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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
.
Commission File No. 000-23151
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USWEB CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
Delaware 87-0551650
(state or other jurisdiction of (IRS employer
incorporation or organization) identification number)
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2880 Lakeside Drive, Suite 300
Santa Clara, California 95054
(address of principal executive offices)
(408) 987-3200
(registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class Name of each exchange on which registered
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<S> <C>
Common Stock, $.001 par value Nasdaq
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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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 23, 1999, there were approximately 74,410,000 shares outstanding
of the registrant's Common Stock, par value $.001, which is the only class of
common or voting stock of the registrant. As of that date, the aggregate
market value of the shares of Common Stock held by nonaffiliates of the
registrant (based on the closing price for the Common Stock on NASDAQ on March
23, 1999) was approximately $2,485,000,000. For purposes of this disclosure,
shares of Common Stock held by each officer and director of the Registrant and
by each person who owns 5% or more of the outstanding voting stock have been
excluded in that such persons may be deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of the
Company which will be filed with the Securities and Exchange Commission no
later than 120 days after December 31, 1998 (the "1999 Annual Meeting Proxy
Statement").
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USWEB CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
YEAR ENDED DECEMBER 31, 1998
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Page
No.
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PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 13
Item 3. Legal Proceedings.............................................. 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 15
Item 6. Selected Consolidated Financial Data........................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 38
Item 8. Consolidated Financial Statements and Supplementary Data....... 39
PART III
Item 10. Directors and Executive Officers of the Registrant............. 63
Item 11. Executive Compensation......................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management. 63
Item 13. Certain Relationships and Related Transactions................. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K............................................................. 64
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This report contains certain forward-looking statements that involve risks
and uncertainties, including statements regarding the Company's strategy,
financial performance, and revenue sources. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors" and elsewhere in this report.
PART I
ITEM 1. BUSINESS
Overview
USWeb Corporation, which is also known as and referred to as "USWeb/CKS," is
a professional services firm with expertise in business strategy, marketing
communications, and Internet technology solutions. Our clients are typically
medium-sized and large companies. We have consulting offices throughout the
United States and in several countries outside the United States. We provide a
comprehensive range of Intranet, Extranet and Web site solutions and services,
as well as marketing communications programs that use advanced technology and
new media.
By combining our expertise with industry-specific knowledge, we provide an
integrated service offering to help clients build their business in innovative
ways. Our services are focused on helping clients to:
. Differentiate their products and services.
. Improve business efficiency.
. Enhance customer relationships.
. Leverage human capital.
Our Internet professional services include strategy consulting; analysis and
design; technology development; implementation and integration; audience
development and maintenance. Our marketing communications services include
strategic corporate and product positioning, corporate identity and product
branding, new media, collateral systems, environmental design, packaging,
advertising, media placement, direct marketing, and consumer and trade
promotions.
Industry Background
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a new set of tools for improving basic business
processes such as communications, data transmission, marketing, transaction
processing and customer service. An Intranet enables a company's employees to
receive corporate information and training efficiently, communicate through e-
mail, use the internal network's business applications, and access proprietary
information and legacy databases. An Extranet can extend part or all of the
functionality of a secure Intranet to selected business partners outside of
the company, such as customers, suppliers or distributors. On the consumer
side, Web sites support the full cycle of customer interaction with a brand.
Web sites can present advertising and marketing materials in new and
compelling fashions, display products and services in electronic catalogs,
offer products and services for sale online, process transactions and fulfill
orders, provide customers with rapid and accurate responses to their
questions, and gather customer feedback efficiently.
Businesses are rapidly adopting Internet solutions. Companies implementing
Internet solutions often must rely on fundamentally new business approaches
because these solutions utilize new technologies and allow companies to
implement a broad scope of business process improvements. Businesses seeking
to realize the benefits provided by Internet solutions face a formidable
series of challenges presented by the need to
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link business strategy with new and rapidly changing technologies and
continuously updated content. Before creating an Intranet, Extranet or Web
site, a company must first conduct a thorough needs assessment to review its
strategic business requirements and compare them to the capabilities of its
existing processes and systems. Next, the company must design the solution and
develop an implementation plan. The implementation, establishment and
maintenance of the solution will require significant technical expertise in a
number of areas, such as electronic commerce systems, security and privacy
technologies, application and database programming, mainframe and legacy
integration technologies and advanced user interface and multimedia
production.
Similarly, recent trends are changing the marketing communications
requirements of businesses throughout the world. Businesses must be able to
develop and execute marketing strategies rapidly, because shortening product
life cycles reduce lead times for marketing campaigns. New media, including
Internet-related services as well as CDROMs and interactive kiosks, have
emerged as an integral component of marketing and communications strategy.
These new media and the increasing complexity of sophisticated digital
delivery, storage and multimedia enhancement tools and technologies enable
companies to improve the effectiveness of communications, but pose additional
challenges to businesses striving to link business strategy with rapidly
changing technologies.
To perform the multitude of Internet professional services and integrated
marketing communications functions in-house, a company would have to make
substantial commitments of time, money and technical personnel to keep current
with rapidly evolving technologies, content presentation techniques and
competitors' offerings. Professionals with the requisite strategic, technical
and creative skills are often in short supply and many organizations are
reluctant to expand their internal information systems or marketing
departments for particular engagements at a time when they are attempting to
minimize fixed costs to increase returns on investment. At the same time,
external economic factors encourage organizations to focus on their core
competencies and limit workforces in the information technology management and
marketing areas. Accordingly, many businesses have chosen to outsource a
significant portion of the design, development and maintenance of their
Intranets, Extranets and Web sites and the development and implementation of
their marketing strategies to independent professionals. These independent
professionals can leverage accumulated strategic, technical and creative
talent and track developments in a field characterized by extremely short
technology, process and content lifecycles.
Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. A
number of small Internet professional services firms have emerged to address
the significant and rapidly growing market for Internet solutions. However,
the small size and capital constraints of most of these firms restrict their
ability to supply clients with the necessary depth and integration of
strategic, technical and creative skills. Furthermore, many of these providers
tend to develop expertise in a limited number of vertical markets because of
the need to leverage the information and experiences gained from the
relatively small number of Internet solution engagements they have completed.
We believe that the rapidly increasing demand for Internet solutions and
integrated marketing communications services, combined with the inability of
most current providers to supply the full range and integration of strategic,
technical and creative skills required by clients, has created a significant
market opportunity for a scaled Internet professional services and integrated
marketing communications services firm. In the currently fragmented and
rapidly changing environment, an organization that could deliver the creative
strengths of advertising and marketing firms, the strategic skills and
technical capabilities of information technology consulting service providers,
and the national reputation, economies of scale, multiple points of presence
and information sharing capabilities of a large organization could capitalize
on this opportunity to help companies build their businesses in innovative
ways.
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The USWeb/CKS Solution
Our mission is to provide clients with the vision, expertise and resources
required to help build their businesses using Internet solutions and
integrated marketing communications. To capitalize on the opportunity
presented by the rapid growth in demand for such services, we have built and
are continuing to expand a professional services firm with offices across the
United States and important markets worldwide. We are an integrated
international firm, with local offices that can develop close client
relationships and gain an in-depth understanding of client needs. Each office
benefits from the resources of our overall organization. For example,
individual offices may draw as needed upon the assistance of one or more
additional offices with specialized creative or technical expertise. Each
office also draws upon a centralized index of best demonstrated practice
methodologies, a technology library of proprietary reusable software and
content objects, a central project registry, and executive briefing programs
for client decision makers.
We believe that our operational model enables us to scale rapidly by
leveraging our central resources as our operations expand. First, we believe
that our aggregation and deployment of the accumulated experience and
expertise of our network of offices provides clients with enhanced business
solutions. Second, our ability to leverage central technology and operational
resources enables us to scale efficiently, through the growth of existing
consulting offices and the acquisition of new offices, which also provides
significant numbers of additional skilled personnel. Finally, our brand
development campaign, which reinforces the message that USWeb/CKS is a secure,
reliable, high-quality choice for the provision of marketing communications
and Internet professional services, increases our ability to access and
influence key client decision makers.
Strategy
Our objective is to become and remain the leading global Internet
professional services and integrated marketing communications firm. Our
strategy to achieve this objective includes the following elements:
Use Integration of Services as a Tool for Building Relationships. Our client
relationships have typically begun with a single assignment that might
encompass corporate identity or packaging, an electronic commerce system, or a
World Wide Web site. Such single project relationships have allowed clients to
try our services with minimal long-term risk. In many instances, we have been
successful in expanding relationships beyond the single-project assignment to
include additional projects in other disciplines. We intend to aggressively
promote the benefits of our integrated services offering and leverage our
integrated approach as a tool for building and enhancing client relationships.
Strengthen Position as a Leading Internet Professional Services Firm. We are
continuing to strengthen our position as a leading Internet professional
services firm in order to provide clients with superior Internet solutions. We
intend to continue investing significantly in identifying, reviewing and
integrating the latest Internet technologies and accumulating and deploying
the best demonstrated practices for developing and implementing Internet
solutions. Our investment in tools and technologies has been an important
factor in recruiting and retaining talented employees who are attracted to our
technology-driven culture. We are continuing to develop a library of partially
pre-built Internet solutions that combine our methodologies, services and
reusable software and content objects with third-party software. Our
consulting offices intend to continue leveraging our nationwide presence,
operational scale and professional marketing tools, which provide each
consulting office with resources and credibility to convince client decision
makers that we can provide successful Internet solutions to meet the most
demanding business needs. We also intend to remain focused on delivering the
Internet solution best suited to a client's needs.
Continue to Expand Geographic Presence. We are continuing to expand our
geographic presence through acquisitions and internal growth. Acquisition
efforts are focused on strategic and international opportunities. We believe
that in the fragmented market for providing Internet solutions, rapidly
building a critical mass of strategic, technical and creative talent through
both internal growth and acquisitions will provide us with a substantial
competitive advantage. As of December 31, 1998, USWeb/CKS had offices in
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major markets across the United States, as well as in Austria, Canada, France,
Germany, Switzerland, and the United Kingdom.
Foster Creative Excellence. We strive to provide creative solutions in all
areas of marketing communications to meet or exceed the highest standards of
service within each individual discipline. We have received numerous honors
and awards, including Addy Awards, Margaret Larsen Awards for Design, Murphy
Awards, and Telly Awards, as well as a One Show Interactive Award and a
Communication Arts Design Annual Award. In order to maintain high levels of
creativity and quality, we place great importance on recruiting and retaining
talented employees.
Develop Additional Strategic Relationships. We intend to continue developing
strategic relationships because they enable us to enter new markets, gain
early access to leading-edge technology, cooperatively market products and
services with leading technology vendors, cross-sell additional services and
gain enhanced access to vendor training and support. We have developed a
number of strategic relationships with leading Internet hardware, software and
content companies, including Intel, Microsoft, Hewlett-Packard, Pandesic LLC
(the Internet company from Intel and SAP), Sun Microsystems and Reuters.
Collectively these relationships provide for co-marketing programs, joint
research and development on leading implementations of Internet solutions,
technical education, client feedback channels and hardware and software
distribution rights. We also maintain relationships with a number of venture
capital firms for early access to leading-edge solutions.
Leverage Operational Economies of Scale. We provide certain operational and
administrative services centrally, allowing the field offices to benefit from
the economies of scale created by a large operation while enabling our
consulting offices to focus on their core competency of providing superior
client services. These centrally provided services include business
development programs, operations management guides, client support assistance,
carrier-grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
Increase Outsourcing Service Offerings. We intend to expand the range of our
service offerings related to managing our clients' information technology
operations. We believe that growing adoption of the Internet and its related
technologies, often by companies whose core expertise does not include
information technology, and growing complexity of electronic infrastructures,
will result in an increase in the outsourcing of such services. Through our
"E-Services" division, we intend to offer comprehensive outsourced management
of Internet-based, entry- and enterprise-level applications on a subscription
basis. These services are intended to give corporate business professionals
and resource-constrained IT organizations cost-effective, accelerated access
to the latest technologies to enhance existing business systems while enabling
them to focus on core competencies. We are leveraging our relationships with
leading technology companies to offer our clients a variety of Internet
application modules, which we will customize to the needs of each client. We
further intend to maintain a data center where the client systems can be
operated with high reliability and efficiency.
Capitalize on Market Opportunities in New Media. We strive to maintain our
leadership position in the development and application of new media marketing
communication services and products. We believe that the proliferation of the
Internet and other new media will continue to provide us with substantial
opportunities. These new media services and products enable companies to
better focus their marketing messages and may ultimately facilitate one-on-one
marketing to specific individuals. Towards this end, we seek to provide
clients with integrated new media design and development services as well as
support in implementing and maintaining key content delivery technologies.
Services
We offer a comprehensive range of services to deliver marketing
communications and Internet solutions designed to help clients build their
businesses innovative ways. In each consulting engagement, the client can
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contract for the specific services it requires, depending on the nature of the
engagement and the capabilities of the client's organization. We bill a
majority of our engagements on a time and materials basis, although we also
deliver solutions on a fixed-price basis and seek to increase the percentage
of engagements provided on such a basis.
Internet Solution Development and Deployment. Our Internet solution
development and deployment methodology consists of six phases:
. Strategy Consulting. We work closely with the client to conduct a
thorough study of its strategic market position, business requirements
and existing systems and capabilities to determine the ways in which
Internet solutions can most improve the client's business processes. We
then deliver our recommendations, which define the strategic basis for a
specific Internet solution that takes into account the client's budget,
timeline and available resources.
. Analysis and Design. Once the strategic groundwork has been established,
we translate the client's strategic requirements into a system or process
design architecture, a blueprint that defines the roles the system will
perform to meet those requirements. By choosing us, our clients receive
vendor-neutral solutions prepared by Internet-focused consultants. We
research, test and evaluate virtually all major Internet technologies and
tools to design system and process architectures that successfully meet
client needs. Our objective is to design, build and deploy a solution
that is logically planned, scales well over time, is sufficiently secure,
and is easy to use, administer and manage.
. Technology Development. In the development phase, we build a testable
version of the client's solution based on the blueprint produced in the
analysis and design phase. We design, code, integrate and test all
necessary programs and components using a broad range of expertise,
including object-based and relational database systems; electronic
commerce systems; custom ActiveX, Java and C++ programming and host
integration; implementation of third-party applications and security
technologies; and integration of hardware, software and Internet access
products. Our experienced and professional graphic designers also work to
create a compelling user interface for the solution to enable it to
attract and hold the attention of the client's target audience while
conforming to the client's brand image and marketing campaigns. In
performing these functions, our professionals benefit from access to an
extensive library of reusable software and content objects.
. Implementation and Integration. In the implementation phase, we test the
solution created in the development phase and ready it to be deployed
into a full production system. We deliver the system to the client,
install it, convert and initialize all necessary data, perform acceptance
testing and put the system into operation. We also integrate Intranet
solutions with back-office legacy systems to ensure that each client's
critical applications are secure and seamless. We maintain third-party
vendor relationships that offer our clients secure, state-of-the-art,
high-availability Intranet, Extranet and Web site hosting and integrated
services for relational databases, workgroup collaboration, streaming
audio and video, management and monitoring, e-mail and secure electronic
commerce.
. E-Services. To address the Application Service Provider (ASP) market, we
have established an "E-Services" division, which intends to offer
outsourced application solutions designed to maximize a company's return
on IT investments. We are assembling a portfolio of offerings in four
categories: e-commerce, communications and knowledge management, customer
relationship management, and back office functions. We intend to combine
best-of-breed packaged applications with customized application
development to help IT organizations implement strategic Internet-based
business solutions quickly and cost-effectively.
. Audience Development. We can work with the client to develop a strategy
for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. We
provide online media planning and purchasing services and advice
regarding online public relations. We have also developed a proprietary
audience creation methodology designed to
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optimize a Web site's search engine presence, increase site access through
hyperlink recruitment and disseminate the client's key messages to
Internet newsgroups, mailing lists and forums.
. Maintenance. We can provide the client with ongoing support services for
its Internet solutions, from content maintenance to site administration,
for as long as the client wishes. Our technical staff can also assist
clients on a case-by-case basis to resolve technical problems, provide
assistance with the hosting environment, and deliver support for Internet
solution software.
Marketing Communication Services. Depending on the scope of the assignment,
our marketing communications services range from execution of a discrete
marketing project, such as designing product packaging, to taking
responsibility for the overall marketing message through multiple methods. Our
marketing communications services, which can be executed around the
development of both on-line and off-line programs, include the following:
. Strategic Corporate and Product Positioning, Corporate Identity, and
Product Branding. We work with the client to analyze the client's
products or services and the market for those services, and to develop a
unique selling proposition for either a company or product that
differentiates it from the competition. We also work to develop a
creative look and feel that establishes the appropriate corporate or
brand personality.
. Internet Design and New Media. We develop media and technology solutions
to help clients deliver a consistent and effective marketing message
through digital channels, including the World Wide Web, the Internet,
proprietary online services, CD-ROMs, and interactive kiosks.
. Advertising and Media Placement. We design cross-media advertising,
including broadcast and/or print advertising, to generate awareness of a
company, product, or service over an extended period of time. We provide
strategic planning, negotiation and purchase of both traditional and new
media.
. Collateral Systems; Packaging. We develop and implement the design and
content of collateral literature systems. We also provide creative
design, development, and production of individual retail packages or
integrated retail packaging systems.
. Environmental Design. We provide creative design, development and
management of virtual and physical images as well as information and
entertainment environments, including the development of public
exhibition spaces and retail store formats.
. Promotions. We develop marketing programs, including marketing
communications campaigns and merchandising materials, which are designed
to generate demand among a specific target audience, to increase sales
among consumers, or to provide information and incentives to specific
industry trade groups in a limited time frame.
Consulting Office Development
We have established and are continuing to expand our broad geographic
presence, with consulting offices across the United States and in certain
other countries. We promote internal growth through rigorous management of
business fundamentals. We are also continuing to pursue a selective
acquisition program, focused on strategic and international opportunities.
For acquisitions, we have frequently used a standardized transaction
structure that includes a purchase price adjustment feature to provide target
company management with an incentive to improve and expand their
organizations. We also generally grant stock options to all employees of a
target company who continue their employment with USWeb/CKS to provide them
with an incentive to contribute to the success of our overall organization. We
have retained a team of professionals dedicated to identifying potential
acquisition candidates and implementing our acquisition methodology. This team
identifies those Internet professional services firms that meet our
acquisition criteria, engages in a series of meetings and due diligence
activities with each candidate to explore whether the candidate meets our
criteria for growth potential and operating
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strategy, and completes the acquisition of a significant percentage of those
candidates. We stress to each desired candidate the advantages of merging with
us, including the depth and breadth of services required by many potential
clients; the client recognition and acceptance of the USWeb/CKS brands;
additional funding required to pursue large and profitable long-term client
opportunities; and strategic partnerships with leading hardware, software and
content vendors. Following the closing of each acquisition, we strive to
rapidly integrate the new subsidiary into our operations by deploying a
conversion team to integrate financial, marketing and operating procedures,
providing access to USWeb/CKS Central, our secure Intranet, and delivering a
thorough orientation to all employees.
We regularly evaluate potential acquisition candidates, are currently
holding preliminary discussions with a number of such candidates and from time
to time are in active negotiations with a number of other candidates. If,
after due diligence review and negotiation, such companies can be acquired on
a basis considered fair to us and our stockholders, we may proceed with such
acquisitions. We expect most of our future acquisitions to include the
issuance of additional shares of our Common Stock.
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As of December 31, 1998, USWeb/CKS had acquired the following companies:
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Month of
Name Office Locations Consolidation (1)
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Schell/Mullaney (2)....... New York, NY Aug-96
Donovan & Green (2)....... New York, NY Jan-97
McKinney & Silver (2)..... Raleigh, NC Jan-97
Xcom Corporation.......... San Francisco, CA and San Diego,
CA Mar-97
CKS Group Holding
(Deutschland) (2)........ Munich and Hamburg, Germany Mar-97
Gormley & Partners (2).... Greenwich, CN Mar-97
Cosmix Corporation........ Seattle, WA Apr-97
Fetch Interactive, Inc.... Milwaukee, WI Apr-97
NewLink Corporation....... Los Angeles, CA Apr-97
NetWORKERS Corporation.... Santa Clara, CA May-97
InterNetOffice, LLC....... Atlanta, GA and Austin, TX May-97
Infopreneurs Inc.......... Washington, D.C. Jun-97
Netphaz Corporation....... Phoenix, AZ Jun-97
SiteSpecific (2).......... New York, NY Jun-97
Electronic Images, Inc.... Pittsburgh, PA Jul-97
Multimedia Marketing &
Design Inc............... Chicago, IL Jul-97
DreamMedia, Inc. (3)...... Hollywood, CA Aug-97
KandH, Inc. (3)........... Hollywood, CA Aug-97
Internet Cybernautics,
Inc...................... Sausalito, CA Sep-97
Synergetix Systems
Integration, Inc......... Long Island, NY Sep-97
Online Marketing Company.. Detroit, MI Sep-97
Zendatta, Inc............. San Mateo, CA Sep-97
USWeb--Apex, Inc.......... Houston, TX Nov-97
W3-design................. Culver City, CA Nov-97
Reach Networks, Inc....... New York, NY Nov-97
InnoMate Online Marketing
GmbH..................... Dusseldorf, Germany Feb-98
Utopia, Inc............... Boston, MA Mar-98
Inter.logic.studios,
inc.(4).................. Atlanta, GA Mar-98
Quest Interactive Media,
Inc (4).................. Memphis, TN Mar-98
Ensemble Corporation...... Dallas, TX Mar-98
Ikonic Interactive, Inc... San Francisco, CA and New York,
NY Mar-98
Xplora Limited............ Windsor, United Kingdom Apr-98
Kallista, Inc............. Chicago, IL May-98
Nutley Systems, Inc.
(nSET)................... Seattle, WA May-98
Advanced Video
Communications (AVC)..... Boston, MA May-98
USWeb San Jose............ San Jose, CA May-98
Gray Peak Technologies,
Inc...................... New York, NY Jun-98
Boston, MA
Reston, VA
Iselin, NJ
Wanchoi, Hong Kong
Tucker Network
Technologies............. So. Norwalk, CT Jul-98
Metrix Communications,
Inc...................... St. Paul, MN and Irvine, CA Aug-98
Sysicom................... Paris, France Dec-98
CKS Group, Inc............ Cupertino, CA Dec-98
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(1) We consolidate the target entity's financial statements as of the date we
establish effective control of the target entity, which date generally
precedes the legal completion of the merger.
(2) Acquired by CKS Group prior to our acquisition of CKS Group in December
1998.
(3) DreamMedia, Inc. and KandH, Inc. combined their operations into a single
wholly owned subsidiary of USWeb upon the consummation of the
acquisitions. W3-design has also combined its operations with these
entities.
(4) Inter.logic.studios, inc. and Quest Interactive Media, Inc. combined their
operations into a single wholly owned subsidiary of USWeb upon the
consummation of the acquisitions.
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We believe that there are numerous potential acquisition candidates that
satisfy our acquisition criteria. We are currently discussing, on a non-
binding basis, the acquisitions of several companies. To penetrate foreign
markets, we may use joint ventures as well as acquisitions, to capitalize on a
foreign partner's local knowledge and reputation as well as the USWeb/CKS
brands and central technical, marketing and administrative resources. Our
acquisition strategy involves a number of risks and uncertainties, and we
cannot be sure that we will be able to identify suitable acquisition
candidates, acquire such companies on acceptable terms or integrate their
operations successfully with ours. As we issue stock to complete future
acquisitions, our existing stockholders experience ownership dilution. In
addition, to the extent we choose to pay cash consideration for such
acquisitions, we may be required to obtain additional financing. We cannot be
sure that such financing will be available on favorable terms, if at all.
In addition to our company-owned offices, as of December 31, 1998, we had
four franchisees ("Affiliates") that collectively managed an aggregate of
seven consulting offices. Each Affiliate agreement typically grants a
nonexclusive right to the Affiliate to maintain an office and advertise in a
designated metropolitan area or territory. The Affiliate agreements, which
have terms ranging from five to ten years, also include a nonexclusive license
to use our intellectual property and proprietary information, including the
USWeb/CKS brands and our Internet solution development methodology. In
exchange for these rights, most Affiliates paid us an initial fee and all
Affiliates make monthly royalty payments to us. Monthly royalties are equal to
the greater of (i) a minimum monthly payment or (ii) the aggregate of a five
percent royalty and a two percent marketing promotion payment, each based on
the Affiliate's adjusted gross revenues. For the year ended December 31, 1998,
fees from Affiliates represented less than 1% of our total revenues.
Revenues recognized by Affiliates are subject to royalty payments to us.
Such royalty payments are included in "Other revenue" in our consolidated
results of operations. Revenues and related expenses recognized by the
company-owned offices are consolidated and included in "Service revenue" and
appropriate expense categories in our consolidated results of operations.
Clients
We market our services primarily to medium-sized and large companies, which
we define as those with over 500 employees or $50 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high willingness to adopt Internet-based
strategies and solutions. We tailor our professional services to meet the
specific needs of these clients. No individual customer accounted for more
than 10% of our total revenues for the year ended December 31, 1998.
For Internet solutions, clients typically begin by establishing a basic Web
site and then implement increasingly powerful business solutions, which can
include business-critical, fully integrated Intranets or Extranets costing
several million dollars. Our strategy is to provide clients with services at
all stages of their adoption of Internet solutions. We target clients whose
Internet technology and marketing communications consulting needs will result
in projects which will generate $250,000 to $5,000,000 in revenues.
Knowledge Management
In order to provide clients with more effective services and solutions, we
aggregate and redeploy the best methodologies, technologies and creative work
delivered by our consulting offices. We believe that our knowledge management
system provides our consulting offices with a competitive advantage by giving
them efficient, real-time access to these assets, allowing them to leverage
the capabilities of our entire operation in their efforts on behalf of each
client. This centrally managed resource is made available to the consulting
offices through USWeb/CKS Central, our secure Intranet.
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Within USWeb/CKS Central, we have constructed a project registry database in
which each client engagement is summarized and registered, enabling each
consulting office to rapidly find which offices have performed certain types
of work. This project registry is used to facilitate the real-time
distribution of engagement activity to those consulting offices best equipped
to serve the client.
We have also established an executive briefing program that enables our
consulting offices to provide their key clients with executive seminars,
solution demonstrations and discussions with our senior executives. These
sessions provide key client decision makers with first-hand experience on the
ways Internet solutions can significantly improve business processes.
In each area where methodologies, technologies and content are aggregated,
we have implemented policies to ensure that confidential or proprietary client
information and assets are accessible only by properly authorized personnel
and not disclosed to unauthorized parties.
Marketing
Our marketing efforts are dedicated to demonstrating the benefits of
Internet solutions, and the proven effectiveness of our organization in
providing such solutions, to key decision makers in client organizations. We
believe that a strong USWeb/CKS brand provides our consulting offices with a
competitive advantage over those Internet professional services firms whose
brands may not be as well known or may not convey the same focused message of
competence, security and results. Our marketing programs are also highly
scalable because most advertising campaigns and marketing tools are developed
by our corporate marketing group and can be delivered to all of the consulting
offices without requiring significant additional expenses.
Our marketing program includes the following initiatives:
Enhance USWeb/CKS Brands. The continued strengthening of the USWeb/CKS
brands is crucial to the achievement of our objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. Our brand development programs are designed to
reinforce the message that we are a national company with a local presence
that can provide a complete range of services to build and deploy business
solutions and that we have a proven track record of doing so. We are
continuing to build and differentiate our brands through the use of publicity
campaigns that include Internet, print and radio advertising; national
seminars and executive briefings; Internet broadcasts; extensive marketing
tools and educational "white papers"; and co-marketing programs with strategic
partners.
Generate Client Leads. Our marketing campaigns are intended to generate
client leads for our consulting offices in several ways. In addition, we have
established a national account program to help manage the accounts of clients
with multiple locations and direct service fulfillment to the consulting
office best situated by geography and specialty to meet the client's needs.
Develop Marketing and Sales Tools for Consulting Offices. We have developed
a toolkit of marketing and sales materials to be used by consulting offices in
their business generation efforts. These materials include brochures, reprints
of articles, fact sheets, white papers, summary "success stories," PR
handbooks, business development guides and client presentation templates and
technologies. These materials are designed to increase the effectiveness of
the sales and marketing efforts of our consulting offices by providing them
with centralized expert advice and consistent, professional marketing tools.
Strategic Relationships
We have entered into, and intend to continue entering into, strategic
relationships with a limited number of leading Internet hardware, software and
content companies. We believe that these relationships, which typically are
non-exclusive, enable us to deliver clients more effective solutions with
greater efficiency because the strategic relationships provide us with the
opportunity to gain early access to leading-edge technology,
10
<PAGE>
cooperatively market products and services with leading technology vendors,
cross-sell additional services and gain enhanced access to vendor training and
support. We also believe that these relationships are important because they
leverage the strong brand and technology positions of these market leaders.
We have strategic relationships with Intel, Microsoft, Hewlett-Packard,
Pandesic, Sun Microsystems and Reuters. Our contractual agreements with these
parties do not cover the entire scope of the strategic relationship and are
typically terminable at will by either party. In the event that any strategic
relationship is discontinued, either in connection with termination of an
agreement or otherwise, our business, results of operations and financial
condition may be materially adversely affected.
In early 1998, we assisted in the formation of HyCurve, Inc., formerly USWeb
Learning, Inc., a separate company with the mission to become the leading
provider of education and certification services relating to Internet
technologies to address the shortage of technology professionals. HyCurve,
Inc. licensed the USWeb brands from us and we contributed certain training
materials. In April 1998, we made a minority equity investment in HyCurve,
Inc. and added management experience through board representation.
Operations
Our organization includes offices throughout the United States and in
several countries outside the United States. Each consulting office is
responsible for providing professional services to its clients, either alone
or in conjunction with one or more other offices. Client sales, engagement
pricing, and staffing decisions for each office are generally made by the
managers of the office, although our executive officers take an active role in
directing the activities of all consulting offices.
Our headquarters, in the San Francisco Bay Area, provides consulting offices
with operational support in financial management and reporting, human
resources, office administration, and management performance improvement
tools. Our headquarters manages our marketing campaigns, the strategic
relationships with partner companies, and the acquisition program. Finally,
our headquarters maintains USWeb/CKS Central, our Intranet and the company's
primary channel for enterprise-wide interaction and communication. We
developed and maintain USWeb/CKS Central in-house. USWeb/CKS Central provides
consulting offices with rapid, secure and efficient online access to each
other and to all of our centrally managed resources, such as the project
registry, sales and marketing tools, vendor information and operational
assistance. We believe that USWeb/CKS Central is both scalable and critical to
our strategy of strengthening our position as a leading Internet professional
services firm because USWeb/CKS Central is the primary mechanism by which we
are able to aggregate and redeploy the best strategic, technical and creative
work developed by the consulting offices.
Competition
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. We
expect competition to persist, intensify and increase in the future. Our
competitors can be divided into several groups: computer hardware and service
vendors such as IBM, Compaq and Hewlett-Packard; advertising and media
agencies such as Foote, Cone & Belding and Ogilvy & Mather; Internet
integrators and Web presence providers such as iXL, Organic Online, Modem
Media, Poppe Tyson and Proxicom; large information technology consulting
service providers such as Andersen Consulting, Cambridge Technology Partners
and EDS; telecommunications companies such as AT&T and MCI; Internet and
online service providers such as America Online, ICG Netcom and UUNet; and
software vendors such as Lotus, Microsoft, Novell and Oracle. Although only a
few of these competitors have to date offered a full range of Internet
professional services, several have announced their intention to offer
comprehensive Internet technology solutions.
In the market for integrated marketing communications, our competitors
include national and regional advertising agencies as well as specialized and
integrated marketing communication firms. With respect to new
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<PAGE>
media, many national advertising agencies have internally developed or
acquired new media capabilities. In addition, there are a growing number of
new competitors that either provide integrated or specialized services (e.g.,
corporate identity and packaging, advertising services or World Wide Web site
design) or are technologically proficient, especially in the new media arena.
We believe that the principal competitive factors in our market are
strategic expertise, technical knowledge and creative skills, brand
recognition, reliability of the delivered solution, client service and price.
Most of our current and potential competitors have longer operating histories,
larger installed client bases, longer relationships with clients and
significantly greater financial, technical, marketing and public relations
resources than we have and could decide at any time to increase their resource
commitments to our market. In addition, the market for Internet solutions is
relatively new and subject to continuing definition, and, as a result, the
core business of certain of our competitors may better position them to
compete in this market as it matures. Competition of the type described above
could materially adversely affect our business, results of operations and
financial condition.
There are relatively low barriers to entry into our business. For example,
we have no significant proprietary technology that would preclude or inhibit
competitors from entering the Internet professional services or integrated
marketing communications services market. We expect to face additional
competition from new entrants into the market in the future. Existing or
future competitors could develop or offer services that provide significant
performance, price, creative or other advantages over those offered by us.
Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which competitors may be
larger and have greater financial and other resources than we have.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition.
Employees
As of December 31, 1998 we had 1,960 employees, of which 140 were located in
our corporate facilities in Cupertino, San Francisco, and Santa Clara,
California, and 1,820 were located in consulting offices. The combined
headquarters employees included 26 in sales and marketing and 104 in finance
and administration. None of our employees is represented by a labor union. We
have experienced no work stoppages and believe our relationship with our
employees is good. Competition for qualified personnel in the industry in
which we compete is intense. We believe that our future success will depend in
part on our continued ability to attract, hire or acquire and retain qualified
employees.
Executive Officers of the Company
The executive officers of the Company, and their ages as of December 31,
1998, are as follows.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark Kvamme................... 38 Chairman of the Board
Robert Shaw................... 50 Chief Executive Officer
Tobin Corey................... 38 President
Carolyn Aver.................. 39 Executive Vice President, Chief Financial
Officer, Secretary
Sheldon Laube................. 48 Executive Vice President and Chief Technology
Officer
</TABLE>
Mr. Mark Kvamme became Chairman of the Board and a director of USWeb/CKS
upon consummation of the USWeb-CKS merger in December 1998. In 1989, Mr.
Kvamme became a Partner in CKS Group and from 1991 until December 1998 served
as the Chairman of its Board of Directors and Chief Executive Officer. Prior
to joining CKS Group, Mr. Kvamme held management and marketing positions at
Wyse Technology, a
12
<PAGE>
terminal and personal computer manufacturer, International Solutions, Inc., a
computer products distributor, and Apple Computer, a personal computer
manufacturer.
Mr. Robert W. Shaw joined USWeb in November 1998 as Chief Executive Officer
and a director. Prior to joining USWeb, Mr. Shaw served as Executive Vice
President of Worldwide Consulting Services and Vertical Markets of Oracle
Corporation since February 1997, and Senior Vice President of Worldwide
Applications and Services of Oracle Corporation from August 1995 to January
1997. From June 1992 to July 1995, Mr. Shaw served as Senior Vice President of
Global Services of Oracle Corporation. Prior to joining Oracle Corporation,
Mr. Shaw served as a Vice President of the West Coast Information Systems
group of Booz-Allen & Hamilton from June 1989 to June 1992.
Mr. Tobin Corey co-founded the Company in December 1995 and has served as
its President since June 1996 and as a Director since April 1998. Prior to
June 1996, Mr. Corey served as its Executive Vice President, Marketing. From
1994 to December 1995, Mr. Corey served as Vice President of Marketing for the
NetWare Products Division of Novell. From 1991 through 1994, Mr. Corey served
as Director of Marketing for the Desktop Division of Novell.
Ms. Carolyn Aver joined the Company in May 1998 as the Company's Executive
Vice President, Chief Financial Officer and Secretary. From May 1997 to May
1998, Ms. Aver was Vice President and Chief Financial Officer of BackWeb
Technologies, an Internet technology company. Prior to joining BackWeb
Technologies, Ms. Aver served as Vice President and Chief Financial Officer of
ParcPlace-Digitalk from March 1993 to May 1997. Ms. Aver was also employed by
AutoDesk, Inc. from October 1984 to March 1993 where she served in various
capacities including Controller, Chief Financial Officer and Vice President,
Finance.
Mr. Sheldon Laube co-founded the Company and has served as its Executive
Vice President and Chief Technology Officer since January 1996. From July 1995
through January 1996, Mr. Laube served as Chief Technology Officer for Novell.
Prior to joining Novell, Mr. Laube was employed by Price Waterhouse LLP as a
partner and served as Director of Information and Technology from 1986 to May
1995.
ITEM 2. PROPERTIES
Our principal headquarters facility occupies approximately 27,100 square
feet under lease in Santa Clara, California. We have recently entered into a
lease for a 75,000 square foot building in San Francisco, a portion of which
we intend to use for our core executive staff beginning in mid-1999. All
company-owned offices also lease their facilities. We believe our facilities
currently under lease, together with space available for lease, are adequate
to meet our current needs. No facilities have been identified for acquisition
in connection with potential acquisition candidates, and we do not anticipate
acquiring property or buildings in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On November 5, 1998, a putative class action lawsuit captioned Wilson v. CKS
Group, Inc., et al., was filed in the United States District Court for the
Northern District of California against CKS Group and three of its former
officers and directors. The complaint alleges that during the period March 20,
1997 to November 7, 1997 (the "Class Period"), the defendants violated the
Securities Exchange Act and the SEC rules and regulations thereunder by
issuing false and misleading statements about CKS Group's operations, revenues
and earnings which allegedly inflated CKS Group's reported revenues, earnings
and stock price. The complaint further alleges that those who purchased CKS
Group's stock did so at artificially inflated prices. The plaintiff seeks to
recover damages in an unspecified amount (together with interest and
attorneys' fees) on behalf of all purchasers of CKS Group Common Stock during
the Class Period. Discovery in the case has not yet begun. USWeb/CKS believes
that this lawsuit is without merit and intends to defend this action
vigorously. We do not believe that the outcome of the stockholder class action
described above is likely to be material to us.
13
<PAGE>
On September 15, 1998, U S WEST filed a complaint against USWeb/CKS and one
of its licensees in the United States District Court for the District of
Nebraska, alleging claims under federal and state law for trademark
infringement, trademark dilution, and unfair competition (the "Nebraska
Action"). U S West filed an Amended Complaint on October 5, 1998. U S West
seeks to enjoin all use by the Company of "USWeb." On March 4, 1999, the
Company filed a motion to dismiss U S West's Amended Complaint. On March 3,
1999, the Company filed a complaint against U S West in the United States
District Court for the Northern District of California, seeking a declaration
that the Company's use of "USWeb" does not infringe upon, dilute, or otherwise
violate any valid rights of U S West (the "California Action"). Discovery has
not yet begun in the Nebraska Action or the California Action. USWeb/CKS
believes that the Nebraska Action is without merit and intends to defend this
action vigorously.
As is typical for companies in our business and of our size, we are from
time to time the subject of lawsuits. In addition to the lawsuits described
above, a number of legal proceedings are presently pending. Certain of such
proceedings may be covered under insurance policies or indemnification
agreements. Based upon information presently available, we believe that the
final outcome of pending proceedings should not materially harm our business,
financial condition or results of operations. However, due to the inherent
uncertainties of litigation, there is a risk that the outcome of pending or
any future litigation could materially harm our business, financial condition
or results of operations.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
USWeb/CKS Common Stock, $0.001 par value, has been traded on the Nasdaq
National Market System under the symbol USWB since December 5, 1997. Prior to
that, there was no public market for our Common Stock. The table below shows
high and low per share closing prices for USWeb/CKS Common Stock for the
period from December 5, 1997 through December 31, 1998. Price data reflect
actual transactions, but do not reflect mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 High Low
----------------------------------- ------ --------
<S> <C> <C>
Fourth Quarter............................................. $27.75 $ 7.875
Third Quarter.............................................. $29.25 $ 8.4375
Second Quarter............................................. $36.75 $17.1875
First Quarter.............................................. $23.00 $10.125
<CAPTION>
Fiscal Year Ended December 31, 1997
-----------------------------------
<S> <C> <C>
Fourth Quarter (from December 5, 1997)..................... $13.13 $ 8.50
</TABLE>
The trading price of our Common Stock has been and in the future could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of new services or business acquisitions by USWeb/CKS
or its competitors, the gain or loss of client accounts, changes in estimates
of revenues or earnings by securities analysts, changes in the mix of revenues
derived by USWeb/CKS from new projects as compared to other projects and other
events or factors. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price of many technology-oriented companies and that often
have been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations could lower the market price of
USWeb/CKS Common Stock. The trading prices of many high technology and
Internet-related companies' stocks, including our Common Stock, are at or near
their historical highs and reflect price/earning ratios substantially above
historical norms. The trading price of USWeb/CKS Common Stock could fall
significantly below its current level.
As of March 23, 1999, we had approximately 890 stockholders of record.
We currently intend to retain future earnings, if any, to fund the
development and growth our business and therefore do not anticipate paying
cash dividends within the foreseeable future. Any future payment of dividends
will be determined by our Board of Directors and will depend on the our
financial condition, results of operations and other factors deemed relevant
by the Board of Directors.
During 1998, we issued the following unregistered securities:
1. On January 22, 1998, we issued 42,237 shares of Common Stock in a private
placement to Advanced Video Communications, Inc. in connection with a
strategic relationship. This issuance was made in reliance on Section 4(2) of
the Securities Act.
2. On February 27, 1998, we issued an aggregate of 151,310 shares of its
Common Stock in a private placement to four shareholders of InnoMate Online
Marketing GmbH and a related company in connection with the acquisition of
both companies. This issuance was made in reliance on Regulation S promulgated
under the Securities Act.
3. On March 12, 1998, we issued an aggregate of 196,605 shares of Common
Stock in a private placement to 27 investors in connection with the
acquisition of Xcom Corporation. This issuance was made in reliance on Section
4(2) of the Securities Act.
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<PAGE>
4. On April 28, 1998, we issued warrants for an aggregate of 246,302 shares
of Common Stock in a private placement to 50 investors in connection with the
acquisition of Ikonic Interactive, Inc. This issuance was made in reliance on
Section 4(2) of the Securities Act.
5. On May 21, 1998, we issued warrants to purchase 1,600,000 and 500,000
shares of Common Stock at an exercise price of $22.50 and $25.43 per share,
respectively, to NBC Multimedia, Inc. Warrants to purchase 1,050,000 shares
are exercisable at any time prior to their expiration on November 21, 1999. If
the agreement is cancelled by NBC Multimedia, Inc. before May 2002, USWeb/CKS
can cancel the warrants to purchase the remaining 1,050,000 shares or, if the
warrants have been previously exercised, can repurchase them. Issuance of
warrants to purchase Common Stock was made in reliance on Section 4(2) of the
Securities Act.
6. On December 23, 1998, we issued an aggregate of 151,717 shares of Common
Stock in a private placement to 2 investors in connection with the acquisition
of Synergetix Systems Integration, Inc. This issuance was made in reliance on
Section 4(2) of the Securities Act.
7. During 1998, an aggregate of 374,406 shares were issued to approximately
185 investors for purchase price increases for previously completed
acquisitions in which the Company issued restricted securities.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements, notes thereto and other financial information included elsewhere
herein. See Note 2 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues........................ $28,992 $43,656 $66,389 $114,302 $ 228,600
------- ------- ------- -------- ---------
Cost of revenues:
Services...................... 18,440 28,842 41,323 74,695 146,251
Provision for loss on
contract..................... -- -- -- -- 9,994
Stock compensation (1)........ -- -- -- 2,420 13,037
------- ------- ------- -------- ---------
Total cost of revenues...... 18,440 28,842 41,323 77,115 169,282
------- ------- ------- -------- ---------
Gross profit.................... 10,552 14,814 25,066 37,187 59,318
------- ------- ------- -------- ---------
Operating expenses:
Marketing, sales and support.. 608 932 14,963 23,374 27,761
General and administrative.... 4,957 7,304 12,633 27,739 44,694
Acquired in-process technology
(1).......................... -- -- -- 9,472 25,508
Stock compensation (1)........ -- -- -- 6,698 31,760
Amortization of intangible
assets (1)................... -- -- 74 12,963 74,538
Merger and integration costs
(2).......................... -- -- -- -- 28,822
Impairment of goodwill........ -- -- -- -- 11,079
------- ------- ------- -------- ---------
Total operating expenses........ 5,565 8,236 27,670 80,246 244,162
------- ------- ------- -------- ---------
Income (loss) from operations... 4,987 6,578 (2,604) (43,059) (184,844)
Interest income, net............ 121 296 2,271 1,706 4,302
Impairment of investee carried
at cost........................ -- -- -- (4,000) --
------- ------- ------- -------- ---------
Income (loss) before income
taxes.......................... 5,108 6,874 (333) (45,353) (180,542)
Provision for income taxes...... 192 1,065 3,026 5,317 7,739
------- ------- ------- -------- ---------
Net income (loss)............... $ 4,916 $ 5,809 $(3,359) $(50,670) $(188,281)
======= ======= ======= ======== =========
Net income (loss) per share (3):
Basic......................... $ 0.69 $ 0.42 $ (0.15) $ (1.73) $ (3.07)
======= ======= ======= ======== =========
Diluted....................... $ 0.51 $ 0.34 $ (0.15) $ (1.73) $ (3.07)
======= ======= ======= ======== =========
Weighted average shares
outstanding (3)
Basic......................... 7,112 13,764 21,803 29,262 61,329
======= ======= ======= ======== =========
Diluted....................... 9,639 16,898 21,803 29,262 61,329
======= ======= ======= ======== =========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash equivalents and short-term
investments............................ $4,314 $4,817 $60,565 $86,397 $101,186
Total assets............................ 3,056 3,626 103,023 225,711 403,174
Working capital......................... 20,596 23,659 50,919 89,680 98,882
Debt and lease obligations, long-term
portion................................ 446 496 1,161 1,111 1,377
Mandatorily Redeemable Convertible
Preferred Stock........................ -- -- 16,200 -- --
Stockholders' equity.................... 5,244 6,350 48,437 161,331 299,872
</TABLE>
- ---------------------
(1) Non-cash acquisition-related charges incurred as a result of the Company's
acquisition program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1, 2 and 9 of
Notes to Consolidated Financial Statements.
(2) Merger and integration charges include direct transaction costs, primarily
for financial advisory and professional fees, and other costs associated
with combining operations of USWeb Corporation and CKS Group.
(3) See Note 1 of Notes to Consolidated Financial Statements for a description
of per share computation and weighted average shares outstanding
computation.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of USWeb Corporation (which is also known as and referred to as
"USWeb/CKS") should be read in conjunction with the Company's consolidated
financial statements (including notes) that appear later in this document.
The following discussion contains forward-looking statements about matters
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions, as well as financial trends.
The discussion also includes cautionary statements about these matters. You
should read the cautionary statements made below as being applicable to all
related forward-looking statements wherever they appear in this document.
USWeb/CKS' actual results could differ materially from those discussed below.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
Overview
USWeb/CKS is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions, advertising and branding services,
and related services to businesses. USWeb/CKS has built a network of
consulting offices and what we believe to be one of the most recognized brands
for Internet professional services. USWeb/CKS offers a comprehensive range of
services to deliver Internet solutions designed to improve clients' business
processes. We provide Internet professional services including strategy
consulting, analysis and design, technology development, systems
implementation and integration, audience development and maintenance. We also
provide consulting services in the areas of strategic corporate and product
positioning, corporate identity and product branding, new media, environmental
design, packaging, collateral systems, advertising, direct marketing, consumer
and trade promotions and media placement services.
On December 17, 1998, USWeb Corporation completed its merger with CKS Group,
Inc. ("CKS Group") in a transaction accounted for as a pooling of interests.
Accordingly, our historical financial statements have been presented to
combine the historical consolidated financial statements of USWeb Corporation
and CKS Group for all periods presented. Under terms of the merger agreement,
each outstanding share of CKS Group common stock was exchanged for 1.5 shares
of USWeb Corporation common stock.
USWeb Corporation was incorporated in December 1995. From the date of its
incorporation to March 31, 1997, our operating activities related primarily to
recruiting personnel, raising capital, and conducting business as a franchisor
of Internet professional services firms. Each such firm that entered into a
franchise agreement with us was designated an "Affiliate." In March 1997, we
entered into its last Affiliate agreement and do not expect to enter into any
additional Affiliate agreements. In the first quarter of 1997, we initiated
the second phase of its corporate development strategy and began to acquire
Internet professional services firms, starting with some of the Affiliates. To
date, USWeb/CKS has derived its revenues from a combination of service
revenues generated by its USWeb/CKS-owned offices and fees paid by its
Affiliates. Revenues from USWeb/CKS-owned offices represented approximately
99% of total USWeb/CKS revenues for the years ended December 31, 1996, 1997
and 1998.
CKS Group was founded in 1987 as Cleary Communications and initially
concentrated on the development and implementation of marketing plans and
programs. Over the last several years, CKS Group developed its vision as an
integrated marketing communications company utilizing both traditional
marketing disciplines, such as product branding and advertising, as well as
advanced technology solutions and new media including Internet development,
Intranet development, database architecture and enterprise systems
integration.
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<PAGE>
Prior to the combination with USWeb Corporation, CKS Group's fiscal year
ended on November 30. In recording the business combination, and to conform
the companies' fiscal year ends, CKS Group's financial statements as of and
for the years ended November 30, 1996 and 1997 have been combined with USWeb
Corporation's consolidated financial statements as of and for the years ended
December 31, 1996 and 1997. For the year ended December 31, 1998, CKS Group's
consolidated financial statements for the nine-months ended August 31, 1998,
and for the three-months ended December 31, 1998, have been combined with
USWeb Corporation's consolidated financial statements for the year ended
December 31, 1998. Accordingly, CKS Group's results of operations for the
month of September 1998 have been excluded from the results of operations of
the combined company. CKS Group's net loss of $1.5 million for the month of
September 1998 has been recorded in stockholder's equity.
Acquisitions
In 1996, we began to acquire selected Internet, marketing communications and
related technology services firms. We transitioned from a franchise-based
business model to one based on USWeb/CKS-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing
professional services and facilitate their growth by furnishing needed working
capital.
USWeb/CKS typically determines the purchase price of each acquisition
candidate based on strategic fit, geographic coverage, historical revenues,
profitability, financial condition and contract backlog, and our qualitative
evaluation of the candidate's management team, operational scalability and
customer base. USWeb/CKS typically acquires suitable candidates through
mergers in exchange for shares of our Common Stock, cash, or a combination of
both. Generally, with respect to past domestic acquisitions, at least fifty
percent of the shares to be issued are deposited into a one-year escrow (or
otherwise deferred) and the remaining shares are delivered to the acquired
company's shareholders. The acquired company is valued again, typically at
each of six and twelve months after acquisition, and additional shares are
issued to the acquired company or escrowed shares are returned to USWeb/CKS
depending on whether the valuation has increased or decreased. After all such
purchase price adjustments have been made, all shares remaining in escrow are
issued to the acquired company's shareholders. USWeb/CKS expects to continue
using this valuation and payment methodology for most of its future
acquisitions; however, in certain situations USWeb may use other methodologies
as appropriate. We may increasingly use cash to pay for acquisitions and, in
particular, intends to increase its use of cash in international acquisitions.
Of the 41 acquisitions completed by USWeb and CKS Group to date, 38 have
been accounted for as purchase business combinations and three, including the
acquisition of CKS Group, have been accounted for as poolings of interests.
For each purchase business combination to date a portion of the purchase price
is allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective fair values on the acquisition
date. Identifiable intangible assets include:
. amounts allocated to in-process technology and immediately charged to
operations,
. amounts allocated to completed technology and amortized on a straight-
line basis over the estimated useful life of the technology generally
from six months to one year,
. amounts allocated to workforce in place and amortized on a straight-line
basis over the estimated period of benefit, which ranges from twelve to
forty-two months, and
. amounts allocated to goodwill and amortized on a straight-line basis over
twelve months to twenty years.
The results of operations of an acquired entity are consolidated with those
of USWeb/CKS as of the date USWeb/CKS acquires effective control of the
entity, which may occur prior to the formal legal closing of the transaction
and the physical exchange of acquisition consideration.
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To determine the amounts to be allocated to acquired in-process technology
we used two distinct approaches. For all acquisitions except Gray Peak
Technologies, Inc. ("Gray Peak"), we performed an internal detailed valuation.
For the acquisition of Gray Peak, which was individually significant at the
time it was acquired, we engaged a valuation consultant to perform an
independent valuation of the Gray Peak purchase price including an allocation
of such purchase price to assets acquired and liabilities assumed.
For each acquisition, excluding Gray Peak, we performed a detailed inventory
of existing in-process technology. Such technology consisted primarily of
software objects, which, if successfully developed, could be reused by
USWeb/CKS in various future client engagements. These software objects were
under development as part of client engagements or as independent research
conducted by the acquired companies. We also reviewed the financial forecasts
of the acquired businesses. The future cash flows of the acquired companies
were then allocated between existing software technology, in-process software
technology and as yet undeveloped technology. The value attributed to existing
software and in-process software technology was determined by discounting
future cash flows attributed to such software technology on a tax adjusted
basis using a 25% discount rate. Given the rapidly changing technology and
resulting limited utility of such software, it was estimated that existing
software technology had an estimated life ranging from six months to one year.
Additionally, due to rapidly changing technologies and processes within the
Internet market place, many items under development may be rendered obsolete
prior to completion. Therefore, cash flows beyond a period of 18 months were
attributed entirely to as yet undeveloped software technology and were
excluded from the valuation of existing and in-process software technology.
Remaining costs to complete in-process technology included further coding,
development and testing. The amount of funding necessary to complete the in-
process technology varies by acquisition. In the aggregate, as of the date of
the individual acquisition, we estimated such amount to range between $5
million to $7 million. Should USWeb/CKS fail to complete such in-process
technology, we may not be able to recover costs invested in development of
such technology or realize any anticipated future net cash flows.
Due to the relative size of the Gray Peak acquisition at the time we acquired
it, as well as the different nature of the Gray Peak business compared to our
other acquisitions, we engaged the services of an independent consultant to
assist in the valuation of the purchase price, including options assumed, and
allocation of such purchase price to assets acquired, including intangible
assets. As part of their analysis of the intangible assets acquired, the
consultant reviewed the various research and development projects under
development on the acquisition date. Such in-process development included Gray
Peak's development of a network operating center and voice over Internet
protocol telephony technologies. The total value of the acquisition purchase
price of Gray Peak allocated to in-process technology was $11.1 million or
approximately 12% of the total purchase price of Gray Peak. As this technology
had not reached the stage of technological feasibility and had no alternative
future use, such amount was recognized as an operating expense at acquisition.
As of the date of the Gray Peak acquisition, we estimated that $675,000 of
additional expenditures were necessary to complete the in-process technology
related to the network operating center. Subsequent to the acquisition, of
Gray Peak USWeb/CKS has continued to invest in development of the network
operating center and has only recently begun to generate revenues related to
the providing of network operating center services. However, to date, such
revenue has been limited and has not generated positive cash flows. We expect
that we will need to invest additional funds in further development of the
network operating center technology through the end of 1999.
Internet protocol telephony represents a new technology that allows voice
transmission over Internet lines and connections allowing for long distance
telephone communications at prices much lower than existing long distance
telephone rates. As of the date of the Gray Peak acquisition, we estimated
that $1.1 million of additional expenditures were necessary to complete the
Internet protocol telephony in-process technology. The estimated costs to
complete the technologies consisted entirely of unique software and process
development and excluded any hardware costs. After the aquisition of Gray
Peak, USWeb/CKS has continued to invest in development of the Internet
protocol telephony technology, which has not yet begun to generate
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revenues. We expect that we will need to invest additional funds in further
development of the Internet protocol telephony technology between the current
date and the end of 1999. Should the technology fail to achieve feasibility,
we may not recover the costs invested in development of the Internet protocol
telephony technology and may not realize anticipated future net cash flows.
Generally, the employees of acquired companies who become employees of
USWeb/CKS are granted options to purchase shares of USWeb/CKS' Common Stock,
which typically become exercisable over a 36-month period. These options have
an exercise price per share equal to at least the fair market value of
USWeb/CKS Common Stock on the date of grant. Additional options generally are
granted at the revaluation dates if the target company's formula-based
valuation increases. In most cases, each optionee is also given the right to
receive a stock bonus at the time an option is granted. The stock bonus vests
at the same rate as the corresponding option and is equal in value to the
aggregate exercise price of this option. The stock bonus is payable at the
earlier of three years from the date of grant or, to the extent vested, upon
termination of employment. The stock bonus amount is amortized ratably over a
36-month period and recorded as compensation expense. This charge is
identified as "Stock Compensation" and allocated to either cost of revenues or
operating expenses depending on whether the optionee is acting in a service
delivery or administrative capacity.
During the year ended December 31, 1998, options for our Common Stock were
exchanged for outstanding vested options for the acquired entity's Common
Stock only with respect to the acquisitions of Gray Peak, Ikonic Interactive,
Inc. ("Ikonic"), and CKS Group, Inc. In the acquisitions of Gray Peak and
Ikonic, which were accounted for as purchase business combinations, the value
of such options was determined using the Black-Scholes option-pricing model
and included in the determination of purchase price. For transactions in which
option vesting was accelerated as a result of the merger transaction, the
vested options were required to be exercised prior to acquisition and the
resultant target company shares exchanged for our Common Stock. Options
granted to new employees with exercise prices equal to the fair value of the
Company's Common Stock on the date of grant in exchange for future services
are accounted for in accordance with Accounting Principles Board Opinion No.
25, with no compensation expense recognized in our consolidated financial
statements. Options granted to consultants with non-variable terms are valued
on the date of grant using the Black-Scholes option pricing model. The
resulting compensation cost is allocated to cost of revenues or operating
expenses depending on whether the optionee is acting in a services delivery or
administrative capacity.
To capitalize on the growth opportunities for a newly acquired consulting
office, USWeb/CKS generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb/CKS network. The capacity utilization rates of these new
employees are initially not as high as those of seasoned employees because of
the time spent on training and professional development. Consequently,
USWeb/CKS expects that the cost of service revenues as a percentage of service
revenues of an integrated office will generally increase during the first
three months following such integration. We believe that this investment in
training and professional development will contribute to its ability to meet
its growth targets.
The successful implementation of USWeb/CKS' acquisition strategy depends on
its ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
those of the Company. USWeb/CKS may not be able to do so. Moreover, in
pursuing acquisitions USWeb/CKS may compete with companies with similar
acquisition strategies, certain of which competitors may be larger and have
greater financial and other resources than USWeb/CKS. Competition for these
acquisition targets could also result in increased prices for acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions also involve a number of other risks, including adverse effects
on USWeb/CKS' reported operating results from increases in goodwill
amortization, acquired in-process technology, stock compensation expense and
increased compensation expenses resulting from newly hired employees, the
diversion of management attention, risks associated with the subsequent
integration of
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acquired businesses, potential disputes with the sellers of one or more
acquired entities and the failure to retain key acquired personnel. Client
satisfaction or performance problems with an acquired firm could also have a
material adverse impact on the reputation of USWeb/CKS as a whole, and any
acquired subsidiary could significantly under-perform relative to USWeb/CKS'
expectations. For all of these reasons, USWeb/CKS' pursuit of an overall
acquisition strategy or any individual completed, pending or future
acquisition could harm USWeb/CKS' business, results of operations and
financial condition. To the extent USWeb chooses to use cash consideration in
the future to pay for all or part of any acquisitions, USWeb may be required
to obtain additional financing. Such financing may be unavailable on favorable
terms, if at all.
Strategic Alliance
In May 1998, USWeb Corporation entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance, we
were awarded a multi-year contract where revenues earned under the contract
are expected to approximate $11.0 million. In connection with the strategic
alliance, we issued warrants to NBC allowing them to purchase 1,600,000 and
500,000 shares of our Common Stock at $22.50 and $25.43 per share,
respectively. Warrants to purchase 1,050,000 shares are exercisable at any
time prior to their expiration in November 1999 (the "Fixed Warrants"). If the
agreement is cancelled by NBC Multimedia, Inc. before May 2002, USWeb/CKS can
cancel the warrants to purchase the remaining 1,050,000 shares or, if the
warrants have been previously exercised, can repurchases them (the "Variable
Warrants"). The warrants were initially valued at $12.6 million. Of the total
value ascribed to the NBC warrants, $6.3 million was attributable to the Fixed
Warrants and recorded as part of stock compensation in operating expenses.
Because the inclusion of the value of the Variable Warrants as a sales
discount over the life of the NBC contract will result in an overall loss on
the contract, an accrual of $10.0 million was provided in the year ended
December 31, 1998 to recognize this loss. The Variable Warrants are subject to
future revaluation at each balance sheet date through the date the related
cancellation or repurchase rights lapse.
As a result of the purchase accounting adjustments, the stock compensation
charges and the charges associated with the NBC warrants described above,
USWeb/CKS has incurred significant non-cash expenses. For example, for the
year ended December 31, 1998, stock compensation expense included in cost of
revenues totaled $13.0 million, stock compensation expense included in
operating expenses totaled $31.8 million (including the $6.3 million
associated with warrants issued to NBC) and amortization of intangible assets
totaled $74.5 million, all of which were related to the acquisition of
USWeb/CKS-owned offices. In addition, USWeb/CKS has recognized an aggregate
cost of $25.5 million for acquired in-process technology related to the
acquisitions it completed during the year ended December 31, 1998. USWeb/CKS
expects these acquisition-related non-cash expenses to continue on a basis
corresponding with operation of the acquisition program.
Sources of Revenues and Revenue Recognition
USWeb/CKS consolidates the financial statements of acquired entities
beginning on the date USWeb/CKS assumes effective control of those entities.
Revenues primarily consist of fees from consulting services engagements
(including both time-and-materials and fixed-price engagements). We provide
Internet professional services including strategy consulting, analysis and
design, technology development, systems implementation and integration,
audience development and maintenance. We also provide strategic corporate and
product positioning, corporate identity and product branding, new media,
environmental design, packaging, collateral systems, advertising, direct
marketing, consumer and trade promotions and media placement services.
Revenues from time-and-materials engagements are recognized as incurred and
revenues from fixed-price engagements are recognized using the percentage-of-
completion method. Billable rates vary by the service provided and
geographical region. Although a majority of engagements are currently
performed on a time-and-materials basis, USWeb/CKS intends to increase the
percentage of its engagements that are
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based on a fixed price. The pricing, management and execution of individual
engagements are the responsibility of the consulting office that performs or
coordinates the services.
Classification of Costs
Cost of revenues include direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues. The
technology, sales, marketing and administrative costs of each USWeb/CKS-owned
office are classified as operating expenses. Corporate expenses are primarily
classified as operating expenses. Marketing and sales expenses include product
and service research, advertising, brand name promotions and lead-generation
activities, as well as the salary and benefits costs of the personnel in these
functions. General and administrative expenses include administration,
accounting, legal and human resources costs.
Results of Operations
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Percent of
Revenue
------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues................................................ 100% 100% 100%
--- --- ---
Cost of revenues:
Services.............................................. 62 65 64
Provision for loss on contract........................ -- -- 4
Stock compensation.................................... -- 2 6
--- --- ---
Total cost of revenues.............................. 62 67 74
--- --- ---
Gross profit............................................ 38 33 26
--- --- ---
Operating expenses:
Marketing, sales and support.......................... 23 20 12
General and administrative............................ 19 24 20
Acquired in-process technology........................ -- 8 11
Stock compensation.................................... -- 6 14
Amortization of intangible assets..................... -- 11 33
Merger and integration costs.......................... -- -- 13
Impairment of goodwill................................ -- -- 5
--- --- ---
Total operating expenses............................ 42 70 107
--- --- ---
Loss from operations.................................... (4) (38) (81)
Interest income, net.................................... 3 1 2
Impairment of investee carried at cost.................. -- (3) --
--- --- ---
Loss before income taxes................................ (1) (40) (79)
Provision for income taxes.............................. 5 5 3
--- --- ---
Net loss................................................ (5)% (45)% (82)%
=== === ===
</TABLE>
Revenues. Total revenues increased $47.9 million or 72% from 1996 to 1997
and increased $114.3 million or 100% from 1997 to 1998. These increases
resulted from an increase in the number and relative size of client
engagements we have undertaken as well as revenue recognized resulting from
acquisitions we have completed during the respective periods. Revenue
recognized related to acquisitions completed during the years ended December
31, 1997 and 1998 was $34.4 million and $46.8 million, respectively. USWeb/CKS
recognizes revenues related to fixed fee for service projects using the
percentage of completion method based
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on the ratio of costs incurred to total estimated project costs. USWeb/CKS
updates its estimated costs on each project monthly. Fees and expenditures in
excess of billings represent the costs incurred and anticipated profits earned
on projects in progress in excess of amounts billed, and are recorded as an
asset. Billings in excess of fees and expenditures represent amounts billed in
excess of costs incurred and estimated profits earned, and is recorded as a
liability. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is accrued for the
excess.
We generally generate higher profit margins when a greater percentage of our
services are performed by full-time employees rather than independent
consultants. Accordingly, USWeb/CKS actively monitors and manages its level of
full-time and temporary employees as compared to independent consultants to
ensure that future projects are adequately staffed. In certain instances,
USWeb/CKS has made a strategic decision to incur the incremental costs of
independent consultants to staff growth in projects rather than increase the
number of full-time employees until such time as USWeb/CKS has determined that
the increased revenue levels are sustainable.
We anticipate that revenues in future periods will vary depending on our
internal growth and management of growth, and as a result of any acquisitions
and the integration of acquired firms.
Cost of Revenues. Cost of revenues increased $35.8 million or 87% from 1996
to 1997 and increased $92.2 million or 120% from 1997 to 1998. These increases
primarily result from increases in the number and relative size of client
engagements we have undertaken as well as cost of revenue resulting from
acquisitions we have completed during the respective periods. Cost of revenue
recognized related to acquisitions completed during the years ended December
31, 1997 and 1998 was $20.3 million and $31.8 million, respectively. Included
in cost of revenues for the year ended December 31, 1998, is a provision for
contract loss of $10.0 million related to the NBC warrants, discussed above.
We anticipate that cost of revenues will increase in absolute dollars as a
result of internal growth and as a result of any acquisitions we may complete.
Marketing, Sales and Support Expenses. Sales and marketing expenses
increased $8.4 million or 56% from 1996 to 1997 and increased $4.4 million or
19% from 1997 to 1998. These increases resulted from the consolidation of
additional Internet consulting businesses acquired during the respective
periods and from increases in personnel to support the growth of our
operations, and were partially offset by decreases in marketing expenses
resulting from our transition away from an affiliate franchising program.
Sales and marketing expenses recognized related to acquisitions completed
during the years ended December 31, 1997 and 1998 were $5.3 million and $6.2
million, respectively. During the year ended December 31, 1997, we recognized
a charge in the amount of $1.3 million related to the discounted sale of
Common Stock to a strategic partner contemporaneously with our initial public
offering. We anticipate that sales and marketing expenses will increase in
future periods in absolute dollars as we continue to pursue an aggressive
brand building strategy and continue to acquire and consolidate the results of
additional Internet consulting firms.
General and Administrative Expenses. General and administrative expenses
increased $15.1 million or 120% from 1996 to 1997 and increased $17.0 million
or 61% from 1997 to 1998. These increases were primarily attributable to
increases resulting from the consolidation of the results of operations of
acquired businesses as well as increases in personnel and overhead costs to
support the internal growth of our operations. General and administrative
expenses recognized related to acquisitions completed during the years ended
December 31, 1997 and 1998 were $7.0 million and $5.6 million, respectively.
Included in general and administrative expenses during the year ended December
31, 1997, is $1.1 million of severance-related costs associated with
USWeb/CKS' decision to discontinue its program for attracting new affiliates.
USWeb/CKS believes that the absolute dollar level of general and
administrative expenses will increase in future periods as a result of
increased staffing and as a result of the acquisition of additional Internet
professional services firms.
Acquired In-Process Technology. Acquired in-process technology results from
our acquisition program. Acquired in-process technology expenses were $9.5
million in 1997 and increased $16.0 million or 169% to $25.5 million during
1998. The acquired in-process technology had not reached the stage of
technological
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feasibility as of the date of acquisition and had no alternative future use.
Accordingly, such amounts were charged to operations in the period the
respective acquisitions were consummated. The amount of acquired in-process
technology, if any, will fluctuate in future periods based upon the nature and
timing of future acquisitions.
Stock Compensation. Stock compensation expense results primarily from stock
bonuses awarded to employees of acquired companies, as well as from stock
options granted with exercise prices below the fair market value of our Common
Stock on the date of grant. Stock compensation expense is classified as cost
of revenue or operating expense depending upon the classification of the
respective employees. Such expenses are recognized ratably over the related
vesting period, which is generally three years. Stock compensation expense
totaled $9.1 million in 1997 and increased $35.7 million or 392% to $44.8
million during the year ended December 31, 1998. USWeb/CKS anticipates that
such amounts will increase in the near term as recent stock awards vest
contemporaneously, and will fluctuate in future periods based upon the nature
and timing of future acquisitions and related stock and option awards.
Amortization of Intangible Assets. Amortization of intangible assets
consists primarily of amortization of purchased technology, workforce in place
and goodwill resulting from our various acquisitions. Amortization of
intangible assets totaled $13.0 million in 1997 and increased $61.6 million or
475% to $74.5 million during the year ended December 31, 1998. Amortization
periods range from six months to twenty years. Amortization of intangible
assets will fluctuate in future periods based upon the nature and timing of
future acquisitions.
Merger and Integration Costs. We completed our merger with CKS Group on
December 17, 1998. Costs directly associated with the merger aggregating $28.8
million were charged to operations upon consummation of the merger. Such costs
included $19.6 million in consulting and investment banking fees, which
included the fair value of certain warrants granted to consultants; legal,
accounting, printing and other professional fees totaling $3.7 million; lease
termination and related costs aggregating $2.9 million; severance and
retention costs of $1.8 million, and other costs totaling $0.8 million.
USWeb/CKS anticipates that it will incur additional merger and integration
costs in the first quarter of 1999 related to costs that, under existing
accounting literature, could not be accrued as of December 31, 1998. Such
costs are expected to consist primarily of additional costs associated with
severance and retention of employees, branding and moving expenses.
Impairment of Goodwill. In December 1998, in connection with the renewal of
an employment arrangement with a key employee of one of our subsidiaries, the
Company estimated that the future undiscounted net cash flows from this
subsidiary would be significantly less than in prior periods and less than the
carrying amount of the goodwill recorded in connection with this subsidiary's
acquisition. Accordingly, based upon the provisions of this employment
arrangement and the expected future net discounted cash flows, we recorded an
impairment charge totaling $11,079 in operating expenses in the quarter ended
December 31, 1998.
Impairment of Investee. During June 1997, we recognized an impairment charge
totaling $4.0 million, representing the total amount of its cost basis
investment in an independent Internet consulting firm. In assessing the level
of impairment we considered the entity's current financial position, recent
operating results and the likelihood of recovery of some or all of its
investment in the event of liquidation, sale or merger.
Interest income, net. Other income (expense) consists primarily of interest
earned on our holdings in cash, cash equivalents and short-term investments,
offset by interest expense incurred primarily on our capital lease facility.
The increase in other income in 1998 as compared to 1997 was primarily
attributable to an increase in interest income due to higher average cash,
cash equivalents and marketable securities balances. These higher balances
resulted from USWeb Corporation's initial public offering completed in
December of 1997 and its follow-on offering completed in April 1998.
Provision for Income Taxes. Provision for income taxes represents the actual
provision for income taxes of CKS Group prior to the merger with USWeb
Corporation. No provision for federal and state income taxes
26
<PAGE>
was recorded by USWeb Corporation for the years ended December 31, 1996, 1997
and 1998 because USWeb Corporation incurred net operating losses in each of
those periods.
Net Loss. Net losses for the years ended December 31, 1996, 1997 and 1998
were $3.4 million, $50.7 million and $188.3 million, respectively. The
increase in the net loss was primarily attributable to increases in costs
directly associated with our acquisition program, including acquired in-
process technology, amortization of intangible assets, and stock compensation;
a goodwill impairment charge in 1998; and merger and integration costs related
to the merger with CKS Group in 1998.
Liquidity and Capital Resources
At December 31, 1998, USWeb/CKS had approximately $101.2 million in cash,
cash equivalents and short-term investments compared to $86.4 million at
December 31, 1997. USWeb/CKS invests its cash predominantly in instruments
that are highly liquid, are investment grade, and generally have maturities of
less than one year, with the intent to make such funds readily available for
operating purposes.
Cash used in operating activities was $11.8 million for the year ended
December 31, 1998, and was primarily due to the net loss of $188.3 million,
offset by non-cash charges of $182.9 million (which includes primarily a
provision for loss on contract, stock compensation, acquired in-process
technology, amortization of intangible assets, depreciation and amortization
of fixed assets and leasehold improvements and a goodwill impairment charge),
an increase in accounts receivable of $11.1 million resulting from an increase
in the number and size of client engagements being entered into and offset by
an increase in accrued expenses of $12.8 million. Cash used in operating
activities was $20.1 million for the year ended December 31, 1997 and was
primarily due to the net loss from operations of $50.7 million, offset by non-
cash charges of $42.9 million, including an impairment provision of $4.0
million, representing the cost basis in Utopia, Inc.
Cash used in investing activities was $32.4 million for the year ended
December 31, 1998. Purchases (net of sales and maturities) of investments in
marketable securities during the period were $11.7 million and capital
expenditures totaled $9.7 million. Capital expenditures have generally
comprised purchases of computer hardware and software as well as leasehold
improvements related to leased facilities, and are expected to increase in
future periods. Cash used in investing activities was $5.1 million for the
year ended December 31, 1997, and was primarily due to capital expenditures.
Cash provided by financing activities was $51.9 million for the year ended
December 31, 1998. In April 1998, USWeb Corporation completed a follow-on
public offering of its Common Stock, resulting in net proceeds to the Company
of $31.2 million. Additionally, various stock option, employee stock purchase
and Common Stock warrant holders exercised or purchased their stock options,
employee shares and Common Stock warrants, offset by Common Stock repurchases,
resulting in net proceeds of $11.0 million. Cash provided by financing
activities was $69.2 million for the year ended December 31, 1997, and was
primarily due to the issuance of Mandatorily Redeemable Preferred Stock (which
converted to shares of Common Stock upon the close of USWeb Corporation's
initial public offering in December 1997), resulting in net proceeds of $16.3
million.
We currently have no material commitments other than those under operating
lease agreements and costs incurred in connection with the recently completed
merger with CKS Group, which including investment banking fees, professional
fees and severance and retention payments. We have experienced a substantial
increase in its capital expenditures and operating lease arrangements since
its inception, which is consistent with increased staffing, and anticipates
that this will continue in the future. Additionally, USWeb/CKS will continue
to evaluate possible acquisitions of or investments in businesses, products,
and technologies that are complementary to those of USWeb/CKS, which may
require the use of cash. USWeb/CKS believes that existing cash, investments,
and borrowings available under its credit facilities will be sufficient to
fund its requirements for working capital and capital expenditures for at
least the next 12 months. However, USWeb/CKS may sell additional equity or
debt securities or seek additional credit
27
<PAGE>
facilities if it believes such actions would be a better way to fund
acquisition-related or other costs. Sales of additional equity or convertible
debt securities would result in additional dilution to our stockholders. We
may need to raise additional funds sooner in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. USWeb/CKS' future liquidity and
capital requirements will depend upon numerous factors, including the success
of our existing and new service offerings and competing technological and
market developments.
Factors Affecting Operating Results
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside our control. These factors
include:
. the level of demand for Intranet, Extranet and Web site development;
. the productivity of our consulting offices;
. our success in finding and acquiring suitable acquisition candidates;
. our ability to attract and retain personnel with the necessary strategic,
technical and creative skills required to service clients effectively;
. the cost of advertising and related media;
. the amount and timing of expenditures by our clients for Internet
professional services;
. client budgetary cycles;
. the amount and timing of capital expenditures and other costs relating to
the expansion of the our operations;
. the introduction of new products or services by us or our competitors;
. pricing changes in the industry;
. technical difficulties with respect to the use of the Internet;
. economic conditions specific to Internet technology usage; and
. general economic conditions.
As a strategic response to changes in the competitive environment, we may from
time to time make certain pricing, service, technology or marketing decisions
or business or technology acquisitions that could have a material adverse
effect on our business, results of operations and financial condition.
USWeb/CKS may also experience seasonality in its business in the future,
resulting in diminished revenues to the Company as a consequence of decreased
demand for Internet professional services during summer and year-end vacation
and holiday periods. Due to all of these reasons, in future periods our
operating results may fall below the expectations of securities analysts and
investors. Our stock price would then be likely to decline significantly and
rapidly.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
the corresponding derivative gains or losses be either reported in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivatives. We have not yet
determined the effect, if any, of adopting SFAS 133, which will be effective
for our fiscal year 2000.
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During 1998 the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance for determining whether computer software is internal-use software
and on accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. USWeb/CKS has not yet
determined the impact, if any, of adopting SOP 98-1, which will be effective
for USWeb's year ending December 31, 1999.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on our results of operations, financial position or cash
flows.
Year 2000
Many computer systems and software and electronic products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. In addition, certain systems and products do not correctly
process "leap year" dates. As a result, in the next 14 months, computer
systems and software ("IT Systems") and other property and equipment not
directly associated with information systems ("Non-IT Systems"), such as
elevators, phones, other office equipment used by many companies, including
USWeb/CKS, may need to be upgraded, repaired or replaced to comply with such
"Year 2000" requirements and "leap year" requirements.
USWeb/CKS has conducted an internal review of most of its internal corporate
headquarters IT Systems, including finance, human resources, Intranet
applications and payroll systems. We have contacted most of the vendors of the
IT Systems in our internal corporate headquarters to determine potential
exposure to Year 2000 issues and have obtained certificates from such vendors
assuring Year 2000 compliance. Although most of our principal internal
corporate headquarters IT Systems are Year 2000 compliant, some of our
internal systems, including our Windows NT operating system and internal
networking systems are not Year 2000 compliant or have not been evaluated.
USWeb/CKS has not yet made an assessment of the status of the IT Systems at
our subsidiaries or the Non-IT Systems for the corporate headquarters and our
subsidiaries.
USWeb/CKS has appointed a task force (the "Task Force") to oversee Year 2000
and leap year issues. The task force is expected to review all IT Systems and
Non-IT Systems that have not been determined to be Year 2000 and leap year
compliant and will attempt to identify and implement solutions to ensure such
compliance. USWeb/CKS expects to evaluate its systems for Year 2000 and leap
year compliance in accordance with the DISC PD2000-1 Year 2000 compliance
standards established by the British Standards Institute. To date, USWeb/CKS
has spent an immaterial amount to remediate its Year 2000 issues. USWeb/CKS
presently estimates that the total cost of addressing its Year 2000 and leap
year issues will be immaterial. These estimates were derived utilizing
numerous assumptions, including the assumption that we have already identified
our most significant Year 2000 and leap year issues and that the plans of our
third-party suppliers will be fulfilled in a timely manner without cost to us.
However, these assumptions may not be accurate, and actual results could
differ materially from those anticipated.
USWeb/CKS has been informed by most of its suppliers that they will be Year
2000 compliant by the Year 2000. Any failure of these third parties systems to
timely achieve Year 2000 compliance could significantly harm our business,
financial condition, results of operations and prospects.
USWeb/CKS has not determined the state of compliance of certain third-party
suppliers of services such as phone companies, long distance carriers,
financial institutions and electric companies. The failure of any one of these
services could severely disrupt our ability to carry on its business as well
as disrupt the business of our customers.
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Failure to provide Year 2000 and leap year compliant business solutions to
their customers or to receive such business solutions from their suppliers
could result in liability to the Company or otherwise significantly harm our
business, results of operations, financial condition and prospects.
Furthermore, USWeb/CKS believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products and services such as those offered by USWeb/CKS, which
could significantly harm our business, results of operations and financial
condition. USWeb/CKS could be affected through disruptions in the operation of
the enterprises with which USWeb/CKS interacts or from general widespread
problems or an economic crisis resulting from noncompliant Year 2000 systems.
Despite our efforts to address the Year 2000 effect on its internal systems
and business operations, such effect could result in a severe disruption of
its business or could significantly harm our business, financial condition or
results of operations. USWeb/CKS has not developed a complete contingency plan
to respond to any of the foregoing consequences of internal and external
failures to be Year 2000 and leap year compliant, but expects the Task Force
to develop such a plan.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" as defined under
securities laws. These forward-looking statements can be identified by the use
of terminology such as "believes," "expects," "anticipates," "plans," "may,"
"will," "projects," "continues," "estimates," "potential," "opportunity" and
so on. These forward-looking statements may be found in the sections entitled
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of this document. Such forward-
looking statements are subject to risks and uncertainties. Our actual results
or experience could differ significantly from the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "--Risk Factors," below, as well as those discussed elsewhere in
this document. Also, we can make no express or implied representation or
warranty as to the attainability of the projected or estimated financial
information referenced or set forth in this document, or as to the accuracy or
completeness of the assumptions from which such projected or estimated
information is derived. Projections or estimations of USWeb/CKS's future
performance are necessarily highly uncertain. You should not expect that
actual results will be the same as projected results. They could be
significantly worse.
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RISK FACTORS
This section identifies risks that USWeb/CKS faces. If we are unable to
prevent these and other events that have a negative effect from occurring,
then USWeb/CKS will suffer. Negative events are likely to decrease our
revenues, increase our costs, make our financial results poorer and decrease
our financial strength. Negative events are also likely to cause our stock
price to decline.
We Have Only A Limited Operating History And Are In An Early Stage Of
Development. USWeb Corporation was founded in December 1995 and is still
evolving rapidly. Because we were founded only recently, USWeb/CKS has only a
limited operating history on which to base an evaluation of our business and
prospects. Companies in an early stage of development frequently encounter
extra risks, expenses and difficulties as they grow and evolve. These risks,
expenses and difficulties apply particularly to USWeb/CKS because its markets,
Internet professional services and integrated marketing communications
services, are new and rapidly evolving. Two particular challenges USWeb/CKS
faces in its early stage of development are, one, an evolving business model
and, two, the management of both internal and acquisition-based growth. To
address these risks, USWeb/CKS must continue to develop the strength and
quality of its operations, expand its network of consulting offices, enhance
its brands, respond to competitive developments and continue to attract,
retain and motivate qualified employees. If USWeb/CKS fails to do any of these
things well, the company may perform poorly and our stock price could decline
significantly and rapidly.
We Have An Accumulated Deficit Of Over $247 Million. USWeb Corporation has
operated with a net loss since it was formed and its expenses have always
exceeded its revenues. As of December 31, 1998 it had an accumulated deficit
of $247.2 million. Although USWeb/CKS has experienced revenue growth in recent
months, we may not be able to sustain that growth or those levels of revenue.
You should not expect that operating results in the future will be the same as
in the past. They could be significantly worse. In addition, we intend to
continue to invest heavily in acquisitions, infrastructure development and
marketing. As a result, USWeb/CKS expects to continue to incur substantial
operating losses through at least 1999.
Our Quarterly Results May Fluctuate. USWeb/CKS is likely to experience
significant fluctuations in our quarterly operating results. Some important
factors affecting operating results are:
. the productivity of our consulting offices
. our success in finding and acquiring suitable acquisition candidates
. our ability to attract and retain personnel with the strategic, technical
and creative skills required to service clients effectively
. the relative mix of lower cost full-time employees versus higher cost
independent contractors
. the amount and timing of expenditures by our clients for Internet
professional services and integrated marketing communications
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations
. the introduction of new products or services by USWeb/CKS or its
competitors
. technical difficulties with respect to the use of the Internet or in
responding to customer's requests
Many of the factors affecting USWeb/CKS's operating results are outside of
USWeb/CKS's control. Some of these factors are:
. the level of demand for intranet, extranet and Web site development
. the cost of advertising and related media
. client budgetary cycles
. pricing changes in the industry
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. economic conditions specific to Internet technology usage
. government regulation and legal developments regarding the use of the
Internet
. general economic conditions
Also, we often must commit to expenses in advance of knowing what revenues
for a particular period will be. As a result, fluctuations in revenues can
cause amplified fluctuations in other financial measures, such as profit or
loss. We attempt to set expense levels on the basis of anticipated revenues,
but such financial planning is difficult for a number of reasons. One
important reason is that, because of USWeb/CKS's limited operating history and
the rapid growth and emerging nature of USWeb/CKS's markets, our historical
financial data is of limited value in planning future operating expenses.
Another reason is that our revenues are derived primarily from consulting fees
for Internet solution engagements, which are difficult to forecast accurately.
Because expenses are relatively fixed, any shortfall in revenues will hurt
USWeb/CKS's business, results of operations and financial condition and may
cause our stock price to decline significantly and rapidly.
We intend to increase expenses significantly to expand operations and
enhance USWeb/CKS's brand names. We also plan to increase other operating
expenses as required to support the operations of our consulting offices. If
USWeb/CKS experiences a shortfall in customer demand, or if our expenses
precede or are not rapidly followed by increased revenues, USWeb/CKS's
business, results of operations and financial condition, as well as our stock
price, may suffer significantly and rapidly.
USWeb merged with CKS Group in December 1998. CKS Group's business has
historically grown at a lower rate than USWeb's and, although USWeb has
experienced recent growth in revenue in absolute terms, USWeb's growth rate
has slowed in recent periods. USWeb/CKS is expected to have an overall lower
growth rate in the future than we have historically both because of CKS
Group's historically lower growth rate and the decrease in growth rate
associated with the increased size of the company.
In addition, in order to compete effectively in its market, USWeb/CKS may
need to take actions that will change its business in significant ways. For
example, we may change pricing or service offerings, make key decisions about
technology directions or marketing strategies, or acquire additional
businesses or technologies. USWeb/CKS may also experience seasonality in
demand for its services. Any of these actions or effects could hurt
USWeb/CKS's business, results of operations and financial condition. Operating
results may fall below the expectations of securities analysts and investors.
In such event, the trading price of our Common Stock would likely fall and
investors might sue the company, causing increased litigation expenses and,
possibly, the payment of large damages or settlement fees.
Our Success Depends On Our Ability To Manage Our Growth. USWeb/CKS's rapid
growth has placed a significant strain on our managerial, operational,
financial and other resources. This strain is likely to continue. As of
December 31, 1998, USWeb/CKS had over 1,960 employees. We believe that we will
need to hire additional personnel to support our business. Our future success
will depend, in part, upon our ability to manage our growth effectively.
Managing growth will require that we continue to implement and improve our
operational, administrative and financial and accounting systems and controls
and to expand, train and manage our employee base.
We Face Risks Associated With Integrating Our Acquisitions. A key component
of our growth strategy is the acquisition of Internet professional service
firms, particularly in locations outside the United States. We also intend to
pursue strategic acquisitions in the U.S. The successful implementation of
this strategy depends on our ability to identify suitable acquisition
candidates, acquire those companies on acceptable terms and integrate their
operations successfully with those of USWeb/CKS. Acquisitions involve a number
of risks, including:
. adverse effects on operating results from increases in goodwill
amortization, acquired in-process technology, stock compensation expense
and increased compensation expense resulting from newly hired employees
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. the diversion of management attention from other aspects of the business
. disputes with the sellers of one or more acquired entities
. failure to retain key acquired personnel
. client satisfaction or performance problems with an acquired entity
. diminishing the value of the USWeb/CKS brands or reputation if an
acquired company turns out to be a poor performer
. the assumption of most or all of the liabilities of the acquired
companies, some of which may be hidden, significant, or not reflected in
the final acquisition price.
Because we have completed over 40 acquisitions, we are currently facing all
of these challenges. And since we are a relatively new company, our ability to
meet these challenges has not been proven.
If we choose to use cash for acquisitions in the future, it may need to
obtain additional financing, and such financing may not be available on
favorable terms, or at all. If, as planned, USWeb/CKS issues stock to complete
future acquisitions, existing stockholders will experience further ownership
dilution.
We Face Risks Associated With The USWeb-CKS Group Merger. USWeb Corporation
merged with CKS Group in December 1998. The combined company will need to
integrate:
. management, technical, creative and other personnel
. technical and creative service offerings
. sales and marketing efforts
. financial, accounting and other operational controls, procedures,
information systems and policies
The integration process will be further complicated by the need to integrate
widely dispersed operations and distinct corporate cultures. Because this is
the largest merger of which USWeb and CKS Group have been a part and we have
no experience with a merger of this magnitude, stockholders should expect some
difficulties. The integration process will require the dedication of
management and other personnel and will distract their attention from the
conduct of day-to-day business activities. In addition, the integration
process will require the development of new service offerings and the pursuit
of other business acquisition opportunities. These factors, in turn, could
interrupt or cause a loss of momentum in the pre-merger activities of either
or both companies or lead customers to defer, reduce or cancel purchase
decisions or to select other vendors. Our business may also be disrupted by
employee departures or reductions in employee productivity due to uncertainty
during the integration process. The integration of USWeb and CKS Group will be
made more difficult by the large number of other relatively small businesses
recently acquired by the two companies, many of which the companies are still
in the process of integrating.
USWeb Corporation and CKS Group merged expecting to gain beneficial
operating synergies. This expectation is based on a number of assumptions,
including that customers want Internet professional services and marketing
communications from a single vendor, that the two companies will be able to
sell their services to one another's customers, that the combined business
will be a more desirable partner for Fortune 500 accounts and that there will
be cost saving opportunities. The merged company's success will also depend on
the ability of its executive officers and senior management to operate
effectively, both independently and as a group. Some members of management,
including Robert Shaw as Chief Executive Officer, have recently joined or will
have new roles in the merged company, which will add to the challenges of
integration. If USWeb Corporation is unable to integrate with CKS Group or
previously acquired companies well, we will be less successful and our stock
price could decline. We may compete with other companies with similar growth
strategies, and some of these competitors may be larger and have greater
financial and other resources than USWeb/CKS. Competition for acquisition
targets could result in increased prices for acquisition targets and a
diminished pool of companies available for acquisition.
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The Market In Which We Operate Is Highly Competitive And Has Relatively Low
Barriers To Entry. The market for Internet professional services and
integrated marketing communications is relatively new, intensely competitive,
rapidly evolving and subject to rapid technological change. USWeb/CKS's
competitors include:
. large computer hardware, software and service vendors, such as IBM
. established advertising and media agencies, such as Ogilvy & Mather
. large information technology consulting service providers, such as
Cambridge Technology Partners
. telecommunications companies, such as AT&T
. major Internet and online service providers, such as America Online
. other Internet integrators and Web presence providers, such as UUNet
Some of these competitors offer a full range of Internet professional
services and integrated marketing communications and several others have
announced their intention to do so. In addition, there are relatively low
barriers to entry into USWeb/CKS's business (for example, no patent
protection). We expect to face additional competition from new entrants into
the market. Furthermore, many of our current and potential competitors have
longer operating histories, longer relationships with clients and
significantly greater financial, technical, marketing and public relations
resources than we do.
We Need To Recruit And Retain Skilled Professionals, Who Are In Short
Supply. USWeb/CKS's business of delivering professional services is labor
intensive. Accordingly, USWeb/CKS's success depends in part on its ability to
identify, hire, train and retain highly skilled consulting professionals.
There is a shortage of these skilled people, which is likely to continue for
some time, and competition to hire them is intense. USWeb/CKS's performance is
also particularly dependent on the continued services and performance of its
executive officers and other key employees. The loss of the services of any of
its executive officers or other key employees could hurt USWeb/CKS.
As We Issue Additional Stock, All Other Stockholdings Will Be
Diluted. USWeb/CKS has a large number of stock options and warrants
outstanding to purchase USWeb/CKS's Common Stock. Many of these options and
warrants were issued at a time when the stock price was lower than it is now
and therefore have exercise prices significantly below the current market
price. When and if these options and warrants are exercised, there will be
further dilution to stockholders. We expect to continue our acquisition
program during the coming year and to issue additional stock, options and
warrants in the future to pay for other acquisitions. USWeb/CKS may also be
required to issue additional shares, stock options and stock bonuses to the
shareholders and employees of acquired companies at each of six and twelve
months after acquisition. For these reasons, our acquisition program will
result in further substantial ownership dilution to investors. This dilution
is in addition to dilution that occurs from employee stock option and purchase
programs and financing activities.
We Need To Maintain And Strengthen The USWeb/CKS Brands. USWeb/CKS believes
that maintaining and strengthening our brands are important aspects of its
efforts to attract clients and that the importance of brand recognition will
increase due to the increasing number of companies entering the market for
Internet professional services and integrated marketing communications. If we
fail to promote and maintain its brands, or incurs excessive expenses in an
attempt to promote and maintain its brands, our business, results of
operations and financial condition will suffer and our stock price could
decline.
We Rely Upon Key Strategic Relationships. USWeb/CKS has established a number
of strategic relationships with leading hardware and software companies, some
of which can be terminated on short notice by the parties. Maintenance of
these strategic relationships is based primarily on an ongoing mutual business
opportunity and a good overall working relationship rather than legal
contracts. The loss of any one of these strategic relationships could deprive
USWeb/CKS of the opportunity to gain early access to leading-edge technology,
market products cooperatively with the vendor, cross-sell additional services
and gain enhanced access to vendor training and support.
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Potential Clients May Not Widely Adopt Internet Solutions, And, If They Do,
May Not Outsource Such Projects. The market for USWeb/CKS's services will
depend upon the adoption of intranet, extranet, Web site and Internet
solutions by customers. Some critical unresolved issues concerning the use of
Internet solutions are security, reliability, cost, ease of deployment and
administration and bandwidth of the Internet itself. These issues may affect
the use of such technologies to solve business problems. Some entities would
have to make significant changes in the way they do business to adapt to the
Internet. Even if these issues are resolved, businesses might not elect to
outsource the design, development and maintenance of their intranets,
extranets and Web sites to Internet professional services firms such as
USWeb/CKS.
The Market In Which We Compete Is Subject To Rapid Technological
Change. Technology in the Internet industry changes very rapidly, and
USWeb/CKS's products and services, as well as the skills of our employees,
could become obsolete quickly. Our success will depend, in part, on our
ability to improve our existing services, develop new services and solutions
that address the increasingly sophisticated and varied needs of our current
and prospective clients, and respond to technological advances, emerging
industry standards and practices, and competitive service offerings.
We Face Risks Associated With Our International Operations. We have recently
begun expanding operations into international markets. However, we have only
limited experience in acquiring and managing international consulting offices
and in marketing services to international clients. We expect to incur
significant costs to do both. There are risks inherent in doing business on an
international level that could hurt our business, such as:
. unexpected changes in regulatory requirements which could raise the cost
of doing business, or even prevent doing business, or restrict
USWeb/CKS's ability to remove funds or its investments from a country
. economic downturns more sudden and dramatic than those generally
occurring in the U.S.
. changes in currency exchange rates, which could dramatically increase the
price of acquisitions where cash is used or significantly decrease the
profitability of operations where payment is in local currency
. difficulties in structuring acquisitions to make them similar to previous
U.S. acquisitions
. difficulties in staffing and managing foreign operations
. difficulties in using equity incentives for employees, which USWeb/CKS
relies on heavily but which are often less understood outside the U.S.
. differences in business customs
. longer payment cycles
. problems in collecting accounts receivable
. political instability and the risk of military conflict
We Could Lose Money On Projects Where We Set A Fixed Price. We currently
bill for most of our projects on a "time and materials" basis. However, we
intend to increase the percentage of our work that is billed at a fixed price
and the percentage of revenues from these fixed-price engagements. If we fail
to estimate accurately the resources and time required for a project, to meet
client expectations about the services to be performed, or to complete
projects within budget, we would have cost overruns and, in some cases,
penalties, which could hurt our business.
We Have Limited Control Over The Operations Of Our Franchisees. USWeb/CKS
has entered into franchise agreements with affiliates that manage a small
number of its consulting offices. The operational autonomy granted to each
affiliate through the franchise structure might inhibit our control over our
market presence and the USWeb/CKS brand or enable the affiliate to compete
with company-owned offices for client engagements. Further, despite
implementation of contractual safeguards and insurance against such a
possibility, a court may hold us responsible for some action or liability of
an affiliate. One claim was made
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alleging, among other claims, breach of contract against a former affiliate,
although that claim has been settled.
We Face Risks Associated With Our Intellectual Property. USWeb/CKS regards
its copyrights, trademarks, trade secrets (including our methodologies,
practices and tools), as important to our success. If others infringe or
misappropriate USWeb/CKS' copyrights, trademarks or similar proprietary
rights, our business could be hurt. In addition, although USWeb/CKS does not
believe that we are infringing the intellectual property rights of others,
other parties might assert infringement claims against USWeb/CKS. Such claims,
even if not true, could result in significant legal and other costs and be a
distraction to management. Protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States, so if
USWeb/CKS' business expands into foreign countries, risks associated with
intellectual property will increase.
We Depend On Key Accounts. CKS Group, a company that merged with USWeb
Corporation in December 1998, was dependent on its five largest clients for a
substantial portion of its revenues during its fiscal year ended November 30,
1997. If any of these major clients or any other client of USWeb/CKS that
provides a substantial portion of overall revenue does not remain a
significant customer, there could be an immediate adverse effect on the
company's business. For instance, one of CKS Group's major clients, Barnett
Bank, was acquired during the fourth quarter of 1997 and, as a result,
substantially reduced its level of spending with CKS Group. This reduction in
spending contributed to a significant decline in CKS Group's earnings during
that quarter.
We Face Risks Associated With Year 2000 Compliance. Many currently installed
computer systems and software products are coded to accept only two-digit
entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates.
As a result, throughout 1999, computer systems and software used by many
companies, including customers and potential customers of USWeb/CKS, may need
to be upgraded to comply with such "Year 2000" requirements. Although
USWeb/CKS believes that our principal internal systems are Year 2000
compliant, some systems are not yet certified, and failure to provide Year
2000 compliant business solutions to USWeb/CKS's customers could materially
harm our business. Furthermore, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may reduce funds
available to purchase USWeb/CKS products and services.
We Might Need Significant Additional Capital And Might Not Be Able To Obtain
It. USWeb/CKS's future liquidity and capital requirements will depend upon
numerous factors. Some of these factors are:
. the timing and amount of funds required for or generated by operations,
. the success and duration of USWeb/CKS's acquisition program, and
. unanticipated opportunities.
USWeb/CKS may seek to raise additional funds through public or private
financing, strategic relationships or other arrangements. Such additional
funding may not be available on terms acceptable to USWeb/CKS, or at all.
Furthermore, we may have to sell stock at prices lower than those paid by
existing stockholders, which would result in dilution, or we may have to sell
stock or bonds with rights superior to rights of holders of common stock. Any
debt financing might involve restrictive covenants that would limit our
operating flexibility. Strategic arrangements may require us to relinquish our
rights to certain of our intellectual property. If adequate funds are not
available on acceptable terms, USWeb/CKS may be unable to develop or enhance
our services and products, take advantage of future opportunities, or respond
to competitive pressures.
Changes In The Law Or In Government Regulation Could Hurt Our Business. Due
to the increasing use of the Internet, a number of laws and regulations
concerning the Internet will probably be adopted or changed at the local,
state, national or international levels. Such laws are likely to cover issues
such as user privacy, freedom of expression, pricing of products and services,
taxation, advertising, intellectual property
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rights, information security or the convergence of traditional communications
services with Internet communications. The adoption or change of any such laws
or regulations may decrease use of the Internet, which could in turn decrease
the demand for USWeb/CKS's services or increase the cost of doing business or
in some other manner harm USWeb/CKS's business.
Our Stock Price Is Volatile. The market price of USWeb/CKS' Common Stock has
been and is likely to continue to be volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by USWeb/CKS or our
competitors, changes in financial estimates by securities analysts, overall
equity market conditions or other events or factors. Because our stock is more
volatile than the market as a whole, our stock is likely to be
disproportionately harmed by factors that significantly harm the market, such
as economic turmoil and military or political conflict, even if those factors
do not relate to our business. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been brought against that company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would hurt USWeb/CKS' business.
If We Do Not Perform To Our Clients' Expectations, We Face Potential
Liability. Many of our consulting engagements involve projects that are
critical to the operations of our clients' businesses. Any failure or
inability to meet a client's expectations in the performance of our services
could injure USWeb/CKS's business reputation or result in a claim for
substantial damages. Many of our projects involve use of material that is
confidential or proprietary client information. The successful assertion of
one or more large claims against USWeb/CKS for failing to protect such
confidential information or failing to complete a project properly and on time
could adversely affect USWeb/CKS, even if the insurance we have were to reduce
the immediate effect of the problem.
We Are Involved In Litigation. A lawsuit has been filed against CKS Group, a
company that recently merged with USWeb, and certain of its officers and
directors on behalf of stockholders of CKS Group. The lawsuit alleges
violations of the Securities Exchange Act. USWeb/CKS, as successor to the
liabilities of CKS Group, will be at risk financially in this lawsuit.
USWeb/CKS believes that this lawsuit is without merit and intends to defend
this action vigorously. However, if the lawsuit is successful and insurance
either does not cover the claim or is insufficient in amount to cover amounts
paid in connection with the claim, it could hurt the financial position of
USWeb/CKS. USWeb/CKS is also likely from time to time to be the subject of
lawsuits typically filed against companies of its size and in its industry.
Conflicts Of Interest Between Potential Clients May Reduce Our Business
Opportunities. Conflicts of interest are inherent in certain segments of the
marketing communications industry, particularly in advertising. CKS Group, a
company that recently merged with USWeb Corporation in December 1998, has in
the past, and USWeb/CKS likely will in the future, be unable to pursue
potential advertising and other opportunities because it would mean offering
similar services to direct competitors. In addition, USWeb/CKS risks
alienating existing clients if it agrees to provide services to even indirect
competitors of existing clients. Because such conflicts may jeopardize
revenues generated from existing clients and preclude access to business
prospects, such conflicts could cause the company's operating results to
suffer.
Our Charter Documents Make It Difficult For Another Company To Acquire
USWeb/CKS. Our board of directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the various terms and rights of
those shares without any further action by the stockholders. The rights of
holders of our Common Stock are subject to the rights of the holders of any
such Preferred Stock that may be issued. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of USWeb/CKS. We have no present plans to issue shares of Preferred
Stock. Some provisions of USWeb/CKS's Amended and Restated Certificate of
Incorporation and Bylaws and of Delaware law could delay or make difficult a
merger, tender offer or proxy contest involving USWeb/CKS.
37
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
USWeb/CKS is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business USWeb/CKS establishes
policies and procedures to manage its exposure to fluctuations in interest
rates and foreign currency values.
Interest Rate Risks. USWeb/CKS' exposure to interest rate risks results
primarily from our short-term investments. To minimize exposure to interest
rate risks, we invest predominately in instruments that are highly liquid, are
of investment grade and generally have maturities of less than one year. We
intend to make such funds readily available for operating purposes. At
December 31, 1998, we had investments with maturities and weighted average
interest rates as follows:
<TABLE>
<CAPTION>
Maturities
--------------
1999 2000
------- ------
<S> <C> <C>
Balance....................................................... $34,182 $2,048
Interest Rate................................................. 5.6% 5.1%
</TABLE>
Foreign Currency Risks. As of December 31, 1998, USWeb/CKS had operating
subsidiaries located in several countries including the United Kingdom,
Germany and France. After December 31, 1998, USWeb/CKS acquired subsidiaries
in Canada and Switzerland. These subsidiaries operate primarily in the
functional currency of their individual countries. As a result, we do not have
exposure to significant foreign currency risk related to the ongoing
operations of these subsidiaries.
We have a foreign currency risk related to one of our acquisitions. Our
acquisitions are typically completed using our Common Stock as consideration
for the acquisitions. Generally, at least fifty percent of the shares to be
issued are deposited into a one-year escrow, and the remaining shares are
delivered to the acquired company's shareholders. The acquired company is
valued again, typically at each of six and twelve months after the
acquisition, and additional shares are issued to the acquired company's
shareholders or escrowed shares are returned to USWeb/CKS, depending on
whether the valuation has increased or decreased. Some acquisitions have been
completed using a cash component, typically denominated in United States
dollars. After December 31, 1998, we completed one acquisition under the
methodology described above, and the acquired company will be valued again in
February 2000. The value of the number of shares of Common Stock that are
potentially issuable in this transaction will be denominated in Swiss Francs.
The value of these shares of Common Stock, assuming financial performance
targets are met, is approximately nine million Swiss Francs.
38
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USWeb Corporation
In our opinion, the accompanying consolidated balance sheet, and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
USWeb Corporation and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
39
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 62,368 $ 64,956
Short-term investments................................... 24,029 36,230
Accounts receivable, net................................. 62,546 89,038
Other current assets..................................... 2,606 9,946
Deferred income taxes.................................... 1,400 637
-------- --------
Total current assets................................... 152,949 200,807
Property and equipment, net................................ 12,051 18,880
Intangible assets, net..................................... 49,247 168,335
Deferred income taxes and other assets..................... 11,464 15,152
-------- --------
$225,711 $403,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 41,084 $ 38,251
Accrued expenses......................................... 17,734 52,908
Deferred revenue......................................... 2,887 4,210
Income taxes payable..................................... -- 3,111
Lease obligations, current............................... 1,564 3,445
-------- --------
Total current liabilities.............................. 63,269 101,925
Lease obligations, non-current............................. 1,111 1,377
-------- --------
64,380 103,302
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred Stock: $0.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common Stock: $0.001 par value; 200,000,000 shares
authorized; 56,108,585 and 70,070,678 shares issued and
outstanding at December 31, 1997 and 1998, respectively. 51 66
Additional paid-in capital............................... 218,702 546,976
Accumulated deficit...................................... (57,422) (247,170)
-------- --------
Total stockholders' equity............................. 161,331 299,872
-------- --------
$225,711 $403,174
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Revenues......................................... $66,389 $114,302 $ 228,600
------- -------- ---------
Cost of revenues:
Services....................................... 41,323 74,695 146,251
Provision for loss on contract................. -- -- 9,994
Stock compensation............................. -- 2,420 13,037
------- -------- ---------
Total cost of revenues....................... 41,323 77,115 169,282
------- -------- ---------
Gross profit..................................... 25,066 37,187 59,318
------- -------- ---------
Operating expenses:
Marketing, sales and support................... 14,963 23,374 27,761
General and administrative..................... 12,633 27,739 44,694
Acquired in-process technology................. -- 9,472 25,508
Stock compensation............................. -- 6,698 31,760
Amortization of intangible assets.............. 74 12,963 74,538
Merger and integration costs................... -- -- 28,822
Impairment of goodwill......................... -- -- 11,079
------- -------- ---------
Total operating expenses..................... 27,670 80,246 244,162
------- -------- ---------
Loss from operations............................. (2,604) (43,059) (184,844)
Interest income, net............................. 2,271 1,706 4,302
Impairment of investee carried at cost........... -- (4,000) --
------- -------- ---------
Loss before income taxes......................... (333) (45,353) (180,542)
Provision for income taxes....................... 3,026 5,317 7,739
------- -------- ---------
Net loss......................................... $(3,359) $(50,670) $(188,281)
======= ======== =========
Net loss per share:
Basic.......................................... $ (0.15) $ (1.73) $ (3.07)
======= ======== =========
Diluted........................................ $ (0.15) $ (1.73) $ (3.07)
======= ======== =========
Weighted average shares
Basic.......................................... 21,803 29,262 61,329
======= ======== =========
Diluted........................................ 21,803 29,262 61,329
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------
Retained
Additional Earnings/ Total
Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 16,981,500 $17 $ 2,809 $ 3,524 $ 6,350
Issuance of Common Stock
warrants............... -- -- 269 -- 269
Tax benefit from
disqualifying
dispositions........... -- -- 926 -- 926
Distributions to
stockholders........... -- -- (499) (4,481) (4,980)
Issuance of Common
Stock, net............. 10,462,000 6 48,449 -- 48,455
Collection of note
receivable............. -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- 30
Stock compensation
expense................ -- -- 146 -- 146
Net loss................ -- -- -- (3,359) (3,359)
---------- --- -------- --------- --------
Balance at December 31,
1996................... 27,724,500 23 52,730 (4,316) 48,437
Tax benefit from
disqualifying
dispositions........... -- -- 3,343 -- 3,343
Distributions to
stockholders........... -- -- -- (2,172) (2,172)
Deferred issuance of
common stock related to
business acquisitions.. -- -- 5,582 -- 5,582
Deferred tax asset
recorded in connection
with taxable pooling of
interests.............. -- -- 9,346 -- 9,346
Repurchase of Common
Stock and cancellation
of note receivable from
stockholder............ (9,000) -- -- -- --
Change in subsidiaries'
fiscal year-ends....... -- -- -- (264) (264)
Exercise of stock
options................ 103,079 -- 500 -- 500
Common Stock issued for
acquired businesses.... 8,201,683 8 46,122 -- 46,130
Issuance of Common
Stock, net............. 7,993,964 8 56,410 -- 56,418
Conversion of
Mandatorily Redeemable
Preferred Stock........ 12,094,359 12 32,478 -- 32,490
Issuance of Affiliate
warrants............... -- -- 150 -- 150
Collection of note
receivable............. -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 10,641 -- 10,641
Net loss................ -- -- -- (50,670) (50,670)
---------- --- -------- --------- --------
Balance at December 31,
1997................... 56,108,585 51 218,702 (57,422) 161,331
Tax benefit from
disqualifying
dispositions........... -- -- 815 -- 815
Common Stock issued for
acquired businesses.... 8,431,898 8 208,872 -- 208,880
Issuance of Common
Stock, net............. 2,302,604 3 35,881 -- 35,884
Change in subsidiary's
fiscal year-end........ -- -- -- (1,467) (1,467)
Exercise of stock
options and warrants... 3,227,591 4 16,920 -- 16,924
Issuance of warrants.... -- -- 27,112 -- 27,112
Stock compensation
expense................ -- -- 38,674 -- 38,674
Net loss................ -- -- -- (188,281) (188,281)
---------- --- -------- --------- --------
Balance at December 31,
1998................... 70,070,678 $66 $546,976 $(247,170) $299,872
========== === ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(3,359) $(50,670) $(188,281)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,444 14,271 81,487
Provision for doubtful accounts............... -- 819 1,280
Provision for loss on contract................ -- -- 9,994
Stock option and warrant costs and expenses... 315 11,891 52,252
Acquired in-process technology................ -- 9,472 25,508
Impairment of goodwill........................ -- -- 11,079
Impairment of investee carried at cost........ -- 4,000 --
Deferred income taxes......................... (1,097) (856) 470
Tax benefit from disqualifying dispositions... 926 3,343 815
Changes in assets and liabilities:
Accounts receivable.......................... (9,932) (23,506) (11,140)
Other assets................................. (739) (1,254) (7,152)
Accounts payable............................. 13,101 13,010 (5,498)
Accrued expenses............................. 6,249 (335) 12,794
Deferred revenue............................. 246 517 574
Income taxes payable......................... (1,253) (847) 3,980
------- -------- ---------
Net cash provided by (used in) operating
activities................................. 5,901 (20,145) (11,838)
------- -------- ---------
Cash flows from investing activities:
Acquisition of property and equipment........... (3,070) (5,103) (9,661)
Cash received (used in) acquisitions............ 55 (12,611) (11,074)
Purchase of investment in affiliate............. (2,850) (1,150) --
Purchase of short-term investments.............. (39,710) (21,175) (95,714)
Proceeds from sales and maturities of short-term
investments.................................... 1,750 34,934 84,026
------- -------- ---------
Net cash used in investing activities....... (43,825) (5,105) (32,423)
------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of Common and Preferred
Stock, net..................................... 59,276 71,957 52,670
Distributions to stockholders................... (4,635) (2,398) --
Proceeds from bank borrowings and notes payable. 500 2,000 --
Repayment of bank borrowings.................... (382) (3,414) (1,349)
Proceeds from collection of notes receivable.... 563 1,400 --
Proceeds from capital lease financing........... 599 431 2,570
Principal payments on capital lease............. (209) (704) (2,002)
------- -------- ---------
Net cash provided by financing activities... 55,712 69,272 51,889
------- -------- ---------
Increase in cash and cash equivalents............ 17,788 44,022 7,628
Change in subsidiares' fiscal year-ends.......... -- (4,259) (5,040)
Cash and cash equivalents, beginning of year..... 4,817 22,605 62,368
------- -------- ---------
Cash and cash equivalents, end of year........... $22,605 $ 62,368 $ 64,956
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Note 1--Nature of Business and Summary of Significant Accounting Policies:
Nature of Business
USWeb Corporation (doing business as USWeb/CKS) and its subsidiaries
("USWeb/CKS" or the "Company") is a leading Internet professional services
firm that provides Internet, intranet, extranet and Web site solutions,
advertising and branding services, and related services to businesses.
USWeb/CKS has built a network of consulting offices and what it believes to be
one of the most recognized brands for Internet professional services.
USWeb/CKS offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company
provides Internet professional services including strategy consulting,
analysis and design, technology development, systems implementation and
integration, audience development and maintenance. The Company also provides
consulting services in the areas of strategic corporate and product
positioning, corporate identity and product branding, new media, environmental
design, packaging, collateral systems, advertising, direct marketing, consumer
and trade promotions and media placement services.
On December 17, 1998, USWeb Corporation ("USWeb") issued 23,428,341 shares
of its common stock for all of the outstanding common stock of CKS Group, Inc.
("CKS Group") based on a conversion ratio of 1.5 shares of the Company's
Common Stock for each share of CKS Group's common stock. The transaction has
been accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position and cash
flows of both USWeb and CKS Group.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. The accompanying
consolidated financial statements have been presented to reflect the
acquisitions accounted for as poolings of interests for all periods presented.
See Note 2.
Investments in business entities in which the Company has an equity interest
of less than 20% and does not have the ability to exercise significant
influence are accounted for using the cost method. At each balance sheet date,
the Company assesses the fair market value of its cost-based investments and
recognizes any identified impairment.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in debt instruments of the U.S.
Government, its agencies, and in high-quality corporate and municipality
issues. The Company considers all highly liquid investments with a remaining
contractual maturity, at the date of their acquisition, of three months or
less to be cash equivalents. All short-term investments are classified as
available-for-sale and are carried at fair value. Any unrealized gains or
losses are reported as a separate component of stockholders' equity when
significant.
44
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets, generally two to seven years. Equipment under capital leases and
leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful lives of the related assets or the remaining lease
terms.
Intangible Assets
Goodwill resulting from the Company's acquisitions of Internet professional
services firms is estimated by management to be primarily associated with the
workforce acquired and technological know how. Accordingly, a significant
portion of the purchase price of each acquisition is considered to relate to
workforce in place. As a result of the rapid technological changes occurring
in the Internet industry and the intense competition for qualified Internet
professionals, goodwill recorded in connection with the Company's acquisitions
of Internet professional services firms is amortized on a straight-line basis
over the estimated periods of benefit, which range from twelve to forty-two
months. Goodwill recorded in connection with the Company's acquisitions of
advertising firms is amortized on a straight-line basis over twenty years. For
certain acquisitions where the Company expects to issue additional shares at
the end of the twelve-month purchase price adjustment periods, amortization
rates have been increased to reflect amortization of the total expected
consideration based upon the estimated fair value of the incremental shares at
the end of the purchase price adjustment periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. In December 1998, the Company determined that an impairment
provision totaling $11,079 was necessary in connection with its acquisition of
an advertising firm and recognized this amount as a charge to operating
expenses in the year ended December 31, 1998. See Note 2.
Completed technologies obtained through acquisition or merger are
capitalized and amortized on a straight-line basis over an estimated benefit
period of six to twelve months.
Costs of in-process technology acquired prior to the achievement of
technological feasibility determined using the working model approach, and any
costs associated with internally developed proprietary technologies prior to
the achievement of technological feasibility, determined using the working
model approach, are expensed in the period incurred.
Revenue Recognition
The Company derives its revenues primarily from consulting service
agreements (including retainer fees, fixed-price and time-and-materials
agreements) and advertising commissions.
Revenues are recognized over the period of each engagement using primarily
the percentage-of-completion method using labor hours incurred as the measure
of progress towards completion. Provisions for contract adjustments and losses
are recorded in the period such items are identified. Deferred revenue
represents amounts billed in advance of services being performed.
Commissions earned from advertising placed with media are generally recorded
as revenue at the time the advertising appears or is broadcast. Commissions
earned for production expenditures and fees derived from other services are
recognized as revenue upon performance of the service.
45
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position ("SOP") 93-7, "Reporting on Advertising Costs." Advertising costs for
the years ended December 31, 1996, 1997 and 1998 totaled $3,223, $4,060 and
$1,562 respectively.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost is recognized based on the difference, if any, on the date
of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
The Company also complies with the provisions of Emerging Issues Task Force
Issue No. 96-18 ("EITF 96-18") with respect to stock options granted to non-
employees who are consultants to the Company. EITF 96-18 requires variable
plan accounting with respect to such non-employee stock options, whereby
compensation associated with such options is measured on the date such options
vest, and incorporates the current air market value of the Company's Common
Stock into the option valuation model.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Net Loss Per Share
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss for the period by the weighted average
number of common shares outstanding during the period. The weighted average
shares used to compute basic net loss per share include outstanding shares of
Common Stock from the date of issuance and shares vested under stock bonus
arrangements computed for each period by dividing cumulative amortization of
deferred compensation expense by the weighted average price of the Company's
Common Stock during the period. The computation excludes (i) for the year
ended December 31, 1997 and 1998, 2,051,000 and 3,682,000 respectively,
equivalent acquisition-related shares held in escrow ("Acquisition Shares"),
(ii) for the years ended December 31, 1996, 1997 and 1998, 4,286,000,
2,830,000 and 1,518,000, respectively, of equivalent shares of Common Stock
subject to repurchase rights ("Restricted Shares") and (iii) for the years
ended December 31, 1996 and 1997, 5,375,000 and 10,278,000, respectively, of
equivalent shares of Mandatorily Redeemable Convertible Preferred Stock
("Preferred Stock") prior to their conversion into Common Stock on December 5,
1997. In addition, the calculation of diluted net loss per share excludes
Common Stock issuable upon exercise of employee stock options and upon
exercise of outstanding warrants, as their effect in all periods presented is
antidilutive.
46
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Financial Instruments and Concentration of Credit Risk
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued
expenses. At December 31, 1997 and 1998 the fair value of these instruments
approximated their carrying values.
The Company's customer base is geographically dispersed and highly
diversified. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral to secure accounts
receivable. Although an allowance for doubtful accounts is maintained, the
Company has not experienced any significant credit losses to date.
The Company is subject to concentrations of credit risk and interest rate
risk related to its short-term investments. The Company's credit risk is
managed by limiting the amount of investments placed with any one issuer,
investing primarily in debt instruments of the US Government and its agencies,
municipal bonds and high quality corporate issues generally with maturities of
one year or less.
Comprehensive Loss
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The Company has no material components of other
comprehensive income (loss) and, accordingly, the Company's comprehensive loss
is the same as its net loss for all periods presented.
Segment Information
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS
131 established standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
The Company has organized its business in a single operating segment,
providing professional services that help its clients define strategies and
ways to build their businesses by combining the expertise of strategy,
Internet technology and marketing communications. Further, the Company derives
the vast majority of its revenue from its operations in the United States.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the Company's fiscal year 2000. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS 133 will not have a material
effect on the financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that entities
capitalize certain costs related to internal-use software once certain
criteria have been
47
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
met. The Company is required to implement SOP 98-1 for the year ending
December 31, 1999. Adoption of SOP-98-1 is expected to have no material impact
on the Company's financial condition or results of operations.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. As USWeb/CKS has expensed
these costs historically, the adoption of this standard is not expected to
have a significant impact on the Company's results of operations, financial
position or cash flows.
Note 2--Acquisitions
During the period from August 1, 1996, to December 31, 1998, the Company
completed the acquisitions of thirty-eight Internet professional services
firms and advertising firms in various transactions accounted for as purchase
business combinations. Collectively, the companies acquired through December
31, 1998 accounted for as purchase business combinations are referred to
herein as the "Acquired Entities." The aggregate purchase price of the
Acquired Entities was approximately $310,100.
The acquisition prices of the Acquired Entities were allocated, on an
entity-by-entity basis, to the assets acquired, including tangible and
intangible assets and liabilities assumed based upon the fair values of such
assets and liabilities on the dates of the acquisitions. Approximately $10,300
of the aggregate purchase price was allocated to identified net tangible
assets consisting primarily of cash, accounts receivable, property and
equipment, and accounts payable. The historical carrying amounts of such
assets approximated their fair values on the dates of acquisition.
Approximately $35,000 of the aggregate purchase price was allocated to in-
process technology. Because such in-process technology had not reached the
stage of technological feasibility at the acquisition dates and had no
alternative future use, these amounts were immediately charged to operations.
Approximately $13,100 of the aggregate purchase price was allocated to
existing technology and is being amortized over its estimated useful life of
six months to one year. Approximately $251,700 of the aggregate purchase price
was allocated to goodwill, primarily workforce in place, and is being
amortized over its estimated useful life of twelve to forty-two months with
respect to the Internet professional services firms, and twenty years with
respect to the advertising firms.
Prior to the combination of USWeb and CKS Group, CKS Group's fiscal year
ended on November 30. In recording the business combination, CKS Group's
consolidated financial statements as of and for each of the two years in the
period ended November 30, 1997 have been combined with USWeb's consolidated
financial statements as of and for each of the two years in the period ended
December 31, 1997.
In 1998, CKS Group changed its fiscal year-end to December 31 to conform to
USWeb's year-end. As a result, an adjustment has been made to stockholders'
equity as of December 31, 1998, to eliminate the effect of including CKS
Group's unaudited results of operations for the month ended September 30, 1998
in the year ended December 31, 1998. CKS Group's unaudited results of
operations for the month ended September 30, 1998, included revenues of $7,893
and a net loss of $1,467.
In December 1998, in connection with the renewal of an employment
arrangement with a key employee of one of the Company's Acquired Entities, the
Company estimated that the future undiscounted net cash flows from this
Acquired Entity would be significantly less than in prior periods. Based upon
the provisions of this employment arrangement and the expected net discounted
cash flows, an impairment charge totaling $11,079 was recorded in operating
expenses in the year ended December 31, 1998.
48
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Between January 31, 1997 and June 17, 1997, CKS Group acquired two entities
in the advertising industry under separate transactions that were accounted
for as poolings of interests (the "CKS Group Acquisitions"). The aggregate
consideration for these transactions was 1,623,599 shares of CKS Group Common
Stock.
The following unaudited pro forma consolidated amounts give effect to the
acquisitions of the Acquired Entities as if they occurred on January 1, 1996
and on January 1, 1997 (or date of inception, if later).
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues............................................ $ 172,397 $ 256,640
========== ==========
Net loss............................................ $ (225,426) $ (177,869)
========== ==========
Pro forma net loss per share:
Basic and diluted................................. $ (5.21) $ (2.66)
========== ==========
Weighted average shares:
Basic and diluted................................. 43,241,000 66,959,000
========== ==========
</TABLE>
The following table sets forth revenues and net income (loss) for acquired
entities that were accounted for as poolings of interests and previously
reported separately:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
USWeb/CKS................................... $ -- $ -- $ 72,648
USWeb....................................... 1,820 19,278 73,086
CKS......................................... 56,951 95,024 82,866
CKS acquired entities....................... 7,618 -- --
-------- -------- ---------
$ 66,389 $114,302 $ 228,600
======== ======== =========
Net income (loss):
USWeb/CKS................................... $ -- $ -- $ (84,149)
USWeb....................................... (13,808) (58,336) (111,532)
CKS......................................... 5,679 7,666 7,400
CKS acquired entities....................... 4,770 -- --
-------- -------- ---------
$ (3,359) $(50,670) $(188,281)
======== ======== =========
</TABLE>
49
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Note 3--Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest............................. $ 121 $ 263 $ 425
Cash paid for income taxes......................... 4,488 1,386 979
Non-cash financing and investing activities:
Common Stock issued for note receivable............ 2,000 -- --
Notes payable converted into Common Stock.......... 957 -- --
Equipment acquired through capital lease........... 288 578 --
Common Stock issued for acquisitions............... 4,997 46,293 208,872
Assumptions of liabilities in acquisition.......... -- 2,146 5,284
Deferred tax asset recorded in connection with
taxable pooling of interests transactions......... -- 9,346 --
</TABLE>
50
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Note 4--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.................................... $58,363 $ 78,746
Unbilled revenues...................................... 6,444 15,533
Less: Allowance for doubtful accounts.................. (2,261) (5,241)
------- --------
$62,546 $ 89,038
======= ========
Property and equipment, net:
Computer equipment..................................... $13,072 $ 25,445
Furniture and fixtures................................. 3,536 3,483
Leasehold improvements................................. 2,991 3,491
------- --------
19,599 32,419
Less: Accumulated depreciation and amortization........ (7,548) (13,539)
------- --------
$12,051 $ 18,880
======= ========
Intangible assets, net:
Goodwill, primarily workforce in place................. $56,572 $239,768
Purchased technology................................... 3,610 13,058
------- --------
60,182 252,826
Less: Accumulated amortization......................... (10,935) (84,491)
------- --------
$49,247 $168,335
======= ========
Accrued expenses:
Compensation and benefits.............................. $ 5,128 $ 14,331
Accrued financing costs................................ 1,450 --
Marketing costs........................................ 1,260 3,458
Professional fees...................................... 1,012 3,953
Merger and related costs............................... -- 17,892
Other.................................................. 8,884 13,274
------- --------
$17,734 $ 52,908
======= ========
</TABLE>
Note 5--Short-Term Investments:
At December 31, 1998, the fair value of the Company's short-term investments
approximated cost. Accordingly, the difference between the short-term
investment portfolio's fair value and its cost has not been presented as a
separate component of stockholders' equity. Information about short-term
investments is as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Commercial paper and corporate bonds........................... $ -- $15,492
Obligations of the U.S. Government and its agencies............ -- 893
Obligations of states and their political subdivisions......... 24,029 15,606
Other debt securities.......................................... -- 4,239
------- -------
$24,029 $36,230
======= =======
</TABLE>
51
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
The contractual maturities of the debt securities were as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Due within one year......................................... $11,329 $34,182
Due after one year through five years....................... -- 2,048
Due after five years through ten years...................... 1,900 --
Due after ten years......................................... 10,800 --
------- -------
$24,029 $36,230
======= =======
</TABLE>
Note 6--Income Taxes:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 2,328 $1,562 $4,108
State............................................ 942 818 2,123
Foreign.......................................... -- 450 (385)
------- ------ ------
Total current.................................. 3,270 2,830 5,846
------- ------ ------
Deferred:
Federal.......................................... (937) (771) 1,020
State............................................ (233) (85) (659)
------- ------ ------
Total deferred................................. (1,170) (856) 361
------- ------ ------
Charge in lieu of taxes attributable to employee
stock option plans................................ 926 3,343 1,532
------- ------ ------
$ 3,026 $5,317 $7,739
======= ====== ======
</TABLE>
52
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................... $ 17,000 $ 19,192
Accounts receivable allowances.......................... 533 2,177
Depreciation............................................ 230 89
Federal benefit of state taxes.......................... -- 190
Basis of assets for tax purposes in excess of book
for taxable pooling transactions....................... 10,280 10,145
Deferred compensation................................... 206 19,562
Benefit and other accruals.............................. 256 7,850
Other................................................... 313 406
-------- --------
Gross deferred tax assets............................. 28,818 59,611
Deferred tax liabilities:...............................
Effect of deferred state taxes........................ -- (1,211)
Change from cash to accrual method of
accounting for income taxes.......................... (278) (156)
-------- --------
Total deferred tax liabilities........................ (278) (1,367)
-------- --------
Net deferred tax assets................................. 28,540 58,244
Valuation allowance..................................... (17,000) (47,139)
-------- --------
$ 11,540 $ 11,105
======== ========
</TABLE>
Deferred tax assets of approximately $47,139 at December 31, 1998 consists
of federal and state net operating loss carryforwards which are subject to
separate return limitations rules and other expenses not currently deductible
for tax purposes. Based on these limitations and a number of factors,
including the lack of a history of profits and the fact that the Company
competes in a developing market that is characterized by rapidly changing
technology, management believes that there is sufficient uncertainty regarding
the realization of $47,139 of deferred tax assets such that a valuation
allowance has been provided.
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1996 1997 1998
------- ----- -----
<S> <C> <C> <C>
Federal statutory tax
rate................... (35.0)% (35.0)% (35.0)%
Partnership benefit..... (514.0) (0.7) --
State income taxes, net
of federal benefit..... 138.0 1.9 0.6
Nondeductible intangible
assets................. -- 23.0 1.4
Change in valuation
allowance.............. 1,451.0 22.0 --
Book loss with no
current benefit........ -- -- 37.0
Other................... (131.0) 0.5 0.3
------- ----- -----
909.0% 11.7% 4.3%
======= ===== =====
</TABLE>
53
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $47,618 and $34,099, respectively, available to
reduce future taxable income, which expire in varying amounts through 2013.
The Company's ability to utilize net operating loss carryforwards and tax
credits are subject to limitations as set forth in applicable federal and
state tax laws. As specified in the Internal Revenue Code, an ownership change
of more than 50% by a combination of the Company's significant stockholders
during any three-year period would result in certain limitations on the
Company's ability to utilize its net operating loss and credit carryforward.
Such a change occurred in December 1997 resulting in a $13,000 annual
limitation.
Note 7--Notes Payable:
In July 1995, the Company entered into a credit agreement with a bank which
allowed for borrowings of up to $4,600, including a $3,000 line of credit, a
$1,000 equipment line of credit, and a $600 term loan to refinance existing
debt. The equipment line of credit and term loan expired during 1997.
Borrowings were secured by all assets of the Company. As of December 31, 1998,
the Company has no amounts outstanding under this line of credit.
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the banks prime lending rate
plus 1% (10.0% at December 31, 1998) and are repayable over a thirty-six month
period. The credit facility is secured by the assets of the Company and
expires on September 29, 2001. In addition, the bank requires the Company to
comply with certain financial covenants relating to profitability and cash
flow ratios. The Company was in compliance with all covenants at December 31,
1998.
In November 1997, the Company obtained a bridge loan facility from a bank.
Under the terms of the facility, the Company borrowed $2,000 (the maximum
amount available), which was secured by substantially all of the Company's
assets. The loan accrued interest at the banks prime rate plus 1%. On December
10, 1997, the Company repaid the outstanding amount.
Note 8--Commitments and Contingencies:
Leases
The Company leases certain office facilities under noncancelable operating
leases. The leases provide for escalating monthly payments that are charged to
operations ratably over the lease term. The leases also provide for the
Company to pay property taxes, insurance and certain other operating costs of
the leased property and generally contain renewal provisions.
54
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Future minimum lease payments under all noncancelable operating and capital
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
------------------------ --------- -------
<S> <C> <C>
1999..................................................... $15,112 $3,547
2000..................................................... 12,498 1,327
2001..................................................... 9,948 285
2002..................................................... 8,663 --
Thereafter............................................... 12,370 --
------- ------
Total minimum payments................................... $58,591 5,159
=======
Less: Amount representing interest....................... (337)
------
Present value of capital lease obligations............... 4,822
Less: Current portion.................................... 3,445
------
Lease obligations, long-term............................. $1,377
======
</TABLE>
Equipment recorded under capital leases is included in Property and
Equipment as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Computers and equipment.................................... $1,234 $3,285
Furniture and fixtures..................................... 154 496
Leasehold improvements..................................... -- 177
------ ------
1,388 3,958
Less: Accumulated depreciation............................. (877) (1,537)
------ ------
$ 511 $2,421
====== ======
</TABLE>
Rent expense for operating leases totaled $2,935, $7,872 and $13,275 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Litigation
As is typical for companies in USWeb/CKS's business and of USWeb/CKS's size,
the Company is from time to time the subject of lawsuits. Management does not
believe that the outcome of any pending litigation is likely to be material to
USWeb/CKS. However due to the inherent uncertainties of litigation, there is a
risk that the outcome of pending or any future litigation could have a
material adverse effect on the Company's business, financial condition, cash
flows, or results of operations.
On November 5, 1998, a putative class action lawsuit was filed in the United
States District Court for the Northern District of California against CKS
Group and three of its officers and directors. The complaint alleges that
during the period March 20, 1997 to November 7, 1997 (the "Class Period"), the
defendants violated the Securities Exchange Act and the SEC rules and
regulations thereunder by issuing false and misleading statements about CKS
Group's operations, revenues and earnings which allegedly inflated CKS Group's
reported revenues, earnings and stock price. The complaint further alleges
that those who purchased CKS Group's stock did so at artificially inflated
prices. The plaintiff seeks to recover damages in an unspecified amount
(together with interest and attorneys' fees) on behalf of all purchasers of
CKS Group Common Stock
55
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
during the Class Period. The Company believes that this lawsuit is without
merit and intends to defend this action vigorously. Certain of such legal
proceedings may be covered under insurance policies or indemnification
agreements. Based upon information presently available, the Company believes
that the final outcome of such proceedings will not have a material adverse
effect upon the Company's business, results of operations or financial
condition.
On September 15, 1998, U S WEST filed a complaint against USWeb/CKS and one
of its licensees in the United States District Court for the District of
Nebraska, alleging claims under federal and state law for trademark
infringement, trademark dilution, and unfair competition (the "Nebraska
Action"). U S West filed an Amended Complaint on October 5, 1998. U S West
seeks to enjoin all use by the Company of "USWeb." On March 4, 1999, the
Company filed a motion to dismiss U S West's Amended Complaint. On March 3,
1999, the Company filed a complaint against U S West in the United States
District Court for the Northern District of California, seeking a declaration
that the Company's use of "USWeb" does not infringe upon, dilute, or otherwise
violate any valid rights of U S West (the "California Action"). Discovery has
not yet begun in the Nebraska Action or the California Action. USWeb/CKS
believes that the Nebraska Action is without merit and intends to defend this
action vigorously.
Note 9--Stockholders' Equity:
Authorized Stock
The Company is authorized to issue 200,000,000 shares of $0.001 par value
Common Stock and 1,000,000 shares of $0.001 par value Preferred Stock. The
Board of Directors has the authority to issue the undesignated Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
Common Stock
During 1996, 5,000,000 shares of Common Stock were purchased by USWeb's five
founders ("Founders Shares"). In the event that any one of the founders ceased
to be an employee of the Company, the Company had the right to repurchase
("the Repurchase Right"), at the original purchase price, a declining
percentage of the shares issued through December 31, 1999. During August 1997,
an USWeb founder terminated his employment. In connection with the
termination, the Company accelerated the vesting of 111,205 shares of Founders
Shares and accordingly recognized a charge in the amount of $1,080.
Additionally, 349,502 shares of unvested Founder's Stock were repurchased by
the Company at their original issuance price of $0.0003 per share. In the
event of a change in control of the Company, the Founders Shares shall become
immediately vested in full and the Repurchase Right shall lapse. At December
31, 1998, 1,059,000 Founders Shares were subject to repurchase rights.
On September 30, 1997, the Company sold 222,222 shares of Common Stock in a
private transaction to an independent third party in exchange for a note
receivable in the amount of $2,000. On October 14, 1997, the note receivable
was collected in full.
On December 5, 1997, USWeb completed its initial public offering of
5,750,000 shares of its Common Stock. Net proceeds to the Company were
approximately $38,309. In addition, the Company sold 1,666,666 shares of
Common Stock to Intel Corporation in a private placement that closed
contemporaneously with the offering. Net proceeds to the Company aggregated
approximately $9,650. In connection with the discounted sale of Common Stock
to Intel Corporation, the Company recognized a $1,250 non-cash charge that is
included in marketing, sales and support expense.
56
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
On April 7, 1998, USWeb completed a follow-on offering whereby the Company
sold 1,581,216 shares of Common Stock. Net proceeds to the Company from the
follow-on offering aggregated approximately $31,151, after deducting
underwriter's discounts and expenses of the offering. In addition, various
option and warrant holders who participated as selling stockholders in the
offering exercised 387,118 stock options and warrants to purchase 56,547
shares of Common Stock. Net proceeds to the Company from the exercise of stock
options and warrants aggregated approximately $2,698.
In September 1998, the Company adopted a stock repurchase program to buy
shares of its Common Stock in the open market. The Board of Directors
authorized the repurchase of up to the lesser of 1,000,000 shares or $15,000.
The stock repurchase program will expire in 1999. As of December 31, 1998, no
shares had been repurchased under this program.
Warrants
From January 1996 to December 31, 1996 the Company issued warrants to
purchase 104,721 shares of its Common Stock at exercise prices ranging from
$0.09 to $1.62 per share. The fair value of these warrants on their respective
grant dates was not material. The warrants are exercisable at any time, and
their expiration dates range from May 2001 through February 2006.
In connection with a financing, the Company issued warrants to purchase a
total of 704,549 shares of stock at $7.50 per share. The warrants are
exercisable at any time prior to their expiration in May 2000.
In May 1998, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC") to expand production capabilities for NBC's
interactive properties and services. As part of the strategic alliance the
Company was awarded a multi-year contract where revenues earned under the
contract are expected to approximate $11,000. In connection with the strategic
alliance, the Company issued warrants to NBC allowing them to purchase
1,600,000 and 500,000 shares of the Company's Common Stock at $22.50 and
$25.43 per share, respectively. Warrants to purchase 1,050,000 shares are
exercisable at any time prior to their expiration in November 1999 (the "Fixed
Warrants"). Warrants to purchase the remaining 1,050,000 shares are subject to
cancellation or, if previously exercised, are subject to repurchase by the
Company at the original purchase price, in the event that the agreement is
cancelled by NBC prior to May 2002 (the "Variable Warrants"). The warrants
were initially valued at $12,568. Of the total value ascribed to the NBC
warrants, $6,286 was attributable to the Fixed Warrants and recorded as part
of stock compensation in operating expenses. The remaining $6,282 of the
initial value was attributed to the Variable Warrants, which are included as
part of the costs of the NBC contract. The Variable Warrants are subject to
revaluation at each balance sheet date through the date the related
cancelation or repurchase rights lapse. The Variable Warrants were revalued at
December 31, 1998, and the original charge was increased to $9,994 based on
current market data. Because the inclusion of the value of the Variable
Warrants as part of the NBC contract results in an overall loss on the
contract, this amount was recognized as a provision for loss on contract.
In connection with the Company's consulting agreement related to certain
mergers and acquisitions, the Company issued warrants to purchase 1,050,583
shares of the Company's Common Stock at exercise prices ranging from $18.35 to
$21.99 per share. The warrants are exercisable at any time and expire in five
years from the date of grant. The fair value of warrants granted was measured
at the grant date using the Black-Scholes formula. At December 31, 1998 $7,455
related to acquisitions accounted for as poolings of interests, and was
included in the merger and related costs and $2,601 related to purchase
business Combinations was recognized as direct acquisition cost and included
in the purchase price of the acquired companies.
57
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Note 10--Stock-Based Compensation:
At December 31, 1998, the Company has various stock-based compensation
plans, which are described below. The Company applies APB No. 25 and related
interpretations and SFAS No. 123 with respect to grants to other than
employees in accounting for its plans. Had compensation cost for the Company's
various stock-based compensation plans been determined based on the minimum
and fair values at the grant dates for awards under those plans consistent
with the methods prescribed by SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................... $(3,359) $(50,670) $(188,281)
======= ======== =========
As adjusted............................... $(5,568) $(59,208) $(213,405)
======= ======== =========
Net loss per share:
Basic and diluted, as reported............ $ (0.15) $ (1.73) $ (3.07)
======= ======== =========
Basic and diluted, as adjusted............ $ (0.25) $ (2.02) $ (3.48)
======= ======== =========
</TABLE>
Fair value estimates
For purposes of complying with the disclosure provisions of SFAS No. 123,
prior to USWeb's initial public offering in December 1997, the fair value of
each option grant of USWeb was determined on the date of grant using the
minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes option pricing model. Except for the
volatility assumption, which was only used under the Black-Scholes model, the
following weighted-average assumptions were used for grants during the years
ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield............................... 0.0% 0.0% 0.0%
Volatility................................... 0.0% 64.0% 70.0%
Risk-free interest rate...................... 6.1% 6.04% 5.27%
Expected life................................ 4.0 years 3.9 years 3.5 years
</TABLE>
Stock Option Plans
1996 Stock Option Plan
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan
provides for grants of options to employees and consultants (including
officers and directors) of the Company and its subsidiaries.
The exercise price of options granted under the 1996 Plan is determined by
the 1996 Plan Administrator, as defined. With respect to incentive stock
options granted under the 1996 Plan, the exercise price must be at least equal
to the fair market value per share of the Common Stock on the date of grant,
and the exercise price of any incentive stock option granted to a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding Common Stock must be equal to a least 110% of fair market value of
the Common Stock on the date of grant.
58
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
Each option outstanding under the 1996 Plan may be exercised in whole or in
part at any time. Exercised but unvested shares are subject to repurchase by
the Company. Options generally vest, assuming continued service by the
optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting., Options outstanding under the 1996 Plan generally have a term of ten
years.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options, and for the
grant to employees and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). At December 31, 1998, a total of 7,000,000 shares of
Common Stock are reserved for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan Administrator, as defined, has the power to determine
the terms of the options of SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability thereof,
and the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting. Options outstanding under the 1996 Equity Plan generally have a term
of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchasers' employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the 1996 Equity Plan Administrator.
The exercise price of all incentive stock options granted under the 1996
Equity 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 SPRs granted under the 1996 Equity Plan is determined by the 1996 Equity
Plan Administrator, 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 all other options granted
under the 1996 Equity Plan may not exceed ten years. As of December 31, 1998,
no SPRs had been granted.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs
to employees, directors and consultants. A total of 20,000,000 shares of
Common Stock, plus annual increases equal to the lesser of (i) 400,000 shares,
(ii) 5% of the outstanding shares, or (iii) a lesser amount determined by the
Board of Directors, are currently reserved for issuance pursuant to the 1997
Plan.
59
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
The 1997 Plan Administrator, as defined, has the power to determine the
terms of the options or SPRs granted, including the exercise price of the
option or SPR, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchasers' employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
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 SPRs
granted under the 1997 Plan is determined by the 1997 Plan Administrator, 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 outstanding capital stock of the Company, its parent and
its subsidiaries, 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
all other options granted under the 1997 Plan may not exceed ten years. As of
December 31, 1998, no SPRs had been granted.
CKS Group Stock Option Plans
In connection with the merger with CKS Group, which was consummated on
December 17, 1998 (See Note 1), the Company assumed all of the outstanding
stock options under CKS Group's 1995 Series B Common Stock Plan, 1995 Stock
Plan, 1995 Director Option Plan, 1996 Supplemental Stock Plan, and Site
Specific Option Plan (collectively the "CKS Group Stock Option Plans").
Outstanding options assumed from CKS Group Stock Option Plans generally vest
25% after one year from the date of grant, and then ratably over 36 months
thereafter, and are exercisable for a period of 10 years. No further grants
will be made under the CKS Group Stock Option Plans.
A summary of the status of the Company's various fixed stock option plans as
of December 31, 1997 and 1998, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
Weighted Weighted
Average Average
Fixed Stock Options Shares Exercise Price Shares Exercise Price
------------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................. 2,529,617 $11.13 12,887,185 $ 9.72
Granted.................. 11,866,080 25.21 16,792,961 14.34
Exercised................ (103,079) 10.51 (3,227,591) 6.70
Canceled................. (1,405,433) 19.18 (4,837,815) 13.36
---------- ----------
Outstanding at end of
year.................... 12,887,185 $22.42 21,614,740 $12.93
---------- ----------
Options exercisable at
end of year............. 3,097,052 $ 8.14 4,625,307 $10.19
Weighted-average minimum
and fair values of
options granted during
the year................ $1.47 $8.78
</TABLE>
60
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(In thousands, except share and per share amounts)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Outstanding Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50--$6.00............ 699,320 6.723 2.112 348,739 1.674
$6.07--$11.99........... 12,709,622 8.787 8.857 3.456,388 8.545
$12.25--$18.25.......... 1,724,290 9.504 14.438 202,637 16.368
$18.37--$25.84.......... 6,185,673 9.477 20.994 568,492 20.914
$26.50--$36.75.......... 295,835 9.348 35.608 49,051 36.750
</TABLE>
Acquisition Stock Bonus Plan
During the years ended December 31, 1997 and 1998, the Company agreed to
issue bonuses contingent on future employment that are payable in shares of
Common Stock to employees previously employed by Acquired Entities (each a
"New Employee").
Under the agreements, the stock bonuses vest over a thirty-six month period
from the date of first employment by the Company and will be paid at the
conclusion of the vesting period. However, to the extent that a New Employee's
status as an employee is terminated, the New Employee will be entitled only to
the vested portion of the stock bonus and such bonus shall become due and
payable upon such New Employee's termination. The aggregate stock bonus for
awards through December 31, 1998 totaled $139,004 and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods and comprise stock compensation expense in
the accompanying consolidated financial statements. Stock compensation
recorded related to vested stock bonuses aggregated $9,118 and $33,411 for the
years ended December 31, 1997 and 1998, respectively. Of these amounts, $2,420
and $11,694, respectively, have been recorded in cost of revenues, with the
remainder recorded in stock compensation.
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 3,000,000 shares of Common
Stock have been reserved for issuance under this plan. Terms of the plan
permit eligible employees to purchase Common Stock through payroll deductions
of up to 15% of each employees' compensation. Amounts deducted and accumulated
by the participant are used to purchase shares of the Company's Common Stock
at 85% of the lower of the fair value of the Common Stock at the beginning or
the end of the offering period, as defined. During 1998, 445,268 shares were
issued pursuant to the Purchase Plan at a weighted average price of $7.31 per
share.
During the years ended December 31, 1997 and 1998, shares totaling 192,824
and 255,764, respectively, were issued under CKS Group's Employee Stock
Purchase Plan at average prices of $9.81 and $10.16 per share, respectively.
Note 11--Subsequent Events--Unaudited:
Acquisitions
During the period from January 1, 1999 through February 28, 1999 the Company
recognized the acquisitions of all the outstanding stock of three entities in
separate transactions in exchange for a total of
61
<PAGE>
959,212 shares of the Company's Common Stock and $5,500 in cash for an
aggregate purchase price of $21,300, excluding acquisition expenses. The
acquisitions will be accounted for using the purchase method of accounting
and, accordingly, the purchase price of each acquisition will be allocated to
net tangible assets and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values.
Note 12--Summary of Quarterly Results of Operations--Unaudited:
<TABLE>
<CAPTION>
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $19,000 $ 27,741 $ 32,678 $ 34,883 $ 39,325 $ 54,041 $ 62,586 $72,648
Cost of revenues:
Services............... 12,686 17,226 20,819 23,964 26,750 33,862 39,741 45,898
Provision for loss on
contract ............. -- -- -- -- -- 9,430 (7,336) 7,900
Stock compensation..... -- 347 619 1,454 1,681 3,576 4,158 3,622
------- -------- -------- -------- -------- -------- -------- -------
Total cost of
revenues............. 12,686 17,573 21,437 25,418 28,431 46,868 36,563 57,420
------- -------- -------- -------- -------- -------- -------- -------
Gross profit............ 6,314 10,168 11,240 9,465 10,894 7,173 26,023 15,228
------- -------- -------- -------- -------- -------- -------- -------
Operating expenses:
Marketing, sales and
support............... 4,205 5,367 6,467 7,335 5,261 7,071 7,268 8,161
General and
administrative........ 4,547 6,748 8,028 8,416 9,358 10,897 10,968 13,471
Acquired in-process
technology............ 711 2,137 3,878 2,746 4,323 18,289 2,896 --
Stock compensation..... 36 912 2,552 3,198 2,568 13,534 7,860 7,798
Amortization of
intangible assets..... 1,825 1,773 3,905 5,460 4,860 17,364 23,552 28,762
Merger and integration
costs................. -- -- -- -- -- -- -- 28,822
Impairment of goodwill. -- -- -- -- -- -- -- 11,079
------- -------- -------- -------- -------- -------- -------- -------
Total operating
expenses............. 11,324 16,937 24,830 27,155 26,370 67,155 52,544 98,093
------- -------- -------- -------- -------- -------- -------- -------
Loss from operations.... (5,010) (6,769) (13,590) (17,690) (15,476) (59,982) (26,521) (82,865)
Interest income, net.... 530 277 270 629 925 1,051 1,081 1,245
Impairment of investee
carried at cost........ -- (4,000) -- -- -- -- -- --
------- -------- -------- -------- -------- -------- -------- -------
Loss before income
taxes.................. (4,480) (10,492) (13,320) (17,061) (14,551) (58,931) (25,440) (81,620)
Provision for income
taxes.................. 174 2,026 2,327 790 704 2,181 2,325 2,529
------- -------- -------- -------- -------- -------- -------- -------
Net loss................ $(4,654) $(12,518) $(15,647) $(17,851) $(15,255) $(61,112) $(27,765) (84,149)
======= ======== ======== ======== ======== ======== ======== =======
Net loss per share:
Basic and diluted...... $ (0.19) $ (0.48) $ (0.54) $ (0.48) $ (0.29) $ (1.08) $ (0.44) (1.26)
======= ======== ======== ======== ======== ======== ======== =======
Weighted average shares
outstanding, basic and
diluted............... 24,083 26,255 29,232 37,514 52,408 56,648 63,451 66,792
======= ======== ======== ======== ======== ======== ======== =======
</TABLE>
62
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to persons who are executive officers of USWeb/CKS
is set forth under the caption "Executive Officers" in Part I of this report.
Information with respect to the directors of USWeb/CKS is incorporated by
reference from the portion of the 1999 Annual Meeting Proxy Statement entitled
"Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of management of USWeb/CKS is
incorporated by reference from the portion of the 1999 Annual Meeting Proxy
Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to ownership of our Common Stock is incorporated by
reference from the portion of the 1999 Annual Meeting Proxy Statement entitled
"Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain business relationships and transactions
between USWeb/CKS, its five percent stockholders and their respective
affiliates, and its directors and officers is incorporated by reference from
the portion of the 1999 Annual Meeting Proxy Statement entitled "Certain
Relationships And Related Transactions."
63
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
<TABLE>
<S> <C>
Report of Independent Accountants.
Consolidated Balance Sheet at December 31, 1997 and 1998.
Consolidated Statement of Operations for the years ended December
31, 1996, 1997 and 1998.
Consolidated Statement of Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1997 and 1998.
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
</TABLE>
2. Financial Statement Schedules
None listed, because the information required to be set forth therein
is included in the Consolidated Financial Statements or Notes to
Consolidated Financial Statements.
3. Exhibits
<TABLE>
<C> <S>
3.1(B) Amended and Restated Certificate of Incorporation of the Registrant.
3.2(A) Bylaws of the Registrant.
4.1(A) Form of Registrant's Common Stock Certificate.
4.2(A) Amended and Restated Investors' Rights Agreement dated May 2, 1997
among the Registrant and the other parties named therein.
4.3(A) Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4(A) Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5(A) Form of Registrant's Common Stock Purchase Warrant.
4.6(A) Form of Registrant's Signing Warrant.
4.7(A) Form of Registrant's AGR Warrant.
4.8(A) Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
4.9(B) Form of Agreement and Plan of Reorganization dated May 13, 1998 among
the Registrant, USWeb Acquisition Corporation 121, Gray Peak
Technologies, Inc. and other individuals and entities named therein.
4.10(D) Agreement and Plan of Reorganization dated September 1, 1998 among
the Registrant, USWeb Acquisition Corporation No. 134 and CKS Group,
Inc.
4.11(D) Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998 (included in Exhibit 10.19).
10.1(A) Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2(A) 1996 Stock Option Plan and related agreements.
</TABLE>
64
<PAGE>
<TABLE>
<C> <S>
10.3(C) 1996 Equity Compensation Plan and related agreements.
10.4(C) 1997 Acquisition Stock Option Plan and related agreements.
10.5(C) 1997 Employee Stock Purchase Plan.
10.6(C) Form of Restricted Stock Purchase Agreement between the Registrant
and certain executive officers.
10.8(A) Management Continuity Agreement between the Registrant and Tobin
Corey.
10.9(A) Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.12(A) Loan and Security Agreement dated September 29, 1997 between the
Registrant and Silicon Valley Bank.
10.13(A) Amendment, dated November 5, 1997 to Loan and Security Agreement
dated September 29, 1997 between the Registrant and Silicon Valley
Bank.
10.14(A) Intel-USWeb Relationship Agreement dated as of November 7, 1997
between the Registrant and Microsoft Corporation.
10.15(B) Lease Agreement dated December 16, 1996 by and between the Company
and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa Clara, CA
95054.
10.16(B) First Amendment to Lease Agreement dated July 23, 1997 by and between
the Company and LAKESIDE DRIVE, INC. for 2880 Lakeside Drive, Santa
Clara, CA 95054.
10.17(D) Form of CKS Voting Agreement between Registrant and certain
stockholders of CKS Group, Inc. dated September 1, 1998.
10.18(D) Form of CKS Group, Inc. Holder Agreement among Registrant, CKS Group,
Inc. and certain stockholders of CKS Group, Inc. dated September 1,
1998.
10.19(D) Form of USWeb Corporation Holder Agreement among Registrant, CKS
Group, Inc. and certain stockholders of Registrant dated September 1,
1998.
10.20 Lease Agreement dated March 5, 1999 between the Company and Rosenberg
SOMA Investments II, LLC for 410 Townsend Street, San Francisco, CA.
11.1 Statement of computation of net loss per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 66).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
(A) Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 333-36827).
(B) Incorporated by reference from the Company's Registration Statement on
Form S-4 (No. 333-38351).
(C) Incorporated by reference from the Company's Registration Statement on
Form S-8 filed on June 3, 1998 (No. 333-55893).
(D) Incorporated by reference from Company's Registration Statement on Form S-
4 (No. 333-63323).
(b) Reports on Form 8-K:
None.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Santa Clara, State of California, on this 26th day of March, 1999.
USWEB CORPORATION
/s/ Carolyn V. Aver
By: _________________________________
Carolyn V. Aver,
Executive Vice President and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Robert W. Shaw and Carolyn V. Aver, and each of
them individually, his attorney-in-fact, for him, in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, this Report has been signed by the following persons in
the capacities indicated on this 26th day of March, 1999.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ Mark D. Kvamme Chairman of the Board and Director
______________________________________________
Mark D. Kvamme
/s/ Robert W. Shaw Chief Executive Officer (Principal
______________________________________________ Exec. Officer) and Director
Robert W. Shaw
/s/ Carolyn V. Aver Executive Vice President, Chief
______________________________________________ Financial Officer and Secretary
Carolyn V. Aver (Principal Financial Officer)
/s/ Tobin Corey President, Chief Operating Officer and
______________________________________________ Director
Tobin Corey
/s/ Robert Hoff Director
______________________________________________
Robert Hoff
/s/ Joseph Marengi Director
______________________________________________
Joseph Marengi
Director
______________________________________________
Gary Rieschel
/s/ Klaus Schwab Director
______________________________________________
Klaus Schwab
</TABLE>
66
<PAGE>
Exhibit 10.20
OFFICE LEASE
by and between
Rosenberg SOMA Investments II, LLC
(Landlord)
and
USWeb Corporation
(Tenant)
<PAGE>
TABLE OF CONTENTS
Page
1. The Premises 4
2. Term 4
3. Possession 6
4. Monthly Basic Rent/Parking Garage Rent 8
5. Operating Expenses 11
6. Security Deposit 17
7. Use. 20
8. Payments and Notices 22
9. Brokers 22
10. Holding Over 22
11. Taxes on Tenant's Property 23
12. Condition of Premises. 23
13. Alterations 24
14. Repairs 28
15. Liens 29
16. Entry by Landlord 29
17. Utilities and Services 30
18. Indemnification 31
19. Damage to Tenant's Property. 31
<PAGE>
20. Insurance 32
21. Damage or Destruction 34
22. Eminent Domain 36
23. Bankruptcy 37
24. Defaults and Remedies 37
25. Assignment and Subletting 39
26. Quiet Enjoyment 42
27. Subordination 42
28. Estoppel Certificate 42
29. Rules and Regulations 43
30. Conflict of Laws 43
31. Successors and Assigns 43
32. Surrender of Premises 43
33. Professional Fees 43
34. Performance by Tenant 44
35. Mortgagee and Senior Lessor Protection 44
36. Definition of Landlord 44
37. Waiver 45
38. Identification of Tenant 45
39. Year 2000 45
40. Terms and Headings 46
41. Examination of Lease 46
ii
<PAGE>
42. Time 46
43. Prior Agreement; Amendments 46
44. Severability 46
45. Recording 46
46. Limitation on Liability 46
47. Riders 46
48. Signs 47
49. Modification for Lender 47
50. Accord and Satisfaction 47
51. Financial Statements 47
52. Tenant as Corporation 48
53. No Partnership or Joint Venture 48
54. Rooftop Deck/Rooftop Antennae 48
55. Option to Lease 49
56. Landlord's Representations 49
57. Arbitration 50
iii
<PAGE>
OFFICE LEASE
This Office Lease ("Lease"), dated March 5, 1999 (the "Effective Date"), is made
and entered into by and between Rosenberg SOMA Investments II, LLC, a Delaware
limited liability company ("Landlord") and USWeb Corporation, a Delaware
corporation ("Tenant").
1. The Premises.
------------
1.1 Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord,
the Premises designated in the Summary and as outlined on the Floor Plan
attached hereto as Exhibit "A" in the building at the address designated
-----------
in the Summary (the "Building"), located on the parcel of real property (the
"Site") under the Building, subject to those rules and regulations attached
hereto as Exhibit D, and such additional reasonable rules and regulations as
---------
Landlord may deliver in writing to Tenant from time to time. Tenant
acknowledges that Landlord has made no representation or warranty regarding
the condition of the Premises, Building, or Site except as specifically stated
in this Lease. The parties hereto agree that Tenant's leasing of the Premises
is upon and subject to the terms, covenants and conditions herein set forth
and Tenant covenants as a material part of the consideration for this Lease to
keep and perform each and all of said terms, covenants and conditions by it to
be kept and performed and that this Lease is made upon the condition of such
performance.
1.2 The rights and obligations of the parties regarding the construction of
the Premises are described in Paragraphs 2 and 3 of this Lease, and in the
Work Letter ("Work Letter") attached as Exhibit E. Any inconsistency between
---------
the provisions of the Work Letter and the provisions of the balance of the
Lease shall be governed by the provisions of the Work Letter.
1.3 The Premises as described herein shall include the right of Tenant to use
the loading dock and storage rooms adjacent to the loading dock. The
obligations of Tenant with respect to the Premises as provided in this Lease
shall be applicable to the loading dock and to the storage areas adjacent to
the loading dock as well as to the remainder of the Premises.
1.4 References in this Lease to "rentable square feet", "rentable square
footage" and "rentable area" shall have the same meanings, and Tenant hereby
acknowledges and agrees that the rentable square footage of the Premises shall
be deemed, and is, 74,686 rentable square feet. No adjustment in the Monthly
Basic Rent, Tenant's Percentage Share, any monetary or other obligation of
Tenant, or any other term of this Lease shall be made by reason of any
discrepancy in the rentable square footage which is later discovered.
2. Term.
----
2.1 Subject to Paragraphs 2.2 and 3.1, the term of this Lease ("Term") shall
commence on the Lease Commencement Date, and terminate on the Lease Expiration
Date, as such terms are defined in the Summary, unless the Term is earlier
terminated as hereinafter provided. Landlord shall provide Tenant, and
Tenant's consultant's and contractors, with access to the Premises at least
fourteen (14) days prior to the anticipated Lease Commencement Date for
purposes of installation by Tenant of its fixtures,
<PAGE>
equipment, wiring, furniture and other similar matters. In connection with any
such early entry by Tenant, Tenant and its consultants and contractors shall
not interfere with the completion of construction by Landlord of the
Landlord's Work and the Tenant's Improvements (as defined below). At all times
that Tenant has access to the Premises, the provisions of this Lease shall be
applicable, provided only that the obligation of Tenant to pay Monthly Basic
Rent, Parking Lot Rent and Operating Rent (as defined below) shall not
commence until the Lease Commencement Date.
2.2 Landlord shall substantially complete the initial, base improvements
to the Building and the Premises, as required of Landlord pursuant to the
terms of the Work Letter, ("Landlord's Work") and shall further substantially
complete the Tenant's Improvements ("Tenant's Improvements") as described in
the Work Letter on or before July 7, 1999. The Lease Commencement Date shall
be July 7, 1999 as specified in the Summary, subject, however, to deferral
pursuant to the provisions of Paragraph 3.1 below. The actual Lease
Commencement Date shall be specified in Landlord's Notice of Lease Term Dates
("Notice"), in the form of Exhibit "B" attached hereto, and shall be served
-----------
upon Tenant as provided in Paragraph 8, as soon as Landlord determines that
the Landlord's Work and the Tenant's Improvements have been substantially
completed as provided in Paragraph 3.1 below. The Notice shall be binding upon
Tenant unless Tenant objects to the Notice in writing, served upon Landlord as
provided in Paragraph 8, within five (5) business days of Tenant's receipt of
the Notice.
2.3 Tenant shall have two (2) consecutive options (the "Extension Options";
each an "Extension Option") to extend the Term, each for a five (5) year
period (the "First Extended Term" and "Second Extended Term", respectively;
each an "Extended Term") on all the terms and conditions contained in this
Lease with the exception of the Monthly Basic Rent and the Base Year which
shall be adjusted pursuant to the provisions of Paragraphs 4.2 and 5.1 below.
Upon commencement of the First Extended Term, the only remaining option to
extend the Term shall be the Second Extended Term, and upon exercise of the
option with respect to the Second Extended Term, no further right to extend
the Term shall exist. In the event Tenant fails to timely exercise the option
for the First Extended Term, Tenant's option for the Second Extended Term
shall be void. In order to exercise an Extension Option, Tenant shall deliver
written notice of its exercise of the option ("Option Notice") to Landlord at
least two hundred twenty-five (225) days but not more than one (1) year before
the expiration of the initial Term or First Extended Term, as the case may be.
The Extension Options shall be subject to the following terms and conditions:
(a) An Extension Option may be exercised only by delivery of the Option
Notice as provided in this Paragraph and only if, as of the date of delivery
of the Option Notice, Tenant is not in default, beyond applicable cure
periods, under this Lease.
(b)
(c) The rights contained in this Paragraph shall be personal to the
originally named Tenant and may be exercised only by the originally named
Tenant (and not any assignee, sublessee, or other transferee of Tenant's
interest in this Lease other than a Permitted Transferee as defined in
Paragraph 25 below) and only if the originally named Tenant (or Permitted
Transferee) occupies the entire Premises as of the date it exercises an
Extension Option in accordance with the terms of this Paragraph.
(d)
(e) If Tenant properly exercises an Extension Option and is not in
default, beyond applicable
<PAGE>
cure periods, under this Lease at the end of the initial Term (or the First
Extended Term, as the case may be), the Term shall be extended for the
applicable Extended Term.
(f)
(g) References in this Lease to the "Term" shall
include the initial Term of ten (10) years and shall, in addition, include the
First Extended Term and the Second Extended Term, as applicable.
(h)
2.4 For purposes of this Lease the term "Lease Year" shall mean each
consecutive twelve (12) month period during the Term provided that (i) the
first Lease Year commences on the Lease Commencement Date and ends on the last
day of the calendar year (December 31st) in which the Lease Commencement Date
falls; (ii) the second and each succeeding Lease Year commences on the first
day of the next calendar year; and (iii) the last Lease Year ends on the Lease
Expiration Date or earlier date of termination.
3. Possession.
----------
3.1 Tenant agrees that in the event Landlord is unable to deliver possession
of the Premises to Tenant, with Landlord's Work and the Tenant's Improvements
having been substantially completed on or before July 7, 1999, this Lease
shall not be void or voidable, nor shall Landlord be liable to Tenant for any
loss or damage resulting therefrom. In the event that Landlord fails to
deliver the Premises to Tenant with Landlord's Work and Tenant's Improvements
substantially completed on or before July 7, 1999, the Lease Commencement Date
shall be extended to the date on which Landlord delivers the Premises to
Tenant with Landlord's Work and Tenant's Improvements substantially completed
subject to the limitations as provided in Paragraph 3.2 below. For purposes
hereof, Landlord's Work and Tenant's Improvements shall be considered as
having been substantially completed (i) upon completion in all material
respects of Landlord's Work and the Tenant's Improvements as certified by
Landlord's architect as identified in the Work Letter ("Landlord's Architect")
subject only to such punch list items as may have been identified by
Landlord's Architect or by Tenant pursuant to the provisions of Paragraph 12
below, and (ii) upon Landlord obtaining all governmental approvals and
occupancy certificates required for the legal occupancy of the Building
(collectively, "Government Approvals").
3.2 Notwithstanding the provisions of Paragraph 3.1 to the contrary, any
extension of the Lease Commencement Date in accordance with the provisions of
Paragraph 3.1 shall be reduced by the aggregate number of days of Tenant Delay
(as defined below). By way of example, if pursuant to the provisions of
Paragraph 3.1 the Lease Commencement Date occurs on July 17, 1999 but there is
an aggregate number of ten (10) days of Tenant Delay, then notwithstanding the
provisions of Paragraph 3.1, the Lease Commencement Date (and the obligation of
Tenant to pay Monthly Basic Rent, Parking Lot Rent and Operating Rent) shall
commence as of July 7, 1999. A delay by Tenant ("Tenant Delay") shall occur
upon: (i) Tenant's failure to perform any obligation of Tenant to be performed
under the Work Letter on or before the date or within the time period set forth
in the Work Letter including, without limitation, any failure by Tenant to
timely satisfy a Tenant Benchmark (as defined in the Work Letter); (ii) any
change by Tenant in the Construction Drawings (as defined in the Work Letter)
which Tenant has previously approved or a change by Tenant in the work to be
performed in connection with the Tenant's Improvements from that work otherwise
specified in the Construction Drawings, which change results in a delay in the
construction of the Tenant's Improvements; (iii) failure of Tenant to timely pay
on or before
<PAGE>
the date required all amounts required to be paid by Tenant as provided in the
Work Letter; or (iv) any other delay caused by Tenant or Tenant's Architect in
connection with the design, construction or bidding process with respect to
the Tenant's Improvements including, without limitation, the failure by Tenant
or Tenant's Architect to promptly respond to reasonable requests from the
Contractor (as defined in the Work Letter) for clarification and/or additional
detail relating to the work to be performed pursuant to the Construction
Drawings. The period of any Tenant Delay with respect to the matters described
in Clauses (i) or (iii) above, shall be the number of days from the date on
which the matter was to be performed by Tenant through and including the day
on which the matter is fully cured and performed by Tenant and the number of
days of any Tenant Delay as specified in Clauses (ii) and Clause (iv) above
shall be equal to the number of days of delay in the performance of the work
in connection with the Tenant's Improvements resulting from the failure by
Tenant or by Tenant's consultants or representatives or the delay resulting
from any change made by Tenant as described in Clause (ii). In the event that
Landlord during the construction of Tenant's Improvements asserts that a
Tenant Delay has occurred, Landlord shall give written notice of such asserted
Tenant Delay to Tenant and to Tenant's Architect as defined in the Work Letter
("Tenant's Architect") which notice ("Delay Notice") shall state specifically
the nature of the purported Tenant Delay. In the event that Landlord fails to
give a Delay Notice within five (5) business days following the occurrence of
the asserted Tenant Delay, Landlord shall be deemed to have waived such
asserted delay and shall thereafter not be entitled to assert such Tenant
Delay in connection with the provisions of this Paragraph 3.2. In the event
that Landlord timely gives a Delay Notice and Tenant disagrees with the
assertion of the claimed delay by giving written notice of such disagreement
to Landlord within five (5) business days following the date on which the
Delay Notice is given, then within ten (10) days following the substantial
completion of the Landlord's Work and the Tenant's Improvements as evidenced
by the certificate of Landlord's architect and receipt of the Government
Approvals (collectively, "Completion Certificate"), Landlord's Architect and
Tenant's Architect shall attempt to come to an agreement, which agreement
shall be binding on Landlord and Tenant, as to whether any Tenant Delay has
occurred and the number of days of such Tenant Delay. A copy of the Completion
Certificate shall be given by Landlord to Tenant which, with respect to the
Government Approvals, shall consist of the certificate of occupancy. In the
event that Landlord's Architect and Tenant's Architect are unable to so agree
within twenty (20) days following the date on which the Landlord's Completion
Certificate is given to Tenant then the issue of the occurrence and the extent
of any delay caused by Tenant shall be subject to arbitration in accordance
with the provisions of Paragraph 57. In the event that Tenant fails to object
to any Delay Notice given by Landlord by timely giving written notice of such
objection to Landlord, Tenant shall be considered to have approved the Tenant
Delay as set forth in the Delay Notice. In the event that a final
determination with respect to the occurrence of any Tenant Delay as provided
in this Paragraph 3.2 has not occurred on or before the date asserted by
Landlord to be the Lease Commencement Date (taking into account any Tenant
Delay as asserted by Landlord) then the Lease Commencement Date shall be
considered to have occurred on the date as provided in the Summary and in
accordance with the provisions of Paragraphs 2.2 and 3.1 subject to adjustment
as asserted by Landlord pursuant to the provisions of this Paragraph 3.2. In
the event that subsequent to such date it is finally determined that a further
delay in the occurrence of the Lease Commencement Date should have occurred by
reason of the provisions of Paragraph 3.1 and the provisions of this Paragraph
3.2, then Tenant shall be entitled to a credit in an amount equal to the per
day amount in connection with the Monthly Basic Rent, the Parking Lot Rent and
the Operating Rent as then having been paid by Tenant for the period of the
additional delay as finally determined pursuant to the provisions of this
Paragraph 3.2.
<PAGE>
Such credit shall be applied against the next payment of Monthly Basic Rent,
Parking Lot Rent and/or Operating Rent as then due pursuant to this Lease from
Tenant to Landlord.
3.3 Notwithstanding anything in the foregoing Paragraphs to the contrary, if
the Landlord's Work and the Tenant's Improvements are not substantially
completed (as evidenced by a Completion Certificate) on or before December 1,
1999, then Tenant shall have the right to terminate this Lease by written notice
given to Landlord at any time prior to the date a certificate of occupancy is
obtained for the Premises. Termination of the Lease hereunder shall be Tenant's
sole remedy in the event of a failure of delivery of possession of the Premises
to Tenant.
4. Monthly Basic Rent/Parking Garage Rent.
--------------------------------------
4.1 Tenant agrees to pay to Landlord as Monthly Basic Rent for the Premises the
Monthly Basic Rent designated in the Summary for each respective period
("Monthly Basic Rent"), each in advance on the first day of each and every
calendar month during said Term, except that the first month's Monthly Basic
Rent shall be paid upon the execution hereof. In the event the Term of this
Lease ends on a day other than the last day of a calendar month, then the rental
for such period shall be prorated in the proportion that the number of days this
Lease is in effect during such period bears to thirty (30), and such rental
shall be paid at the commencement of such period. In the event that the Lease
Commencement Date occurs other than on the first day of a calendar month, and
the full first month's Monthly Basic Rent has been previously paid as provided
in this Lease, then the rent for the initial partial calendar month commencing
as of the Lease Commencement Date shall be prorated in the proportion that the
number of days this Lease is in effect during such calendar month bears to
thirty (30) and the prepaid first month's Monthly Basic Rent shall be applied to
such prorated amount with the balance of the prepaid first month's Monthly Basic
Rent being applied to reduce the payment of Monthly Basic Rent to be paid on the
first day of the first full calendar month of the Term of this Lease. In
addition to said Monthly Basic Rent, Tenant agrees to pay the amount of the
rental adjustments as and when provided in this Lease. Said Monthly Basic Rent
and all additional rent including, without limitation, Parking Lot Rent and
Operating Rent, shall be paid to Landlord, without any prior demand therefor and
without any deduction or offset whatsoever in lawful money of the United States
of America, which shall be legal tender at the time of payment, at the address
of Landlord designated in Subparagraph (c) of the Summary or to such other
person or at such other place as Landlord may from time to time designate in
writing. Further, all charges to be paid by Tenant hereunder, including,
without limitation, payments for repairs and other costs and expenses shall be
considered additional rent for the purposes of this Lease, and the word "rent"
in this Lease shall include such additional rent as well as Monthly Basic Rent,
Parking Lot Rent and Operating Rent unless the context specifically or clearly
implies that only the Monthly Basic Rent, Parking Lot Rent and/or Operating Rent
is referenced. Tenant shall deliver to Landlord as prepaid rent that amount set
forth in the Summary upon execution of this Lease.
4.2 In the event Tenant exercises either of the options to extend the Term
pursuant to the provisions of Paragraph 2.3, the Monthly Basic Rent shall be
adjusted at the commencement of each Extended Term to reflect the then-fair
market rental value of the Premises pursuant to the terms of this Paragraph.
The fair market rental value of the Premises shall be determined in good faith
by Landlord, who shall notify Tenant of such determination in writing within
thirty (30) days of receipt of the Option Notice. If Tenant
<PAGE>
does not agree with Landlord's determination, Tenant shall deliver written
notice of Tenant's objection to Landlord within fifteen (15) days of receipt
of notice from Landlord, or Landlord's determination of the fair market rental
value shall be final. If Tenant timely objects to Landlord's determination,
Landlord and Tenant shall diligently attempt in good faith to agree on the
fair market rental value of the Premises on or before the tenth (10th) day
following delivery of Tenant's written objection to Landlord's determination
(the "Outside Agreement Date"). If Landlord and Tenant are unable to agree on
the new Monthly Basic Rent by the Outside Agreement Date, the fair market
rental value of the Premises shall be determined by appraisal. Landlord and
Tenant shall first attempt to select a mutually agreeable appraiser to conduct
the appraisal, which appraiser's conclusion shall be binding on the parties.
In the event they are unable to agree on one appraiser within ten (10) days of
the Outside Agreement Date, the parties shall each select an appraiser within
twenty (20) days of the Outside Agreement Date, who together shall attempt to
determine the fair market rental value of the Premises. If either party fails
to appoint an appraiser within such time period, the appraiser timely
appointed by the other party shall be the sole appraiser, whose determination
shall be binding on both parties. If two appraisers are timely appointed, but
they are unable to agree on the fair market rental value of the Premises
within fifty (50) days of the Outside Agreement Date, they shall mutually
select a third appraiser and the three appraisers shall each submit their
appraisal of the fair market rental value of the Premises within thirty (30)
days of selection of the third appraiser. The fair market rental value of the
Premises shall be the average of the three appraisals; provided, however, that
if either the high or low appraisal differs from the middle appraisal by ten
percent (10%) or more, it shall be disregarded and the two remaining
appraisals shall be averaged to determine the fair market rental value. If
both the high and low appraisals differ from the middle appraisal by ten
percent (10%) or more, then both shall be disregarded, and the fair market
rental value of the Premises shall be as determined by the middle appraisal.
Each party shall bear the cost of their respective appraisers; if a third
appraiser is necessary, the parties shall share equally the cost of the third
appraiser. All appraisers shall be MAI qualified appraisers, and shall have a
minimum of five (5) years experience in the appraisal of commercial properties
in the San Francisco Bay Area and no appraiser shall have worked previously
for Landlord or Tenant in any capacity. The fair market rental value shall be
based on comparable space in San Francisco, which shall (i) not be subleased,
(ii) shall be comparable in size, location and quality with the Premises,
(iii) shall be leased for a term comparable to the subject option term (five
years), and (iv) shall take into account the value of any rent abatement,
tenant improvement allowances or other concessions given to the tenant of the
comparable space. The Monthly Basic Rent shall be adjusted to reflect the fair
market rental value, as so determined. The Base Year for each Extended Term
shall be adjusted as set forth in Paragraph 5.1 below.
4.3 In addition to the Monthly Basic Rent, Tenant shall pay an additional
monthly rental amount (the "Parking Lot Rent") for Tenant's exclusive use of the
parking garage (the "Garage") located in the basement of the Building. The
Parking Lot Rent shall be payable, in advance, on the first day of each and
every calendar month during the Term with amounts payable for any partial month
to be prorated in proportion to the number of days that this Lease is in effect
during such period bears to thirty (30) with such rental to be paid at the
commencement of such period. The Garage shall constitute a portion of the
Premises and shall be subject to all terms and conditions of this Lease. During
the Term, Landlord shall provide a parking valet/attendant on all business days
during the hours of 8:00 a..m. to 6:00 p.m. Tenant, at its election, shall be
entitled to request Landlord to adjust the hours during which valet/attendant
parking is provided so that such hours commence one (1) hour earlier or one (1)
hour later, and end one
<PAGE>
(1) hour earlier or one (1) hour later, as the case may be, provided that, in
all events, Landlord shall not be obligated to provide valet/attendant parking
for in excess of ten (10) hours and further provided that any adjustment in
such hours requested by Tenant shall be subject to compliance with any
collective bargaining agreements then in effect with respect to the employees
providing parking and any excess cost incurred by reason of any such
adjustment in the hours shall be borne solely by Tenant. It is agreed that the
number of vehicles which can be reasonably valet parked in the Garage is sixty
(60), subject to an increase or decrease to a maximum of seventy (70) and a
minimum of fifty-four (54) which increase or decrease shall be subject to the
reasonable determination of Landlord and Tenant. Entrance to the Garage shall
be pursuant to a card key access system. Prior to the Lease Commencement Date,
Landlord shall substantially complete installation of a card key reader
apparatus at the Garage entrance facing Bluxome Street which shall allow 24
hour/7days per week access to the Garage via the use of magnetic card keys.
The Parking Lot Rent which Tenant shall pay to Landlord shall be the product
of the sum of Two Hundred Dollars ($200.00) multiplied by the number of
vehicles which can be reasonably valet parked in the Garage. The Parking Lot
Rent shall be adjusted upward on an annual basis, commencing on the first day
(the "First Adjustment Date") of the calendar month following the first
anniversary of the Lease Commencement Date and continuing thereafter on each
subsequent anniversary of the First Adjustment Date thereafter (each, an
"Adjustment Date") throughout the initial ten (10) year Term of this Lease, by
an amount equal to four percent (4%) of the Parking Lot Rent in effect for the
month immediately preceding the subject Adjustment Date. Thereafter during the
Extended Terms (if applicable), in the reasonable discretion of Landlord, the
Parking Lot Rent shall be periodically adjusted upward to reflect then-current
market conditions. In no event shall the Parking Lot Rent be decreased from
the Parking Lot Rent in effect for the month immediately preceding any
applicable Adjustment Date.
In the event that Landlord and Tenant are unable to agree upon the amount
of the increase or decrease in the number of vehicles which can be reasonably
valet parked in the Garage within ten business days following the written
request of either given to the other ("Outside Parking Date"), then the amount
of such increase or decrease shall be determined by a third party parking
company experienced in the valet parking of vehicles. The right to request a
determination by a third party parking company (or companies) as described in
this Paragraph shall be a one-time right and after exercise by either Landlord
or Tenant shall thereafter not be further exercisable by either Landlord or
Tenant. Landlord and Tenant shall first attempt to select a mutually agreeable
parking company to conduct a review of the Garage and determine on a basis
binding on both parties the amount of increase or decrease in the number of
vehicles which can be reasonably valet parked in the Garage (referred to as
the "Amount of Adjustment"). In the event Landlord and Tenant are unable to
agree on a parking company within ten (10) days of the Outside Parking Date,
the parties shall each select a parking company within twenty (20) days of the
Outside Parking Date, who together shall attempt to determine the Amount of
Adjustment. If either party fails to appoint a parking company within such
time period, the parking company timely appointed by the other party shall be
the sole parking company, whose determination shall be binding on both
parties. If two parking companies are timely appointed but they are unable to
agree on the Amount of Adjustment within forty (40) days of the Outside
Parking Date, they shall mutually select a third parking company and the three
parking companies shall each submit their determination of the Amount of
Adjustment within ten (10) business days following the selection of the third
parking company. The Amount of Adjustment shall be the average of the three
determinations, provided, however, that if either the high or low
determination differs from the middle determination by 10% or more, it shall
be disregarded and the two remaining
<PAGE>
determinations shall be averaged to determine the Amount of Adjustment. If
both the high and low determinations differ from the middle determination by
10% or more, then both shall be disregarded, and the Amount of Adjustment
shall be as determined by the middle parking company. Each party shall bear
the cost of its respective parking company; if a third parking company is
necessary, the parties shall share equally the cost of the third parking
company. All parking companies shall have a minimum of five (5) years
experience in the management and operation of valet parking lots and/or
garages and no parking company shall have previously worked for either the
Tenant or the Landlord.
If the Amount of Adjustment is determined subsequent to the Lease
Commencement Date, the Parking Lot Rent payable as of the Lease Commencement
Date shall be based upon the number of sixty (60) vehicles. In the event that
it is finally determined that an adjustment is required, then the Parking Lot
Rent payable on the first day of the next succeeding calendar month and
thereafter, shall be based upon the number of vehicles as so adjusted. In
addition, in the event that the Amount of Adjustment results in an increase in
the number of vehicles from the initially determined sixty (60), then within
twenty (20) days following receipt by Landlord and Tenant of final determination
of such Amount of Adjustment, Tenant shall pay to Landlord the amount of
additional Parking Lot Rent attributable to such adjustment based upon Two
Hundred Dollars ($200) per month per additional vehicle (pro rated if necessary
on the basis of a partial month). In the event that the Amount of Adjustment
results in a decrease in the number of vehicles from the initial sixty (60),
then Tenant shall be entitled to a credit against the next Parking Lot Rent then
due based upon such decrease in the number of vehicles at a rent of Two Hundred
Dollars ($200) per vehicle per month (with any partial month to be pro rated).
Tenant shall, from time to time, at its cost, be entitled to construct
storage areas within the Garage provided that such areas are constructed in
accordance with all applicable law and regulations and that such construction is
subject to Landlord's reasonable review. Notwithstanding the construction of
any one or more of such storage areas, the Parking Lot Rent otherwise payable by
Tenant as provided above in this Paragraph 4.3 shall not be subject to reduction
regardless of whether or not the construction of any storage areas within the
Garage reduces the number of vehicles which can be valet parked in the Garage.
4.4 The aggregate of the Monthly Basic Rent and the Parking Lot Rent from time
to time to be paid pursuant to the provisions of this Lease may sometimes be
referred to as the "Aggregate Monthly Basic Rent". The Aggregate Monthly Basic
Rent shall be payable in advance on the first day of each and every calendar
month during the Term as provided herein in connection with the Monthly Basic
Rent and the Parking Lot Rent, respectively.
4.5 All payments received by Landlord from Tenant for Monthly Basic Rent,
Parking Lot Rent, Operating Rent or any other sums due under this Lease shall be
applied to the oldest payment obligation owed by Tenant to Landlord. No
designation by Tenant, either in a separate writing or on a check or money
order, shall modify this clause or have any force or effect.
5. Operating Expenses.
------------------
5.1 For the purposes of this Subparagraph 5.1, the following terms are defined
as follows:
<PAGE>
Tenant's Percentage Share. Tenant's Percentage Share shall mean the
-------------------------
percentage set forth in the Summary.
Base Year. Base Year shall mean the year set forth in the Summary;
---------
provided, however, that should Tenant exercise its option for the First Extended
Term and/or the Second Extended Term, then the Base Year for the applicable
Extended Term shall be revised to mean the calendar year in which the applicable
Extended Term commences.
Operating Expenses. Operating Expenses shall consist of all costs of
------------------
operation and maintenance of the Building, the common areas and the Site as
determined by standard accounting practices, calculated assuming the Building is
ninety-five percent (95%) occupied (unless actually occupied in a greater
percentage, in which case the actual occupancy percentage shall be used),
including the following costs by way of illustration, but not limitation: real
property taxes and assessments and any taxes or assessments hereafter imposed in
lieu thereof; gross receipt taxes (whether assessed against Landlord or assessed
against Tenant and collected by Landlord, or both); the net cost and expense of
insurance for which Landlord is responsible hereunder or which Landlord or any
first mortgagee with a lien affecting the Premises reasonably deems necessary in
connection with the operation of the Building (including the deductible portion
of any insured loss); janitorial services; security; parking valet/attendant
expenses; card key parking apparatus repair and maintenance; any and all Garage-
related expenses, with all such valet/attendant, car key apparatus repair,
maintenance and other Garage-related expenses not to exceed such expenses
incurred by prudent operators of substantially similar sized garages within the
geographical location of the Premises; labor; utilities and utilities
surcharges, and any other costs levied, assessed or imposed by, or at the
direction of, or resulting from statutes or regulations or interpretations
thereof, promulgated by any federal, state, regional, municipal or local
government authority in connection with the use or occupancy of the Building or
the Premises or the parking facilities serving the Building or the Premises; the
cost (amortized over the useful life of the improvement or equipment in question
as reasonably determined by Landlord in accordance with generally accepted
accounting principles at a capitalization rate of ten percent (10%) of (a) any
capital improvements made to the Building by the Landlord which are reasonably
anticipated to increase the efficiency of the Building or made to the Building
by Landlord that are required under any governmental law or regulation that was
not applicable to the Building at the time it was constructed, or (b)
replacement of any building equipment needed to operate the Building at the same
quality levels (or levels of efficiency) as prior to the replacement; costs
incurred in the management of the Building, if any (including supplies, wages
and salaries of employees used in the management, operation and maintenance of
the Building, and payroll taxes and similar governmental charges with respect
thereto); on site Building management office rental; a management fee (not to
exceed 3% of the gross revenue receivable by Landlord from time to time in
connection with the Premises pursuant to this Lease); air conditioning; waste
disposal; heating; ventilating; elevator maintenance; supplies; materials;
equipment; tools; repair and maintenance of the structural portions of the
Building and the plumbing, heating, ventilating, air conditioning and electrical
systems installed or furnished by Landlord; and maintenance, costs and upkeep of
all parking and common areas, rental of personal property used in maintenance;
costs and expenses of gardening and landscaping, maintenance of signs (other
than Tenant's signs); personal property taxes levied on or attributable to
personal property used in connection with the entire Building, including the
common areas; reasonable audit or verification fees; and costs and expenses of
repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning,
<PAGE>
window washing, refuse removal, security and similar items, including
appropriate reserves.
Notwithstanding anything contained in this Paragraph 5.1 to the contrary,
Operating Expenses shall not include any of the following:
(a) electrical, water, sewer, gas, garbage, and janitorial costs (including
janitorial supplies) with respect to the Premises which are to be paid directly
by Tenant or reimbursed to Landlord as having been separately billed by Landlord
to Tenant as provided in Paragraph 5.2 below;
(b) depreciation on the Building or equipment therein;
(c) Landlord's executive salaries;
(d) real estate brokers' commissions;
(e) interest expense on Building financing;
(f) amortization of cost of tenant improvements in the Building;
(g) ground rent;
(h) income and franchise taxes;
(i) Landlord's cost of electricity or other service sold to tenants to the
extent Landlord is reimbursed therefore as a charge over the Monthly Basic Rent
and any additional rent payable under the lease with that tenant;
(j) third party accountants' fees, attorneys' fees and other professional
fees and costs incurred in connection with disputes or lease negotiations with
tenants or other occupants or prospective tenants or occupants of the
Building, the enforcement of any leases (including unlawful detainer
proceedings and the collection of rents), other than de minimis amounts, and
requests to assign or sublet;
(k) overhead and profit paid to subsidiaries or affiliates of the Landlord
for management or other services on or to the Building for supplies or other
materials, to the extent that the overall cost of the services, supplies or
materials provided by Landlord materially exceeds the competitive cost of the
services, supplies, or materials if obtained from an unrelated third party on
an arm's length basis;
(l) compensation paid to clerks, attendants, or other persons in commercial
concessions operated by the Landlord;
(m) rentals and other related expenses incurred in leasing air conditioning
systems, elevators, or other equipment ordinarily considered to be of a capital
nature;
(n) items and services for which Tenant reimburses the Landlord or pays
third parties or that the Landlord provides selectively to one or more tenants
of the Building other than Tenant without
<PAGE>
reimbursement;
(o) maintenance costs incurred in connection with repairs or other work
needed because of fire, windstorm, or other casualty or cause insured against
by Landlord or to the extent Landlord's insurance required under the terms of
the Lease would have provided insurance, whichever is greater;
(p) all voluntary contributions to any political or charitable
organizations or other industry related associations (e.g., BOMA);
(q) capital costs for the acquisition of sculpture, paintings or other art
objects;
(r) advertising, marketing and promotion costs;
(s) costs associated with the operation of the corporation or other entity
which constitutes the Landlord, as distinguished from costs of operation of the
Building, including accounting and legal costs, costs of defending lawsuits with
any mortgagee, and the costs of selling, syndicating, financing, mortgaging or
hypothecating any ownership interest in Landlord, or any of the Landlord's
interests in the Building;
(t) costs that are actually reimbursed to the Landlord by insurance
companies or other third parties; provided that the Landlord shall use
commercially reasonable efforts to pursue payment from such insurance
companies or other third parties (the costs of such efforts to procure payment
to be included as an Operating Expense);
(u) reserves for capital items, bad debts, or rental losses;
(v) the costs incurred to investigate the presence of any Hazardous
Material (as defined below), costs to respond to any claim of Hazardous
Material contamination or damage, costs to remove any Hazardous Material from
the Premises, Building or Site or to remediate any Hazardous Material
contamination, any judgments or other costs incurred in connection with any
Hazardous Material exposure or release, except to the extent that the cost is
caused by the storage, use, release or disposal of the subject Hazardous
Material by Tenant;
(w) fines and penalties incurred due to Landlord's operation of the
Building in violation of applicable laws or due to Landlord's failure to
timely pay real property taxes;
(x) except to the extent expressly permitted, any repairs of a capital
nature or costs for items that would normally be capitalized under generally
accepted accounting principles; and
(y) interest, charges and fees incurred with respect to mortgage financing
for the Building or Site.
As used herein, the term "real property taxes" shall include any form of
assessment, license fee, license tax, business license fee, tax, levy, charge,
or similar imposition, imposed by any authority having
<PAGE>
the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other
improvement or special assessment district thereof, as against any legal or
equitable interest of Landlord in the Premises, including, but not limited to,
the following:
(i) any tax on Landlord's "right" to rent or "right" to other income from
the Premises or as against Landlord's business of leasing the Premises;
(ii) any assessment, tax, fee, levy or charge in substitution, partially
or totally, of any assessment, tax, fee, levy or charge previously included
within the definition of real estate tax, it being acknowledged by Tenant and
Landlord that Proposition 13 was adopted by the voters of the State of
California in the June, 1978 Election and that assessments, taxes, fees, levies
and charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
(iii) any assessment, tax, fee, levy or charge allocable to or measured
by the area of the Premises or the rent payable hereunder, including, without
limitation, any excise tax levied by the State, City or Federal government, or
any political subdivision thereof, with respect to the receipt of such rent, or
upon or with respect to the possession, leasing, operating, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or
any portion thereof;
(iv) any assessment, tax, fee, levy or charge upon this transaction or any
document to which Tenant is a party, creating or transferring an interest or an
estate in the Premises;
(v) any assessment, tax, fee, levy or charge by any governmental agency
related to any transportation plan, fund or system instituted within the
geographic area of which the Building is a part; or
(vi) reasonable legal and other professional fees, costs and disbursements
incurred in connection with proceedings to contest, determine or reduce real
property taxes.
Notwithstanding any provision of this Paragraph 5.1 expressed or implied to
the contrary, "real property taxes" shall not include Landlord's federal or
state income, franchise, inheritance, gift or estate taxes. Real property taxes
also shall not include any tax or assessment expense (i) in excess of the amount
which would be payable if such tax or assessment expense were paid in
installments over the longest possible term; or (ii) imposed on land and
improvements other than the Building and/or Site. Tenant may in good faith
contest any tax or assessment, provided that Tenant indemnifies Landlord from
any loss or liability in connection therewith and further provided that Tenant
bears the cost of any such contest including without limitation the cost of any
interest and penalties which may be assessed.
5.2 Tenant shall directly and timely pay all electrical, gas, water, garbage
and sewer costs as well as janitorial costs (including the cost of janitorial
supplies) relating to the Premises. With respect to janitorial costs (including
the cost of janitorial supplies) tenant shall be entitled to contract with such
supplier of
<PAGE>
janitorial services as Tenant may elect (subject to the approval of Landlord,
which approval shall not be unreasonably withheld or delayed), or in the
alternative, shall be entitled to internally provide janitorial services in
connection with the Premises. In all events, Tenant shall provide janitorial
services in connection with the Premises in a commercially reasonable fashion
consistent with janitorial services provided in first class commercial
buildings in the geographical area in which the Premises is located. The cost
of all janitorial supplies in connection with the Premises shall be the
responsibility of Tenant. All such janitorial costs (including the costs of
janitorial supplies) shall be paid directly by Tenant. Upon request of the
Landlord, from time to time, but no more frequently than once during each
Lease Year, Tenant shall provide to Landlord evidence reasonably satisfactory
to Landlord of the payment of such costs. In the event that such costs are not
timely paid by Tenant, Landlord shall be entitled (but not obligated), upon
ten (10) days prior notice to Tenant, to pay such costs which payment shall
promptly be reimbursed by Tenant to Landlord within twenty (20) days after
receipt of Landlord's invoice, together with interest equal to the annual rate
of the lesser of ten percent (10%) or the maximum rate allowed by law from the
date of payment to the date of receipt by Landlord.
5.3 No later than April of each calendar year following the Lease Commencement
Date during the Term of this Lease, or as soon thereafter as possible, Landlord
shall endeavor to deliver to Tenant a statement ("Estimate Statement") wherein
Landlord shall estimate the Operating Expenses for the current calendar year,
and Tenant's Percentage Share of the excess, if any, of the estimated Operating
Expenses for the current calendar year over the Operating Expenses for the Base
Year. If Operating Expenses estimated in the Estimate Statement of the current
calendar year exceed the Operating Expenses of the Base Year then Tenant's
Percentage Share of such excess amount shall be divided into twelve (12) equal
monthly installments and Tenant shall pay to Landlord within thirty (30) days,
following the receipt of such statement, an amount equal to one (1) monthly
installment multiplied by the number of months from January in the calendar year
in which said statement is submitted to the month of such payment, both months
inclusive. Subsequent installments shall be paid concurrently with the regular
monthly rent payments for the balance of the calendar year and shall continue
until the next calendar year's Estimate Statement is rendered. If Landlord
determines that Tenant's Percentage Share of the excess Operating Expenses for
such current calendar year is greater than that set forth in the Estimate
Statement, then Landlord may, at any time, but not more frequently than once
during each Lease Year, deliver a revised Estimate Statement and Tenant shall
pay to Landlord, within thirty (30) days of the delivery of such revised
Estimate Statement, the difference between such revised Estimate Statement and
the original Estimate Statement for the portion of the current calendar year
which has then expired and Tenant shall pay during the balance of such current
calendar year a fraction of the balance of such difference as would fully
amortize such excess over the remaining months of the then current calendar
year. Notwithstanding anything to the contrary set forth in this Paragraph 5.3,
or elsewhere in this Lease or the Summary, Tenant shall have no obligation to
pay Tenant's Percentage Share of the increase in Operating Expenses over the
Base Year for the first twelve full calendar (12) months following the Lease
Commencement Date. Tenant's first obligation to pay Operating Rent shall accrue
in the thirteenth full calendar (13th) month following the Lease Commencement
Date. Notwithstanding the designation of Base Year in the Summary, for purposes
of calculating Tenant's share of the increase in real property taxes, the
initial real property taxes for purposes of determining any increase, shall be
the real property taxes based on an assessed value of the Premises, Building and
Site which takes into account the construction of Landlord's Work and the
Tenant's Improvements. Tenant's obligation to pay increases in real property
taxes, if any,
<PAGE>
shall commence as of the thirteenth (13th) full calendar month following the
Lease Commencement Date even if such increases, if any, cannot be calculated
until subsequent to such time.
By the first day of June of each succeeding calendar year during the Term
of this Lease, or as soon thereafter as possible (but, in any event, no later
than December 31 of such succeeding calendar year), Landlord shall endeavor to
deliver to Tenant a statement ("Actual Statement") wherein Landlord shall state
the actual Operating Expenses for the preceding calendar year. If the Actual
Statement reveals a greater increase in Tenant's Percentage Share of Operating
Expenses in excess of the Base Year than was estimated by Landlord in the
Estimate Statement delivered as provided herein, then within thirty (30) days
following receipt of the Actual Statement by Landlord, Tenant shall pay a lump
sum equal to said total increase over the Operating Expenses for the Base Year,
less the total of the monthly installments of increases set forth on the
Estimate Statement which were paid in the previous calendar year. If the Actual
Statement reveals that Tenant overpaid Operating Expenses for any calendar year,
any overpayment made by Tenant on the monthly installment basis provided above
shall be credited toward the next monthly rent falling due and the monthly
installment of Tenant's Percentage Share of Operating Expenses to be paid
pursuant to the then current Estimate Statement shall be adjusted to reflect
such lower expenses for the most recent calendar year, or if this Lease has been
terminated, such excess shall be credited against any amount which Tenant owes
Landlord pursuant to this Lease and, to the extent all amounts which Tenant owes
Landlord pursuant to this Lease have been paid, Landlord shall promptly pay such
excess to Tenant. Landlord shall not be entitled to deliver an Actual Statement
more than one time per calendar year. Any delay or failure by Landlord in
delivering any estimate or statement pursuant to this Paragraph shall not
constitute a waiver of its right to require an increase in Tenant's share of the
Operating Expenses in excess of the Base Year nor shall it relieve Tenant of its
obligations pursuant to this Paragraph, except that Tenant shall not be
obligated to make any payments based on such estimate or statement until thirty
(30) days after receipt of such estimate or statement.
5.4 Even though the Term has expired and Tenant has vacated the Premises, when
the final determination is made of Tenant's Percentage Share of Operating
Expenses for the year in which this Lease terminates, Tenant, within twenty (20)
days after receipt of Landlord's determination, shall pay any increase due over
the estimated expenses paid and conversely any overpayment made in the event
said expenses decrease shall be rebated by Landlord to Tenant, within twenty
(20) days after Landlord's determination.
5.5 Notwithstanding anything contained in this Paragraph 5, the rental payable
by Tenant each month shall in no event be less than the Monthly Basic Rent
specified in Paragraph 4 hereof. The excess Operating Expenses to be paid by
Tenant to Landlord pursuant to the provisions of this Paragraph 5 shall
sometimes be referred to in the aggregate as the "Operating Rent".
5.6 Notwithstanding any provision to the contrary contained in this Lease,
within sixty days after receipt by Tenant of Landlord's Operating Expenses for
any prior calendar year during the Term, Tenant or its authorized representative
shall have the right to inspect the books of Landlord upon reasonable notice and
during the business hours of Landlord at Landlord's office in the Building, or,
at Landlord's option, at such other location as Landlord reasonably may specify,
for the purpose of verifying the information contained in the statement. Unless
Tenant asserts specific errors within sixty (60) days after
<PAGE>
receipt of the statement, the statement shall be deemed correct as between
Landlord and Tenant.
6. Security Deposit.
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6.1 As and for security for Tenant's full and faithful performance of all the
terms, covenants and conditions of this Lease to be kept and performed by
Tenant, Tenant shall deposit with Landlord (i) cash in the amount of Two Hundred
Two Thousand, Two Hundred Seventy-Five Dollars ($202,275.00) and (ii) an
unconditional, irrevocable letter of credit ("LOC") in favor of Landlord in the
sum of Seven Hundred Ninety-Seven Thousand, Seven Hundred Twenty-Five Dollars
($797,725.00) (subject to adjustment pursuant to Subparagraph 6.2) from a bank
or other financial institution and in a form reasonably acceptable to Landlord.
If at any time during the Term, any item constituting rent as provided herein,
or any other sum payable by Tenant to Landlord hereunder, shall be overdue and
unpaid, beyond applicable cure periods, then Landlord may, at the sole option of
Landlord, but without any requirement to do so, draw down or make a claim or
demand for draw against the LOC (or at the election of Landlord against the cash
portion of the security deposit) an amount equal to the overdue and unpaid
amount, together with Landlord's actual and reasonable expenses incurred in
connection with the default, and apply such sum to payment of such overdue rent
or other sum. The LOC shall provide that any draw thereunder shall be
accompanied by a certificate of an officer of Landlord stating that Tenant is in
default under the Lease beyond the applicable notice and cure period, if any,
and that Landlord or its authorized agent is entitled to draw down on the LOC
the amount requested pursuant to the terms of this Lease. Further in the event
of the failure of Tenant to keep and perform any term, covenant or condition of
this Lease to be kept or performed by Tenant, beyond applicable cure periods,
then, at the sole option of Landlord, and after termination of this Lease,
Landlord may draw down the entire LOC (and draw against any remaining cash
portion of the security deposit), or so much thereof as may be necessary to
compensate Landlord for any loss or damage sustained or suffered by Landlord due
to such breach on the part of Tenant. In the event that all or any portion of
the LOC is drawn down by Landlord to pay overdue rent or other sums due and
payable to Landlord by Tenant hereunder, then Tenant shall, within ten (10) days
after receipt of written demand of Landlord, promptly remit to Landlord a
sufficient amount in cash or an additional letter of credit to restore
Landlord's security to the original amount of the LOC as provided in this
Paragraph. In the event that all or any portion of the cash portion of the
security deposit is charged against by Landlord to pay overdue rent or other
sums due and payable to Landlord by Tenant hereunder, then Tenant shall, within
ten (10) days after receipt of written demand of Landlord, promptly remit to
Landlord a sufficient amount in cash to restore the cash portion of Landlord's
security deposit as drawn against by Landlord. Any failure on the part of Tenant
to restore either the cash portion of the security deposit or the LOC in
accordance with the provisions immediately above within ten (10) days following
the date on which demand for restoration is deemed given hereunder, shall
constitute a default by Tenant pursuant to this Lease. In the event Landlord
transfers the LOC and the cash portion of the security deposit to any successor
in interest of Landlord to title of the Site and Building, then, in such event,
Landlord shall be discharged from any further obligation or liability with
respect to the LOC and the cash portion of the security deposit. Tenant waives
the provisions of California Civil Code Section 1950.7 and all other provisions
of law now in force or that become in force after the date of execution of this
Lease that provide that Landlord may claim from a security deposit only those
sums reasonably necessary to remedy defaults in the payment of rent, to repair
damages caused by Tenant, or to clean the Premises. Landlord and Tenant agree
that Landlord may, in addition, claim those sums reasonably necessary to
compensate
<PAGE>
Landlord for any out-of-pocket (but not consequential) loss or damage caused by
any act or omission of Tenant or Tenant's officers, agents, employees,
independent contractors or invitees. Landlord's obligations with respect to the
cash portion of the security deposit are those of a debtor and not of a trustee,
and Landlord is entitled to commingle the cash portion of the security deposit
with Landlord's general funds. Landlord shall not be required to pay Tenant
interest on any portion of the security deposit including without limitation the
cash portion of the security deposit.
The cash portion of the security deposit shall be delivered by Tenant to
Landlord within five (5) days following execution and delivery by Landlord and
Tenant of this Lease. The LOC shall be delivered by Tenant to Landlord within
ten (10) days after execution and delivery of this Lease by Landlord and Tenant.
6.2 The LOC shall be subject to adjustment under the following circumstances:
(a) Provided that Tenant completely and faithfully performs all terms,
conditions and obligations imposed upon Tenant by this Lease for the first nine
full calendar (9) months of the Term, and provided that Tenant is not then in
default, beyond any applicable cure period, of this Lease, the LOC may be
reduced by ten percent (10%) of its original amount at the conclusion of said
nine (9) month period. Thereafter, on each subsequent anniversary date of the
first reduction, and provided Tenant has not been in default of this Lease since
the prior reduction in the LOC, the LOC may be further reduced by ten percent
(10%) of the outstanding amount of the LOC. Notwithstanding any provision to
the contrary of this Lease including, without limitation, the provisions of this
Paragraph 6.2, in no event shall the security deposit to be given by Tenant,
pursuant to the provisions of Paragraph 6 be reduced to an amount less than a
cash deposit in the amount of Two Hundred and Two Thousand, Two Hundred and
Seventy-five Dollars ($202,275.00), Such minimum cash deposit shall be subject
to return to Tenant upon the expiration or earlier termination of this Lease
only in accordance with the provisions of Paragraph 6.5 below.
(b) If, on the tenth (10) month anniversary of the Lease Commencement
Date, or at any time thereafter, Tenant provides Landlord with satisfactory
evidence (such as audited financial statements) that Tenant's earnings before
income taxes, depreciation and amortization (EBITDA) reflect a profit for the
immediately preceding three (3) consecutive calendar quarters, and Tenant's
net worth is no less than Seventy-Five Million Dollars ($75,000,000.00), then
the LOC may be reduced to one month's Monthly Basic Rent. Thereafter, the LOC
shall be increased (i) to two (2) month's Monthly Basic Rent if Tenant's net
worth as determined in accordance with generally accepted accounting
principles falls below Seventy-Five Million Dollars ($75,000,000.00), (ii) to
four (4) month's Monthly Basic Rent if Tenant's net worth falls below Fifty
Million Dollars ($50,000,000.00), and (iii) to six (6) month's Monthly Basic
Rent if Tenant's net worth falls below Thirty Million Dollars
($30,000,000.00). Further, in the event that the financial statements of
Tenant at any time reflect a loss for two or more consecutive calendar
quarters on the basis of EBITDA, then the amount of the LOC otherwise then in
effect shall be increased by an amount equal to one month of Monthly Basic
Rent. All multiples of Monthly Basic Rent shall be calculated at a rental rate
of $32.50 per square foot of the Premises. The provisions of this Subparagraph
6.2(b) shall control in the event of a conflict with Subparagraph 6.2 (a).
Notwithstanding any provisions to the contrary contained in this Paragraph
6.2, if Tenant's net worth, after falling below any of the variables described
above in this Paragraph 6.2(b), subsequently rises to a higher net worth
threshold and
<PAGE>
remains at such higher threshold for three consecutive months, at the end of
such three month period Tenant shall have the right to replace the LOC in the
higher amount with an LOC for the lower amount provided for with respect to
the higher net worth threshold as described above in this Paragraph 6.2(b)
that Tenant has maintained for the preceding three month period subject,
however, to subsequent increase in the amount of the LOC should Tenant's net
worth again fall below such higher threshold amount. Tenant shall from time to
time promptly provide to Landlord for each calendar quarter during the Term
hereof a copy of Tenant's financial statement (audited if available) provided
that Tenant shall not be obligated to provide Landlord with a copy of Tenant's
financial statement more often than once per calendar quarter.
6.3 If, after any default by Tenant beyond applicable cure periods and a
termination of this Lease by Landlord as set forth in Paragraph 6.1 above and
Landlord has drawn down the entire LOC, any proceeds of the LOC in excess of
the sum equal to the amount necessary to compensate Landlord for any loss or
damage sustained or suffered by Landlord due to Tenant's default, together
with Landlord's actual and reasonable expenses incurred in connection
therewith, shall be held in a separate, interest-bearing account ("Account")
in Landlord's name at such national bank as Landlord reasonably selects
("Bank"). Tenant shall have no rights to the money in the Account, except for
(i) the return rights specified below, and (ii) the right to receive interest
on the Account, as specified herein. Landlord agrees to place on the signature
card for the Account the following language "[name of Landlord] is holding the
funds in the Account in accordance with a Lease dated [date of Lease] between
[name of Landlord] and USWeb Corporation. The rights of [name of Landlord] and
USWeb Corporation in and to the funds are subject to the terms of such Lease."
Within ten (10) business days after Landlord signs the signature card (or any
replacement signature card) on the Account, Landlord agrees to provide Tenant
with a copy of the signature card for the Account. Landlord agrees to request
the Bank to pay interest on the Account directly to Tenant on a quarterly
basis, and to report to the appropriate taxing authorities that such interest
has been paid to Tenant; provided, however, that if, despite Landlord's
request, the Bank will not or cannot pay the interest directly to Tenant, the
(x) the Bank shall pay interest on the Account directly to Landlord, in which
case, within ten (10) business days after Landlord receives such payment of
interest, Landlord shall pay to Tenant the interest Landlord receives from the
Bank on the Account, and (y) Landlord shall have the right to report to the
appropriate taxing authorities that such income is the income of Tenant.
Tenant represents to Landlord that Tenant's Federal Taxpayer Identification
Number is 87-0551650. If the proceeds of the LOC are placed in a fixed term
instrument, such as a certificate of deposit, then Landlord shall not be
liable for any prepayment penalty if Landlord uses the Account, or a portion
thereof, in accordance with the provisions of this Paragraph 6.
6.4 Notwithstanding anything contained in this Paragraph 6 to the contrary, if
Landlord draws on the LOC an amount in excess of the amount necessary to
compensate Landlord in full for any loss or damage sustained or suffered by
Landlord due to the default of Tenant, then Tenant shall have the right, upon
ten (10) days' prior written notice to Landlord, to obtain a refund from
Landlord of any excess proceeds of the LOC which Landlord has drawn upon, any
such refund being conditioned upon Tenant simultaneously delivering to Landlord
a new replacement LOC in the amount then required, and otherwise meeting the
requirements contained in this Paragraph 6.
6.5 Upon the expiration or earlier termination of this Lease, Landlord shall
return to Tenant so much
<PAGE>
of the LOC (and the cash portion of the security deposit) as has not been
applied or entitled to be held by Landlord to be applied to cure any and all
defaults by Tenant occurring prior to the expiration or earlier termination of
this Lease and any default by Tenant pursuant to the provisions of Paragraph
13.1(f) below.
7. Use.
---
7.1 Tenant shall use the Premises for general office purposes and purposes
incident thereto and shall not use or permit the Premises to be used for any
other purpose without the prior written consent of Landlord, which consent may
be granted or withheld in Landlord's sole discretion. Tenant shall not use or
occupy the Premises in violation of any recorded covenants, conditions and
restrictions affecting the Site or of any law or of the Certificate of Occupancy
issued for the Building, and shall upon five (5) days' written notice from
Landlord, discontinue any use of the Premises which is declared by any
governmental authority having jurisdiction to be a violation of any recorded
covenants, conditions and restrictions affecting the Site or of any law or of
said Certificate of Occupancy. Subject to the provision of Paragraph 54.2,
Tenant shall not install any radio or television antenna, loudspeaker or other
device on the roof or exterior walls of the Building. Tenant shall not
interfere with radio or television broadcasting or reception from or in the
Building or elsewhere. Tenant shall comply with any direction of any
governmental authority having jurisdiction which shall, by reason of the nature
of Tenant's specific use or alteration of the Premises, impose any duty upon
Tenant or Landlord with respect to the Premises or with respect to the use or
occupation thereof. Tenant shall not do or permit to be done anything which
will invalidate or increase the cost of any fire, extended coverage or any other
insurance policy covering the Building and/or property located therein and shall
comply with all rules, orders, regulations and requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar function. Tenant
shall within twenty (20) days after receipt of demand reimburse Landlord as
additional rent for any additional premium charged for such policy by reason of
Tenant's failure to comply with the provisions of this Paragraph 7. 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 or occupants
of the Building, or injure them, or use or allow the Premises to be used for any
unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on
or about the Premises. Tenant shall not commit or suffer to be committed any
waste in or upon the Premises and shall keep the Premises in first-class repair
and appearance. Tenant shall not place a load upon the Premises exceeding the
average pounds of live load per square foot of floor area specified for the
Building by Landlord's Architect, with the partitions to be considered a part of
the live load. Landlord reserves the right to prescribe the weight and position
of all safes, files and heavy equipment which Tenant desires to place in the
Premises so as to distribute properly the weight thereof. Tenant's business
machines and mechanical equipment which cause vibration or noise that may be
transmitted to the Building structure or to any other space in the Building
shall be so installed, maintained and used by Tenant as to eliminate such
vibration or noise. Tenant shall be responsible for all structural engineering
required to accommodate the structural load. Tenant shall fasten all files,
bookcases and like furnishings to walls in a manner to prevent tipping over in
the event of earth movements. Landlord shall not be responsible for any damage
or liability for such events.
7.2 Except for the normal and proper use and storage of typical cleaning
fluids and solutions, and office equipment supplies (such as copier toner), in
amounts commensurate with Tenant's use and occupancy of the Premises, Tenant
shall not use, introduce to the Premises, generate, manufacture,
<PAGE>
produce, store, release, discharge or dispose of, on, under or about the
Premises or transport to or from the Premises any Hazardous Material (as
defined below) or allow its employees, agents, contractors, invitees or any
other person or entity to do so. Tenant warrants that it shall not make any
use of the Premises which may cause contamination of the soil, the subsoil or
ground water. Tenant shall keep and maintain the Premises in compliance with,
and shall not cause or permit the Premises to be in violation of any and all
federal, state or local laws, ordinances, rules or regulations pertaining to
health, industrial hygiene or the environmental conditions on, under or about
the Premises. Tenant shall give immediate written notice to Landlord of (i)
any action, proceeding or inquiry by any governmental authority or any third
party with respect to the presence of any Hazardous Material on the Premises
or the migration thereof from or to other property or (ii) any spill, release
or discharge of Hazardous Materials that occurs with respect to the Premises
or Tenant's operations.
(a) Tenant shall indemnify and hold harmless Landlord, its directors,
officers, employees, agents, successors and assigns (collectively "Landlord")
from and against any and all claims arising from Tenant's use of the Premises
in violation of this paragraph. The indemnity shall include all costs, fines,
penalties, judgments, losses, reasonable attorney's fees, expenses and
liabilities incurred by Landlord for any such claim or any action or
proceeding brought thereon including, without limitation, (a) all foreseeable
consequential damages including without limitation loss of rental income and
diminution in property value; and (b) the costs of any cleanup, detoxification
or other ameliorative work of any kind or nature required by any governmental
agency having jurisdiction thereof or Landlord. This indemnity shall survive
the expiration or termination of this Lease. In any action or proceeding
brought against Landlord by reason of any such claim, upon notice from
Landlord if Landlord does not elect to retain separate counsel, Tenant shall
defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord.
(b) Landlord shall indemnify and hold harmless Tenant, its directors,
officers, employees, agents, successors and assigns (collectively, "Tenant")
from and against any and all claims arising from or relating to Hazardous
Materials actually existing and present at the Building or the Site or within
the Premises as of the Lease Commencement Date. The indemnity shall include
all costs, fines, penalties, judgments, losses, reasonable attorney's fees,
expenses and liabilities incurred by Tenant for any such claim or any action
or proceeding brought thereon including, without limitation, (a) all
foreseeable consequential damages; and (b) the cost of any clean up,
detoxification or other ameliorative work of any kind or nature required by
any governmental agency having jurisdiction thereof. This indemnity shall
survive the expiration or termination of this Lease. Any action or proceeding
brought against Tenant by reason of any such claim, upon notice from Tenant,
if Tenant does not elect to retain separate counsel, Landlord shall defend the
same at Landlord's expense by counsel reasonably satisfactory to Tenant.
(c) As used herein, the term "Hazardous Material" shall mean any substance
or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances designated
as hazardous or toxic by the city in which the Premises are located, the U.S.
Environmental Protection Agency, the Consumer Product Safety Commission, the
Food and Drug Administration, the California Water Resources Control Board,
the Regional Water Quality Control Board, San Francisco Bay Region, the
California Air Resources Board, CAL/OSHA Standards Board, Division of
Occupational Safety and Health, the California Department of Food and
Agriculture, the California Department of Health Services,
<PAGE>
and any federal agencies that have overlapping jurisdiction with such
California agencies, or any other governmental agency now or hereafter
authorized to regulate materials and substances in the environment. Without
limiting the generality of the foregoing, the term "Hazardous Material" shall
included all of those materials and substances defined as "hazardous
materials" or "hazardous waste" in Sections 66680 through 66685 of Title 22 of
the California Administrative Code, Division 4, Chapter 30, as the same shall
be amended from time to time, petroleum, petroleum-related substances and the
by-products, fractions, constituents and sub-constituents of petroleum or
petroleum-related substances, asbestos, and any other materials requiring
remediation now or in the future under federal, state or local statutes,
ordinances, regulations or policies.
8. Payments and Notices. All rents and other sums payable by Tenant to
--------------------
Landlord hereunder shall be paid to Landlord by check at the address
designated by Landlord in the Summary or at such other places as Landlord may
hereafter designate in writing. Any notice required or permitted to be given
hereunder must be in writing and may be given by personal delivery, mail, or
by recognized overnight courier. If notice is given by personal delivery, such
notice shall be deemed to be given upon delivery, if notice is given by
registered or certified mail addressed to Tenant at the address designated in
the Summary or to Landlord at both of the addresses designated in the Summary,
then such notice shall be deemed given three (3) business days following
deposit in the U.S. mail, postage prepaid, addressed to Tenant as designated
in the Summary or to Landlord at both of the addresses designated in the
Summary and if given by overnight courier shall be deemed given one (1)
business day following delivery to the courier, charges prepaid, addressed as
stated above. Either party may by written notice to the other specify a
different address for notice purposes. If more than one person or entity
constitutes the "Tenant" under this Lease, service of any notice upon any one
of said persons or entities shall be deemed as service upon all of said
persons or entities.
9. Brokers. The parties recognize that the brokers who negotiated this Lease
-------
are the brokers whose names are stated in the Summary, and agree that Landlord
shall be solely responsible for the payment of brokerage commissions to said
brokers, and that Tenant shall have no responsibility therefor. As part of the
consideration for the granting of this Lease, Tenant represents and warrants
to Landlord that to Tenant's knowledge no other broker, agent or finder
negotiated or was instrumental in negotiating or consummating this Lease and
that Tenant knows of no other real estate broker, agent or finder who is, or
might be, entitled to a commission or compensation in connection with this
Lease. Any broker, agent or finder of Tenant whom Tenant has failed to
disclose herein shall be paid by Tenant. Tenant shall hold Landlord harmless
from all damages and indemnify Landlord for all said damages paid or incurred
by Landlord resulting from any claims that may be asserted against Landlord by
any broker, agent or finder who has, or has claimed to have, rendered services
to Tenant undisclosed by Tenant herein. Landlord shall hold Tenant harmless
from all damages and indemnify Tenant for all said damages paid or incurred by
Tenant resulting from any claims that may be asserted against Tenant by any
broker, agent or finder who has, or has claimed to have, rendered services to
Landlord undisclosed by Landlord herein.
10.Holding Over. If Tenant remains in possession of the Premises after
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expiration or earlier termination of this Lease with Landlord's express
consent, Tenant's occupancy shall be a month to month tenancy at a rent agreed
upon by Landlord and Tenant but, in no event less than the aggregate of the
Monthly Basic Rent, Parking Lot Rent and Tenant's Percentage Share of the
Operating Costs payable under this Lease
<PAGE>
during the last full month before the date of expiration or earlier
termination. The month to month tenancy shall be on the terms and conditions
of this Lease except as provided in the preceding sentence and the Lease
clauses concerning extension rights. If Tenant holds over after the expiration
or earlier termination of the Term hereof without the express written consent
of Landlord, Tenant shall become a tenant at sufferance only, at a rental rate
equal to one hundred fifty percent (150%) of the Monthly Basic Rent and
Parking Lot Rent which would be applicable to the Premises upon the date of
such expiration (subject to adjustment as provided herein and prorated on a
daily basis) for the first sixty (60) days of such holdover, and two hundred
percent (200%) of such aggregate amount thereafter during the pendency of such
holdover, and otherwise subject to the terms, covenants and conditions herein
specified, so far as applicable including, without limitation, the obligation
to pay increased Operating Expenses as provided in Paragraph 5. Acceptance by
Landlord of rent after such expiration or earlier termination shall not
constitute a consent to a holdover hereunder or result in a renewal. The
foregoing provisions of this Paragraph 10 are in addition to and do not affect
Landlord's right of re-entry or any rights of Landlord hereunder or as
otherwise provided by law. If Tenant fails to surrender the Premises upon the
expiration of this Lease despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability arising out of
such failure, including without limitation, any claim made by any succeeding
tenant founded on or resulting from such failure to surrender. No provision of
this Paragraph 10 shall be construed as implied consent by Landlord to any
holding over by Tenant. Landlord expressly reserves the right to require
Tenant to surrender possession of the Premises to Landlord as provided in this
Lease upon expiration or other termination of this Lease. The provisions of
this Paragraph 10 shall not be considered to limit or constitute a waiver of
any other rights or remedies of Landlord provided in this Lease or at law.
11.Taxes on Tenant's Property. Tenant shall be liable for and shall pay
--------------------------
before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by
the inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based upon such increased assessments, which Landlord shall have the
right to do regardless of the validity thereof, but only under proper protest
if requested by Tenant, Tenant shall within ten (10) days after receipt of
demand repay to Landlord the taxes levied against Landlord, or the proportion
of such taxes resulting from such increase in the assessment; provided that in
any such event, at Tenant's sole cost and expense, Tenant shall have the
right, in the name of Landlord and with Landlord's full cooperation, to bring
suit in any court of competent jurisdiction to recover the amount of any such
taxes so paid under protest, any amount so recovered to belong to Tenant.
12.Condition of Premises. Other than with respect to the completion of
---------------------
Landlord's construction obligations set forth in the Work Letter, which shall
be done in a good and workmanlike manner in accordance with all applicable law
(including, without limitation, the Americans With Disabilities Act of 1990)
and in accordance with the provisions of the Work Letter, using materials and
equipment of good quality, Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty of any kind
whatsoever with respect to the Premises or the Building or with respect to the
suitability of either for the conduct of Tenant's business. The acceptance of
possession of the Premises by Tenant after receipt of the Notice, without
objection within the time prescribed for such
<PAGE>
objection, shall conclusively establish that the Premises and the Building
were at such time in satisfactory condition. Tenant acknowledges and agrees
that Tenant is relying solely upon Tenant's own inspection of the Premises,
and Tenant is not relying on any representation or warranty from the Landlord
regarding the Premises or the Building, except as specifically set forth in
this Lease or the Work Letter, including, without limitation, any
representation or warranty as to the physical condition, design or layout of
the Premises. Notwithstanding the foregoing; as of the Lease Commencement
Date, the heating, ventilating and air conditioning system, and the
electrical, plumbing, sewer, life safety and, if applicable, security systems
(collectively, "Building Systems") serving the Premises shall be in good
working order and repair. In connection with delivery of possession of the
Premises to Tenant with Landlord's Work and the Tenant's Improvements having
been substantially completed, Tenant, together with Tenant's Architect and a
representative of Landlord and Landlord's Architect, shall conduct a walk
through of the Premises and prepare a punch list setting forth a description
of any and all of Landlord's Work and/or Tenant's Improvements remaining to be
completed or defective and requiring repair or replacement as reasonably
determined by Tenant's Architect and Landlord's Architect. Landlord shall,
following the preparation of such punch list, diligently pursue completion or
repair of the punch list items and upon completing or repairing all such punch
list items, Landlord shall be considered to have fulfilled its obligations in
connection with construction of both the Landlord's Work and the Tenant's
Improvements. Landlord shall for a period of thirty (30) days following
delivery of possession of the Premises to Tenant, perform any repairs required
in connection with the Building Systems so as to maintain such systems in good
working order and repair, provided, however, that Landlord shall have no
obligation to make any repairs in connection with any portion of the Building
Systems damaged by Tenant or any of Tenant's contractors, employees or agents.
13.Alterations.
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13.1 Tenant may, at any time and from time to time during the Term of this
Lease, at its sole cost and expense, make alterations, additions, installations,
substitutions, improvements and decorations (hereinafter collectively called
"Changes" and individually, a "Change") in and to the Premises, excluding
structural changes, on the following conditions, and providing such Changes will
not result in a violation of or require a change in the Certificate of Occupancy
applicable to the Premises:
(a) The outside appearance, character or use of the Building shall not be
affected, and no Changes shall weaken or impair the structural strength or, in
the reasonable opinion of Landlord, lessen the value of the Building or create
the potential for unusual expenses to be incurred upon the removal of Changes
and the restoration of the Premises upon the termination of this Lease.
(b) No part of the Building outside of the Premises shall be physically
affected.
(c) The proper functioning of any of the mechanical, electrical, sanitary
and other service systems or installations of the Building ("Service
Facilities") shall not be adversely affected and there shall be no
construction which might interfere with Landlord's free access to the Service
Facilities or interfere with the moving of Landlord's equipment to or from the
enclosures containing the Service Facilities.
(d) In performing the work involved in making such Changes, Tenant shall be
bound by and
<PAGE>
observe all of the conditions and covenants contained in this Paragraph 13.
(e) All work shall be done at such times and in such manner as Landlord from
time to time may reasonably designate.
(f) At the date upon which the Term of this Lease shall end, or the date
of any earlier termination of this Lease, Tenant shall remove all Changes with
respect to which Landlord has given notice to Tenant requiring such removal as
provided in Paragraph 13.2 below and restore or repair the Premises in
accordance with the direction of Landlord as described in Paragraph 13.2
below. Such removal and restoration or repair shall be made not later than the
date of expiration of this Lease or thirty (30) days following any earlier
termination of this Lease. If Tenant fails to complete the removal and
restoration or repair, as the case may be, before the expiration of the Term,
or in the case of any earlier termination of this Lease, within thirty (30)
days following the occurrence of such termination, Landlord may complete the
removal and restoration or repair and charge the cost of such to Tenant. At
the expiration or earlier termination of this Lease, Tenant shall, in
addition, at the option of Landlord, be required to remove and restore any
Change (including a Minor Change, as defined below) with respect to which
Tenant has failed to give notice to Landlord in accordance with the provisions
of Paragraph 13.2 below. Any such removal and restoration by Tenant shall be
made within thirty (30) days following the request by Landlord (which request
by Landlord in the case of expiration of this Lease, shall not be given later
than thirty (30) days prior to such expiration and, in the case of earlier
termination of this Lease, shall not be given later than the date of such
earlier termination) and Landlord may complete the removal and restoration of
any such Change and charge the cost to Tenant in the event that Tenant fails
to timely complete such removal and restoration.
13.2 Before proceeding with any Change (exclusive only of changes to items
constituting Tenant's personal property and non-structural Changes not costing
in the aggregate more than Twenty-five Thousand Dollars ($25,000) per work of
improvement and not requiring any building permit or other like permit from any
applicable governmental agency), Tenant shall submit to Landlord plans and
specifications for the work to be done, which shall in all cases require
Landlord's prior written approval which shall not be unreasonably withheld or
delayed. In connection with any nonstructural changes not costing in the
aggregate, more than Twenty-five Thousand Dollars ($25,000) per work of
improvement and not requiring any building permit or like permit from any
applicable governmental agency ("Minor Change"), Tenant shall deliver to
Landlord at least ten (10) days prior to commencement of such Minor Change, a
general description of the proposed Change including a copy of any plans and
specifications available. Landlord's consent shall not be required in
connection with any proposed Minor Change although construction of any such
Minor Change by Tenant shall otherwise be performed in accordance with the
provisions of this Paragraph 13. At the time Tenant requests the consent of
Landlord to a proposed Change (other than a Minor Change) Landlord, in
connection with granting any such consent shall advise Tenant as to whether
Landlord will require Tenant upon the expiration of this Lease or any earlier
termination of this Lease to remove any such Change and, in the event that
Landlord elects to require such removal, whether Landlord will require Tenant to
(i) restore the Premises to its condition prior to the making of such Change or,
(ii) merely to remove the Change and repair any damages resulting from such
removal. In connection with any Minor Change of which Landlord receives notice
from Tenant, Landlord shall advise Tenant as to whether Landlord will require
removal of such Change at the
<PAGE>
expiration or earlier termination of this Lease and in connection with any
required removal, as to whether Landlord will require restoration or merely
repair as described above. In connection with any Change requiring Landlord's
approval, Landlord may confer with consultants in connection with the review
of the plans and specifications. If Landlord or such consultant(s) shall
disapprove of any of the Tenant's plans Tenant shall be advised of the reasons
of such disapproval. In any event, Tenant agrees to pay to Landlord, as
additional rent, the reasonable cost of such consultation and review (but not
in excess of $1,000 per request) within twenty (20) days after receipt of
invoices either from Landlord or such consultant(s). Any Change for which
approval has been received shall be performed strictly in accordance with the
approved plans and specifications, and no material amendments or additions to
such plans and specifications shall be made without the prior written consent
of Landlord which shall not be unreasonably withheld or delayed and Minor
Changes shall generally be performed in accordance with the notice given by
Tenant to Landlord.
13.3 If the proposed Change requires approval by or notice to the lessor of a
superior lease or the holder of a mortgage, no Change shall be proceeded with
until such approval has been received, or such notice has been given, as the
case may be, and all applicable conditions and provisions of said superior lease
or mortgage with respect to the proposed Change or alteration have been met or
complied with at Tenant's expense; and Landlord, if it approves the Change, will
promptly request such approval or give such notice, as the case may be.
13.4 Tenant shall submit to Landlord the name and address of each contractor
intended to be used by Tenant in connection with construction of Changes and
Landlord's approval thereof shall not be unreasonably withheld or delayed. No
contractor which is reasonably unacceptable to Landlord shall be engaged by
Tenant. All costs and expenses incurred in Changes shall be timely paid by
Tenant after each billing therefor. If Landlord approves the construction of
specific interior improvements in the Premises by contractors or mechanics
selected by Tenant and approved by Landlord, then Tenant's contractors shall
obtain on behalf of Tenant and at Tenant's sole cost and expense, (i) all
necessary governmental permits and certificates for the commencement and
prosecution of Tenant's Changes and for final approval thereof upon completion,
and (ii) at Landlord's request, a completion and lien indemnity bond, or other
surety, reasonably satisfactory to Landlord, for the Changes. In the event
Tenant shall request any changes in the work to be performed after the
submission of the plans referred to in this Paragraph 13, such additional
changes shall be subject to the same approvals and notices as the changes
initially submitted by Tenant.
13.5 All Changes and the performance thereof shall at all times comply with (i)
all laws, rules, orders, ordinances, directions, regulations and requirements of
all governmental authorities, agencies, offices, departments, bureaus and boards
having jurisdiction thereof, (ii) all rules, orders, directions, regulations and
requirements of the Pacific Fire Rating Bureau, or of any similar insurance body
or bodies, and (iii) all reasonable rules and regulations of Landlord, and
Tenant shall cause Changes to be performed in compliance therewith and in good
and first class workmanlike manner, using materials and equipment at least equal
in quality and class to the existing improvements and installations of the
Building. Changes shall be performed in such manner as not to delay or impose
any additional expense upon Landlord in construction, maintenance or operation
of the Building, and shall be performed by contractors or mechanics approved by
Landlord and submitted to Tenant pursuant to this Paragraph, who shall
coordinate their work in cooperation with any other work being performed with
respect to the Building.
<PAGE>
Throughout the performance of Changes, Tenant, at its expense, shall carry, or
cause to be carried, workmen's compensation insurance in statutory limits, and
general liability insurance for any occurrence in or about the Building, of
which Landlord and its managing agent shall be named as parties insured, in
such limits as Landlord may reasonably prescribe, with insurers reasonably
satisfactory to Landlord all in compliance with Subparagraph 20.2.
Notwithstanding any provision of this Lease to the contrary, in no event shall
Landlord be required to undertake any alteration or any improvements of any
kind whatsoever in connection with the Premises or the Building as a result of
or in connection with any Changes being made by Tenant and specifically, but
without limitation, Landlord shall not be required to make any improvements or
alteration of any kind whatsoever in order to comply with any applicable laws,
orders, ordinances, regulations or building codes which may be required in
connection with Changes being made by Tenant.
13.6 Tenant further covenants and agrees that any mechanic's lien filed against
the Premises or against the Building for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within twenty (20) days after the receipt of
notice of filing thereof, at the cost and expense of Tenant. All alterations,
decorations, additions or improvements upon the Premises, made by either party,
including (without limiting the generality of the foregoing) all wallcovering,
built-in cabinet work, paneling and the like, shall, unless Landlord elects
otherwise, at the time set forth in Paragraph 13.1(f) above, become the property
of Landlord, and shall remain upon, and be surrendered with the Premises, as a
part thereof, at the end of the Term hereof. Notwithstanding any provision to
the contrary contained in this Paragraph 13.6, Tenant shall not be required to
remove or restore any Changes which Landlord agreed in accordance with the
provisions of Subparagraph 13.1(f) need not be removed or restored. In no event
shall Tenant be obligated to remove the Landlord's Work or the Tenant's
Improvements upon the expiration or earlier termination of this Lease.
13.7 All articles of personal property and all business and trade fixtures,
machinery and equipment, furniture and movable partitions owned by Tenant or
installed by Tenant at its expense in the Premises shall be and remain the
property of Tenant and may be removed by Tenant at any time during the Term
provided Tenant is not in default hereunder, and provided that Tenant shall
repair any damage caused by such removal. If Tenant shall fail to remove all of
its effects from said Premises upon termination of this Lease for any cause
whatsoever, Landlord may, at its option, remove the same in any manner that
Landlord shall choose, and store said effects without liability to Tenant for
loss thereof, and Tenant agrees to pay Landlord within ten (10) days after
receipt of demand any and all expenses incurred in such removal, including court
costs and reasonable attorneys' fees and storage charges on such effects for any
length of time that the same shall be in Landlord's possession or Landlord may,
at its option, without notice, sell said effects, or any of the same, at private
sale and without legal process, for such price as Landlord may obtain and apply
the proceeds of such sale against any amounts due under this Lease from Tenant
to Landlord and against the expense incident to the removal and sale of said
effects.
13.8 Subject to Landlord's agreement to minimize any disturbance of Tenant's use
of the Premises, Landlord reserves the right at any time and from time to time
without the same constituting an actual or constructive eviction and without
incurring any liability to Tenant therefor or otherwise affecting Tenant's
obligations under this Lease, to make such changes, alterations, additions,
improvements, repairs or
<PAGE>
replacements in or to the Site or the Building (including the Premises if
required so to do by any law or regulation) and the fixtures and equipment
thereof, as well as in or to the street entrances, halls, passages and
stairways thereof, on ninety (90) days advance written notice to Tenant,
and/or to change the name by which the Building is commonly known, as Landlord
may deem necessary or desirable. Nothing contained in this Paragraph 13, shall
be deemed to relieve Tenant of any duty, obligation or liability of Tenant
with respect to making any repair, replacement or improvement or complying
with any law, order or requirement of any government or other authority and
nothing contained in this Paragraph 13, shall be deemed or construed to impose
upon Landlord any obligation, responsibility or liability whatsoever, for the
care, supervision or repair of the Building or any part thereof other than as
otherwise provided in this Lease. Landlord's exercise of the foregoing rights
shall not materially increase Tenant's obligations nor diminish Tenant's
rights under this Lease, or interfere with Tenant's parking rights.
13.9 The construction of the improvements to the Premises to be constructed
pursuant to the provisions of the Work Letter attached to this Lease as Exhibit
E shall be governed by the terms of such Work Letter and not by the provisions
of this Paragraph 13.
14.Repairs.
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14.1 Subject to the provisions of Paragraph 12, by entry hereunder, Tenant
accepts the Premises as being in good and sanitary order, condition and repair.
Tenant shall, when and if needed, at Tenant's sole cost and expense, maintain
and make all repairs to the Premises and every part thereof, to keep, maintain
and preserve the Premises in first class condition, excepting ordinary wear and
tear, casualties, condemnation and acts of God. Any such maintenance and
repairs shall be performed by Landlord's contractor, or a contractor or
contractors reasonably approved in advance in writing by Landlord. All costs
and expenses incurred in such maintenance and repair shall be paid by Tenant
within twenty (20) days after receipt of billing by Landlord or such contractor
or contractors. Tenant shall upon the expiration or sooner termination of the
Term hereof surrender the Premises to Landlord in the same condition as when
received, reasonable wear and tear, casualties, condemnation, Hazardous
Materials not existing, released or disbursed by Tenant or any of its employees,
agents, contractors or invitees and acts of God and Changes not required to be
removed excepted. Landlord shall have no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof and the parties
hereto affirm that Landlord has made no representations to Tenant respecting the
condition of the Premises or the Building except as specifically herein set
forth or in the Tenant's Work Letter. Notwithstanding anything set forth above
in this Paragraph to the contrary, Tenant shall have no obligation to install,
maintain, repair or replace any of the structural elements or systems of the
Building (including, without limitation, the Building Systems, as defined
above), unless such work is required due to Tenant's specific use or misuse of
the Premises. Notwithstanding any provision to the contrary contained in this
Lease, as part of its maintenance and repair obligations, Tenant shall not be
required to construct or pay the cost of (i) complying with any laws existing as
of the Commencement Date, including without limitation, all Hazardous Materials
Laws (as defined below) regarding the presence of Hazardous Materials, unless
the same are stored, used or disposed of by Tenant, its agents, invitees or
employees on, in, under or about the Premises; or (ii) the correction of any
condition existing on the Premises as of the Commencement Date; or (iii) the
correction of any latent or structural defect in the Premises during the Term,
as it may be extended.
<PAGE>
14.2 Anything contained in Subparagraph 14.1 above to the contrary
notwithstanding, Landlord shall repair and maintain the structural portions of
the Building, including the basic plumbing, heating, ventilating, air
conditioning and electrical systems installed or furnished by Landlord, unless
such maintenance and repairs are caused in part or in whole by the act, neglect,
fault of or omission of any duty by Tenant, its agents, servants, employees or
invitees, in which case Tenant shall pay to Landlord as additional rent, the
reasonable cost of such maintenance and repairs. Landlord shall not be liable
for any failure to make any such repairs, or to perform any maintenance unless
such failure shall persist for an unreasonable time after written notice of the
need of such repairs or maintenance is given by Tenant to Landlord. Except as
provided in Paragraph 21 hereof there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with Tenant's
business arising from the making of any repairs, alterations or improvements in
or to any portion of the Building or the Premises or in or to fixtures,
appurtenances and equipment therein. Tenant hereby waives the provisions of
California Civil Code Sections 1932(1), 1941 and 1942 and of any similar law,
statute or ordinance now or hereafter in effect. Notwithstanding anything to
the contrary contained in this Paragraph 14, Tenant shall maintain and repair at
its sole cost and expense, and with maintenance contractors approved by
Landlord, all non-base building facilities, including lavatory, shower, toilet,
washbasin and kitchen facilities and heating and air conditioning systems,
including all plumbing connected to said facilities or systems installed by
Tenant or on behalf of Tenant (including, without limitation, the Tenant's
Improvements) or existing in the Premises at the time of delivery of possession
of the Premises to Tenant by Landlord exclusive only of normal wear and tear.
The provisions of the immediately preceding sentence shall not apply to the
Building basic heating and air conditioning system or to the basic plumbing
system (excluding lavatory, shower, toilet, washbasin, and kitchen facilities
actually located within the Premises as well as base building facilities
installed by Tenant or at Tenant's request as a part of the Tenant's
Improvements).
15.Liens. Tenant shall not permit any mechanic's, materialmen's or other liens
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to be filed against the real property of which the Premises form a part nor
against the Tenant's leasehold interest in the Premises. Landlord shall have
the right at all reasonable times to post and keep posted on the Premises any
notices which it deems necessary for protection from such liens. If any such
liens are filed and Tenant fails to remove such liens within twenty (20) days
after receipt of notice of attachment thereof, Landlord may, without waiving
its rights and remedies based on such breach of Tenant and without releasing
Tenant from any of its obligations, cause such liens to be released by any
means it shall deem proper, including payment in satisfaction of the claim
giving rise to such lien. Tenant shall pay to Landlord at once, upon notice by
Landlord, any sum paid by Landlord to remove such liens, together with
interest at the maximum rate per annum permitted by law from the date of such
payment by Landlord.
16.Entry by Landlord. Upon reasonable prior notice, Landlord reserves and
-----------------
shall at any and all reasonable times (except in the case of emergency, in
which case, Landlord shall have the right for immediate entry without notice)
have the right to enter the Premises for any valid purpose including without
limitation to inspect the same, to supply any service to be provided by
Landlord to Tenant hereunder, to submit said Premises to prospective
purchasers or mortgagors/lenders or, during the last nine (9) months of the
Term of this Lease, to prospective tenants, to post notices of
nonresponsibility, to alter, improve or repair the Premises or any other
portion of the Building, all without being deemed guilty of any eviction of
Tenant
<PAGE>
and without abatement of rent, and may, in order to carry out such purposes,
erect scaffolding and other necessary structures where reasonably required by
the character of the work to be performed, provided that the business of
Tenant shall be interfered with as little as is reasonably practicable.
Notwithstanding any provision to the contrary contained in this Lease, any
entry by Landlord or Landlord's agents shall not impair Tenant's operations
more than reasonably necessary, and Tenant shall have the right to have an
employee accompany Landlord and/or its agents at all times that Landlord
and/or its agents are present on the Premises except in the case of an
emergency in which event Landlord shall be entitled to enter the Premises
regardless of whether an employee is available to accompany Landlord. 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, and any other loss occasioned thereby except to the extent
caused by the gross negligence or willful misconduct of Landlord, its agents,
employees or contractors. For each of the aforesaid purposes, Landlord shall
at all times have and retain a key with which to unlock all of the doors in,
upon and about the Premises excluding Tenant's vaults, safes, and security
areas, and Landlord shall have the means which Landlord may deem proper to
open said doors in an emergency in order to obtain entry to the Premises, and
any entry to the Premises obtained by Landlord by any of said means, or
otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an
eviction of Tenant from the Premises or any portion thereof, and any damages
caused on account thereof shall be paid by Tenant except to the extent caused
by the gross negligence or willful misconduct of Landlord, its agents,
employees or contractors. It is understood and agreed that no provision of
this Lease shall be construed as obligating Landlord to perform any repairs,
alterations or decorations except as otherwise expressly agreed herein to be
performed by Landlord. Landlord shall attempt in the exercise of its rights
under this Paragraph 16 to minimize any disturbance of Tenant's use and
possession of the Premises and to provide as much notice to Tenant as may be
reasonably possible prior to any such exercise of Landlord's rights under this
Paragraph 16.
17.Utilities and Services. Landlord agrees, during the Term, to furnish to
----------------------
the Premises Monday through Friday, 8:00 a.m. through 5:30 p.m., holidays
excepted, reasonable quantities of electric current for normal lighting and
fractional horsepower office machines, water for lavatory and drinking
purposes, heat and air conditioning required in Landlord's reasonable judgment
for the comfortable use and occupancy of the Premises, washing of windows with
reasonable frequency as reasonably determined by Landlord and elevator service
by non attended automatic elevators. Landlord shall not be liable for, and
Tenant shall not be entitled to any abatement or reduction of rent by reason
of Landlord's failure to furnish any of the foregoing when such failure is
caused by accident, breakage, repairs, strikes, lockouts or other labor
disturbances or labor disputes of any character, or for other causes beyond
Landlord's reasonable control. Landlord's cost of providing services pursuant
to this Paragraph 17, shall be part of Operating Expenses to the extent not
expressly excluded pursuant to the provisions of Paragraph 5.1. Tenant hereby
waives the provisions of California Civil Code Section 1932(1) or any other
applicable existing or future law, ordinance or governmental regulation
permitting the termination of this Lease due to the interruption or failure of
or inability to provide any services required to be provided by Landlord
hereunder. Landlord shall provide Tenant access to the Premises on a twenty-
four (24) hour per day basis, subject to events beyond Landlord's reasonable
control. Notwithstanding any provision to the contrary of this Paragraph 17,
pursuant to the provisions of Paragraph 5.2, Tenant is to contract directly
for and obtain (and Landlord is to have no responsibility for) all utilities
and janitorial services and supplies.
<PAGE>
If water, gas, electric current, heat or air conditioning fail to be
provided to the Premises and the Premises becomes completely untenable and
unusable by Tenant and such failure (i) continues for in excess of seven (7)
consecutive business days and (ii) results from the gross negligence or
intentional misconduct of Landlord, Tenant shall be entitled to give notice to
Landlord ("Initial Notice") specifying such situation (the "Abatement Event").
If Landlord has not cured such Abatement Event within three (3) business days
after receipt of the Initial Notice, or in the case of an Abatement Event which
cannot reasonably be cured within three (3) business days, in the event that
Landlord has not commenced to cure such Abatement Event within three (3)
business days and thereafter diligently continue such cure to completion, Tenant
may deliver an additional, notice to Landlord (the "Additional Notice")
specifying such uncured Abatement Event and Tenants intention to abate the
payment of Monthly Basic Rent and Parking Lot Rent under this Lease. If
Landlord does not cure the Abatement Event within two (2) business days after
receipt of the Additional Notice, or in the case of an Abatement Event not
reasonably curable within such two (2) business days, in the event that Landlord
fails to commence to cure such Abatement Event within such two (2) business
days, (in each case, the date of expiration of the two (2) business days being
referred to as the "Abatement Date"), Tenant may, upon written notice to
Landlord, immediately abate the Monthly Basic Rent, the Parking Lot Rent and the
Operating Rent payable with respect to the Premises for the period beginning on
the Abatement Date and the total nonuse of the Premises by Tenant to the earlier
of the date Landlord cures such Abatement Event or the Tenant recommences the
use of the Premises or any portion of the Premises. In the event that Tenant
abates the payment of Monthly Basic Rent, the Parking Lot Rent and/or the
Operating Rent, on the basis of the provisions immediately above and such
provisions allowing abatement have not been fully and completely satisfied,
Tenant shall be in default pursuant to this Lease and Landlord shall be entitled
to all rights and remedies in connection with such default.
18.Indemnification.
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18.1 To the fullest extent permitted by law, and except to the extent caused by
the gross negligence or willful misconduct of Landlord, its agents, employees or
contractors, Tenant hereby agrees to defend, indemnify, protect and hold
Landlord harmless against and from any and all loss, cost, damage or liability
arising in whole or in part from Tenant's use of the Premises or the conduct of
its business or from any activity, work, or thing done, permitted or suffered by
Tenant, its agents, contractors, employees or invitees in or about the Premises,
Building and/or Site, and hereby agrees to further indemnify and hold harmless
Landlord against and from any and all loss, cost, damage or liability arising in
whole or in part from any breach or default in the performance of any obligation
on Tenant's part to be performed under the terms of this Lease or arising from
any act, neglect, fault or omission of Tenant, or of its agents, employees or
invitees, and from and against all costs, reasonable attorneys' fees, expenses
and liabilities incurred for such claim or any action or proceeding brought
thereon. In case any action or proceeding is brought against Landlord by reason
of any such claim, Tenant upon notice from Landlord hereby agrees to defend the
same at Tenant's expense by counsel reasonably approved in writing by Landlord.
Tenant, as a material part of the consideration to Landlord, hereby assumes all
risk of damage to property or injury to persons in, upon or about the Premises
from any cause whatsoever except to the extent caused by Landlord's gross
negligence, intentional misconduct or the failure of Landlord to observe any of
the terms and conditions of this Lease and such failure has persisted for an
unreasonable period of time after written
<PAGE>
notice of such failure, and Tenant hereby waives all its claims in respect
thereof against Landlord.
18.2 Landlord shall indemnify Tenant and hold it harmless from any loss by
reason of injury to person or property to the extent such injury is caused by
the gross negligence or intentional misconduct of Landlord or its agents,
employees or contractors, including without limitation any liability or injury
to the person or property of Landlord, its officers, directors, partners,
employees, agents, invitees or guests. Nothing herein shall relieve Tenant of
liability for its own willful acts or negligence.
19.Damage to Tenant's Property. Notwithstanding the provisions of Paragraph 18
---------------------------
to the contrary, except to the extent caused by the gross negligence or
willful misconduct of Landlord, its agents, employees or contractors, Landlord
or its agents shall not be liable for any damage to property entrusted to
employees of the Building (except by reason of the gross negligence of such
employees), nor for loss of or damage to any property by theft or otherwise,
nor for any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak from any part of the Building or from the pipes, appliances or plumbing
works therein or from the roof, street or sub-surface or from any other place
or resulting from dampness or any other patent or latent cause whatsoever.
Landlord or its agents shall not be liable for for interference with the light,
air, view or intangible characteristics or qualities of the Premises. Tenant
shall give prompt notice to Landlord in case of fire or accidents in the
Premises or in the Building or of defects known to Tenant therein or in the
fixtures or equipment located therein. Further, neither Landlord nor any
partner, director, officer, agent, servant or employee of Landlord shall be
liable: (i) for any such damage caused by other tenants or persons in, upon or
about the Building, or caused by operations in the construction of any
private, public or quasi-public work (the limitations of liability set forth
in this Clause (i) shall not apply to any damage or liability caused by the
gross negligence or intentional misconduct of Landlord or its agents,
employees or contractors); or (ii) for consequential damages, including lost
profits, of Tenant or any person claiming through or under Tenant.
20.Insurance.
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20.1 During the Term hereof, Tenant, at its sole expense, shall obtain and keep
in force the following insurance:
(a) Commercial general liability insurance naming the Landlord as an
additional insured against any and all claims for bodily injury and property
damage occurring in, or about the Premises arising out of Tenant's use and
occupancy of the Premises. Such insurance shall have a combined single limit
of not less than Two Million Dollars ($2,000,000.00) per occurrence with a
Five Million Dollars ($5,000,000.00) - aggregate limit. Such liability
insurance shall be primary and not contributing to any insurance available to
Landlord and Landlord's insurance shall be in excess thereto. In no event
shall the limits of such insurance be considered as limiting the liability of
Tenant under this Lease.
(b) Personal property insurance insuring all equipment, trade fixtures,
inventory, fixtures and personal property located on or in the Premises for
perils covered by the causes of loss - special form (all risk) and in addition,
coverage for flood, and boiler and machinery (if applicable). Such insurance
shall be written on a replacement cost basis in an amount equal to the full
replacement value of the aggregate of the foregoing less any applicable
deductible.
<PAGE>
(c) Workers' compensation insurance in accordance with statutory law.
(d) Loss of income and extra expense insurance in such amounts as will
reimburse Tenant for direct or indirect loss of earnings attributable to all
perils commonly insured against by prudent tenants or attributable to prevention
of access to the Premises or to the Building as result of such perils.
(e) Any other form or forms of insurance as Tenant, Landlord, or Landlord's
mortgagees or ground or primary lessors may reasonably require from time to time
(with additions not to be required more than once in any Lease Year) in form, in
amounts, and for insurance risks against which a prudent tenant of a comparable
size and in a comparable business would protect itself.
20.2 The policies required to be maintained by Tenant shall be with companies
rated AX or better in the most current issue of Best's Insurance Reports.
Insurers shall be licensed to do business in the state in which the Premises are
located and domiciled in the USA. Any deductible amounts under any insurance
policies required hereunder shall not exceed Ten Thousand Dollars ($10,000).
Certificates of insurance shall be delivered to Landlord prior to the Lease
Commencement Date and annually thereafter at least thirty (30) days prior to the
expiration date of the old policy. Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms hereof
in a blanket policy, provided such blanket policy expressly affords coverage to
the Premises and to Landlord as required by this Lease. Each policy of
insurance shall provide that Landlord and Landlord's managing agent (and any
mortgagee) are additional insureds and shall provide notification to Landlord at
least thirty (30) days prior to any cancellation or modification to reduce the
insurance coverage.
20.3 During the Term hereof, Landlord shall insure the Building (excluding any
property which Tenant is obligated to insure under Subparagraph 20.l(b) hereof
but including the Landlord's Work and Tenant's Improvements) against damage with
All Risk insurance in the amount of the full replacement cost of the Building
and public commercial liability insurance, all in such amounts and with such
deductibles as Landlord considers appropriate and consistent with the provisions
of Paragraph 20.8. Landlord may, but shall not be obligated to, obtain and
carry any other form or forms of insurance as it or Landlord's mortgagees may
determine advisable. Landlord shall not be required to maintain earthquake
coverage. Notwithstanding any contribution by Tenant to the cost of insurance
premiums, as provided herein, Tenant acknowledges that it has no right to
receive any proceeds from any insurance policies carried by Landlord.
20.4 Tenant will not knowingly keep, use, sell, or offer for sale in, or upon,
the Premises any article which may be prohibited by any insurance policy
periodically in force covering the Building. If Tenant's occupancy or business
in, or on, the Premises, whether or not Landlord has consented to the same,
results in any increase in premiums for the insurance periodically carried by
Landlord with respect to the Building, Tenant shall pay any such increase in
premiums as additional rent within twenty (20) days after being billed therefor
by Landlord. In determining whether increased premiums are a result of Tenant's
use of the Premises, a schedule issued by the organization computing the
insurance rate on the Building or the Premises showing the various components of
such rate, shall be conclusive evidence of the several items and charges which
make up such rate. Tenant shall promptly comply with all reasonable requirements
of the insurance authority or any present or future insurer relating to the
Premises.
<PAGE>
20.5 If any of Landlord's insurance policies shall be canceled or cancellation
shall be threatened or the coverage thereunder reduced or threatened to be
reduced in any way because of the specific use of the Premises or any part
thereof by Tenant or any assignee or sub-tenant of Tenant or by anyone Tenant
permits on the Premises and, if Tenant fails to remedy the condition giving rise
to such cancellation, threatened cancellation, reduction of coverage, threatened
reduction of coverage, increase in premiums, or threatened increase in premiums,
within 72 hours after receipt of notice thereof, Landlord may, at its option,
either terminate this Lease or enter upon the Premises and attempt to remedy
such condition, and Tenant shall promptly pay the cost thereof to Landlord as
additional rent. Landlord shall not be liable for any damage or injury caused to
any property of Tenant or of others located on the Premises resulting from such
entry. If Landlord is unable, or elects not, to remedy such condition, then
Landlord shall have all of the remedies provided for in this Lease in the event
of a default by Tenant. Notwithstanding the foregoing provisions of this
Subparagraph 20.5, if Tenant fails to remedy as aforesaid, Tenant shall be in
default of its obligation hereunder and Landlord shall have no obligation to
remedy such default.
20.6 Landlord and Tenant hereby mutually waive their respective rights of
recovery against each other for any loss of, or damage to, either parties'
property, to the extent that such loss or damage is insured by an insurance
policy required to be in effect at the time of such loss or damage. Each party
shall obtain any special endorsements, if required by its insurer whereby the
insurer waives its rights of subrogation against the other party. The provisions
of this clause shall not apply in those instances in which waiver of subrogation
would cause either party's insurance coverage to be voided or otherwise made
uncollectible.
20.7 In the event Tenant does not purchase the insurance required by this Lease
or keep the same in full force and effect, Landlord may, but shall not be
obligated to, purchase the necessary insurance and pay the premium. The Tenant
shall repay to Landlord, as additional rents the amount so paid promptly upon
demand. In addition, Landlord may recover from Tenant and Tenant agrees to pay,
as additional rent, any and all reasonable expense (including attorneys' fees)
and damages which Landlord may sustain by reason of the failure of Tenant to
obtain and maintain such insurance.
20.8 Landlord shall maintain insurance coverage comparable to insurance coverage
maintained by prudent landlords of buildings in the area in which the Building
is located that are comparable to the Building, and which in any event includes
fire and extended coverage insurance for the Building and commercial liability
coverage.
21.Damage or Destruction.
---------------------
21.1 In the event that the Premises is damaged by fire or other casualty which
is covered under insurance pursuant to the provisions of the foregoing
paragraph, Landlord shall restore such damage provided that: (i) the destruction
of the Building does not exceed fifty percent (50%) of the then replacement
value of the Building; (ii) insurance proceeds are available (inclusive of any
deductible amounts) to pay one hundred percent (100%) of the cost of
restoration; and (iii) in the reasonable judgment of Landlord, the restoration
can be completed within two hundred and seventy (270) days after the date of the
damage or casualty under the laws and regulations of the state, federal, county
and municipal authorities having jurisdiction. Landlord shall notify Tenant
whether or not the Premises will
<PAGE>
be restored under this paragraph within thirty (30) days of the occurrence of
the casualty. The deductible amount of any insurance coverage shall be paid by
Tenant. If such conditions apply so as to require Landlord to restore such
damage pursuant to this paragraph, this Lease shall continue in full force and
effect, unless otherwise agreed in writing by Landlord and Tenant. Tenant
shall be entitled to a proportionate reduction of Monthly Basic Rent, Parking
Lot Rent and Operating Rent at all times during which Tenant's use of the
Premises is interrupted, such proportionate reduction to be based on the
extent to which the damage and restoration efforts actually interfere with
Tenant's business in the Premises. Tenant's right to a reduction of Rent
hereunder shall be Tenant's sole and exclusive remedy in connection with any
such damage. Notwithstanding the foregoing, if Landlord elects to terminate
this Lease pursuant to this Subparagraph 21.1, if within thirty (30) days
after receipt of Landlord's notice Tenant elects to provide the funds
necessary to make up the shortage (or absence) of insurance proceeds and
provides Landlord with reasonable assurance thereof, Landlord shall restore
the Premises as provided in this Subparagraph provided that the Premises are
reasonably subject to restoration within two hundred seventy (270) days
following the date on which the casualty occurs. Tenant in connection with
such election, shall have the right to exercise the first or second (as
applicable) option to extend the Term provided by Paragraph 2.3 above,
provided that Tenant otherwise meets all requirements necessary for such
exercise.
21.2 In the event that the Building is damaged by casualty and Landlord is not
required to restore such damage in accordance with the provisions of the
immediately preceding paragraph, Landlord shall have the option to either (i)
repair or restore such damage, with the Lease continuing in full force and
effect, but Monthly Basic Rent, Parking Lot Rent and Operating Rent to be
proportionately abated as provided above; or (ii) give notice to Tenant at any
time within thirty (30) days after the occurrence of such damage terminating
this Lease as of a date to be specified in such notice which date shall not be
less than thirty (30) nor more than sixty (60) days after the date on which such
notice of termination is given. In the event of the giving of such notice of
termination, this Lease shall expire and all interest of Tenant in the Premises
shall terminate on the date so specified in such notice and the Rent, reduced by
any proportionate reduction in Monthly Basic Rent, Parking Lot Rent and
Operating Rent as provided for above, shall be paid to the date of such
termination. Notwithstanding the foregoing, if within thirty (30) days after
receipt of Landlord's notice, Tenant elects to advance to Landlord the funds
necessary to make up the shortage (or absence) in insurance proceeds and
provides Landlord with reasonable assurance thereof and the restoration can be
completed in a two hundred seventy (270) day period, as reasonably determined by
Landlord, Landlord shall restore the Premises as provided in the immediately
preceding paragraph. Tenant in connection with any such election, shall have
the right to exercise the first or second (as applicable) option to extend the
Term provided by Paragraph 2.3 above, provided that Tenant otherwise satisfies
all requirements in connection with such exercise.
21.3 Notwithstanding the foregoing, either Landlord or Tenant may terminate this
Lease if the Building damaged by fire or other casualty (and Landlord's
reasonably estimated cost of restoration of the Premises exceeds ten percent
(10%) of the then replacement value of the Building) and such damage or casualty
occurs during the last twelve (12) months of the Term of this Lease (or the
Term of any renewal option, if applicable) by giving the other notice thereof at
any time within thirty (30) days following the occurrence of such damage or
casualty. Such notice shall specify the date of such termination, which date
shall not be less than thirty (30) nor more than sixty (60) days following the
date on which such notice of termination is given. In the event of the giving
of such notice of termination, this Lease shall expire and all interest of
<PAGE>
Tenant in the Premises shall terminate on the date so specified in such notice
and the Rent shall be paid to the date of such termination. Notwithstanding the
foregoing to the contrary, Landlord shall not have the right to terminate this
Lease if damage or casualty occurs during the last twelve (12) months of the
Term if Tenant timely exercises its option to extend the Term of this Lease (if
any) within thirty (30) days after the date of such damage or casualty.
21.4 In the event that the destruction to the Premises cannot be restored as
required herein under applicable laws and regulations within two hundred seventy
(270) days of the damage or casualty, notwithstanding the availability of
insurance proceeds, or if Landlord commences the restoration but does not
substantially complete the restoration within three hundred (300)days, in either
case Tenant shall have the right to terminate this Lease by giving the Landlord
notice thereof within thirty (30) days of date of the occurrence of such
casualty, or within thirty (30) days after the end of the three hundred (300)
day period, as applicable, specifying the date of termination which shall not be
less than thirty (30) days nor more than sixty (60) days following the date on
which such notice of termination is given. In the event of the giving of such
notice of termination, this Lease shall expire and all interest of Tenant in the
Premises shall terminate on the date so specified in such notice and the Rent,
reduced by any proportionate reduction in Monthly Basic Rent, Parking Lot Rent
and Operating Rent as provided for above, shall be paid to the date of such
termination.
21.5 Upon any termination of this Lease under any of the provisions of this
Paragraph 21, the parties shall be released thereby without further obligation
to the other from the date possession of the Premises is surrendered to Landlord
except for items which have already accrued and are then unpaid.
21.6 Tenant shall not be released from any of its obligations under this Lease
except to the extent and upon the conditions expressly stated in this Paragraph
21. Notwithstanding anything to the contrary contained in this Paragraph 21,
should Landlord be delayed or prevented from repairing or restoring the damaged
Premises within three hundred (300) days after the occurrence of such damage or
destruction by reason of acts of God, war, governmental restrictions, inability
to procure the necessary labor or materials, or other cause beyond the control
of Landlord, Landlord shall be relieved of its obligation to make such repairs
or restoration and Tenant shall be released from its obligations under this
Lease as of the end of said three hundred (300) day period.
21.7 It is hereby understood that if Landlord is obligated to or elects to
repair or restore as herein provided, Landlord shall be obligated to make
repairs or restoration only of those portions of the Building and the Premises
which were originally provided at Landlord's expense (including, without
limitation, Landlord's Work or the Tenant's Improvements) or which were insured
by either party and the proceeds of such insurance have been received by
Landlord, and the repair and restoration of items not provided at Landlord's
expense shall be the obligation of Tenant.
21.8 Tenant hereby waives California Civil Code Sections 1932(2) and 1933(4),
providing for termination of hiring upon destruction of the thing hired and
Sections 1941 and 1942, providing for repairs to and of Premises.
22.Eminent Domain.
--------------
<PAGE>
22.1 In case the whole of the Premises, or such part thereof as shall
substantially interfere with Tenant's use and occupancy thereof, shall be taken
for any public or quasi-public purpose by any lawful power or authority by
exercise of the right of appropriation, condemnation or eminent domain, or sold
to prevent such taking, either party shall have the right to terminate this
Lease effective as of the date possession is required to be surrendered to said
authority. Tenant shall not assert any claim against Landlord or the taking
authority for any compensation because of such taking (provided that Tenant may
present a separate claim for Tenant's relocation costs, moving expenses, loss of
goodwill, the unamortized cost of any Changes paid for by Tenant and lost
personal property, so long as such claim does not diminish any award otherwise
available to Landlord), and Landlord shall be entitled to receive the entire
amount of any award without deduction for any estate or interest of Tenant. In
the event the amount of property or the type of estate taken shall not
substantially interfere with the conduct of Tenant's business, Landlord shall be
entitled to the entire amount of the award without deduction for any estate or
interest of Tenant. If this Lease is not so terminated, Landlord shall promptly
proceed to restore the Premises to substantially their same condition prior to
such partial taking, and a proportionate allowance shall be made to Tenant for
the rent corresponding to the time during which, and to the part of the Premises
of which, Tenant shall be so deprived on account of such taking and restoration.
Nothing contained in this Paragraph shall be deemed to give Landlord any
interest in any award separately made to Tenant for the taking of personal
property and trade fixtures belonging to Tenant or for relocation costs incurred
by Tenant in relocating Tenant's business, moving expenses, loss of goodwill and
the unamortized cost of any Changes paid for by Tenant.
22.2 In the event of taking of the Premises or any part thereof for temporary
use, (i) this Lease shall be and remain unaffected thereby and rent shall not
abate, and (ii) Tenant shall be entitled to receive for itself such portion or
portions of any award made for such use with respect to the period of the taking
which is within the Term, provided that if such taking shall remain in force at
the expiration or earlier termination of this Lease, Tenant shall then pay to
Landlord a sum equal to the reasonable cost of performing Tenant's obligations
under Paragraph 14 with respect to surrender of the Premises and upon such
payment shall be excused from such obligations. For purpose of this Subparagraph
22.2, a temporary taking shall be defined as a taking for a period of 270 days
or less.
22.3 Landlord and Tenant each hereby waive the provisions of California Code of
Civil Procedure Section 1265.130 and any other applicable existing or future
law, ordinance or governmental regulation providing for, or allowing either
party to petition the courts of the state of California for, a termination of
this lease upon a partial taking of the Premises and/or the Building.
23. Bankruptcy. If Tenant shall file a petition in bankruptcy under any
----------
Chapter of federal bankruptcy law as then in effect, or if Tenant be
adjudicated a bankrupt in involuntary bankruptcy proceedings and such
adjudication shall not have been vacated within sixty (60) days from the date
thereof, or if a receiver or trustee be appointed of Tenant's property and the
order appointing such receiver or trustee not be set aside or vacated within
sixty (60) days after the entry thereof, or if Tenant shall assign Tenant's
estate or effects for the benefit of creditors, or if this Lease shall
otherwise by operation of law pass to any person or persons other than Tenant,
then and in any such event Landlord may, if Landlord so elects, with or
without notice of such election and with or without entry or action by
Landlord, forthwith terminate this Lease. Notwithstanding any other provisions
of this Lease, Landlord, in addition to any and all rights and
<PAGE>
remedies allowed by law or equity, shall upon such termination be entitled to
recover damages in the amount provided in Subparagraph 24.2 below and neither
Tenant nor any person claiming through or under Tenant or by virtue of any
statute or order of any court shall be entitled to possession of the Premises
but shall forthwith quit and surrender the Premises to Landlord. Nothing
herein contained shall limit or prejudice the right of Landlord to prove and
obtain as damages by reason of any such termination an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, such damages are to be proved, whether or
not such amount be greater, equal to, or less than the amount of damages
recoverable under the provisions of this Paragraph 23.
24.Defaults and Remedies.
---------------------
24.1 The occurrence of any one or more of the following events shall constitute
a default hereunder by Tenant:
(a) The vacation or abandonment of the Premises by Tenant. Abandonment is
herein defined to include, but is not limited, to, any absence by Tenant from
the Premises for ten (10) days or longer while in default of any provision of
this Lease.
(b) The failure by Tenant to make any payment of Basic Rent, Parking Lot
Rent, Operating Rent, other rent or sums deemed herein as additional rent, or
any other payment required to be made by Tenant hereunder as and when due,
where such failure continues for a period of five (5) business days after
written notice thereof from Landlord to Tenant.
(c) The failure by Tenant to observe or perform any of the express or
implied covenants or provisions of this Lease to be observed or performed by
Tenant, other than as specified in Subparagraph 24.1(a) or 24.1(b) above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Landlord to Tenant; provided, however, that any
such notice shall be in lieu of, and not in addition to, any notice required
under California Code of Civil Procedure 1161; provided, further, that if the
nature of Tenant's default is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed to be in
default if Tenant shall commence such cure within said thirty-day period and
thereafter diligently and without interruption prosecute such cure to
completion.
(d) (1) The making by Tenant of any general assignment for the benefit of
creditors; (2) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days); (3) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within sixty (60) days; or (4) the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease where such seizure
is not discharged within sixty (60) days.
(e) The failure by Tenant within ten (10) days after receipt of written
demand of Landlord to restore the security deposit by deposit of additional
cash or an additional letter of credit as required
<PAGE>
pursuant to the provisions of Paragraph 6.1 of this Lease.
24.2 In the event of any such default by Tenant, 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.
Upon such termination of Tenant's right to possession of the Premises, this
Lease shall terminate and Landlord shall be entitled to recover damages from
Tenant as provided in California Civil Code Section 1951.2 or any other
applicable existing or future law, ordinance or regulation providing for
recovery of damages for such breach, including but not limited to the
following:
(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
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; 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 course of things would be likely to result
therefrom.
As used in Subparagraphs 24.2(a) and 24.2(b) above, the "worth at the time
of award" is computed by allowing interest at the maximum rate permitted by law
per annum. As used in Subparagraph 24.2(c) above, the worth at the time of
award is computed by discounting to present value such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
24.3 If a default exists under this Lease, Landlord shall also have the remedy
described in California Civil Code Section 1951.4 (Landlord may continue this
Lease in effect after Tenant has breached this Lease and abandoned the Premises
and recover rent as it becomes due; provided, however that Tenant has the right
to sublet or assign this Lease, subject only to reasonable limitations). Acts
of maintenance or preservation or efforts to relet the Premises or the
appointment of a receiver upon initiative of Landlord to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
24.4 During the continuance of a default beyond applicable cure periods,
Landlord may enter the Premises without terminating this Lease and, upon five
(5) days prior written notice to Tenant, remove all Tenant's personal property,
any Changes and trade fixtures from the Premises and store them at Tenant's risk
and expense. If Landlord removes such property from the Premises and stores it
at Tenant's risk and expense, and if Tenant fails to pay the cost of such
removal and storage after written demand therefor and/or to pay any rent then
due, then after the property has been stored for a period of thirty (30)-days or
more Landlord may sell such property at public or private sale, in the manner
and at such times and places as Landlord deems commercially reasonable following
reasonable notice to Tenant of the time and place
<PAGE>
of such sale. The proceeds of any such sale shall be applied first to the
payment of the expenses for removal and storage of the property, the
preparation for and the conducting of such sale, and for reasonable attorneys'
fees and other legal expenses incurred by Landlord in connection therewith;
and the balance shall be applied to any past due amount owing hereunder.
Tenant hereby waives all claims for damages that may be caused by
Landlord's reentering and taking possession of the Premises or removing and
storing Tenant's personal property pursuant to this Paragraph 24, and Tenant
shall hold Landlord harmless from and against any loss, cost or damage resulting
from any such act. No reentry by Landlord shall constitute or be construed as a
forcible entry by Landlord.
24.5 All rights, options' and remedies of Landlord contained in this Lease
shall be construed and held to be cumulative, and no one of them shall be
exclusive of the other, and Landlord shall have the right to pursue any one or
all of such remedies or any other remedy or relief which may be provided by
law, whether or not stated in this Lease. No waiver of any default of Tenant
hereunder shall be implied from any acceptance by Landlord of any rent or
other payments due hereunder or any omission by Landlord to take any action on
account of such default if such default persists or is repeated, and no
express waiver shall affect defaults other than as specified in said waiver.
The consent or approval or Landlord to or of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent or approval to or of any subsequent similar
acts by Tenant.
24.6 If Landlord is in default of any obligations under this Lease, and fails to
commence to cure within thirty (30) days after receipt of written notice from
Tenant which notice shall specify the nature of Landlord's default, Tenant shall
be entitled to exercise any and all remedies available to Tenant at law or in
equity except to the extent expressly waived by Tenant pursuant to this Lease.
25.Assignment and Subletting. Tenant shall not voluntarily assign or encumber
-------------------------
its interest in this Lease or in the Premises, or sublease all or any part of
the Premises, or allow any other person or entity to occupy or use all or any
part of the Premises, without first obtaining Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. Any
assignment, encumbrance or sublease without Landlord's prior written consent
shall be voidable, at Landlord's election, and shall constitute a default. If
Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by
operation of law of any partner, or the dissolution of the partnership, shall
be deemed a voluntary assignment. If Tenant consists of more than one person,
a purported assignment, voluntary or involuntary or by operation of law from
one person to the other shall be deemed a voluntary assignment. If Tenant is a
nonpublic corporation, any dissolution, merger, consolidation or other
reorganization of Tenant, or sale or other transfer of a controlling
percentage of the capital stock of Tenant, or the sale of at least fifty
percent (50%) of the value of the assets of Tenant shall be deemed a voluntary
assignment. If Tenant is a publicly traded corporation, any sale or other
transfer of a controlling percentage of the capital stock of Tenant in one
transaction or a series of related transactions to one person or entity or two
or more affiliated entities and/or persons shall be deemed a voluntary
assignment which requires Landlord's consent. Except as set forth in the
sentence immediately above, the transfer of publicly traded shares of Tenant,
whether or not in the aggregate constituting a transfer of a controlling
percentage of the capital stock of Tenant, shall not constitute a voluntary
assignment. No consent to any assignment, encumbrance, or sublease shall
<PAGE>
constitute a further waiver of the provisions of this Paragraph. No later than
thirty (30) days prior to the effective date of the proposed assignment or
sublease, Tenant shall notify Landlord in writing of Tenant's intent to
assign, encumber, or sublease, the name of the proposed assignee or sublessee,
information concerning the financial responsibility of the proposed assignee
or sublessee and the terms of the proposed assignment or subletting, and
Landlord shall, within fifteen (15) days of receipt of such written notice as
well as any additional information requested by Landlord concerning the
proposed assignee's or sublessee's financial responsibility, elect one of the
following:
(i) Consent to such proposed assignment, encumbrance or sublease;
(ii) Refuse such consent, which refusal shall be on reasonable grounds,
including but not limited to those matters set forth hereinbelow;
(iii) In the case of an assignment, elect to terminate this Lease. In the
case of a sublease elect to terminate this Lease, but only in the event that a
request to sublet would have the result of in excess of fifty percent (50%) of
the rentable square feet of the Premises being subject to sublease at any time
during the Term. In the event that Landlord elects to terminate the Lease by
reason of a proposed assignment or by reason of a proposed sublease as
described immediately above, Landlord shall give notice of such election
("Recapture Notice") to Tenant within fifteen (15) days after receipt of
written notice from Tenant of the proposed assignment or sublease as well as
any additional information requested by Landlord concerning the proposed
assignee's or sublesee's financial responsibility. In the case of a proposed
sublease (and not a proposed assignment), in the event that Landlord gives a
Recapture Notice, Tenant shall be entitled to rescind its proposed sublease
(and thus avoid termination of the Lease) by giving written notice to Landlord
of such recission within five (5) days following receipt by Tenant of the
Recapture Notice. In the event that Tenant fails to give such notice within
such five (5) days, Tenant shall be considered to have waived its right to
give such recission notice. The Recapture Notice, if given, shall in addition
to stating Landlord's election to terminate this Lease, state a date of
termination of the Lease which, in no event, shall be earlier than thirty (30)
days following the date on which the Recapture Notice is given nor later than
90 days following the date on which the Recapture Notice is given.
Without limiting the other instances in which it may be reasonable for
Landlord to withhold its consent to an assignment or subletting, Landlord and
Tenant acknowledge that it shall be reasonable for Landlord to withhold its
consent in the following instances: (i) if at the time consent is requested or
at any time prior to the granting of consent, Tenant is in default, beyond any
applicable cure period, under this Lease or would be in default under this Lease
but for the pendency of any grace or cure period under Paragraph 24 above; (ii)
if the proposed assignee or sublessee is a governmental agency; (iii) if, in
Landlord's reasonable judgment, the use of the Premises by the proposed assignee
or sublessee (1) would be inconsistent with Paragraph 7 of this Lease, (2) would
contemplate any alterations which would lessen the value of the leasehold
improvements in the Premises, (3) would result in more than a reasonable number
of occupants per floor, or (4) would materially require increased services by
Landlord; (iv) if the proposed assignee's or sublessee's credit, character and
business or professional standing does not meet the commercially reasonable
standards of Landlord; (v) the proposed assignee has a net worth of less than
the net worth of Tenant as of the date of this Lease (in the approximate amount
of Three Hundred Million Dollars ($300,000,000)); or (vi) if Landlord is
currently marketing space in the Building to such proposed
<PAGE>
assignee or sublessee.
Landlord may require that the rent payable by such assignee or sublessee be
at the then current rental rates for the Premises or comparable premises in the
Building and may require that the assignee remit directly to Landlord on a
monthly basis all monies due to Tenant by said assignee. Payments with respect
to any sublease, so long as the Tenant is not in default hereunder, may be made
directly to Tenant and Tenant shall then promptly pay to Landlord any amount due
Landlord in connection with such sublease. In the event that Landlord shall
consent to any assignment or sublease under the provisions of this Paragraph 25,
Tenant shall pay Landlord's reasonable processing costs and attorneys' fees
incurred in giving such consent, not to exceed one thousand dollars ($1,000) per
request for consent. If for any proposed assignment or sublease Tenant receives
rent or other consideration, either initially or over the term of the assignment
or sublease, in excess of the rent and monthly amortization of Transfer Costs
(defined below) called for hereunder, or, in case of the sublease of a portion
of the Premises, in excess of the monthly amortization of all Transfer Costs and
such rent fairly allocable to such portion, after appropriate adjustments to
assure that all other payments called for hereunder are taken into account,
Tenant shall pay to Landlord as additional rent hereunder fifty percent (50%) of
all of the excess of each such payment of rent or other consideration received
by Tenant promptly after its receipt. As used herein, "Transfer Costs" shall
mean the aggregate of (i) commercially reasonable brokerage commissions and
attorneys' fees incurred by Tenant in negotiating and documenting such
assignment or sublease and (ii) the actual third party costs incurred by Tenant
in connection with constructing improvements to the Premises directly related to
the assignment or sublease subject, however, to a maximum cost of ten dollars
($10) per rentable square foot. Such Transfer Costs are to be amortized
(without interest) for the purposes of Tenant's recovery of same from excess
consideration, on a straight-line basis over the remaining initial Term of this
Lease as of the effective date of such assignment or subletting. Landlord's
waiver or consent to any assignment or subletting shall not relieve Tenant from
any obligation under this Lease.
Notwithstanding any provision to the contrary of this Paragraph 25, Tenant,
without Landlord's prior written consent, may sublet all or any portion of the
Premises or assign this Lease to (i) a corporation controlling, controlled by or
under common control with Tenant; (ii) a successor corporation related to Tenant
by merger, consolidation or non-bankruptcy reorganization provided that if
Tenant is not the surviving corporation, then the surviving corporation shall
have a minimum net worth as of the date of sublease or assignment at least equal
to that of Tenant immediately prior to completion of the subject merger
consolidation or reorganization; or (iii) a purchaser of substantially all of
Tenant's assets, provided that immediately following such purchase, such
purchaser shall have a net worth at least equal to that of Tenant immediately
prior to completion of the subject purchase. In connection with any such
assignment or sublease, Tenant shall not be relieved of any liability or
obligations pursuant to this Lease. The entities described in Clauses (i), (ii)
and (iii) above shall sometimes be referred to as a "Permitted Transferee". In
connection with any transfer to a Permitted Transferee, Tenant shall give
Landlord at least thirty (30) days prior written notice of such intended
transfer and shall provide to Landlord such information and copies of such
documents as Landlord may reasonably request in connection with such proposed
transfer. Notwithstanding any provision of this Lease to the contrary
including, without limitation, any provision of this Paragraph 25, no assignment
or sublease of this Lease shall relieve Tenant of any of its obligations or
liability pursuant to this Lease.
<PAGE>
26.Quiet Enjoyment. Landlord covenants and agrees that, conditioned upon
---------------
Tenant paying the rent required under this Lease and paying all other charges
and performing all of the covenants and provisions to be observed and
performed by Tenant under this Lease, and subject to the terms and conditions
of this Lease, Tenant shall and may peaceably and quietly have, hold and enjoy
the Premises in accordance with this Lease.
27.Subordination. Without the necessity of any additional document being
-------------
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any first mortgagee with a lien on the Building or any
ground lessor with respect to the Building, this lease shall be subject and
subordinate at all times to; (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Building or the land upon
which the Building is situated or both, and (b) the lien of any mortgage or
deed of trust which may now exist or hereafter be executed in any amount for
which the Building, land, ground leases or underlying leases, or Landlord's
interest or estate in any of said items is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any
such liens to this lease. In the event that any ground lease or underlying
lease terminates for any reason or any mortgage or deed of trust is foreclosed
or a conveyance in lieu of foreclosure is made for any reason, Tenant shall,
if requested by the ground lessor, mortgagee or beneficiary, as applicable,
attorn to and become the Tenant of the successor in interest to Landlord and
in such event Tenant's right to possession of the Premises shall not be
disturbed if Tenant is not in default beyond acceptable cure periods and so
long as Tenant shall pay the rent and all other amounts required to be paid to
Landlord pursuant to the terms hereof and observe and perform all of the
provisions of this Lease, unless the Lease is otherwise terminated pursuant to
its terms. Tenant covenants and agrees to execute and deliver, upon demand by
Landlord and in the form reasonably requested by Landlord, any additional
documents evidencing the priority or subordination of this Lease with respect
to any such ground leases or underlying leases or the lien of any such
mortgage or deed of trust. Should Tenant fail to sign and return any such
documents within ten (10) business days of receipt, Tenant shall be in
default, and Landlord may, at Landlord's option, terminate this Lease provided
written notice of such termination is received by Tenant prior to Landlord's
receipt of such documents. In connection with any subordination by Tenant of
its leasehold interest to any future ground lease, or the lien of any mortgage
or deed of trust, Tenant shall be entitled to obtain a non-disturbance
agreement in a form reasonably satisfactory to Tenant providing that Tenant's
right to occupancy of the Premises shall not be disturbed in the event of any
termination of the ground lease or any foreclosure of the lien of the deed of
trust or mortgage. Landlord shall take such action as is reasonable (without
cost to Landlord) so as to cause a non-disturbance agreement to be available
to Tenant in connection with any subordination by Tenant of its leasehold
interest. In connection with the execution of this Lease by Landlord and
Tenant, Landlord shall use its best efforts (without cost to Landlord) to
cause a Subordination and Non-Disturbance Agreement to be made available to
Tenant in a form reasonably acceptable to Tenant within ten (10) days
following the execution and delivery of this Lease by Landlord and Tenant in
connection with any lender or lenders with respect to any deed of trust
currently constituting a lien against the Building and Site.
28.Estoppel Certificate.
--------------------
28.1 Within ten (10) business days following receipt of Landlord's written
request, Tenant shall execute
<PAGE>
and deliver to Landlord a statement, in a form substantially similar to the
form of Exhibit "C" attached hereto, certifying; (i) the Lease Commencement
-----------
Date; (ii) the fact that this Lease is unmodified and in full force and effect
(or, if there have been modifications hereto, that this Lease is in full force
and effect, as modified, and stating the date and nature of such
modifications); (iii) the date to which the rent and other sums payable under
this Lease have been paid; (iv) the fact that there are no current defaults
under this Lease by either Landlord or Tenant except as specified in such
statement; and (v) such other matters reasonably requested by the requesting
party. Landlord and Tenant intend that any statement delivered pursuant to
this Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser
or prospective purchaser of the Building or any interest therein.
28.2 Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant (i) that this Lease is in full force and effect, without
modification except as may be represented by the requesting party, (ii) that
there are no uncured defaults in the requesting party's performance, and (iii)
that not more than one (1) month's rent has been paid in advance.
29.Rules and Regulations. Tenant shall faithfully observe and comply with the
---------------------
"Rules and Regulations," a copy of which is attached hereto and marked Exhibit
-------
"D", and all reasonable and nondiscriminatory modifications thereof and
- ---
additions thereto from time to time put into effect by Landlord that do not
increase any obligations or diminish any rights of Tenant. In the event of any
conflict between the terms of this Lease and the Rules and Regulations, the
terms of this Lease shall prevail.
30.Conflict of Laws. This Lease shall be governed by and construed pursuant to
----------------
the laws of the State of California.
31.Successors and Assigns. Except as otherwise provided in this Lease, all of
----------------------
the covenants, conditions and provisions of this Lease shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
heirs, personal representative, successors and assigns.
32.Surrender of Premises. The voluntary or other surrender of this Lease by
---------------------
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Landlord, operate as an assignment to it of any or all
subleases or subtenancies. Upon the expiration or termination of this Lease,
Tenant shall peaceably surrender the Premises and all alterations and
additions thereto broom-clean, in good order, repair and condition, reasonable
wear and tear, casualty, condemnation, acts of God, Hazardous Materials not
stored, used, released or disposed of by Tenant, its agents, employees,
invitees or contractors and Changes with respect to which Landlord has not
reserved the right to require removal excepted. The delivery of keys to any
employee of Landlord or to Landlord's agent or any employee thereof shall not
be sufficient to constitute a termination of this Lease or a surrender of the
Premises.
33.Professional Fees.
-----------------
33.1 In the event that Landlord or Tenant should bring suit for the possession
of the Premises, for the recovery of any sum due under this Lease, or because of
the breach of any provisions of this Lease, or for any other relief against
Tenant or Landlord hereunder, or should either party bring suit against the
other with respect to matters arising from or growing out of this Lease, then
all costs and expenses, including
<PAGE>
without limitation, its reasonable professional fees such as appraisers',
accountants' and attorneys' fees, incurred by the prevailing party therein
shall be paid by the other party, which obligation on the part of the other
party shall be deemed to have accrued on the date of the commencement of such
action and shall be enforceable whether or not the action is prosecuted to
judgment.
33.2 Should Landlord be named as a defendant in any suit brought against Tenant
in connection with or arising out of Tenant's occupancy hereunder, Tenant shall
pay to Landlord its costs and expenses incurred in such suit, including without
limitation, its actual and reasonable professional fees such as appraiser's,
accountants' and attorneys' fees.
34.Performance by Tenant. All covenants and agreements to be performed by
---------------------
Tenant under any of the terms of this Lease shall be performed by Tenant at
Tenant's sole cost and expense and without any abatement of rent, except as
expressly set forth in this Lease. Tenant acknowledges that the late payment
by Tenant to Landlord of any sums due under this Lease will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of such cost
being extremely difficult and impractical to fix. Such costs include, without
limitation, processing and accounting charges, and late charges that may be
imposed on Landlord by the terms of any encumbrance and note secured by any
encumbrance covering the Premises or the Building of which the Premises are a
part. Therefore if, following five (5) business days after Landlord has
notified Tenant that such amount has not been received, any monthly
installment of Monthly Basic Rent is not received by Landlord, or if Tenant
fails to pay any other sum of money due hereunder and such failure continues
for ten (10) days after receipt by Tenant of notice thereof from Landlord,
Tenant shall pay to Landlord, as additional rent, ten percent (10 %) of the
overdue amount as a late charge. Such overdue amount shall also bear interest,
as additional rent, at the maximum rate permissible by law calculated, as
appropriate, from the date either (a) the monthly installment of Monthly Basic
Rent is due, or (b) of receipt of said notice, until the date of payment to
Landlord. Landlord's acceptance of any late charge or interest shall not
constitute a waiver of Tenant's default with respect to the overdue amount or
prevent Landlord from exercising any of the other rights and remedies
available to Landlord under this Lease or any law now or hereafter in effect.
Further, in the event such late charge is imposed by Landlord for three (3)
consecutive months for whatever reason, Landlord shall have the option to
require that, beginning with the first payment of rent due following the
imposition of the third consecutive late charge, rent shall no longer be paid
in monthly installments but shall be payable three (3) months in advance.
35.Mortgagee and Senior Lessor Protection. No act or failure to act on the
--------------------------------------
part of Landlord which would entitle Tenant under the terms of this Lease, or
by law, to be relieved of Tenant's obligations hereunder or to terminate this
Lease, shall result in a release of such obligations or a termination of this
Lease unless (a) Tenant has given notice by registered or certified mail to
Landlord and to any beneficiary of a deed of trust or mortgage covering the
Building and to the lessor under any master or ground lease covering the
Building, the Site or any interest therein whose identity and address shall
have been furnished to Tenant, and (b) Tenant offers such beneficiary,
mortgagee or lessor a reasonable opportunity (but in no event less than thirty
(30) days) to cure the default, including time to obtain possession of the
Premises by power of sale or of judicial foreclosure, if such should prove
necessary to effect a cure. Landlord shall, from time to time, give Tenant
written notice of the identity and address of the beneficiary of any deed of
trust or mortgage covering the Building and/or the lessor under any master or
ground lease.
<PAGE>
36.Definition of Landlord. 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 title to, or a lessee's interest in a ground lease of the Site or
master lease of the Building. In the event of any transfer, assignment or
other conveyance or transfer of any such title or interest, 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, assignment or conveyance of all liability with respect to the
performance of any covenants or obligation s on the part of Landlord contained
in this Lease thereafter to be performed and, without further agreement, the
transferee of such title or interest shall be deemed to have agreed to observe
and perform any and all obligations of Landlord hereunder, during its
ownership of the Premises. Landlord may transfer its interest in the Premises
without the consent of Tenant and such transfer or subsequent transfer shall
not be deemed a violation on Landlord's part of any of the terms and
conditions of this Lease.
37.Waiver. The failure of Landlord or Tenant to seek redress for violation
------
of, or to insist upon strict performance of, any term, covenant or condition
of this Lease or the Rules and Regulations attached hereto as Exhibit "D",
-----------
shall not be deemed a waiver of such violation or prevent a subsequent act
which would have originally constituted a violation from having all the force
and effect of an original violation, nor shall the failure of Landlord to
enforce any of said Rules and Regulations against any other tenant of the
Building be deemed a waiver of any such Rule or Regulation, nor shall any
custom or practice which may become established between the parties in the
administration of the terms hereof be deemed a waiver of, or in any way
affect, the right of either party to insist upon the performance by the other
in strict accordance with said terms. The subsequent acceptance or payment of
rent hereunder by Landlord or Tenant shall not be deemed to be a waiver of any
preceding breach by Tenant or Landlord of any term, covenant or condition of
this Lease, other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
38.Identification of Tenant. Unless the provisions of Paragraph 52 herein
------------------------
below are applicable to this Lease, then if more than one person executes this
Lease as Tenant, (a) each of them is jointly and severally liable for the
keeping, observing and performing of all of the terms, covenants, conditions,
provisions and agreements of this Lease to be kept, observed and performed by
Tenant, and (b) the term "Tenant" as used in this Lease shall mean and include
each of them jointly and severally and the act of or notice from, or notice or
refund to, or the signature of, any one or more of them, with respect to the
tenancy or this Lease, including, but not limited to, any renewal, extension,
expiration, termination or modification of this Lease, shall be binding upon
each and all of the persons executing this Lease as Tenant with the same force
and effect as if each and all of them had so acted or so given or received
such notice or refund or so signed.
39.Year 2000. Notwithstanding any covenant or provision contained in the Lease
---------
to the contrary, Landlord shall have no liability or responsibility whatsoever
to Tenant for (i) any disruption or interruption in Tenant's business, (ii)
any disruption or interruption in Tenant's use or possession of the Premises,
or (iii) any other damage or consequence suffered or experienced by Tenant,
arising from or relating in any way to the malfunction, shut down or other
abnormal behavior of any computer or computer controlled system which provides
utilities or services to the Premises, or controls any systems serving the
Premises (whether such computer is within the control of Landlord or
otherwise) resulting
<PAGE>
from the inability or failure of any such computer or computer controlled
system to recognize the year 2000, and distinguish said year from the year
1900 (sometimes referred to as the "Y2K problem", or the "failure to be year
2000 compliant"). In connection with the construction of the Landlord's Work
and the Tenant's Improvements, Landlord shall request that the Contractor (as
defined in the Work Letter) take such action as is commercially reasonable so
that the systems being installed are year 2000 compliant.
40.Terms and Headings. The words "Landlord" and "Tenant" as used herein shall
------------------
include the plural as well as the singular. Words used in any gender include
other genders. If there be more than one Tenant, i.e., if two or more persons
or entities are jointly referred to in this Lease as "Tenant," the obligations
hereunder imposed upon Tenant shall be joint and several. The Paragraph
headings of this Lease are not a part of this Lease and shall have no effect
upon the construction or interpretation of any part hereof.
41.Examination of Lease. Submission of this instrument for examination or
--------------------
signature by Tenant does not constitute a reservation of or option for Lease,
and it is not effective as a Lease or otherwise until execution by and
delivery to both Landlord and Tenant.
42.Time. Time is of the essence with respect to the performance of every
----
provision of this Lease in which time or performance is a factor. For purposes
of this Lease, the term "business day" shall refer to any day other than a
Saturday, Sunday or a legal holiday for national banks in the location where
the Building is located.
43.Prior Agreement; Amendments. This Lease contains all of the agreements of
---------------------------
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreement or understanding, oral or written, express or
implied, pertaining to any such matter shall be effective for any purpose. No
provision of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in
interest. The parties acknowledge that all prior agreements, representations
and negotiations are deemed superseded by the execution of this Lease to the
extent they are not incorporated herein.
44.Severability. Any provision of this Lease which shall prove to be invalid,
------------
void or illegal in no way affects, impairs or invalidates any other provision
hereof, and such other provisions shall remain in full force and effect.
45.Recording. Neither Landlord nor Tenant shall record this Lease nor a short
---------
memorandum thereof without the consent of the other and if such recording
occurs, it shall be at the sole cost and expense of the party requesting the
recording, including any documentary transfer taxes or other expenses related
to such recordation.
46.Limitation on Liability. The obligations of Landlord under this Lease do
-----------------------
not constitute personal obligations of the individual partners, directors,
officers, members or shareholders of Landlord, and Tenant shall not seek
recourse against the individual partners, directors, officers, members or
shareholders of Landlord or any of their personal assets for satisfaction of
any liability in respect to this Lease. In consideration of the benefits
accruing hereunder, Tenant and all successors and assigns covenant and agree
that in the event of any actual or alleged failure, breach or default
hereunder by Landlord, the sole
<PAGE>
and exclusive remedy shall be against Landlord's interest in the Building in
the rental stream and sales proceeds thereof.
47.Riders. Clauses, plats and riders, if any, signed by Landlord and Tenant
------
and affixed to this Lease are a part hereof.
48.Signs. Tenant shall not place any sign upon the Premises or the Building
-----
without Landlord's prior written consent which consent in the case of interior
signage within the Building, shall not be unreasonably withheld or delayed and
which consent, in the case of exterior signage with respect to the Building
(except as specifically provided in this Paragraph 48) may be given or
withheld by Landlord in its discretion. Tenant shall have the right to utilize
all Building signage space facing Townsend Street without any additional
compensation to Landlord. All signs shall be constructed, erected and affixed
to the Premises at Tenant's sole cost and expense, and Tenant shall be
responsible for the removal of such signage, and the repair of any damage to
the Building caused thereby, at the end of the Term. All signs shall be in
full compliance with all applicable ordinances, statutes and regulations
imposed by all applicable governmental authorities. Tenant shall have until
August 1, 2000 within which to notify Landlord in writing that Tenant wishes
to place Tenant's signage on the easterly and westerly facades of the
Building, in which case Tenant shall be allowed to do so at no charge during
the initial ten (10) year Term of this Lease. If Tenant fails to give Landlord
such notice within the time period provided, Landlord may lease such facades
to third parties as Landlord determines appropriate, without compensation to
Tenant. In no event, however, shall Landlord lease such facades to a
competitor of Tenant. During the Extended Terms, Landlord may impose a
reasonable signage rental fee, and adjust such fee periodically as Landlord
reasonably determines, based on the thencurrent rental value for comparable
signage, for the easterly and westerly Building facades. Tenant's rights to
utilize the Building facades for signage is limited to signage related to the
business of Tenant only (and in the event of an assignment or sublease
pursuant to the provisions of this Lease, the business of such assignee or
sublessee). Tenant shall have no right to sublet the signage space, nor
otherwise earn a profit therefrom. Following the full execution and delivery
of this Lease by both Landlord and Tenant, Tenant shall be entitled to place a
banner at the roof line on the exterior facade of the Building announcing the
intended occupancy of the Building by Tenant. The wording of such banner shall
be subject to reasonable review by Landlord. Any and all publicity or public
announcements of any kind with respect to the execution of this Lease or any
other matter relating to the Lease (exclusive of the banner described
immediately above) to be made by Tenant shall be subject to the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed.
49.Modification for Lender. If in connection with obtaining construction,
-----------------------
interim or permanent financing for the Building, the lender shall request
reasonable modifications in this Lease as a condition to such financing,
Tenant will not unreasonably withhold, delay or defer its consent thereto,
provided that such modifications do not increase the obligations of Tenant
hereunder or materially adversely affect the leasehold interest hereby created
or Tenant's rights hereunder, including Tenant's parking rights.
50.Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a
-----------------------
lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the rent, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction and Landlord may accept such check or payment without
prejudice to
<PAGE>
Landlord's right to recover the balance of such rent or pursue any other
remedy provided in this Lease. Tenant agrees that each of the foregoing
covenants and agreements shall be applicable to any covenant or agreement
either expressly contained in this lease or imposed by any statute or at
common law.
51.Financial Statements. At any time during the Term of this Lease, and if
--------------------
requested by Landlord in connection with a potential sale or financing of the
Building, Tenant shall, upon ten (10) days prior written notice from Landlord,
provide Landlord with a current financial statement and financial statements
of the two (2) years prior to the current financial statement year. Except in
connection with a request by Landlord in connection with a potential sale or
financing, Landlord shall limit its requests for financial statements to once
per calendar quarter. Such statements shall be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice
of Tenant, shall be audited by an independent certified public accountant.
Landlord shall use commercially reasonable efforts to protect the
confidentiality of any such statement and to request that any proposed buyer
or lender similarly treat the information contained in such statement as being
confidential in nature, such that such information shall only be disclosed to
the consultants, analysts or counsel as may be reasonably necessary in order
to evaluate a potential purchase of, or loan upon, the Building.
In connection with any and all financial statements to be delivered by
Tenant to Landlord, Landlord shall deal with Mr. Tony Attig, Executive Partner
and Chief Accounting Officer as the representative of Tenant and Tenant shall be
entitled to deal with and provide notices and copies of financial statements to
Douglas C. Rosenberg or any successor-in-interest, as from time to time,
designated by Landlord. In the event that Mr. Attig no longer serves as
Tenant's representative, Tenant shall give written notice to Landlord of another
person or officer with which Landlord is to deal and, in the event of the
failure of Tenant to give such written notice to Landlord, Landlord shall be
entitled to deal with Tenant's facilities manager or any other officer or
manager of Tenant.
52.Tenant as Corporation. If Tenant executes this Lease as a corporation,
---------------------
then Tenant and the persons executing this Lease on behalf of Tenant represent
and warrant that the individuals executing this Lease on Tenant's behalf are
duly authorized to execute and deliver this Lease on its behalf in accordance
with a duly adopted resolution of the board of directors of Tenant, a copy of
which is to be delivered to Landlord on execution hereof, and in accordance
with the By-Laws of Tenant and that this Lease is binding upon Tenant in
accordance with its terms.
53.No Partnership or Joint Venture. Nothing in this Lease shall be deemed to
-------------------------------
constitute Landlord and Tenant as partners or joint venturers. It is the
express intent of the parties hereto that their relationship with regard to
this Lease be and remain that of landlord and tenant.
54.Rooftop Deck/Rooftop Antennae.
-----------------------------
54.1 Subject to Landlord's prior approval of the plans and specifications, which
approval shall not be unreasonably withheld or delayed, Tenant shall have the
right to construct a roof deck on the Building. Any such improvement to the
Building shall be done at Tenant's sole cost, by licensed, bonded contractors
approved by Landlord, and in strict compliance with all applicable rules,
regulations, ordinances and other requirements of every nature imposed by any
governmental authority with jurisdiction over the Building.
<PAGE>
Tenant shall obtain all applicable permits and approvals as may also be
required for such construction.
54.2 Subject to Landlord's prior approval, Tenant may install, at Tenant's sole
cost, an antennae or satellite dish on the roof of the Building. Any such
improvement to the Building shall be done at Tenant's sole cost, by licensed,
bonded contractors approved by Landlord, and in strict compliance with all
applicable rules, regulations, ordinances and other requirements of every nature
imposed by any governmental authority with jurisdiction over the Building.
Tenant shall obtain all applicable permits and approvals as may also be required
for such modifications.
55.Option to Lease. Landlord shall employ reasonable effort (without cost to
---------------
Landlord) to obtain an option to lease for the benefit of Tenant in connection
with that certain real property commonly known as 420 Townsend Street, San
Francisco, California. Landlord shall consult with Tenant in connection with
its attempt to obtain such an option to lease and in connection with the terms
and conditions of any such option.
If, during the Term of this Lease, Landlord purchases the real property
commonly known as 420 Townsend Street, San Francisco, California ("420
Property"), and provided that Tenant is not then in default, beyond any
applicable cure period, of this Lease, Landlord shall notify Tenant of such
purchase and for the first thirty (30) days following the close of escrow for
Landlord's purchase of such property, Tenant shall have the right to negotiate
with Landlord for the leasing of any space then unleased, unoccupied and
available in such property. The right contained in this paragraph shall be
personal to Tenant (and/or any Permitted Transferee) and may be exercised only
by Tenant (and/or any Permitted Transferee) and only if the originally named
Tenant (or any Permitted Transferee) has not assigned this Lease or sublet at
any time during the Term more than all or any portion of two (2) floors of the
Premises. In the event that Landlord and Tenant (or any Permitted Transferee)
have not executed a mutually acceptable lease for the applicable space at the
420 Property by the expiration of the thirty (30) day period described above,
then Tenant shall have no further rights under this paragraph or in connection
with the 420 Property including, but not limited to, any right to require that
Landlord negotiate further with Tenant or lease any space on any basis in the
420 Property to Tenant.
56.Landlord's Representations. Notwithstanding any provision to the contrary
--------------------------
of this Lease, Landlord represents and warrants to Tenant that, to the best of
Landlord's knowledge: (i) the Premises, the Building and the Site as of the
date of this Lease are in compliance in all material respects with all laws
regarding Hazardous Materials ("Hazardous Materials Laws"). Landlord further
represents and warrants that, to the best of Landlord's knowledge, no
litigation has been filed or threatened, nor are any settlements pending with
any governmental or private party, concerning the actual or alleged presence
of Hazardous Materials in or on the Premises, Building or Site, nor has
Landlord received any written notice of any violation, or any alleged
violation, of any Hazardous Materials Laws, pending claims or pending
investigations with respect to the presence of Hazardous Materials on or in
the Premises, Building or Site. In addition to Landlord's indemnification of
Tenant pursuant to the provisions of Paragraph 7.2(b) above, except to the
extent that the Hazardous Material in question was released, emitted, used,
stored, manufactured, transported or discharged by Tenant or any of its
agents, employees, contractors or invitees, Tenant shall not be responsible
for and Tenant is hereby released from any claim, remediation obligation,
investigation obligation, removal obligation, monetary obligation, liability,
cause of action, penalty,
<PAGE>
attorneys' fees, costs, expenses or damages owing or alleged to be owing to
any third party with respect to any Hazardous Materials present in or on the
Premises, the Building or the Site, or the soil, ground water or surface water
thereof, without regard to whether the Hazardous Materials were present in or
on the Premises, the Building or the Site as of the Lease Commencement Date or
whether the presence of the Hazardous Materials was caused by any person other
than Landlord. In no event, however, shall the indemnification obligations of
Landlord in connection with the Hazardous Materials be more expansive than the
indemnification obligation of Landlord as set forth in Paragraph 7.2(b) above.
Landlord's representations and warranties under this Paragraph 56 and
Landlord's indemnification obligation under Paragraph 7.2(b) shall survive
termination of this Lease.
57.Arbitration. Any dispute pursuant to the provisions of Paragraph 3.2 which
-----------
is not resolved pursuant to such Paragraph shall be finally settled by binding
arbitration in accordance with and under the rules of practice and procedure
for arbitration hearings of Judicial Arbitration and Mediation Services, Inc.
("JAMS"), or its successor in San Francisco, California. The parties may agree
upon a retired judge from the JAMS panel. If they are unable to agree, JAMS
shall provide a list of available judges containing one more judge than there
are parties to the arbitration and each party may strike one. The remaining
judge shall serve as the arbitrator. The arbitrator shall have the authority
to grant injunctive and/or other equitable relief. The arbitrator shall not
have the power to commit errors of law or legal reasoning and the appropriate
court shall have the authority to review the award for errors of fact, law or
legal reasoning. The award may also be vacated or corrected pursuant to the
California Code of Civil Procedure for any such error. If and when a demand
for arbitration is made by either party, the parties agree to execute a
submission agreement, provided by JAMS, setting forth the rights of the
parties and the rules and procedures to be followed at the arbitration
hearing; provided, however, that (i) the arbitration shall take place in San
Francisco California; (ii) the arbitrator shall apply the rules of evidence
and substantive law of the State of California; (iii) the arbitrator shall
render written findings of fact and conclusions of law; (iv) the parties shall
be entitled to conduct such pre-hearing discovery as would otherwise be
permitted under California law; (v) the arbitrator shall have the authority to
entertain and decide motions before the arbitration hearing as otherwise would
be permitted in a court of law, including, by way of example, motions to
compel discovery and motions for summary judgment; and (vi) remedies which the
arbitrator shall have the authority to grant shall be limited to the same
remedies which could otherwise be imposed by a court of law. Such arbitration
shall be the sole remedy available to the parties.
IN WITNESS WHEREOF, the parties have executed and delivered this Lease on
the day and year first above written.
LANDLORD: TENANT:
Rosenberg SOMA Investments II, LLC, a
Delaware limited liability company
USWeb Corporation, a
By: TRC Investors II, LLC, a California Delaware corporation
limited liability company, Manager
By: ___________________________
By: The Rosenberg Company, a Name: _________________________
<PAGE>
California corporation, Manager Its: __________________________
By:_____________________
Douglas C. Rosenberg By: ___________________________
President Name: _________________________
Its: __________________________
By:_____________________
Douglas C. Rosenberg
Secretary
<PAGE>
EXHIBIT A
FLOOR PLAN
----------
[Attached]
<PAGE>
EXHIBIT B
---------
LANDLORD'S NOTICE OF LEASE TERM DATES
-------------------------------------
To: USWeb Corporation, a Delaware corporation
Date: __________, 1999
Re: The Office Lease ("Lease") dated March _____, 1999 between USWeb
Corporation, a Delaware corporation, ("Tenant"), and Rosenberg SOMA Investments
II, LLC, a Delaware limited liability company, ("Landlord"), concerning that
certain premises (the "Premises") consisting of all four (4) floors of office
space, all of the basement parking garage and basement storage area located in
that certain building (the "Building") commonly known as 410 Townsend Street,
San Francisco, CA.
In accordance with the Lease, Landlord and Tenant confirm as follows:
1. The Premises and the Building have been delivered to and accepted by
Tenant; Tenant acknowledges that all Tenant Improvements and other Landlord's
Work required under the Lease have been satisfactorily completed.
2. The Lease Commencement Date is _________, 1999; the Lease Expiration
Date is ___________, 2009.
3. Tenant's obligation to pay Aggregate Monthly Basic Rent under the
Lease shall commence on the Lease Commencement Date, as specified in Paragraph 2
above.
4. Aggregate Monthly Basic Rent and Operating Rent (when accrued pursuant
to Paragraph 5.3 of the Lease) are due and payable in advance on the first day
of each and every month during the Term of Lease. All payments shall be made
payable to Landlord and
<PAGE>
delivered care of ROK Properties, Inc., 501 Second Street, Ste. 214, San
Francisco, CA 94107.
AGREED AND ACCEPTED
-------------------
LANDLORD:
TENANT:
Rosenberg SOMA Investments II, LLC, a
Delaware limited liability company USWeb Corporation, a
Delaware corporation
By: TRC Investors II, LLC, a California
limited liability company, Manager By: __________________________
Name: ________________________
Its: _________________________
By: The Rosenberg Company, a
California corporation, Manager By: __________________________
Name: ________________________
By:_____________________ Its: ________________________
Douglas C. Rosenberg
President
By:_____________________
Douglas C. Rosenberg
Secretary
<PAGE>
EXHIBIT C
---------
SAMPLE FORM OF
--------------
TENANT ESTOPPEL CERTIFICATE
---------------------------
The undersigned, ______________________________ ("Landlord"), with a mailing,
address c/o
________________________________________________________________
and _____________________________ ("Tenant"), hereby certify to
_____________________, a ________________________ as follows:
1. Attached hereto is a true, correct and complete copy of that certain
lease dated ___________________ between Landlord and Tenant (the
"Lease"), which demises premises which are located on the second (2nd)
floor of the Building located at ___________________.
The Lease is now in full force and effect and has not been amended,
modified or supplemented, except as set forth in Paragraph 4 below.
2. The term of the Lease commenced on _______________________.
3. The term of the Lease shall expire on _______________________.
4. The Lease has: (Initial one)
( ) not been amended, modified, supplemented, extended, renewed or
assigned.
( ) been amended, modified, supplemented, extended, renewed or
assigned by the following described agreements, copies of which are
attached hereto:
_________________________________________________________
_________________________________________________________
5. Tenant has accepted, is now in possession of and is now conducting
business in said Premises.
6. Tenant and Landlord acknowledge that the Lease will be assigned to and
that no modification, adjustment, revision or cancellation of the
Lease or amendments thereto shall be effective unless written consent
of is obtained, and that until further notice, payments under the
Lease may continue as heretofore.
<PAGE>
7. The amount of Basic Annual Rent is $____________
Basic Annual Rent shall be increased based upon operating expense
increases
and as follows:
_____________________________________.
8. The amount of security deposits (if any) is $ ____________
No other security deposits have been made.
9. Tenant is paying the full lease rental, which has been paid in full as
of the date hereof. No rent under the Lease has been paid for more
than thirty (30) days in advance of its due date.
10. All Work required to be performed by Landlord under the Lease has been
completed and all required contributions by Landlord to Tenant on
account of Tenant Improvements have been received.
11. There are no defaults on the part of the Landlord or Tenant under the
Lease.
12. Tenant has no defense as to its obligations under the Lease and claims
no set-off or counterclaim against Landlord.
13. Tenant has no right to any concessions (rental or otherwise) or
similar compensation in connection with renting the space it occupies,
except as provided in the Lease.
14. The Lease, amended as noted in Item 4 above, represents the entire
agreement between Landlord and Tenant as to this leasing.
All provisions of the Lease and the amendments thereto (if any)
referred to above are hereby ratified.
DATED: _______________________ , 19__
TENANT: LANDLORD:
- ------ --------
___________________________, __________________________,
a _________________________ a _________________________
By:______________________ By:__________________________
Name:___________________ Name:_______________________
Its:______________________ Its:__________________________
<PAGE>
EXHIBIT D
---------
RULES & REGULATIONS
-------------------
1. Subject to Paragraph 48 of the Lease, no sign, placard, picture,
advertisement, name or notice shall be installed or displayed on any part of the
outside or inside of the Building without the prior written consent of Landlord,
which shall not be unreasonably withheld or delayed. Landlord shall have the
right to remove, at Tenant's expense and without notice, any sign installed or
displayed in violation of this rule. All approved signs or lettering on doors,
windows and walls shall be printed, painted, affixed or inscribed at the expense
of Tenant by a person reasonably approved by Landlord, using materials, style
and format reasonably acceptable to Landlord.
2. Landlord shall have the right to approve the window coverings in all
exterior and atrium window offices of the Premises, which approval shall not be
unreasonably withheld or delayed. No awning shall be permitted on any part of
the Premises. Tenant shall not place anything against or near glass partitions
or doors or windows which may appear unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls passages, exits,
entrances, elevators or stairways of the Building in a manner which would
violate any applicable code or ordinance.
4. Landlord will furnish Tenant, free of charge, with 10 keys to each
door lock in the Premises and 60 parking garage entry cards. Landlord may make a
reasonable charge for any additional keys or parking entry cards. Tenant shall
not make or have made additional keys or cards without Landlord's prior consent.
Tenant may install a security system at the Premises at Tenant's expense, in
which event Tenant shall provide Landlord with a key and/or entry card for
purposes of Landlord's entry to the Premises as provided in the Lease. Tenant,
upon the termination of its tenancy, shall deliver to Landlord the keys for all
doors and all parking cards which have been furnished to Tenant, and in the
event of loss of any keys or card keys so furnished, shall pay Landlord
therefor.
5. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
6. No equipment, materials, furniture, packages, supplies,
merchandise or other property will be received in the Building or carried in
the elevators except between such hours and in such elevators as may be
designated by Landlord.
7. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by
<PAGE>
law. Landlord shall have the right to prescribe the weight, size and position
of all equipment, materials, furniture or other property brought into the
Building. Heavy objects, if such objects are considered necessary by Tenant,
as reasonably determined by Landlord, shall stand on such platforms as
determined by Landlord to be necessary to properly distribute the weight. The
persons employed to move such equipment in or out of the Building must be
reasonably acceptable to Landlord. Landlord will not be responsible for loss
of, or damage to, any such equipment or other property from any cause, and all
damage done to the Building by maintaining or moving such equipment or other
property shall be repaired at the expense of Tenant.
8. Tenant shall not use or keep in the Premises any kerosene,
gasoline or inflammable or combustible fluid or material other than those
limited quantities necessary for the operation or maintenance of office
equipment. Tenant shall not use or permit to be used in the Premises any foul
or noxious gas or substance, or permit or allow the Premises to be occupied or
used in an unlawful manner by reason of noise, odors or vibrations, nor shall
Tenant bring into or keep in or about the Premises any birds or animals,
except animals assisting disabled persons.
9. Tenant shall not use any method of heating or air conditioning
other than that reasonably approved by Landlord. No space heaters of any type
are to be used within the Premises. Landlord reserves the right to remove
space heaters found during normal inspection of Premises.
10. Heat and air conditioning shall be provided as set forth in the
Lease.
11. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building.
12. Landlord reserves the right to exclude from the building between
the hours of 6:00 p.m. and 7:00 a m. the following day, or such other hours as
may be established from time to time by Landlord, and on Saturdays, Sundays
and legal holidays, any person unless that person is known to the person or
employee in charge of the Building and has a pass or is properly identified.
Tenant shall be responsible for all persons for whom it requests passes and
shall be liable to Landlord for all acts of such persons. Landlord shall not
be liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. Landlord reserves the right to
prevent access to the Building in case of invasion, mob, riot, public
excitement or other commotion by closing the doors or by other appropriate
action.
13. Tenant shall close and lock the doors of its Premises and entirely
shut off all water faucets or other water apparatus, and, except with regard to
Tenant's computers and other equipment which requires utilities on a twenty-four
hour basis, all electricity, gas or air outlets before Tenant and its employees
leave the Premises. Tenant shall be responsible for any damage or injuries
sustained by Landlord for noncompliance with this rule.
<PAGE>
14. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose employees or
invitees, shall have caused it.
15. Tenant shall not sell, or permit the sale at retail, of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to the
general public in or on the Premises. Tenant shall not use the Premises for any
business or activity other than that specifically provided for in Tenant's
Lease.
16. Tenant shall not mark, drive nails, screw or drill into the
partitions, woodwork or plaster or in any way deface the Premises or any part
thereof, except to install normal wall hangings, and to secure files and
bookcases and other furniture that could fall over. Landlord reserves the right
to direct electricians as to where and how telephone and telegraph wires are to
be introduced to the Premises. Tenant shall not cut or bore holes for wires.
Tenant shall not affix any floor covering to the floor of the Premises in any
manner except as reasonably approved by Landlord. Tenant shall repair any damage
resulting from noncompliance with this rule.
17. Tenant shall not install, maintain or operate upon the Premises any
vending machine without the written consent of Landlord.
18. Landlord reserves the right to exclude or expel from the Building
any person who, in Landlord's reasonable judgment, is intoxicated or under the
influence of liquor or drugs or who is in violation of any of the Rules and
Regulations of the Building.
19. Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of trash and
garbage disposal. All garbage and refuse storage and disposal shall be made in
accordance with directions issued from time to time by Landlord.
20. The Premises shall not be used for the storage of merchandise held
for sale to the general public, or for lodging or for manufacturing of any
kind, nor shall the Premises be used for any improper, immoral or
objectionable purpose. No cooking shall be done or permitted by any tenant on
the Premises, except that use by tenant of Underwriters' Laboratory-approved
equipment for brewing coffee, tea, hot chocolate and similar beverages shall
be permitted, and the use of a microwave oven shall be permitted, provided
that such equipment and use is in accordance with all applicable federal,
state, county and city laws, codes, ordinances, rules and regulations.
21. Except for mail carts and hand trucks, Tenant shall not bring any
vehicles of any kind into the Building except the Garage. Tenant shall comply
with all reasonable rules and regulations with respect to the use of the Garage
as Landlord may from time to time deliver to Tenant in writing.
<PAGE>
22. Without the written consent of Landlord, Tenant shall not use the
name of the Building in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
23. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by any governmental agency or reasonably
established by Landlord.
24. Tenant assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage, which includes keeping doors
locked and other means of entry to the Premises closed.
25. The requirements of Tenant will be attended to only upon
appropriate application to the office of the Building by an authorized
individual. Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from
Landlord, and no employee of Landlord will admit any person (tenant or
otherwise) to any office without specific instructions from Landlord.
26. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Tenant, but no such waiver by Landlord shall be construed
as a permanent or continuing waiver of such Rules and Regulations in favor of
Tenant, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against Tenant.
27. These Rules and Regulations are in addition to the terms,
covenants, agreements and conditions of the Lease. In the event these Rules
and Regulations conflict with any provision of the Lease, the Lease shall
control.
28. Landlord reserves the right to make such other and reasonable Rules
and Regulations as, in its judgment, may from time to time be needed for safety
and security, for care and cleanliness of the Building and for the preservation
of good order therein, provided such rules and regulations do not materially
increase Tenant's obligation hereunder or diminish Tenant's rights hereunder.
Tenant agrees to abide by all such Rules and Regulations hereinabove stated and
any additional rules and regulations which are adopted.
29. Tenant shall be responsible for the observance of all of the
foregoing rules by Tenant's employees, agents, clients, customers, invitees
and guests.
30. Smoking is prohibited in all enclosed areas of the Building without
limitation. When smoking outside the Building, ash receptacles must be used and
provided by the smoker if not provided by Landlord. Smokers must not leave any
ashtrays, smoking material or debris in the area where they have been smoking,
except in ash receptacles.
<PAGE>
EXHIBIT E
---------
WORK LETTER
-----------
410 TOWNSEND STREET, SAN FRANCISCO, CALIFORNIA
TENANT WORK LETTER
This Tenant Work Letter ("Work Letter") is entered into effective March 5,
1999, and shall set forth the terms and conditions controlling the construction
of the Premises. Unless otherwise defined herein, all capitalized terms shall
have the meanings ascribed to them in that certain lease between USWeb
Corporation, a Delaware corporation ("Tenant") and Rosenberg SOMA Investments
II, LLC, a Delaware limited liability company ("Landlord") dated March 5, 1999
(the "Lease").
SECTION 1
SELECTION OF CONTRACTOR
1.1. Selection of General Contractor. Tenant acknowledges and agrees that
-------------------------------
Landlord shall engage Cannon Constructors ("Contractor") to act as the
general contractor for construction of all Landlord's Work (as defined
below) and the Tenant's Improvements (as defined below) to be performed to
the Building. Landlord shall enter into one or more contracts with
Contractor for the construction of Landlord's Work and the Tenant's
Improvements (sometimes referred to collectively as the "Improvement
Work"). The one or more contracts between Landlord and Contractor with
respect to the Improvement Work shall separately reference and describe the
Landlord's Work and the Tenant's Improvements and shall, in addition,
separately reference the costs and charges attributable to the Landlord's
Work and the Tenant's Improvements. Landlord shall use commercially
reasonable efforts to cause the Improvement Work to be substantially
completed not later than July 7, 1999. It is acknowledged, that
substantial completion of the Tenant's Improvements is dependant, in part,
on the timely performance by Landlord of those matters required of Landlord
in connection with construction of the Tenant's Improvements and on the
timely performance by Tenant of those matters required by Tenant in
connection with construction of the Tenant's Improvements, including
without limitation, those certain Tenant Benchmarks as defined and set
forth in Paragraph 5.2 below. Tenant's failure to meet a Tenant Benchmark
shall constitute a Tenant Delay and shall be subject to Paragraph 3.2 of
the Lease. For purposes of the Lease and this Work Letter, "substantial
completion" of the Improvement Work shall mean the date on which all of the
following have occurred: (i) Landlord has substantially completed the
Improvement Work in accordance with this Work Letter, as certified by
Landlord's Architect (as defined below) subject only to completion of punch
list items and such other items as do not materially affect the ability of
Tenant to occupy and use the Premises; and (ii) Landlord has obtained all
governmental approvals and occupancy certificates required for the legal
occupancy of the Building. Upon substantial completion of the Improvement
<PAGE>
Work, Landlord shall give written notice thereof to Tenant. Within three
(3) business days after Tenant's receipt of such written notice, a
representative of Tenant, a representative of Landlord and Tenant's
Architect (as defined below) and Landlord's Architect shall conduct a
physical inspection and walk through of the Premises for the purpose of
determining which components of the Improvement Work, if any, have not been
completed, and which require additional work or repair. Within three (3)
business days thereafter, Tenant's Architect and Landlord's Architect shall
prepare a punch list setting forth such components of the Improvement Work.
Landlord shall thereafter diligently pursue completion and/or repair of the
punch list items. Upon completion of all such punch list items, Landlord
shall be considered to have completely fulfilled its obligations in
connection with the Improvement Work subject to the provisions of Paragraph
12 of the Lease. Notwithstanding any provision to the contrary contained
in the Lease or in this Work Letter, Tenant's acceptance of the Improvement
Work or submission of a "punch list" with respect to Improvement Work shall
not be deemed a waiver of Tenant's right to have latent defects in
Improvement Work repaired at no cost to Tenant. Tenant shall give written
notice to Landlord whenever any such defect becomes reasonably apparent and
Landlord shall repair such defect as soon as practicable so long as Tenant
gives such notice to Landlord within one (1) year following substantial
completion of the Improvement Work (as defined in Section 1.1).
Notwithstanding the above provisions, Landlord shall have no obligation to
repair any defect in the Tenant Improvements resulting from or relating to
design defects attributable to Tenant's Architect or any one or more of
Tenant's Engineers (as defined below). Subsequent to one (1) year
following substantial completion of the Improvement Work, the repair
obligation of Landlord with respect to latent defects shall be as otherwise
set forth in the Lease.
1.2. General Contractor's Contract for Improvements. As a condition of
----------------------------------------------
Contractor's contract with Landlord for the construction of the Tenant's
Improvements (the "Construction Contract"), Contractor shall solicit and
employ commercially reasonable effort to obtain bids from a minimum of
three (3) subcontractors for each component of work contemplated by the
Construction Drawings (as defined below) to be performed pursuant to
subcontract. Contractor shall provide Landlord and Tenant with a copy of
all such bids related to the Tenant's Improvements. Contractor shall also
provide Landlord and Tenant with an itemized breakdown of all general
conditions proposed under the Construction Contract related to the Tenant's
Improvements. All general conditions shall be subject to Landlord's
approval and to Tenant's approval as provided below in this paragraph.
Contractor shall be limited to three and one-half percent (3 1/2 %) of the
total cost of construction of the Tenant's Improvements incurred by
Contractor as Contractor's profit in connection with construction of the
Tenant's Improvements. The proposed form of Construction Contract shall
set forth the cost of construction for Tenant's Improvements (either on
fixed basis or on a guaranteed maximum basis) and relate to the
construction of the Tenant's Improvements in accordance with the
Construction Drawings. A copy of the proposed form of
<PAGE>
Construction Contract shall be delivered by Landlord to Tenant. Within
five (5) business days following delivery by Landlord to Tenant of (i) a
copy of the proposed form of Construction Contract; (ii) a copy of all
bids of subcontractors in connection with the Construction Contract; and
(iii) an itemized breakdown of the general conditions proposed in the
Construction Contract, Tenant shall deliver written approval or
disapproval of all such items to Landlord. If Tenant disapproves any such
items, Tenant's notice to Landlord shall specify the basis for the
disapproval. In the event that Tenant approves all of such items,
Landlord shall proceed with construction of the Tenant's Improvements in
accordance with the Construction Contract as so approved. In the event
that Tenant disapproves any such items, Landlord shall reasonably attempt
to satisfy any such objections of Tenant and shall give Tenant written
notice of suggested resolutions which in each case Tenant shall approve
or disapprove in writing within one (1) business day after receipt.
Landlord may elect not to proceed with construction of the Tenant's
Improvements pursuant to the Construction Contract until all objections
as raised by Tenant have been fully satisfied and Tenant has given
written approval of the Construction Contract in full, including without
limitation all of the above described items. In the alternative, Landlord
shall be entitled to proceed with construction of the Tenant's
Improvements pursuant to the Construction Contract even if Tenant's final
approval to all components of the Construction Contract has not yet been
obtained provided that Landlord gives written notice to Tenant of its
intent to so proceed and Tenant fails to object to such notice within two
(2) business days following receipt by giving written notice to Landlord
of such objection.
SECTION 2
LANDLORD'S WORK
2.1. Scope of Landlord's Work. The following work and improvements
------------------------
("Landlord's Work") shall be specified in construction drawings prepared
by Landlord's Architect ("Landlord's Drawings") and shall be constructed
at Landlord's sole cost. Prior to Landlord's entry into the Construction
Contract for construction of the Tenant's Improvements, Landlord shall
provide Tenant with a copy of Landlord's Drawings. Landlord shall not be
required to enter into the Construction Contract for the construction of
the Tenant's Improvements until and unless Tenant has given written
approval of Landlord's Drawings. The Landlord's Drawings shall set forth
the scope of the Landlord's Work and shall include, but not be limited
to, the improvements set forth below.
2.1.1. Installation of the primary heating, ventilating, and
airconditioning system ("HVAC") for the Building, stubbed out to
each floor, ready for local distribution.
2.1.2. Installation of 480 volt, 3 phase electrical power supply to
the main power panel for the Building, and distribution thereof to
subpanels on each floor of the Building as specified in the
Construction Drawings.
<PAGE>
2.1.3. Installation of lifesafety systems as required by applicable
building codes on an unimproved basis, including all sprinkler
systems, emergency exit systems (including required lighting and
signage) and other required fire safety systems.
2.1.4. Installation of the main telephone terminal panel with
appropriately sized services in the telephone/electrical room
specified in the Construction Drawings, and installation of
telephone closets on each floor of the Building, ready for
secondary line branching throughout each floor.
2.1.5. Construction of Men's and Women's restrooms on each floor of
the Building, as specified in the Landlord's Drawings, with the
exception of the basement.
2.1.6. Construction of gated basement parking and installation of a
card key access system.
2.1.7. Installation of two (2) new passenger elevators serving all
floors, as specified in the Landlord's Drawings.
2.1.8. Installation of operable windows throughout the Building in
all current window opening locations.
2.1.9. Performance of all work necessary for the Building to comply
with all applicable seismic regulations, the Americans with
Disabilities Act of 1980 (except with respect to those compliances
associated exclusively with the Tenant's Improvements) and all
applicable path of travel regulations.
2.1.10. Installation of at least one (1) fiber optic system to a
location in the Building mutually agreed upon by Landlord, Tenant
and the fiber optic provider, ready for distribution throughout the
Building.
SECTION 3
TENANT'S IMPROVEMENTS
3.1. Scope of Tenant's Improvements. The physical improvements to the
------------------------------
Premises and the Building (in addition to Landlord's Work) set forth and
described in the Construction Drawings shall constitute the "Tenant's
Improvements". For purposes of this Work Letter, the "Tenant Improvement
Allowance Items" shall consist of the following: (i) all costs incurred
in connection with or arising from the Construction Contract; (ii) all
fees and costs of Tenant's Architect and Tenant's Engineers (as defined
below); (iii) all space planning costs (subject to the limitations of
paragraph 3.4); (iv) the cost of Tenant's security system to be installed
at the Premises; (v) Landlord's
<PAGE>
supervision/construction management fee (as described in Paragraph 4.3
below); (vi) all costs related to obtaining all necessary construction
and other permits necessary for construction of the Tenant's
Improvements; (vii) all fees and costs associated with the hiring of an
expediter to assist in obtaining all building and planning department
consents and approvals with respect to the Tenant's Improvements; (viii)
the cost of other items related to the design and construction of the
Tenant's Improvements; and (ix) all other costs and expenses incurred in
connection with the Construction Contract or construction of the Tenant's
Improvements. Tenant shall be responsible for the full amount of all such
costs in connection with the Tenant's Improvements, all of which shall be
paid in accordance with the provisions of this Work Letter.
Notwithstanding anything to the contrary contained in the Lease or this
Work Letter, the cost of the Tenant's Improvements and the Tenant
Improvement Allowance Items shall not include (and Tenant shall have no
responsibility for) the following components: (i) costs attributable to
Landlord's Work or improvements installed "off-site" (such as streets,
curbs, gutters, traffic lights, lights for parking and street lighting);
(ii) costs incurred to remove hazardous materials from the Building
unless the presence of such materials was caused by Tenant or its agents,
contractors, employees or invitees in violation of hazardous materials
laws (as such may exist from time to time); (iii) attorneys' fees
incurred in connection with the Construction Contract (or any
subcontracts), or attorneys' fees, experts' fees and other costs of legal
and arbitration proceedings to resolve construction disputes with third
parties except for attorney's fees and other costs incurred in connection
with construction disputes relating to or arising out of decisions made,
actions taken or positions taken by Tenant's Architect; (iv) loan fees,
mortgage brokerage fees, interest and other costs of financing
construction costs; (v) costs incurred as a consequence of a delay by
Landlord or construction defects except for construction defects arising
or relating in whole or in part to services provided or decisions made by
Tenant's Architect or any other consultant or contractor engaged by
Tenant; (vi) restoration costs in excess of insurance proceeds as a
consequence of a casualty during construction, unless the casualty is
caused by Tenant, its agents, contractors, employees or invitees; (vii)
costs recovered by Landlord by reason of warranties or insurance; and
(viii) penalties and late charges attributable to the failure to pay
construction costs in accordance with the Construction Contract, except
to the extent such penalties and late charges arise due to delays caused
by Tenant, its agents, contractors, employees or invitees including,
without limitation, Tenant's Architect.
3.2. Tenant Improvement Allowance. Tenant shall be entitled to a onetime
----------------------------
tenant improvement allowance (the "Tenant Improvement Allowance") in the
amount of Thirty-One and 50/100 Dollars ($31.50) per rentable square foot
of the Premises as set forth in Paragraph 1.4 of the Lease. For purposes
of calculation of the total Tenant Improvement Allowance, the maximum
amount of the Improvement Loan (as defined below) and Landlord's
obligation to advance space planning costs, the rentable square feet of
the Premises shall be as set forth in Paragraph 1.4 of the Lease. The
Tenant Improvement Allowance shall be
<PAGE>
exclusively applied toward the costs of completing the Tenant's
Improvements. Landlord shall be entitled to employ the Tenant's
Improvement Allowance in connection with payment of the Tenant
Improvement Allowance Items. In no event shall Landlord be obligated to
make disbursements pursuant to this Work Letter, or otherwise for the
construction of the Tenant's Improvements, in excess of the Tenant
Improvement Allowance, except as provided in Paragraph 3.3. Tenant shall
be solely responsible for all costs incurred in constructing the Tenant's
Improvements in excess of the Tenant Improvement Allowance, whether
resulting from cost overruns, changes to the Construction Drawings or
otherwise.
3.3. Additional Funds for Tenant's Improvements. Notwithstanding the
------------------------------------------
limitation on the Tenant Improvement Allowance to be provided by Landlord
in the immediately preceding Paragraph, Tenant may request that Landlord
loan Tenant additional funds (the "Improvement Loan") to be used to
complete the Tenant's Improvements, if reasonably necessary, in the event
the Tenant Improvement Allowance is insufficient to pay in full the cost
of the Tenant's Improvements, taking into account any changes to the
Construction Drawings made by Tenant (which shall be at Tenant's sole
cost). In the event that the Tenant Improvement Allowance is insufficient
as described above, Landlord shall loan to Tenant an additional amount
not to exceed Three and 50/100 Dollars ($3.50) per rentable square foot
of the Premises. The obligation of Landlord to make the Improvement Loan
shall be conditioned on (i) exhaustion of the Tenant Improvement
Allowance in connection with Tenant Improvement Allowance Items, (ii)
Tenant contributing an amount equal to the Improvement Loan ("Matching
Funds") and (iii) the Improvement Loan and Matching Funds being applied
only towards hard construction costs as set forth in the Construction
Contract. If, at the time the Construction Contract is approved by
Tenant, the costs of the Tenant Improvement Allowance Items are
reasonably anticipated to be in excess of the Tenant Improvement
Allowance, then as a condition to Landlord's obligation to execute the
Construction Contract, Tenant shall fund the full amount of the
reasonably anticipated Matching Funds to Landlord as provided below. The
amount of the Improvement Loan shall be evidenced by an installment
promissory note (the "Note") made by Tenant in favor of Landlord in a
form reasonably acceptable to Landlord and Tenant. The Note shall provide
for interest at the rate of nine percent (9%) per annum, for a term of
ten (10) years commencing as of the Lease Commencement Date and for equal
monthly installment payments of principal and interest due on the first
day of each calendar month, which payments shall be sufficient to fully
amortize the principal amount of the Improvement Loan over the ten (10)
year term of the Note. In the event that at the time the Construction
Contract is finally approved by Tenant, it is not anticipated that any
amount in excess of the Tenant Improvement Allowance will be required in
connection with the cost of the Tenant Improvements, then to the extent
that excess costs are thereafter incurred, Landlord shall be required to
make the Improvement Loan in the maximum amount as described above,
subject however, to the conditions provided in Clauses (i), (ii) and
(iii) above. In connection with any such excess costs anticipated to be
incurred and the
<PAGE>
requirement for Matching Funds or additional Matching Funds to be
contributed by Tenant, such funds shall be deposited with Landlord as
described below.
Tenant shall solely be responsible for bearing the cost of the Tenant's
Improvements in excess of the Tenant Improvement Allowance and the Improvement
Loan. In the event it becomes reasonably apparent from the Construction
Drawings and Construction Contract that the cost of the Tenant's Improvements
will exceed the Tenant Improvement Allowance, the Improvement Loan and the
Matching Funds, within ten (10) business days following final approval of the
Construction Contract by Tenant, Tenant shall deposit with Landlord (to be held
in an interest bearing account by Landlord) an amount equal to the cost of the
Tenant's Improvements in excess of the Tenant Improvement Allowance, the
Improvement Loan and the Matching Funds as reasonably determined by Landlord.
Tenant shall, in addition, within ten (10) business days following final
approval of the Construction Contract, deposit the Matching Funds with Landlord
to be held in an interest bearing account by Landlord. The amount so deposited
by Tenant ("Tenant's Funds") shall be disbursed and/or employed in accordance
with Paragraph 3.5 below; provided however, that Tenant's Funds shall not be
used or applied towards the cost of completing the Tenant's Improvements until
such time as the Tenant Improvement Allowance has been exhausted in accordance
with the provisions of this Work Letter. In the event that following final
approval of the Construction Contract by Tenant, additional funds are required
by reason of additional costs attributable to change orders or other reasons
approved by Tenant (or Tenant's Architect), which approval shall not be
unreasonably withheld or delayed, Landlord may, thereafter, from time to time
upon written notice to Tenant, require that Tenant deposit additional funds with
Landlord (within ten (10) business days following receipt by Tenant of the
request for an additional deposit) to be held by Landlord in an interest bearing
account as a part of the Tenant's Funds in an amount as reasonably determined by
Landlord equal to such excess amount of costs to be incurred in connection with
construction of the Tenant's Improvements. Any and all interest accruing on the
Tenant's Funds shall accrue for the benefit of Tenant. In the event that Tenant
fails to deposit additional funds with Landlord within ten (10) business days
following receipt by Tenant of the request for an additional deposit as
described above, then Landlord may, at the sole option of Landlord, but without
any requirement to do so, draw down from the cash portion of the security
deposit made by Tenant pursuant to the provisions of Paragraph 6.1 of the Lease
the amount of additional deposit requested by Landlord which Tenant has failed
to timely make. In the event of any such withdrawal by Landlord, the funds so
withdrawn shall be held by Landlord as a portion of the Tenant's Funds and
disbursed by Landlord as otherwise provided herein. Further, in the event of
any draw by Landlord against the cash portion of the security deposit, Tenant
shall be obligated to restore such drawn amount to the security deposit within
ten (10) days after receipt of written demand of Landlord requiring such
restoration in accordance with the provisions of Paragraph 6.1 of the Lease.
Within ten (10) business days following completion of construction of the
Tenant's Improvements and payment in full of all costs incurred by Landlord in
connection with such construction, any Tenant's Funds then held by Landlord,
together with any accrued interest then held, shall be disbursed by Landlord to
Tenant.
<PAGE>
3.4. Cost of Initial Space Planning. In connection with the Tenant's
------------------------------
Improvements, Landlord shall advance the cost of initial space planning for
the Premises up to the maximum amount of Ten Cents ($0.10) per rentable
square foot of the Premises, which amount actually advanced by Landlord
shall be debited against the Tenant Improvement Allowance otherwise
available.
3.5. Landlord's Disbursement Process. During the construction of the
-------------------------------
Tenant's Improvements, Landlord shall make monthly disbursements of the
Tenant Improvement Allowance (and to the extent necessary, the
Improvement Loan, the Matching Funds and Tenant's Funds) for Tenant
Improvement Allowance Items for the benefit of Tenant and shall authorize
the release of monies for the benefit of Tenant as follows:
3.5.1. Monthly Disbursements. On or before the first day of each
---------------------
calendar month during the construction of the Tenant's Improvements
(or such other date as Landlord may designate), and before Landlord
shall be required to disburse any funds hereunder, Contractor shall
deliver to Landlord: (i) a request for payment of Contractor (and
others as appropriate), approved by Tenant's Architect (which
approval shall not be unreasonably withheld or delayed), in a form
to be provided by Landlord, showing the schedule, by trade, of
percentage of completion of the Tenant's Improvements in the
Building, detailing the portion of the work completed and the
portion not completed; (ii) invoices from Contractor (and others as
appropriate), for labor rendered and materials delivered to the
Building; (iii) executed mechanic's lien releases from Contractor
(and all others requesting payment) which shall comply with the
appropriate provisions, as reasonably determined by Landlord, of
California Civil Code Section 3262(d); and (iv) all other
information reasonably requested by Landlord. Tenant's Architect's
approval of any request for payment shall be deemed Tenant's
acceptance and approval of the work furnished and/or the materials
supplied as set forth in the subject payment request. Tenant's
Architect shall approve or disapprove any request for payment
within three (3) business days following receipt of Tenant's
Architect of such request and, in connection with any disapproval
of the request, shall specifically state the reason for
disapproval. In connection with any disapproval, Tenant's Architect
shall, thereafter, respond within one (2) business days following
receipt by Tenant's Architect of any revised request for payment.
Within five (5) business days following written approval by
Tenant's Architect, Landlord shall deliver a check made payable to
Contractor (or other party as appropriate) in payment of: (A)
amounts so requested by Contractor, as set forth in this Paragraph,
less a retention in accordance with the provisions of the
Construction Contract (the aggregate amount of such retentions to
be known as the "Final Retention"), provided that Landlord does not
dispute any request for payment based on noncompliance of any work
with the approved Construction Drawings, or due to any substandard
work, or for any other reason. Landlord's payment of such amounts
shall not be deemed Landlord's approval or acceptance of the work
<PAGE>
furnished or materials supplied as set forth in the subject payment
request. In addition to the disbursement described immediately
above, Landlord shall be entitled to disburse funds in payment of
obligations incurred by Landlord for Tenant Improvement Allowance
Items as Landlord may, from time to time, deem appropriate.
Landlord shall provide to Tenant and Tenant's Architect, copies of
invoices in connection with any such disbursements within five (5)
business days following disbursement. Tenant shall, in addition, be
entitle to submit, from time to time, invoices of Tenant's
Architect and Tenant's Engineers, which invoices shall be approved
by Tenant. Landlord shall pay such invoices as approved by Tenant
within thirty (30) days following receipt by Landlord of approved
invoices, but no more often than once per calendar month.
In no event shall Landlord have any obligation to make
disbursements in excess of the aggregate of; (i) the Tenant Improvement
Allowance, (ii) the Improvement Loan, (iii) the Matching Funds as having been
deposited by Tenant with Landlord, and (iv) the Tenant's Funds as having been
deposited by Tenant with Landlord (exclusive of Matching Funds).
3.5.2. Final Retention. Subject to the provisions of this Work
---------------
Letter, a check for the Final Retention payable to Contractor shall
be delivered by Landlord to Contractor following the completion of
construction of the Tenant's Improvements, provided that (i)
Contractor delivers to Landlord properly executed mechanics lien
releases in compliance with both California Civil Code Section
3262(d)(2) and either Section 3262(d)(3) or Section 3262(d)(4),
(ii) Landlord has determined that no substandard work exists which
adversely affects the mechanical, electrical, plumbing, heating,
ventilating and air conditioning, lifesafety or other systems of
the Building, the structure or exterior appearance of the Building,
and (iii) Tenant's Architect delivers to Landlord a certificate, in
a form reasonably acceptable to Landlord, certifying that the
construction of the Tenant's Improvements in the Building has been
substantially completed.
3.6. Unused Allowance. In the event that there remains any unused portion
----------------
of the Tenant Improvement Allowance following disbursements by Landlord
in connection with the Tenant's Improvements, any such amount shall be
retained by Landlord. Tenant shall have no entitlement to any excess of
the Tenant Improvement Allowance not in good faith consumed in the
construction of the Tenant's Improvements.
SECTION 4
CONSTRUCTION DRAWINGS; SUPERVISION OF WORK
4.1. Selection of Architect/Construction Drawings. Tenant hereby selects
--------------------------------------------
Interior Architects ("Tenant's Architect") to prepare the Construction
Drawings, and Landlord hereby consents to such selection of Tenant's
Architect. Tenant
<PAGE>
shall enter into a written contract with Tenant's Architect reasonably
acceptable to Landlord. To the extent required or appropriate, Tenant
also shall select engineering consultants reasonably acceptable to
Landlord ("Tenant's Engineers") to prepare and/or review plans and
drawings relating to the Tenant's Improvements. The plans and
specifications to be prepared by Tenant's Architect and Tenant's
Engineers shall be known collectively as the "Construction Drawings". In
connection with the preparation of the Construction Drawings, Tenant
shall submit to Landlord, the schematic plans ("Schematic Plans") prior
to and in connection with the Construction Drawings, which Schematic
Plans shall be subject to the approval of Landlord which approval shall
not be unreasonably withheld or delayed. Following the approval by
Landlord of the final Schematic Plans, the Construction Drawings shall be
prepared and a copy delivered to Landlord. The Construction Drawings
shall be subject to Landlord's written approval, which shall not be
unreasonably withheld or delayed. The Construction Drawings shall be full
and complete and sufficient to obtain all necessary governmental permits
and approvals required in connection with the construction of the
Tenant's Improvements. Tenant's Architect shall respond within three (3)
business days upon receipt of any written request of Landlord or
Contractor for clarification or further definition in connection with the
Construction Drawings. Tenant and Tenant's Architect shall verify in the
field the actual dimensions and surface conditions of the Building, and
Tenant and Tenant's Architect shall be solely responsible therefor and
shall rely exclusively thereon. Landlord shall have no responsibility
whatsoever for determination of the dimensions and conditions of the
Building, and makes no representations in connection therewith.
Landlord's review of the Construction Drawings as set forth in this
Paragraph shall be for its sole purpose and shall not imply Landlord's
review of the same, or obligate Landlord to review the same, for quality,
design, code compliance or other like matters. Accordingly,
notwithstanding that any Construction Drawings are reviewed by Landlord
or its architect, engineers and consultants (if any), and notwithstanding
any advice or assistance which may be rendered to Tenant by Landlord or
Landlord's Architect, engineers, and consultants (if any), Landlord shall
have no liability whatsoever in connection therewith and shall not be
responsible for any omissions or errors contained in the Construction
Drawings. No changes, modifications or alterations in the Construction
Drawings may be made without the prior written consent of Landlord, which
shall not be unreasonably withheld or delayed. Any delay in the
completion of construction of the Tenant's Improvements resulting from
any defect or omission in the Construction Drawings including, without
limitation, the failure of the Construction Drawings to satisfy or to
comply with any applicable law, code or regulations shall constitute a
Tenant Delay for purposes of Paragraph 3.2 of the Lease.
4.2. Permits. Prior to the commencement of construction of the Tenant's
-------
Improvements, Landlord, with the assistance and cooperation of Tenant's
Architect, shall submit the Construction Drawings as approved by Landlord
to the appropriate municipal authorities and shall obtain all applicable
building permits
<PAGE>
necessary to allow the Contractor to commence and fully complete the
construction of the Tenant's Improvements (the "Permits"). Tenant shall
reasonably cooperate with Landlord in taking such action as may be
reasonably required so as to enable Landlord to obtain all such Permits
and approvals.
4.3. Landlord's Supervision Fee. In connection with Landlord's review and
--------------------------
supervision of construction of the Tenant's Improvements as provided in
this Work Letter, Landlord has designated Douglas C. Rosenberg ("Landlord's
Supervisor") to serve as its representative and supervisor of the
construction of the Tenant's Improvements and all related matters, and in
connection with such function, Landlord shall be entitled to a supervision
fee equal to two percent (2 %) of the total, final cost of constructing the
Tenant's Improvements including all hard and soft costs and other matters
constituting Tenant Improvement Allowance Items (exclusive only of the fee
paid to Tenant's Architect and to Tenant's Engineers, if any) which fee
shall be payable incrementally from time to time from the Tenant
Improvement Allowance, Improvement Loan, Matching Funds and Tenant's Funds.
The supervision fee shall be payable at least once each calendar month and
shall generally be payable on a basis consistent with the percentage of the
total cost for the Tenant's Improvements then having been incurred as
approved by Landlord's Architect in accordance with Paragraph 3.5.1 above.
SECTION 5
TENANT'S COVENANTS AND BENCHMARKS; LEASE COMMENCEMENT DATE
5.1. Tenant Indemnity. Tenant hereby indemnifies Landlord from any loss,
----------------
claims, damages, actions or courses of action (including, without
limitation, reasonable attorney's fees) arising from or relating to the
actions of Tenant's agents, employees or contractors in the Premises or the
Building or in the event Tenant shall conduct additional work to the
Premises separate and apart from the Tenant Improvements prior to
substantial completion of the Tenant Improvements, such as fixture
installation or workstation set up, Tenant shall do so in strict compliance
with any and all rules and regulations related thereto that Contractor or
Landlord shall reasonably impose. Tenant shall only have the right to
conduct such activities prior to substantial completion provided that such
activities do not interfere with Landlord's completion of the Tenant's
Improvements.
5.2. Tenant's Benchmarks. The obligations of Tenant in connection with the
-------------------
Tenant's Improvements include the following (each a "Tenant Benchmark" and
collectively, the "Tenant Benchmarks") which Tenant Benchmarks,
notwithstanding any provision to the contrary of this Work Letter or the
Lease, are to be completed by the date indicated below:
<PAGE>
Date of
Description of Tenant Benchmark Completion
------------------------------- ----------
(i) Tenant's written approval and delivery to Landlord February 18, 1999
and the Contractor of final schematic drawings and written
identification of long lead architectural items, light
fixtures and other mechanical, electrical and plumbing
items (and written agreement on specifications for each
of such items).
(ii) Delivery by Tenant to Landlord of final approval and 4 business days
release of the long lead architectural items described following receipt
immediately above. Landlord will provide to Tenant pricing by Tenant of the
information and availability information in connection with Long Lead
the long lead items ("Long Lead Submission") for purposes of Submission
obtaining Tenant's final approval with respect to all such
items.
(iii) Delivery by Tenant to Landlord and the Contractor of March 26, 1999
complete construction drawings and specifications
(collectively, the "Construction Drawings").
(iv) Final written approval by Tenant of the bid pricing of 4 business days
the Tenant's Improvements as set forth in the Construction following receipt
Drawings which bid pricing shall be set forth in a by Tenant of the
submission by Landlord and the Contractor to Tenant Pricing
("Pricing Submission"). It is anticipated that the Pricing Submission
Submission will be delivered to Tenant on or about April 2nd,
1999.
(v) Written approval by Tenant of the total of the Tenant's 4 business days
Improvements as described in the Construction Drawings and following
the Pricing Submission as the Construction Drawings and delivery by
Pricing Submission may have been amended. Landlord and Landlord to
Contractor shall deliver to Tenant after any amendments as Tenant of final
required, a final form of Pricing Submission. Pricing
Submission
SECTION 6
MISCELLANEOUS
6.1. Tenant's Representative. Tenant has designated Laurie Guluarte as
-----------------------
its sole representative with respect to the matters set forth in this
Work Letter, who shall have full authority and responsibility to act on
behalf of the Tenant as required in this Work Letter.
6.2. Landlord's Representative. Landlord has designated Landlord's
-------------------------
Supervisor, as defined above, as its sole representative with respect to
the matters set forth in this Work Letter, who, until further notice to
Tenant, shall have full authority and responsibility to act on behalf of
the Landlord as required in this Work Letter.
<PAGE>
6.3. Time of the Essence. Unless otherwise indicated, all references
-------------------
herein to a "number of days" shall mean and refer to calendar days. If
any item requiring approval is timely disapproved by Landlord or Tenant,
the procedure for preparation of the document and approval thereof shall
be repeated until the document is approved by Landlord or Tenant, as the
case may be. Unless otherwise provided in this Work Letter, Landlord's
approval or Tenant's approval of any submittals required to be approved
by the other shall be given or withheld within three (3) business days
after receipt by the approving party of the submittal. In connection with
any disapproved matter, any resubmittal by Landlord or Tenant, as the
case may be, shall be approved or disapproved within two (2) business
days and this procedure shall continue until Landlord's or Tenant's
approval, as the case may be, of any submittal or resubmittal has been
approved. For purposes of this Paragraph 6.3, references to submittals to
and approvals by Tenant, shall be equally applicable to submittals to and
approvals by Tenant's Architect.
6.4. Hazardous Materials. Landlord shall be responsible for the lawful
-------------------
treatment and/or disposal of all hazardous or toxic materials (as such
terms may be defined from time to time by any governmental authority with
jurisdiction) existing at the Building prior to the Lease Commencement Date
which are disrupted or disturbed in connection with construction of the
Improvement Work, with the exception of any such materials which were
introduced to the Building or at the Site by Tenant or any of Tenant's
representatives, agents, contractors or invitees.
6.5. Landlord's Architect. Landlord hereby designates Rebecca Nolan
--------------------
("Landlord's Architect") to act as architect on behalf of Landlord in
connection with this Work Letter and the Lease.
6.6. Incorporated into the Lease. For all purposes, this Work Letter
---------------------------
shall be and is hereby deemed a part of the Lease, and to the extent
necessary, they shall together be construed as one and the same document.
IN WITNESS WHEREOF, the parties have executed and delivered this Work
Letter on the day and year first above written.
LANDLORD: TENANT:
Rosenberg SOMA Investments II, LLC, a
Delaware limited liability company USWeb Corporation, a Delaware
corporation
By: TRC Investors II, LLC, a California
limited liability company, Manager By: ___________________________
Name: _________________________
By: The Rosenberg Company, a Its: __________________________
California corporation,
Manager
By:_____________________ By: ___________________________
Douglas C. Rosenberg, Name: _________________________
President Its: __________________________
By:_____________________
Douglas C. Rosenberg,
Secretary
<PAGE>
EXHIBIT 11.1
USWEB CORPORATION
CALCULATION OF NET LOSS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Net loss......................................... $(3,359) $(50,670) $(188,281)
------- -------- ---------
Weighted average common shares outstanding....... 21,803 29,760 61,329
Shares deemed outstanding under stock bonus
arrangements for employees of acquired
companies....................................... -- 498
------- -------- ---------
Total weighted average common shares outstanding. 21,803 29,262 61,329
======= ======== =========
Basic and diluted net loss per share............. $ (0.15) $ (1.73) $ (3.07)
======= ======== =========
</TABLE>
<PAGE>
Exhibit 21.1
Subsidiaries
As of March 26, 1999, there are 30 wholly owned subsidiaries of USWeb
Corporation operating in the United States and nine wholly owned subsidiaries of
USWeb Corporation operating in foreign countries, all of which carry on the same
line of business as USWeb Corporation. Some of the subsidiaries themselves hold
further subsidiary entities, all of which are also in the same line of business.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-74587, 333-69093, 333-55893, and 333-48543)
of USWeb Corporation of our report dated January 25, 1999 appearing on page 39
of the Annual Report to Shareholders which is incorporated in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 62,368 64,956
<SECURITIES> 24,029 36,230
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 152,949 200,807
<PP&E> 19,599 32,419
<DEPRECIATION> 7,548 13,539
<TOTAL-ASSETS> 225,711 403,174
<CURRENT-LIABILITIES> 63,269 101,925
<BONDS> 0 0
0 0
0 0
<COMMON> 51 66
<OTHER-SE> 161,280 299,806
<TOTAL-LIABILITY-AND-EQUITY> 225,711 403,174
<SALES> 114,302 228,600
<TOTAL-REVENUES> 114,302 228,600
<CGS> 0 0
<TOTAL-COSTS> 77,115 169,282
<OTHER-EXPENSES> 80,246 244,162
<LOSS-PROVISION> 4,000 0
<INTEREST-EXPENSE> 1,706 4,302
<INCOME-PRETAX> (45,353) (180,542)
<INCOME-TAX> 5,317 7,739
<INCOME-CONTINUING> (50,670) (188,281)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (50,670) (188,281)
<EPS-PRIMARY> (1.73) (3.07)
<EPS-DILUTED> (1.73) (3.07)
</TABLE>
