, employees or contractors or costs to
bring the Building into compliance with any applicable laws which are in effect
as of execution hereof; (viii) costs incurred to correct any construction
defects in the Building or to comply with any conditions, covenants or
restrictions affecting the Building in effect as of execution hereof; (ix) costs
incurred in connection with negotiations or disputes with other tenants or
occupants of the Building and costs arising from the violation of any lease or
agreement by Landlord or any other tenant or occupant of the Building;(x)
without limitation on the provisions of Section 46 below, costs incurred in the
remediation of Hazardous Materials; and (xi) costs for which Landlord receives
reimbursement from a third party (except from other tenants in the Building as a
share of Operating Expenses in accordance with this provision or a similar
provision in such tenants' leases). The cost of premiums for earthquake or flood
insurance, if incurred by Landlord after the Base Year, shall be added to the
Base Year calculation and Tenant shall only be responsible for its share of the
amount exceeding the amount attributed to the Base Year. In the event that the
Building is less than ninety-five percent (95%) occupied, actual Operating
Expenses for both the Base Year and each subsequent calendar year shall be
adjusted to equal Landlord's reasonable estimate of Operating Expenses had
ninety-five percent (95%) of the total rentable area of the Building been
occupied and assessed.
(b) The Base Rent payable during each calendar year, or part thereof
during the Term, after the calendar year 1999 (the "Base Tax Year"), shall also
be increased by Tenant's Share of Increased Costs, as specified in the Basic
Lease Information, of the total dollar increase, if any, in real and personal
property taxes, rental tax, gross receipts tax and any tax, tax assessment,
special assessment, charges or other imposition of any nature whatsoever levied
wholly or partly in lieu thereof, whether or not such tax, tax assessment,
special assessment, charge or other imposition is presently within the
contemplation of the parties, levied against the Building and fixtures and other
property used in connection with the operation or maintenance of the Building
for such calendar year, over such taxes for the Base Tax Year. In the event that
the Building is less than ninety-five percent (95%) occupied, the actual amount
of said taxes and assessments for both the Base Tax Year and each subsequent
calendar year shall be adjusted to equal Landlord's reasonable estimate thereof
had ninety-five percent (95%) of the total rentable area of the Building been
occupied and assessed.
<PAGE>
(c) Prior to the start of each calendar year or as soon thereafter as
practicable, Landlord shall give Tenant written notice of its estimate of
amounts payable under paragraphs (a) and (b) above for the ensuing calendar
year. On or before the first day of each month during the ensuing calendar year,
Tenant shall pay to Landlord one-twelfth (1/12) of such estimated amounts,
provided that if such notice is not given in December, Tenant shall continue to
pay on the basis of the prior year's estimate until the month after such notice
is given. If at any time or times it appears to Landlord that the amounts
payable under either paragraph (a) and (b) above for the current calendar year
will vary from its estimate by more than five percent (5%), Landlord shall, by
written notice to Tenant, revise its estimate for such year, and subsequent
payments by Tenant for such year shall be based upon such revised estimate.
(d) Within a reasonable time after the close of each calendar year,
Landlord shall deliver to Tenant a statement of amounts payable under paragraphs
(a) and (b) above for such calendar year. If such statement shows an amount
owing by Tenant that is less than the estimated payments for such calendar year
previously made by Tenant, Tenant shall be given a credit towards future rents
owed in an amount equivalent to the overpayment. If such statement shows an
amount owing by Tenant that is more than the estimated payment for such calendar
year previously made by Tenant, Tenant shall pay the deficiency to Landlord
within thirty (30) days after delivery of the statement.
(e) If, for any reason, this Lease shall terminate on a day other
than the last day of a calendar year, the amount of increase (if any) in rent
payable by Tenant applicable to the calendar year in which such termination
shall occur shall be equitably prorated on the basis which the number of days
from the commencement of such calendar year to and including such termination
date bears to three hundred sixty-five (365).
(f) Tenant shall be charged for the amortization, with a market rate
of interest, of the cost of installation of capital investment items that are
for the purpose of reducing operating costs or which result in energy
conservation or that may be required by applicable law or governmental
authority. All such costs shall be amortized over the reasonable life of the
capital investment items, with the reasonable life and amortization schedule to
be determined in accordance with sound management accounting principles.
(g) All amounts payable under this Section 6 shall be considered
additional rent.
(h) Upon reasonable advance written notice by Tenant to Landlord,
given not more often than once per statement described above and within sixty
(60) days after Tenant's receipt of the statement described in Subsection 6(d)
above, Tenant shall be permitted to examine the books and records in Landlord's
possession which are pertinent to the Operating Expenses and Taxes described in
such statement. Such examination shall be conducted at Tenant's sole expense and
at Landlord's office or at such other place where such books and records are
commonly kept by Landlord, and shall be conducted so as not to interfere with
Landlord's normal business operations. If Tenant fails to conduct such
examination within sixty (60) days after its receipt of a statement as set forth
above, then Tenant's right to conduct such examination shall be deemed waived
with respect to such statement and such statement shall be final and binding
upon Landlord and Tenant. If such examination reveals an overpayment of
Operating Expenses or Taxes for the period covered-by such statement, then,
provided Landlord does not reasonably dispute the results thereof, Landlord
shall credit such overpayment against the next monthly rent payment of Tenant,
or if the Term hereof has expired, Landlord shall promptly refund the
overpayment to Tenant. If such examination reveals an underpayment of Operating
Expenses or Taxes for the period covered by such statement, then Tenant shall
pay the same with its next monthly rent payment, or if the Term hereof has
expired, Tenant shall pay the same within fifteen (15) days after receipt of the
examination results. If Tenant's examination reveals an overstatement of
Operating Expenses of five percent (5%) or more, then the reasonable costs and
expenses of Tenant's examination shall be paid by Landlord.
7. USE.
---
(a) The Premises shall be used for general office purposes and as a
computer server room containing fiber optic and telephone devices and electrical
switching devices (the "Data Center"), and for no other purpose without the
written consent of Landlord. Tenant shall not do or permit to be done in or
about the
<PAGE>
Premises, nor bring or keep or permit to be brought or kept therein, anything
which is prohibited by or will in any way conflict with any law, statute,
ordinance or governmental rule or regulation now in force or which may hereafter
be enacted or promulgated or which is prohibited by the standard form of fire
insurance policy, or will in any way increase the existing rate of or affect
any fire or other insurance upon the Building or any of its contents, or cause a
cancellation of any insurance policy covering the Building or any part thereof
or any of its contents. Tenant shall not do or permit anything to be done in or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants of the Building, or injure or annoy them, or allow any
excessive noises, vibrations or odors to emit from the Premises, or use or allow
the Premises to be used for any improper, immoral, unlawful or objectionable
purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about
the Premises or commit or suffer to be committed any waste in, on or about the
Premises. Tenant shall keep the blinds closed on any first (1st) floor windows
through which telephone or computer equipment may be seen from outside the
Premises, as determined by Landlord.
(b) Tenant shall not use the name of the Building or any similar name
in connection with any business carried on by Tenant (except as Tenant's
address) without written consent of Landlord which Landlord may withhold in its
sole and absolute discretion.
(c) Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty regarding the zoning of the
Building or the suitability of the Premises for the conduct of Tenant's
business, nor whether said business is permitted by law.
8. SERVICES.
--------
(a) Landlord shall maintain the public and common areas of the
Building, such as lobbies, stairs, elevators, corridors and restrooms in
reasonably good order and condition except for damage occasioned by the act of
Tenant, which damage shall be repaired by Landlord at Tenant's expense.
(b) Landlord shall furnish the Premises with (i) electricity for
lighting and the operation of office machines consistent with normal general
office use, (ii) heat and air conditioning to the extent reasonably required in
Landlord's judgment for the comfortable occupation of the Premises for normal
general office use during the reasonable and usual business hours of 8:00 a.m.
to 6:00 p.m., Monday through Friday, and between the hours of 8:00 a.m. and 1:00
p.m. on Saturday (exclusive of Sundays and Holidays) or such shorter period
specified or prescribed by any applicable policies or regulations adopted by any
utility or government agency, (iii) elevator service (if an elevator currently
exists in the Building), (iv) lighting replacement (for building standard
lights), (v) restroom supplies, and (vi) daily janitor service based on normal
general office use five nights per week (exclusive of holidays) furnished in the
manner that such services are customarily furnished in comparable buildings in
the Irvine area. If Tenant requires any utilities or services during times other
than the business hours set forth in item (ii) above, then Tenant shall promptly
upon demand reimburse Landlord for all costs of providing the same, as
reasonably estimated by Landlord. Landlord shall not be in default hereunder or
be liable for any damages directly or indirectly resulting from, nor shall the
rental herein reserved be abated by reason of (1) the installation, use or
interruption of use of any equipment used for the furnishing of any of the
foregoing services or of any phone lines, (2) failure to furnish or delay in
furnishing any such services when such failure or delay is caused by repair,
accident or any condition beyond the reasonable control of Landlord or by the
making of necessary repairs or improvements to the Premises or to the Building,
or (3) the limitation, curtailment, rationing or restrictions on use of water,
electricity, gas or any other form of energy serving the Premises or the
Building. Landlord shall use reasonable efforts to remedy the interruption in
the furnishing of such services. Landlord shall be entitled to cooperate
voluntarily in a reasonable manner with the efforts of national, state or local
agencies or utilities suppliers in reducing energy or other resource
consumption. Landlord shall be under no obligation to provide additional or
after-hours heating or air conditioning, but if Landlord elects to provide such
services at Tenant's request, Tenant shall pay Landlord the then current
Building standard rate for such services as determined by Landlord.
(c) Whenever heat generating machines or equipment or lighting other
than Building standard lights are used in the Premises by Tenant which affect
the temperature otherwise maintained by the air conditioning system, unless
installed by Tenant pursuant to Section 2.13 of Exhibit "B", Landlord shall have
-----------
the right to install
<PAGE>
supplementary air conditioning units in the Premises, and the cost thereof,
including the cost of installation and the cost of operation and maintenance
thereof, shall be paid by Tenant to Landlord upon billing by Landlord. In
addition, Tenant shall enter into and pay for a service contract with a licensed
air-conditioning contractor to service the supplementary air-conditioning units.
If Tenant installs lighting or equipment requiring power in excess of that
required for normal lighting or desk-top office equipment or normal copying
equipment, Tenant shall pay for the cost of such excess power as additional
rent, together with the cost of installing any additional risers or other
facilities that may be necessary to furnish such excess power to the Premises.
(d) In the event that Tenant has unusual needs with regard to the
services to be provided by Landlord set forth above, including but not limited
to, any unusual utility usage or installation, Tenant shall immediately notify
Landlord in writing of same. In the event of any of the above situations
requiring additional electricity, Landlord, at its option, may: (i) cause same
to be separately metered at Tenant's expense including the expense of
installation of such meters, in which case Tenant shall pay the cost of a
monthly meter reader to read the meter(s), or (ii) equitably estimate the cost
thereof to be charged directly to Tenant. If Tenant fails to give Landlord
written notice of Tenant's unusual needs for services, Landlord may back-charge
Tenant for an equitable amount to compensate Landlord for such extra electrical
usage; provided, however, Tenant's use of electric current shall never exceed
the capacity of the feeders to the Building in which the Premises is located or
the risers or wiring installation.
9. TAXES PAYABLE BY TENANT.
-----------------------
In addition to the monthly rental and other charges to be paid by
Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all
taxes payable by Landlord (other than net income taxes) whether or not now
customary or within the contemplation of the parties hereto: (a) upon, measured
by or reasonably attributable to the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the Premises or by
the cost or value of any leasehold improvements made in or to the Premises by or
for Tenant, other than Landlord's work under Exhibit "B" regardless of whether
------------
title to such improvements shall be in Tenant or Landlord; (b) upon or measured
by the monthly rental payable hereunder, including, without limitation, any
gross income tax or excise tax levied by the City of Irvine, the State of
California, the Federal Government or any other governmental body with respect
to the receipt of such rental; (c) upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises or any portion thereof; and (d) upon this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises.
10. IMPROVEMENTS. REPAIRS AND ALTERATIONS.
-------------------------------------
Upon taking possession of the Premises as set forth herein, Tenant
shall, be deemed to have accepted the Premises as being in tenantable and good
condition. Upon delivery thereof, the Premises (and all Building systems
directly serving the Premises except those which Tenant is responsible for
installing in connection with the Tenant Improvements) shall be in good
condition, order and repair and the Premises roof shall be watertight. Tenant
shall, at Tenant's sole cost and expense, repair and maintain the Premises and
every part thereof in good order and condition and, except as expressly provided
in Section 15 below, in compliance with all applicable laws, ordinances and
regulations and, subject to the third sentence of this Section 10, Tenant shall,
at Tenant's sole cost and expense, make any change or alterations to the
Premises required thereby. Without limiting the foregoing, Tenant shall, at its
sole cost and expense, cause the Premises to comply at all times with the
requirements of Title III of the Americans With Disabilities Act (42 U.S.C.
Section 12181 et seq.), the regulations now or hereafter adopted pursuant
-- ---
thereto, and any and all applicable laws, statutes, ordinances, rules and
regulations concerning public accommodations for disabled persons now or
hereafter in effect. Notwithstanding the foregoing, Tenant shall not alter or
change the Premises or any other portion of the Building without the prior
written consent of Landlord, which shall not be withheld for changes required by
law, except that such changes shall be subject to Landlord's reasonable approval
of plans therefor and Landlord may elect to have its own contractors perform any
such alterations that affect Building systems, utilities or structural portions
and Tenant shall reimburse Landlord for the reasonable costs thereof within five
(5) business days after written demand. Notwithstanding the immediately
preceding sentence, Tenant shall have the right (i) to make interior, non-
structural alterations which do not affect the Building systems (including,
without limitation; mechanical, electrical, HVAC, plumbing and life and safety
systems) and which do not cost more than $10,000 in the
<PAGE>
aggregate over the Term of the Lease and (ii) to install cables, computer lines
and telephone lines in the Premises subject to Landlord's approval as to size,
design, layout, location and method of installation. Tenant hereby waives the
provisions of Subdivision (1) of Section 1932 of the Civil Code of California,
and any successor or similar statute or law. All improvements, repairs and/or
alterations that may be required of or desired by Tenant shall be done by
Landlord's contractor but at the cost of Tenant. All improvements, repairs, and
alterations shall become the property of Landlord and shall remain upon and be
surrendered with the Premises; provided, however, that at Landlord's option,
Tenant shall, at Tenant's expense, when surrendering the Premises, restore the
same to their original condition. All damage or injury done to the Premises by
Tenant, or by any persons who may be in or upon the Premises with the consent of
Tenant, shall be paid for by Tenant. Tenant shall, at the termination of this
Lease by the expiration of time or otherwise, surrender and deliver up the
Premises to Landlord in as good condition as when received by Tenant from
Landlord, reasonable wear and tear excepted and subject to the following (to the
extent not caused or created by Tenant, its agents, employees or invitees): (i)
acts of God, (ii) casualty, (iii) condemnation, (iv) the presence of Hazardous
Materials not caused or created by Tenant, its agents employees or contractors,
and (v) improvements, repairs and/or alterations which Landlord has requested to
remain in the Premises. Tenant shall pay for all damage to the Building, as well
as all damage to tenants or occupants thereof, caused by Tenant's misuse or
neglect of the Premises or the appurtenances thereto.
11. LIENS.
-----
Tenant shall keep the Premises and the Building free from any
mechanic's and/or materialmen's liens or other liens arising out of any work
performed, materials furnished or obligations incurred by Tenant. Tenant shall
notify Landlord at least seventy-two (72) hours prior to the commencement of any
work or activity on the Premises which may give rise to such liens and Landlord
shall have the right to post and keep posted on the Premises any notices that
may be provided by law or which Landlord may deem to be proper for the
protection of Landlord, the Premises and the Building from such liens. If a
mechanic's lien is filed as a result of Tenant's activities, Tenant shall
promptly cause such lien to be removed, or if Tenant contests the correctness or
validity of any claim of lien, Tenant shall provide Landlord with evidence that
Tenant has recorded a statutory lien release bond pursuant to California Civil
Code Section 3143 and has given notice thereof pursuant to California Civil Code
Section 3144.5 or any successor statutes pertaining to those Sections. If Tenant
fails to do so, Landlord may, but need not (i) record the statutory lien release
bond, and charge Tenant the bond premium together with interest thereon as
additional rent hereunder, or (ii) Landlord may, at its option, pay the lien or
any portion of it without inquiry as to its validity. Any amounts paid by
Landlord to remove a mechanics' lien, including all expenses and reasonable
attorneys' fees incurred by Landlord, shall be due and payable by Tenant to
Landlord immediately upon demand, together with interest, until paid.
12. DAMAGE AND DESTRUCTION.
----------------------
If the Premises or the Building are completely destroyed by any cause
insured against under a standard form fire and extended coverage policy of
insurance, or are so damaged thereby that they are untenantable within one
hundred eighty (180) days after the date of such destruction or damage, Landlord
or Tenant may terminate this Lease by written notice to the other given within
five (5) business days after the end of the one hundred eighty (180) day period.
Within forty-five (45) days after the date of such destruction or damage,
Landlord shall give written notice to Tenant as to whether or not the Premises
will be rendered tenantable within one hundred eighty (180) days after the date
of such destruction or damage. If this Lease is not terminated by Landlord or
Tenant as set forth above, Landlord shall with due diligence render the Premises
tenantable to the extent insurance proceeds are available therefor, and rent
allocable to the untenantable portion of the Premises shall be abated while such
portion remains untenantable. If the Premises or the Building are damaged or
destroyed by any cause other than a cause insured against under Landlord's
standard form fire and extended coverage policy of insurance or if more than
twenty-five percent (25%) of the replacement value of the Building is destroyed,
then Landlord may terminate this Lease by written notice to Tenant given within
thirty (30) days after such damage or destruction, which termination shall be
effective as of the date of the notice. Notwithstanding anything to the contrary
herein, if the Building or the Premises are damaged or destroyed within the last
twelve (12) months of the Term of this Lease, then Landlord may terminate this
Lease upon written notice to Tenant given within thirty (30) business days after
the damage or destruction occurs. Tenant hereby waives the provisions of
Subdivision 2 of Section 1932 of the California Civil Code and the
<PAGE>
provisions of Subdivision 4 of Section 1933 of the California Civil Code, and
all successor and similar statutes and laws and agrees that this Section 12 is
intended to govern damage and destruction to the Premises and the Building.
13. WAIVER OF SUBROGATION.
---------------------
Prior to or immediately after the execution of this Lease, Tenant
shall procure from its insurers under all polices of property, liability,
workmen's compensation and other insurance now or hereafter existing during the
Term, and purchased by it insuring or covering the Premises or any portion
thereof or operations therein, a waiver of all rights of subrogation which the
insurer might otherwise have. Prior to or immediately after the execution of
this Lease, Landlord shall procure from its insurers under all polices of
property, liability, workmen's compensation and other insurance now or hereafter
existing during the Term, and purchased by Landlord insuring or covering the
Building or any portion thereof, or operations therein, a waiver of all rights
of subrogation which the insurer might otherwise have. The waiver of subrogation
under this Section 13 shall be applicable to Landlord's and Tenant's respective
agents, employees, contractors, successors, assigns and tenants or subtenants
and shall apply to all perils actually insured against by Landlord or Tenant
without regard to negligence or willful misconduct of the party so released.
14. INDEMNIFICATION.
---------------
Tenant hereby waives all claims against Landlord, its agents,
employees and contractors for damage to Tenant's business or any of Tenant's or
any other person's or entity's property or injury to or death of any person in,
upon or about the Premises arising at any time and from any cause other than
solely by reason of the willful act or gross negligence of Landlord, its agents,
employees or contractors. Tenant shall defend (by counsel acceptable to
Landlord), indemnify and hold Landlord harmless from and against any and all
losses, claims, damages, liabilities and costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) arising directly or
indirectly from Tenant's (or any of Tenant's subtenants', assignees', agents',
contractors', employees', invitees', licensees' or guests') violation of any of
the terms, covenants or conditions of this Lease or from the use or occupancy of
the Premises, the Building, the Generator (as defined in Exhibit "B" attached
-----------
hereto) and/or the property upon which the Generator is located, except for
those losses, claims, damages, liabilities and costs and expenses caused solely
by the willful misconduct or gross negligence of Landlord, its agents, employees
or contractors. Tenant's obligations and Landlord's rights under this Section 14
shall survive the expiration or earlier termination of this Lease.
Landlord shall indemnify, protect, defend (by counsel reasonably
satisfactory to Tenant), and hold Tenant harmless from and against any and all
claims, demands, actions, obligations, losses, liabilities, damages, costs, and
expenses (including, without limitation, reasonable attorneys' and other
professional fees), incurred by or asserted against Tenant in connection with
any claim, action, or demand for bodily injury or death or property damage
arising out of (i) any negligent act or omission or willful misconduct of
Landlord or of any of Landlord's employees, officers, agents, contractors, or
representatives occurring on or about the Common Areas to the extent the same is
covered Under a standard commercial general liability insurance policy, (ii) or
any construction defects in the Premises unless due to construction or
installation of improvements or alterations in the Premises by Tenant, its
agents employees or contractors, or (iii) in connection with any Hazardous
Materials present in the Building or the Premises not caused or created by
Tenant, its agents employees or contractors. Landlord's indemnity hereunder
shall exclude any claims for lost profits, loss in value, or other consequential
damages and shall not apply to the extent of any (a) negligence or willful
misconduct of Tenant or Tenant's agents, employees or contractors, or (b) breach
of any of Tenant's warranties or obligations hereunder. Landlord's obligations
and Tenant's rights under this Section 14 shall survive the expiration or
earlier termination of this Lease.
15. COMPLIANCE WITH LAW.
-------------------
Tenant shall, at its sole cost and expense, promptly comply with all
laws, statutes, ordinances and governmental rules, regulations or requirements
now in force or which may hereafter be in force, with the requirements of any
board of fire underwriters or other similar body now or hereafter constituted,
with any directions or occupancy certificates issued pursuant to any law by any
public officer or officers, as well as the provisions of all recorded documents
affecting the Premises, insofar as any thereof relate to or affect the
condition, use or occupancy of the Premises, or Tenant's business conducted
therein, excluding remediation of any Hazardous Materials not caused or created
<PAGE>
in any manner by Tenant and further excluding structural changes that are not
required due to improvements made by or for Tenant or due to Tenant's acts, but
including alterations to the Premises required by the Americans With
Disabilities Act that are required due to Tenant's alterations to the Premises.
Notwithstanding the foregoing, any cost to bring the Premises into compliance
with existing (i) applicable laws, (ii) conditions, covenants or restrictions,
or (iii) lender's requirements, which are in effect as of execution hereof for
the Premises based on normal general office use shall be at Landlord's cost.
Tenant shall be responsible for compliance with all applicable laws for the
Premises being used for other than normal general office use.
16. INSURANCE.
---------
(a) Tenant shall, at its sole cost and expense, during the Term of
this Lease, cause all improvements at any time located in the Premises (other
than the Building standard tenant improvements) and all equipment and fixtures
from time to time used or intended to be used in connection with the operation
and maintenance of the Premises, to be insured for the mutual benefit of
Landlord and Tenant against loss or damage by fire and against loss or damage by
other risks now or hereafter included in the All-Risk insurance policy, in an
amount equal to the full insurable value thereof. All proceeds from such
insurance shall be used for the repair or replacement of such improvements,
equipment and fixtures.
(b) Notwithstanding any other provisions of this Lease, Tenant, at
its own expense, shall also maintain the following insurance coverage. All
coverage shall be primary and non-contributory over any insurance the Landlord
may elect to provide on his behalf. Upon the commencement of the Term, and upon
renewal of such insurance coverage, Tenant shall deliver to the Landlord an
original certificate of such insurance from the insurer providing a minimum of
thirty (30) days' notice of cancellation or modification. All policies of
insurance required to be carried by Tenant under this Section 16 shall be in
form satisfactory to Landlord, shall name Landlord as an additional insured,
shall be issued by responsible insurance companies which are licensed to do
business in the State of California, and shall have a Best's rating of at least
"A" and a financial rating of not less than "X" and have been approved in
writing by Landlord. The policies shall contain cross-liability endorsements or
their equivalent, and shall be for the mutual and joint benefit and protection
of Landlord, Tenant and any other party designated by Landlord as an additional
insured.
(1) Worker's Compensation and Employer's Liability. Tenant shall
maintain Worker's Compensation insurance sufficient to comply with all
applicable State and/or Federal laws and an Employer's Liability policy with a
limit of not less than $1,000,000.
(2) Commercial General Liability. Tenant shall maintain a
Commercial General Liability policy with limits of liability not less than
$2,000,000 per occurrence and $3,000,000 general aggregate for Bodily Injury and
Property Damage and $2,000,000 aggregate products/completed operations coverage.
Such policy shall specifically name the Landlord as additional insured. Landlord
may, at its discretion, request evidence of products insurance.
(3) Business Interruption. Tenant shall also maintain a policy
of (or obtain an endorsement providing) business interruption insurance insuring
Tenant against losses from interruption of its use of the Premises for any
reason with coverage for a period of not less than one (1) year.
(4) Property Insurance. Tenant shall maintain an All-Risk
property insurance policy on all personal property and tenant improvements and
betterments for not less than ninety percent (90%) of the replacement cost of
the same. Tenant's property policy shall not provide for a deductible in excess
of $5,000 without prior written approval of Landlord.
17. ASSIGNMENT AND SUBLETTING.
-------------------------
Tenant shall not assign, mortgage, pledge or otherwise transfer this
Lease, or any interest therein, either voluntarily, involuntarily, or by
operation of law, and shall not sublet the Premises or any part thereof, or any
right or privilege appurtenant thereto, or suffer any other person (the agents
and employees of Tenant excepted) to occupy or use the Premises, or any portion
thereof, without the written consent of Landlord, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Tenant may transfer its
interest in the Premises to (i) a parent company, subsidiary, or affiliate of
Tenant which controls or is controlled by or is under common control with
Tenant, (ii) a successor
<PAGE>
corporation related to Tenant by merger, consolidation, nonbankruptcy
reorganization or government action, or (iii) a purchaser of all or
substantially all of Tenant's assets (collectively "Affiliate"), without
Landlord's consent, but upon thirty (30) days prior written notice. If Tenant is
a corporation, then a change or changes in the ownership of Tenant, whether
voluntarily, involuntarily, or by operation of law, which aggregate(s) fifty
percent (50%) or more of total capital stock of Tenant or fifty percent (50%) or
more of voting capital stock of Tenant shall be deemed an assignment of this
Lease. Notwithstanding the immediately preceding sentence, so long as Tenant's
stock is sold on a nationally recognized public exchange, no sale of stock shall
be deemed an assignment or subletting. a consent to one assignment, mortgage,
pledge, subletting, occupation, or use by any other person shall not relieve
Tenant from any obligation under this Lease and shall not be deemed to be a
consent to any subsequent assignment, mortgage, pledge, subletting, occupation
or use by another person. Any assignment, mortgage, pledge, subletting,
occupation or use without such consent shall be void, and shall, at the option
of Landlord, terminate this Lease. Tenant's request for Landlord's consent
pursuant to this Section 17 shall be submitted in writing at least forty-five
(45) days prior to the date Tenant desires to secure such consent. Such request
shall be accompanied by all relevant information reasonably necessary for
Landlord to consider such request. Any request for Landlord's consent pursuant
to this Section 17 shall also be accompanied by a payment to Landlord of $500.00
for the review, evaluation, and/or preparation of any materials or documents;
provided, however, if Landlord elects to terminate pursuant to this Section 17,
the $500.00 shall be refunded to Tenant. In lieu of considering any such request
(other than a request to the mortgage or pledge of this Lease) following the
initial Term of this Lease, Landlord may, within fifteen (15) days after receipt
thereof from Tenant, notify Tenant of Landlord's election to terminate this
Lease (or if a subletting of only a part of the Premises is involved, terminate
this Lease only as to that part and reduce the rent and other monetary
obligations of Tenant proportionately), which election, if made, shall be
effective no less than sixty (60) nor more than ninety (90) days after the date
of such election. If such election is made by Landlord, Tenant shall surrender
the Premises (or if a subletting of only a part of the Premises is involved,
only that part) to Landlord on the effective date of such termination, and
Tenant shall thereafter incur no further liability under this Lease for the
Premises (or for that part of the Premises required to be surrendered).
Tenant and Landlord shall equally divide any sums or other economic
consideration for which Tenant is entitled to as a result of an assignment,
sublease or transfer of Tenant's interest in and to the Premises, or any portion
thereof (other than (i) the rental or other payments received which are
attributable to the cost of leasehold improvements made to the assigned or
sublet portion of the Premises at the cost of Tenant, (ii) any brokerage
commission related to the assignment or sublet, and (iii) any reasonable
attorneys' fees related to the assignment or sublet, provided that each of the
foregoing costs are amortized over the term of the assignment or sublease, as
applicable), whether denominated rentals under the sublease or otherwise, which
exceed in the aggregate the total sums which Tenant is obligated to pay Landlord
under this Lease (prorated to reflect obligations allocable to that portion of
the Premises subject to such assignment or sublease) ("Net Proceeds"). Said Net
Proceeds shall be paid to Landlord (i) in the case of an assignment, in its
entirety promptly following the effective date of the assignment, or (ii) in the
case of a sublease, on a monthly basis, along with Tenant's payment of Base
Monthly Rent, without affecting or reducing any other obligation of Tenant
hereunder.
Regardless of Landlord's consent, no subletting or assignment
(including subletting or assignment to an Affiliate) shall release Tenant of
Tenant's obligations hereunder or otherwise alter the primary liability of
Tenant hereunder. The acceptance of rent or any other sum by Landlord from any
person or entity shall not be deemed to be a waiver by Landlord of any provision
hereof. In the event of default by any assignee of Tenant or any successor of
Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
said assignee or successor. Landlord may consent to subsequent subletting or
assignments of this Lease by assignees of Tenant without notifying Tenant or any
successor of Tenant, and without obtaining its or their consent thereto and such
action shall not relieve Tenant of any liability under this Lease.
18. RULES.
-----
Tenant shall faithfully observe and comply with the rules and
regulations annexed to this Lease as Exhibit "D" and, after notice thereof, all
-----------
reasonable modification thereof and additions thereto from time to time
promulgated in writing by Landlord. Landlord shall not be responsible to Tenant
for the nonperformance by any other tenant or occupant of the Building of any of
said rules and regulations.
<PAGE>
19. ENTRY BY LANDLORD.
-----------------
Landlord may enter the Premises at reasonable hours upon twenty-four
(24) hours prior notice (except (i) in the event of emergency or to provide
services pursuant to subsection (d) below in which case no notice shall be
necessary or (ii) only eight (8)hours prior notice shall be required with
respect to exhibiting the Premises to prospective tenants during the last seven
(7) months of the Term; provided, however, that Tenant shall use reasonable
efforts to cooperate with Landlord in the event Landlord provides fewer than
eight (8) hours notice) to: (a) inspect the same; (b) exhibit the same to
prospective purchasers, lenders or tenants; (c) determine whether Tenant is
complying with all of Tenant's obligations hereunder; (d) supply janitor service
and any other service to be provided by Landlord to Tenant hereunder, (e) post
notice of non-responsibility; and (f) make repairs required of Landlord under
the terms hereof or repairs to any adjoining space or utility service or make
repairs, alterations or improvements to any other portion of the Building,
provided, however, that all such work shall be done as promptly as reasonably
possible and so as to cause as little interference to Tenant as reasonably
possible. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises or any other loss occasioned by such entry.
Landlord shall at all times have and retain a key with which to unlock all of
the doors in, on or about Premises (excluding Tenant's vaults, safes and similar
areas designated in writing by Tenant in advance) and Landlord shall have the
right to use any and all means which Landlord may deem proper to open said doors
in an emergency in order to obtain entry to the Premises. Any entry to the
Premises obtained by Landlord by any of said means, or otherwise, shall not be
construed or deemed to be a forcible or unlawful entry into or a detainer of the
Premises or an eviction, actual or constructive, of Tenant from the Premises, or
any portion thereof.
20. EVENTS OF DEFAULT.
-----------------
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant shall
fail to pay any rent (including Base Rent and Tenant's Share of Increased Costs)
within three (3) days after the date such rent becomes due and payable, or (b)
if Tenant shall fail to pay any other sum when and as the same becomes due and
payable and such failure shall continue for more than ten (10) business days
after receipt of written notice that such payment is overdue; or (c) if Tenant
shall fail to perform or observe any other term hereof or of the rules and
regulations described in Section 18 to be performed or observed by Tenant, such
failure shall continue for more than thirty (30) days after notice thereof from
Landlord and Tenant shall not within such period commence with due diligence and
dispatch the curing of such default, or, having so commenced, shall thereafter
fail or neglect to prosecute or complete with clue diligence and dispatch the
curing of such default; or (d) if Tenant shall make a general assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
as they become due or shall file a petition in bankruptcy, or shall be
adjudicated as bankrupt or insolvent, or shall file a petition seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, or
shall fail any answer admitting or shall fail timely to contest the material
allegations of a petition filed against it in any such proceeding, or shall seek
or consent to or acquiesce in the appointment of any trustee, receiver or
liquidator of Tenant or any material part of its properties; or (e) if within
thirty (30) days after the commencement of any proceeding against Tenant seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceeding shall not have been dismissed, or if, within thirty
(30) days after the appointment without the consent or acquiescence of Tenant or
of any material part of its properties, such appointment shall not have been
vacated; or (f) if this Lease or any estate of Tenant hereunder shall be levied
upon under any attachment or execution and such attachment or execution is not
vacated within ten (10) days; or (g) if any other event occurs which is
described in this Lease as a material breach of, or default under, this Lease.
21. TERMINATION UPON DEFAULT.
------------------------
If an Event of Default shall occur, Landlord at any time there after
may give a written termination notice to Tenant, and on the date specified in
such notice (which shall be not less than three (3) days after the giving of
such notice) Tenant's right to possession and this Lease shall terminate, unless
on or before such date all rent and other sums payable by Tenant under this
Lease (together with interest thereon at the maximum rate allowable by law) and
all costs have been paid by Tenant and all other breaches of this Lease by
Tenant at the time existing shall have been fully remedied. Upon such
termination, Landlord may recover from Tenant: (a) the worth at the time of
award of the unpaid rent which had been earned at the time of termination; (b)
the worth at the time of
<PAGE>
award of the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; (c) the worth at the time of
award of the amount by which the unpaid rent for the balance of the Term after
the time of award exceeds the amount of such rental loss that Tenant proves
could be reasonably avoided; and (d) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which results therefrom. The "worth at the
time of award" of the amounts referred to in clauses (a) and (b) above shall be
computed by allowing interest at the rate of ten percent (10%) per annum. The
worth at the time of award of the amount referred to in clause (c) above 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 percent (1%). For
the purposes of determining unpaid rent under clauses (a), (b) and (c) above,
the monthly rent reserved in this Lease shall be deemed to be the rent due under
Sections 4 and 5 above, as adjusted by Section 6.
22. CONTINUATION AFTER DEFAULT.
--------------------------
Landlord also has the remedy described in California Civil Code
Section 1951.4 (Lessor may continue Lease in effect after Lessee's breach and
abandonment and recover rent as it becomes due, if Lessee has the right to
sublet or assign, subject only to reasonable limitations). Acts of maintenance
or preservation or efforts to relet the Premises or the appointment of a
receiver upon application of Landlord to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession.
23. OTHER RELIEF.
------------
The remedies provided for in this Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
24. PARKING.
-------
Unless Tenant is in default under this Lease resulting in delivery of
a written termination notice pursuant to Section 21 above, Tenant shall be
entitled to fifty-four (54) unreserved vehicle parking spaces (based on (i) 3.8
spaces per 1,000 usable square feet in the Premises which is used as office
space, and (ii) 1 space per 750 usable square feet in the Premises which is used
as light industrial space (i.e., the Data Center)) in the Building parking
facility at no cost to Tenant during the initial Term of the Lease or the
Extension Term, if exercised. Thereafter, if applicable, parking spaces shall be
subject to a monthly parking fee for such spaces designated by Landlord for
parking, with Landlord reserving the right to set and increase monthly parking
fees for such spaces from time to time during the Term of this Lease. Upon
Tenant's completion of the Tenant Improvements, Tenant shall provide Landlord
with certification by Tenant's Space Planner (as defined in Exhibit "B" attached
-----------
hereto) of the usable square footage of the Data Center (which usable square
footage shall be subject to Landlord's verification), and the number of parking
spaces set forth above shall be adjusted accordingly (i.e., 19,435 [-] Data
Center usable square footage = office space usable square footage; [(office
space usable square footage/1,000) * 3.8] + [(Data Center usable square
footage/750] = total unreserved vehicle parking spaces). Landlord may assign any
unreserved and unassigned parking spaces and/or make all or a portion of such
spaces reserved, if it determines in its reasonable discretion that it is
necessary for orderly and efficient parking. Tenant shall not use more parking
than said number. If Landlord has not assigned specific spaces to Tenant, Tenant
shall not use any spaces which have been so specifically assigned by Landlord to
other tenants or for such other uses as visitor parking or which have been
designated by governmental entities with competent jurisdiction as being
restricted to certain uses. Tenant shall not permit or allow any vehicles that
belong to or are controlled by Tenant or Tenant's employees, suppliers,
shippers, customers, or invitees to be loaded, unloaded, or parking in areas
other than those designated by Landlord for such activities. If Tenant permits
or allows any of the prohibited activities described in this Section 24, then
Landlord shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Tenant, which cost shall be immediately payable upon demand
by Landlord. Landlord reserves the right at any time to relocate such spaces and
to substitute an equivalent number of parking spaces in a parking structure or
subterranean parking facility or in a surface parking area within a reasonable
distance of the Premises.
If requested by Landlord, Tenant shall submit a written notice in a
form reasonably specified by Landlord containing the names and office addresses
and telephone numbers of those persons who are authorized by Tenant to use the
parking spaces on a
<PAGE>
monthly basis (the "Authorized Users") and shall use its best efforts to
identify each automobile by make, model and license number. Such notice, as
amended from time to time, is hereafter referred to as the "Parking Notice." No
person whose name, address, and phone numbers are not contained in the Parking
Notice shall have any right to park an automobile in the area of the parking
facilities designated for monthly parking and no person whether or not their
name is included in the Parking Notice shall have any right to park an
automobile not identified in the Parking Notice without (in either case) paying
the parking charge then applicable for daily parking in the parking facilities
for the Building and parking in the area designated for daily parking.
Tenant and Authorized Users shall comply with all rules and
regulations as set forth in the Parking Rules and Regulations portion of the
rules and regulations adopted by Landlord from time to time. Landlord may refuse
to permit any person who violates the Parking Rules and Regulations to park in
the parking facility, and any violation of the rules shall subject the car to
removal. Tenant agrees to use its best efforts to acquaint all Authorized Users
and visitors with the Parking Rules and Regulations.
All responsibility for damage to cars is assumed by Authorized Users.
Tenant shall repair or cause to be repaired at its sole cost and expense any and
all damage to the parking facility or any part thereof caused by Tenant or its
Authorized Users or resulting from vehicles of Authorized Users.
25. INTENTIONALLY OMITTED
26. TRADE FIXTURES.
--------------
Subject to the provisions of Sections 7 and 8 hereof, Tenant shall
install and maintain, its trade fixtures on the Premises, provided that such
fixtures, by reason of the manner in which they are affixed, do not become an
integral part of the Building or Premises. Tenant, if not in default hereunder,
may at any time or from time to time during the Term, or upon the expiration or
earlier termination of this Lease, alter or remove any such trade fixtures so
installed by Tenant. If not so removed by Tenant on or before the expiration or
earlier termination of this Lease, Tenant, upon the request of Landlord to do
so, shall thereupon remove the same. Any damage to the Premises caused by any
installation, alteration or removal of such trade fixtures shall be promptly
repaired at the expense of Tenant.
27. SUCCESSORS AND ASSIGNS.
----------------------
Subject to the provisions hereof relating to assignment, mortgaging,
pledging and subletting, this Lease shall bind the heirs, executors,
administrators, successors and assigns of any and all the parties hereto.
28. TIME.
----
Time is of the essence of this Lease.
29. LANDLORD's DEFAULT.
------------------
If Landlord shall default in the performance of any of its obligations
under this Lease, Tenant shall have no right to pursue any remedies against
Landlord, including, without limitation, termination of this Lease, unless and
until Tenant shall have given Landlord written notice of the default and
Landlord shall not have commenced the cure of such default within thirty (30)
days after receipt of the notice, or thereafter shall not diligently prosecute
the cure to completion. Satisfaction of any money judgment obtained against
Landlord shall be satisfied only out of: (i) proceeds of sale or disposition of
Landlord's interest in the Building, whether by Landlord or by execution of
judgment; or (ii) rentals and other payments from tenants in the Building.
30. INTENTIONALLY OMITTED
31. LANDLORD's RIGHT TO CURE DEFAULTS.
---------------------------------
All agreements and provisions to be performed by Tenant under any of
the terms of this Lease shall be performed at Tenant's sole cost and expense and
without any abatement or setoff against rent. If Tenant shall fail to pay any
sum of money, other than rent, required to be paid by it hereunder or shall fail
to perform any other act on its part to be performed hereunder and such failure
shall continue for thirty (30) days after notice thereof by Landlord, Landlord
may, but shall not be obligated to do so, and without waiving or releasing
Tenant from any obligations of Tenant, make any such payment or
<PAGE>
perform any such other act on Tenant's part to be made or performed as provided
in this Lease. All sums so paid by Landlord and all necessary incidental costs
shall be deemed additional rent payable hereunder and shall be payable to
Landlord on demand, and Landlord shall have (in addition to any other right or
remedy of Landlord) the same rights and remedies in the event of the nonpayment
thereof by Tenant as in the case of default by Tenant in the payment of rent.
32. ATTORNEYS' FEES.
---------------
If as a result of any breach or default in the performance of any of
the provisions of this Lease, Landlord or Tenant shall use the services of any
attorney in order to secure compliance with such provisions or recover damages
therefore, or to enforce any judgment or to terminate this Lease or, in
Landlord's case, to evict Tenant, the non-prevailing party shall reimburse the
prevailing party upon demand for any and all reasonable attorneys' fees and
expenses so incurred by such prevailing party, including but not limited to,
fees and expenses incurred in connection with appellate proceedings, enforcement
proceedings and bankruptcy proceedings (and the obligation to pay such fees and
expenses shall survive and not be merged into any judgement).
33. EMINENT DOMAIN.
--------------
Should the whole or any part of the Premises be condemned and taken by
any competent authority for any public or quasi-public use or purpose, all
awards payable on account of such condemnation and taking shall be payable to
Landlord, and Tenant hereby waives all interest in or claim to said awards, or
any part thereof. If the whole of the Premises shall be so condemned and taken,
then this Lease shall terminate. If a part only of the Premises is condemned and
taken and the remaining portion thereof is not suitable for the purposes of
which Tenant had leased said Premises, Tenant shall have the right to terminate
this lease. If by such condemnation and taking a part only of the Premises is
taken, and the remaining part thereof is suitable for the purposes for which
Tenant has leased said Premises, this lease shall continue, but the rental shall
be reduced in an amount proportionate to the value of the portion taken as it
related to the total value of the Premises. a voluntary sale of the building by
Landlord to any public or quasi-public body, agency or person, corporate or
otherwise, having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed to
be taking under the power of eminent domain for purposes of this Section 33.
34. SUBORDINATION.
-------------
This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modification, consolidations, replacements
and extensions thereof. Notwithstanding such subordination, Tenant's right to
quiet possession of the Premises shall not be disturbed if Tenant is not in
default and so long as Tenant shall pay the rent and observe and perform all of
the provisions of the Lease, unless this Lease is otherwise terminated pursuant
to its terms. If at any time any mortgagee, trustee or ground landlord shall
elect to have this Lease prior to the lien of its mortgage, deed of trust or
ground lease, then this Lease shall be deemed prior to such mortgage, deed of
trust or ground lease, whether this Lease is dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof. Tenant agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lira of any mortgage, deed of
trust or ground lease, as the case may be, and failing to do so within ten (10)
days after demand, does hereby make, constitute and irrevocably appoint Landlord
as Tenant's attorney in fact and in Tenant's name, place and stead, to do so. If
Tenant fails to execute any documents required to be executed by Tenant under
this Section within fifteen (15) days after written demand by Landlord, then
such failure shall constitute an Event of Default under this Lease.
35. NO MERGER.
---------
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work at merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
<PAGE>
Delivery Dock Hours: Monday-Friday 7:00 A.M. to 5:00 P.M.
Freight Elevator Hours: Monday-Friday 6:00 A.M. to 6:00 P.M.
Note: Other hours of access are available with prior arrangement.
8. Building access hours:
Monday-Friday: 6:00 AM to 10:00 PM
Saturday: 8:00 AM to 6:00 PM
Sunday: 10:00 AM to 6:00 PM
Note: Other hours of access are available with prior arrangement.
9. Contractor, subcontractors and materialsmen are responsible for maintaining
the condition of docks, elevators and corridors used. Contractor is
responsible to protect floor and walls in corridors leading from the
freight elevator to the entrance of the construction sight, as well as
freight door jams.
10. All materials are to be stored at the Job Site or in designated storage
areas. No materials are to be stored in corridors or in public areas. The
Landlord's Agent may provide minimum secured storage for materials with
prior arrangement.
11. Contractor, subcontractors and materialsmen must arrange access to areas
other than Job Site at a minimum of 48 hours in advance.
12. All work areas are to be visually and materially protected from the tenants
and general public. Radios or other excessive noise are not permitted. All
Contractors will be held responsible for compliance with O.S.H.A. Rules and
Regulations.
13. Toxic materials or odor-causing liquids are not to be used without prior
scheduling with the Landlord's Agent, and prior notice to the tenants in
suites adjacent to the Job Site.
14. All non-Job Site areas of the building are to be kept clean; dust, debris
and materials are to be cleaned immediately. There is to be no tracking of
material residue through corridors or public areas.
15. The Contractor and subcontractors are to ensure the Job Site is left broom
clean at the completion of each scheduled work day. No trash or excess
materials are
<PAGE>
permitted to remain on, in, or at the Job Site. Materials are to be
disposed of in bins or by truck promptly, not staged or stored at the Job
Site in any public or adjacent areas, nor disposed of in the building's
---------------------------------
trash receptacles.
-----------------
16. Tool clean-up is permitted in janitorial/utility closets only; no clean-up
is permitted in rest rooms.
17. Contractor is to furnish adequate protection against personal injury to
employees and public while work is in progress. In addition, all equipment,
furniture and supplies shall be protected from damage.
18. The work area may be occupied during construction, which may require the
Contractor to move and relocate furniture, files, machinery and equipment
during construction. Upon the completion of the work, the contractor is to
return all items relocated during the work to their original location.
19. All salvageable items removed during the course of the work that are to be
reused in the job, whenever possible, are to be stored and maintained by
the Contractor. All salvageable materials and items of value, as determined
by Landlord's Agent, that are removed from the site, that are not to be
reused in the work, shall remain the property of the Landlord's Agent, and
shall be stored or disposed of as directed by the Landlord's Agent.
20. All work includes replacing, patching and finishing all adjacent surfaces
or features displaced or disturbed in the performance of the work such as,
but not limited to: acoustical tile, topset base, cove base, floor
coverings, paint, etc. Upon completion of the work, there shall be no
discrepancy between the new work and the existing work.
21. The Contractor shall not disable, interrupt or test any building utilities
or systems without prior arrangement with the Agent, nor without the
presence of Building Engineering personnel.
22. The Contractor shall be responsible for any stoppage, interruptions or
failures to building services, utilities or incidental damages to the
building during the course of the work being performed as a result of his
performance of the work.
<PAGE>
23. All Contractors are responsible for supplying the following tools or
materials to the Job Site:
a. Ladders
b. Industrial vacuum cleaner
c. Protection for corridor floor coverings, walls and ceilings from
the Job Site to the elevators
d. Protection for the elevators and the Job Site
24. All anchoring of studs, drilling or coring of holes in concrete, applying
carpet tack, and applying noxious materials (stains, fire-sealers, etc.)
should be done after hours.
25. The Landlord's Agent is not responsible for providing any tools, equipment,
materials or labor for the work.
26. The Contractor is responsible for the compliance to these rules and
regulations by all his own personnel and those of his subcontractors,
materialsmen and any other parties who may be employed for the performance
and completion of the work.
<PAGE>
EXHIBIT B-1
-----------
SECTION II: LANDLORD's REQUIREMENTS FOR TENANT IMPROVEMENTS OR
--------------------------------------------------
ALTERATIONS TO LEASED SPACE BY TENANT OR CONTRACTOR(S)
------------------------------------------------------
HIRED BY TENANT
---------------
The Tenant has certain requirements to provide information to the Landlord's
Agent regarding any alteration to be performed in the leased premises by Tenant.
Said information is to be submitted for approval by Landlord's Agent, which
approval shall not be unreasonably withheld. Below is a listing of those
requirements:
1. Two sets of plans (a.k.a. working drawings) of the work to be
performed, including details of connections to any building system
(i.e., electrical, life-safety, plumbing, HVAC, etc.). One set will be
retained by Landlord's Agent. One set will be returned to Tenant,
signed by Landlord's Agent, as the approval set of record.
2. List of all Contractors, sub-contractors and material suppliers.
3. A copy of the Contractor's and sub-contractors' current construction
licenses including expiration date and type.
4. Certificates of Insurance from the Contractor, naming Master Landlord,
Landlord, Landlord's Agent and Tenant as Additional Insureds, and an
adequate amount of liability coverage, specifically:
a. General & Public Liability, no less than $1,000,000.
b. Workers' Compensation not less than statutory requirements.
c. Contractor's Business Liability (Umbrella) coverage of no less
than $1,000,000.
Upon submittal to Landlord's Agent of the above items, Landlord's Agent shall
review the plans, list of project participants and other documentation, and make
recommendations, if any, for modifications and compliance with building
standards, including materials, as well as proper connections to the building
systems.
<PAGE>
After obtaining approval from the Landlord's Agent, and prior to the
commencement of work, the Tenant shall provide:
1. Hold Harmless Agreements signed by the Tenant and the Tenant's
Contractor for the purpose of indemnifying the Master Landlord,
Landlord, and Landlord's Agent from any liabilities, including but not
limited to, liens filed against the property by any and all General
Contractors, sub- contractors and sub-sub-Contractors, material
suppliers and laborers.
2. A copy of the fully executed Contract for Work between Tenant and
Contractor.
3. A copy of all required Municipal Building Permits.
The Tenant shall be responsible for instructing the Contractor and sub-
contractors to follow the building's Rules and Regulations provided herewith.
The Tenant will then advise the Landlord's Agent of the commencement date of
work, upon which notification the Landlord's Agent shall complete a Notice of
Non-Responsibility for filing with the County Recorder's Office and posting on
the job site. The Tenant shall provide Landlord with an anticipated payment
schedule prior to the commencement of work.
During the performance of the work, if there is a change or addition of
contractors, sub-contractors or material suppliers, the Tenant shall immediately
notify the Landlord's Agent, in writing, of the change or addition. All the same
qualifications shall apply to the changed or added parties.
In the event a Preliminary Lien Notice or Lien Notice is received by the Tenant,
Tenant shall immediately provide a copy of same to Landlord's Agent.
Landlord's Agent may, at its option, inspect the work in progress to insure that
the building's minimum standards of quality of craftsmanship are maintained.
The Tenant is responsible for coordinating with the office of the building, any
access requirements for the contractor for the purpose of stocking the job, work
to be performed in adjacent space, or connecting to or testing of base building
systems which may disturb the normal operation of the building.
After completion of the alteration, Tenant shall obtain the completed Permit Job
Card and a Temporary Certificate of
<PAGE>
Occupancy clearly indicating the City's final Inspection by signature and date.
Tenant shall submit a copy of same to Landlord's Agent as evidence of the
completed alteration.
Tenant shall, at the conclusion of all work, provide original Unconditional
Lien Release documents to the Landlord's Agent demonstrating the payment of all
outstanding invoices for the work.
Upon completion of the work, Contractor is to provide Landlord's Agent with a
set of "as-built" plans, cut sheets and specifications on all installed
equipment, all warranties, and the stamped plancheck approved drawings with the
permit signature card. These plans would include, but not be limited to:
architectural, structural, electrical, plumbing and mechanical drawings as
applicable.
If any reimbursement from Landlord's Agent is due Tenant, copies of all paid
invoices to all Contractors, sub-contractors and material suppliers must
accompany above said original Unconditional Lien Releases from each. Landlord's
Agent shall then reimburse Tenant's costs up to the agreed upon Tenant
Improvement Allowance, less any costs Landlord or Landlord's Agent may have
incurred in association with the performance of the work.
These requirements neither supersede or subjugate any of the terms and
conditions of the Lease for the leased space.
<PAGE>
EXHIBIT B-2
[FLOOR PLAN]
<PAGE>
EXHIBIT "C"
-----------
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT "D"
-----------
RULES AND REGULATIONS
---------------------
The following Rules and regulations shall be in effect at the Building.
Landlord reserves the right to adopt reasonable modifications and additions
hereto.
(1) The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls of the Building shall not be obstructed by any
tenant or used for any purpose other than ingress and egress from the respective
premises. The halls, passages, entrances, elevators, stairways, balconies and
roof are not for the use of the general public, and Landlord shall in all cases
retain the right to control and prevent access thereto of all persons whose
presence in the judgment of Landlord shall be prejudicial to the safety,
character, reputation and interests of the Building and its tenants, provided
that nothing herein contained shall be construed to prevent such access to
persons with whom Tenant normally deals only for the purpose of conducting its
business on the Premises (such as clients, customers, office suppliers and
equipment vendors, and the like) unless such persons are engaged in illegal
activities. No tenant and no employees of any tenant shall go upon the roof of
the Building without the written consent of Landlord.
(2) No awnings or other projection shall be attached to the outside walls
of the Building or to balconies without the prior written consent of Landlord.
No hanging planters, television sets or other objects shall be attached to or
suspended from ceilings without the prior written consent of Landlord. No
curtains, blinds, shades or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises without the prior written
consent of Landlord. All electrical ceiling fixtures hung in offices or spaces
along the perimeter of the Building must be of a quality, type, design and bulb
color approved by Landlord. No awnings, furniture, trees or plants or other
personal property shall be placed upon any balcony or patio, without Landlord's
prior written approval.
(3) No sign, advertisement or notice shall be exhibited, painted or
affixed by any tenant on any part of, or so as to be seen from the outside of,
the Premises or the Building without the prior written consent of Landlord. In
the event of the violation of the foregoing by any tenant, Landlord may remove
such sign, advertisement or notice without any liability and may charge the
expense incurred in such removal to the tenant violating this rule. Interior
signs on doors and director tablet shall be inscribed, painted or affixed for
each tenant by Landlord at the expense of such tenant, and shall be of a size,
color and style acceptable to Landlord.
(4) The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by any tenant, nor shall any
bottles, parcels or other articles be placed in the windowsills, balcony or
patio railings.
(5) The water and wash closets and other plumbing fixtures shall not be
used for any purpose other than those for which they were constructed, and no
foreign substance of any kind shall be thrown herein. All damages resulting from
any misuse of the fixtures shall be borne by the tenant who, or whose servants,
employees, agents, visitors or licensees shall have caused the same.
(6) No tenant shall mark, paint, drill into, or in any way deface any part
of the Premises or the Building. No boring, cutting or stringing of wires or
laying of linoleum or other floor coverings shall be permitted, except with the
prior written consent of Landlord, and as Landlord may direct or as specifically
permitted under the Lease. Any tenant permitted by Landlord to lay linoleum or
other similar floor covering shall not affix the same to the floor of the
Premises in any manner except by a paste, or other material which may easily be
removed with water, the use of cement or other similar adhesive materials being
expressly prohibited. The method of affixing any such linoleum or other similar
floor covering to the floor, as well as the method of affixing carpets or rugs
to the Premises, shall be subject to approval by Landlord. The expense of
repairing any damage resulting from a violation of this rule shall be borne by
the tenant by whom, or by those agents, clerks, employees or visitors, the
damage shall have been caused.
(7) If Tenant desires telephone, cable TV, computer or telegraph
connections, other than for the Data Center which shall be governed by the
provisions of Exhibit "B"
<PAGE>
of the Lease, Landlord will direct electricians as to where and how the wires
are to be introduced.
(8) No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the Premises, and no cooking shall be done or permitted by any
tenant in the Premises, except for items customarily cooked in standard
household microwave ovens and preparation of coffee, tea, hot chocolate and
similar items for tenants, their employees and visitors shall be permitted. No
tenant shall cause or permit any unusual or objectionable odors to be produced
in or permeate from or throughout the Premises.
(9) No portion of the Building shall be used for manufacturing or for the
storage of merchandise except as expressly permitted under the use provisions of
the Lease and except as such storage may be incidental to the use of the
Premises for general office purposes without Landlord's prior written approval.
No tenant shall, without the prior written consent of the Landlord, occupy or
permit any portion of this premises to be occupied or used for the manufacture
or sale of liquor, narcotics, or tobacco in any form, as a medical office,
chiropractor's office, as a barber or manicure shop, or as an employment bureau
or any business other than that specifically provided for in the Lease. No
tenant shall engage or pay any employees on its premises except those actually
working for such tenant on its premises nor advertise for laborers giving an
address at its premises. The Building shall not be used for lodging or sleeping
or for any immoral or illegal purposes.
(10) Except with the prior written consent of the Landlord, no tenant shall
sell, or permit the sale at retail or otherwise of newspapers, magazines,
periodicals, or theatre tickets, in or from the Building, nor shall any tenant
carry on, or permit or allow any employee or other person to carry on, the
business of stenography, typewriting or any similar business in or from the
Building for the service or accommodation of occupants of any other portion of
the Building.
(11) Landlord reserves the right to prohibit personal goods and services
vendors (as such term is defined below) from access to the Building. To the
extent that Landlord permits such vendors access to the Building, such access
shall be upon such reasonable terms and conditions, including but not limited to
the payment of a reasonable fee and provision for insurance coverage, as are
related to the safety, care and cleanliness of the Building, the preservation of
good order thereon, and the relief of any financial or other burden on Landlord
occasioned by the presence of such vendors or the sale by them of personal goods
or services (as such term is defined below) to a tenant or its employees. If
reasonably necessary for the accomplishment of the aforementioned purposes,
Landlord may exclude a particular vendor entirely or limit the number of vendors
who may be present at any one time in the Building. The term "personal goods or
services vendors" means persons who periodically enter the Building for the
purpose of selling goods or services to a tenant, other than goods or services
which are used by a tenant only for the purpose of conducting its business on
its premises. "Personal goods or services" include, but are not limited to,
barbering services and shoe shining services. "Personal goods or services" shall
not include vendors delivering bottled water, soft drinks, pizza, sandwiches and
the like when doing so at the express request of Tenant or Tenant's employees
for purposes other than resale.
(12) No tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring buildings
or premises or those having business with them by the use of any musical
instrument, radio, phonograph or unusual noise, or in any other way.
(13) No tenant shall throw anything out of doors, windows or skylights or
down the passageways.
(14) No tenant, nor any of a tenant's servants, employees, agents, visitors
or licensees, shall at any time bring, keep or use on the Building any kerosene,
gasoline, or inflammable, combustible, explosive, or corrosive fluid, or any
other illuminating material, or use any method of heating other than that
supplied by Landlord.
(15) No tenant shall sweep or throw or permit to be swept or thrown from
the Premises any dirt or other substance into any of the corridors or halls or
elevators, or out of the doors, windows, stairways, patios or balconies of the
Building, and Tenant shall not use, keep or permit to be used or kept any foul
or noxious gas or substance in the Premises, or Permit or suffer the Premises to
be occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those
<PAGE>
having business therein, nor shall any animals or birds be kept in or about the
Building. Smoking or carrying lighted cigars, cigarettes, pipes, or other
lighted smoking materials, in the elevators and all other common and/or public
areas of the Building is prohibited.
(16) No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, or shall any changes be made in existing
locks or the mechanisms thereof unless Landlord is first notified thereof and
gives written approval. Each tenant must, upon termination of his tenancy, give
to Landlord all keys of stores, offices, or toilets and toilet rooms, either
furnished to, or otherwise procured by, such tenant, and in the event of the
loss of any keys so furnished, such tenant shall pay Landlord the cost of
replacing the same or of changing the lock or locks opened by such lost key if
Landlord shall deem it necessary to make such change.
(17) All removals, or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the hours
which Landlord may determine from time to time. The moving of safes or other
fixtures or bulky matter of any kind must be made upon previous notice to the
manager of the Building and under his/her supervision, and the persons employed
by any tenant for such work must be acceptable to Landlord. Landlord reserves
the right to inspect all safes, freight or other bulky articles to be brought
into the Building and to exclude from the Building and all such bulky articles
which violate any of the Rules and Regulations or the Lease of which these Rules
and Regulations are a part. Landlord reserves the right to prescribe the weight
and position of all safes, which must be placed upon supports approved by
Landlord to distribute the weight.
(18) No tenant shall purchase janitorial, maintenance or other services
from any company or persons not approved by Landlord, which approval shall not
be unreasonably withheld. Any person employed by any tenant to do janitorial
work shall, while in the Building and outside of the Premises, be subject to and
under the control and direction of the office or management of the Building (but
not as an agent or servant of Landlord, and the tenant shall be responsible for
all acts of such persons). Except with Landlord's prior written approval, no
tenant shall permit janitorial services to be performed during the hours of 7:00
a.m. to 6:00 p.m. Monday through Friday.
(19) Should the Building have retail tenants, Landlord shall have the right
to prohibit any advertising by any tenant which, in Landlord's opinion, tends to
impair the reputation of the Building or its desirability as an office/retail
building and upon written notice from Landlord any tenant shall refrain from and
discontinue such advertising.
(20) On Saturdays from 1:00 p.m. to 8:00 a.m., Sundays, those legal
holidays designated by Landlord, and on other days between the hours of 7:00
p.m. and 7:00 a.m., access to the Building or to the halls, corridors, elevators
or stairways in the Building, or to the Premises may be refused unless the
person seeking access is pre-approved by Landlord. Any list of employees of
Tenant submitted to Landlord shall be deemed pre-approved. Landlord shall in no
case be liable for damages for admission to or exclusion from the Building of
any person whom Landlord has the right to exclude. Each tenant shall be
responsible for all persons for whom he requests after hours access and shall be
liable to Landlord for all acts of such persons. In case of invasion, mob, riot,
public excitement, or other commotion, Landlord reserves the right but shall not
be obligated to prevent access to the Building during the continuance of the
same by closing the doors or otherwise, for the safety of the tenants and
protection of property in the Building.
(21) All doors opening into public corridors shall be kept closed, except
when in use for ingress and egress. Tenants shall see that the windows, transoms
and doors of their premises are closed and securely locked before leaving the
Building.
(22) The requirements of tenants will be attended to by the manager of the
Building upon formal written or oral request of Tenant.
(23) Canvassing, soliciting and peddling in the Building are prohibited and
each tenant shall cooperate to prevent the same.
(24) There shall not be used in any space, or in the public halls of the
Building, either by any tenant or others, any hand trucks except those equipped
with rubber tires and side guards.
<PAGE>
(25) No vending or coin operated machines shall be placed by any tenant
within his premises without the prior written consent of Landlord, not to be
unreasonably withheld.
(26) Tenant shall fully abide by and comply with any Covenants, Conditions
and Restrictions or similar instrument or document imposed against or
encumbering the Building or Project.
(27) These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions or any lease of premises in the Building.
<PAGE>
EXHIBIT 10.56
SUBLEASE
THIS SUBLEASE AGREEMENT ("Sublease"), made and entered on the 22nd day
December 1999, by and between WILLIAMS COMMUNICATIONS, INC., a Delaware
corporation formerly known as CRITICAL TECHNOLOGIES, INC., a Missouri
corporation ("Sub-Landlord") and CONCENTRIC NETWORK CORPORATION, a Delaware
corporation ("Sub-Tenant") (collectively the "parties").
WITNESSETH:
WHEREAS, an office building lease with an effective date of February 26,
1997, was entered into by and between Sub-Landlord as Tenant and Armstrong
Properties, LTC as Landlord (the "Lease");
WHEREAS, the Premises covered by the Lease is an approximately 23,500
square foot office building and adjoining parking areas located at 944 Anglum
Drive, Hazelwood, Missouri 63042 (the "Premises"). Sub-Landlord desires to
sublet the entire Premises (hereinafter the "Sublease Premises") to Sub-Tenant,
and Sub-Tenant desires to Rent from Sub-Landlord the Sublease Premises.
WHEREAS, the parties have reached an agreement by which Sub-Tenant would
sublease the Sublease Premises from Sub-Landlord; and
WHEREAS, the parties desire to set forth the terms and conditions of the
sublease of the Sublease Premises.
NOW, THEREFORE, in consideration of the premises and the following mutual
covenants, the parties hereby agree:
1. Recitals: The above recitals are incorporated herein as terms of this
Sublease.
2. Sublease: Sub-Landlord hereby subleases to Sub-Tenant and Sub-Tenant hereby
subleases from Sub-Landlord the Sublease Premises, subject to and
conditioned upon obtaining the consent of Landlord to this Sublease.
3. Lease: Sub-Tenant represents and warrants that it has received a conformed
copy of the Lease, that it has reviewed the same, and that it agrees to
comply with the terms thereof the same as if it were the Tenant
<PAGE>
thereunder, except as otherwise provided herein. This Sublease is and shall
remain subordinate to the terms and conditions of the Lease. To the extent
that Sub-Landlord has rights or obligations under the Lease as Tenant, Sub-
Tenant has the same rights or obligations with respect to the Sublease
Premises. This Sublease shall not increase any obligation of Sub-Landlord
beyond its obligations as a Tenant under the Lease. A copy of the Lease is
attached hereto as Exhibit "A" and made a part hereof by reference.
4. Term: The Sublease shall commence on November 1, 1999, (the "Commencement
Date") subject to Landlord's consent to the Sublease, and terminate on
March 31, 2002 (the "Termination Date"), unless sooner terminated as
hereinafter provided (the "Sublease Term"). If Landlord's consent has not
occurred for any reason whatsoever on or before December 15, 1999, then
either party may terminate the Sublease by written notice to the other and
Sub-Tenant shall promptly vacate the Sublease Premises.
5. Basic Rent: Sub-Tenant shall pay Sub-Landlord as Rent for the Sublease
Premises the sum Fourteen Thousand Six Hundred Eighty Seven and 00/100
Dollars ($14,687.00) per month from November 1, 1999, through March 31,
2000; and, commencing April 1, 2000, through March 31, 2002, Sub-Tenant
shall pay Sub-Landlord as Rent for the Sublease Premises the sum Sixteen
Thousand Six Hundred Forty Five and 00/100 Dollars ($16,645.00) per month.
Rent shall be payable in advance without demand on the first day of each
and every month during the remaining term of the Lease. Any Rent accrued
prior to obtaining Landlord's consent to the Sublease shall be due and
payable on obtaining Landlord's consent. A late charge of five percent (5%)
of any monthly payment will be added after fifteen (15) days from the due
date and paid by Sub-Tenant. Sub-Tenant's failure to pay any monthly rental
within ten (10) days after the due date shall be deemed an event of default
under this Sublease.
6. Operating Expenses: Sub-Tenant shall, from the Commencement Date, pay Sub-
Landlord for all gas, electricity, water, air conditioning, sewer and
telephone service and all other utilities used in and upon the Sublease
Premises. Sub-Tenant shall pay for its own trash removal.
<PAGE>
7. Real Estate Taxes: Sub-Tenant shall pay all real estate and occupancy
taxes, assessments, and/or installments thereon (collectively, "Taxes") on
or before the date the same shall become due, whether general or special,
foreseen and unforeseen, and shall furnish Landlord and Sub-Landlord a copy
of the paid receipts therefor. Taxes shall be pro-rated between Sub-
Landlord and Sub-Tenant for the year 1999, according to the Commencement
Date.
8. Use of Sublease Premises:
8.1 The Sublease Premises are subleased to Sub-Tenant in "as is" condition
with all faults as of the Commencement Date of the Sublease Term and
Sub-Landlord has made no representation or warranty, express or
implied, with respect to the condition of the Sublease Premises, or
appurtenant grounds or facilities or with respect to their suitability
for the conduct of Sub-Tenant's business or other intended use. Prior
to the Commencement Date, Sub-Landlord shall have cleared all debris
from the Sublease Premises and shall deliver the Sublease Premises to
Sub-Tenant in vacant, good, "broom-clean" condition, with all systems
that were Tenant's responsibility under the Lease in good working
order. Sub-Tenant's acceptance of the Sublease Premises shall not be
deemed a waiver of the above representations. Subject to Landlord's
consent, Sub-Landlord hereby approves Sub-Tenant's installation of the
alterations described in Exhibit "B", attached hereto, and subject to
Landlord's consent agrees the Sub-Tenant may surrender such
alterations on the termination of the Sublease.
8.2 The Sublease Premises are to be used only for the purposes allowed by
the Lease, including a data center, and must be continuously occupied
by Sub-Tenant.
8.3 Upon the termination of the Sublease, Sub-Tenant will return the
Sublease Premises to Sub-Landlord in the same condition as the
Sublease Premises were in as of the Commencement Date of this
Sublease,
<PAGE>
reasonable wear and tear, casualty and condemnation damage, and
approved alterations excepted.
9. Assignment and Subletting: Sub-Tenant will not assign this Sublease or
sublet the Sublease Premises without the prior written consent of Landlord
and Sub-Landlord. Sub-Landlord shall not unreasonably withhold or delay its
consent. Provided, Sub-Tenant may, without Sub-Landlord's prior written
consent (but subject to Landlord's consent to the extent required under the
Lease), sublet the Sublease Premises or assign the Sublease to (i) an
entity controlling, controlled by or under common control with Sub-Tenant;
(ii) a successor entity related to Sub-Tenant by merger, consolidation,
nonbankruptcy reorganization, or government action; or (iii) a purchaser of
substantially all of Sub-Tenant's assets located in the Sublease Premises.
In the event of any sublease or assignment pursuant to (i), (ii), or (iii)
above, Sub-Tenant shall remain liable under this Sublease. A transfer of
Sub-Tenant's capital stock shall not be deemed an assignment, subletting or
any other transfer of the Sublease or the Sublease Premises.
10. No Real Estate Broker: Each of the parties represents that no real estate
broker was used in connection with this Sublease.
11. No Security Deposit: Sub-Tenant acknowledges that Sub-Landlord has
deposited with Landlord the sum Sixteen Thousand Six Hundred Forty Five and
00/100 Dollars ($16,645.00) as a Security Deposit pursuant to paragraph 6
of the Lease, and agrees to make no claim to or against said Security
Deposit or any portion thereof on termination of this Sublease, or
otherwise. Sub-Landlord will not require any security deposit from Sub-
Tenant under this Sublease.
12. No Option to Renew: Sub-Tenant may not exercise the Option to Renew granted
to Sub-Landlord under paragraph 31 of the Lease unless Landlord shall first
have agreed in writing with Sub-Landlord and Sub-Tenant that Sub-Landlord
shall have no further liability under the Lease or Sublease whatsoever with
respect to the extension period, and that Sub-Landlord shall receive full
refund of the Security Deposit on termination of the Lease. Sub-Landlord
shall not exercise the Option to Renew
<PAGE>
unless first obtaining Sub-Tenant's prior written consent.
13. Notice and Payment Addresses: Notices shall be delivered in the manner set
forth in Section 22 of the Lease to the addresses set forth below:
Sub-Landlord:
Williams Communications, Inc.
One Williams Center
Suite 2200
Tulsa, Oklahoma 74172
Attn: Director of Facilities Management
Sub-Tenant:
Concentric Network Corporation
944 Anglum Drive
Hazelwood, Missouri 63042
Attn: Office Manager
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, California 95014
Attn: Director of Administration
Landlord:
Armstrong Properties, LTC
31 Fordyce
St. Louis, MO 63124
Attn: Mr. William H. Armstrong
14. Termination of Lease: The parties hereto agree that in the event the Lease
terminates, then this Sublease shall also terminate on that same date.
15. Insurance: Sub-Tenant agrees, at its sole cost and expense, during the term
of this Sublease to maintain in full force and effect insurance coverages
in form and substance as required of Tenant under the Lease, and to name
Sub-Landlord as an additional insured in each case in which Landlord must
be named an additional insured as provided by the Lease.
16. Sub-Landlord Warranties:
<PAGE>
16.1 Sub-Landlord represents and warrants the following to Sub-Tenant:
16.1.1 The Lease is in full force and effect and that there is no
default thereunder or to Sub-Landlord's knowledge no event which, with
the passage of time and giving of notice or both, would constitute a
default thereunder.
16.1.2 Sub-Landlord has corporate authority to enter into this
Sublease and perform its obligations hereunder.
16.1.3 This Sublease evidences a valid and binding contractual
obligation of Sub-Landlord enforceable in accordance with its terms.
16.1.4 The copy of the Lease attached hereto as Exhibit A is a true,
correct and complete copy of the Lease.
17. Sub-Tenant's Authority:
17.1 Sub-Tenant represents and warrants the following to Sub-Landlord:
17.1.1 Sub-Tenant has corporate authority to enter into this Sublease
and perform its obligations hereunder.
17.1.2 This Sublease evidences a valid and binding contractual
obligation of Sub-Tenant.
18. Indemnification: The following indemnification provisions shall apply.
(a) By Sub-Landlord. Sub-Landlord will indemnify, defend, protect, and
---------------
hold Sub-Tenant, its officers, directors, employees, and agents
(collectively, the "Sub-Tenant Indemnitees") harmless from and against
any and all demands, actions or causes of action, assessments,
judgments, damages, obligations, liabilities and claims (collectively,
"Claims") of every type and nature whatsoever (including, without
limitation, injury to or death of any person or persons, or
<PAGE>
damage to or loss of any property) and shall reimburse the Sub-Tenant
Indemnitees for any and all financial expenditures, costs and expenses
(including, without limitation, interest, penalties and reasonable
attorneys' fees, reasonable consultants' fees, expenses and court
costs incurred in connection therewith and all reasonable costs and
expenses of investigating and defending any claim or any order,
directive, final judgment, compromise, settlement, fine, penalty,
court costs or proceeding) in consequence of such Claims arising from
or related to:
(i) any inaccuracy in or breach by Sub-Landlord of any
representation or warranty made by it herein; or
(ii) any claim or demand for commission or other compensation by
any broker, finder, agent or similar intermediary claiming to
have been employed by or on behalf of Sub-Landlord, in connection
with this transaction; or
(iii) any contamination at, on, in, above or beneath the Sublease
Premises during the term of the Lease and preceding the term of
the Sublease; or
(iv) any negligent acts or omissions, or willful misconduct, by
Sub-Landlord, its employees or agents, which result in or cause
harm or damage to any person or property, in, upon, or about the
Sublease Premises; or
(v) any event of default by Sub-Landlord under the Lease or
this Sublease.
(b) By Sub-Tenant. Sub-Tenant will indemnify, defend, protect, and
-------------
hold Sub-Landlord and Landlord and any affiliated company thereto,
their respective officers, directors, stockholders, managers, members,
employees, and agents (the "Sub-Landlord Indemnitees") harmless from
and against any and all demands, actions or
<PAGE>
causes of action, assessments, judgments, damages, obligations,
liabilities and claims (collectively, "Claims") of every type and
nature whatsoever (including, without limitation, injury to or death
of any person or persons, or damage to or loss of any property) and
shall reimburse the Sub-Landlord Indemnitees for any and all financial
expenditures, costs and expenses (including, without limitation,
interest, penalties and reasonable attorneys' fees, reasonable
consultants' fees, expenses and court costs incurred in connection
therewith and all reasonable costs and expenses of investigating and
defending any claim or any order, directive, final judgment,
compromise, settlement, fine, penalty, court costs or proceeding) in
consequence of such Claims, and arising from or pursuant to:
(i) any inaccuracy in or breach by Sub-Tenant of any
representation or warranty made by it herein;
(ii) any claim or demand for commission or other compensation by
any broker, finder, agent or similar intermediary claiming to
have been employed by or on behalf of Sub-Tenant in connection
with this transaction;
(iii) any contamination at, on, in, above or beneath the Sublease
Premises during the term of this Sublease caused or created by
Sub-Tenant or its agents, employees, or contractors; or
(iv) any negligent acts or omissions, or willful misconduct, by
Sub-Tenant, its employees or agents, which result in or cause
harm or damage to any person or property, in, upon, or about the
Sublease Premises; or
(v) any event of default by Sub-Tenant under this Sublease.
19. Applicable Law: This Sublease shall be construed according to the laws of
the State of Missouri.
<PAGE>
20. Headings: The headings in this Sublease are for reference only and do not
expand or limit the terms agreed to by the parties.
21. Entire Agreement: This Sublease represents the entire agreement between the
parties and no modification hereof shall be effective unless first reduced
to writing and signed by both parties.
22. Incorporation of Lease. All of the provisions of the Lease are incorporated
herein as if set forth in their entirety herein, except (a) the following
provisions shall not be incorporated herein: Sections 4 (the first sentence
only), 5, 6, 22, 31, and 32; and (b) references to "Landlord" in the
following provisions shall mean "Landlord" only: Sections 10 (except the
fourth paragraph), 11 (except the first sentence), 14, 17 (the third
through seventh sentences only) and 19 (except the last sentence of subpart
(a)). References in the Lease as incorporated herein to "Landlord",
"Tenant", "Lease" and "Leased Premises" shall be deemed to refer to "Sub-
Landlord", "Sub-Tenant", "Sublease" and "Sublease Premises", respectively;
provided, however, that (i) with respect to work, services, repairs,
restoration, insurance or any other similar obligation of Landlord under
the Lease, the sole obligation of Sub-Landlord shall be to use Sub-
Landlord's reasonable efforts to obtain Landlord's performance as set forth
below; and (ii) with respect to any consent or approval required to be
obtained from the "Landlord" under the Lease, such consent must be obtained
from both Landlord and Sub-Landlord, and the approval of Sub-Landlord may
be withheld if Landlord's consent is not obtained.
23. Quiet Enjoyment. In the event that Sub-Landlord defaults in the performance
or observance of any of Sub-Landlord's remaining obligations under the
Lease or fails to perform Sub-Landlord's stated obligations under the
Sublease, then Sub-Tenant shall give Sub-Landlord notice specifying in what
manner Sub-Landlord has defaulted, and if such default shall not be cured
by Sub-Landlord within thirty (30) days thereafter (except that if such
default cannot be cured within said thirty (30) day period, this period
shall be extended for an additional reasonable time, provided
<PAGE>
that Sub-Landlord commences to cure such default within such thirty (30)
day period and proceeds diligently thereafter to effect such cure as
quickly as possible), then Sub-Tenant shall be entitled to cure such
default and promptly collect from Sub-Landlord Sub-Tenant's reasonable
expenses in so doing (including, without limitation, reasonable attorneys'
fees). Sub-Tenant shall not be required, however, to wait the entire cure
period described herein if earlier action is required to comply with the
Lease or with any applicable governmental law, regulation or order.
24. Sub-Landlord's Obligations. Sub-Landlord shall fully perform all of its
obligations under the Lease to the extent Sub-Tenant has not agreed to
perform such obligations under the Sublease. Sub-Landlord shall not
terminate or take any action under the Lease that could give rise to the
termination of the Lease, amend or waive any provisions under the Lease or
make any elections, exercise any right or remedy or give any consent or
approval under the Lease without, in each instance, Sub-Tenant's prior
written consent if any of the foregoing would materially adversely affect
Sub-Tenant's rights or obligations hereunder. Sub-Landlord, with respect to
the obligations of Landlord under the Lease, shall use Sub-Landlord's
diligent good faith efforts to cause Landlord to perform such obligations
for the benefit of Sub-Tenant. Such diligent good faith efforts shall
include, without limitation: (a) upon Sub-Tenant's written request,
immediately notifying Landlord of its nonperformance under the Lease, and
requesting that Landlord perform its obligations under the Lease; and (b)
to commence litigation against Landlord to obtain the performance required
from Landlord under the Lease.
25. Authorization to Direct Sublease Payments. Sub-Tenant shall have the right
to pay all rent and other sums owing by Sub-Tenant to Sub-Landlord
hereunder for those items which also are owed by Sub-Landlord to Landlord
under the Lease directly to Landlord if Sub-Tenant reasonably believes that
Sub-Landlord has failed to make any payment required to be made by Sub-
Landlord to Landlord under the Lease and Sub-Landlord fails to provide
adequate proof of payment within two (2) business days after Sub-Tenant's
written
<PAGE>
demand requesting such proof. Any sums paid directly by Sub-Tenant to
Landlord in accordance with this paragraph shall be credited toward the
amounts payable by Sub-Tenant to Sub-Landlord under the Sublease. In the
event Sub-Tenant tenders payment directly to Landlord in accordance with
this paragraph and Landlord refuses to accept such payment, Sub-Tenant
shall have the right to deposit such funds in an account with a national
bank for the benefit of Landlord and Sub-Landlord, and the deposit of said
funds in such account shall discharge Sub-Tenant's obligation under the
Sublease to make the payment in question.
26. Assignment of Rights. Sub-Landlord hereby assigns to Sub-Tenant all
warranties given and indemnities made by Landlord to Sub-Landlord under the
Lease which would reduce Sub-Tenant's obligations hereunder, and shall
cooperate with Sub-Tenant to enforce all such warranties and indemnities.
27. Subordination. Sub-Landlord shall reasonable efforts to obtain from any
lenders or ground lessors of the Sublease Premises a written agreement in
form reasonably satisfactory to Sub-Tenant providing for recognition of
Sub-Tenant's interests under the Sublease in the event of foreclosure of
the lender's security interest or termination of the ground lease.
28. Hazardous Materials. To the best knowledge of Sub-Landlord, no Hazardous
Materials are present in or about the Sublease Premises and no action,
proceeding, or claim is pending or threatened concerning any Hazardous
Materials or pursuant to any laws. Sub-Landlord shall indemnify, defend,
protect and hold Sub-Tenant, its agents, officers, directors and
shareholders, harmless from and against all claims, losses, costs, damages,
liabilities, (including, without limitation, sums paid in settlement of
claims), and expenses (including, without limitation, reasonable attorneys'
and consultant's fees and litigation expenses), arising out of or based
upon the presence of any Hazardous Materials on, under, in or about the
Sublease Premises, except to the extent the same results from Sub-Tenant's,
or any other person or entity's, release or emission of Hazardous Materials
in or about the Sublease Premises.
<PAGE>
29. Approvals. Whenever the Sublease requires an approval, consent,
designation, determination, selection or judgment by either Sub-Landlord or
Sub-Tenant, unless another standard is expressly set forth, such approval,
consent, designation, determination, selection or judgment and any
conditions imposed thereby shall be reasonable and 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.
30. Landlord Consent. The Sublease shall be conditioned upon receipt of consent
thereto by Landlord in a form reasonably acceptable to Sub-Tenant, which
consent shall, at Sub-Tenant's election, include the terms set forth in
Exhibit "C" hereto. Sub-Landlord shall use commercially reasonable efforts
to obtain such consent. In the event Landlord fails to so consent within
thirty (30) days for the date Sub-Tenant executes the Sublease, either Sub-
Landlord or Sub-Tenant shall have the right to terminate the Sublease at
any time before such consent is received by delivering written notice
thereof to the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed and sealed by their respective representatives, thereunto duly
authorized, as of the date first above written.
Sub-Landlord:
Williams Communications Inc.,
By: /s/ James A. Wootten
--------------------
Printed: James A. Wootten
----------------
Title: Vice President
-----------------
ATTEST:
- -----------------
Secretary [Seal]
<PAGE>
Sub-Tenant:
Concentric Network Corporation
By: /s/ Henry R. Nothhaft
---------------------------
Printed: Henry R. Nothhaft
----------------------
Title: Chairman, President & CEO
--------------------------
ATTEST:
- --------------------
Secretary [Seal]
<PAGE>
EXHIBIT B
Williams Technology Solutions
Anglum Leasehold Improvements
1997 Relocation
Net Book Value
Phase I
Office Buildout $ 76,829.22
Electrical $ 63,941.84
Kitchen-New Cabinets/Counter $ 630.63
Net Ops/Computer Room $ 31,966.17
Security/Fire Protection $ 16,713.87
-----------
Sub-total $190,081.73
Phase II
Construction $ 58,102.50
Floor Covering $ 16,288.64
Electrical $ 50,471.02
HVAC $ 4,383.86
Signage $ 5,579.46
Misc. $ 1,092.78
-----------
Sub-total $135,918.27
-----------
Total $326,000.00
===========
<PAGE>
Exhibit B
5 ton Liebert cooling system w/Humidification
30 KVA UPS
<PAGE>
LEASE
THIS LEASE, made and entered into the 26 day of February, 1997, by and between
ARMSTRONG PROPERTIES, LTC, a Missouri Limited Partnership ("Landlord"), and
CRITICAL TECHNOLOGIES, INC., a Missouri corporation ("Tenant"),
WITNESSETH:
1. PREMISES: Landlord, for and in consideration of the rents, covenants and
--------
agreements hereinafter mentioned and hereby agreed to be paid, kept and
performed by Tenant, does hereby lease with covenant for quiet enjoyment to
Tenant, and Tenant hereby hires from the Landlord, the following described
premises (the "Leased Premises") located in the city of Hazelwood, in the
County of St. Louis, State of Missouri, and more particularly described as
follows:
A 23,500 square foot office building and adjoining parking areas known
and numbered as 944 Anglum Drive, Hazelwood, Missouri 63042.
2. USE OF PREMISES: The Leased Premises may be used and occupied by Tenant
---------------
during the term hereof, subject to the conditions herein contained and
subject to applicable zoning regulations, for parking, office and warehouse
activities. In no event shall the leased Premises be used for any purpose
contrary to law, zoning regulations, or recorded restrictions, if any.
3. IMPROVEMENTS TO PROPERTY: Landlord agrees that prior to the commencement of
------------------------
the term of this Lease it will, at its expense, inspect and repair all of
the mechanical (heating, cooling and ventilating) units, lighting,
electrical, plumbing, and windows, in order to place same in good working
order. Landlord shall not be obligated to make any other repairs or
improvements to accommodate Tenant's use. Tenant shall have the right to
install in the Leased Premises additional heating ventilating and air
conditioning equipment, loading facilities, interior furnishes and shall
have the right to instill a free-standing electrical generator outside of
the building, provided all of the following conditions have been met: (a)
plans and specifications for any such improvement shall have been submitted
to Landlord and Landlord shall have specifically approved same in writing
(which approval Landlord agrees shall not be unreasonably withheld) and (b)
all work is done in a good and workmanlike manner in accordance with the
plans and specifications approved by Landlord, (c) all work is done in
full compliance with all building codes, City of Hazelwood ordinances and
other laws applicable thereto, and (d) Tenant shall pay for all cost and
expense involved in such work, including and professional fees incurred by
Landlord to review such plans and specifications, and (e) Tenant shall
obtain Lien Waivers from all mechanics and material suppliers for such
improvements.
4. TERM: The term of this Lease shall commence on the 26th day of February,
----
1997, and end on the 31st day of March, 2002, both dates inclusive. If by
mutual consent of the parties, Tenant shall remain in possession of the
Leased Premises after the expiration of the term of this Lease, such
possession shall be as a month-to-month tenant, during which the rent shall
be payable at the same rate as that in effect during the last month of the
term, and provisions of this Lease shall be applicable.
5. RENT: Tenant shall, without deduction, abatement or set-off of any nature
----
whatsoever, pay to Landlord as fixed rent for the Leased Premises, as
follows. There shall be no rent paid for the period of February 26, 1997
to March 31, 1997.
Commencing April 1, 1997 to March 31, 1998 = $11,750.00 per month
Commencing April 1, 1998 to March 31, 1999 = $12,729.00 per month
Commencing April 1, 1999 to March 31, 2000 = $14,687.00 per month
Commencing April 1, 2000 to March 31, 2002 = $16,645.00 per month
Page 1 of 8
<PAGE>
payable in advance without demand on the first day of each and every month
during the term of this Lease, commencing April 1, 1997. Tenant shall pay
the fixed rent for April, 1997 upon the execution hereof.
A late charge of five percent (5%) of any monthly rental payment will be
added after fifteen (15) days from the due date. Failure to pay any monthly
rental within ten (10) days after the due date shall be deemed to be an
event of default by Tenant under this Lease.
6. SECURITY DEPOSIT: Upon the execution of this Lease, Tenant shall deposit
----------------
with Landlord the sum equal to $28,395.00 of which $11,750.00 shall be
credited against the first month's rent payable hereunder and the balance
of $16,645.00 shall be held by Landlord as security for the faithful
performance and observance by Tenant of all the terms, covenants and
conditions of this Lease. Landlord shall retain said funds, as its own,
(without being liable for interest thereon) and may use, apply or retain
the whole or any part of the funds so deposited to the extent required for
the payment of any rent, additional rent or other sums as to which Tenant
is in default, or for the payment of any amount which Lessor may be
required to expend by reason of Tenant's default in respect of any of the
terms of this Lease. Landlord shall give Tenant five (5) days' written
notice before applying the deposit to any default. Should Tenant comply
with all of the terms of this Lease, so much of said security deposit not
spent or applied pursuant to the provisions of this paragraph shall be
returned to Tenant within thirty (30) days after the termination of this
Lease. If any portion of said deposit is so used or applied, Tenant shall,
within ten (10) days after the demand therefor, deposit cash with Landlord
in an amount sufficient to restore the security deposit to its original
amount and Tenant's failure to do so shall be a material breach of this
Lease. Should Landlord sell its interest in the Premises during the term
hereof and if Landlord delivers to the purchaser thereof the then
unappropriated funds deposited by Tenant as aforesaid, thereupon Landlord
shall be discharged from any and all liability, with respect to said
security deposit. The security deposit may not be used to pay the last
month's rent.
7. TAXES: Tenant shall pay all real estate and occupancy taxes, assessments
-----
and/or installments thereof on or before the date the same become due,
whether general or special, foreseen and unforseen, and shall furnish
Landlord a copy of the paid receipts therefor. Taxes shall be prorated for
1997 and 2002 for the period of the Lease.
Tenant reserves the right and privilege to contest the validity and amount
of any tax or assessment payable by it to any governmental body or agency,
whether assessed in its name or in the name of the Landlord. Landlord
grants Tenant the right to contest the validity and amount of any such tax
or assessment provided Tenant pays all costs and fees incurred in
proceedings before any agency or court; and, provided further, that Tenant
shall make proper provision to prevent any such tax or assessment from
becoming delinquent by reason of any contest thereof.
8. ASSIGNMENT AND SUBLETTING: Tenant shall not assign this Lease nor sublet
-------------------------
all or any part of the Leased Premises without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Landlord's
consent to one assignment or subletting shall not be deemed a consent to
any other or further assignment or subletting. No assignment of this Lease
or subletting thereunder and no acceptance by Landlord of any rent or any
other sum of money from any assignee or sublessees shall release Tenant
from any of its obligations under this Lease; and in any event Tenant shall
remain primarily liable on this Lease for the entire term hereof and shall
in no way be released from the full and complete performance of all the
terms, conditions, covenants and agreements herein contained.
9. PARKING: Tenant shall during the Lease term have exclusive right to use all
-------
of the parking spaces.
10. REPAIRS AND MAINTENANCE: Landlord shall, at its cost, during the term of
-----------------------
this Lease keep in good repair the foundations, exterior walls, roofs,
gutters, and down spouts forming a part of the Leased Premises.
Landlord will be responsible for making major repairs or replacement of the
HVAC system until March 31, 1999, at which time Tenant will be responsible
for HVAC repairs or
Page 2 of 8
<PAGE>
replacement throughout the remainder of the Lease, as required. Tenant
shall, at its cost, keep in good repair the parking lot drives, sidewalks,
and common areas forming a part of the Leased Premises and shall maintain
in good and first-class condition the lawn, sidewalks, drives, common
areas, and shrubbery, including watering same, cutting the grass, and the
replacing of any dead trees, bushes or other ornamental plants.
Tenant also, at its own cost and expense, keep all other parts of the
Leased Premises in good repair (including, but not limited to, repair and
replacement of the mechanical equipment, plumbing system, electrical
system, sprinkler system, exterior doors and interior doors and partitions)
and shall keep the Leased Premises in good order to the standards of a
first-class office building, including, but in no way limited to, keeping
the Leased Premises free of trash; and maintaining, and replacing all
broken glass, plate glass and skylights, in the Leased Premises.
In the event that Tenant shall be in default under this Paragraph 10, then
Landlord may cure such default on behalf of Tenant after providing 10 days
prior written notice, in which event Tenant on demand shall reimburse
Landlord for all sums paid to effect such cure, plus twelve percent (12%)
thereof to cover Landlord's overhead expenses and plus reasonable
attorneys' fees. In order to collect such reimbursement, Landlord shall
have all the remedies available under this Lease for a default in the
payment of rent.
11. ALTERATIONS: No substantial alteration, addition or improvement to the
-----------
Leased Premises shall be made by Tenant without the written consent of
Landlord, such consent not to be unreasonably withheld. Any alteration,
addition, or improvement made by Tenant after such consent shall have been
given, and any non-movable fixtures installed as a part thereof, shall at
Landlord's option become the property of Landlord upon the expiration or
sooner termination of this Lease; provided, however, that Landlord shall
have the right to require Tenant to remove such fixtures including all
phone, computer and telecommunications cabling, at Tenant's cost upon such
termination of this Lease. It is expressly understood and agreed, however,
that Tenant shall retain ownership of, and shall upon termination of this
Lease be permitted to remove from the Leased Premises, those items of
equipment and personal property described on Exhibit A attached hereto,
---------
provided that such removal does not adversely affect or impair the
structure of the Leased Premises or mechanical or working systems serving
the Leased Premises, and further provided that Tenant shall be responsible
at its sole cost for repairing all damage to the Leased Premises caused by
such removal.
12. WASTE: Tenant covenants not to do or suffer any waste to the Leased
-----
Premises.
13. MECHANICS' LIENS: Tenant shall not permit mechanics' liens to be filed
----------------
against the fee of the Leased Premises or against Tenant's leasehold
interest in the Premises by reason of work, labor, services or materials
supplied or claimed to have been supplied to Tenant or anyone holding the
Leased Premises through or under Tenant, whether prior or subsequent to the
commencement of the term hereof. If any such mechanics' lien shall at any
time be filed, against the Leased Premises and Tenant shall fail to remove
same within thirty (30) days thereafter, it shall constitute a default
under the provisions of this Lease.
14. RESTRICTIONS OF USE: Tenant shall not allow, permit or suffer any noise,
-------------------
smoke or odor to escape from the Leased Premises, or occupy the Leased
Premises in such manner as to constitute a public nuisance or environmental
hazard. No sign, fixture, advertisement or notice shall be displayed,
inscribed, painted, or affixed by Tenant on any part of the outside of the
Leased Premises or on the parking lot or on any part of the Leased
Premises' without the prior written consent of Landlord. At the expiration
of the Lease term, Tenant shall remove all such signs or advertisement
matter at its cost and shall repair any damage resulting from such removal.
Nor shall Tenant allow or permit any goods, materials or equipment to be
stored outside of the buildings without the prior written consent of
Landlord. Such consent may not be unreasonably withheld.
15. UTILITIES: Tenant shall pay for all gas, electricity, water, air
---------
conditioning, sewer and telephone service and all other utilities used in
and upon the Leased Premises. Tenant shall be responsible for its own trash
removal.
Page 3 of 8
<PAGE>
16. ACCESS: Landlord, and its duly authorized agents, employees and
------
contractors, shall have access to the Leased Premises at all reasonable
times for the purpose of inspecting the same and making necessary repairs
or replacements as described under Paragraph 10.
17. INSURANCE: Prior to commencement of occupancy by Tenant, Tenant at its
---------
expense shall obtain a policy of insurance insuring the Leased Premises
against losses for fire and extended coverage for the full replacement
value of the building on the Leased Premises including earthquake, coverage
and shall also obtain a policy of public liability insurance in at least
the amount of $1,000,000.00. Landlord shall be named as an insured under
such policies. In the event the building and improvements on the Leased
Premises are damaged or destroyed by fire or other casualty, rent shall not
abate and Landlord shall restore the said premises to substantially the
same condition in which they existed prior to such damage, and with all
reasonable speed and promptness, not to exceed one hundred eighty (180)
days. Landlord shall use the proceeds of such insurance and repairs in
rebuilding the Leased Premises. In determining what constitutes reasonable
speed and promptness, considerations shall be given to delays caused, by
strikes, adjustment of insurance, and other causes beyond Landlord's
control. In no event shall Landlord be required to restore any alteration,
additions, or improvement made by or for Tenant, nor any trade fixtures,
equipment or other property belonging to Tenant. In the event that the
Leased Premises have not been restored within one hundred eighty (180) days
of the casualty, either Tenant or Landlord may thereafter elect to
terminate this Lease by serving written notice of termination on the other
party, provided that the Leased Premises have not been restored prior to
the date on which the notice of termination has been given hereunder.
Tenant shall have the right to provide the insurance policies required
above pursuant to blanket policies obtained by Tenant, provided such
blanket policies expressly afford coverage to the Premises and Landlord
required by this Lease. Landlord and Tenant hereby waive the right each
may have against the other on account of any loss or damage occasioned to
Landlord or Tenant, as the case may be, their respective property, the
Leased Premises or its contents arising from any risk insured against by
Landlord or Tenant; and the parties each, on behalf of their respective
insurance companies insuring the property of either Landlord or Tenant
against any such loss, waive any right of subrogation that it may have
against Landlord or Tenant, as the case may be. This release shall apply
only to the extent that such loss or damage is covered by insurance and
only so long as the applicable insurance policies contain a clause or
otherwise provide that this release shall not affect the right of the
injured to recover under such policies.
18. LIABILITY: Landlord shall not be liable for any failure of water supply,
---------
gas, or electric current; nor for any injury or damage to person or
property caused by gasoline, oil, steam, gas electricity, ice/snow,
tornado, flood, wind, or similar storms and disturbances; nor water or rain
which may leak or flow from the street, sewer, gas mains or any subsurface
area from any part of the buildings or improvements on the Leased Premises
occurring from such causes or at no fault of Landlord; nor for any
interference with light or air. Landlord shall not be liable for any
personal injury to Tenant, its officers, agents, employees and invitees,
nor for any damages to any property of Tenant, irrespective of how much
such injury or damage may be caused.
Tenant shall indemnify and hold Landlord harmless from any loss, damages,
and expenses incident thereto, including attorneys' fees, arising out of
the liability to any person on account of loss of or damage to property or
injury persona resulting item the use and occupancy of the Leased Premises
or the parking lot, sidewalks, XXX, or common areas by Tenant; except,
however, Tenant shall not indemnify Landlord for its own acts of
negligence.
19. CONDEMNATION
------------
(a) If the whole of the Leased Premises shall be taken for any public or
any quasi-public use under any statute or by right of eminent domain,
or by purchase under threat of condemnation, then this Lease shall
automatically terminate as of the date that title shall be taken. If
any part of the Leased Premises shall be so taken as to render the
remainder thereof unusable for the purposes for which the Leased
Premises were leased in either parties' discretion, then Landlord and
Tenant shall each have the right to terminate this Lease on thirty
(30) days' notice to the other given within ninety (90) days after the
date of such taking. In the event that this Lease shall terminate or
be
Page 4 of 8
<PAGE>
terminated, the rental shall, if and as necessary, be prorated between
Landlord and Tenant as of the date of such termination;
(b) If any part of the Leased Premises shall be so taken and this Lease
shall not terminate or be terminated under the provisions of
Subparagraph (a) above, then the rental shall be equitably apportioned
according to the area so taken, and Landlord shall, at its own cost
and expense, restore the remaining portion of the Leased Premises to
the extent necessary to render them reasonably suitable for the
purposes for which they were leased, and shall make all repairs to the
building in which the Leased Premises are located to the extent
necessary to constitute the building a complete architectural unit;
and
(c) All compensation awarded or paid upon such a total or partial taking
of the Leased Premises shall belong to and be the property of Landlord
without any participation by Tenant; provided, however, that nothing
contained herein shall be construed to preclude Tenant from
prosecuting any claim directly against the condemning authority in
such condemnation proceeding for loss of business, depreciation to,
damage to, or cost of removal of, or the value of stock, trade
fixtures, furniture, and other personal property belonging to Tenant;
provided, however, that no such claim shall diminish or otherwise
adversely affect Landlord's award.
20. DEFAULT: The following events shall be deemed to be events of default by
-------
Tenant under this Lease: (i) if Tenant shall fail to pay any fixed or
additional rent hereby reserved within ten (10) days after due date; (ii)
if Tenant shall fail to comply with any term, or provision, or covenant of
this Lease, other than the payment of rent, and shall not cure such failure
within thirty (30) days after written notice thereof to Tenant; (iii) if
Tenant shall become insolvent, or shall make a transfer with intent to
defraud its creditors, or shall make an assignment for the benefit of its
creditors; (iv) if Tenant shall file a petition under any section or
chapter of the National Bankruptcy Act; as amended, or under any similar
law or statute of the United States or any state thereof; or Tenant shall
be adjudicated bankrupt or insolvent in proceedings filed thereunder; (v)
if a receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant; or (vi) if Tenant shall desert or vacate any
substantial portion of the Leased Premises.
Upon the occurrence of any such event of default, Landlord shall have the
option to pursue any one or more of the following remedies (as well as any
other remedies provided by law) without any further notice or demand
whatsoever:
(a) Declare immediately due and payable the entire amount of the rent then
remaining to be paid under this Lease for the balance of the Lease
term;
(b) Enter upon and take possession of the Leased Premises by any lawful
means, and dispossess, expel, and remove Tenant and any other persons
who may be occupying the Leased Premises or any part thereof
(including changing or altering the locks and other security devices)
and remove and expel any personal property or trade fixtures located
therein, all without being liable to any prosecution thereof or for
any damages resulting therefrom. Such re-entry and/or repossession by
Landlord shall not terminate this Lease nor relieve Tenant of its
obligations under this Lease, including its obligation to pay rent
(whether or not the time for payment of rent has been accelerated). In
the event of such re-entry or repossession by Landlord, Landlord shall
also have the option to re-let the Leased Premises as agent for Tenant
(in the name of Landlord or in the name of Tenant), at any rent and
for any term readily obtainable and receive the rent therefor, in
which event Tenant shall be given credit for any rents that may arise
by reason, of such re-letting (after first deducting all repossession
costs, brokerage commissions, legal expenses, attorneys' fees, and all
other expenses in cleaning, repairing and altering the premises for
re-letting); and
(c) Forfeit and terminate this Lease forthwith. In the event of such
termination, Tenant shall immediately surrender the Leased Premises to
Landlord and if Tenant fails to do so, Landlord may enter upon and
take possession of the Leased Premises by any lawful means and
expel or remove Tenant and any other person who may be
Page 5 of 8
<PAGE>
occupying said premises or any part thereof, and any personal property
or trade fixtures located therein. In the event of the forfeiture of
this Lease as herein provided, Tenant agrees that any security deposit
being held by Landlord hereunder shall be retained by Landlord and
applied against all damages incurred with respect to Tenant's default,
which damages shall include all unpaid rent and any other damages
accruing to Landlord by reason of the violation by Tenant of any of
the terms, provisions and covenants of this Lease.
Tenant hereby waives demand for rent, demand for possession, notice for
forfeiture, notice of termination and any and all other demands or notices
required by law.
Pursuit by Landlord of any of the foregoing remedies or any other remedy
provided by law shall not constitute a forfeiture or waiver of any rent due
to Landlord hereunder or of any damages accruing to Landlord by reason of
the violation by Tenant of any of the terms, provisions and covenants of
this Lease. In no event shall Tenant be relieved from its obligation to pay
the rentals specified in this Lease by reason of a surrender of possession,
termination of this Lease or in any other manner whatsoever, unless
specifically agreed to in writing by Landlord.
No waiver by Landlord of any violation or breach of any of the terms,
provisions and covenants of this Lease shall be deemed or construed to
constitute a waiver of any other violation or breach of any of the terms,
provisions and covenants herein contained. Forbearance by Landlord to
enforce one or more of the remedies herein provided upon an event of
default shall not be deemed or construed to constitute a waiver of such
default.
If Landlord incurs any expenses, including court costs and attorneys' fees,
as a result of a default by Tenant under this lease, then such expenses
shall be reimbursed by Tenant as additional rent, whether or not such
default is subsequently cured.
Tenant's delinquent payments shall bear interest at the rate of twelve
percent (12%) per annum from the date of delinquency until paid.
21. SURRENDER AND TERMINATION: At the expiration of the Lease term, Tenant
-------------------------
shall surrender the Leased Premises in as good condition as they were in at
the beginning of the term, reasonable use and wear and damage by the
elements excepted.
Notwithstanding and provisions of law or any judicial decision to the
contrary, no notice shall be required to terminate the term of this Lease
as herein provided, and the term of this Lease shall expire on this
termination date herein mentioned without notice being required from either
party. In the event that Tenant or any party holding under Tenant shall
remain in possession of the Leased Premises beyond the expiration of the
term of this Lease, whether by limitation or forfeiture, such party shall
pay double rent hereunder during such hold-over period, except if such
hold-over is with Landlord's consent as provided in Paragraph 4.
22. NOTICES: Any notice required to be given by either party to the other party
-------
under the terms of this Lease shall be personally served upon it or mailed
by United Stated certified mail to said party at its last known address.
The current addresses of the parties are as follows:
LANDLORD TENANT
-------- ------
Mr. William H. Armstrong, Jr. Mr. Mike Fallon, Treasurer
Armstrong Properties, LTC Critical Technologies, Inc.
31 Fordyce 3324 Hollenberg Drive
St. Louis, Missouri 63124 Bridgeton, Missouri 63044
23. HEADINGS AND DEFINITIONS:
------------------------
(a) It is agreed that the headings and phrases as to the contents of
particular paragraphs of this Lease are inserted a matter of
convenience and for reference, and in no way are or are intended to be
a part of this Lease or in any way to define, limit or describe the
scope or intent of the paragraph to which they refer; and
Page 6 of 8
<PAGE>
(b) Where in this instrument pronouns appear, or words indicating the
singular number, such words shall be considered as masculine,
feminine, or neuter pronouns or words indicating the plural number,
and vice versa, where the context indicates the propriety of such use.
24. MODIFICATIONS: Landlord and Tenant agree that this Lease contains the
-------------
entire agreement between them and shall not be modified in any manner
except by an instrument in writing signed by each of them.
25. BENEFIT: This Lease shall inure to the benefit of and be binding upon
-------
Landlord and Tenant and their respective heirs, executors, personal
representatives, administrators, successors and assigns, as the case may
be.
26. SUBORDINATION: Tenant agrees that upon delivery to it by any mortgagee of
-------------
the Leased Premises of a "non-disturbance letter," as same is defined
below, that this Lease and Tenant's interest in this Lease shall be
subordinated to any mortgage, deed of trust or other method of financing or
refinancing now or hereafter encumbering the Leased Premises, the land
underlying the Leased Premises, and/or the building of which the Leased
Premises comprise a part; and to all renewals, modifications, replacements,
consolidations and extensions thereof. Tenant further agrees that in such
event it will execute and deliver any and all documents necessary to
evidence the subordination of its rights under this Lease as aforesaid. The
"non- disturbance letter" referred to above shall be any letter from the
holder of such mortgage, deed of trust or other security instrument to the
effect that in the event of a foreclosure or other action taken under any
such security instrument that this Lease and the rights of Tenant hereunder
shall not be disturbed, diminished or interfered with, but shall continue
in full force and effect so long as Tenant shall not be in default
hereunder.
In any event, if any such mortgage, deed of trust or other security
instrument encumbering the Leased Premises is foreclosed for any reason,
and the holder of such mortgage, deed of trust or other security instrument
succeeds to the interest of Landlord under this Lease, Tenant shall be
bound to such mortgage, deed of trust or security holders under all of the
terms of this Lease for the balance of the term thereof remaining, with the
same force and effect as if said mortgagee were the Landlord under this
Lease; and Tenant hereby attorns to the mortgagee as its Landlord, such
attornment to be effective and self-operative, without the execution of any
further instrument on the part of either of the parties hereto, immediately
upon the mortgage succeeding to the interest of Landlord under this Lease.
27. ESTOPPEL CERTIFICATE: Tenant agrees, at any time, and from time to time,
--------------------
upon not less than ten (10) days' prior notice by Landlord, to execute,
acknowledge and deliver to Landlord, a statement in writing addressed to
Landlord certifying that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that the same is in full
force and effect as modified and stating the modifications), stating the
dates to which the fixed minimum rent, additional rental and other charges
have been paid, and stating whether or not to the best knowledge of the
signer of such certificate, agreement, term, provision or condition
contained in this Lease, and, if so, specifying each such default of which
the signer may have knowledge, it being intended that any such statement
delivered pursuant hereto may be relied upon by Landlord and by any
mortgagee or prospective mortgagee of any mortgage affecting the building
or the building and the land, and by prospective purchaser of the Property.
28. SEVERABILITY: This Lease and its provisions are to be construed as a whole,
------------
but should any provision be held or be void or illegal, then such clause or
provision shall be deemed severable from the Lease and shall be considered
stricken herefrom, but the Lease shall not be deemed void or otherwise
modified or affected.
29. QUIET ENJOYMENT: Tenant shall at all times during the term hereof and all
---------------
extensions or renewals, subject only to its payment of the rental and
performance of the agreements on its part to be performed, peacefully and
quietly have, hold and enjoy the premises without any manner of suit,
trouble, hindrance or from Landlord, its successors or assigns, or any
other person.
Page 7 of 8
<PAGE>
30. ENVIRONMENTAL: Tenant shall not use, store, manufacture, dispose of or
-------------
discharge any pollutants, contaminants, or harmful or hazardous substances
from or on the Leased Premises or otherwise occupy or permit the Leased
Premises to be occupied or used in a manner which (i) violates any law,
regulation, rules or other governmental requirement, (ii) impairs the
health, safety or condition of any person or property or (iii) adversely
affects the use, enjoyment or value of the Leased Premises or the
surrounding property. Tenant shall promptly notify Landlord of the breach,
or the potential or threatened breach, of any of the provisions of this
paragraph. Tenant shall indemnify and hold Landlord and its officers,
shareholders, partners, employees, and agents, harmless from any loss,
claim, liability or expense (including, without limitation, attorneys'
fees, court costs, consultant fees, expert fees, penalties, fines, removal,
clean-up, transportation, disposal and restoration expenses) arising in
connection with Tenant's failure to comply with the provisions of this
paragraph. A breach of the provisions of this paragraph shall be a material
default enabling Landlord to exercise any of the remedies set forth in this
Lease. Tenant's obligation hereunder shall survive the termination of this
Lease.
31. RENEWAL OPTION: Tenant shall have the right to extend the term of the Lease
--------------
for an additional period of three (3) years, commencing on the expiration
of the original term of the Lease. Such renewal option shall be deemed
effectively exercised only if Tenant has given Landlord written notice
thereof at least one hundred eighty (180) days prior to the expiration of
the original term and only if Tenant is not in default under this Lease
both at the time of such exercise and at the time of the commencement of
the renewal term. All terms and provisions of the Lease shall be applicable
during such renewal term, except the fixed rent payable pursuant to
paragraph 5 shall equal $223,250.00 annually, with equal monthly payments
of $18,604.17. Such rent shall be payable without deductions, abatements or
set-offs of any nature whatsoever. It is expressly understood that the
renewal option granted in this paragraph is personal to the entity
expressly named as Tenant in this Lease and to any assignee and subtenant
which has been approved by Landlord, and that said option shall terminate
upon an assignment or subletting of Tenant's interest hereunder and shall
not inure to the benefit of any assignee or subtenant of Tenant which has
not been approved by Landlord.
32. CANCELLATION OPTION: Upon six months prior written notification, Leasee
-------------------
will have the right to terminate this Lease at the end of the 36th month.
Anytime after 36 months Leasee can terminate this Lease with three months
prior written notice. As consideration, Leasee will pay Lessor, an amount
equal to 50% of the remaining fixed rent obligation under the Lease as of
the effective date of the Lease termination, which amount will accompany
and be a requirement of the notice to terminate.
This Lease consists of thirty-two (32) paragraphs numbered consecutively.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and
year first above mentioned.
TENANT: LANDLORD:
CRITICAL TECHNOLOGIES, INC. ARMSTRONG PROPERTIES, LTC
By: /s/ [ILLEGIBLE]^^ By: /s/ William H Armstrong, Jr.
-------------------- ----------------------------------------
Wm. H. Armstrong, Jr., General Partner
Date: 2/27/97 Date: 2/27/97
------------------ -------------------------------------
Time: 12:00 pm Time: 1:30 pm
------------------ -------------------------------------
Page 8 of 8
<PAGE>
EXHIBIT 10.57
LANDLORD: SSP ASSOCIATES, INC.
And
TENANT: CONCENTRIC NETWORK CORPORATION
Dated: December 15, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
SECTION 1 SCHEDULE..................................... 1
SECTION 2 GRANT AND TERM............................... 2
2.1 Demised Premises......................... 2
2.2 Term..................................... 3
2.3 Renewal Term............................. 3
SECTION 3 CONSTRUCTION OF DEMISED PREMISES............. 3
3.1 Construction............................. 3
3.2 Delays................................... 3
3.3 Completion Date.......................... 4
3.4 Settlement of Disputes................... 4
SECTION 4 POSSESSION AND COMMENCEMENT OF TERM.......... 4
4.1 Possession and Commencement of Lease Term 4
4.2 Landlord Not Liable For Delays........... 5
4.3 Memorandum............................... 5
SECTION 5 BASE RENT.................................... 5
5.1 Base Rent................................ 5
5.2 Renewal Base Rent........................ 6
5.3 Rent Net of All Expenses................. 7
5.4 Delinquency Charge....................... 7
5.5 Lease Year............................... 7
5.6 Default Charge........................... 7
SECTION 6 UTILITIES.................................... 8
SECTION 7 TAXES AND ASSESSMENTS........................ 8
7.1 Obligation............................... 8
7.2 Definition............................... 8
7.3 Payments................................. 8
7.4 Escrow................................... 9
7.5 Right to Contest Taxes................... 9
7.6 Tenant's Taxes........................... 10
7.7 Surplus Taxes............................ 10
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
SECTION 8 USE OF DEMISED PREMISES....................... 10
8.1 Use of Demised Premises................... 10
8.2 Care of Demised Premises.................. 10
8.3 Hazardous Substances...................... 11
8.4 Obligation of Tenant...................... 11
SECTION 9 INDEMNITY..................................... 11
9.1 Indemnity................................. 11
9.2 Liability Insurance....................... 12
9.3 Tenant's Contractor's Insurance........... 12
9.4 Delivery of Policy and Special Endorsement 12
SECTION 10 MAINTENANCE AND REPAIRS....................... 12
10.1 Maintenance And Repairs.................. 12
10.2 Compliance With Laws..................... 13
SECTION 11 TENANT'S ALTERATIONS.......................... 13
11.1 Alterations.............................. 13
11.2 Construction Liens....................... 14
SECTION 12 PROPERTY INSURANCE, REBUILDING AND WAIVER
OF SUBROGATION................................ 14
12.1 Property Insurance....................... 14
12.2 Rebuilding............................... 15
12.3 Tenant's Deposit for Rebuilding.......... 16
12.4 Waiver of Subrogation.................... 16
SECTION 13 EMINENT DOMAIN................................ 16
13.1 Total Condemnation....................... 16
13.2 Partial Condemnation..................... 16
13.3 Landlord's and Tenant's Damages.......... 17
SECTION 14 ACCESS TO PREMISES............................ 17
SECTION 15 FIXTURES AND EQUIPMENT........................ 18
SECTION 16 BANKRUPTCY AND INSOLVENCY OF TENANT........... 18
SECTION 17 RIGHT TO MORTGAGE............................. 19
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
SECTION 18 ASSIGNMENT, SUBLETTING AND TRANSFERS
BY TENANT................................ 19
SECTION 19 SALE OR TRANSFER.......................... 20
SECTION 20 DEFAULT, RE-ENTRY AND DAMAGES............. 20
20.1 Default.............................. 20
20.2 Re-Entry and Damages................. 20
20.3 Waiver of Landlord's Liability....... 21
20.4 Landlord's Rights Cumulative......... 21
20.5 Waiver of Jury Trial and Counterclaim 21
20.6 Non-Liability........................ 21
SECTION 21 LANDLORD'S RIGHT TO CURE DEFAULTS......... 22
SECTION 22 QUIET ENJOYMENT........................... 22
SECTION 23 HOLDING OVER.............................. 22
SECTION 24 CUMULATIVE REMEDIES AND WAIVER............ 22
24.1 Cumulative Remedies.................. 22
24.2 Waiver............................... 23
SECTION 25 OPTION TO EXPAND BUILDING SPACE........... 23
SECTION 26 DEFINITION OF LANDLORD, LANDLORD'S
LIABILITY................................ 23
SECTION 27 WASTE..................................... 24
SECTION 28 SIGNS..................................... 24
SECTION 29 SECURITY DEPOSIT.......................... 24
SECTION 30 MISCELLANEOUS............................. 24
30.1 Condition of Demised Premises........ 24
30.2 Lease Changes Required By Lender..... 25
30.3 Entire Agreement..................... 25
30.4 Modification......................... 25
30.5 Joint Venture, Mortgage.............. 25
30.6 Notices.............................. 25
30.7 Survival............................. 25
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
30.8 Estoppel Certificate........... 26
30.9 Gender......................... 26
30.10 Captions and Section Numbers.. 26
30.11 Broker's Commission........... 26
30.12 Recording..................... 26
30.13 Execution of Lease............ 26
30.14 Construction.................. 26
30.15 Binding Effect................ 27
</TABLE>
-iv-
<PAGE>
LEASE
-----
SECTION I
SCHEDULE
--------
LANDLORD: NAME: SSP Associates, Inc.
ADDRESS: 4509 Longmeadow Road, Saginaw, MI 48603
TENANT: NAME: Concentric Network Corporation
ADDRESS:
Before Commencement Date:
1400 Parkmoor Avenue
San Jose, CA 95126
Attn: Director of Administration
After Commencement Date:
1400 Parkmoor Avenue and The Premises
---
San Jose, CA 95126 Attn: Facility Manager
Attn: Director of Administration
DEMISED
PREMISES: Land ("Site") as described in Exhibit A consisting of
approximately 7.34 acres, and improvements to be constructed or
installed thereon ("Project"), located at 1405 Tittabawassee,
Carrollton Township, Saginaw County, Michigan, described as
follows:
An office and computer facility consisting of approximately
40,000 square feet of office space, and including driveways,
parking areas and related improvements.
PLANS: Plans and specifications ("Plans") for completion and
construction of the Project, as approved and initialed by the
parties, floor plan (Job No. 99-1334-60; 10/20/99) Sheet A1,
Elevation (Job No. 99-1334-60; 11/8/99) Sheet A2, together with
any subsequent plans and specifications approved in writing by
the parties.
LEASE TERM: 12 years
RENEWAL TERM: One 10-year term
COMMENCEMENT
DATE: When built (Anticipated to be June 1, 2000)
1
<PAGE>
TERMINATION
DATE: May 30, 2012
ANNUAL BASE
RENT: Lease Year Annual Base Rent
---------- ----------------
1 ($10.00 x sq. ft.) $440,000.00
2 ($10.00 x sq. ft.) $440,000.00
3-12 ($12.75 x sq. ft.) $510,000.00
Renewal Term (13-22) $CPI since 2000 with no one
year exceeding 3.5% increase
MONTHLY
INSTALLMENT OF
BASE RENT: Month of Lease Term Monthly Installment of Base Rent
------------------- --------------------------------
1-24 $36,666.66
25-144 $42,500.00
SECURITY
DEPOSIT: None required at commencement
USE OF DEMISED
PREMISES: Office/Computer Facility and other uses permitted under the
B-1 Zoning
DATED: December 15, 1999
EXHIBITS
ATTACHED: A - Legal Description of Demised Premises and Site Plan
B - Plans
C - Tenant Requirements
SECTION 2
GRANT AND TERM
--------------
2.1 Demised Premises
----------------
Landlord, in consideration of the rents to be paid and the covenants,
promises and agreements to be performed by Tenant, does hereby lease to Tenant
and Tenant hereby rents from Landlord, the Demised Premises described in
Section 1.
2
<PAGE>
2.2 Term
----
The term of this Lease shall be for the Lease Term stated in Section 1,
commencing on the Commencement Date stated in Section 1 and expiring on the
Termination Date stated in Section 1, unless delayed or sooner terminated as
herein set forth.
2.3 Renewal Term
------------
Tenant is granted an option to renew the term of the Lease for one 10-year
term which shall be exercised, if at all, as follows:
Not less than 270 days before the expiration of the Lease, Tenant will
notify Landlord in writing of Tenant's election to renew the Lease for an
additional term of ten years. The monthly rental charge is set out in
Section 5.
SECTION 3
CONSTRUCTION OF DEMISED PREMISES
--------------------------------
3.1 Construction
------------
Landlord agrees, prior to the Commencement Date to construct and complete
the Project on the Site, in accordance with the Plans as described in Section 1,
at Landlord's sole cost and expense. Any changes made to the Plans, at the
request of Tenant, after the date of this Lease, which are acceptable to
Landlord in cost, character, nature and scope, shall be paid by Tenant to the
extent they increase the cost to complete the Project; one-half of such amount
at date of the request by Tenant and the balance to be paid on the Commencement
Date. Minor changes from such plans and specifications, which may be necessary
to accommodate construction and are reasonably approved by Tenant, shall not
affect, change or invalidate this Lease. The Project shall be constructed in a
good and workmanlike manner, free of all liens, and in accordance with the Plans
and all laws, statutes, ordinances, building codes, rules and regulations of any
federal, state or municipal body or other governmental agency having
jurisdiction thereof then in effect. Landlord warrants against structural
defects and further warrants that the entire Project will be free from defect in
materials or workmanship for one year.
3.2 Delays
------
Landlord's obligations under this section shall not require Landlord to
incur overtime costs and expenses. In the event Landlord shall be delayed or
hindered in the construction of the Project or prevented from completing such
construction or prevented from delivering possession of the Demised Premises
because of any strike, lockout, labor dispute, fire, damage or destruction or
casualty, unavailability of material, weather, power failures, unavailability of
utilities, restrictive governmental laws or regulations, riots, insurrection,
war, or any other reason, beyond its control,
3
<PAGE>
then Landlord shall be excused for the period of delay and the Commencement Date
shall be postponed for such period of delay until such time as the Demised
Premises are ready for occupancy, but no such failure to give Tenant occupancy,
shall extend the Termination Date.
3.3 Completion Date
---------------
Subject to Section 3.2, the Project shall be substantially completed on or
before the Commencement Date. Substantially completed shall mean the date upon
which water, gas, electricity, sewer and other utilities at levels reasonably
required for the permitted use are available, Landlord has substantially
completed the Project (subject only to Punchlist Items or exterior seasonal
projects (e.g., blacktopping, landscaping, etc.)) and Landlord delivers a
Certificate of Occupancy which permits Tenant to occupy the Project and conduct
its business.
3.4 Settlement of Disputes
----------------------
If any disagreement or dispute may arise between Landlord and Tenant with
reference to the work performed by Landlord with respect to the Exhibit B
(Plans) or Exhibit C (Tenant Requirements), such shall be decided by arbitration
in accordance with the Construction Industry Arbitration Rules of the American
Arbitration Association unless the parties mutually agree otherwise. Notice of
the demand for arbitration shall be filed in writing with the other party and
with the American Arbitration Association and shall be made within a reasonable
time after the dispute has arisen. The arbitrator's decision shall be final and
binding upon Landlord and Tenant and a judgment for enforcement thereof shall be
entered by a court in Saginaw County, Michigan. Landlord and Tenant shall agree
that all arbitration hearings shall be held in Saginaw County, Michigan, and
that any contractors, subcontractors, laborers, materialmen and other persons or
entities having responsibility for the claim or dispute may be joined to the
arbitration.
SECTION 4
POSSESSION AND COMMENCEMENT OF TERM
-----------------------------------
4.1 Possession and Commencement of Lease Term
-----------------------------------------
Landlord shall deliver actual possession of the Demised Premises to Tenant
on or before the completion date specified in Section 3.3, but if delivery is
delayed by reason of Section 3.2 or by the Landlord for any reason whatsoever,
the date upon which such possession is delivered shall constitute the
"Commencement Date" in lieu of the date provided in Section 1; however, the
Termination Date provided in Section I shall not change. Landlord shall, when
construction progress so permits, notify Tenant of the anticipated completion
date specified in Section 3.3. By occupying the Demised Premises, Tenant will be
deemed to have accepted the Demised Premises and acknowledged that they are in
substantially the condition required under this Lease; except for incidental
items of uncompleted contract work that does not interfere with or diminish
Tenant's use of the Project of which Tenant shall notify Landlord in a writing
("Punchlist") within six (6) months after the Commencement Date. Landlord shall
diligently pursue completion of such items of
4
<PAGE>
uncompleted contract work set forth in the Punchlist. The Rent, as defined
herein, due under this Lease and the term of this Lease shall commence on the
Commencement Date. If permission is given to Tenant to occupy all or part of the
Demised Premises prior to the Commencement Date, Tenant covenants and agrees
that such occupancy shall be governed by all terms and conditions of this Lease
(other than the obligation to pay rent), and the Termination Date shall not be
changed. Such early occupancy shall not interfere with Landlord's completion of
the Project. Tenant and its contractors shall have the right to install
equipment, trade fixtures, furnishings and decorations in the Demised Premises
for a period of 30 days prior to the Commencement Date, provided such does not
delay or interfere with Landlord's construction or delivery of possession and
any such delay or interference shall not postpone the Commencement Date or the
obligation to pay Rent.
4.2 Landlord Not Liable For Delays
------------------------------
Under no circumstances shall Landlord be liable for any delays in the
delivery of possession to Tenant on the Commencement Date.
4.3 Memorandum
----------
Within 30 days after the delivery of possession to Tenant, Tenant shall
join with Landlord in the execution of a written memorandum confirming the
Commencement Date and Termination Date of the Lease Term. Tenant's failure to
execute the Memorandum shall be a violation by Tenant under this Lease and
Landlord's default under this Lease shall not relieve Tenant of the obligation
to execute the Memorandum within such 30-day period.
SECTION 5
BASE RENT
---------
5.1 Base Rent
---------
Tenant shall pay to Landlord the Annual Base Rent stated in Section 1, for
the Demised Premises during the Lease Term. The Annual Base Rent shall be
payable in monthly installments equal to the Monthly Installment of Base Rent
stated in Section 1, paid in advance, on the first day of each and every
calendar month during the Lease Term, without any set-off or deduction
whatsoever (except as expressly set forth herein), at the office of Landlord
stated in Section 1, or at such other place as Landlord may designate from time
to time in writing. The first Monthly Installment of Base Rent shall be due and
payable at the time of the execution of this Lease. If the Lease Term shall
commence on a day other than the first day of a calendar month, or shall end on
other than the last day of a calendar month, then the Monthly Installment of
Base Rent due for such partial month shall be prorated.
5
<PAGE>
5.2 Renewal Base Rent
-----------------
A. If Tenant elects to continue the Lease for an additional ten-year
term, the Annual Base Rent for each year of the Renewal Term (ten years)
shall be increased on June 1, 2012 ("Adjustment Date"), to an amount equal
to the product obtained by multiplying Five Hundred Ten Thousand
($510,000.00) Dollars by the sum of each calendar year percent change
(positive or negative) in the Consumer Price Index-Detroit All Items (1992-
1984 = 100), published by the Bureau of Labor Statistics of the United
States Department of Labor during the lease term. For each year that the
Consumer Price Index exceeds a percent change greater than 3.5% (positive
or negative), the figure of 3.5% shall be used instead of the actual
figure. In no event shall the Annual Base Rent as adjusted be less than the
Annual Base Rent for the previous lease year. The Monthly Installment of
Base Rent shall be increased on each Adjustment Date to an amount equal to
one-twelfth (1/12) of the Annual Base Rent as increased on such Adjustment
Date. References in this Lease to Annual Base Rent shall include
adjustments thereto pursuant to this Section. An example of how the
adjustment of Base Rent shall be calculated in the year 2012, shall be as
follows:
Assume the following annual percent increase in CPI Detroit All Items:
00 2.1% 06 3.0%
01 2.7% 07 2.8%
02 4.6% 08 2.3%
03 5.2% 09 2.0%
04 4.0% 10 2.1%
05 3.4% 11 -2.0%
Sum total percent increase without adjustment for the lease
------------------
term = 32.2%
Sum total percent increase with adjustment (e.g., 3.5% cap)
---------------
to use for ten-year Renewal Term = 28.9%
$510,000.00 x 1.289 = $657,390.00 / 12 = $54,782.50 per month
for each month often-year Renewal Term
B. The Landlord shall, within a reasonable time after obtaining the
appropriate data necessary for computing such increase, give Tenant written
notice of any such increase, and Tenant shall commence paying the Monthly
Installment of Base Rent as increased with the next Monthly Installment of
Base Rent due hereunder. In the event the determination is made after the
Adjustment Date, then Tenant shall pay the increase allocated for any prior
periods with the next Monthly Installment of Base Rent payment or within
thirty (30) business days after such notice of the increase, whichever
occurs last.
C. In the event the CPI Detroit (All Items) is discontinued and not
replaced by a successor index by the Bureau of Labor Statistics, the
adjustments to be made hereunder
6
<PAGE>
shall be made based upon such comparable statistics on the cost of living
for the Detroit region which shall carry out the intent of this paragraph.
D. In the event of any dispute between Landlord and Tenant with
regard to such adjustment, such dispute shall be determined by arbitration
under the then prevailing commercial arbitration rules of the American
Arbitration Association. Such arbitration shall be final and binding upon
the parties and a judgment may be entered upon it in accordance with the
applicable law in any court having jurisdiction thereof.
5.3 Rent Net of all Expenses
------------------------
Landlord and Tenant intend that the Annual Base Rent due hereunder,
together with any adjustments during the Lease Term shall be absolutely net of
all operating costs, expenses, taxes (real and personal) and charges.
5.4 Additional Rent
---------------
All amounts due from Tenant and payable to Landlord, excluding Annual Base
Rent, including, without limitation, if applicable, taxes and assessments
pursuant to Section 7 hereof and insurance premiums pursuant to Section 9 and 12
hereof, shall be deemed to be Additional Rent and upon Tenant's failure to pay
any such amount, Landlord, in addition to any other remedies, shall have the
same remedies provided for Tenant's failure to pay the Annual Base Rent (the
Annual Base Rent, together with the Additional Rent, shall be collectively
referred to as "Rent"). Tenant shall pay any and all sums of money or charges
required to be paid by Tenant under this Lease promptly when the same are due,
without any deductions or setoff whatsoever (except as expressly set forth
herein).
5.5 Delinquency Charge
------------------
If Tenant shall fail to pay all or any portion of a Monthly Installment of
Base Rent, as and within five (5) days after the date the same is due, in
addition to the Monthly Installment of Base Rent, Tenant shall pay a delinquency
charge equal to 5 percent of the amount unpaid per month outstanding to
reimburse the Landlord for the costs incurred as the result of such late
payment. Such delinquency charge shall be paid with the next Monthly Installment
of Base Rent.
5.6 Default Charge
--------------
If Tenant shall default in any payment or expenditure other than Annual
Base Rent required to be paid or expended by Tenant under the terms hereof, then
Landlord may, at its option, make such payment or expenditure in accordance with
Section 21. In such event, the amount thereof shall be due and payable as
Additional Rent to Landlord by Tenant with the next Monthly Installment of Base
Rent, together with interest thereon at a rate equal to the sum of the then
prevailing "prime interest rate" (as hereinafter defined) plus 2% from the date
of such payment or expenditure by Landlord until the date of the payment by
Tenant, to cover Landlord's loss of the use of the funds and administrative
costs resulting from Tenant's failure. Upon Tenant's failure to
7
<PAGE>
pay said Additional Rent together with interest, such interest shall continue
for each month or portion thereof outstanding until the date of payment. The
"prime interest rate" for purposes of this Lease shall mean the rate of interest
announced by Wall Street Journal as the "prime interest rate". The "prime
interest rate" shall be determined as of the date of Landlord's payment or
expenditure. If the Wall Street Journal ceases to publish its "prime interest
rate", the most comparable interest rate to that known as the "prime interest
rate" shall be used.
SECTION 6
UTILITIES
---------
Tenant agrees to pay all charges made against the Demised Premises for gas,
heat, water, air conditioning, electricity, sanitary and storm sewage
disposition, telephone and all other utilities during the Lease Term as the same
shall become due. Landlord shall not be liable to Tenant for the quality or
quantity of any such utilities, or for any interruption in the supply of any
such utilities.
SECTION 7
TAXES AND ASSESSMENTS
---------------------
7.1 Obligation
----------
Tenant agrees to pay all Taxes, as defined in Section 7.2, on the Demised
Premises for each lease year or partial lease years during the Lease Term. At
the start of the Lease, taxes shall be prorated and treated as if paid in
arrears with Landlord responsible for payment of taxes from January 1, 2000, to
the Commencement Date. Thereafter, Tenant will be responsible for taxes each
year including the year of termination. At termination, Tenant shall pay for
taxes from January 1 through the date the premises have been turned over to
Landlord.
7.2 Definition
----------
"Taxes" shall be defined as: (a) all taxes (either real or personal),
assessments (general or specific), all water and sewer charges, and all other
governmental impositions, which may be levied during the Lease Term upon the
land, buildings or improvements comprising the Demised Premises or any part
thereof; (b) a tax or surcharge of any kind or nature upon, against or with
respect to the parking areas or the number of parking spaces on the Demised
Premises; and (c) all costs and expenses incurred by Landlord during
negotiations for or contests of the amount of such taxes and assessments,
without regard to the result, including, without limitation, actual attorneys'
fees.
7.3 Payments
--------
Taxes on the Demised Premises levied or assessed for or during the Lease
Term shall be paid before any penalty interest is imposed or within thirty (30)
days of issuance of a tax bill to the
8
<PAGE>
Tenant (whichever occurs later). In the event a refund of Taxes previously paid
is obtained, Landlord shall credit the portion which relates to the Demised
Premises to the next payment due under this Section or after the termination of
the Lease, refund such amounts to Tenant. A copy of a tax bill or assessment
bill submitted by Landlord to Tenant shall at all times be sufficient evidence
of the amount of Taxes assessed or levied against the property to which such
bill or return relates.
7.4 Escrow
------
If Tenant fails to pay taxes within applicable notice and cure periods on
more than two occasions during the term of the Lease, Landlord may, at its
option and upon written notice to Tenant, require that Taxes shall be paid to
Landlord in monthly installments on or before the first day of each calendar
month, in advance, in an amount estimated by Landlord; provided, that in the
event Landlord is required under any mortgage covering the demised Premises, or
any portion thereof, to escrow Real Estate Taxes, Landlord may, but shall not be
obligated to, use the amount required to be so escrowed as a basis for its
estimate of the monthly installments due from Tenant hereunder. If Landlord
elects to require monthly installments, upon making such election, Tenant shall
pay to Landlord an amount which, when added to the installment payments to be
paid by Tenant, will be sufficient to provide Landlord with the amount required
to pay the Taxes thirty (30) days before the Taxes are due. Subsequent to the
end of each lease year or partial lease, Landlord shall furnish Tenant with a
written statement of the actual amount of the Taxes on the Demised Premises. In
the event no tax bill is available, Landlord will compute the amount of such
tax. If the total amount paid by Tenant under this Section 7.4 for any lease
year during the Lease Term shall be less than the actual amount due from Tenant
for such year, as shown on such statement, Tenant shall pay to Landlord the
difference between the amount paid by Tenant and the actual amount due, such
deficiency to be paid within thirty (30) days after demand therefor by Landlord;
and if the total amount paid by Tenant hereunder for any such year shall exceed
such actual amount due from Tenant for such year, such excess shall be credited
against the next installment of taxes and assessments due from Tenant to
Landlord hereunder or after the termination of the Lease, refund such amounts to
Tenant. In the event a refund of Taxes previously paid is obtained, Landlord
shall credit the portion which relates to the Demised Premises to the next
installments due under this Section.
7.5 Right to Contest Taxes
----------------------
In the event the amount of the Taxes are not contested by Landlord, then
Tenant, upon written notice to Landlord, shall have the right to contest the
amount of the Taxes at Tenant's sole cost and expense, by the appropriate
proceedings diligently contest in good faith and shall immediately pay any
increases in the Taxes or shall be given a credit against monthly installments
thereof subsequently due (or, after the termination of the Lease, a refund) in
the amount of any reductions in the Taxes. Notwithstanding such proceedings,
Tenant shall promptly pay and discharge such Taxes and any penalties or interest
assessed thereon, unless such proceedings and the posting of a bond or other
security shall (a) operate to prevent or stay the collection of the Taxes and
secure any accruing penalties or interest and (b) operate to cure Landlord's
default in the payment of Taxes required under any mortgage upon the Demised
Premises. Landlord agrees to
9
<PAGE>
join Tenant in such proceedings, if necessary, provided Tenant pays all costs
and expenses incurred by Landlord, including actual attorneys' fees.
7.6 Tenant's Taxes
--------------
Tenant shall pay all real and personal property taxes levied or assessed
against Tenant's property and improvements upon or affixed to the Demised
Premises, including taxes attributable to all alterations, additions, or
improvements made by Tenant.
7.7 Surplus Taxes
-------------
Landlord's obligation to refund overpayment of Taxes shall survive the
termination of this Lease.
SECTION 8
USE OF DEMISED PREMISES
-----------------------
8.1 Use of Demised Premises
-----------------------
Tenant may use and occupy the Demised Premises during the Lease Term only
for the purpose stated in Section 1, and attendant office use and other legal,
related uses and for no other purpose without the prior written consent of the
Landlord. Tenant shall not use or permit any person to use the Demised Premises
or any part thereof for any use or purpose other than the use stated in Section
1 or in violation of any law, statute, order, ordinance, code, rule or
regulation of any federal, state or municipal body or other governmental agency
or authority having jurisdiction thereof, including, without limitation,
occupational safety and health requirements, community right-to-know
requirements, requirements pertaining to the possession, generation,
transportation, treatment and disposal of hazardous substances and hazardous
wastes, or pollution standards or requirements ("Laws"), or any building and use
restrictions ("Restrictions") affecting the Demised Premises, if any. Subjection
to Section 10.2, Tenant shall comply with all such present and future Laws and
Restrictions affecting the Demised Premises and the cleanliness, safety,
occupation and use of the same, at Tenant's sole cost and expense. Tenant shall
promptly notify Landlord of, and provide Landlord with copies of, all notices,
requests, orders, complaints or other correspondence directed to Tenant from any
federal, state or municipal body or governmental agency or authority pertaining
to any actual or alleged violation of Laws or Restrictions.
8.2 Care of Demised Premises
------------------------
Tenant shall keep the Demised Premises orderly, neat, safe and clean and
free from rubbish and dirt at all times and shall store all inventory, supplies,
trash and garbage within the building or approved containers on the Demised
Premises. Tenant shall maintain the landscaping on the Demised Premises and keep
the driveways and walkways within the Demised Premises free from snow and ice,
and shall arrange for the regular removal of snow during the winter months at
Tenant's expense and the pick up of trash and garbage at Tenant's expense.
Tenant shall not burn
10
<PAGE>
any trash or garbage at any time in or about the Demised Premises. At the
expiration of the term of this Lease, or the sooner termination thereof, Tenant
shall surrender the Demised Premises in as good condition and repair as existed
at the time Tenant took possession, reasonable wear and tear excepted.
8.3 Hazardous Substances
--------------------
Tenant and its agents, employees and contractors shall not generate,
manufacture, refine, transport, treat, store, handle, dispose, transfer, produce
or process on or about the Demised Premises hazardous substances as defined in
Section 101(14) of the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended, 42 U.S.C. (S)9601(14), hazardous wastes as defined in
Section 1004(5) of the Resource Conservation and Recovery Act, as amended, 42
U.S.C. (S)6903(5) and implementing regulations, hazardous wastes as defined in
the Michigan Hazardous Waste Management Act, as amended, MCL (S)299.501 et seq,
-- ---
or extremely hazardous substances as defined in the Emergency Planning and
Community Right-To-Know Act of 1986, 42 U.S.C. (S)11001 et seq. (hereinafter
-- ---
collectively referred to as "Hazardous Substances") without Landlord's prior
written consent. Landlord hereby approves Tenant's use of diesel fuel for its
generator if said use of diesel fuel is in compliance with Federal, State and
local laws.
8.4 Obligation of Tenant
--------------------
The obligations and liabilities of Tenant and Landlord, under Sections 8.1
- - 8.3, shall survive termination of this Lease.
SECTION 9
INDEMNITY
---------
9.1 Indemnity
---------
Tenant shall defend, indemnify and hold harmless Landlord and Landlord's
officers, directors, employees and agents, from and against any and all claims,
suits, liabilities, damages, losses, costs or expenses, including, without
limitation, reasonable legal, accounting, consulting, engineering and other
expenses which may be imposed upon, incurred by, or asserted against Landlord or
Landlord's officers, directors, employees or agents, for personal injuries,
death or property damage, damage to natural resources or environmental
contamination ("Damages") occurring or originating on or about the Demised
Premises from and after the Commencement Date and during the Lease Term, to the
extent due to the negligence or willful misconduct by Tenant or its agents,
employees or contractors due to Tenant's violation of any law, order or
regulation, or breach of Tenant's obligations or representations under the
Lease. The indemnities provided herein shall include attorneys' fees incurred by
Landlord or Landlord's officers, directors, employees and agents in connection
with such Damages or to enforce the indemnity given hereunder.
11
<PAGE>
9.2 Liability Insurance
-------------------
Tenant shall procure and keep in effect during the Lease Term, for the
benefit of Landlord and any mortgagee of the Demised Premises, commercial
general liability insurance, including blanket contractual coverage in the
amount of One Million ($1,000,000.00) Dollars for personal injury or death
resulting from one occurrence and the sum of Five Hundred Thousand ($500,000.00)
Dollars for property damage resulting from any one occurrence. In addition,
Tenant shall maintain excess insurance or "umbrella" coverage in the amount of
Two Million ($2,000,000.00) Dollars. Such insurance policies shall name Landlord
and any mortgagee of the Demised Premises (at Landlord's request) as additional
insureds by specific endorsement.
9.3 Tenant's Contractor's Insurance
-------------------------------
Tenant shall require any contractor of Tenant performing work on the
Demised Premises to take out and keep in force, at no expense to Landlord, (a)
commercial general Liability insurance, including contractor's liability
coverage, contractual liability coverage, completed operations coverage, broad
form property damage endorsement and contractor's protective liability coverage,
to afford protection to the limit, for each occurrence, of not less than Two
Million ($2,000,000.00) Dollars with respect to personal injury or death and
Five Hundred Thousand ($500,000.00) Dollars with respect to property damage; and
(b) worker's compensation or similar insurance in form and amounts required by
law. The liability insurance shall name Landlord and any mortgagee of the
Demised Premises, or any portion thereof, as additional insureds by specific
endorsement.
9.4 Delivery of Policy and Special Endorsement
------------------------------------------
The insurance policies required by this Section 10 shall contain provisions
or special endorsements satisfactory to Landlord and Landlord's mortgagee, if
any, prohibiting cancellation, deletions or reductions in coverage either at the
instance of Tenant or the insurance company issuing the policy, without at least
30 days prior written notice having been given to Landlord at the address stated
above. Original Insurance Certificates including declaration page showing all
coverages and amounts of coverage, together with receipts evidencing payment in
full of the premiums thereon, shall be delivered promptly to Landlord and in no
event less than 30 days prior to expiration of such insurance.
SECTION 10
MAINTENANCE AND REPAIRS
-----------------------
10.1 Maintenance And Repairs
-----------------------
Tenant shall, at its sole cost and expense, during the Lease Term, maintain
and repair and keep neat and in good appearance and condition the Demised
Premises, including, but not limited to, the roof (e.g., removal of snow),
exterior, interior, ceiling, electrical system, plumbing system,
12
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H.V.A.C. system, storm sewers, sanitary sewers, water main, the driveways,
walkways, parking area, lighting facilities, landscaping and land, which are
part of the Demised Premises. The plumbing system, including the sewage
facility, serving the Demised Premises shall not be used for any purpose other
than for which it was constructed and Tenant shall not introduce any matter
therein which results in blocking such system. Tenant shall, at its sole cost
and expense, also repair or replace the driveways, walkways, parking areas, or
landscaping on the Demised Premises. Tenant shall, at its sole cost and expense,
contract with contractors acceptable to Landlord for the performance of all
maintenance and repairs required of Tenant under this Lease. Tenant shall
perform such maintenance and repair so as to maintain the Demised Premises in a
first-class condition. The maintenance and repair obligations of Tenant
hereunder arising during the term of the Lease, shall survive termination of
this Lease. All warranties provided by the contractor will be assigned to Tenant
for benefit of Tenant at commencement of the Lease.
10.2 Compliance With Laws
--------------------
During the term of this Lease, Tenant shall make any repairs, additions,
modifications or alterations to the Demised Premises, regardless of the nature
thereof, which are required by any Laws or Restrictions (as defined in Section
8.1) or required by the insurance carrier to maintain the insurance required
under this Lease.
SECTION 11
TENANT'S ALTERATIONS
--------------------
11.1 Alterations
-----------
Tenant shall not make any alterations, additions, modifications or
improvements ("Alterations") to the Demised Premises without the prior written
consent of Landlord. Landlord will not unreasonably withhold its consent with
respect to Alterations. All Alterations made by either Landlord or Tenant to the
Demised Premises shall become the property of Landlord, shall remain upon and be
surrendered with the Demised Premises at the termination of this Lease, without
molestation or injury; unless Landlord consents in writing to Tenant's removal
of such alterations and Tenant repairs any damage or injury caused thereby in a
good and workmanlike manner. Notwithstanding anything to the contrary herein,
Landlord, at its option, may, at the time Landlord consents to an Alteration,
require Tenant, at Tenant's sole cost and expense, to remove any Alterations
made by Tenant during the Lease Term and to repair any damage or injury caused
thereby in a good and workmanlike manner at the expiration of the Lease Term.
All Alterations made by Tenant or the removal thereof shall be made free of all
liens and encumbrances and in compliance with all Laws and Restrictions. Tenant
hereby indemnities and holds Landlord harmless from and against any such liens,
encumbrances and violations of Laws and Restrictions. The filing of any lien or
encumbrance, or the violation of Laws or Restrictions, shall constitute a
violation hereunder. The repair obligations of Tenant hereunder shall survive
the termination of this Lease.
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11.2 Construction Liens
------------------
Tenant shall not permit any construction liens to be filed against the
Demised Premises or any part thereof by reason of work, labor, services or
materials supplied or claimed to have been supplied to Tenant or any part
thereof through or under Tenant. If any such construction lien shall at any time
be filed against the Demised Premises, Tenant shall cause the same to be
discharged of record within 20 days after the date of filing the same. If Tenant
shall fail to discharge such construction lien within such period, then, in
addition to any other right or remedy of Landlord, Landlord may,, but shall not
be obligated to, discharge the same either by paying the amount claimed to be
due or by procuring the discharge of such lien by deposit in court or by giving
security or in such other manner as is, or may be, prescribed by law. Any amount
paid by Landlord for any of the aforesaid purposes, and all actual legal and
other expenses of Landlord, including actual counsel fees, in or about procuring
the discharge of such lien, together with all necessary disbursements in
connection therewith, and together with interest thereon at the rate of prime
plus two (2%) percent per annum, but in no event higher than the legal limit,
from the date of payment, shall be repaid by Tenant to Landlord on demand, and
if unpaid may be treated as Additional Rent. Nothing herein contained shall
imply any consent or agreement on the part of Landlord to subject Landlord's
estate to liability under any construction lien law.
SECTION 12
PROPERTY INSURANCE, REBUILDING
AND WAIVER OF SUBROGATION
-------------------------
12.1 Property Insurance
------------------
A. Tenant shall, during the Lease Term, carry at its expense
insurance for the benefit of Landlord and any mortgagee of the Demised
Premises, or a portion thereof, against fire, vandalism, malicious mischief
and such other perils as are from time to time included in a policy of "all
risk" insurance, insuring the Demised Premises in an amount equal to the
full replacement and reconstruction cost and valued on a replacement cost
basis of the building and improvements which are a part of the Demised
Premises. If Tenant fails to maintain such insurance coverage, Landlord
may, at its option, procure such insurance for the account of Tenant and
the cost thereof shall be paid by Tenant to Landlord upon delivery to
Tenant of bills therefor. The insurer or insurers shall be such as may from
time to time be approved by Landlord. The policies of all such insurance
and all renewals thereof, together with receipts evidencing payment in full
of the premiums thereon, shall be delivered promptly to Landlord and in no
event less than 30 days prior to the expiration of such insurance. The
terms and conditions of all policies and endorsements thereto shall be in
form and content satisfactory to Landlord. All of the required policies of
insurance shall contain provisions satisfactory to Landlord prohibiting
cancellation, deletions or reductions in coverage, either at the instance
of the Tenant or of the insurance company issuing the policy, without at
least 30 days prior written notice having been given to Landlord at the
address of Landlord stated above, and shall name Landlord as a loss payee
and any
14
<PAGE>
mortgagee of the Demised Premises as a loss payee under the standard
mortgage loss payable endorsement. Tenant shall not, without the prior
written consent of Landlord, cancel, alter, change, amend, modify, delete
or reduce the coverage of any required policy of insurance which results in
Tenant failing to have insurance coverage as required hereby. In the event
of loss or damage, the proceeds of the insurance shall be paid to Landlord
and such mortgagee alone. Landlord is authorized to adjust and compromise
such loss without the consent of Tenant, to collect, receive and receipt
for such proceeds in the name of Landlord and Tenant. The power granted
hereby shall be deemed to be coupled with an interest and shall be
irrevocable.
B. Tenant shall, during the Lease Term, carry rental interruption
insurance naming Landlord as the insured party, which insurance shall be
carried in amounts equal to Tenant's Annual Base Rent for twelve (12) full
months under this Lease plus the total of the estimated costs to Tenant of
taxes, assessments, utilities, insurance premiums and common facilities
maintenance costs for such 12-month period with proceeds payable to
Landlord.
C. Tenant shall, during the Lease Term, carry, at its expense,
insurance against fire, vandalism, windstorm, explosion, smoke damage,
malicious mischief, and such other perils as are from time to time included
in an "all risk" policy of insurance, insuring Tenant's merchandise, trade
fixtures, furnishings, equipment and all other items of personal property
of Tenant located on or within the Demised Premises, in an amount equal to
not less than 80 percent of the actual replacement cost thereof and furnish
Landlord with a certificate evidencing such coverage. If Tenant fails to
maintain such insurance coverage, Landlord may, at its option, procure such
insurance for the account of Tenant and the cost thereof shall be paid by
Tenant to Landlord upon delivery to Tenant of bills therefor.
12.2 Rebuilding
----------
In the event, during the Lease Term, the improvements on the Demised
Premises are damaged or destroyed in whole or in part by fire or other casualty
insured under the insurance carried by Tenant pursuant to Section 12., then
Landlord shall, after the adjustment of the insurance loss, immediately commence
and diligently pursue the restoration of such improvements to good and
tenantable condition unless Landlord shall elect not to rebuild as hereinafter
provided. If: (a) the insurance proceeds are insufficient to pay the full cost
of the repairs (unless Tenant deposits sufficient funds with Landlord pursuant
to Section 13.3 to pay the full cost of the repairs), (b) more than 35 percent
of the improvements on the Demised Premises shall be destroyed by fire or other
casualty, or (c) during the last 24 months of the Lease Term, more than 20
percent of the improvements on the Demised Premises shall be destroyed by fire
or other casualty, Landlord may, at its option, terminate this Lease by notice
in writing delivered to Tenant within 120 days after the occurrence of such fire
or other casualty or repair to the improvements on the Demised Premises. If
Landlord is obligated, or elects, to perform such repairs, the improvements on
the Demised Premises are partially or totally untenable, then the Rent shall be
proportionately reduced during the period of rebuilding, based upon the extent
to which Tenant's use of the Demised Premises is diminished. During such time
period, Tenant shall have in effect
15
<PAGE>
renter's insurance which pays to Landlord an amount equal to the monthly rental
payment as set forth in Section 12.1 (b) of this Lease.
12.3 Tenant's Deposit for Rebuilding
-------------------------------
If the insurance proceeds available for rebuilding are insufficient to
cover the cost of repair or restoration of the Demised Premises as required
hereunder, Tenant, so long as Tenant is not in default, may elect to deposit
with Landlord an amount which in combination with the insurance proceeds shall
be sufficient for such repairs or restorations. In the event Tenant elects not
to deposit such funds, then Landlord shall be relieved of any obligation to
repair or restore the Demised Premises.
12.4 Waiver of Subrogation
---------------------
Any insurance policy carried by Landlord or Tenant or any policy covering
both the interest of Landlord or Tenant under this Section 12 shall include a
provision under which the insurance company waives all right of recovery by way
of subrogation against Landlord or Tenant in connection with any loss or damage
covered by any such policy. Landlord or Tenant hereby release and discharge each
other from any liability whatsoever arising from any loss, damage or injury
caused by fire or other casualty to the extent of the paid insurance proceeds
coverting such loss, damage or injury.
SECTION 13
EMINENT DOMAIN
--------------
13.1 Total Condemnation
------------------
If the whole of the Demised Premises shall be taken by any condemning
authority under the power of eminent domain, then the term of this Lease shall
cease as of the date actual physical possession of the Demised Premises is
transferred to such condemning authority and the Rent shall be paid up to that
day with a proportionate refund by Landlord of such Rent as may have been paid
in advance for a period subsequent to the date of the transfer of actual
physical possession.
13.2 Partial Condemnation
--------------------
If only a part of the Demised Premises shall be taken by any condemning
authority under the power of eminent domain, then, except as otherwise provided
in this Section, this Lease and the term shall continue in full force and effect
and there shall be no reduction in the Rent. From and after the date actual
physical possession of a portion of the building or parking area on the Demised
Premises is transferred to such condemning authority, the Rent shall be reduced
based on the extent to which Tenant's use of the Demised Premises is diminished.
If (a) more than 20 percent of the floor area of all buildings on the Demised
Premises shall be taken under eminent
16
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domain, or (b) more than 20 percent of the parking spaces on the Demised
Premises shall be taken under eminent domain and Landlord is unable to provide
parking spaces on land immediately contiguous to the Demised Premises equal to
one-half of the number of parking spaces taken, Tenant shall have the right to
terminate this Lease and declare the same null and void, by written notice of
such intention to the other party within 30 days after the date the order is
entered in such eminent domain proceeding establishing the date upon which
actual physical possession shall be transferred to the condemning authority. In
the event Tenant does not exercise said right of termination, the Lease Term
shall cease only on the part of the Demised Premises so taken as of the date
actual physical possession is transferred to the condemning authority and Tenant
shall pay Annual Base Rent and Additional Rent up to that day, with appropriate
refund by Landlord of such Rent as may have been paid in advance for a period
subsequent to the date actual physical possession is transferred, and thereafter
all the terms herein provided shall continue in effect, except that the Rent
shall be reduced in the proportion stated above and Landlord shall, at its own
cost and expense, make all the necessary repairs or alterations to the remaining
Demised Premises so as to cause it to be a complete architectural unit.
13.3 Landlord's and Tenant's Damages
-------------------------------
All damages awarded for such taking under the power of eminent domain,
whether for the whole or a part of the Demised Premises, shall belong to and be
the property of Landlord whether such damages shall be awarded as compensation
for diminution in value to the leasehold or to the fee of the Demised Premises;
provided, however, that Landlord shall not be entitled to the award made for
depreciation to, and cost of removal of, Tenant's stock and fixtures, Tenant's
relocation costs, lost goodwill, the unamortized value of improvements paid for
by Tenant and any "bonus value" under the Lease.
SECTION 14
ACCESS TO PREMISES
------------------
Landlord or Landlord's agent shall have the right to enter the Demised
Premises at all reasonable times to inspect or examine the same, and to show
them to prospective purchasers or mortgagees of the Demised Premises and to make
such tests, repairs, alterations, improvements or additions as Landlord may deem
necessary or desirable, and Landlord shall be allowed to take all material into
and upon the Demised Premises that may be required therefor without the same
constituting an eviction of Tenant in whole or in part, and the Annual Base Rent
and Additional Rent shall in no way abate while said repairs, alterations,
improvements, or additions are being made, by reason of loss or interruption of
the business of Tenant, or otherwise. During the six months prior to the
expiration of the Lease Term or any renewal term, Landlord may exhibit the
Demised Premises to prospective lessees and place upon the Demised Premises the
usual notices of "For Sale", "For Lease" or "For Rent" signs advertising the
space which will be available three (3) months prior to vacancy.
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SECTION 15
FIXTURES AND EQUIPMENT
----------------------
Subject to Section 11.1, all fixtures and equipment installed by Tenant
during the term of this Lease which are incorporated and affixed to the
buildings or improvements and cannot be removed without substantial damage or
injury to the buildings or improvements shall not be removed without Landlord's
consent, and all fixtures and equipment not removed shall remain the property of
Landlord at the termination of the Lease Term. In the event Landlord consents to
such removal, Tenant shall remove such fixtures in accordance with all
applicable Laws and Restrictions and shall repair any such damage or injury in a
good and workmanlike manner.
SECTION 16
BANKRUPTCY AND INSOLVENCY OF TENANT
-----------------------------------
If the estate created hereby shall be taken in execution or by other
process of law, or if Tenant shall be declared bankrupt or insolvent, according
to law, or if any receiver be appointed for the business and property of Tenant
or if any assignment shall be made of Tenant's property for the benefit of
creditors (and as to such matters involuntarily taken against Tenant, Tenant,
has not within 60 days thereof obtained release or discharge therefrom), then
this Lease may be cancelled at the option of Landlord. If, as a matter of law,
Landlord has no right upon the bankruptcy of Tenant, to terminate this Lease,
then the rights of Tenant, as debtor, or its trustee, shall be deemed abandoned
or rejected unless Tenant, as debtor or its trustee, (a) within 60 days after
the date of the Order for Relief under Chapter 7 of the Bankruptcy Code or 60
days after the date the Petition is filed under Chapter 11 of the Bankruptcy
Code assumes in writing the obligations under this Lease (b) cures or adequately
assures the cure of all defaults existing under this Lease on Tenant's part
within 60 days and (c) furnishes adequate assurances of future performance of
the obligations of Tenant under this Lease within such 60 days. Adequate
assurance of curing defaults means the posting with Landlord of a sum in cash
sufficient to defray the costs of such cure. Adequate assurance of future
performance of the Tenant's obligations under this Lease means increasing any
existing security deposit or creating a security deposit in an amount equal to
three Monthly Installments of Base Rent.
Tenant shall not be permitted to assume and assign this Lease in
connection with any bankruptcy or insolvency proceedings without full and
complete compliance with the following provisions: (a) Landlord is provided with
the following information regarding the party desiring to assume the Lease
("Assumptor") which Landlord in its reasonable discretion deems sufficient (1)
organizational information regarding the Assumptor (2) audited financial
statements for the three most recent fiscal years, and (3) such other
information as Landlord deems appropriate, (b) Landlord determines that the use
of the Demised Premises by the intended Assignee is compatible with the
character of the Building, (c) all existing defaults under this Lease are cured
at least ten days prior to any hearings in connection with Tenant's request to
assume and assign the Lease, (d) the Assumptor at any such hearing provides
adequate assurance of its future performance of the
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Lease as determined by Landlord in its reasonable discretion, which adequately
assurance shall include at least the following: (1) posting of security deposit
equal to three Monthly Installments of Base Rent, if such was not already posted
by Tenant, (2) establishing with Landlord an escrow for the full cost of all
real estate taxes, insurance, and common area maintenance charges as required
under the Lease for the next 12 months of the Lease and thereafter on an annual
basis in advance, and (3) the Assumptor executes a written agreement assuming
the Lease and such Lease amendments as are necessary, which agreements and
amendments are satisfactory to Landlord in its reasonable discretion.
SECTION 17
RIGHT TO MORTGAGE
-----------------
Landlord reserves the absolute right to subject and subordinate this
Lease, at all times, to the lien of any mortgage or mortgages now or hereafter
placed upon the Demised Premises; provided Tenant's right of possession will not
disturbed by the mortgagee of any mortgage upon the Demised Premises in
connection with any mortgage foreclosure proceedings so long as Tenant is in not
default hereunder. In the event Landlord exercises its right hereunder, Tenant
hereby agrees to execute and deliver, or join in the execution and delivery of
an agreement which shall provide, among other things, (a) that this Lease is
subordinate to the lien of any mortgage or mortgages upon the Demised Premises,
(b) that the Tenant's right of possession will not be disturbed by the mortgagee
in connection with any mortgage foreclosure proceedings, so long as Tenant is
not in default, and (c) that the Tenant shall attorn to any foreclosing
mortgagee or purchaser at the foreclosure sale.
SECTION 18
ASSIGNMENT, SUBLETTING AND TRANSFERS BY TENANT
----------------------------------------------
Tenant shall not sell, assign, sublet, hypothecate, encumber, mortgage or
in any manner transfer this Lease or any estate or interest therein (including
any transfer by operation of law or otherwise), the Demised Premises or any part
thereof or permit the use of the Demised Premises by any Third Party
(collectively "Transfer") without the prior written consent of the Landlord
which shall not be reasonably withheld.
The acceptance of Rent or Additional Rent from an assignee, subtenant or
occupant shall not constitute a release of Tenant from the obligations and
covenants in this Lease. Tenant shall remain liable under this Lease until
Landlord executes and delivers a written release of such liability. Landlord's
consent hereunder shall not be unreasonably withheld. In the event of a Transfer
by Tenant, with or without Landlord's consent, then fifty (50%) per cent of all
Rent, sums of money or other economic considerations owed to or received by
Tenant, which exceed, in the aggregate, the total sums of Rent, Additional Rent
or otherwise which Tenant is obligated to pay Landlord under this Lease, after
first deducting therefrom Tenant's actual costs to effect
19
<PAGE>
the transfer, shall be payable to Landlord as Additional Rent under this Lease
without affecting or reducing any obligations of Tenant hereunder.
SECTION 19
SALE OR TRANSFER
----------------
Landlord shall have the right to sell, transfer or assign the Demised
Premise ("Conveyance"). In the event of Conveyance, Tenant shall attorn to the
purchaser, transferee or assignee ("Transferee") and recognize such Transferee
as Landlord under this Lease and Landlord shall be relieved from all subsequent
obligations and liabilities under this Lease, provided such obligations are
assumed in writing by such Transferee and a copy thereof is provided to Tenant.
SECTION 20
DEFAULT. RE-ENTRY AND DAMAGES
-----------------------------
20.1 Default
-------
The following shall constitute a default under this Lease: (a) Failure to
pay when due any Annual Base Rent or Additional Rent due hereunder on the day
the same shall be due and such failure remains uncured for five (5) days
following written notice; (b) Failure to perform any of the terms and conditions
under this Lease, other than the payment of Annual Base Rent or Additional Rent,
and such failure remains uncured for thirty (30) days following written notice
or such longer period as may be reasonably required to effect such cure provided
Tenant diligently pursues such cure; (c) Landlord has elected to cure Tenant's
default under Section 21 and Tenant has failed to pay Landlord the cost and
expenses incurred to cure such default within 15 days after demand; or (d) an
event of bankruptcy or insolvency in violation of Section 16 has occurred;
20.2 Re-Entry and Damages
--------------------
In the event of Tenant's default, Landlord shall, in addition to all of
its other remedies under this Lease, or permitted in law or equity, have the
right to re-enter the Demised Premises, with process of law, to remove all
persons and property therefrom. Upon such default, Landlord, at its option, may
terminate this Lease, or without terminating this Lease, relet the Premises or
any part thereof on such reasonable terms and reasonable conditions.
No re-entry or taking possession of the Demised Premises by Landlord shall
be construed as an election on its part to terminate this Lease unless written
notice of such intention is given to Tenant. It is understood between the
parties that the Tenant shall not be liable for any damages caused by a third-
party entering into a Lease with Landlord in replacement of Tenant. At all times
herein, Landlord shall have the duty to mitigate damages.
20
<PAGE>
In the event Landlord elects to terminate this Lease, then Landlord shall
have the right to accelerate all of the Annual Base Rent and Additional Rent due
hereunder for the balance of the term of this Lease and Tenant shall forthwith
pay to Landlord upon demand, as liquidated damages, the deficiency between the
present value of the amount of said accelerated rent and the proceeds of
reletting, if any, for what would have otherwise constituted the balance of the
Lease Term or the reasonable rental value of the Demised Premises for such
balance of the Lease Term if the Demised Premises are not relet by Landlord
within 30 days following Tenant's default. Upon acceleration, for the purpose of
determining the Additional Rent for the remainder of the Lease Term, the
Additional Rent paid during the 12 months immediately preceding the date of
acceleration shall be assumed to be the amount of Additional Rent which Tenant
would have paid during the remainder of the Lease Term. In computing such
liquidated damages there shall be added to such deficiency any expenses incurred
in connection with obtaining possession of the Demised Premises and reletting
the Demised Premises (to the extent allocable to the remainder of the term),
whether such reletting is successful or not, which expenses include, but are not
limited to, actual attorney fees, brokerage fees and expenses, advertising
expenses, reasonable alterations and repairs to the Demised Premises, and
inspection fees.
20.3 Waiver of Landlord's Liability
------------------------------
Whether or not Landlord terminates the Lease because of Tenant's default,
Landlord shall have no liability or responsibility in any way whatsoever for its
failure to relet the Demised Premises or, in the event of reletting, for failure
to collect the Rent under such reletting. The failure of Landlord to relet the
Demised Premises or any part thereof shall not release or affect Tenant's
liability for Rent or damages.
20.4 Landlord's Rights Cumulative
----------------------------
All the rights and remedies of Landlord hereunder shall be cumulative and
in addition to all other rights and remedies allowed by law or equity and may be
exercised separately or jointly without constituting an election of remedies.
20.5 Waiver of Jury Trial and Counterclaim
-------------------------------------
(Deleted upon agreement of parties.)
20.6 Non-Liability
-------------
Subject to Sections 9.1 and 9.3, Landlord shall not be responsible or
liable to Tenant for any loss or damage that may be occasioned by or through the
acts or omissions of persons occupying adjoining premises or for any loss or
damage resulting to Tenant or its property from burst, stopped or leaking water,
gas, sewer or steam pipes, or for any damage or loss of property within the
Demised Premises from any cause whatsoever, and no such occurrence shall be
deemed to be an actual or constructive eviction from the Demised Premises or
result in an abatement of rental.
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<PAGE>
SECTION 21
RIGHT TO CURE DEFAULTS
----------------------
If Tenant defaults in the performance of any provision of this Lease,
Landlord shall have the right (but not the obligation) in addition to any and
other rights and remedies in the event of default, to cure such default for the
account of Tenant, without prior notice to Tenant, and Tenant shall upon receipt
of notice thereof and demand for payment from Landlord pay any payment or
expenditure made by Landlord with the next Monthly Installment of Base Rent,
together with interest at the "prime interest rate" as defined in Section 5.6
plus 2%.
SECTION 22
QUIET ENJOYMENT
---------------
Landlord covenants that so long as Tenant is not in default the terms and
conditions of this Lease, Tenant may peacefully and quietly hold and enjoy the
Demised Premises for the Lease term without interference by Landlord or any
person claiming by, through or under Landlord.
SECTION 23
HOLDING OVER
------------
In the event of Tenant holding over after the expiration of the Term of
this Lease, then the tenancy shall continue from month-to-month in the absence
of a written agreement to the contrary, subject to all the terms and provisions
hereof, except the Monthly Installment of Base Rent shall be equal to one
hundred twenty-five (125%) percent of the Monthly Installment of Base Rent, due
in the last full month of the lease Term.
SECTION 24
CUMULATIVE REMEDIES AND WAIVER
24.1 Cumulative Remedies
-------------------
Each and every right, remedy and benefit provided by this Lease to
Landlord shall be cumulative and shall not be exclusive of any other right,
remedy or benefit allowed by law. These remedies may be exercised jointly or
severally without constituting an election of remedies.
22
<PAGE>
24.2 Waiver
------
One or more waivers by Landlord of any term and condition hereunder or
default by Tenant hereunder shall not be construed as a waiver of such term and
condition or default in the future or any subsequent default for the same cause.
Any consent or approval given by Landlord requiring such consent or approval
shall not constitute consent or approval to any subsequent similar act by
Tenant.
No payment by Tenant or receipt by Landlord of a lesser amount than the
Monthly Installment of Base Rent shall be deemed to be other than on account of
the earliest stipulated Rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment of Rent be deemed an
accord and satisfaction, and Landlord shall accept such check or payment without
prejudice to Landlord's right to recover the balance of such Rent or pursue any
other remedy in this Lease provided.
SECTION 25
OPTION TO EXPAND BUILDING SPACE
-------------------------------
In the event the parties desire to expand the building space, the parties
shall amend this lease agreement to provide for such expansion.
SECTION 26
DEFINITION OF
-------------
LANDLORD'S LIABILITY
--------------------
The term "Landlord" as used in this Lease so far as covenants or
obligations on the part of Landlord are concerned shall be limited to mean and
include only the owner or owners at the time in question of the fee of the
Demised Premises, and in the event of any transfer or transfers of the title to
such fee (and the written assumption by such transferee of Landlord's
obligations hereunder) Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved from and after the date of such transfer or conveyance of all personal
Liability as respects to the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed, provided
that any funds in the hands of such Landlord or the then grantor at the time of
such transfer in which Tenant has an interest, shall be turned over to the
grantee and any amount then due and payable to Tenant by Landlord or the then
grantor under any provision of this Lease, shall be paid to Tenant, it being
intended hereby that the covenants and obligations contained in this Lease on
the part of Landlord shall, subject as aforesaid, be binding on Landlord, its
successors and assigns, only during and in respect of their respective
successive periods of ownership.
23
<PAGE>
If Landlord shall fail to perform any covenant, term or condition of this
Lease upon Landlord's part to be performed, and if as a consequence of such
default Tenant shall recover a money judgment against Landlord, such judgment
shall be limited to Landlord's interest in the Project, including any sale,
insurance or condemnation proceeds thereof, and Landlord shall not be liable for
any deficiency.
SECTION 27
WASTE
-----
Tenant and its employees and agents shall not commit any waste upon the
Demised Premises.
SECTION 28
SIGNS
-----
Tenant will not place or cause to be placed or maintained any sign or
advertising matter of any kind anywhere on the Demised Premises, except as
agreed upon by both parties. Tenant further agrees to maintain in good condition
and repair at all times any such sign or advertising matter of any kind which
has been approved by Landlord for use by Tenant.
SECTION 29
SECURITY DEPOSIT
----------------
The Landlord herewith acknowledges that no Security Deposit is needed.
However, if Tenant is more than five (5) days late with rent payments on three
or more occasions during a calendar year, then Landlord may elect to require
Tenant to provide a security deposit equal to one month's rent. Said Security
Deposit shall be paid at the time of the next rent payment.
SECTION 30
MISCELLANEOUS
-------------
30.1 Condition of Demised Premises
-----------------------------
Tenant is fully familiar with the proposed plans and the intended physical
conditions of the Demised Premises and except as expressly set forth herein,
Landlord has made no representations of whatever nature in connection with the
condition of the Demised Premises.
24
<PAGE>
30.2 Lease Changes Required By Lender
--------------------------------
(This section is blank by agreement of the parties)
30.3 Entire Agreement
----------------
This Lease and exhibits attached hereto and forming a part hereof, set
forth all of the covenants, agreements, stipulations, promises, conditions,
understandings and representations, hereinafter collectively "Representations"
between Landlord and Tenant concerning the Demised Premises and the buildings
and improvements to be constructed thereon. Landlord and Tenant agree that there
are no Representations other than set forth herein and agree to make no claims
against each other based upon Representations not set forth herein.
30.4 Modification
------------
This Lease shall not be modified or amended unless by a writing signed by
Landlord and Tenant.
30.5 Joint Venture, Mortgage
-----------------------
Nothing contained herein shall be deemed or construed by the parties
hereto, nor by any third party, as creating relationship of mortgagor and
mortgagee, principal and agent or of partnership or of joint venture between the
parties hereto, it being understood and agreed that neither this method of
computation of Rent, nor any other provision contained herein, nor any acts of
the parties herein, shall be deemed to create any relationship between the
parties hereto other than the relationship of lessor and lessee.
30.6 Notices
-------
Except as specifically provided otherwise in this Lease, any notices or
demands required under this Lease shall be given in writing and either delivered
personally or sent by certified mail, return receipt requested, postage prepaid
and addressed to the address of Landlord or Tenant as set forth in Section 1
hereof or such other address as Landlord or Tenant shall designate from time to
time by written notice to the other and shall be deemed received three days
after being deposited in the mail or upon personal hand-delivery.
30.7 Survival
--------
Any obligation of Tenant under this Lease which is not performed in full
prior to the termination of this Lease shall survive the termination of this
Lease and continue in full force and effect until performed in full.
25
<PAGE>
30.8 Estoppel Certificate
--------------------
Upon request by Landlord, Tenant shall, from time to time, execute,
acknowledge and deliver to Landlord a written statement certifying that this
Lease is in full force and effect and unmodified (or if modified specifying the
nature of the modification), the dates to which Rent and other charges have been
paid, that Landlord is not in default hereunder (or if in default, specifying
the nature of any default) and such other matters pertaining to the Lease and
Tenant's occupancy of the Demised Premises as Landlord may reasonably request.
It is understood that such statement may be relied upon by Landlord, a
prospective purchaser, mortgagee or assignee of any mortgagee of Landlord's
interest in the Demised Premises or this Lease.
30.9 Gender
------
Whenever the singular is used herein, the same shall include the plural
and the masculine, feminine and neuter genders.
30.10 Captions and Section Numbers
----------------------------
The captions, section numbers, article numbers, and index appearing in
this Lease are inserted only as a matter of convenience and in no way define,
limit, construe, or describe the scope or intent of such sections or articles of
this Lease nor in any way affect this Lease.
30.11 Broker's Commission
-------------------
A real estate commission is owed to Spallino Reid, Corporate Real Estate
Services and The Miller Group payable by the Landlord. Tenant shall have no
liability for payment of any broker commissions..
30.12 Recording
---------
Landlord and Tenant shall record a memorandum of this Lease promptly on
Lease execution.
30.13 Execution of Lease
------------------
The submission of this Lease for examination does not constitute a
reservation of, or option for, the Demised Premises, and this Lease shall become
effective as a lease only upon execution and delivery thereof by Landlord and
Tenant.
30.14 Construction
------------
This Lease shall be construed and enforced in accordance with the laws of
the State of Michigan. If any provision of this Lease, or the application
thereof to any person or circumstances, shall, to any extent be invalid or
unenforceable, the remaining provisions of this Lease shall not be affected
thereby and shall be valid and enforceable.
26
<PAGE>
30.15 Binding Effect
--------------
This Lease shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors, assigns
and permitted transferees..
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day
and year first above written.
IN THE PRESENCE OF: LANDLORD: SSP ASSOCIATES, INC.,
A Michigan Corporation
/s/ [ILLEGIBLE]^^ By: /s/ [ILLEGIBLE]^^
- -------------------------- ----------------------------------
Its: President
TENANT: CONCENTRIC NETWORK
CORPORATION
/s/ [ILLEGIBLE]^^ By: /s/ Henry R. Nothhaft
- -------------------------- ----------------------------------
Its: Chairman, President, & CEO
PREPARED BY:
ROBERT A. JAREMA (P31537)
Smith, Bovill, Fisher, Meyer
& Borchard, P.C.
200 St. Andrews Road
Saginaw, MI 48603
(517) 792-9641
27
<PAGE>
EXHIBIT A
11/30/99
LEGAL DESCRIPTION FOR CONCENTRIC PARCEL
Beginning 330 feet North 89 deg 18 mm 00 sec West and
561.80 feet South 0 deg 09 min 30 sec East of the North 1/4 Corner of
Section 1,
T12N, R4E, Carrollton Township, Saginaw County, Michigan;
Thence South 0 deg 09 min 30 sec East 707.15 feet;
Thence North 89 deg 47 min 00 sec West 191 feet;
Thence North 0 deg 09 min 30 sec West 99 feet;
Thence North 89 deg 47 min 00 sec West 304 feet;
Thence North 0 deg 09 min 30 sec West 608.15 feet;
Thence South 89 deg 47 min 00 sec East 495 feet to the place of
beginning
Consisting of 7.34 acres.
PARCEL INCLUDES 80,000 SQ FEET OF BUILDING AND THE REQUIRED PARKING.
DETENTION POND AND THE DRAIN ARE NOT INCLUDED.
Jerry Schafer
631 1245
<PAGE>
[FLOORPLAN]
<PAGE>
EXHIBIT C
TENANT REQUIREMENTS
-------------------
The following is an itemized list of the tenant improvements required for
Concentric Network Incorporated. The proposal shall address but shall not be
limited to the improvements described herein for your reference.
Hard Walls
- - 4 Conference Rooms (accommodate 4-6 people and strategically located
throughout the facility).
- - 2 Large Conference Rooms (approx. 12x30)
- - 3-5 Private Offices (approx. 12x12)
- - 1 Executive Office (approx. 12x16)
- - 1 Reception Area to accommodate two people with side room for storage, mail,
copy, fax
**All offices require a front glass wall, and some form of sound proofing
- - 4 Supply rooms (approx. 8x10)
- - 1 Employee lounge area (approx. 20x20) and located by the kitchen area.
- - 1 Kitchen Area (approx. 30x30)
- - 2 Coffee Stations strategically located
- - 3 Training Rooms (approx. 16x30)
- - 4 Telecommunication Rooms;
One (1) room which contains fiber, data and voice equipment centrally
located in the facility (approx. 25x40)
Three (3) smaller rooms for commercial power service entry and main
distribution
(Size of these Telecom room; to be determined)
- - 4 Electrical Rooms
One (1) main room for commercial power service entry and main distribution
Three (3) Smaller rooms for secondary, distribution of UPS and commercial
power
(Size of these Electrical rooms to be determined)
- - UPS supply room
- - 1 System Lab/Repair and Testing center for client server systems (approx.
14x16)
Electrical Requirements:
- - Power Distribution throughout facility and to all offices
- - Commercial Power (1600 amps/208v/3Phase)
- - UPS power distribution (200 kva/208v/3Phase)
One Generator external to facility (approx. 400 kva/208v/3phase)
Emergency power to UPS, HVAC, and commercial power distribution
- - Soft fluorescent lighting (suspended-indirect) throughout the facility
HVAC Requirements:
- - Dedicated Units in all conference rooms, training rooms, UPS and
telecommunications rooms
- - All units must be centrally controlled via computer and have remote alarming
capabilities
<PAGE>
FIRST ADDENDUM TO LEASE
-----------------------
THIS FIRST ADDENDUM TO LEASE (this "Addendum") is made by and between SSP
ASSOCIATES, INC. ("Landlord"), and CONCENTRIC NETWORK CORPORATION ("Tenant"), to
be a part of that certain Lease of even date herewith between Landlord and
Tenant (the "Lease") concerning an approximately 40,000 square foot building and
related land and improvements located at 1405 Tittabawassee, Carrollton
Township, Saginaw County, Michigan (the "Demised Premises"). Landlord and Tenant
agree that, notwithstanding anything to the contrary in the Lease, the Lease is
hereby modified and supplemented as set forth below.
2.2 Term. The Lease shall commence on the date by which Landlord has
----
substantially completed the Project in accordance with the Lease and delivered
possession of the Project to Tenant. If the Commencement Date has not occurred
for any reason whatsoever on or before (i) July 1, 2000, then the date Tenant is
otherwise obliged to commence payment of rent shall be delayed by one day for
each day that the Commencement Date is delayed beyond such date; or (ii) August
1, 2000, then, in addition to Tenant's other rights or remedies, Tenant may
terminate the Lease by written notice to Landlord, whereupon any monies
previously paid by Tenant shall be reimbursed to Tenant.
3.1 Construction. Notwithstanding anything to the contrary herein,
------------
effective upon the Commencement Date, Landlord does hereby warrant that (a) the
construction of the Project was performed in accordance with all Laws and
Restrictions, in accordance with the Plans, and in a good and workman-like
manner, (b) all material and equipment installed therein conformed to the Plans
and was new and otherwise of good quality, (c) the electrical, plumbing, and
mechanical systems servicing the Demised Premises are in working order and in
good condition, and (d) the roof is in good condition and water tight. Prior to
the Commencement Date, Landlord shall cause the roadway into the Demised
Premises to be named Concentric Boulevard, if the Township will allow such name
to be used.
4.1 Possession. Landlord shall diligently complete the Project; provided,
----------
however, Landlord shall not be held liable for any loss, damage or delay due to
fire, strike, civil disturbance, military riot, insurrection, casualty loss
including, but not limited to, tornado, high winds or extraordinary winter
conditions defined as seven (7) consecutive business days with the average
temperature below 15(degrees) Fahrenheit nor seven (7) consecutive business days
with average precipitation in excess of 1/2 inch as measured at the Site.
Notwithstanding the forgoing, in the event Landlord is delayed in meeting any of
the Milestone Dates (defined below) in constructing the Project by more than
sixty (60) days for any reason (other than Tenant's delay), Tenant shall have
the right to terminate this Lease by delivery of written notice thereof to
Landlord, whereupon any monies previously paid by Tenant to Landlord shall be
reimbursed to Tenant. As used herein, "Milestone Dates" shall mean the following
dates: (a) January 17, 2000 for completion of the foundation on the Project; and
(b) March 17, 2000 for the building to be "under-roof" and "roughed- in".
Promptly upon substantial completion of the Project, Landlord shall deliver
possession of the Demised Premises to Tenant in good, broom clean condition,
with all building systems in good working order and in compliance with all
ordinances and laws.
6 Utilities. Landlord represents that, on the Commencement Date, the
---------
Demised Premises shall be served by water, electricity, gas, telephone, sewer
and other utilities pursuant to Tenant's specifications for the Demised
Premises. If the Demised Premises should not be reasonably suitable for Tenant's
use as a consequence of cessation of utilities or other services, interference
with access to the Demised Premises, legal restrictions or the presence of any
Hazardous Substance, which in any such case does not result from Tenant's
negligence or willful misconduct, and if any of the foregoing causes a
substantial interference with Tenant's use of the Demised Premises and prevents
Tenant from using the Demised Premises for its intended purpose for fourteen
(14) days, then Tenant shall be entitled to an equitable abatement of rent. If
such
-1-
<PAGE>
interference persists for more than one hundred eighty (180) days, Tenant shall
have the right to terminate the Lease.
7.2 Taxes. "Taxes" shall not include and Tenant shall not be required to
-----
pay any portion of any tax or assessment expense or any increase therein (a) in
excess of the amount which would be payable if such tax or assessment expense
were paid in installments over the longest permitted term or (b) resulting from
a change of ownership or transfer of any or all of the Demised Premises.
8.2 Care of Demised Premises. Tenant's obligations with respect to the
------------------------
surrender of the Demised Premises shall be fulfilled if Tenant surrenders
possession of the Demised Premises in the condition existing at the Commencement
Date, ordinary wear and tear, condemnation, Hazardous Substances (other than
those released or emitted by Tenant), and alterations or other interior
improvements which Tenant is permitted to surrender at the termination of the
Lease, excepted, and subject to Section 12 of the Lease.
8.3 Hazardous Substances. To the best knowledge of Landlord, (a) no
--------------------
Hazardous Substance is present on the Land or the soil, surface water or
groundwater thereof, (b) no underground storage tanks are present on the Land,
and (c) no action, proceeding or claim is pending or threatened regarding the
Land concerning any Hazardous Substance or pursuant to any environmental law.
Under no circumstance shall Tenant be liable for, and Landlord shall indemnify,
defend, protect and hold harmless Tenant, its agents, contractors, stockholders,
directors, successors, representatives, and assigns from and against, all
losses, costs, claims, liabilities and damages (including attorneys' and
consultants' fees) of every type and nature, directly or indirectly arising out
of or in connection with any Hazardous Substance present at any time on or about
the land, or the soil, air, improvements, groundwater or surface water thereof,
or the violation of any laws, orders or regulations, relating to any such
Hazardous Substance, except to the extent that any of the foregoing actually
results from the release or emission of Hazardous Substance by Tenant or its
agents or employees in violation of applicable environmental laws. This section
and Section 8.3 of the Lease constitute the entire agreement of Landlord and
Tenant regarding Hazardous Substances. No other provision of the Lease shall be
deemed to apply thereto.
9.1 Indemnity. Landlord shall not be released or indemnified from, and
---------
shall indemnify, defend, protect and hold harmless Tenant from, all losses,
damages, liabilities, claims, attorneys' fees, costs and expenses arising from
the negligence or willful misconduct of Landlord or its agents, contractors,
licensees or invitees, Landlord's violation of any law, order or regulation, or
a breach of Landlord's obligations or representations under the Lease.
10.1 Maintenance and Repairs. Landlord shall perform and construct, and
-----------------------
Tenant shall have no responsibility to perform or construct, any repair,
maintenance or improvements (a) necessitated by the acts or omissions of
Landlord or its agents, employees or contractors, (b) which are the subject of a
warranty in Landlord's favor, (c) to the structural portions of the Demised
Premises, which are defined as the roof, sidewalls and foundation, but excluding
any windows, doors, roof-top heating ventilating and air conditioning units, and
any required snow removal from the roof or (d) which would be treated as a
capital expenditure under generally accepted accounting principles.
Notwithstanding the foregoing, Landlord shall amortize the cost of any "capital
expenditure" over its useful life as reasonably determined by Landlord in
accordance with generally accepted accounting principles and Tenant shall pay
the monthly amortized amount thereof together with interest at the rate of the
prime rate plus two percent (2%) per annum with each monthly installment of base
rent. Landlord shall, at its sole cost, maintain in good condition and free of
snow the roadway (Concentric Boulevard) leading to the Demised Premises.
10.2 Compliance with Laws. Tenant shall not be required to comply with or
--------------------
cause the Demised Premises to comply with any Laws or Restrictions requiring the
construction of alterations unless such compliance is necessitated solely due to
Tenant's particular use of the Demised Premises.
-2-
<PAGE>
11.1 Alterations. Tenant may construct non-structural alterations,
-----------
additions and improvements in the Demised Premises without Landlord's prior
approval, if the cost of any such work does not exceed Twenty-Five Thousand
Dollars ($25,000). Alterations and Tenant's trade fixtures, furniture, equipment
and other personal property installed in the Demised Premises ("Tenant's
Property") shall at all times be and remain Tenant's property. Except for
Alterations which cannot be removed without structural injury to the Demised
Premises, at any time Tenant may remove Tenant's Property from the Demised
Premises, provided that Tenant repairs all damage caused by such removal.
Landlord shall have no lien or other interest in any item of Tenant's Property.
Landlord shall have the right to require Tenant to remove any alterations within
the Demised Premises unless Landlord notifies Tenant at the time Landlord
consents to such alteration that Landlord shall not require such alteration to
be removed. Upon request by Tenant, Landlord shall inform Tenant at the time
Landlord consents to any alterations whether Tenant shall be required to remove
such alterations.
12.2 Damage. If the Demised Premises are damaged by any peril and Landlord
------
does not terminate the Lease, then Tenant shall have the option to terminate the
Lease if the Demised Premises cannot be, or are not in fact, fully restored by
Landlord to their prior condition within one hundred eighty (180) days after the
damage. Landlord shall not have the right to terminate the Lease if (a) the
damage to the Demised Premises is (i) due to a risk required to be insured
against under Section 12.1 of the Lease (provided Tenant has maintained such
insurance in place) or (ii) relatively minor (e.g., repair or restoration would
cost less than ten percent (10%) of the replacement cost of the Demised
Premises) or (b) Tenant pays any uninsured amounts.
12.4 Waiver of Subrogation. Notwithstanding anything to the contrary
---------------------
herein, the parties hereto release each other and their respective agents,
employees, successors, assignees and subtenants from all liability for injury to
any person or damage to any property that is caused by or results from a risk
which is actually insured against without regard to the negligence or willful
misconduct of the entity so released. All of Landlord's and Tenant's repair and
indemnity obligations under the Lease shall be subject to the waiver contained
in this paragraph.
14 Access to Premises. Landlord and Landlord's agents, except in the
------------------
case of emergency, shall provide Tenant with one (1) business day notice prior
to entry of the Demised Premises. Any entry by Landlord and Landlord's agents
shall not impair Tenant's operations more than reasonably necessary, and shall
comply with Tenant's reasonable security measures.
17 Right to Mortgage. Landlord represents that there is not currently a
-----------------
mortgage or deed of trust encumbering the Demised Premises. Prior to Landlord's
execution of a mortgage or deed of trust as to the Demised Premises, Landlord
shall obtain from any lender of the Demised Premises a written agreement on
commercially reasonable terms providing for recognition of Tenant's interests
under the Lease in the event of a foreclosure of the lender's security interest.
Further, as a condition to the subordination of Tenant's leasehold interest,
Landlord shall obtain from any lenders a non-disturbance agreement recognizing
Tenant's leasehold interest and the ability of Tenant to continue its leasehold
interest in the Demised Premises as long as Tenant is not in default hereunder,
after expiration of applicable notice and cure periods.
18 Assignment and Subletting. Tenant may, without Landlord's prior
-------------------------
written consent, sublet the Demised Premises or assign the Lease to (a) a
publicly-traded entity controlling, controlled by or under common control with
Tenant, or (b) a successor publicly-traded entity related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action. In addition
to the foregoing Tenant may, without Landlord's prior written consent, sublet
the Demised Premises or assign the Lease to (i) a non-public entity controlling,
controlled by or under common control with Tenant, (ii) a non-public successor
entity related to Tenant by merger, consolidation, nonbankruptcy reorganization,
or government action, or (iii) a purchaser of substantially all of Tenant's
assets; provided, however, that in any such case, such entity
-3-
<PAGE>
shall have a net worth equal to or greater than Tenant's net worth immediately
prior to the proposed assignment or sublease. A sale or transfer of Tenant's
capital stock shall not be deemed an assignment, subletting or any other
transfer of the Lease or the Demised Premises.
21 Right to Cure Defaults. In the event Landlord fails to perform any of
----------------------
its obligations under the Lease and (except in case of a roof leak or similar
emergency posing an immediate threat to persons or property, in which case only
three (3) days prior notice shall be required) fails to cure such default within
thirty (30) days after written notice from Tenant specifying the nature of such
default (where such default could reasonably be cured within said thirty (30)
day period), or fails to commence such cure within said thirty (30) day period
and thereafter continuously with due diligence prosecute such cure to completion
(where such default could not reasonably be cured within said thirty (30) day
period), then Tenant may, in addition to its other remedies, cure any default of
Landlord at Landlord's cost and deduct the reasonable cost of such cure from
rent.
28 Signs. Landlord hereby approves Tenant's signage as described in
-----
Exhibit _____ hereto. Landlord shall contract, at its sole cost, a monument sign
base at the street entrance to the driveway of the Demised Premises as allowed
by Township ordinance, in accordance with plans and at a location reasonably
acceptable to Tenant. Tenant shall be entitled, at its sole cost, to install
thereon Tenant's signage. Tenant shall also be entitled to install, at its sole
cost, signage on the building in compliance with all applicable laws. Tenant
shall further have the right, at its sole cost, to install on the Demised
Premises in front of the building flag poles and to fly Tenant's flag thereon.
30.16 Approvals. Whenever the Lease requires an approval, consent,
---------
determination, selection or judgment by either Landlord or Tenant, unless
another standard is expressly set forth, such approval, consent, determination,
selection or judgment and any conditions imposed thereby shall be reasonable and
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.
30.17 Reasonable Expenditures. Any expenditure by a party permitted or
-----------------------
required under the Lease, for which such party demands reimbursement from the
other party, and while the Lease is not in default (after expiration of
applicable notice and cure periods), 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 upon request.
Effect of Addendum. All terms with initial capital letters used herein as
------------------
defined terms shall have the meanings ascribed to them in the Lease unless
specifically defined herein. In the event of any inconsistency between this
Addendum and the Lease, the terms of this Addendum shall prevail.
In witness whereof, said parties hereunto subscribe their names.
LANDLORD: TENANT:
SSP ASSOCIATES, INC. CONCENTRIC NETWORK CORPORATION
By /s/ [ILLEGIBLE]^^ By /s/ Henry R. Nothhaft
---------------------- -------------------------
Name [ILLEGIBLE]^^ Henry R. Nothhaft
------------------
Its President Chairman, President & CEO
------------------
-4-
<PAGE>
Exhibit 21.1
List of Material Subsidiaries
-----------------------------
The following companies are wholly-owned subsidiaries of Concentric Network
Corporation:
AnaServe, Inc., a California corporation;
Delta Internet Services, Inc., a California corporation;
InterNex Information Services, Inc., a California corporation;
and 9 Net Avenue, Inc., a New Jersey corporation.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to the Incentive Stock Option Plan, 1995 Stock
Incentive Plan for Employees and Consultants Option Agreements, Amended and
Restated 1996 Stock Plan, 1997 Stock Plan and 1997 Employee Stock Purchase
Plan and in the Registration Statement (Form S-8) pertaining to the 1996 Stock
Option Plan, Stock Option Agreement and Warrant Agreement of Delta Internet
Services, Inc. and in the related Prospectuses, of Concentric Network
Corporation of our report dated January 21, 2000, except for Note 13, as to
which the date is March 20, 2000, with respect to the consolidated financial
statements and financial statement schedule of Concentric Network Corporation
included in this annual report (Form 10-K) for the year ended December 31,
1999.
San Jose, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,891
<SECURITIES> 224,155
<RECEIVABLES> 30,533
<ALLOWANCES> 1,419
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220,860
0
<COMMON> 420,515
<OTHER-SE> (357,837)
<TOTAL-LIABILITY-AND-EQUITY> 497,794
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