<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25759
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1491253
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40 CUTTER MILL ROAD, 11021
SUITE 405, GREAT NECK, N.Y. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(516) 466 - 8422
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of November 1, 1999, there were 21,340,095 shares of AppliedTheory
Corporation common stock, par value $.01, outstanding.
The Index of Exhibits appears on page 36
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APPLIEDTHEORY CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Balance Sheets as of December 31, 1998 and September 30, 1999............................3
Statements of Operations for the three and nine months ended
September 30, 1998 and September 30, 1999................................................4
Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1999................................................5
Notes to Financial Statements............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................19
Item 2. Changes in Securities and Use of Proceeds...............................................19
Item 3. Defaults Upon Senior Securities.........................................................20
Item 4. Submission of Matters to a Vote of Security Holders.....................................20
Item 5. Other Information.......................................................................20
Item 6. Exhibits and Reports on Form 8-K........................................................34
Signatures ........................................................................................35
Exhibit
Index ........................................................................................36
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIEDTHEORY CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
(Derived from Audited (Unaudited)
Financial Statements)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,786 $ 3,290
Marketable securities -- 51,646
Accounts receivable, net of allowance for doubtful accounts
of $157 and $208, respectively 3,584 6,108
Due from related parties -- 1,163
Prepaid expenses and other assets 255 896
-------- --------
Total current assets 5,625 63,103
Property and equipment, net 4,203 7,532
Investment, at cost -- 5,000
Other assets 690 996
-------- --------
Total assets $ 10,518 $ 76,631
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,149 $ 4,303
Accrued payroll 582 1,586
Accrued expenses 2,473 2,357
Deferred revenue 1,849 2,559
Current portion of long-term debt
and capital lease obligations 551 959
Preferred stock dividends payable 420 --
Due to related parties 850 --
-------- --------
Total current liabilities 8,874 11,764
Long-term debt and capital lease obligations 5,979 5,084
Borrowings from NYSERNet.net, Inc. 2,957 --
Other liabilities 215 279
Redeemable preferred stock - 1,000,000 shares
authorized; Issued and outstanding
15,000 shares at December 31, 1998 and 0 shares at
September 30, 1999; cumulative 14%
dividend; $100 per share liquidation value 1,500 --
Stockholders' equity (deficit):
Common stock, $.01 par value; 90,000,000 shares authorized;
issued and outstanding 15,094,336 shares at
December 31, 1998 and 21,193,576 shares
at September 30, 1999 151 212
Additional paid-in capital 6,581 82,833
Accumulated deficit (15,739) (23,369)
Accumulated other comprehensive income (loss) -- (172)
-------- --------
Total stockholders' equity (deficit) (9,007) 59,504
-------- --------
Total liabilities and stockholders' equity (deficit) $ 10,518 $ 76,631
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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APPLIEDTHEORY CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------------------- -------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues
Third-party customers $ 4,178 $ 7,447 $ 10,033 $ 18,250
NYSERNet.org, Inc. customers and services 2,010 2,730 6,271 7,487
------------ ------------ ------------ ------------
Total net revenues 6,188 10,177 16,304 25,737
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenues 3,433 6,818 9,237 16,710
Sales and marketing 1,771 3,688 4,745 8,096
General and administrative 1,604 2,958 3,906 6,827
Research and development 22 66 142 196
Depreciation and amortization 422 879 1,181 2,286
Other expenses (2) -- -- 3
------------ ------------ ------------ ------------
Total costs and expenses 7,250 14,409 19,211 34,118
------------ ------------ ------------ ------------
Loss from operations (1,062) (4,232) (2,907) (8,381)
Investment income -- (756) -- (1,279)
Interest expense 141 129 424 455
------------ ------------ ------------ ------------
NET LOSS (1,203) (3,605) (3,331) (7,557)
Preferred stock dividends 52 -- 157 73
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (1,255) $ (3,605) $ (3,488) $ (7,630)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.09) $ (0.17) $ (0.29) $ (0.40)
============ ============ ============ ============
Shares used in computing basic
and diluted loss per share 13,539,735 21,180,152 11,834,585 18,858,416
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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APPLIEDTHEORY CORPORATION
STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30,
---------------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (3,331) $ (7,557)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,182 2,286
Provision for bad debts -- 68
Deferral (payment) of interest expense to NYSERNet.net, Inc., net 154 (270)
Loss on sale of property and equipment 14 3
Non-cash compensation expense 341 940
Changes in assets and liabilities
Accounts receivable (1,022) (2,592)
Due to (from) related parties (505) (2,012)
Prepaid expenses and other assets (1,134) (1,070)
Accounts payable 147 2,154
Accrued payroll 616 1,004
Accrued expenses and other liabilities 272 (51)
Deferred revenue 804 711
-------- --------
Net cash used in operating activities (2,462) (6,386)
-------- --------
Cash flows from investing activities
Purchases of property and equipment (1,185) (4,174)
Purchase of marketable securities -- (77,258)
Proceeds from sale or redemption of marketable securities -- 25,440
Purchase of investment -- (5,000)
Payments received on notes receivable -- 122
Proceeds from sale of property and equipment 4 5
-------- --------
Net cash used in investing activities (1,181) (60,865)
-------- --------
Cash flows from financing activities
Issuance of common stock, net of issuance costs 4,895 75,371
Payment of preferred stock dividends -- (493)
Redemption of preferred stock -- (1,500)
Borrowings from NYSERNet.net, Inc. 301 800
Repayment of borrowings from NYSERNet.net, Inc. -- (3,487)
Proceeds from (repayment of) line of credit borrowings, net 356 (1,190)
Principal payments on capital leases (165) (746)
-------- --------
Net cash provided by financing activities 5,387 68,755
-------- --------
Net increase (decrease) in cash and cash equivalents 1,744 1,504
Cash and cash equivalents, beginning of period 135 1,786
-------- --------
Cash and cash equivalents, end of period $ 1,879 $ 3,290
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
AppliedTheory Corporation (formerly AppliedTheory Communications, Inc.) was
incorporated in the State of New York in November 1995 as a wholly owned
subsidiary of NYSERNet.net, Inc. ("NET"), a not-for-profit corporation. NET
is also the sole member of NYSERNet.org, Inc. ("ORG"), a not-for-profit
corporation (in effect ORG is a wholly owned subsidiary of NET). As a
result of certain transactions completed during 1998 (the exercise of
options for 3,559,335 shares of AppliedTheory Corporation common stock, the
private placement of 1,725,000 shares of AppliedTheory Corporation common
stock and NET's direct sale of 4,875,000 shares of AppliedTheory
Corporation common stock), AppliedTheory Corporation is no longer a
subsidiary of NET.
These financial statements for the three months and nine months ended
September 30, 1999 and 1998 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with
the audited financial statements of AppliedTheory Corporation (the
"Company") as of and for the year ended December 31, 1998 included in our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission. The accompanying unaudited financial statements of
AppliedTheory Corporation have been prepared in accordance with generally
accepted accounting principles for interim financial information, with the
instructions to Form 10-Q and Article 10 of Regulation S-X. All material
adjustments, consisting of only normal and recurring adjustments, which, in
the opinion of management, are necessary for fair presentation of the
results for the interim periods have been reflected. Operating results for
the three-month and nine month period ended September 30, 1999 and 1998 are
not necessarily indicative of the results that may be expected for any
succeeding quarters or for the full year. The financial statements and
notes thereto should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1998.
In conjunction with its Initial Public Offering (the "IPO"), AppliedTheory
Communications, Inc. reorganized as a Delaware corporation. On January 28,
1999, AppliedTheory Communications, Inc. established its wholly owned
subsidiary, AppliedTheory Corporation. AppliedTheory Communications, Inc.
merged into AppliedTheory Corporation, which is the surviving entity
effective with the completion of its IPO, on May 5, 1999. On April 12,
1999, a committee of the Board of Directors of both AppliedTheory entities
authorized an increase in the number of authorized shares of common stock
and preferred stock to 90,000,000 and 1,000,000, respectively. Further, all
non-voting common shares were converted into voting common shares and a 1.5
to 1 stock split was declared effective upon completion of the IPO. All per
share amounts have been adjusted retroactively.
On May 5, 1999, the Company's IPO became effective. Through the IPO,
5,175,000 shares of the Company's common stock were issued for net proceeds
of approximately $75.3 million after deduction of the underwriting
discount, commissions and other offering costs.
NOTE B - LOSS PER SHARE
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per
share is computed using the weighted average number of shares of common
stock outstanding, adjusted for the dilutive effect of potential common
shares issued or issuable pursuant to stock options and stock appreciation
rights. Potential common shares issued are calculated using the treasury
stock method. All potential common shares have been
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excluded from the computation of diluted loss per share as their effect
would be antidilutive and accordingly, there is no reconciliation of basic
and diluted loss per share for the periods presented.
NOTE C - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and nine months ended September
30, 1998 and 1999, was as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(1,203) $(3,605) $(3,331) $(7,557)
Other comprehensive income (loss):
Unrealized gain (loss) on
Marketable securities -- 21 -- (172)
------- ------- ------- -------
Comprehensive income (loss) $(1,203) $(3,584) $(3,331) $(7,729)
======= ======= ======= =======
</TABLE>
NOTE D - SEGMENT AND RELATED INFORMATION
The Company operates as one business segment, as a provider of Internet
solutions. The Company had revenues from its major service offerings as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues
Internet connectivity $ 3,834 $ 5,081 $10,929 $14,189
Internet integration and
enterprise portal development 1,981 4,250 4,285 9,284
Web hosting 373 846 1,090 2,264
------- ------- ------- -------
Total net revenues $ 6,188 $10,177 $16,304 $25,737
======= ======= ======= =======
</TABLE>
NOTE E - MARKETABLE SECURITIES
Investments classified as marketable securities represent fixed maturity
instruments (bonds and notes) which are reported at their fair values.
Unrealized gains and losses on these securities, net of related tax effects
are included in stockholders' equity as a component of accumulated other
comprehensive income (loss). The Company categorizes all marketable
securities as available for sale in order to provide the Company
flexibility to respond to various factors, including changes in market
conditions.
Investment income is recognized when earned. Realized gains and losses on
sales, maturities and liquidation of investments are determined on a
specific identification basis. The amortization of premiums and accretion
of discounts are computed on the straight-line basis. Fair values are based
on quoted market prices.
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NOTE F - PROPERTY AND EQUIPMENT
On December 21, 1998, the Company adopted a plan, which was approved by its
Board of Directors, to close a leased facility, which principally is used
as a Web-hosting data center. The facility experienced operational
difficulties which limited its usability as a Web-hosting site and its
ability to generate sufficient revenues. In connection with the plan of
abandonment, the Company recorded a $900,000 charge to operations for the
year ended December 31, 1998 consisting of (i) a $486,000 write-down of
equipment and leasehold improvements to management's estimate of their fair
value, based on the anticipated discounted future cash flows through the
date of abandonment, of approximately $70,000 in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of" and (ii) a $414,000
accrued liability, included in Accrued Expenses, relating to equipment
leases and facility operating leases, (net of anticipated subrental income)
expiring in October 2001 and May 2006, respectively, in accordance with the
provisions of EITF 94-3, "Liability Recognized for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This accrued
liability provides for only those costs subsequent to exiting the facility,
which had been expected to occur in September 1999, and costs prior thereto
will be recognized during the period they are incurred. The plan calls for
the Web-hosting customer base served from this abandoned facility and the
related revenues, which are not significant, to be transitioned to another
facility. As of September 30, 1999, no amounts have been paid against this
liability. Management currently anticipates that the closure date will be
delayed approximately four months later than originally planned.
NOTE G - INVESTMENT IN PLANNING TECHNOLOGIES, INC.
On June 22, 1999, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Planning Technologies, Inc. ("PTI"), a
Georgia corporation which provides consulting and network engineering
services, along with Grumman Hill Investments III, L.P., and certain
shareholders of PTI. Pursuant to the Stock Purchase Agreement, the Company
acquired approximately 10% of the capital stock of PTI on a fully diluted
basis, as defined in the Stock Purchase Agreement, for $5.0 million. The
Company's 10% ownership interest in PTI is represented by 2,976,190 shares
of PTI's Convertible Preferred Stock, which represents approximately 50% of
PTI's outstanding Convertible Preferred Stock. The investment is being
accounted for under the cost method.
The Stock Purchase Agreement provides a definition of service revenues for
PTI for the year ending December 31, 1999. In the event that PTI's service
revenues for that period are below thresholds which are described in the
Stock Purchase Agreement, the Company will receive additional shares of PTI
Convertible Preferred Stock representing up to 5% of the fully diluted
capital stock of PTI.
As a result of its investment in PTI, so long as the Company continues to
hold at least 25% of the total outstanding Convertible Preferred Stock of
PTI, the Company will be entitled to designate and elect one director out
of a total of six seats on the Board of Directors.
Pursuant to the terms of its investment, during the period beginning June
30, 2000 and ending December 31, 2000, the Company will have the option to
purchase all the outstanding capital stock of PTI at a price, which at that
time is determined to be fair market value.
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NOTE H - LONG-TERM DEBT
Line of Credit
On January 20, 1998, the Company entered into a credit agreement with a
bank for an aggregate amount of $7,500,000, which expires on January 19,
2001. The agreement provides for the payment on January 19, 2001 of the
unpaid principal balance of all amounts advanced on and outstanding at that
time. Interest is charged and payable on a monthly basis as determined by
the Company, either on a LIBOR plus 50 basis points or a prime rate basis
less 200 basis points. The credit facility is collateralized by
substantially all assets of the Company and by a maximum of $5,500,000 of
cash and cash equivalents, government securities, corporate securities or
corporate equities pledged by NET.
The Company had $4,240,000 outstanding under the line of credit as of
September 30, 1999 and, as a result of certain restrictions, has an
additional $1,260,000 available as of September 30, 1999. The average
interest rate on outstanding borrowings was 6.2% at September 30, 1999.
In accordance with the terms of the credit agreement, amended on August 3,
1999, the bank issued a standby letter of credit in the Company's name for
$650,000, expiring July 30, 2000, pursuant to the amended agreement,
collateralizing the Company's obligation to a third party for a real
property lease. The Company's available credit under its line of credit
agreement is effectively reduced by the outstanding amount of the letter of
credit.
Borrowings from NYSERNet.net, Inc.
The Company has an unsecured borrowing facility with NET, which provides
for borrowings to a maximum amount of $6,187,000, less any preferred stock
issued to NET, for working capital requirements. This borrowing facility
expires on January 1, 2002. Interest on the loans accrues at the prime rate
and payments are deferred for five years from the date of each advance or
January 1, 2002, whichever date is earlier. All principal borrowings under
this agreement are due and payable on January 1, 2002. On May 5, 1999, the
Company paid down the line of credit and deferred interest in full with the
proceeds from the IPO.
As of September 30, 1999, the Company had no principal borrowings
outstanding under this facility and had $6,187,000 available for additional
principal borrowings.
Capital Lease Obligations
During March 1999, the Company leased approximately $1,449,000 of equipment
under an agreement accounted for as a capital lease. The obligation for the
equipment requires the Company to make monthly payments of approximately
$52,000 through September 2001. In connection with the equipment financing,
the Company was required to deliver a security deposit by placing on
deposit $782,000 as additional collateral. The security deposit was fully
refunded to the Company in June 1999.
Interest paid for the three and nine months ended September 30, 1998 and
1999 was approximately $141,000, $424,000, $129,000 and $794,000,
respectively.
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NOTE I - REDEEMABLE PREFERRED STOCK
On May 5, 1999, the Company paid approximately $1,993,000 to fully redeem
all outstanding preferred stock and accrued dividends with a portion of the
proceeds from the Company's IPO.
NOTE J - STOCKHOLDERS' EQUITY
Certain options were granted in 1998 at exercise prices below the fair
market value of the Company's stock. The Company recorded compensation
expense associated with these options of $100,000 and $314,000 for the
three months ended September 30, 1998 and 1999 and a total of $300,000 and
$941,000 for the nine months ended September 30, 1998 and 1999,
respectively.
During the nine months ended September 30, 1999, options with respect to
924,426 shares of common stock were exercised for aggregate net proceeds of
approximately $140,000.
NOTE K - RELATED PARTY TRANSACTIONS
Transactions with NET and ORG
The Company has entered into an Internet service provider agreement with
ORG to serve as ORG's sole source provider for Internet solutions to ORG's
customer base under contractual arrangements. ORG's customers consist of
(i) unrelated customers for which ORG serves as a conduit to the sales
transactions between the Company and these customers and (ii) member
institutions of ORG for which ORG provides pricing terms below that charged
by the Company to ORG. The Company's revenues from ORG's customer base for
the following periods are (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Unrelated customers $ 730 $ 754 $2,351 $2,196
Member institutions 1,120 1,265 3,358 3,620
Services to ORG 160 711 562 1,671
------ ------ ------ ------
$2,010 $2,730 $6,271 $7,487
====== ====== ====== ======
</TABLE>
During each of the three and nine months ended September 30, 1998 and 1999,
the Company charged NET approximately $25,000 and $75,000 and ORG $75,000
and $225,000, respectively, in management fees.
The excess of the Company's revenues over amounts charged by ORG to its
member institutions was approximately $701,000 and $783,000 for the three
months ended September 30, 1998 and 1999 and $2,116,000 and $2,256,000 for
the nine months ended September 30, 1998 and 1999, respectively.
NOTE L - COMMITMENTS
During the three months ended September 30, 1999, the Company entered into
five noncancelable operating leases for new office facilities with terms
ranging from seven to ten years. Certain of these
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operating leases include rent holidays and scheduled base rent increases
over the term of the lease. The total amount of the base rent is charged to
expense on the straight-line method over the terms of the lease. The
Company's total future minimum annual lease payments under the
noncancelable operating leases entered into during the quarter ended
September 30, 1999 are approximately $1,200,000 in 2000, $1,500,000
annually from 2001 through 2007 and approximately $1,000,000 annually from
2007 through 2009.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read and consider the following discussion in conjunction
with our audited financial statements and notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as of
and for the year ended December 31, 1998 which is included in the Registration
Statement on Form S-1 (File No. 333-72133), as filed with the Securities and
Exchange Commission in connection with our initial public offering ("IPO") of
common stock.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or those of the industry in which we operate, to be materially
different from any expected future results, performance or achievements
expressed or implied by these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed in Part II, Item 5 of this Form 10-Q
and in the Registration Statement for our initial public offering of common
stock.
Unless the context otherwise requires, references in this Form 10-Q to
"AppliedTheory", the "Company, "we", "our" and "us" refer to AppliedTheory
Corporation.
OVERVIEW
We are a leading provider of one-stop Internet solutions to the
business mid-market and public sector, offering an extensive array of high
performance, reliable and scalable Internet technology products and services.
Our products and services can be tailored to meet our customers' requirements.
We provide the following products and services, either individually or as part
of a one-stop package:
- - Internet integration and enterprise portal development, including custom
software application development, Web site design and development and upgrading
of legacy systems;
- - Web hosting, consisting of custom hosting solutions and outsourcing, shared
server, dedicated server and co-location hosting solutions; and
- - Internet connectivity, including virtual private network solutions, network
and security consulting and dedicated Internet access.
We market our products and services to the business mid-market and
public sector institutions. We believe these businesses and institutions are
increasingly demanding one-stop solutions for Internet services due to the
difficulty and expense of managing and integrating the products and services of
multiple vendors. Our comprehensive suite of products and services enables our
customers to capitalize on the wide variety of critical data communication
opportunities made possible by the Internet.
We are rapidly building our sales and marketing efforts to more
aggressively pursue customers. During the third quarter of 1999 we increased our
sales force 70% and opened sales offices in 2 new regions. AppliedTheory also
signed leases to open a new data center in Hayward, California and a network
operations center in Columbia, Maryland. We have also signed a lease for new
office facilities in Syracuse, New York, which will provide additional space for
the expansion of our current network
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operations and data center. During the remainder of 1999 and the first quarter
of 2000, we have targeted 10 metropolitan areas throughout the East Coast of the
United States, which have high concentrations of businesses and intend to
continue to grow our direct sales force. These targeted markets are where we
plan to have a physical local presence consisting of a sales office and/or
planned points of presence, ("POPs").
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUE. Total net revenues were approximately $10.2 million for the
three months ended September 30, 1999, an increase of $4.0 million or 65%, from
$6.2 million in the three months ended September 30, 1998. Total net revenues
were approximately $25.7 million for the nine months ended September 30, 1999,
an increase of $9.4 million or 58%, from $16.3 million in the nine months ended
September 30, 1998. Approximately $3.3 million of the growth during the nine
months ended September 30, 1999 from the same period ended September 30, 1998
was from Internet connectivity revenue, which resulted primarily from the
addition of new customers and from additional revenue derived from existing
customers who upgraded their level of service. Web hosting revenue increased by
approximately $1.1 million during the same period. This increase resulted from
an approximately equal increase in Web monitoring, management and hosting
services for the New York State Department Labor in connection with America's
Job Bank and from our managed dedicated web hosting product. The remaining
increase in total net revenues of approximately $5.0 million was derived from
Internet integration and enterprise portal development services. These services
include, but are not limited to:
- - linking existing databases and legacy systems with the Web; and
- - creating open, universal interfaces to business-critical information and
standards-based software used to link with the systems of suppliers, partners
and customers.
The increase of Internet integration and enterprise portal development
was primarily derived from the expansion of these services to the New York State
Department of Labor in connection with America's Job Bank as well as from the
addition of contracts for services with other state agencies and commercial
customers.
For the nine months ended September 30, 1999, as a percentage of total
net revenues, Internet connectivity represented 55%, Internet integration and
enterprise portal development represented 36% and Web hosting represented 9%.
For the nine months ended September 30, 1998, as a percentage of total net
revenues, Internet connectivity represented 67%, Internet integration and
enterprise portal development represented 26% and Web hosting represented 7%.
COST OF REVENUE. Cost of revenue consists principally of backbone and
Internet access costs, including charges from local exchange carriers and
personnel costs to operate our network and data centers and provide Internet
integration and enterprise portal development services. Cost of revenue totaled
approximately $6.8 million (67% of revenue) for the three months ended September
30, 1999, an increase of approximately $3.4 million from the $3.4 million (55%
of revenue) for the three months ended September 30, 1998. Cost of revenue
totaled approximately $16.7 million (65% of revenue) for the nine months ended
September 30, 1999, an increase of approximately $7.5 million from the $9.2
million (57% of revenue) for the nine months ended September 30, 1998. The
increase in both periods is
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primarily attributable to the upgrade of our network to support customer growth,
improve the efficiency and performance of our Internet connectivity services and
building and staffing of our network operations center. Additionally,
approximately $1.3 million of the increase in the three months ended September
30, 1999 and approximately $2.4 million of the increase in the nine months ended
September 30, 1999 from the same periods last year was derived from an increase
in labor and other professional service costs associated with the expansion of
Internet integration and enterprise portal development services.
SALES AND MARKETING. Sales and marketing expense consists principally
of advertising and marketing programs, including personnel, occupancy and other
professional service expenses consisting of telemarketing services. Sales and
marketing expense was approximately $3.7 million (36% of revenue) for the three
months ended September 30, 1999, an increase of $1.9 million, or 108% from $1.8
million (29% of revenue) for the three months ended September 30, 1998. Sales
and marketing expense was approximately $8.1 million (31% of revenue) for the
nine months ended September 30, 1999, an increase of $3.4 million, or 71% from
$4.7 million (29% of revenue) for the nine months ended September 30, 1998.
These increases reflect a substantial investment in the sales and marketing
organizations necessary to support our expanded customer base, advertising
campaigns and efforts to establish national sales and marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
principally of costs relating to personnel, including customer support,
occupancy, general operating costs and professional fee expenses. General and
administrative expense was approximately $3.0 million (29% of revenue) for the
three months ended September 30, 1999, an increase of $1.4 million, or 84% from
$1.6 million (26% of revenue) for the three months ended September 30, 1998.
General and administrative expense was approximately $6.8 million (27% of
revenue) for the nine months ended September 30, 1999, an increase of $2.9
million, or 75% from $3.9 million (24% of revenue) for the nine months ended
September 30, 1998. The increase in general and administrative expenses was
primarily attributable to:
- - compensation expense relating to stock compensation expense;
- - costs related to recruiting new personnel; and
- - increases necessary to manage the financial, legal and administrative
aspects of our business.
RESEARCH AND DEVELOPMENT. Research and development costs are
principally focused in our Internet integration and enterprise portal
development and web hosting service offerings. For the three and nine months
ended September 30, 1999 and 1998, research and development expenses have not
significantly fluctuated.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization consist
principally of depreciation of computer equipment, office furniture and
leasehold improvements. Depreciation and amortization expense was approximately
$.9 million (9% of revenue) for the three months ended September 30, 1999, an
increase of $.5 million, or 108% from $.4 million (7% of revenue) for the three
months ended September 30, 1998. Depreciation and amortization was approximately
$2.3 million (9% of revenue) for the nine months ended September 30, 1999, an
increase of $1.1 million, or 94% from $1.2 million (7% of revenue) for the nine
months ended September 30, 1998. Depreciation and amortization costs have
increased as a result of capital expenditures associated with our Internet
integration and enterprise portal development and web hosting products, as well
as computer equipment
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and office furniture for personnel supporting our national expansion.
INTEREST INCOME. Interest income was approximately $.8 million for the
three months ended September 30, 1999 and $1.3 million for the nine months ended
September 30, 1999. Interest income was insignificant for the same periods in
1998. The increase is a result of the return on funds invested since May 5, 1999
representing the net proceeds from the Company's IPO.
INTEREST EXPENSE. Interest expense was approximately $.1 million for
the three months ended September 30, 1999 and 1998, and approximately $.4
million for the nine months ended September 30, 1999 and 1998.
NET LOSS. Net loss attributable to common stockholders for the quarter
ended September 30, 1999 was $3.6 million, or $0.17 per share, compared with
$1.2 million, or $.09 per share, for the quarter ended September 30, 1998. Net
loss attributable to common stockholders for the nine months ended September 30,
1999 was $7.6 million, or $.40 per share compared with $3.5 million, or $.29 per
share for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES.
We had an accumulated deficit of $23.4 million at September 30. 1999,
and have used $15.1 million in cash in the aggregate to fund operations during
the period since our inception on October 1, 1996, through September 30, 1999.
Until the successful completion of our initial public offering, we had satisfied
our cash requirements primarily through the sale of common and preferred stock
and borrowings under credit agreements and equipment financing arrangements. Our
principal uses of cash are to fund operations, for working capital requirements
and for capital expenditures. At September 30, 1999, we have $3.3 million in
cash and cash equivalents and working capital of approximately $51.3 million.
The Company used approximately $6.3 million of cash in operations during the
nine months ended September 30, 1999, compared to $2.5 million for the nine
months ended September 30, 1998. Net cash used in investing activities for the
nine months ended September 30, 1999 and 1998 was approximately $60.9 million
and $1.2 million, respectively. The increase of approximately $59.7 million is
associated with the purchase of marketable securities and an investment using
net proceeds of our IPO which closed on May 5, 1999. Net cash provided by
financing activities was approximately $68.8 in the nine months ended September
30, 1999 and approximately $5.4 million for the nine months ended September 30,
1998. This increase of approximately $63.4 million consists principally of $75
million in net proceeds received from issuance of 5,175,000 shares of our common
stock in connection with our IPO, less repayment of all outstanding borrowings
from NYSERNet.net, Inc., including deferred interest of approximately $3.5
million and redemption of preferred stock including dividends payable of
approximately $1.9 million.
Capital expenditures, including capital leases, amounted to
approximately $5.6 million for the nine months ended September 30, 1999, as
compared to $1.2 million for the nine months ended September 30, 1998.
On January 20, 1998, we obtained a secured revolving line of credit
with Fleet National Bank for $7.5 million, which expires on January 19, 2001.
Borrowings under this line are secured by substantially all our assets and by a
maximum of $5.5 million of cash and cash equivalents, government securities and
corporate securities or corporate equities pledged by NYSERNet.net, Inc. At
September 30, 1999, borrowings under this line amounted to $4.2 million and a
standby letter of credit in the Company's name for $650,000 that expires July
30, 2000. As of September 30, 1999, as a result of restrictions under
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the line of credit, additional credit of $1.3 million was available under this
agreement.
We also have an unsecured revolving borrowing facility with
NYSERNet.net, which provides for borrowings up to a maximum amount of
approximately $6.2 million, less any preferred stock issued to NYSERNet.net. As
of September 30, 1999, approximately $6.2 million was available under this
borrowing facility. In connection with our IPO, we fully redeemed our
outstanding preferred stock and paid down all outstanding line of credit
borrowings to NYSERNet.net.
We believe that the net proceeds from our IPO and availability under
the aforementioned financing agreements, will be sufficient to meet our
anticipated cash needs for expanding our sales and marketing efforts, expanding
our customer support services, building new distributed data centers, and for
other working capital requirements and general corporate purposes. However,
there can be no assurance regarding the period of time through which our
financial resources will be adequate to support our operations. We may need to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that additional
financing, if needed, will be available on terms acceptable to us, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available may involve restrictive covenants and
significant interest expense. Strategic arrangements, if necessary to raise
additional funds, may require us to relinquish rights to some of our
technologies.
YEAR 2000 COMPLIANCE
Our business operations and revenues are very sensitive to the effects
of Year 2000 problems. These problems may originate within our own systems and
products or within the systems of our third party suppliers or our customers.
Some of our non-information technology systems, such as equipment or machinery,
may also be affected by Year 2000 problems.
OUR YEAR 2000 COMPLIANCE PROGRAM
During the second quarter of 1998, we formed a working group to ensure
that our products and services are Year 2000 compliant. These include:
- - our commercial product line;
- - internal software business applications;
- - hardware;
- - desktop support;
- - telephone systems;
- - office equipment; and
- - facilities.
All of these components are undergoing a rigorous Year 2000 readiness
verification process, which includes:
- - component inventory and assessment, including vendor and third
party evaluation;
- - component remediation;
- - component testing;
- - system testing; and
- - contingency planning.
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As of November 1, 1999, all product lines and internal systems have
been tested or are in the process of being tested. All AppliedTheory Internet
connectivity and Unix Web hosting products and services have been tested and are
deemed to be compliant. NT Web hosting products are in final testing, with no
problems reported to date. Scheduled maintenance and system upgrades necessary
before year-end will be fully tested for compliance. Custom developed code for
our customers have been completely tested. Based on requested Year 2000
readiness statements from each of our third party vendors, software upgrades
have been applied where appropriate. To date, there are no responses from
vendors that cause concern as far as achieving compliance. Internal systems are
in final stages of acceptance testing and will be completed by December 1, 1999.
Our Total Estimated Costs Associated with Year 2000. As of November 15,
1999, we estimate approximately 100 to 150 hours of internal labor hours and an
insignificant amount of additional expense will be necessary to complete testing
and upgrading.
YEAR 2000 AND OUR INTERNAL APPLICATIONS
Our State of Readiness. All of our internally developed systems,
upgrades and applications are Year 2000 ready or in the process of being tested.
Most of our system packages have also been deemed compliant by our vendors. Even
though we will continue to test our systems, we anticipate full compliance
during 1999.
Contingency Plans. If during our testing in 1999 we find results that
warrant concern, we will dedicate programming staff to procure readiness and to
complete re-testing. Additionally, certain major applications will be run in
test during January 2000 and manually checked for accuracy prior to release.
YEAR 2000 AND OUR SERVICES AND PRODUCTS.
Our State of Readiness. The AppliedTheory Internet connectivity
products are Year 2000 ready. The current Dial product, which is not compliant,
is being transitioned to a new dial up service provided by a third party,
Concentric Networks. The Concentric product is Y2K compliant. Customer
transition will be completed by December 15, 1999.
Testing on our NT Web hosting product is being targeted for completion
by November 15, 1999. The tests are simulating the Web hosting services for the
two calendar weeks before and after January 1, 2000. Software testing is also
being done to ensure date processing does not cause any problems. The goal of
these tests is to identify any problematic operations and create a plan for
rectifying problems. No problems have been identified to date in testing.
We are currently assessing the Year 2000 readiness of the different
operational aspects of our Internet access and value-added services such as mail
and news, and almost all components are Year 2000 ready. Any component that is
found not to be Year 2000 ready will be upgraded and tested further. Any third
party vendor of products that we use for these services that has been noted as
not yet Year 2000 ready has been sent a letter requesting its readiness plans.
Regarding our security services offerings, while versions 4.0a and
higher of the Gauntlet firewall software program which we use have been tested
and are Year 2000 ready, we have recommended that all of our Gauntlet customers
upgrade to version 4.2 or higher. We have sent the Gauntlet version 4.2 or
higher to all our existing Gauntlet customers.
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We deliver Web hosting services through integration of third party
hardware and software. This creates an environment in which our clients may
place and run their Web sites in our data centers. All critical third party
vendors are compliant. We are testing outside software used by our customers in
the same manner as internally designed software when there is no third party
vendor liable for upgrades and patches.
We expect that our Internet integration and enterprise portal
development services will be for the most part unaffected by the Year 2000
issue. Each individual application has been appropriately tested. There may be
cases where incoming data feeds from customers will need to be adjusted or
slight modifications will need to be made on the Web server. However, because
Internet integration and enterprise portal development is a fairly new business
line, Year 2000 compliance was addressed from its inception. Additionally,
Internet integration and enterprise portal development projects have been
implemented almost exclusively by in-house technical programmers who have helped
to ensure that Year 2000 standards, as well as other programming standards, were
adhered to.
Risks of our Products and Services' Year 2000 Issues. The worst case
scenario for our Internet access services would be the unavailability of access
to all customers. Although this risk is unlikely, given the high level of Year
2000 readiness already in place for the components of this product line, it is
possible that we could suffer minor access problems.
In the case of our Web hosting services, the worst case scenario would
be the inability to access the Web sites we manage. A more likely risk would be
that our service would be unavailable to some sites for time periods of less
than one week. In such cases we may give service credits to our customers whose
service is interrupted.
Our Web enabling solutions applications may experience problems such as
a customer data feed not being Year 2000 ready or customers failing to make
necessary changes. In such a case, our technical support and operations groups
would help customers fix these problems to the best of our ability.
Contingency Plans. If our Internet access and value-added services are
not Year 2000 ready, we are prepared to move customers' local loop access
services to other providers or to offer service credits. We do not currently
have any information that would cause us to believe that any of our third party
vendors will experience substantial Year 2000 problems. However, if during the
course of our Year 2000 testing we find that any particular vendor is being
unresponsive, we will attempt to locate a replacement for that vendor.
Additionally, we have communicated, and will communicate with our customers
throughout the year in order to alert them to third party issues that may affect
them.
If, during the course of the Year 2000 testing of our Internet
integration and enterprise portal development solutions, we discover that a
customer will be required to alter or correct a data feed and that the customer
is unable to do so, we will try to correct the data feed and reform it as
necessary. This correction would likely involve a small amount of additional
labor on our part.
In any event, we will fully staff our technical support and operations
groups during the last week of December and all of January 2000 to fix any
problems in our systems and help customers to the best of our ability with any
problems they may experience.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 1999, we completed our initial public offering ("IPO") of
5,175,000 shares of our common stock, par value $.01 per share. The offering was
made pursuant to a Registration Statement on Form S-1 (File No. 333-72133) which
registered up to 5,175,000 shares of our common stock and was declared effective
on April 29, 1999. The offering commenced on April 30, 1999 and all 5,175,000
shares registered in our offering were sold at an initial public offering price
of $16.00 per share. The managing underwriters were Bear, Stearns & Co. Inc.,
CIBC World Markets Corp., Lehman Brothers Inc. and Wit Capital Corporation.
Gross proceeds from the offering were $82.8 million, $5.8 million of which was
applied to the underwriting discount. As of October 30, 1999, approximately $1.7
million was applied to expenses related to our offering. As a result, net
proceeds from the offering are approximately $75.3 million. Except as discussed
herein with respect to our repayment of a revolving line of credit and
redemption of our preferred stock to NYSERNet.net, none of the net proceeds of
our offering were paid by us, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person or entity owning 10
percent or more of our equity securities or the equity securities of any of our
affiliates.
On May 5, 1999, we paid approximately $3.8 million to repay outstanding
borrowings under our revolving line of credit with NYSERNet.net, including
accrued interest. We also paid approximately $2.0 million to redeem our
outstanding preferred stock, including accrued dividends, from NYSERNet.net.
NYSERNet.net owns approximately 23.0% of our common stock and has one
representative on our board of directors. On June 22, 1999, the Company
purchased Convertible Preferred Stock of Planning Technologies, Inc. for $5.0
million. For additional information about this investment, please see our report
on Form 8-K (File No. 000-25749), filed with the Securities and Exchange
Commission on July 7, 1999. We intend to use the remaining $64.5 million of
the net proceeds from the offering for general corporate purposes and working
capital requirements, including the following:
- - to expand our sales and marketing efforts in 20-30 metropolitan areas
and increase our direct sales force by over 100 employees nationally;
- - to build a new network operation center;
- - to expand our customer support services, and
- - for working capital requirements and other general corporate purposes,
including possible acquisitions.
No portion of the proceeds has been allocated for any specific purpose
referred to above. We have discretionary authority over the use of net proceeds
from the offering. In addition, we intend to use a portion of the net proceeds
from this offering to build new data centers and add additional data center
capacity.
Pending the above uses, we have invested the proceeds of the offering
in short-term, interest bearing securities of investment grade.
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During the quarter ended September 30, 1999, proceeds of approximately
$18,000 were generated from the exercise of options for 45,674 shares of our
common stock. There were no significant expenses, underwriting discounts or
commissions attributable to these proceeds. These options had been granted under
our 1996 Incentive Stock Option Plan and were exercised by certain employees and
directors. The shares we issued pursuant to the exercise of these options were
registered through our Form S-8 (File No.333-83177), which we filed with the
Securities and Exchange Commission on July 19, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
RISK FACTORS
From time to time, in both written and in oral statements by our senior
management, we express expectations and other statements regarding future
performance. These forward-looking statements are inherently uncertain and you
must recognize that events could turn out to be different than such expectations
and statements. We discuss key factors impacting current and future performance
in the registration statement for our initial public offering on Form S-1
(Commission File No. 333-72133) filed with the Securities and Exchange
Commission and in our other filings and reports. In addition, you should
consider the following risk factors as well as any other information in this
Quarterly Report in evaluating our business and us. Any investment in our common
stock involves a high degree of risk.
WE HAVE A LIMITED OPERATING HISTORY AND MAY SUCCESSFULLY IMPLEMENT OUR BUSINESS
PLAN.
We have a limited operating history, and our business model is still in
development. We were incorporated in 1995 and commenced operations in late 1996.
As an early stage Internet company we are subject to expenses and difficulties
associated with implementing our business plan that are not typically
encountered by more mature companies. The risks associated with implementing our
business plan relate to:
- - building out our operations infrastructure;
- - expanding our sales structure and marketing programs;
- - increasing awareness of our brand;
- - providing services to our customers that are reliable and
cost-effective;
- - responding to technological development or service offerings by
competitors; and
- - attracting and retaining qualified personnel.
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If we are not successful in implementing our business plan, our
business or future financial or operating results could suffer.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO INCREASE IN
THE FORESEEABLE FUTURE.
We have incurred significant net losses and negative cash flows from
operations in each quarterly and annual period since inception and expect to
continue to do so for the foreseeable future. At September 30, 1999, we had an
accumulated deficit of approximately $23.4 million. We incurred net losses of
$3.6 million and $1.2 million in the three months ended September 30, 1999 and
1998, respectively, and a year to date net loss of approximately $7.6 million
for the nine months ended September 30, 1999 compared with a net loss of
approximately $3.5 million for the nine months ended September 30, 1998. In
connection with our expansion plans, we anticipate making significant
investments in sales and marketing, new distributed data centers, customer
support and personnel. As a result of our expansion plans, we expect our net
losses and negative cash flows from operations on a quarterly and annual basis
to increase in the foreseeable future. Our ability to achieve profitability is
dependent in large part upon the successful implementation of our regional and
nationwide expansion strategy. We cannot assure you that we will achieve or
sustain revenue growth or profitability on either a quarterly or annual basis.
TO DATE, MOST OF OUR REVENUES HAVE BEEN DERIVED FROM CUSTOMERS LOCATED IN NEW
YORK STATE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR NATIONWIDE GROWTH STRATEGY.
To date, most of our revenues have been derived from customers located
in New York State. Our business strategy is to become a leading national
provider of advanced Internet technology solutions to the business mid-market
and select public sector organizations. The risks we may encounter in executing
our nationwide growth strategy include the possibility that:
- our products and services are not accepted beyond our current market;
- there are significant delays in the completion of our new data centers;
- we fail to successfully implement our sales and marketing strategy on a
national scale;
- we fail in our efforts to build a national sales force; and/or
- we fail to develop a nationally recognized brand.
OUR RAPID GROWTH STRATEGY IS LIKELY TO PLACE A SIGNIFICANT STRAIN ON OUR
RESOURCES.
Our future success depends in large part on our ability to manage any
achieved growth in our business. For our nationwide growth strategy to succeed,
we will need:
- to expand our business with new and current customers;
- to develop and offer successful new products and services;
- to retain key employees and hire new employees; and
- to ensure that any future business we may develop or acquire will
perform in a satisfactory manner.
These activities are expected to place a significant strain on our
resources. Also, we cannot guarantee that any of these will occur or that we
will succeed in managing the results of any success in our nationwide growth
strategy.
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OUR ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF
OPERATIONS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
We have experienced significant fluctuations in our results of operations
on a quarterly and annual basis. We expect to continue to experience significant
fluctuations in our future quarterly and annual results of operations due to a
variety of factors, many of which are outside of our control, including:
- - demand for and market acceptance of our services;
- - customer retention;
- - the timing and success of our marketing efforts;
- - the timing and magnitude of capital expenditures, including costs relating
to the expansion of operations;
- - the timely expansion of existing facilities and completion of new
facilities;
- - the ability to increase bandwidth as necessary;
- - fluctuations in bandwidth used by customers;
- - introductions of new services or enhancements by us and our competitors;
- - increased competition in our markets;
- - growth of Internet use and establishment of Internet operations by
mainstream enterprises; and
- - changes in our and our competitors' pricing policies.
A RELATIVELY LARGE PORTION OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM. AS A
RESULT, OUR RESULTS OF OPERATIONS WILL BE PARTICULARLY SENSITIVE TO FLUCTUATIONS
IN REVENUE.
A relatively large portion of our expenses are fixed in the short-term,
particularly in respect of data and telecommunications costs, depreciation, real
estate interest expense and personnel. Because we will be required to incur
these fixed expenses, irrespective of our revenue, our future results of
operations are particularly sensitive to fluctuations in revenue.
THE EXPECTED CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES MAY
NOT MATERIALIZE OR MAY MATERIALIZE IN A MANNER WE HAVE NOT ANTICIPATED.
Our market is new and rapidly evolving. Whether, and the manner in which,
the market for our products and services will continue to grow is uncertain. The
market for our products and services may be inhibited for a number of reasons,
including:
- - the reluctance of businesses to outsource their Internet integration,
enterprise portal development, Web hosting and Internet connectivity needs;
- - our failure to successfully market our products and services to new
customers; and
- - the inability to maintain and strengthen our brand awareness.
OUR SUCCESS DEPENDS IN LARGE PART ON THE CONTINUED GROWTH OF THE INTERNET
MARKET.
Our business would be hurt if Internet usage does not continue to grow.
Internet usage may be inhibited for a number of reasons, including:
- - access costs;
- - inadequate network infrastructure;
- - security concerns;
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- - uncertainty of legal and regulatory issues concerning use of the Internet;
- - inconsistent quality of service; and
- - lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could, in the future,
grow more slowly or decline. This could hurt our business.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The Internet-based services market is extremely competitive and many of our
competitors are more established and have greater financial resources than us.
In addition, there are no substantial barriers to entry in this market. We also
expect that competition will intensify in the future. Many of our competitors
have greater market presence, engineering and marketing capabilities and
financial, technological and personnel resources than we do. As a result, as
compared to us our competitors may:
- - develop and expand their network infrastructures and service offerings more
efficiently or more quickly;
- - adapt more swiftly to new or emerging technologies and changes in customer
requirements;
- - take advantage of acquisitions and other opportunities more effectively;
and
- - more effectively leverage existing relationships with customers or exploit
a more recognized brand name to market and sell their services.
Our current and prospective competitors, both in New York State and
nationally, generally may be divided into the following three groups:
- - Internet service providers including Concentric Network Corp., Exodus
Communications, Inc., Globix Corporation, PSINet Inc., UUNET Technologies, Inc.,
Frontier Global Center, GTE Internetworking, Digex, Inc., Verio Inc. and other
national and regional providers;
- - telecommunications companies, such as AT&T Corp., Cable & Wireless plc,
Sprint Corporation, MCI WorldCom, Inc., Qwest Communications International Inc.,
regional telecommunications companies and various cable companies; and
- - network and system integrators, including IBM Corporation, Oracle
Corporation, the Big 5 accounting firms, EDS Corporation and similar entities.
We believe that we may also face competition from other large computer
hardware and software companies and other media, technology and
telecommunications companies.
The number of businesses providing Internet-related services is rapidly
growing. We are aware of other companies, in addition to those named above, that
have entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
WE COULD ENCOUNTER SIGNIFICANT PRICING PRESSURE AS A RESULT OF INCREASED
COMPETITION AND INDUSTRY CONSOLIDATION.
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As a result of increased competition and consolidation in the industry,
we could encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of our services. We may not
be able to offset such price reductions even if we obtain an increase in the
number of our customers, derive higher revenue from enhanced services or manage
to reduce our costs. Increased price or other competition could erode our market
share and could significantly hurt our business. We cannot assure you that we
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully in that environment.
OUR REVENUES ARE HEAVILY DEPENDENT ON TWO CUSTOMERS. IF WE LOSE EITHER OF THESE
CUSTOMERS, IF EITHER OF THEM REDUCES THE AMOUNT OF WORK IT DOES WITH US, OR IF
WE FAIL TO DIVERSIFY OUR CUSTOMER BASE, OUR BUSINESS WILL SUFFER.
We currently derive a substantial portion of our total revenue from two
customers - NYSERNet.org, Inc., a not-for-profit corporation that is also
affiliated with one of our major stockholders, and the New York State Department
of Labor. The loss of either of these customers could significantly hurt our
business. For the three and nine months ended September 30, 1999, revenue from
NYSERNet.org, Inc. represented approximately 27% and 29% of our total revenue
compared to 32% and 38% for the three and nine months ended September 30, 1998,
respectively. Revenue under the agreement with the New York State Department of
Labor for the three and nine months ended September 30, 1999 represented 43% and
38%, respectively, of our total revenue compared to 33% and 28% for the three
and nine months ended September 30, 1998, respectively.
We have an agreement with NYSERNet to provide NYSERNet and its
customers with services. This agreement has an initial term of three years,
ending October 1, 2001, and is automatically renewable for successive one-year
terms. While the agreement only allows termination by either party under special
circumstances, it is still possible that NYSERNet could terminate the agreement
or cease working with us. Our contract with the New York State Department of
Labor is for the development and maintenance of the America's Job Bank Web site.
This agreement is subject to cancellation by the New York State Department of
Labor upon 15 days notice.
On June 14, 1999, we concluded a contract with NYSERNet to enhance,
operate and maintain NYSERNet's next generation Internet backbone network
(NYSERNet2000). We completed construction of the network in April 1999. Under
the terms of the contract, which extends until 2002, we will enhance and
maintain the first OC-12 research network backbone in New York State. We will
receive $5.2 million for our services over the term of the contract.
We cannot assure you that revenue from these two customers or from
other customers that have accounted for significant revenue in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period. In addition, we may not succeed in
diversifying our customer base in future periods.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF OUR SERVICES. IF IXC DOES NOT COMPLETE THIS NETWORK, OUR BUSINESS
COULD SUFFER.
Our business model assumes that we will use IXC's Gemini2000 Network
for the delivery of our services. While we believe that we could transfer our
business to another network supplier if this network was not available, we may
not find an alternate network, which would provide comparable technology at a
competitive cost. At this time, IXC has not completed construction of the
network. Any failure by IXC or Cincinnati Bell, Inc. after its announced merger
with IXC to complete construction of,
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or deploy and maintain, the Gemini2000 Network could hurt our business. While
IXC had previously publicly announced its intention to complete construction of
the Gemini2000 Network, we do not have a written agreement with them, which
requires them to do so.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF OUR SERVICES. IF PROBLEMS OCCUR AS A RESULT OF THE CHANGE OF
OWNERSHIP OF IXC INTERNET SERVICES, INC. AND THE GEMINI2000 NETWORK, OUR
BUSINESS COULD SUFFER.
On July 21, 1999, Cincinnati Bell, Inc. announced its intention to
merge with IXC Communications Inc., parent of a major stockholder of the Company
and owner of the Gemini2000 Network. Our business model assumes we will use this
network for delivery of our services. As noted above, any failure by IXC (or
Cincinnati Bell and IXC after their merger) to complete construction of, or
deploy and maintain, the Gemini2000 Network could hurt our business.
OUR BUSINESS AND EXPANSION MODELS ASSUME THAT WE WILL BE ABLE TO EASILY SCALE
THE NETWORK INFRASTRUCTURE WE USE TO ACCOMMODATE INCREASING NUMBERS OF CUSTOMERS
AND INCREASED TRAFFIC. HOWEVER, THE SCALABILITY OF THE GEMINI2000 NETWORK IS
UNPROVEN.
Due to its limited deployment, the ability of the Gemini2000 Network to
connect and manage a large number of customers or a large quantity of traffic at
high transmission speeds is unproven. This network's ability to be scaled up to
meet our expected customer usage levels while maintaining superior performance
is also unproven. As the number of our customers grows or as network usage
increases, we may need to make additional investments to expand and adapt our
network infrastructure and maintain adequate data transmission speeds. Any
future expansion and adaptation of our telecommunications and hosting facility
infrastructure could require substantial financial, operational, technical and
management resources. Furthermore, additional network capacity many not be
available from IXC or other third-party suppliers as it is needed by us, and, as
a result, our network may not be able to achieve or maintain a sufficiently high
capacity for data transmission. Any failure on our part to achieve or maintain
high data transmission capacity could significantly reduce customer demand for
our services and hurt our business. If we are required to expand our network
significantly and rapidly due to increased usage, additional stress will be
placed upon our network hardware, traffic management systems and hosting
facilities.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH WOULD AFFECT
OUR ABILITY TO COMPETE.
Interruptions in service to our customers could hurt our business. To
succeed, we must be able to operate our network management infrastructure 24
hours per day, seven days per week, without interruption. Our operations depend
upon our ability to protect our network infrastructure, our equipment and
customer data against damage from human error or "acts of God." Even if we take
precautions, the occurrence of a natural disaster or other unanticipated
problems could result in interruptions in the services we provide to our
customers.
At this time, we do not have a formal disaster recovery plan. Although
we have attempted to build redundancy into our network and hosting facilities,
our network is currently subject to various single points of failure. For
example, a problem with one of our routers or switches could cause an
interruption in the services we provide to some of our customers. Any
interruptions in service could:
- - cause end users to seek damages for losses incurred;
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<PAGE> 26
- - require us to spend more money replacing existing equipment, expanding
facilities or adding redundant facilities;
- - cause us to spend money on existing or new equipment and infrastructure
earlier than we plan;
- - damage our reputation for reliable service;
- - cause existing end-users and resellers to cancel our contracts; or
- - make it more difficult for us to attract new end-users and partners.
Any of these results could hurt our business.
Failure of the national telecommunications network and Internet
infrastructure to continue to grow in an orderly manner could result in service
interruptions. While the national telecommunications network and Internet
infrastructure have historically developed in an orderly manner, there is no
guarantee that this will continue as the network expands and more services,
users and equipment connect to the network. Failure by our telecommunications
providers to provide us with the data communications capacity we require could
cause service interruptions, which could hurt our business.
WE ARE DEPENDENT ON NETWORKS BUILT AND OPERATED BY OTHERS. IF WE DO NOT HAVE
CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER.
In delivering our services, we rely on networks, which are built and
operated by others. We do not have control over these networks, nor can we
guarantee that we will continue to have access on terms that fit our business
needs.
Our use of the infrastructure of other communications carriers presents
risks. Our success partly depends upon the capacity, scalability, reliability
and security of the network infrastructure provided to us by telecommunications
network suppliers, including IXC, Bell Atlantic Corp. and Sprint Corporation.
Our nationwide expansion plans require rapid expansion of network capacity,
which we expect will be satisfied through the completion of the Gemini2000
Network. Without this expanded capacity, our ability to execute our business
strategy could be hurt. In addition, future expansion and adaptation of our
network infrastructure may require substantial financial, operational and
management resources. We may not be able to expand or adapt our network
infrastructure on a timely basis and at a commercially reasonable cost to meet
additional demand, changing customer requirements or evolving industry
standards. In addition, if demand for usage of our network were to increase
faster than projected or were to exceed our current forecasts, the network could
experience capacity constraints which would hurt its performance.
We also depend on our telecommunications suppliers to provide uninterrupted
and error-free service through their telecommunications networks. If these
suppliers greatly increased the prices for their services or if the
telecommunications capacity available to us was insufficient for our business
purposes, and we were unable to use alternative networks or pass along any
increased costs to our customers, it could hurt our business.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS
WHICH COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM OUR REPUTATION.
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Despite the implementation of network security measures, the core of our
network infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by Internet users. This could result in our liability
for damages, and our reputation could suffer, thereby deterring potential
customers from working with us. Security problems caused by third parties could
lead to interruptions and delays or to the cessation of service to our
customers. Furthermore, inappropriate use of the network by third parties could
also jeopardize the security of confidential information stored in our computer
systems and in those of our customers.
We rely upon encryption and authentication technology listed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. Although we intend to continue to
implement industry-standard security measures, in the past some of these
standards have occasionally been circumvented by third parties. Therefore, we
cannot assure you that the measures we implement will not be circumvented. The
costs and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service to
our customers, which could hurt our business.
OUR BRAND IS NOT WELL KNOWN, AND FAILURE TO DEVELOP BRAND RECOGNITION COULD HURT
OUR BUSINESS.
To successfully execute our strategy, we must strengthen our brand
awareness. While many of our competitors have well-established brands in
Internet services, to date, our market presence has been limited principally to
New York State. We have generated our existing revenue primarily through a small
sales force and word of mouth. In order to build our brand awareness, our
marketing efforts must succeed, and we must provide high quality services. We
expect to increase our marketing budget substantially as part of our brand
building efforts. We cannot assure you that these investments will succeed as
planned. If we do not build our brand awareness, our ability to realize our
strategic and financial objectives could be hurt.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD SUFFER.
If we do not successfully use or develop new technologies, introduce new
services or enhance our existing services on a timely basis, or new technologies
or enhancements used or developed by us do not gain market acceptance, our
business could be hurt. The Internet industry is characterized by rapidly
changing technology, industry standards, customer needs and competition, as well
as by frequent new product and service introductions. Our future success will
depend, in part, on our ability to accomplish all of the following in a timely
and cost-effective manner, all while continuing to develop our business model
and rolling-out our services on a national level:
- - effectively use and integrate leading technologies;
- - continue to develop our technical expertise;
- - enhance our products and current networking services;
- - develop new products and services that meet changing customer needs;
- - have the market accept our services;
- - advertise and market our products and services; and
- - influence and respond to emerging industry standards and other changes.
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We cannot assure you that we will successfully use or develop new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies or enhancements used or developed by us
will achieve market acceptance. Our pursuit of necessary technological advances
may require substantial time and expense. In addition, we cannot assure you
that, if required, we will successfully adapt our network and services to
alternate access devices and conduits.
If our services do not continue to be compatible and interoperable with
products and architectures offered by other industry members, our ability to
compete could be impaired. Our ability to compete successfully is dependent, in
part, upon the continued compatibility and interoperability of our services with
products and architectures offered by various other members of the industry.
Although we intend to support emerging standards in the market for Internet
access, we cannot assure you that we will be able to conform to new standards in
a timely fashion and maintain a competitive position in the market. Our services
rely on the continued widespread commercial use of Transmission Control
Protocol/Internetwork Protocol, commonly known as TCP/IP, which is an industry
standard to facilitate the transfer of data. Alternative open protocol and
proprietary protocol standards could emerge and become widely adopted. A
resulting reduction in the use of TCP/IP could render our services obsolete and
unmarketable. Our failure to anticipate the prevailing standard or the failure
of a common standard to emerge could hurt our business.
WE DERIVE SIGNIFICANT REVENUE FROM CONTRACTS WITH GOVERNMENT AGENCIES. THESE
CONTRACTS OFTEN ARE SUBJECT TO A COMPLEX PROCUREMENT PROCESS, REQUIRE COMPLIANCE
WITH VARIOUS GOVERNMENT REGULATIONS AND POLICIES AND MAY BE SUBJECT TO
UNILATERAL TERMINATION OR MODIFICATION BY THE GOVERNMENT. IN ADDITION, CHANGES
IN GOVERNMENT FUNDING AND OTHER POLICY DECISIONS COULD JEOPARDIZE OUR CONTRACTS
WITH GOVERNMENT AGENCIES.
Contracts with various government agencies accounted for approximately
50% of our revenues in the three and nine months ended September 30, 1999.
Government contracts are often subject to a competitive bidding process, which
is governed by applicable federal and state statutes and regulations. The
procurement process for government contracts is complex and can be very time
consuming.
Because of our contracts with governmental agencies, we are required to
comply with various government regulations and policies. For instance, we are
required to maintain employment policies relating to equal opportunity, and we
are subject to audit by the government to confirm our compliance with these
policies. If we fail to comply with regulations which apply to government
contractors, we may face sanctions, including substantial fines and
disqualification from being awarded government contracts in the future.
Contracts with governmental agencies are subject to the risk of
unilateral termination by the government for its convenience and reductions in
services, or modifications in contractual terms, due to changes in the
government's requirements or to budgetary restraints.
In addition, the government may not continue to fund the projects and
programs with which we work. Even if funding continues, we may not obtain this
funding. We cannot assure you that we will be able to procure additional
government contracts, that we will be able to retain our existing government
contracts or, if retained, that these contracts will be fully funded.
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WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS, INCLUDING INTEGRATION
RISKS AND RISKS ASSOCIATED WITH METHODS OF FINANCING AND THE IMPACT OF
ACCOUNTING TREATMENT. COMPLETED ACQUISITIONS MAY NOT ENHANCE OUR BUSINESS.
A component of our strategy is to acquire network assets,
Internet-related technologies and businesses complementary to our operations.
Any future acquisitions would be accompanied by the risks commonly encountered
in acquisitions, including:
- - the difficulty of assimilating the operations and personnel of
acquired companies;
- - the potential disruption of our business;
- - the inability of our management to maximize our financial and strategic
position by the incorporation of an acquired technology or business
into our service offerings;
- - the difficulty of maintaining uniform standards, controls, procedures
and policies; and
- - the potential loss of key employees of acquired businesses, and
the impairment of relationships with employees and customers as a
result of changes in management.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash,
including proceeds of this offering, could be used to consummate the
acquisitions. If we were to consummate one or more acquisitions in which the
consideration consisted of stock, our stockholders could suffer significant
dilution of their interest in us. In addition, we could incur or assume
significant amounts of indebtedness in connection with acquisitions.
Acquisitions required to be accounted for under the purchase method could result
in significant goodwill and/or amortization charges for acquired technology.
WE ARE DEPENDENT ON OUR HARDWARE AND SOFTWARE SUPPLIERS TO PROVIDE US WITH THE
PRODUCTS AND SERVICES WE NEED TO SERVE OUR CUSTOMERS.
We rely on outside vendors to supply us with computer hardware,
software and networking equipment. These products are available from only a few
sources. We purchase virtually all of these products from Sun Microsystems,
Inc., Compaq Computer Corporation and Cisco Systems, Inc. We cannot assure you
that we will be able to obtain the products and services that we need on a
timely basis and at affordable prices.
We have in the past experienced delays in receiving shipments of
equipment purchased for resale. To date, these delays have not adversely
affected us, but we cannot guarantee that we will not be adversely affected by
delays in the future. We may not be able to obtain computer equipment on the
scale and at the times required by us at an affordable cost. Our suppliers may
enter into exclusive arrangements with our competitors or stop selling us their
products or services at commercially reasonable prices. If our sole or limited
source suppliers do not provide us with products or services, our business,
financial condition and results of operations may be significantly hurt.
WE OPERATE IN AN UNCERTAIN REGULATORY AND LEGAL ENVIRONMENT. NEW LAWS AND
REGULATIONS COULD HARM OUR BUSINESS.
We are not currently subject to direct regulation by the Federal
Communications Commission or
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any other governmental agency, other than regulations applicable to businesses
in general. However, in the future, we may become subject to regulation by the
FCC or another regulatory agency. Our business could suffer depending on the
extent to which our activities are regulated or proposed to be regulated.
While there are currently few laws or regulations which specifically
regulate Internet communications, laws and regulations directly applicable to
online commerce or Internet communications are becoming more prevalent. There is
much uncertainty regarding the market-place impact of these laws. In addition,
various jurisdictions already have enacted laws covering intellectual property,
privacy, libel and taxation that could affect our business by virtue of their
impact on online commerce. Further, the growth of the Internet, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. If we become subject to claims that we have violated
any laws, even if we successfully defend against these claims, our business
could suffer. Moreover, new laws that impose restrictions on our ability to
follow current business practices or increase our costs of doing business could
hurt our business.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR DISTRIBUTING OR PUBLISHING CONTENT OVER
THE INTERNET, WHICH COULD BE COSTLY FOR US TO DEFEND.
It is possible that claims will be made against online services
companies and Internet access providers in connection with the nature and
content of the materials disseminated through their networks. Several private
lawsuits are pending which seek to impose liability upon online services
companies and Internet access providers as a result of the nature and content of
materials disseminated over the Internet. If any of these actions succeed, we
might be required to respond by investing substantial resources in connection
with this increased liability or by discontinuing some of our service or product
offerings. Also, any increased attention focused upon liability issues relating
to the Internet could also have a negative impact on the growth of Internet use.
Although we carry general liability insurance, it may not be adequate to
compensate us or it may not cover us in the event we become liable for
information carried on or disseminated through our networks. Any costs not
covered by insurance that we incur as a result of liability or asserted
liability for information carried on or disseminated through our networks could
hurt our business.
OUR COMPUTER SYSTEMS AND THOSE OF OUR BUSINESS PARTNERS MAY NOT BE YEAR 2000
COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF OPERATIONS.
The risks posed by the Year 2000 issue could hurt our business in a
number of significant ways. Many currently installed computer systems and
software products accept only two digit entries in the date code field and will
not distinguish 21st century dates from 20th century dates. This may result in
system failures or miscalculations causing disruptions of operations, including
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
We are currently completing a Year 2000 readiness review that included
assessment, implementation, testing and contingency planning. After evaluating
our internally developed software, we believe that this software is Year 2000
compliant. However, we utilize software and hardware developed by third parties
both for our network and for our internal information systems. We sought
assurances from our vendors that their products are Year 2000 compliant. To
date, we have not received any responses from our vendors that lead us to
believe that we will be unprepared for the year 2000.
We expect to continue assessing and testing our internal information
technology systems throughout this year. However, we may experience material
unanticipated problems and costs caused by
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undetected errors or defects in our systems.
In addition, Year 2000 issues may also impact other entities with which
we do business, including those responsible for maintaining telephone and
Internet communications. If these entities fail to take preventative or
corrective actions in a timely manner, the Year 2000 issue could hurt our
business in ways which are not now quantifiable.
We do not have any information regarding the Year 2000 status of our
customers, most of whom are private companies. If our customers experience Year
2000 problems which result in business interruptions or otherwise impact their
operations, we could experience a decrease in the demand for our services, which
could hurt our business.
To date, we have not incurred and do not foresee any significant
expenses associated with our Year 2000 plan. Apart from the risk that we may not
achieve Year 2000 compliance, we believe that a loss of revenues, which could be
significant, would arise if our major customers or providers fail to achieve
Year 2000 readiness.
WE MAY NEED ADDITIONAL FUNDS WHICH, IF AVAILABLE, COULD RESULT IN DILUTION OF
YOUR SHAREHOLDINGS OR AN INCREASE IN OUR INTEREST EXPENSE. IF THESE FUNDS ARE
NOT AVAILABLE, OUR BUSINESS COULD BE HURT.
We intend to use the proceeds from our recently completed initial
public offering to fund the expansion of our sales and marketing efforts, build
our new data centers, expand our customer support services and for working
capital and general corporate purposes. While we believe that the proceeds from
this offering will be sufficient for these purposes, we may need to raise
additional funds through public or private debt or equity financings in order
to:
- take advantage of anticipated opportunities or acquisitions of
complementary assets, technologies or businesses;
- develop new products; or
- respond to unanticipated competitive pressures.
If additional funds become necessary, additional financing may not be
available on terms favorable to us or available at all. If adequate funds are
not available or are not available on acceptable terms when needed, our business
could be hurt.
If additional funds are raised through the issuance of equity
securities, the percentage ownership of our then current stockholders may be
reduced, and the new equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. If additional
funds are raised through the issuance of debt securities, these securities would
have some rights, preferences and privileges senior to those of the holders of
our common stock, and the terms of this debt could impose restrictions on our
operations and result in significant interest expense to us.
SIGNIFICANT STOCKHOLDERS AND CURRENT MANAGEMENT CONTROL APPROXIMATELY 74% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
IXC Internet Services, Inc., NYSERNet.net, Inc. and Grumman Hill
Investments, L.P. control approximately 26.7%, 23.0% and 13.4%, respectively, of
our outstanding common stock. In addition, our executive officers and directors
may be deemed to beneficially own in the aggregate approximately 74% of our
outstanding common stock, including shares of our common stock owned by IXC,
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NYSERNet.net and Grumman Hill that may be deemed to be owned by some of our
officers and directors as a result of their relationships with these entities.
Accordingly, IXC, NYSERNet.net, Grumman Hill and our officers and directors,
whether acting alone or together, are able to exert considerable influence over
any stockholder vote, including any vote on the election or removal of directors
and any merger, consolidation or sale of all or substantially all of our assets,
and control our management and affairs. Such control could discourage others
from initiating potential merger, takeover or other change in control
transactions. As a consequence, our business could be hurt. IXC, Grumman Hill
and NYSERNet.net each have one representative on our board of directors. In
addition, three of our directors and/or executive officers are also directors of
NYSERNet.net and NYSERNet.org, Inc., a not-for-profit corporation that is also
affiliated with NYSERNet.net. Two of our executive officers are executive
officers of NYSERNet.net and/or NYSERNet.org. Grumman Hill has a significant
equity interest in IXC. NYSERNet.net, NYSERNet.org, IXC, Grumman Hill and our
officers and directors may have conflicts of interest among themselves, and
their interests could conflict with the interests of our other stockholders.
WE ARE DEPENDENT ON KEY PERSONNEL AND OPERATE IN AN INDUSTRY WHERE IT IS
DIFFICULT TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
We expect that we will need to hire additional personnel in all areas
of our business. The competition for personnel throughout our industry is
intense. At times, we have experienced difficulty in attracting qualified new
personnel. If we do not succeed in attracting new, qualified personnel or
retaining and motivating our current personnel, our business could suffer. We
are also dependent on the continued services of our key personnel, including our
senior management. We have entered into employment agreements with Richard
Mandelbaum, Lawrence B. Helft, James D. Luckett, Denis J. Martin, Mark A. Oros
and David A. Buckel. We have also secured key man insurance policies on the
lives of Messrs. Mandelbaum, Oros and Martin.
OUR STOCK PRICE MAY BE VOLATILE.
Pursuant to our initial public offering, we began offering our common
stock to the public on April 30, 1999, and the public market for our common
stock is not well-established. We cannot assure you that an active trading
market will develop or be sustained, nor can we provide you with any guarantees
as to how liquid that market might become. Further, we cannot guarantee that the
price of our common stock will not decline. Stock prices of technology
companies, especially Internet-related companies, have been highly volatile. The
current trading price of our common stock may not be indicative of prices that
will prevail in the trading market. Various factors could cause the market price
of our common stock to fluctuate substantially. These factors may include:
- variations in our revenue, earnings and cash flow;
- announcements of new service offerings, technological
innovations or price reductions by us, our competitors or
providers of alternative services; and
- changes in analysts' recommendations or projections and
general economic and market conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company in question. If we become subject to securities
litigation, we could incur substantial costs and experience a diversion of
management's attention and resources.
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Also, a substantial number of shares of common stock issuable upon
exercise of outstanding stock options are available for resale in the public
market as a result of our registering a Form S-8 with the Securities and
Exchange Commission on July 19, 1999 (File No. 333-83177) in order to register
the shares issued and issuable upon the exercise of options granted under the
1996 Incentive Stock Option Plan, or granted and to be granted under our 1999
Stock Option Plan and our 1999 Employee Stock Purchase Plan.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR FUTURE SALE.
THE FUTURE SALE OF LARGE AMOUNT OF OUR STOCK, OR THE PERCEPTION THAT THESE SALES
COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of future
sales of a large number of shares of common stock in the market after the
offering.
As a result of our re-offer prospectus filed on Form S-8 with the
Securities and Exchange Commission on July 19, 1999, approximately 21.3% of the
shares of our outstanding common stock no longer qualify as "restricted
securities" under Rule 144 of the Securities Act and, under the Securities Act,
these shares may be freely re-offered and re-sold. However, stockholders who
sell shares of our common stock under this re-offer prospectus must comply with
the volume of sale limitations imposed under Rule 144(e) of the Securities Act.
In addition, holders of 94.0% of the shares covered by the re-offer prospectus
are parties to lock-up agreements which are further discussed in the
registration statement for our initial public offering and under which the
holders of these shares have agreed not to sell or otherwise dispose of any of
their shares during the 180-day lock-up period which ended October 31, 1999.
Upon effectiveness of the re-offer prospectus, an additional 54.2% of
the shares of our common stock continue to be restricted securities. The holders
of these shares are also parties to the lock-up agreements described above and
in the registration statement for our initial public offering. The holders of
these restricted shares have registration rights with respected to these
restricted shares and with respect to any after-acquired shares and these
registration rights could be exercised after expiration of the 180-day lock-up
period. Also, under Rule 144 these shares become freely tradable in the future.
Therefore, through the re-offer prospectus, as a result of registration
rights and under Rule 144, large amounts of the shares of our common stock may
become freely tradable and affect the market for our stock.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a.) EXHIBITS.
The following Exhibits are filed or incorporated by reference herewith:
Exhibit 10.1 Amendment No. 8 to Agreement between AppliedTheory
Corporation and the New York State Department of
Labor, dated August 17, 1999.
Exhibit 10.2 Lease Agreement between 224 Harrison Associates,
LLC and AppliedTheory Corporation, dated September
17, 1999.
Exhibit 10.3 Lease Agreement between Hayward Point Eden I
Limited Partnership and AppliedTheory Corporation,
dated September 3, 1999.
Exhibit 11.1 Calculation of basic and diluted loss per share
and weighted average shares used in calculation for
the three months ended September 30, 1999.
Exhibit 11.2 Calculation of Basic and diluted loss per share
and weighted average shares used in calculation for
the three months ended September 30, 1998.
Exhibit 11.3 Calculation of Basic and diluted loss per share
and weighted average shares used in calculation for
the nine months ended September 30, 1999.
Exhibit 11.4 Calculation of Basic and diluted loss per share
and weighted average shares used in calculation for
the nine months ended September 30, 1998.
Exhibit 27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
(b.) REPORTS ON FORM 8-K.
None.
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APPLIEDTHEORY CORPORATION
FORM 10-Q
SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
AppliedTheory Corporation
Date: November 15, 1999 by: /s/ Richard Mandelbaum
-------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer,
and Director
(Principal Executive Officer)
Date: November 15, 1999 and: /s/ David Buckel
------------------------------------
David Buckel
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference herewith:
Exhibit 10.1 Amendment No. 8 to Agreement between AppliedTheory Corporation
and the New York State Department of Labor, dated August 17,
1999
Exhibit 10.2 Lease Agreement between 224 Harrison Associates, LLC and
AppliedTheory Corporation, dated September 17, 1999.
Exhibit 10.3 Lease Agreement between Hayward Point Eden I Limited
Partnership and AppliedTheory Corporation, dated September 3,
1999.
Exhibit 11.1. Calculation of basic and diluted loss per share and
weighted average shares used in calculation for the three
months ended September 30, 1999.
Exhibit 11.2. Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the three
months ended September 30, 1998.
Exhibit 11.3. Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the nine
months ended September 30, 1999.
Exhibit 11.4. Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the nine
months ended September 30, 1998.
Exhibit 27.1. Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission for
information only.
36
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 8 TO CONTRACT C000525
THIS AMENDMENT, made this Thirtieth day of August in the year
One Thousand Nine Hundred and Ninety-Nine serves to increase the contract amount
to $21,887,237.12 as per the July 1999 Scope of Work.
WITNESSETH, that AppliedTheory and the Department of Labor,
in consideration of the agreements incorporated herein, do hereby agree as
follows:
ARTICLE I. The party of the first part shall provide
Consulting, Applications Development, Systems Integration and Help Desk Services
as per the July 1999 Scope of Work and the Software Licensing Agreement
attached, which together with all appendices is hereby made a part of this
agreement.
ARTICLE II. It is hereby mutually agreed between the parties
hereto that the sum to be paid by the party of the second part to the party of
the first part for said services shall be as follows:
This Amendment increases the Contract amount by $5,500,000.00.
All other terms and conditions remain the same.
IN WITNESS WHEREOF, the parties hereto have set their hand and
seals, the day and year written above.
STATE OF NEW YORK, COUNTY OF ONONDAGA SS:
On the 12th Day of August, Nineteen Hundred and Ninety-Nine
before me personally came Angelo A. Gencarelli, to me known, who, being by me
duly sworn, did depose and say that he resides at: Liverpool, New York, and that
he is the Sr. Director of Accounting & Controller of AppliedTheory Corporation,
the corporation described in and which executed the foregoing instrument, and
that he signed his name thereto by order of the Board of Directors of said
corporation.
/s/ Margaret A. Smallman
----------------------------------
NOTARY PUBLIC (affix stamp)
<PAGE> 2
C000525
PAGE 2 OF 2
Agency Certification
"In addition to the acceptance of this contract, I also
certify that original copies of this signature page will be attached to all
other exact copies of this contract."
VENDOR NYS DEPARTMENT OF LABOR
/s/ Angelo A. Gencarelli III /s/ Laurel Dawson
- --------------------------------------- -----------------
Authorized Signature Authorized Signature
Angelo A. Gencarelli III Laurel Dawson
- --------------------------------------- -------------
Printed Name Printed Name
Sr. Director of Accounting & Controller Purchasing Agent
- --------------------------------------- ----------------
Title Title
August 12, 1999 August 17, 1999
- --------------------------------------- ---------------
Date Date
STATE ATTORNEY GENERAL STATE COMPTROLLER
Date Date
<PAGE> 1
EXHIBIT 10.2
STANDARD
OFFICE SPACE LEASE
AGREEMENT made as of this 17th day of September, 1999, by and between
the following parties: 224 HARRISON ASSOCIATES LLC, a New York limited liability
company, having an office at 4 Clinton Square, Syracuse, New York 13202
("Landlord"), and APPLIED THEORY CORPORATION, a corporation duly organized under
the laws of the State of Delaware having its principal office at 125 Elwood
Davis Road, Liverpool, New York 13088 ("Tenant").
WITNESSETH:
ARTICLE 1
PREMISES
1.01 PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases and hires
from Landlord those certain premises located in the building commonly known as
"THE SYRACUSE BUILDING" (the "Building") which is located at 224 Harrison Street
in the City of Syracuse, County of Onondaga and State of New York, which
premises are outlined on the plan attached as Exhibit "A" (the "Premises"),
together with the right to use, in common with others, the Building Commons
Areas and Outside Common Areas as hereinafter defined. For purposes of this
Paragraph 1.01, the sum of the square feet in the Premises and Tenant's share of
Building Common Areas (as defined in Paragraph 1.02 hereof) shall be the
aggregate of approximately 36,126 SQUARE FEET, being comprised of approximately
(a) 13,416 square feet on each of the 7TH and 8TH floors of the Building, (b)
1,456 leaseable square feet (including the Common Area Factor defined in
Paragraph II of the Addendum of this Lease) located on the 2ND floor of the
Building, and (c) 7,838 leaseable square feet (including the Common Area Factor)
located on the 6TH floor of the Building. The Premises shall include the area
bounded by: the center line of any walls common to adjacent tenants, the
Building Common Area, side of any wall adjoining Building Common Areas (but not
the surface thereof), the line established by the exterior face of the exterior
walls of the Building and the exterior face of any windows in the exterior walls
of the Building, the concrete floor surface of the Premises and the lower
surface of the next higher floor (or roof). Subject to Paragraph X of the
"Addendum" (defined in Section 22.24), Landlord reserves unto itself, its
successors and assigns, the right to install, maintain, use, repair and replace
pipes, ducts, conduits, wires and structural elements leading through the
Premises in locations which will not materially or unreasonably interfere with
Tenant's use of or access to the Premises and which do not diminish the useable
square footage of the Premises. No right to use any part of the exterior of tile
Building and no easement for light or air are included in the lease of the
Premises hereby made.
1.02 DEFINITION OF BUILDING COMMON AREAS
"Building Common Areas" shall be defined to mean all areas, space,
equipment, and signs made available by Landlord specifically for the Building or
for the common or joint use and
<PAGE> 2
benefit of all the tenants in the Building, their employees, agents, customers,
visitors and other invitees, including without limitation hallways, corridors,
trash rooms, mechanical and electrical rooms, storage rooms, stairways,
entrances, elevators, rest rooms, lobbies, stairs, loading docks, pedestrian
walks, roofs and basements, janitor's and storage closets within the Building
and all other common rooms and common facilities within the Building.
1.03 DEFINITION OF OUTSIDE COMMON AREAS
The term "Outside Common Areas" is defined to mean the land described
on Exhibit "B" attached hereto and made a part hereof, or such portion thereof
as may from time to time devoted to uses associated with the Building, and any
adjacent or contiguous land which may from time to time be devoted to such uses,
together with such improvements as may from time to time be erected upon or
under any of such lands, including, but not limited to, surface and subsurface
parking areas, lighting facilities, utility lines, sidewalks, covered walkways,
underground walkways, driveways, plazas, courts, sidewalks, retaining walls,
access roads, truck serviceways, landscaped areas, signs, and equipment.
ARTICLE 2
TERM OF LEASE
2.01 TERM
The term of this Lease shall be Eight (8) years commencing as of the
Term Commencement Date determined in accordance with Section 2.02, below, and
expiring as of the day which is the day prior to the eighth (8th ) anniversary
of the Term Commencement Date (said date being herein referred to as the
"Expiration Date"), unless earlier terminated pursuant to the provisions of this
Lease.
2.02 TERM COMMENCEMENT
(a) The term of this Lease shall commence on the earlier to occur of
(i) the expiration of ten (10) days following the date of Tenant's receipt of
"Landlord's Notice of Substantial Completion" (defined in Section 2.02(b),
below, and (ii) the date on which Tenant opens for business in the Premises. The
date of commencement of the term of this Lease is herein referred to as the
"Term Commencement Date". The word "term" shall, unless otherwise expressly
provided to the contrary, be deemed to include the initial and any renewal term
exercised by Tenant.
(b) The Premises shall be deemed to be "Substantially Complete" on the
date Landlord has completed "Landlord's Work" (defined in Section 4.01, below)
such that:
(i) Tenant can begin installation of its fixtures and equipment
without interference from Landlord's workmen;
(ii) adequate facilities exist for access to and egress from the
Premises;
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<PAGE> 3
(iii) Landlord has completed Landlord's Work in accordance with
Tenant's plans, subject to minor punch-list items, and has secured a
certificate of occupancy for the Premises, or evidence that the Premises
qualify for the same based upon completion of Landlord's Work; and
(iv) all major Building systems, including the electrical, plumbing,
sprinkler and other fire safety systems, heating, ventilating, and air
conditioning ("HVAC") systems, utilities and elevators (collectively,
"Building Systems") are installed and are in good working order.
Upon Substantial Completion of Landlord's Work, Landlord or its
architect will notify Tenant in writing that the Premises are Substantially
Completed as herein required ("Landlord's Notice of Substantial Completion"),
with the exception of minor punch-list items which will not interfere with
Tenant's installations and work in order to outfit the Premises for Tenant's
use. Landlord will complete the punch-list items of Landlord's Work within
thirty (30) days after Landlord's receipt of Tenant's punch-list. Tenant shall
provide a punch-list to Landlord within thirty (30) days after Tenant's receipt
of Landlord's Notice of Substantial Completion, subject to reasonable
extension(s) as may be required to perform the work and/or obtain necessary
parts or items to perform the work, provided that Landlord continues with all
due diligence to perform the work and obtain such parts/items as may be
necessary to complete the punch-list items within a reasonable period of time.
(c) Tenant may, prior to the Term Commencement Date, and without
incurring any liability for payment of Fixed Monthly Rent, Additional Rent or
other charges, enter into the Premises to perform work thereto (including the
installation of telephone lines, data and computer lines), and to place and
install Tenant's personal property, equipment and trade fixtures, in any part of
the Premises (collectively, "Tenant's Work"), at Tenant's expense, provided,
however that the performing of Tenant's Work (1) does not cause undue
interference or delay in the completion of Landlord's Work; and (2) shall be at
Tenant's sole risk.
2.03 CONDITION OF PREMISES
Tenant's taking possession shall be conclusive evidence as against
Tenant that the Premises were in good order and satisfactory condition when
Tenant took possession, excepting (i) any punch-list items of Landlord's Work,
which Landlord will complete with due diligence and minimum disruption to Tenant
in the Premises within thirty (30) days of Landlord's receipt of Tenant's
punch-list, (ii) any condition of Landlord's Work, the Premises as delivered or
any Building System which is unacceptable to Tenant, in Tenant's reasonable
discretion, and of which Tenant gives Landlord written notice within thirty (30)
days following the Warranty Period, as defined in Section 4.01, below, and (iii)
latent defects. At the expiration or sooner termination of this Lease, Tenant
shall return the Premises broom-clean and in as good condition as when Tenant
took possession, ordinary wear and loss by fire or other casualty excepted,
failing which the Landlord may restore the Premises to such condition and Tenant
shall pay the reasonable cost thereof.
3
<PAGE> 4
ARTICLE 3
RENT, TAXES, LEASE YEAR AND PARKING
3.01 FIXED ANNUAL RENT
Tenant agrees to pay to Landlord at the offices of Landlord, or at such
other place designated by Landlord, without any prior demand therefor and
without any deduction or set-off whatsoever except as may be specifically herein
permitted, as fixed annual rent,
<TABLE>
<CAPTION>
FIXED FIXED PER
MONTH OF INITIAL TERM: ANNUAL RENT: MONTHLY RENT: SQUARE FOOT:
- ---------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Term Commencement Date through the sixth
(6th) full calendar month of the initial
term, inclusive: $0.00 $0.00 $0.00
Seventh (7th) full calendar month through $12.00
the end of the initial term, inclusive: $433,512.00 36,126.00 per annum
</TABLE>
each equal monthly installments (the "fixed monthly rent") payable in advance
upon the first day of each calendar month during the term hereof. The monthly
installments shall be deemed to have been paid upon such first day only if
actually received by such first day.
If the term shall commence or expire upon a day other than the first
(or in the case of termination the last) day of a calendar month, Tenant shall
pay, upon the Term Commencement Date, and on the first day of the last calendar
month, a pro rata portion of the fixed monthly rent and additional rent for the
first and last fractional calendar month, respectively, prorated on a per term
basis with respect to such fractional calendar month based upon the actual
number of days in those months.
3.02 TAXES
(a) Landlord shall in the first instance, during the term of this
Lease, pay to the public officers charged with the collection thereof, all
Building Taxes as hereinafter defined.
The term "Building Taxes" shall be deemed to include (i) all real
property taxes (which shall be deemed to include all property taxes and
assessments, water and sewer rents, rates and charges, parking surcharges and
any other governmental charges, general and special, ordinary and
extraordinary), which may be levied or assessed by any lawful authority against
the Building, the Building Common Areas and the Outside Common Areas. The amount
required to be paid by Landlord pursuant to any Payment-in-Lieu-of-Tax Agreement
between Landlord and any taxing authority having jurisdiction over the Building
shall, for purposes of this Lease, be deemed to be a real property tax
obligation and included within the definition of Building Taxes.
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<PAGE> 5
(b) During the term of this Lease, Tenant agrees to pay to Landlord as
additional rent, within fifteen (15) days after receipt of Landlord's invoice
therefor, Tenant's Allocable Share (computed pursuant to Paragraph 22.11(b)
hereof) of the amount by which Building Taxes payable by Landlord under
Paragraph 3.02(a) above for each lease year exceeds said Building Taxes payable
during the Tax Base Year as hereinafter defined. The term "Tax Base Year" for
purposes of this Lease shall mean the calendar year 2000. At the end of each
lease year or partial lease year, Landlord will furnish to Tenant a statement
setting forth the actual Building Taxes payable during such lease year,
comparing such actual Building Taxes with the Building Taxes for Tax Base Year
and also comparing Tenant's Allocable Share of the increase as reasonably
estimated by Landlord and paid by Tenant with Tenant's Allocable Share of the
actual increase in Building Taxes for such lease year. Any overpayment or
underpayment by Tenant shall be promptly adjusted by payment, within fifteen
(15) days of the balance of any underpayment for such year by Tenant to
Landlord, or by Landlord to Tenant of the balance of any overpayment for such
year, or at Landlord's election if any overpayment shall be less than one (1)
month's Fixed Monthly Rent, by applying such overpayment by Tenant as a credit
to the next succeeding monthly installments of Additional Rent. A copy of the
actual tax bill or assessment bill for the Building and the Outside Common Areas
from the appropriate taxing authority and upon which the calculation of Tenant's
Allocable Share is based shall be submitted by Landlord to Tenant with
Landlord's invoice and shall at all times be sufficient evidence of the amount
of Building Taxes levied or assessed against the property to which such bill
relates.
(c) Tenant shall at all times be responsible for and pay, before
delinquency, all municipal, county, state or federal taxes assessed against its
leasehold interest or any fixtures, furnishings, equipment, stock-in-trade or
other personal property of any kind owned, installed or used in or on the
Premises.
(d) Should any governmental taxing authority acting under any present
or future law, ordinance or regulation, levy, assess or impose a tax, excise,
surcharge and/or assessment (other than a tax on net rental income or franchise
tax) upon or against the rents payable by Tenant to Landlord, or upon or against
the Building, the Building Common Areas or the Outside Common Areas, by way of
substitution for or in addition to any existing tax on the Building or tax
parcel on which the Building is constructed ("Tax Parcel"), which existing tax
comprises a portion of "Building Taxes", Tenant shall be responsible for and
shall pay Tenant's Allocable Share of such tax, excise, surcharge and/or
assessment in the manner provided in subparagraph (b) above.
(e) Landlord may seek a reduction in the assessed valuation (for real
estate tax purposes) of the Building in which the Premises are situated by
administrative or legal proceedings. Tenant shall pay to Landlord Tenant's
Allocable Share of Landlord's reasonable, out-of-pocket costs for said
proceedings including but not limited to, special counsel, counsel's
reimbursable expenses, and special appraiser if required, Tenant's Allocable
Share of Landlord's costs being computed under Paragraph 22.11(b); and provided,
however, that Tenant's Allocable Share of such costs shall not exceed any tax
savings realized as a result of Landlord's successful reduction in the
assessment of the Building. Upon receipt of any refund resulting from any
proceeding for which Tenant has paid Tenant's Allocable Share of Landlord's
costs and has paid Tenant's Allocable Share of excess Building Taxes under
Paragraph 3.02(b) above, Landlord shall (after deducting Landlord's costs to
obtain such refund) recompute the amount that would have been due from
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<PAGE> 6
Tenant (after subtracting such refund) and pay to Tenant the amount by which
Building Taxes originally paid by Tenant exceed such recomputed amount.
(f) Should any alteration or improvement performed by Tenant, during
the term of this Lease, be shown to have caused an increase in the assessment of
the Building, Tenant shall pay to Landlord the actual amount of all taxes
resulting from such increase in assessment. Any amount paid separately hereunder
by Tenant to Landlord shall be in addition to any amounts paid by Tenant
pursuant to Paragraph 3.02(b) above.
3.03 PAST DUE RENT
If, during the term of this Lease, Tenant shall fail to pay any
installment of the fixed monthly rent or additional rent or any other charge
hereunder when the same is due and payable, then interest at the lesser rate of
(i) the prime rate published in the Wall Street Journal (or such other similar
daily business journal, should the Wall Street Journal no longer be in
publication) on or about the due date, plus two percent (2%) per annum, and (ii)
the maximum legal rate (the lesser of such rates is herein called the "Lease
Rate") shall accrue from and after the date on which such sum was due and
payable, and such interest, together with a late charge of Fifty Dollars
($50.00) for each past-due payment to cover the extra expense of handling such
delinquency, shall be paid to Landlord as additional rent and liquidated damages
at the time of payment of such past-due sum. Anything contained in the foregoing
to the contrary notwithstanding, Tenant shall not be obligated to pay the
foregoing interest or Late Charge with respect to the first late payment of any
charge hereunder occurring during any twelve (12) month period; provided,
however, that the same is received by Landlord within five (5) days of Tenant's
receipt of written notice thereof from Landlord. Landlord shall have the right
to apply any payments made by Tenant first to any deficiency in the payment of
the interest and Late Charge provided for herein. Nothing contained in this
Paragraph 3.03 shall be construed to be a limitation of or in substitution of
Landlord's rights and remedies under Article 13 of this Lease.
3.04 DEFINITION OF LEASE YEAR AND PARTIAL LEASE YEAR
The term "lease year" is defined to mean a period of twelve (12)
consecutive calendar months, the first full lease year commencing on the first
day of the first full calendar month following the Term Commencement Date (if
other than on the first day of a month), and each succeeding lease year
commencing on the anniversary of the commencement of the first full lease year.
Any portion of the term which is less than a lease year shall be deemed a
partial lease year" and computations requiring proration shall be pro-rated on a
per term basis using 365 day year.
3.05 SECURITY DEPOSIT
INTENTIONALLY DELETED.
6
<PAGE> 7
ARTICLE 4
CONSTRUCTION, FINANCING
AND ALTERATIONS
4.01 LANDLORD'S OBLIGATION
Landlord shall, at its sole cost and expense (except as otherwise
specified), construct the Premises for Tenant's use and occupancy in accordance
with plans and specifications prepared by Tenant and as approved by Landlord
(such approval not to be unreasonably withheld, conditioned or delayed,
incorporating all items of work provided in Exhibit "C" attached hereto and made
a part hereof (all of the foregoing, "Landlord's Work"). Landlord hereby
covenants and agrees that it shall warrant all items of Landlord's Work for a
period of twelve (12) full calendar months following the Term Commencement Date
("Warranty Period"), and that Landlord shall correct any defects of any kind or
nature in Landlord's Work within thirty (30) days of written notice thereof from
Tenant, provided, however, that Landlord receives written notice of any such
defect within thirty (30) days following the expiration of the Warranty Period.
4.02 FINANCING
If Landlord can obtain mortgage financing or refinancing only upon the
basis of reasonable modifications of the terms and provisions of this Lease,
Landlord and Tenant shall enter into a mutually agreeable amendment to this
Lease incorporating such modifications; provided, however, that the lease
modifications referred to herein shall not relate to those provisions pertaining
to length of the term of the lease, amount of rent, additional rent, and other
charges, nor shall the lease modifications otherwise increase Tenant's
obligations hereunder, nor diminish Tenant's rights.
In the event of a refinancing or a bona fide sale of the Building by
the Landlord, Tenant shall, immediately within five (5) business days of receipt
of written request therefor, provide to Landlord a copy of Tenant's most current
available annual report.
4.03 TENANT'S OBLIGATION
Tenant shall perform such work in the Premises over and above
Landlord's Work in accordance with the standards described in Exhibit "D"
attached hereto and made a part hereof.
4.04 ALTERATIONS, ADDITIONS AND IMPROVEMENTS
(a) Except as specifically permitted by the provisions of Section
4.04(b), below, Tenant shall not make any alterations, additions or improvements
in or to the Premises without the prior written consent of Landlord (which
consent shall not be unreasonably withheld, conditioned or delayed), and then
only by contractors approved by Landlord (said approval not to be unreasonably
withheld, conditioned or delayed. Landlord represents to Tenant and Tenant
acknowledges the existence of certain covenants affecting the Building and the
Premises including those portions of the architecturally or historically
significant interior features of the Building which may limit the construction
of, or removal, as the case may be, of certain alterations, additions or
improvements in or to the Premises ("Historical Features"), notwithstanding the
7
<PAGE> 8
requirement of consent thereto by Landlord. If Landlord shall grant its consent,
Tenant shall provide Landlord with certificates evidencing the insurance
coverages and limits required by Exhibit "F" to the commencement of any such
work. Tenant shall not make nor permit any defacement, injury or waste in, to or
about said Premises nor make any defacement, injury or waste in, to or about any
part of the Building. Tenant agrees that any improvements (excepting Tenant's
Personal Property, hereinafter defined) as may be installed within and
permanently affixed to the Premises by Tenant pursuant to this paragraph 4.04
(collectively, "Permanent Leasehold Improvements") shall remain as part of the
Premises at the expiration of the Lease or any extension or renewal thereof;
provided, however, that the foregoing shall not apply to Tenant's equipment,
furniture and trade fixtures, nor to any items of personal property (all of the
foregoing, collectively, "Tenant's Personal Property"), which Tenant may, at
Tenant's expense, remove from the Premises no matter how attached, so long as
Tenant shall repair any damage to the Premises caused by said removal. Landlord,
however, shall have the right to require Tenant to remove any alterations,
additions or improvements so made provided that the removal of such alteration,
addition or improvement was made an express condition of Landlord's consent to
Tenant's installation thereof at the time of the granting of such consent.
Tenant shall, at its expense, repair or cause to be repaired any damage to the
Premises caused by such removal.
(b) Tenant shall have the right to make interior, non-structural
additions, alterations, modifications and improvements to, and to perform such
other work within, the Premises, not to exceed the cost of ten thousand dollars
($10,000) in each instance (herein, "Exempted Alterations"), without Landlord's
prior approval provided, however, that:
(a) all Exempted Alterations shall be in conformity with (i) all
applicable rules and regulations of the Building; (ii) all applicable
governmental laws, rules, regulations and zoning ordinances; and (iii)
the applicable requirements of Exhibit D, attached hereto, and
(b) the Exempted Alterations do not affect the structural components of
the Premises, the Historical Features of the Premises, the Building,
the Common Areas, and/or the Outside Common Areas, nor materially
impact or affect, or otherwise require any modification of or to any
Building System not located within the Premises;
(c) at least ten (10) days prior to Tenant's commencement of the Exempted
Alterations, Tenant shall provide Landlord written notice of such
Exempted Alterations, including a reasonably detailed description of
the work to be performed, plans and specifications for such work, and
an insurance certificate evidencing insurance coverage as may be
required to be maintained by Tenant during the performance of work by
the provisions of Exhibit "D", naming Landlord as an additional
insured.
4.05 SIGNS, AWNINGS AND CANOPIES
Except as specifically provided otherwise in the Addendum, attached
hereto Tenant will not place or maintain or suffer to be placed or maintained on
or in an exterior door, wall or window of the Premises any sign, awning or
canopy, decoration, lettering or advertising matter without first obtaining the
written consent of Landlord thereto, such consent not to be unreasonably
withheld, conditioned or delayed. In the event such consent is received, then
Tenant shall maintain
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<PAGE> 9
such sign, awning, canopy, decoration, lettering or advertising matter as may be
approved in good condition and repair at all times during the term of this
Lease.
ARTICLE 5
USE OF PREMISES
5.01 USE OF PREMISE
Tenant shall occupy and use the Premises during the term for general
offices and no other purpose whatsoever. Tenant further agrees to comply with
the rules and regulations set forth in Exhibit "E" attached hereto and made a
part hereof and with such reasonable modifications thereof and additions thereto
as Landlord may hereafter from time to time make for the Building, the Building
Common Areas or the Outside Common Areas, provided Tenant has received actual
written notice thereof and to the extent the same are not in contradiction with
the provisions of this Lease. Landlord shall not be responsible for the
nonobservances by any other tenant of any said rules and regulations and shall
not be responsible to Tenant for any violation of the rules and regulations, or
the covenants or agreements contained in any other lease, by any other tenant of
the Building, or its agents or employees; provided, however, that Landlord shall
use commercially reasonable efforts to enforce the rules and regulations in a
uniform and non-discriminatory manner.
ARTICLE 6
OPERATING COSTS
6.01 DEFINITIONS
(a) The term "Operating Costs" shall be deemed to include (i) the
reasonable and actual costs of operating and maintaining the Building, the
Building Common Areas and the Outside Common Areas, including, but without
limiting the generality of the foregoing, the cost of: gardening and
landscaping; parking lot repair, maintenance and line restriping; janitorial and
cleaning services (which shall be deemed to include labor, materials and
supplies for cleaning any office space in the Building, whether or not leased to
tenants, excluding the Premises); all insurance premiums paid by Landlord for
the insurance coverages required under Paragraphs 10.02 and 10.03 of this Lease;
repairs to the Building and roof; painting and caulking; refinishing; glass
repair; the maintenance and repair of all mechanical systems and facilities in
the Building including electrical, plumbing, sanitary control, and heating,
ventilating and air-conditioning systems and facilities; removal of snow, ice,
trash, waste and refuse; traffic control and policing; fire and security
protection; the cost, as amortized over the useful life of the improvement, as
reasonably and in good faith determined by Landlord, with annual interest at the
lesser rate of ten percent (10%) and the actual rate charged to Landlord to
finance the respective improvement (herein, "Improvement Rate"), of any capital
improvement made after calendar year 2000 in compliance with the requirements of
any federal, state or local law or governmental regulation; subject to the
provisions of Section 6.01(b), below, the cost, as amortized over the useful
life of the improvement, as reasonably and in good faith determined by Landlord,
with interest at the Improvement Rate per annum, of any capital improvement made
after calendar year 2000; maintenance, replacement and
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<PAGE> 10
rental of signs and equipment; depreciation of the capital cost of any
machinery, provided the cost of the machinery had not already been recovered, in
whole or in part, under this Article 6, equipment and vehicles used solely in
connection with the operation and maintenance of the Outside Common Areas and
Building Common Areas; repair and/or (subject to the provisions of Section 6.0 1
(b)) replacement of on-site water lines, sanitary and storm sewer lines; rental
and other charges paid to third parties; personnel costs and management fees,
subject to the provisions of Section 6.01(b); holiday and other decorations; and
related costs to implement such services, plus (ii) a charge equal to eight
percent (8%) of the Operating Expenses for overhead expenses.
(b) Anything contained in the foregoing to the contrary
notwithstanding, Operating Costs shall not include any of the following:
(i) inheritance, estate, gift, franchise or income taxes, or any
capital levy imposed on Landlord; or
(ii) the cost to Landlord for any work or service performed in any
instance for any tenant (including Tenant) or other occupant of the
Building, at the cost of such tenant or occupant; or
(iii) the cost of improvements performed for tenants or other occupants
of the Building as Landlord's work;
(iv) original construction costs of the Building;
(v) interest and amortization of funds borrowed by Landlord, whether
secured or unsecured;
(vi) costs or expenses associated with leasing space in the building or
the sale of any interest in the building, including, without limitation,
advertising and marketing, and commissions;
(vii) ground rents;
(viii) salaries, wages, or other compensation above reasonable industry
standards, and any salaries, wages, or other compensation paid to:
(A) employees above the level of Building Manager in excess
of time allocated to the Building, or
(B) any partner, shareholder, officer or director of
Landlord;
(ix) expenses for repairs, replacements or improvements arising from
the initial construction of the Building to the extent such expenses are
either (i) reimbursed to Landlord by virtue of warranties from contractors
or suppliers or (ii) result by reason of deficiencies in design or
workmanship except conditions resulting from ordinary wear and tear;
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(x) accounting or legal fees incurred in tenant disputes, or in
procuring tenants, or for fees not reasonably related to the operation and
maintenance of the Building;
(xi) costs for repairs to and/or maintenance of the Building or the
Common Areas or Outside Common Areas to the extent the same are reimbursed
to Landlord by proceeds of insurance (or the amount of reimbursement if
Landlord would have maintained insurance per Landlord's requirements in the
Lease), condemnation awards or other reimbursement received by Landlord;
(xii) interest or penalties arising by reason of Landlord's failure to
timely pay any Operating Costs, Taxes or Building utilities;
(xiii) capital improvements to or acquisition of capital equipment for
the Building, or the Common Areas or Outside Common Areas, except for those
(A) acquired to reduce Operating Costs, (B) which are required in order to
comply with the requirements of any federal, state or local law or
governmental regulation, to the extent that the cost was incurred by
Landlord after the Term Commencement Date and provided that the respective
law, ordinance, regulation or order was not required to have been
implemented prior to the Term Commencement Date, or (C) which are
reasonably necessary for the efficient and economical operation and
maintenance of the Building, each as amortized over the useful life of the
improvement, as reasonably and in good faith determined by Landlord, at the
Improvement Rate;
(xiv) repairs or replacements to the Building or the Common Areas or
Outside Common Areas which, under sound accounting principals and practices
consistent with the operation of commercial office buildings, should be
classified as capital expenditures, and/or should be considered a deferred
expense and spread over a reasonable period of time, as reasonably and in
good faith determined by Landlord in accordance with the aforementioned
practices, in which case(s) Operating Costs for any Lease Year occurring
during the term may include only the proportionate share of the cost of
such repair or replacement appropriately allocated to such year;
(xv) costs incurred due to Landlord's violation of or failure to comply
with any term or condition of this Lease or any other lease or agreement
relating to the Building or of any law, ordinance or governmental rule,
code or regulation affecting the Building, the Common Areas and/or the
Outside Common Areas;
(xvi) reserves for repairs, maintenance or replacements; or
(xvii) the cost of any new services which were not included in the
calculation of Operating Costs as of the "Base Period" (defined below),
excepting that Tenant shall pay increases in the costs of any such new
services over the cost incurred for such service during its first twelve
(12) months of implementation at the Building.
Landlord covenants and warrants that:
(A) any management fee included as part of Operating Costs shall be
reasonable, competitive and consistent with such fees as may be charged in
the town, county and state
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in which the Building is located for the management of buildings of a
similar nature and operations as the Building;
(B) no cost, charge or expense charged to Tenant as part of Operating
Costs is or will be in any manner duplicative of any cost, charge or
expense either (I) charged to or payable by Tenant under any other
provision of this Lease or otherwise, or (II) reimbursed or reimbursable to
Landlord by any source other than through Operating Costs, and
(C) the Operating Costs for the Base Period shall include any
management fee and the eight percent (8%) administrative charge heretofore
described.
6.02 TENANT TO SHARE INCREASES IN OPERATING COSTS
(a) Tenant agrees to pay to Landlord, as additional rent, monthly (or
less frequently as Landlord shall determine) within ten (10) days after receipt
of Landlord's estimate therefor (and thereafter on the first day of each month
without invoice) an amount equal to one twelfth (1/12) of Tenant's Allocable
Share (computed pursuant to Paragraph 22.11(a) hereof) of the estimated amount
by which Operating Costs for each lease year exceed the Operating Costs for the
Base Period as hereinafter defined. The "Base Period" for purposes of this Lease
shall mean calendar year 2000. In determining the amount of Operating Costs for
any lease year or partial lease year, (1) if less than 100% of the square feet
leaseable in the Building shall have been occupied by tenants at any time during
a lease year or partial lease year, Operating Costs shall be deemed, for
purposes of this Article 6, to be increased to an amount equal to like operating
costs which would normally be expected to be incurred, had such occupancy been
100% during the entire period, or (2) if Landlord is not furnishing any
particular work or service (the cost of which if performed by Landlord would
constitute Operating Costs) to a tenant who has undertaken to perform such work
or service in lieu of the performance thereof by Landlord, Operating Costs shall
be deemed for the purposes of this Article to be increased by an amount equal to
the additional Operating Costs which would reasonably have been incurred during
such period by Landlord if it had at its own expense furnished such work or
service to such tenant.
(b) Following the end of each lease year (or partial lease year),
Landlord shall furnish to Tenant a comparative statement showing Tenant's
Allocable Share of the Operating Costs during such year and the amounts paid by
Tenant (based on Landlord's estimate of increases in Operating Costs)
attributable to such year. Any overpayment or underpayment by Tenant shall be
promptly adjusted by payment, within fifteen (15) days, of the balance of any
underpayment for such year by Tenant to Landlord, or by Landlord to Tenant of
the balance of any overpayment for such year, or, if any overpayment shall be
less than one (1) month's Fixed Monthly Rent, at Landlord's election, by
applying such overpayment by Tenant as a credit to succeeding monthly
installments of Additional Rent. Landlord and Tenant shall use their best
efforts to minimize such costs of operation, management and maintenance in a
manner consistent with generally accepted office building practices.
6.03 TENANT'S RIGHT TO AUDIT
Tenant shall have the right to audit Landlord's books and records with
respect to all items of Operating Costs and Additional Rent for which Landlord
has billed Tenant during the
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preceding calendar year or accounting period, upon ten (10) business days'
advance written notice. Tenant shall have the right to conduct this audit not
more than once each lease year to determine if the Operating Costs and items of
Additional Rent billed to Tenant are correct, and Landlord shall fully cooperate
in such regard. If Tenant shall not conduct any such audit within twelve (12)
months of the date of Tenant's receipt of the respective Operating Expenses'
statement or invoice, as the case may be, which is the subject of such audit,
then, upon the expiration of such twelve (12) month period, the respective
Operating Expenses' statement or invoice shall be deemed conclusive and final.
If an audit discloses that Landlord has overcharged Tenant for any charge
included as part of Operating Expenses, Landlord shall reimburse Tenant for such
overbilled amount within thirty (30) days of Tenant's written demand therefor.
If the audit discloses that any charge to Tenant which is more than five percent
(5%) in excess of the amount actually owed by Tenant, Landlord shall also
reimburse Tenant for the costs of the audit conducted, plus interest from the
date of overpayment at the Lease Rate.
ARTICLE 7
ENERGY COSTS AND WATER
7.01 DEFINITIONS
As used in this Lease, "Premises Electrical Energy Cost" shall mean the
cost of the electrical energy consumed by the lighting fixtures and electrical
convenience outlets within the Premises only. As used in this Lease, "Energy
Costs and Water" shall mean (i) the cost of all energy, including electrical,
oil, gas, solar, steam and any other energy and the cost of all water used in or
at the Building, the Building Common Areas and the Outside Common Areas,
excluding the Premises.
7.02 CHARGE FOR PREMISES ELECTRICAL ENERGY COSTS
(a) Premises Electrical Energy Costs are included in Fixed Monthly
Rent. If Tenant elects to operate a twenty-four (24) hour Customer Service
Center ("CSC") from the Premises (the difference between the "Building Hours"
established in Section 20.01 and the hours of operation of the CSC are herein
referred to as "Additional Hours") and uses Premises Electric Energy in addition
to that which is used in or at the Premises during such Additional Hours when
Tenant's business is not being operated therefrom ("Base Usage") as such
additional usage is established by the Check Meter, hereinafter provided for,
then Tenant agrees to pay to Landlord, as additional rent, monthly within ten
(10) days after receipt of Landlord's reasonable estimate (based upon the
additional usage established by the Check Meter) (and thereafter on the first
day of each month during which Tenant operates the CSC at the Premises, without
invoice), a charge for Premises Electrical Energy Costs based upon an average
useage established by the use of the Check Meter during the Additional Hours,
and at the rate actually charged to Landlord therefor by the appropriate utility
company or authority supplying such energy. Landlord and Tenant each reserve the
right to survey and calculate Tenant's connected electrical load and hours of
usage thereof from time to time during any portion of the term during which
Tenant is operating a CSC at the Premises (but not more than twice annually) and
to adjust the monthly charge herein set forth by the amount of electrical energy
usage used during the Additional Hours the exceeding Base Usage, at the rate
actually charged to Landlord therefor. Tenant agrees to pay to Landlord, as
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additional rent, the amount of such monthly charge, as adjusted, within ten (10)
business days following Tenant's receipt of notice of the adjustment (including
reasonable supporting documentation) and on the first day of each calendar month
thereafter during which Tenant operates the CSC at the Premises.
(b) If Tenant elects to operate a CSC from the Premises, it shall so
notify Landlord in writing and Landlord shall thereafter install and maintain,
at Landlord's cost and expense, a check meter for purposes of measuring Tenant's
electrical usage during the Additional Hours over and above the Base Usage
("Check Meter"). The Check Meter shall be operated and maintained during such
portion of the term that Tenant operates a CSC at the Premises for Additional
Hours and is required to reimburse Landlord for the Premises Electrical Energy
Costs applicable to such Additional Hours in accordance with Section 7.02(a),
above. Following any meter reading period (not to be less than four (4) full
calendar months), all future charges under Section 7.02(a) for Premises
Electrical Energy for the Additional Hours shall be based on the average meter
readings, until such time as Landlord or Tenant reasonably determines Tenant's
usage has changed due to a change in Tenant's operation of business, including
but not limited to, a change in the number of hours or the amount and type of
equipment used in the Premises. Tenant's obligations to pay Additional Rent
pursuant to this Section 7.02 shall continue only for such periods that Tenant
operates the CSC.
7.03 TENANT TO SHARE INCREASES IN ENERGY COSTS AND WATER
(a) Tenant agrees to pay to Landlord as additional rent, monthly,
within ten (10) business days after receipt of Landlord's reasonable estimate
therefor (and thereafter on the first day of each month, without invoice) an
amount equal to one-twelfth (1/12) of Tenant's Allocable Share (computed under
Paragraph 22.11(a) hereof) of the estimated amount by which Energy Costs and
Water for each lease year (or, in the case of a partial lease year, a
corresponding fractional portion of said amount of Energy Costs) occurring after
the Base Period (as defined in Section 3.02(b), above) exceed the Base Amount as
hereinafter defined. The term "Base Amount" for purposes of this Lease shall be
the amount computed by applying the actual electrical rate charged to Landlord
as of the Term Commencement Date to the total kilowatt hours of usage (computed
monthly) during the Base Period. In determining the amount of Energy Costs and
Water for the purpose of this Article 7 for any lease year or partial lease
year, (i) if less than one hundred percent (100%) of the square feet leaseable
in the Building shall have been occupied by tenants at any time during a lease
year or partial lease year, Energy Costs and Water shall be deemed for the
purposes of this Article to be increased to an amount equal to the like energy
costs and water which would normally be expected to be incurred, had such
occupancy been one hundred percent (100%) during the entire period, or (ii) if
Landlord is not furnishing any particular work or service (the cost of which if
performed by Landlord would constitute Energy Costs and Water) to a tenant who
has undertaken to perform such work or service in lieu of the performance
thereof by Landlord, Energy Costs and Water shall be deemed for the purposes of
this Article to be increased by an amount equal to the additional Energy Costs
and Water which would reasonably have been incurred during such period by
Landlord if it had at its own expense furnished such work or service to such
tenant.
(b) Following the end of each lease year (or partial lease year)
occurring after the Base Period, Landlord shall furnish to Tenant a comparative
statement showing Tenant's Allocable Share of the Cost of Energy and Water
during such year and the amounts paid by Tenant
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(based on Landlord's estimates of the Energy Costs and Water) attributable to
such year, together with copies of all invoices from appropriate utility
suppliers upon which the respective comparative statement is based. Any
overpayment or underpayment by Tenant shall be promptly adjusted by payment,
within fifteen (15) days, of the balance of any underpayment for such year by
Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment
for such year, or, if any overpayment shall be less than one (1) month's Fixed
Monthly Rent, then at Landlord's election by applying such overpayment for such
year as a credit to succeeding monthly installments of Additional Rent. The
Energy Costs and Water hereinabove described in this Article 7 shall be subject
to review by Tenant at Landlord's office, and Landlord and Tenant shall use
their best efforts to minimize such Energy Costs and Water.
7.04 PERIODIC INCREASES
Energy Costs and Water are subject to periodic increases or taxes by
various utility companies, fuel companies, municipalities, governmental agencies
and others. Landlord may revise the estimate of the Energy Costs and Water
referred to in Paragraph 7.03(a) above and revise Tenant's monthly payment of
Energy Costs and Water (but not more than once during any lease year) based upon
actual changes in amounts payable by Landlord to the appropriate utility
suppliers. Tenant agrees to pay to Landlord, as additional rent, the amount of
such monthly charge, as adjusted, within ten (10) business days following
Tenant's receipt of notice of the adjustment (including reasonable supporting
documentation) and on the first day of each calendar month thereafter without
notice or invoice.
ARTICLE 8
REPAIRS
8.01 REPAIRS
Tenant shall give to Landlord prompt written notice of any damage to,
or defective condition in any part of or appurtenance to the Building's
plumbing, electrical, heating, ventilating, air-conditioning or other systems
serving, located in, or passing through the Premises. Subject to the provisions
of Article 11 of this Lease and Landlord's warranty of Landlord's Work, Tenant
shall, at Tenant's own expense, keep the Premises, including everything therein
(except the heating and air-conditioning and other Building Systems and any
structural portions of the Building), in good order, condition and repair during
the term. Landlord shall, as part of the Operating Costs set forth in Article 6
of this Lease, maintain the heating, ventilating and air-conditioning and other
Building Systems throughout the Building (including the Premises) and the
outside walls, outside windows, floors, foundations, and roof of the Building in
good order and repair. Repairs made by Landlord required due to negligence or
fault of Tenant, its contractors, agents or employees shall be made at Tenant's
expense plus a 19% administrative charge.
Tenant, at Tenant's expense, shall comply with all laws or ordinances,
and all rules and regulations of all governmental authorities and of all
insurance bodies at any time in force, applicable to the Premises or to Tenant's
use thereof, except that Tenant shall not hereby be under any obligation to
comply with any law, ordinance, rule or regulation requiring any structural
alteration of or capital improvement to the Premises or with respect to the
Premises, or which may
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require change(s) in or to the Buildings Systems not exclusively serving and
located in the Premises, compliance with which shall be Landlord's sole
responsibility unless such alteration or improvement to the Premises or change
to the Building System(s) is required by reason of a condition which has been
created by, or at the instance of, Tenant, or is required by reason of a breach
of any of Tenant's covenants and agreements hereunder. All repairs made by
Tenant shall be made using contractors approved by Landlord which approval shall
not be unreasonably withheld, conditioned or delayed.
ARTICLE 9
INDEMNITY
9.01 INDEMNIFICATION BY TENANT
(a) Tenant does hereby indemnify and shall defend Landlord and its
constituent shareholders, members or partners (and such other persons as are in
privity of estate with Landlord) and save it harmless from and against any and
all claims, actions, damages, liability and expense in connection with loss of
life, personal injury and/or damage to property arising from or out of any
occurrence in, upon or at the Premises, from or out of the occupancy or use by
Tenant of the Premises or any part thereof, or occasioned wholly or in part by
any act or omission of Tenant, its agents, contractors, employees, lessees or
concessionaires, except to the extent arising from or out of any act or omission
of Landlord, its agents, employees, contractors or lessees (all of the foregoing
collectively and individually, "Landlord Party"); and provided, however, that
nothing contained in this Lease shall be deemed to relieve Landlord of liability
for its acts, omissions, or negligence or the acts, omissions or negligence of
any Landlord Party, and Landlord does hereby indemnify, defend and to hold
Tenant and its constituent shareholders, partners, members or other owners,
harmless from and against any and all claims, actions, damages, liability and
expense (including reasonable attorneys' fees) incurred in connection with the
loss of life, personal injury and/or damage to property arising from or out of
such acts, omissions or negligence.
(b) In case either party shall, without fault on its part, be made a
party to any litigation commenced by or against the other, then each party
agrees to protect and hold the party without fault harmless and to pay all
costs, expenses and reasonable attorney's fees incurred or paid by said party
without fault in connection with such litigation. Each party further agrees also
to pay all costs, expenses and reasonable attorney's fees that may be incurred
or paid by the other party in enforcing the covenants and agreements in this
Lease.
(c) The provisions of this Article 9 shall survive the expiration or
earlier termination of this Lease with respect to any injury, illness, death or
damage occurring prior to such expiration or termination.
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ARTICLE 10
INSURANCE
10.01 LIABILITY INSURANCE
At all during the term of this Lease, Tenant shall, at its sole cost
and expense, for the mutual benefit of Landlord and Tenant, maintain personal
injury, death or property damage occurring on, in or about the Premises during
the term of this Lease in an amount of not less than One Million Dollars
($1,000,000.00) with respect to personal injury, death or property damage and
including contractual indemnity coverage. In the event that Tenant shall not
have delivered to Landlord a policy or certificate evidencing such insurance
fifteen (15) days prior to the Term Commencement Date and fifteen (15) days
prior to the expiration dates of each expiring policy, Landlord may, upon at
least three (3) business days prior notice to Tenant affording Tenant the
opportunity to provide evidence of such insurance, obtain such insurance as it
may reasonably require to protect its interest. The reasonable cost for such
policies shall be paid by Tenant to Landlord as additional rent within ten (10)
business days of receipt of written demand (including reasonable supporting
documentation), plus eighteen percent (18%) administrative charge. All insurance
policies required hereunder shall be issued by insurers of recognized
responsibility and licensed to conduct business in the State of New York.
10.02 ALL RISKS AND DIFFERENCE IN CONDITIONS INSURANCE
At all times during the term of this Lease, Landlord shall, as part of
the Operating Costs set forth in Article 6 of this Lease, keep the Building
insured for the benefit of Landlord against loss or damage by risks now or
hereafter embraced by "All Risks," "Difference in Conditions", and loss of rent
coverages, and against such other risks as Landlord from time to time reasonably
may designate in amounts sufficient to prevent Landlord from becoming a
co-insurer.
In any event, the amount applicable to "All Risks" shall be ninety
percent (90%) of the then full replacement cost (being the cost of replacing the
Building, exclusive of the costs of excavations and footings below the lowest
grade level). Such full replacement cost shall be determined from time to time
(but not more frequently than once in any twelve (12) calendar months) by an
appraiser, architect or other person or firm designated by Landlord.
The parties agree that Landlord shall not provide any insurance
coverage for Tenant's merchandise, trade fixtures, furnishings, equipment and
other personal property of Tenant.
10.03 INSURANCE ON COMMON AREAS
At all times during the term of this Lease, Landlord shall, as part of
the Operating Costs set forth in Article 6 of this Lease, keep the Common Areas
insured for personal injury and property damage liability, "All Risk" property
coverage, "Difference in Conditions," workers' compensation, employee's
liability and any other casualty or risk insurance which Landlord or Landlord's
insurance carrier deems necessary or appropriate, provided such other
insurance(s) are reasonable and customary for buildings, operations, and
property similar to those of the Building in the area in which the Building is
located.
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10.04 INCREASE IN FIRE INSURANCE PREMIUM
Tenant covenants and agrees to promptly pay to Landlord as additional
rent, within ten (10) business days of receipt of written demand (including
reasonable supporting documentation), the amount of any increase in the rate of
insurance on the Premises or on any part of the Building that (but for Tenant's
act(s) or Tenant's permitting certain activities to take place which result in
an increase in said rate of insurance) would not otherwise have been in effect.
10.05 WAIVER OF SUBROGATION
Each of the parties shall have a waiver of subrogation clause attached
to, and made a part of, its insurance policy or policies in the following or
equivalent form: "This insurance shall not be invalid should the insured waive
in writing, prior to a loss, any or all rights of recovery against any party for
loss occurring to the property described herein. Notice is hereby accepted that
the insured has agreed in writing, prior to a loss, to waive any and all of its
rights of recovery from (the Landlord or the Tenant as the case may be)."
ARTICLE 11
DAMAGE BY FIRE, THEFT
AND WATER DAMAGE
11.01 UNTENANTABILITY
If the Premises are made untenantable in whole or in part by fire or
other casualty, the fixed monthly rent, additional rent and other charges, until
repairs shall be made or the Lease terminated as hereinafter provided, shall be
proportionately abated on a per diem basis according to the part of the Premises
which is reasonably usable by Tenant for the normal operation of its business.
If such damage shall be so extensive that the Premises cannot be restored by
Landlord within a period of four (4) months, Landlord and Tenant shall have the
right to cancel this Lease by notice to the other given at any time within
thirty (30) days after the date of such damage. If a portion of the Building
other than the Premises shall be so damaged that in the reasonable judgment of
Landlord the Building should be restored in such a way as to alter the Premises
materially, Landlord may cancel this Lease by notice to Tenant given at any time
within thirty (30) days after the date of such damage. In the event of giving
effective notice pursuant to this paragraph, this Lease and the term and the
estate hereby granted shall expire on the earlier to occur of (i) the date
fifteen (15) days after the giving of such notice and (ii) the date on which
Tenant is forced to cease normal operation of its business from the Premises as
a result of such damage, as fully and completely as if such date were the date
hereinbefore set for the expiration of the term of this Lease. If this Lease is
not so terminated, Landlord will promptly (taking into account the time
necessary to effectuate a satisfactory settlement with Landlord's insurance
company) restore the damage to the Building and/or the Premises, as the case may
be. Tenant hereby expressly waives the provisions of Section 227 of the New York
Real Property Law and agrees that the foregoing provisions of this Paragraph
11.01 shall govern and control in lieu thereof. Anything contained in the
foregoing to the contrary notwithstanding, if the Premises, or any material
portion thereof and/or Tenant's reasonable access thereto, and/or Tenant's
reasonable use of the Designated Parking Spaces (or reasonable alternative
parking facilities) shall be so damaged or impaired that Tenant's
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use of the Premises is unreasonably interfered with and Landlord shall not have
commenced repair of the same within ninety (90) days of the date of damage, or
having commenced repairs during such time, if Landlord shall fail to thereafter
diligently and continuously prosecute the repairs toward completion, Tenant
shall have the right to terminate this Lease upon written notice to Landlord
given at any time after the expiration of such ninety (90) days, but prior to
such date as repairs to the Premises and access thereto are Substantially
Completed.
11.02 LOSS OF PROPERTY AND WATER DAMAGE
Except as herein provided, Landlord shall not be responsible to Tenant
for any loss or theft or damage of or to any property left with any employee of
Landlord, except to the extent due to the negligence or willful misconduct of
Landlord or any Landlord Party. Landlord shall not be liable for any damage
caused by water, rain, snow or ice, or by breakage, stoppage or leakage of
water, gas, heating, air conditioning, sewer or other pipes or conduits, or
arising from any other cause, in, upon, about or adjacent to the Premises, or
the Building in which said Premises are located, except to the extent due to the
negligence or willful misconduct of Landlord or any Landlord Party, or to the
extent covered by any insurance carried or required to be carried by Landlord
pursuant to the provisions of Article 10 of this Lease.
ARTICLE 12
EMINENT DOMAIN
12.01 EMINENT DOMAIN
(a) In the event that title to the whole or any part of the Premises
shall be lawfully condemned or taken in any manner for any public or
quasi-public use, this Lease and the term and estate hereby granted shall
forthwith cease and terminate as of the date of vesting of title and Landlord
shall be entitled to receive the entire award, Tenant hereby assigning to
Landlord Tenant's interest therein, if any.
(b) In the event that title to a part of the Building other than the
Premises shall be so condemned or taken and if in the opinion of Landlord, the
Building should be restored in such a way as to alter the Premises materially,
Landlord may terminate this Lease and the term and estate hereby granted by
notifying Tenant of such termination within sixty (60) days following the date
of vesting of title, and this Lease and the term and estate hereby granted shall
expire on the earlier to occur of (i) the date specified in the notice of
termination, which date shall be not less than sixty (60) days after the giving
of such notice, and (ii) the date Tenant is forced to cease normal operation of
its business from the Premises as a result of any such taking, as fully and
completely as if such date were the date hereinbefore set for the expiration of
the term of this Lease, and the fixed monthly rent, additional rent, and other
charges hereunder shall be apportioned as if such date. In such event, Tenant
shall not be entitled to any portion of Landlord's award hereunder, if any, nor
shall Tenant have any claim against Landlord for the value of the unexpired
portion of the term.
(c) Nothing in this Article 12 shall be deemed to prevent Tenant from
claiming and receiving from the condemning authority, if legally payable,
compensation for the taking of
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Tenant's own tangible property, equipment and/or trade fixtures, any leasehold
improvements constructed by Tenant, and such amount as may be payable by statute
or ordinance or otherwise recoverable by Tenant toward Tenant's damages for
Tenant's loss of or interruption and/or damage to business, removal and
relocation expenses.
ARTICLE 13
BANKRUPTCY AND
DEFAULT PROVISIONS
13.01 CONDITIONAL LIMITATIONS
This Lease and the demised term are subject to the limitation that if,
at any time prior to or during the term, any one or more of the following events
(herein called an "Event of Default") shall occur, that is to say:
(a) If Tenant shall make an assignment for the benefit of its
creditors; or
(b) If the leasehold estate hereby created shall be taken on execution
or by other process of law; or
(c) If any petition shall be filed against Tenant in any court, whether
or not pursuant to any statute of the United States or of any State, in any
bankruptcy, reorganization, composition, extension, arrangement, or insolvency
proceedings, and Tenant shall thereafter be adjudicated bankrupt, or such
petition shall be approved by the court, or the court shall assume jurisdiction
of the subject matter and if any such proceedings shall not be dismissed within
sixty (60) days after the institution of the same, or if any such petition shall
be so filed by the Tenant, or
(d) If in any proceedings a receiver or trustee be appointed for
Tenant's property, and such receivership or trusteeship shall not be vacated or
set aside within sixty (60) days after the appointment of such receiver or
trustee; or
(e) INTENTIONALLY OMITTED; or
(f) If Tenant shall fail to pay any installment of the fixed monthly
rent or any part thereof when the same shall become due and payable, and such
failure shall continue for ten (10) days following Tenant's receipt of written
notice thereof from Landlord; or
(g) If Tenant shall fail to pay any other charge required to be paid by
Tenant hereunder, and failure shall continue for ten (10) days after Tenant's
receipt of written notice thereof from Landlord to Tenant; or
(h) If Tenant shall fall to perform or observe any other requirement of
this Lease (not hereinbefore in this paragraph specifically referred to) on the
part of Tenant to be performed or observed, and such failure shall continue for
thirty (30) days after notice thereof from Landlord to Tenant; provided,
however, that if the cure of Tenant's failure to perform shall be of such a
nature so as to reasonably require more than thirty (30) days to complete,
Tenant shall not be deemed in
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default of this Section 13.01(h) of the Lease if Tenant commences the cure
within such thirty (30) day period, and shall thereafter diligently prosecute
the cure to completion within a reasonable time;
then, upon the happening of any one or more of the aforementioned Events of
Default, and the expiration of the period of time prescribed above, Landlord may
give Tenant a notice (hereinafter called "notice of termination") of its
intention to end the term of this Lease at the expiration of five (5) days from
the date of service of such notice of termination, and at the expiration of such
five (5) days, this Lease and the term hereof, as well as all of the right,
title and interest of Tenant hereunder, shall wholly cease and expire in the
same manner and with the same force and effect as if the date of expiration of
such five (5) day period were the date originally specified herein for the
expiration of this Lease and the demised term, and Tenant shall then quit and
surrender the Premises to Landlord, but Tenant shall remain liable as
hereinafter provided.
13.02 LANDLORD'S REMEDIES
(a) If this Lease shall be terminated as in Paragraph 13.01 provided,
Landlord or Landlord's agents or employees may immediately or at any time
thereafter re-enter the Premises and remove therefrom Tenant, its agents,
employees, licensees, and any subtenants and other persons, firms or
corporations, and all or any of its or their property therefrom either by
summary dispossess proceedings or by any suitable action or proceeding at law,
without being liable to indictment, prosecution or damages therefor except to
the extent of gross negligence or willful misconduct, and repossess and enjoy
said Premises, together with all alterations, additions and improvements
thereto.
(b) In case of any such termination, re-entry or dispossess by summary
proceedings, the rents and all other charges required to be paid up to the time
of such termination, re-entry or dispossess, shall be paid by Tenant and Tenant
shall also pay to Landlord all reasonable and actual expenses which Landlord may
then or thereafter incur for legal expenses, attorneys' fees, brokerage
commissions and all other reasonable and actual costs paid or incurred by
Landlord for restoring the Premises to good order and condition and for altering
and otherwise preparing the same for reletting and for reletting thereof,
provided, however, that Landlord's recovery of costs hereunder with respect to
and incurred in connection with altering and otherwise preparing the Premises
for reletting shall not be greater than the reasonable and actual cost to
Landlord of restoring the Premises to good order and condition and returning the
same to "vanilla shell" using Landlord's standard building criteria package, and
shall not include the cost of any specialized improvements or alterations for a
specific tenant's use or business operations. Landlord may, at any time and from
time to time, relet the Premises, in whole or in part, for any rental then
obtainable either in its own name or as agent of Tenant, for a term of terms
which, at Landlord's option, may be for the remainder of the then current term
of this Lease or for any longer or shorter period.
(c) If this Lease be terminated as aforesaid, Tenant nevertheless
covenants and agrees, notwithstanding any entry or reentry by Landlord whether
by summary proceedings, termination, or otherwise, to pay and be liable for on
the days originally fixed herein for the payment thereof, amounts equal to the
several installments of fixed monthly rent, additional rent and other charges as
they would, under the terms of this Lease, become due if this Lease had not
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been terminated or if Landlord had not entered or re-entered as aforesaid, and
whether the Premises be relet or remain vacant in whole or in part or for a
period less than the remainder of the term, and for the whole thereof. But in
the event the Premises be relet by Landlord, Tenant shall be entitled to a
credit in the net amount of rent received by Landlord in reletting the Premises
after deduction of all reasonable and actual expenses and costs incurred or paid
as aforesaid in reletting the Premises and in collecting the rent in connection
therewith.
(d) Tenant hereby expressly waives, so far as permitted by law, for and
on behalf of itself and all persons claiming through or under Tenant also waives
any and all right of redemption or re-entry or repossession under present or
future laws including specifically but without limitation Section 761 of the New
York Real Property Actions and Proceedings law including any amendments
hereafter, or to restore the operation of this Lease. In case Tenant shall be
dispossessed by a judgment or by warrant of any court or judge or in case of
reentry or repossession by Landlord or in case of any expiration or termination
of this Lease, Landlord and Tenant, so far as permitted by law, waive and will
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way connected with this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of said Premises, or any claim or injury or
damage. The terms "enter," "entry," or "re-entry" as used in this Lease are not
restricted to their technical legal meaning.
(e) No failure by Landlord to insist upon the strict performance of any
covenant, agreement, term or condition of this Lease or to exercise any right or
remedy consequent upon a breach thereof, and no acceptance of full or partial
rent during the continuance of any such breach, shall constitute a waiver of any
such breach or of such covenant, agreement, term and condition. No waiver of any
breach shall affect or alter this Lease, but each and every covenant, agreement,
term and condition of this Lease shall continue in full force and effect with
respect to any other than existing or subsequent breach thereof. No payment by
Tenant or receipt by Landlord of a lesser amount than the monthly installments
of rent or additional rent stipulated in this Lease shall be deemed to be other
than on account of the earliest stipulated rent nor shall any endorsement or
statement on any check or letter accompanying a check for payment of rent be
deemed any accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or to pursue any other remedy provided by this Lease.
(f) In the event of any breach or threatened breach by Tenant of any of
the covenants, agreements, terms or conditions contained in this Lease, Landlord
shall be entitled to seek to enjoin such breach or threatened breach and shall
have the right to invoke any right and remedy allowed at law or in equity or by
statute or otherwise.
(g) Each right and remedy of Landlord provided for in this Lease shall
be cumulative and shall be in addition to every other right or remedy provided
for in this Lease or now or hereafter existing at law or in equity or by statute
or otherwise.
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ARTICLE 14
MECHANIC'S LIENS
14.01 MECHANIC'S LIENS
Tenant agrees to pay when due all sums of money that may become due
for, or purporting to be due for, any labor, services, materials, supplies or
equipment furnished or to be furnished to or for Tenant in, upon or about the
Premises and/or Landlord's interest therein. If any mechanic's lien shall be
filed against the Premises or the Building based upon any act of Tenant or
anyone claiming through Tenant, Tenant, after notice thereof from Landlord (or
any person in privity of estate with Landlord) forthwith shall commence such
action by bonding, deposit, payment or otherwise, as will remove or satisfy such
lien within fifteen (15) business days. In the event Tenant does not remove or
satisfy said lien with said fifteen (15) business day period, Landlord shall
have the right to do so by posting a bond or undertaking and Tenant agrees to
reimburse Landlord for any and all expenses incurred by Landlord in connection
therewith within five (5) days after receipt by Tenant of Landlord's invoice
therefor, including reasonable supporting documentation. These expenses include,
but are not limited to filing fees, reasonable legal fees and bond premiums.
However, nothing in this Article 14 shall be deemed or construed as (a)
Landlord's consent to any person, firm or corporation for the performance of any
work or services or the supply of any materials to the Premises, or (b) giving
Tenant or any other person, firm or corporation any right to contract for or to
perform or supply any work, services or materials that would permit or give rise
to a lien against the Premises or the Building.
ARTICLE 15
MORTGAGES, ASSIGNMENTS, SUBLEASES
AND TRANSFERS OF TENANT'S INTEREST
15.01 LIMITATION ON TENANT'S RIGHTS
Except as hereinafter otherwise provided, during the term of this
Lease, in each case, without the prior written consent of Landlord first had and
received (such consent not to be unreasonably withheld, conditioned or delayed),
neither this Lease nor the interest of Tenant in this Lease, or in any sublease,
or in any rentals under any sublease shall be sold, assigned, transferred,
mortgaged, pledged, hypothecated or otherwise disposed of, whether by operation
of law or otherwise, nor shall the Premises be sublet.
It is understood and agreed between the parties that, should Tenant
request Landlord's consent to a proposed assignment of this Lease or a
subletting of all or any portion of the Premises, Landlord will, in addition to
any other requirements which may be imposed as conditions to Landlord's consent,
require that Tenant execute and deliver to Landlord an agreement whereby Tenant
obligates itself, as additional rent, to pay over to Landlord fifty percent
(50%) of the amount, if any, of all rent, additional rent and any other
consideration paid by such assignee or sublessee to Tenant pursuant to such
assignment or sublease which is in excess of rent and additional rent due and
payable from time to time from Tenant to Landlord pursuant to this Lease (such
excess, subject to the following "notwithstanding" provision, is herein called
"Assignment
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Profit"). Anything contained in the foregoing to the contrary notwithstanding,
"Assignment Profit" shall be deemed to mean rent and/or other consideration
received by Tenant specifically as consideration for: (i) the assignment of this
Lease and/or of Tenant's leasehold interest in the Premises (including all
"Permanent Leasehold Improvements", excepting "Tenant's Personal Property", as
such terms are defined in Section 4.04, above), or (ii) a subletting of the
Premises, including all Permanent Improvements, excepting Tenant's Personal
Property, after the deduction by Tenant of all reasonable and out-of-pocket
expenses incurred in connection with any such transfer, but shall specifically
exclude any money or other consideration received by Tenant for, and
appropriately and reasonably allocable to, Tenant's Personal Property, and/or
for Tenant's business and/or its good will, stock, and/or other tangible and
intangible items not comprising a portion of the Premises or Tenant's interest
therein (all of the foregoing, collectively, "Tenant's Business Property"). Any
consideration received by Tenant for Tenant's Business Property shall remain the
sole property of Tenant.
No consent by Landlord to an assignment of this Lease and no assignment
made as hereinafter permitted, shall be effective until there shall have been
delivered to Landlord (a) an agreement, in recordable form, executed by Tenant
and the proposed assignee, wherein and whereby such assignee assumes due
performance of the obligation on Tenant's part to be performed under this Lease
to the end of the term hereof, and (b) the written consent of such assignment of
the holder of any fee or leasehold mortgage to which this Lease is then subject
shall have been obtained and delivered to Landlord if so required by the terms
of such fee or leasehold mortgage.
Notwithstanding the assumption by such assignee of due performance,
Tenant shall continue to be fully responsible for the due performance of
Tenant's obligations hereunder in the same manner and to the same extent as if
no such assignment had been made.
Any assignment, mortgage, pledge, sublease or hypothecation of this
Lease, or of the interest of Tenant hereunder, without full compliance with any
and all requirements set forth in this Lease shall be a breach of this Lease
and, if not cured within thirty (30) days of notice from Landlord (or such
extended period of time, to the extent reasonably required), a default
hereunder.
15.02 EFFECT OF LANDLORD'S CONSENT
Any consent by Landlord to a sale, assignment, sublease, mortgage,
pledge, hypothecation, or transfer of this Lease, shall apply only to the
specific transaction thereby authorized and shall not relieve Tenant from the
requirement of obtaining prior written consent of Landlord to any further sale,
assignment, sublease, mortgage, pledge, hypothecation, or transfer of this
Lease. In instances where the consent of Landlord is required hereunder to any
proposed assignment or sublease of this Lease, or to the mortgaging, pledging or
hypothecation of this Lease, contemporaneously with the request of Tenant
therefor Tenant shall submit in writing information reasonably sufficient to
enable Landlord to decide with respect thereto. Landlord shall reply to Tenant
within ten (10) days after receipt of the request as aforementioned.
With respect to any of the consents requested by Tenant under the
provisions of this Article 15, whether or not the Landlord shall have consented
thereto, Tenant shall pay to the Landlord all reasonable counsel fees and other
out-of-pocket expenses incurred by the Landlord in
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connection therewith up to a maximum amount of five hundred dollars ($500.00) in
connection with any one (1) request for consent from Tenant.
15.03 SALE OF STOCK OR PARTNERSHIP OR MEMBERSHIP INTEREST
INTENTIONALLY DELETED.
15.04 TRANSFER TO RELATED ENTITIES
Anything contained in this Lease to the contrary notwithstanding,
Tenant shall have the right to assign and/or transfer this Lease and/or sublet
all or any portion of the Premises without the prior written consent of
Landlord, and without affording Landlord any right to receive any portion of any
"Assignment Profits" (defined in Section 15.01, above), to:
(i) any corporation or other entity that is a parent, subsidiary or
affiliate of Tenant;
(ii) any corporation or other entity which is a successor (immediate or
remote) to the initial Tenant hereunder, either by merger or consolidation,
in accordance with applicable law, provided the surviving entity assumes
the liabilities of Tenant;
(iii) any corporation or other entity a majority of whose voting stock
is owned by Tenant;
(iv) any corporation or other entity which has the power to direct
Tenant's management and operation or whose management and operation is
controlled by Tenant; and
(v) any purchaser of all or substantially all of the assets or
substantially all of the voting stock and equity interests in Tenant,
provided the purchasing entity assumes the liabilities and obligations of
Tenant hereunder;
(all of the foregoing collectively hereinafter referred to as "Related
Entities").
Tenant shall provide Landlord with written notice of any such assignment or
subletting within thirty (30) days of the effective date thereof, which notice
shall include the correct name and address of the assignee or sublessee. Tenant
shall not be released by any such assignment or sublet.
ARTICLE 16
SUBORDINATION OF LEASE
16.01 SUBORDINATION TO MORTGAGES AND GROUND LEASES
This Lease and all the rights of Tenant hereunder are and shall be
automatically subject and subordinate to the lien of any ground or underlying
leases and to any mortgage or mortgages, whether fee or leasehold mortgages,
which may now affect the Premises or the Building
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or the land under the Building and to all renewals, modifications,
consolidations, and extensions thereof, and advances thereunder. In order to
confirm such subordination, Tenant shall execute and deliver such instruments
upon commercially reasonable terms, and in the event Tenant fails to do so
within ten (10) business days after written demand therefor, the same, at
Landlord's option, may be treated as a default hereunder, subject to any
applicable notice provisions of Article 13, above. Landlord agrees that it shall
use commercially reasonable efforts to provide Tenant with a written agreement
from the holder(s) of any liens superior to Landlord's and existing as of the
Lease Date wherein such party (i) acknowledges this Lease and Tenant's rights
hereunder, and (ii) agrees that so long as no Event of Default shall occur and
continue, such party shall not disturb the tenancy hereby created (any such
agreement herein called a "Non-Disturbance Agreement "). Tenant shall, within
ten (10) business days of Landlord's written request, subordinate this Lease to
any future lien placed by Landlord upon the Building and/or the land on which
the Building is constructed, provided that the intended lien holder executes and
delivers to Tenant a Non-Disturbance Agreement upon commercially reasonable
terms.
16.02 OTHER AGREED MATTERS
Tenant will not knowingly do, suffer or permit any act, happening or
occurrence or any condition to occur or remain which may be prohibited under the
terms or provisions of any ground or underlying lease or mortgage to which this
Lease is subject or which will create a default thereunder except that Tenant
shall not be obligated to pay the principal indebtedness or any installment
thereof or interest thereon.
So long as any such mortgage or lease shall remain a lien on the
Premises, Tenant agrees simultaneously with the giving of any notice to Landlord
which is required to be given by this Lease to give a duplicate copy thereof to
any mortgagee or ground lessor, notice of whose name and address have been given
by written notice to Tenant. Further, Tenant agrees that if Landlord defaults in
the performing of any of its covenants under this Lease and if such default
allows Tenant to cancel or surrender said Lease, the mortgagee or ground lessor
may cure said default with the same effect as if cured by Landlord, and if
necessary, enter upon the Premises for the purpose of curing any such default,
provided that the mortgagee or ground lessor must cure the default within the
time which Landlord is obligated to cure such default in the Lease. The giving
of any such notice to Landlord shall not be properly given under the terms of
this Lease and shall not be of any force and effect until a duplicate copy
thereof shall also have been given to the mortgagee or ground lessor pursuant to
this paragraph.
ARTICLE 17
ENTRY TO PREMISES
17.01 ENTRY TO PREMISES BY LANDLORD
Landlord shall have the right to enter the Premises upon reasonable
prior written notice, at all reasonable times, during normal business hours
(except in the event of an emergency), for the purpose of:
(a) inspecting the same, and
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(b) making any repairs to the Premises and performing any work therein
that may be necessary by reason of Tenant's default under the terms of this
Lease continuing beyond the applicable periods of grace,
(c) exhibiting the Premises for the purpose of sale, ground lease or
mortgage, and
(d) exhibiting the Premises to prospective tenants within six (6)
months prior to the expiration of the term hereof.
Tenant reserves the right to require that, except in the event of an
emergency, Landlord, any of Landlord's Agents and/or any contractors, servicemen
and/or prospective transferees and/or tenant(s) be accompanied by Tenant's
designated representatives at all times during any showing.
ARTICLE 18
NOTICES AND
CERTIFICATES
18.01 NOTICES
Any notice, statement, certificate, request or demand required or
permitted to be given in this Lease shall be in writing sent by recognized
overnight courier service providing for a receipt upon delivery, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed, as the case may be, to Landlord at the mailing address shown at the
beginning of this Lease, and to Tenant at the address shown at the beginning of
this Lease, with copies of each notice to: Applied Theory Corporation, 1500
Broadway, Suite 300, New York, New York 10036, Attention: Diane Barker; and to
the Premises; or to such other addresses as Landlord or Tenant shall designate
in the manner herein provided. Such notice, statement, certificate, request or
demand shall be deemed to have been given on the date deposited with such
courier or on the date mailed as aforesaid in any post office or branch post
office regularly maintained by the United States Government, except for notice
of change of address or revocation of a prior notice, which shall only be
effective upon receipt.
At any time or times when Tenant's interest herein shall be vested in
more than one person, firm or corporation, jointly in common or in severally, a
notice given by Landlord to any one such person, firm or corporation shall be
conclusively deemed to have been given to all such persons, firms or
corporations. Any notice by Tenant pursuant to the provisions hereof shall be
void and ineffective unless signed by all such persons, firms and corporations,
unless all such persons, firms and corporations shall have previously given
notice to Landlord, signed by each of them designating and authorizing one or
more of them to give the notice referred to, and such notice shall then be
unrevoked by any notice to Landlord.
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18.02 CERTIFICATE BY TENANT AND LANDLORD
Within fifteen (15) days after request by the other party, Landlord and
Tenant from time to time and without charge shall deliver to the requesting
party or to a person, firm or corporation, thereby specified, a duly executed
and acknowledged instrument certifying:
(a) that this Lease is unmodified and in full force and effect, or if
there has been any modification, that the Lease is in full force and effect, as
modified, and identifying the date of any such modification; and
(b) whether said party knows or does not know, as the case may be, of
any default by the requesting party in the performance thereby of the terms,
covenants, and conditions of this Lease, and specifying the nature of such
defaults, if any; and
(c) whether or not there are any then existing set-offs or defenses by
Tenant to the enforcement by Landlord of the terms, covenants and conditions of
this Lease and any modification thereof, and if so, specifying them; and
(d) the date to which the fixed monthly rent has been paid.
Such certification shall not estop the party delivering the same from thereafter
asserting any existing default of which said party did not have actual knowledge
on the date of execution thereof.
ARTICLE 19
COVENANT OF
QUIET ENJOYMENT
19.01 COVENANT OF QUIET ENJOYMENT
Tenant, subject to the terms and provisions of this Lease, on payment
of the rent and observing, keeping and performing all the terms and provisions
of this Lease on its part to be observed, kept and performed shall lawfully,
peaceably and quietly have, hold and enjoy the Premises during the term hereof
on and after the Term Commencement Date without hindrance or ejection by
Landlord and any other persons lawfully claiming possession to the Premises, or
portion thereof, subject nevertheless to terms and conditions of this Lease and
to any ground or underlying lease and/or mortgages.
ARTICLE 20
SERVICES
20.01 SERVICES
(a) During the term of this Lease, Landlord shall furnish to the
Premises electricity sufficient to operate the Premises for their intended
purpose(s), lighting, elevator service, and water to the plumbing fixtures, if
any, twenty-four (24) hours per day, seven (7) days a week,
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and, heating, ventilating, air conditioning, on Monday through Friday from 8:00
A.M. to 6:00 P.M. and on Saturday from 8:30 A.M. to 1:00 P.M., principal legal
holidays excepted ("Building Hours"). Use of any of these services by Tenant
outside these days and hours could result in an additional charge to Tenant as
provided by the terms of Section 7.02 of this Lease, which charge shall be paid
by Tenant to Landlord, as additional rent, within fifteen (15) days following
the receipt of an invoice. Landlord shall also furnish janitorial services to
the Premises in accordance with the Janitorial Specifications set forth in
Exhibit "G", attached.
(b) In addition to the obligations as set forth and described in the
Lease, Landlord hereby covenants and warrants to:
(i) maintain the Building Systems, including, without limitation, their
availability to the Premises, in good working order and repair;
(ii) maintain the outside walls, outside windows, roof, foundation and
other structural portions of the Premises and the Building and the garage
in good order and repair;
(iii) cause such of the Common Areas as are exposed to the elements to
be properly drained and kept reasonably free from ice and snow;
(iv) maintain the parking lot, parking garage and landscaping (if any)
of the Outside Common Areas in a good and clean condition and repair;
(v) maintain adequate facilities such that utility services, including
water, sewer, electricity, and telephone services, are and shall continue
to be available to the Building throughout the Lease term, subject,
however, to the provisions of Section 20.02, below;
(vi) maintain adequate parking facilities for the Building in
compliance with municipal requirements;
(vii) maintain reasonable elevator service to the Premises;
20.02 INTERRUPTION OF SERVICE
No diminution or abatement of rent or other compensation shall be
claimed or allowed for inconvenience or discomfort arising from the making of
repairs or improvements to the Building or its appurtenances; provided, however
that the same do not materially interfere with Tenant's reasonable access to and
from the Premises, or otherwise interfere in any material way with Tenant's
ability to conduct its normal business operations from the Premises. Except as
hereinafter provided, there shall be no diminution or abatement of rent or any
other compensation for interruption or curtailment of any service or utility
herein expressly or impliedly agreed to be furnished by Landlord when such
interruption or curtailment shall be due to accident, alterations, repairs
desirable or necessary, or to inability or difficulty in securing supplies or
labor, or to some other cause not negligence on the part of Landlord or of any
Landlord Party. No such interruption or curtailment shall be deemed a
constructive eviction. Tenant agrees that Landlord shall not be responsible for
interruption of utility service caused by any utility company or governmental
regulatory agency. Anything contained in the foregoing to the contrary
notwithstanding, if any interruption or curtailment of service, or other
condition of the Premises or any part of the Building
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or the Building Common Areas or Outside Common Areas shall unreasonably
interfere with Tenant's access to and from the Premises and/or Tenant's normal
business operations at the Premises, and such condition shall continue for more
than three (3) consecutive Business Days, or for more than ten (10)
nonconsecutive Business Days during any thirty (30) day period, all obligation
of Tenant to pay Fixed Monthly Rent, Additional Rent and/or other charges
hereunder shall abate until the services are restored in full and/or the
condition is remedied such that Tenant's access and/or business operations may
resume to normal operations.
ARTICLE 21
CERTAIN RIGHTS
RESERVED TO LANDLORD
21.01 CERTAIN RIGHTS RESERVED TO LANDLORD
Landlord reserves the following rights:
(a) To name the Building and to change the name or street address of
the Building, provided that the Building shall not be named for a person or
entity whose business is in competition with Tenant;
(b) To install and maintain a sign or signs on the exterior or interior
of the Building;
(c) To designate all sources furnishing sign painting, and lettering,
and like services used on the Premises;
(d) During the last ninety (90) days of the term, if during or prior to
that time Tenant vacates the Premises, upon at least five (5) business days
prior written notice to Tenant, to decorate, remodel, repair, alter or otherwise
prepare the Premises for reoccupancy, including the placing of a notice of
reasonable size on or in the Premises offering said Premises "For Rent" or "For
Lease", all without affecting Tenant's obligation to pay Fixed Monthly Rental
for the Premises, but such entry and work shall be at LANDLORD'S SOLE RISK, and
Landlord hereby acknowledges and agrees that Landlord, by such entry, waives any
and all claim of any kind or nature against Tenant or Tenant's insurance carrier
for any condition of the Premises, Additional Rent accruing after such date,
and/or any injury to person (including death) occurring on, in or about the
Premises; Tenant may require that Landlord acknowledge the foregoing in a signed
writing before permitting Landlord to commence any such work;
(e) To constantly have pass keys to the Premises;
(f) At any time in the event of an emergency, or otherwise at
reasonable times upon reasonable prior written notice to Tenant and subject to
all other provisions of this Lease, to take any and all reasonable measures,
including inspections, repairs, alterations, additions and improvements to the
Premises or to the Building, as may be reasonably necessary for the safety,
protection or preservation of the Premises or the Building or the Landlord's
interests, or as may be
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necessary in the operations or improvement of the Building or in order to comply
with all laws, orders and requirements of governmental or other authority; and
Nothing in this Lease shall imply any duty on the part of the Landlord
to do work which, under any of the provisions of this Lease Tenant may be
required to perform, and the performance thereof by Landlord shall not
constitute a constructive eviction nor a waiver of Tenant's default in failing
to so perform. In the event Landlord performs or causes any such work to be
performed following appropriate notice to Tenant as may be required by the terms
of this Lease, Tenant shall pay the reasonable and actual cost thereof to
Landlord forthwith as additional rent upon receipt of Landlord's invoice
therefor, including reasonable supporting documentation of all amounts spent. No
exercise by Landlord of any rights provided in this paragraph 21.01 or elsewhere
in this Lease shall entitle Tenant to any damages for inconvenience,
disturbance, loss of business or other damage to Tenant occasioned thereby nor
to any abatement of rent or additional rent, except as may be provided otherwise
by the terms of this Lease.
ARTICLE 22
MISCELLANEOUS PROVISIONS
22.01 HOLDOVER
Should Tenant continue to occupy the Premises after the expiration of
the term hereof or after a forfeiture incurred, whether with or against the
consent of Landlord, such tenancy shall be from month-to-month, and such
month-to-month tenancy shall be under all the terms, covenants and conditions of
this Lease, and at one and one-half (1 and 1/2) times the fixed monthly rent
reserved herein.
22.02 LIMITATION ON PERSONAL LIABILITY
(a) It is understood and agreed that Tenant shall look solely to the
estate and property of Landlord in the Building, the Outside Common Areas
(including, without limitation, the garage and any adjacent property owned by
Landlord and/or its affiliates, to the extent the same are used in connection
with the Building and/or the Outside Common Areas, the costs of which are
included as part of Operating Costs, together with any "Proceeds", hereinafter
defined), for the satisfaction of Tenant's remedies for the collection of a
judgment (or other judicial process) requiring the payment of money by Landlord
in the event of any default or breach by Landlord with respect to any of the
terms, covenants and conditions of this Lease to be observed and/or performed by
Landlord and any other obligation of Landlord created by or under this Lease and
no other property or assets of Landlord or of its partners, beneficiaries,
co-tenants, shareholders, or principals (as the case may be) shall be subject to
levy, execution or other enforcement procedures. For purposes of this Section
22.02, "Proceeds" shall mean:
(i) proceeds of sale by Landlord of its interest in the Building, the
Outside Common Areas (including, without limitation, the garage and any
adjacent property the costs of which are included as part of Operating
Costs, hereinafter, "Garage" and "Adjacent Property", respectively), or any
portions thereof, to the extent such sums are in excess of
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sums necessary to discharge or pay-off any third party outstanding loan,
including reasonable expenses paid by Landlord in connection with the sale;
(ii) condemnation awards received by Landlord in connection with the
taking the Building, the Outside Common Areas, the Garage and any Adjacent
Property (or portions thereof), to the extent said proceeds are made
available to Landlord by any holder of any outstanding mortgage or other
lien on such property, and are not used for the repair the Building so
taken; and
(iii) insurance proceeds received by Landlord in connection with any
damage or destruction to the Building, the Outside Common Areas, the Garage
and any Adjacent Property (or portions thereof), to the extent said
proceeds are made available to Landlord by any holder of any outstanding
mortgage or other lien on such property and are not used for the repair or
restoration of the Building or Property so damaged.
(b) The term "Landlord," as used in subparagraph 22.02(a) above and
throughout this Lease, so far as covenants and agreements on the part of the
Landlord are concerned, shall be limited to mean and include only the owner or
owners at the time in question of the Building and Lease. Further, in the event
of any transfer or transfers of the title to the said Lease and/or the Building,
upon the express written assumption of all of the obligations of "Landlord"
hereunder by the grantee of such interest (a copy of which must be delivered to
Tenant), Landlord herein named (and in case of any subsequent transfers or
conveyances, the then grantor), including each of its partners, beneficiaries,
co-tenants, shareholders, or principals (as the case may be), shall be
automatically freed and relieved from and after the effective date of such
assumption made in connection with such transfer and conveyance of the accrual
of any further liability as respects the performance of any covenants and
agreements on the part of Landlord. Landlord or the grantor shall turn over to
the grantee all monies and security, if any, then held by Landlord or such
grantor on behalf of Tenant and shall assign to such grantee all right, title
and interest of Landlord or such grantor thereto, it being intended that the
covenants and agreements contained in this Lease on the part of Landlord to be
performed shall, subject as aforesaid, be binding on Landlord, its successors
and assigns.
22.03 NO REPRESENTATIONS BY LANDLORD
Landlord or Landlord's agents have made no representations or promises
with respect to the Building, the land upon which the Building is erected or the
Premises except as herein expressly set forth in the provisions of this Lease.
22.04 LEASE BINDING
All covenants of this Lease (other than those regarding the payment of
Fixed Monthly Rent, Additional Rent or other charges) which are binding upon
Tenant shall be construed to be equally applicable to and binding upon Tenant's
agents, employees and others claiming the right to be in the Premises or in the
Building through or under Tenant.
If more than one individual, firm or corporation shall join as Tenant,
the singular context shall be construed to be plural wherever necessary and the
covenants of Tenant shall be the joint and several obligations of each entity
named as Tenant, and, when the parties named as
32
<PAGE> 33
Tenant are partners, shall be the joint and several obligations of the firm and
of the individual members thereof.
22.05 VAULTS, VAULT SPACE, ETC.
No vaults, vault space or space not within the property line of the
Building is leased hereunder, anything contained in or indicated on any sketch,
blueprint or plan, or anything contained elsewhere in this Lease to the contrary
notwithstanding. Landlord makes no representations as to the location of the
property line of the Building. All vaults and vault space and all space not
within the property line of the Building, which Tenant may be permitted to use
and/or occupy, is to be used and/or occupied under a revocable license, and if
any such license be revoked, or if the amount of such space be diminished or
required by any Federal, State, Municipal Authority or public utility, Landlord
shall not be subject to any liability nor shall Tenant be entitled to any
compensation or diminution or abatement of rent, nor shall such revocation,
diminution or requisition be deemed constructive or actual eviction. Any fee or
charge of municipal authorities for and attributable to any vault space, or
portion thereof, actually used by Tenant, only, shall be paid by Tenant.
22.06 FAILURE TO GIVE POSSESSION
If the Building is not in the course of construction, and Landlord is
unable to give possession of the Premises on the Term Commencement Date by
reason of the holding over or retention of possession of any tenant, tenants, or
occupants or for any other reason, or if repairs, improvements or decoration of
the Premises or of the Building are not completed, such inability by Landlord
shall not constitute a default under this Lease but the Term Commencement Date
shall be postponed until such date as such holdover tenant or occupant shall
give up possession of the Premises and the term of this Lease shall be deemed to
commence on such Term Commencement Date as postponed (and the termination date
of the term of the Lease shall be extended by the same period as the Term
Commencement Date is postponed). Anything contained in the foregoing to the
contrary notwithstanding, if Landlord's Work is not Substantially Completed and
possession of the Premises delivered to Tenant by the expiration of one hundred
and twenty (120) days following the later to occur of (i) the Lease Date, and
(ii) Landlord's receipt of Tenant's proposed floor plan for the Premises; and
any delay in Substantial Completion shall not be due to Force Majeure (not to
exceed an aggregate of fifteen (15) business days), nor to any act or omission
of Tenant, Tenant's contractors, agents or employees (collectively, "Tenant
Delay"), then, in such case, Tenant shall receive one (1) day of free Minimum
Rent for each day expiring between the expiration said one hundred and twenty
(120) day period (as may have been extended due to Force Majeure or Tenant
Delay) and the date on which Tenant receives "Landlord's Notice of Substantial
Completion" (defined in Section 2.02(b)). If Landlord's Work is not
Substantially Completed by the expiration of one hundred and eighty (180) days
following the Lease Date, then, until Tenant shall receive Landlord's Notice of
Substantial Completion in accordance with the provisions of Section 2.02, Tenant
shall have the option to terminate upon written notice to Landlord.
22.07 RELOCATION OF TENANT
INTENTIONALLY DELETED.
33
<PAGE> 34
22.08 FORCE MAJEURE
The period of time during which either party is prevented or delayed,
in the performance or the making of any improvements or repairs or fulfilling
any obligation other than the payment of fixed monthly rent or additional rent
required under this Lease due to unavoidable delays caused by fire, catastrophe,
strikes or labor trouble, civil commotion, Acts of God or the public enemy,
governmental prohibitions or regulation or inability to obtain materials by
reason thereof, or other causes beyond such party's reasonable control, shall be
added to such party's time for performance thereof, and such party shall have no
liability by reason thereof, subject to the express terms of this Lease.
22.09 ATTORNMENT BY TENANT
If at any time during the term of this Lease Landlord hereunder shall
be the holder of a leasehold estate covering premises which include the Premises
and if such leasehold estate shall be cancelled or otherwise terminated prior to
the expiration date thereof and prior to the expiration of the term of this
Lease or in the event of the surrender thereof whether voluntary, involuntary or
by operation of law, Tenant shall make full and complete attornment to the
lessor of such leasehold estate for the balance of the term of this Lease upon
the same covenants and conditions as are contained herein upon the written
assumption of the respective lessor of all of the obligations of "Landlord"
hereunder (a copy of which must be provided to Tenant), so as to establish
direct privity between such lessor and Tenant and with the same force and effect
as though this Lease was made directly from such lessor to the Tenant. As of the
effective date of the assumption, Tenant shall make all rent payments thereafter
directly to such lessor, and Landlord waives any right to recover the same from
Tenant. In the event any proceedings are brought for the foreclosure of, or in
the event of conveyance by deed in lieu of foreclosure of, or in the event of
exercises of the power of sale under any mortgage or deed of trust made by
Landlord covering the leases Premises, or in the event Landlord sells, conveys
or otherwise transfers its interest in the Building or any portion thereof
containing the leased Premises, upon Tenant's receipt of evidence that the
respective transferee has assumed all of the obligations of "Landlord" under
this Lease, Tenant shall attorn to and hereby covenants and agrees to execute an
instrument in writing reasonably satisfactory to the new owner whereby Tenant
attorns to such successor in interest and recognizes such successor as the
Landlord under this Lease.
22.10 LANDLORD MAY PAY TENANT'S OBLIGATIONS
All costs and expenses which Tenant assumes or agrees to pay under the
provisions of this Lease shall at Landlord's election be treated as additional
rent, and in the event of nonpayment, subject to any applicable period of notice
or cure, Landlord shall have all the rights and remedies herein provided for in
case of nonpayment of rent or of a breach of covenant. If Tenant shall default
in making any payment required to be made by Tenant (other than the payment of
rent as provided by Article 3 above), said failure continuing for more than ten
(10) days following Tenant's receipt of written notice thereof from Landlord, or
shall default in performing any term, covenant or condition of this Lease on the
part of Tenant to be performed which shall involve the expenditure of money by
Tenant, continuing for more than thirty (30) days following Tenant's receipt of
written notice thereof from Landlord, then, Landlord at Landlord's option may,
but shall not be obligated to, make such payment or, on behalf of Tenant, expend
such sum as may
34
<PAGE> 35
be reasonably necessary to perform and fulfill such term, covenant or condition,
and any and all sums so expended by Landlord, with interest thereon at the
"Lease Rate" defined in Section 3.03, above, from the date of such expenditure,
shall be and be deemed to be additional rent, in addition to the rent provided
in Article 3 and shall be repaid by Tenant to Landlord on written demand
(including reasonable supporting documentation of all amounts), but no such
payment or expenditures by Landlord shall be deemed a waiver of Tenant's default
nor shall it affect any other remedy of Landlord by reason of such default.
22.11 DEFINITION OF "TENANT'S ALLOCABLE SHARE"
(a) For purposes of determining Tenant's Allocable Share herein, except
as provided in subparagraph(b) below, such share shall be the percentage
resulting from dividing the number of square feet set forth in Paragraph 1.01
above, by the total number of square feet leaseable in the Building as of the
beginning of each lease year or partial lease year. As of the Lease Date, the
Building contains 108,000 leaseable square feet of premises.
(b) For purposes of determining Tenant's Allocable Share for Paragraph
3.02, such share shall be the percentage resulting from dividing the number of
square feet set forth in Paragraph 1.01 above, by the total number of square
feet leaseable in the Building as of the beginning of each lease year or partial
lease year.
22.12 DIVISION OF COST
Landlord may construct and operate other office buildings located
adjacent to the Building and Tenant agrees that Landlord may treat the Building
and the adjacent buildings as one unit for the purpose of purchasing and
providing energy and water, insurance and common services included within the
definition of Operating Costs. Landlord shall equitably allocate such costs
between the Building and the adjacent building(s) for each lease year or partial
lease year.
22.13 EFFECT OF CAPTIONS
The captions or legends on this Lease are inserted only for convenient
reference or identification of the particular paragraphs. They are in no way
intended to describe, interpret, define or limit the scope, extent or intent of
this Lease, or any paragraph or provision thereof.
22.14 AUTHORIZED TO DO BUSINESS IN NEW YORK
Landlord and Tenant represent and covenant to the other that it is and
throughout the term of this Lease shall be authorized to do business in the
State of New York. Landlord further represents and warrants that it is the owner
of the Building and the Outside Common Areas as of the Lease Date and that it
has full power and authority to enter into to this Lease and to perform all of
the obligations of "Landlord" hereunder.
22.15 EXECUTION IN COUNTERPARTS
This Lease may be executed in one or more counterparts, any one or all
of which shall constitute but one agreement.
35
<PAGE> 36
22.16 MEMORANDUM OF LEASE
This Lease may not be recorded. Both parties agree that, if requested
by the other party, it shall execute a Memorandum of Lease in recordable form
pursuant to Section 291-c of the Real Property Law of the State of New York, the
recording of which shall be paid for by the requesting party.
22.17 LAW GOVERNING EFFECT AND GENDER
This Lease shall be construed in accordance with the laws of the State
of New York and shall be binding upon the parties hereto and their respective
legal representatives, successors and assigns except as expressly provided
otherwise. Use of the neuter gender shall be deemed to include the masculine or
feminine, as the sense requires. Any reference to successors and assigns of
Tenant is not intended to constitute a consent to any assignment by Tenant but
has reference only to those instances in which Landlord may later give consent
to a particular assignment as required by the provisions of Article 15 hereof.
22.18 AMENDMENTS
The parties hereto mutually agree that so long as a mortgage or any
extension thereof shall be a lien upon the Premises, they will not reduce the
rents from that provided for in this Lease, provide for payments of rents prior
to the time herein provided for, nor terminate said Lease prior to the end of
the term, except as otherwise provided in this Lease or otherwise permitted by
the provisions of the mortgage, without first obtaining the consent of the
mortgagee in writing, and that any such proposed modification or termination
without said mortgagee's consent shall be void as against said mortgagee.
22.19 COMPLETE AGREEMENT
This Lease (including the Addendum and Exhibits hereto) contains and
embraces the entire agreement between the parties hereto and it or any part of
it may not be changed, altered, modified, limited, terminated, or extended
orally or by any agreement between the parties unless such agreement be
expressed in writing, signed and acknowledged by the parties hereto, their legal
representative, successors or assigns, except as may be expressly otherwise
provided herein.
22.20 INVALIDITY OF PARTICULAR PROVISIONS
If any term or provision of this Lease or the application thereof to
any person or circumstances shall to any extent, be invalid or unenforceable,
the remainder of this Lease, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
22.21 EXECUTION OF LEASE BY LANDLORD
The submission of this document for examination and negotiation does
not constitute an offer to lease, or a reservation of, or option for, the
Premises and this document becomes effective and binding only upon the execution
and delivery hereof by Landlord and by
36
<PAGE> 37
Tenant. All negotiations, considerations, representations and understandings
between Landlord and Tenant are incorporated herein and may be modified or
altered only by agreement in writing between Landlord and Tenant, and no act or
omission of any employee or other agent of Landlord shall alter, change or
modify any of the provisions hereof.
22.22 RELATIONSHIP OF THE PARTIES
Nothing contained herein shall be deemed or construed by the parties
hereto nor by any third party as creating the relationship of principal and
agent or of partnership or of joint venture between the parties hereto, it being
understood and agreed that neither the method of computation of rent nor any
other provision herein contained, nor any acts of the parties hereto, shall be
deemed to create any relationship between the parties hereto other than Landlord
and Tenant.
22.23 GUARANTY OF LEASE
INTENTIONALLY DELETED.
22.24 OTHER PROVISIONS
There is attached hereto and incorporated herein an addendum containing
additional provisions to this Lease ("Addendum"), said Addendum consisting of
four (4) pages, containing Paragraphs (I) through (XVIII). Should there be or
arise any conflict between the foregoing provisions of the Lease and the
Addendum, the provisions of the Addendum shall in all instances govern and
control.
37
<PAGE> 38
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
LANDLORD: TENANT:
224 HARRISON ASSOCIATES, LLC APPLIED THEORY CORPORATION
By: /s/ John P. Funiciello By: /s/ Angelo A. Gencarelli III
-------------------------- ------------------------------------
Printed Name: John P. Funiciello Printed Name: Angelo A. Gencarelli III
Title: Member Title: Sr. Director of Accounting &
Controller
(Acknowledgement of TENANT)
STATE OF NEW YORK}
SS.:
COUNTY OF ONONDAGA}
On this 17th day of September, 1999, before me personally came Angelo
A. Gencarelli III, to me personally known, who, being by me duly sworn, did
depose and say that (s)he resides at 4007 Arrowhead Lane, Liverpool, New York,
that (s)he is the Senior Director of Accounting and Controller of APPLIED THEORY
CORPORATION, the corporation described in, and which executed the within Lease
as "Tenant"; and who further acknowledged to me that (s)he executed said Lease
for, on behalf and in the name of said corporation by and with the authorization
thereof.
/s/ Margaret A. Smallman
---------------------------------
NOTARY PUBLIC
(Acknowledgement of LANDLORD)
STATE OF NEW YORK}
SS.:
COUNTY OF ONONDAGA}
On this 17th day of September, 1999, before me personally came John P.
Funiciello, to me personally known, who, being by me duly sworn, did depose and
say that (s)he resides at 3184 Olive Drive, Baldwinsville, New York, that (s)he
is one (1) of the Members of 224 HARRISON ASSOCIATES, LLC, the entity named and
described in, and which executed, the within Lease as "Landlord"; and who
further acknowledged to me that (s)he executed said Lease for, on behalf and in
the name of said entity by and with the authorization thereof.
/s/ Margaret A. Smallman
--------------------------------
NOTARY PUBLIC
38
<PAGE> 1
Exhibit 10.3
LEASE
THIS LEASE is made and entered into as of the 3rd day of
September, 1999 (the "Lease Date"), by and between HAYWARD POINT EDEN I LIMITED
PARTNERSHIP, a Delaware limited partnership ("Landlord") and APPLIED THEORY
CORPORATION, a Delaware corporation ("Tenant").
THE PARTIES AGREE AS FOLLOWS:
1. PREMISES
1.1. Premises. Landlord leases to Tenant and Tenant hires and leases
from Landlord, on the terms, covenants and conditions hereinafter set forth, the
premises (the "Premises") designated in Exhibit A-1 attached hereto and
incorporated herein by this reference and commonly known as 4030 Point Eden Way,
Hayward, CA 94545, consisting of approximately 15,000 square feet of space
located in the easterly portion of the building shown in said Exhibit A-1 (the
"Building") in the Britannia Point Eden Business Park (the "Center") in the City
of Hayward, County of Alameda, State of California, together with the
nonexclusive right to use any common areas designated from time to time in any
Declaration of Covenants, Conditions and Restrictions or similar document
affecting the Center. The demising line separating the Premises from the balance
of the Building (and thus the final size and configuration of the Premises)
shall be subject to mutual approval by Landlord and Tenant in the course of the
development of plans and specifications for tenant improvements under Sections
2.3 and 2.4 and Exhibit C, subject to the process of preparation of plans and
specifications already in progress between Landlord and Thermage Inc. under a
lease dated August 4, 1999 for the westerly portion of the Building. The Center
and the location of the Building within the Center are shown in Exhibit A-2
attached hereto and incorporated herein by this reference. The real property on
which the Building is located (the "Property") and the real property on which
the Center is located are more particularly described in Exhibit B attached
hereto and incorporated herein by this reference. Landlord represents to Tenant
that the parking ratio for the Property is presently 3.74 parking spaces for
each 1,000 square feet of space in the two existing buildings on the Property
(although Landlord anticipates that this ratio will be reduced slightly by the
loss of a few parking spaces in connection with the installation of Tenant's
emergency generator as contemplated in Section 17.20 hereof), and Landlord
agrees to maintain on the Property throughout the term of this Lease, for use at
all times on a nonexclusive basis by Tenant and the other tenants and occupants
of the Property, parking spaces in at least the minimum quantities required
under applicable law from time to time.
1.2. Landlord's Reserved Rights. Landlord reserves the right from time
to time to (i) install, use, maintain, repair and replace pipes, ducts,
conduits, wires and appurtenant meters and equipment for service to other parts
of the Building above the ceiling surfaces, below the floor surfaces, within the
walls or leading through the Premises in locations which will not materially
interfere with Tenant's use thereof, (ii) relocate any pipes, ducts, conduits,
wires and appurtenant meters and equipment included in the Premises which are so
located or located elsewhere outside the Premises, (iii) make
<PAGE> 2
alterations or additions to the Building, (iv) construct, alter or add to other
buildings or improvements on the Property, (v) build adjoining to the Property,
and (vi) lease any part of the Property for the construction of improvements or
buildings. Landlord may modify or enlarge the Common Areas, alter or relocate
accesses to the Premises, or alter or relocate any common facility; provided,
however, that no such modification, alteration or relocation shall reduce the
number of parking spaces on the Property below the minimum quantities required
under applicable law from time to time. Notwithstanding any other provisions of
this Section 1.2, Landlord shall not exercise rights reserved to it pursuant to
this Section 1.2 in such a manner as to materially impair Tenant's access to and
from the Premises or Tenant's ability to conduct its activities in the normal
manner; provided, however, that the foregoing shall not limit or restrict
Landlord's right to undertake reasonable construction activity and Tenant's use
of the Premises shall be subject to reasonable temporary disruption incidental
to such activity diligently prosecuted.
2. TERM
2.1. Term. Tenant's obligation to pay rent and Operating Expenses under
this Lease shall commence on the earlier to occur of (i) the date which is one
hundred twenty (120) days after the date of Landlord's delivery of actual
possession of the Premises to Tenant (said 120-day period being herein called
the "Construction Period") or (ii) the date Tenant commences actual operation of
its business in the Premises, the earlier of such dates being herein called the
"Rent Commencement Date." The term of this Lease shall commence on the date of
Landlord's delivery of actual possession of the Premises to Tenant (the
"Commencement Date") and shall end on the day immediately preceding the date ten
(10) years after the Rent Commencement Date (the "Expiration Date"), unless
sooner terminated or extended as hereinafter provided.
2.2. Possession. Landlord shall deliver actual possession of the
Premises to Tenant immediately upon mutual execution of this Lease by Landlord
and Tenant. If Landlord fails to deliver actual possession of the Premises to
Tenant within five (5) days after the Lease Date, then the Construction Period
as defined in Section 2.1 shall be extended by one (1) day for each day by which
Landlord's delivery of actual possession of the Premises is delayed beyond five
(5) days after the Lease Date.
2.3. Plans and Specifications. Following the Lease Date, Tenant shall
promptly and diligently cause a space plan and proposed specifications for the
tenant improvements necessary for Tenant's contemplated use of the Premises to
be prepared and delivered to Landlord, after which both parties shall proceed
promptly and diligently, and shall cause their respective consultants to proceed
promptly and diligently, to develop detailed plans and specifications for such
tenant improvements, subject to mutual approval by Landlord and Tenant (which
approval shall not be unreasonably withheld, delayed or conditioned by either
party), and to cause such development and mutual approval of plans and
specifications to occur as promptly as reasonably practicable after the Lease
Date. Without limiting the generality of the foregoing obligation, each party
agrees to respond within ten (10) business days to any plans, specifications,
comments, change orders or other reasonable requests submitted in writing by the
other party, and agrees that failure to respond within such time period shall be
deemed an approval of the
2
<PAGE> 3
plans, specifications, comments, change order or other reasonable request
submitted by the other party. Following mutual approval of plans and
specifications, Landlord as to Landlord's Work and Tenant as to Tenant's Work
shall promptly submit such approved plans and specifications (and all working
drawings necessary to implement the same) to the appropriate governmental
authorities for issuance of all governmental permits and approvals necessary for
the construction of Landlord's Work and Tenant's Work, respectively, and shall
diligently pursue the issuance of such permits and approvals.
2.4. Construction. The respective obligations of Landlord and Tenant to
perform work to improve the Premises for occupancy are set forth in Exhibit C
attached hereto and incorporated herein by this reference. Except to the extent
of Landlord's Work as set forth in Exhibit C and in this Section 2.4, Landlord
is delivering the Premises to Tenant "AS IS," in their currently existing
condition, and shall have no other responsibilities or obligations with respect
to preparation of the Premises for Tenant's occupancy. Acceptance by Tenant of
possession of the Premises shall constitute acceptance by Tenant of the Premises
in their then existing condition, subject only to the completion of Landlord's
Work as set forth in Exhibit C and in this Section 2.4. With respect to
Landlord's Work, (a) within thirty (30) days after the Rent Commencement Date,
Tenant may furnish to Landlord a "punch list" identifying any items or matters
of Landlord's Work which are not constructed in accordance with the plans and
specifications approved under Section 2.3 and Exhibit C hereto and Landlord
shall promptly and diligently correct all such matters at its sole cost and
expense; and (b) Landlord warrants that Landlord's Work shall be free from
latent defects for a period of one (1) year after the Rent Commencement Date,
and if Landlord receives written notice from Tenant within such one-year period
of any latent defects in Landlord's Work which were not reasonably discoverable
during the thirty-day "punch list" period set forth in clause (a), Landlord
shall promptly and diligently correct such matters at Landlord's sole cost and
expense.
2.5. Acknowledgement Of Lease Commencement. Upon commencement of the
term of this Lease, Landlord and Tenant shall execute a written acknowledgement
of the Commencement Date, Rent Commencement Date, Expiration Date, square
footage of the Premises (determined in accordance with Section 3.1 (b) hereof)
and related matters, substantially in the form attached hereto as Exhibit D
(with appropriate insertions), which acknowledgement shall be deemed to be
incorporated herein by this reference. Notwithstanding the foregoing
requirement, the failure of one or both parties to execute such a written
acknowledgement shall not affect the determination of the Commencement Date,
Rent Commencement Date, Expiration Date, square footage of the Premises and
related matters in accordance with the provisions of this Lease.
2.6. Holding Over. If Tenant holds possession of the Premises after the
term of this Lease with Landlord's written consent, then except as otherwise
specified in such consent, Tenant shall become a tenant from month to month at
one hundred twenty-five percent (125%) of the rental and otherwise upon the
terms herein specified for the period immediately prior to such holding over and
shall continue in such status until the tenancy is terminated by either party
upon not less than thirty (30) days prior written notice. If Tenant holds
possession of the Premises after the term of this Lease without Landlord's
3
<PAGE> 4
written consent, then Landlord in its sole discretion may elect (by written
notice to Tenant) to have Tenant become a tenant either from month to month or
at will, at one hundred fifty percent (150%) of the rental (prorated on a daily
basis for an at-will tenancy, if applicable) and otherwise upon the terms herein
specified for the period immediately prior to such holding over, or may elect to
pursue any and all legal remedies available to Landlord under applicable law
with respect to such unconsented holding over by Tenant. Tenant shall indemnify
and hold Landlord harmless from any loss, damage, claim, liability, cost or
expense (including reasonable attorneys' fees) resulting from any delay by
Tenant in surrendering the Premises (except with Landlord's prior written
consent), including but not limited to any claims made by a succeeding tenant by
reason of such delay. Acceptance of rent by Landlord following expiration or
termination of this Lease shall not constitute a renewal of this Lease.
2.7. Options To Extend Term. Tenant shall have the option to extend the
term of this Lease, at the minimum rental set forth in Section 3.1 (c) and (d)
and otherwise upon all the terms and provisions set forth herein with respect to
the initial term of this Lease, for up to two (2) additional periods of five (5)
years each, commencing upon expiration of the initial term hereof. Exercise of
such option with respect to the first such extended term shall be by written
notice to Landlord at least six (6) months and not more than eight (8) months
prior to the expiration of the initial term hereof, exercise of such option with
respect to the second such extended term, if the first extension option has been
duly exercised, shall be by like written notice to Landlord at least six (6)
months and not more than eight (8) months prior to the expiration of the first
extended term hereof. If Tenant is in default hereunder (beyond any applicable
cure periods) on the date of any such notice or on the date any extended term is
to commence, then the option shall be of no force or effect, the extended term
shall not commence and this Lease shall expire at the end of the then current
term hereof (or at such earlier time as Landlord may elect pursuant to the
default provisions of this Lease). If Tenant properly exercises one or more
extension options under this Section, then all references in this Lease (other
than in this Section 2.7) to the "term" of this Lease shall be construed to
include the extension term(s) thus elected by Tenant. Except as expressly set
forth in this Section 2.7, Tenant shall have no right to extend the term of this
Lease beyond its prescribed term.
3. RENTAL
3.1. Minimum Rental.
(a) Tenant shall pay to Landlord as minimum rental for the
Premises, in advance, without deduction, offset, notice or demand, on or before
the Rent Commencement Date and on or before the first day of each subsequent
calendar month of the term of this Lease, the following amounts per month:
<TABLE>
<CAPTION>
Months Minimum Rental (approx rate per sq ft)
------ --------------------------------------
<S> <C>
001-012 $20,250.00 ($1.3500/sq ft)
013-024 21,060.00 ($1.4040/sq ft)
025-036 21,902.40 ($1.4602/sq ft)
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
037-048 22,778.50 ($1.5186/sq ft)
049-060 23,689.64 ($1.5793/sq ft)
061-072 24,637.23 ($1.6425/sq ft)
073-084 25,622.72 ($1.7082/sq ft)
085-096 26,647.63 ($1.7765/sq ft)
097-108 27,713.54 ($1.8476/sq ft)
109-120 28,822.08 ($1.9215/sq ft)
</TABLE>
If the obligation to pay minimum rental hereunder commences on other than the
first day of a calendar month or if the term of this Lease terminates on other
than the last day of a calendar month, the minimum rental for such first or last
month of the term of this Lease, as the case may be, shall be prorated based on
the number of days the term of this Lease is in effect during such month. If an
increase in minimum rental becomes effective on a day other than the first day
of a calendar month, the minimum rental for that month shall b e the sum of the
two applicable rates, each prorated for the portion of the month during which
such rate is in effect.
(b) The minimum rental amounts specified in this Section 3.1
are based upon an estimated area of 15,000 square feet for the Premises. If the
actual area of the Premises, when completed, is greater or less than such
estimated area, then the minimum rentals specified in this Section 3.1 shall be
adjusted proportionately to the change in the area of the Premises. For all
purposes under this Lease for which the square footage of the Premises is
relevant (including, but not limited to, this Section 3.1(b) and Section 5.1(b)
hereof), such square footage shall be as determined in good faith by Landlord's
architect on the following basis of measurement: to the exterior faces of
exterior walls, to the dripline of any overhangs (such as over a recessed entry
area) and to the centerline of any interior demising walls. To the extent there
are any common or shared facilities within the Building as measured in
accordance with the preceding sentence, the square footage of such facilities
shall be equitably apportioned among the tenants of the Building. The parties
presently anticipate that the only such common facility will be a shared
electrical closet, and that the square footage of that electrical closet will be
allocated in equal shares among the various leased premises in the Building
(half to the Premises and half to the remainder of the Building if, as will be
the case upon execution of this Lease, and for so long as there are two tenants
in the Building).
(c) If Tenant properly exercises its right to extend the term
of this Lease pursuant to Section 2.7 hereof, the minimum rental during the
first extended term shall be equal to the fair market rental value of the
Premises (as theretofore improved under Section 2.4 and Exhibit C), including
any cost-of-living adjustments or other rental increase provisions then
customary in the relevant market for comparable commercial leases, determined as
of the commencement of such extended term in accordance with this paragraph.
Upon Landlord's receipt of a proper notice of Tenant's exercise of its option to
extend the term of this Lease, the parties shall have sixty (60) days in which
to agree on the fair market rental (including any applicable rental increase
provisions) for the Premises (as theretofore improved under Section 2.4 and
Exhibit C) at the commencement of the first extended term for the uses permitted
hereunder. If the parties
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<PAGE> 6
agree on such fair market rental and rental increase provisions (if any), they
shall execute an amendment to his Lease stating the amount of the applicable
minimum monthly rental and any applicable rental increase provisions. If the
parties are unable to agree on such rental (including any applicable rental
increase provisions) within such sixty (60) day period, then within fifteen (15)
days after the expiration of such period each party, at its cost and by giving
notice to the other party, shall appoint a real estate appraiser with at least
five (5) years experience appraising similar commercial properties in the city
or county in which the Property is located, to appraise and set the fair market
rental and any applicable rental increase provisions for the Premises at the
commencement of the first extended term. If either party fails to appoint an
appraiser within the allotted time, the single appraiser appointed by the other
party shall be the sole appraiser. If an appraiser is appointed by each party
and the two appraisers so appointed are unable to agree upon a fair market
rental (and any appropriate rental increase provisions) within thirty (30) days
after the appointment of the second, they shall appoint a third qualified
appraiser within ten (10) days after expiration of such 30-day period; if they
are unable to agree upon a third appraiser, either party may, upon not less than
five (5) days notice to the other party, apply to the Presiding Judge of the
Superior Court for the county in which the Property is located for the
appointment of a third qualified appraiser. Each party shall bear its own legal
fees in connection with appointment of the third appraiser and shall bear
one-half of any other costs of appointment of the third appraiser and of such
third appraiser's fee. The third appraiser, however selected, shall be a person
who has not previously acted for either party in any capacity. Within thirty
(30) days after the appointment of the third appraiser, a majority of the three
appraisers shall set the fair market rental and any applicable rental increase
provisions for the first extended term and shall so notify the parties. If a
majority are unable to agree within the allotted time, (i) the three appraised
fair market rentals shall be added together and divided by three and the
resulting quotient shall be the fair market rental for the first extended term,
and (ii) the applicable rental increase provision shall be equal to the
mathematical average (or the nearest reasonable approximation thereto) of the
two rental increase provisions that are most closely comparable, which
determinations shall be binding on the parties and shall be enforceable in any
further proceedings relating to this Lease.
(d) If Tenant properly exercises its right to a second
extended term of this Lease pursuant to Section 2.7 hereof, the minimum rental
during such second extended term shall be determined in the same manner provided
in the preceding paragraph for the first extended term, except that the
determination shall be made as of the commencement of the second extended term.
3.2. Late Charge. If Tenant fails to pay when due rental or other
amounts due Landlord hereunder, such unpaid amounts shall bear interest for the
benefit of Landlord at a rate equal to ten percent (10%) per annum from the date
due to the date of payment. In addition to such interest, Tenant shall pay to
Landlord a late charge in an amount equal to six percent (6%) of any installment
of minimum rental and any other amounts due Landlord if not paid in full on or
before the fifth (5th) day after such rental or other amount is due. Tenant
acknowledges that late payment by Tenant to Landlord of rental or other amounts
due hereunder will cause Landlord to incur costs not contemplated by this Lease,
including, without limitation, processing and accounting charges and late
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<PAGE> 7
charges which may be imposed on Landlord by the terms of any loan relating
to the Property. Tenant further acknowledges that it is extremely difficult and
impractical to fix the exact amount of such costs and that the late charge set
forth in this Section 3.2 represents a fair and reasonable estimate thereof.
Acceptance of any late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to overdue rental or other amounts, nor shall such
acceptance prevent Landlord from exercising any other rights and remedies
available to it. Acceptance of rent or other payments by Landlord shall not
constitute a waiver of late charges or interest accrued with respect to such
rent or other payments or any prior installments thereof, nor of any other
defaults by Tenant, whether monetary or non-monetary in nature, remaining
uncured at the time of such acceptance of rent or other payments.
4. TAXES
4.1. Personal Property. Tenant shall be responsible for and shall pay
prior to delinquency all taxes and assessments levied against or by reason of
all alterations and additions and all other items installed or paid for by
Tenant under this Lease, and the personal property, trade fixtures and other
property placed by Tenant in or about the Premises. Upon written request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment
thereof. If at any time during the term of this Lease any of said alterations,
additions or personal property, whether or not belonging to Tenant, shall be
taxed or assessed as part of the Property, then such tax or assessment shall be
paid by Tenant to Landlord immediately upon presentation by Landlord of copies
of the tax bills in which such taxes and assessments are included, together with
evidence reasonably demonstrating that such taxes or assessments are in fact
assessed against Tenant's alterations, additions or personal property, and
shall, for the purposes of this Lease, be deemed to be personal property taxes
or assessments under this Section 4.1.
4.2. Real Property. To the extent the real property taxes and
assessments on the Premises are assessed separately from the remainder of the
Property, Tenant shall be responsible for and shall pay prior to delinquency all
such taxes and assessments levied against the Premises. Upon written request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment
thereof. To the extent the Premises are taxed or assessed as part of the
Property, such real property taxes and assessments shall constitute Operating
Expenses (as that term is defined in Section 5.2 of this Lease) and shall be
paid in accordance with the provisions of Article 5 of this Lease.
5. OPERATING EXPENSES
5.1. Payment Of Operating Expenses.
(a) Tenant shall pay to Landlord, at the time and in the
manner hereinafter set forth, as additional rental, an amount equal to twenty
percent (20%) ("Tenant's Operating Cost Share") of the Operating Expenses
defined in Section 5.2, subject to adjustment of Tenant's Operating Cost Share
from time to time pursuant to Section 5.1 (b), if applicable.
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<PAGE> 8
(b) Tenant's Operating Cost Share as specified in paragraph
(a) of this Section is based upon an estimated area of 15,000 square feet for
the Premises and upon an aggregate area of 75,000 square feet for the buildings
owned by Landlord on the Property. If the actual area of the Premises (when
completed) or of the buildings owned by Landlord on the Property, as determined
in accordance with Section 3.1 (b) hereof, differs from the assumed numbers set
forth above, then Tenant's Operating Cost Share shall be adjusted to reflect the
actual areas so determined.
(c) If Landlord constructs additional buildings on the
Property or on any adjacent property owned by Landlord and operated, for common
area purposes, on an integrated basis with the Property (hereinafter referred to
as an "Adjacent Property") from time to time, or elects (in Landlord's sole
discretion) to begin operating any such existing Adjacent Property on an
integrated basis with the Property for common area purposes, then Tenant's
Operating Cost Share shall be adjusted to be equal to the percentage determined
by dividing the gross square footage of the Premises as they then exist by the
gross square footage of all buildings located on the Property and on any such
applicable Adjacent Property. In determining said percentage, a building shall
be taken into account from and after the date on which a tenant first enters
into possession of the building or a portion thereof, and the good faith
determination of the gross square footage of any such building by Landlord's
architects shall be final and binding upon the parties. No costs or expenses
associated with or allocable to any such Adjacent Property or any buildings
thereon shall be included in Operating Expenses until the date on which the
square footage of the buildings on such Adjacent Property is taken into account
for the purpose of determining Tenant's Operating Cost Share. Landlord
represents to Tenant that it is Landlord's present intention to operate and
account for the Property separately from the balance of the Center for Operating
Expense purposes.
5.2. Definition Of Operating Expenses.
(a) Subject to the exclusions and provisions hereinafter
contained, the term "Operating Expenses" shall mean the total costs and expenses
incurred by Landlord for management, operation and maintenance of the Building
and the Property (and any Adjacent Property as to which the square footage of
buildings on such Adjacent Property is taken into account in determining
Tenant's Operating Cost Share as described above), including, without
limitation, costs and expenses of (i) insurance, property management,
landscaping and operations, repairs and maintenance of buildings and common
areas; (ii) all utilities and services; (iii) real and personal property taxes
and assessments or substitutes therefor, including (but not limited to) any
possessory interest, use, business, license or other taxes or fees, any taxes
imposed directly on rents or services, any assessments or charges for police or
fire protection, housing, transit, open space, street or sidewalk construction
or maintenance or other similar services from time to time by any governmental
or quasi-governmental entity, and any other new taxes on landlords in addition
to taxes now in effect; (iv) supplies, equipment, utilities and tools used in
management, operation and maintenance of the Property; (v) capital repairs,
replacements and improvements to the Property or the Building, amortized over
the reasonably estimated useful life thereof, which are not otherwise excluded
from Operating Expenses under any provision of Section 5.2(b) hereof and (aa)
which reduce or will cause future
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<PAGE> 9
reduction of other items of Operating Expenses for which Tenant is otherwise
required to contribute or (bb) which are required by law, ordinance, regulation
or order of any governmental authority or (cc) of which Tenant has use or which
benefit Tenant; and (vi) any other costs (including, but not limited to, any
parking or utilities fees or surcharges) paid by Landlord, as owner of the
Property or Building, pursuant to any applicable laws, ordinances, regulations
or orders of any governmental or quasi-governmental authority or pursuant to the
terms of any declarations of covenants, conditions and restrictions now or
hereafter affecting the Property (or any applicable adjacent property owned by
Landlord as described above). Operating Expenses shall not include any costs
attributable to increasing the size of or otherwise expanding the Building or
any other buildings on the Property or the cost of the work for which Landlord
is required to pay under Section 2.4 or Exhibit C. The distinction between items
of ordinary operating maintenance and repair and items of a capital nature shall
be made in accordance with generally accepted accounting principles applied on a
consistent basis. Notwithstanding any other provisions of this Section 5.2,
Landlord hereby agrees that (A) any management fee included as part of Operating
Expenses shall be reasonable, competitive and consistent with such fees as are
generally charged in the city and county in which the Building is located for
the management of properties of a nature and operation similar to those of the
Building and the Property; and (B) no cost, charge or expense charged to Tenant
as part of Operating Expenses is or shall be in any manner duplicative of any
cost, charge or expense charged to or payable by Tenant under any other
provision of this Lease or otherwise.
(b) Anything contained in the foregoing Section 5.2(a) to the
contrary notwithstanding, Operating Expenses shall not include:
(i) any costs attributable to increasing the size of
or otherwise expanding the Property, the Building or any of the other buildings
now or hereafter existing on the Property or comprising part of the Center, or
on any Adjacent Property, or the cost of the work for which Landlord is required
to pay under Section 2.4 or Exhibit C;
(ii) the cost to Landlord for any work or service
performed or utility provided in any instance for any tenant (including, but not
limited to, Tenant) or other occupant of the Building or of any other building
on the Property or in the Center or on any Adjacent Property from time to time,
to the extent either (A) Landlord receives direct payment or reimbursement for
such cost from the tenant(s) or occupant(s) to whom the work, service or utility
is provided or (B) the applicable work, service or utility would not ordinarily
be provided at Landlord's cost under a "net" lease structure such as that
reflected in this Lease and is instead provided to the applicable tenant or
occupant on what is in substance a "gross" or "full service" lease basis;
(iii) original construction costs of the Building or
of any other building on the Property or in the Center or on any Adjacent
Property from time to time;
(iv) debt service (interest and principal) on any
funds borrowed by Landlord, whether on a secured or unsecured basis;
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<PAGE> 10
(v) expenses for repairs, replacements or
improvements arising from the initial construction of the Building or of any
other building on the Property or in the Center or on any Adjacent Property from
time to time, to the extent such expenses are either (A) reimbursed to Landlord
by virtue of warranties from contractors or suppliers or (B) attributable to
deficiencies in the design or construction of such building(s), except
conditions resulting from ordinary wear and tear;
(vi) expenses for repairs to and/or maintenance of
the Building or any other building or other improvements on the Property or in
the Center or on any Adjacent Property from time to time, to the extent such
expenses are reimbursed to Landlord by proceeds of insurance (or would have been
eligible for such reimbursement by proceeds of insurance if Landlord had
maintained insurance satisfying the express insurance obligations imposed on
Landlord under this Lease), condemnation awards or any other cash reimbursements
received by Landlord; (vii) interest or penalties arising by reason of any
failure of Landlord to timely pay any Operating Expenses, taxes or utilities for
which Landlord is responsible under applicable law or under this Lease, except
to the extent such interest or penalties are imposed with respect to a late
payment occurring during a period in which Tenant is delinquent in the payment
of any monetary obligation of Tenant to Landlord under this Lease;
(viii) expenses for repairs or replacements to the
Building or any other building or other improvements on the Property or in the
Center or on any Adjacent Property from time to time, to the extent such
expenses are, in the reasonable judgment of Landlord's independent certified
public accountants, ordinarily required, under sound accounting principles and
practices consistent with the ordinary ownership and operation of commercial
office buildings, to be classified as capital expenditures, except that a
proportionate share of such expenses appropriately allocated to each Lease Year
(based on amortization of such expenses over the reasonably estimated useful
life of the applicable repair or replacement) may be included in Operating
Expenses for the Lease Year in which the applicable expenses are incurred and
for each subsequent Lease Year during the term of this Lease, and no amount in
excess of such proportionate share shall be included in Operating Expenses for
any Lease Year; and/or
(ix) costs incurred due to any violation by Landlord
of or any failure of Landlord to comply with (A) any term or condition of this
Lease or of any other lease relating to the Building or any other building on
the Property or in the Center or on any Adjacent Property, or (B) any law,
ordinance, code or governmental rule or regulation applicable to the Building,
the Property, the Center or any Adjacent Property, to the extent Landlord is
required to comply therewith under the terms of such law, ordinance, code or
governmental rule or regulation or under the terms of this Lease.
5.3. Determination Of Operating Expenses. On or before the Rent
Commencement Date and during the last month of each calendar year of the term of
this Lease ("Lease Year"), or as soon thereafter as practical, Landlord shall
provide Tenant notice of Landlord's good faith estimate of the Operating
Expenses for the ensuing Lease
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Year or applicable portion thereof. On or before the first day of each month
during the ensuing Lease Year or applicable portion thereof, beginning on the
Rent Commencement Date, Tenant shall pay to Landlord Tenant's Operating Cost
Share of the portion of such estimated Operating Expenses allocable (on a
prorata basis) to such month; provided, however, that if such notice is not
given in the last month of a Lease Year, Tenant shall continue to pay on the
basis of the prior year's estimate, if any, until the month after such notice is
given. If at any time or times it appears to Landlord that the actual Operating
Expenses will vary from Landlord's estimate by more than five percent (5%),
Landlord may, by notice to Tenant, revise its estimate for such year and
subsequent payments by Tenant for such year shall be based upon such revised
estimate.
5.4. Final Accounting For Lease Year.
(a) Within ninety (90) days after the close of each Lease
Year, or as soon after such 90-day period as practicable, Landlord shall deliver
to Tenant a statement of Tenant's Operating Cost Share of the Operating Expenses
for such Lease Year prepared by Landlord from Landlord's books and records,
which statement shall be final and binding on Landlord and Tenant, subject to
the provisions of Section 5.4(b) below. If on the basis of such statement Tenant
owes an amount that is more or less than the estimated payments for such
calendar year previously made by Tenant, Tenant or Landlord, as the case may be,
shall pay the deficiency to the other party within thirty (30) days after
delivery of the statement. Failure or inability of Landlord to deliver the
annual statement within such ninety (90) day period shall not impair or
constitute a waiver of Tenant's obligation to pay Operating Expenses, or cause
Landlord to incur any liability for damages.
(b) Tenant shall have the right to audit Landlord's books and
records with respect to all Operating Expenses claimed by Landlord with respect
to any Lease Year for which Tenant has any liability for Operating Expenses
under this Lease, subject to all the provisions of this paragraph (b). Such
audit right shall be exercisable only by written notice from Tenant to Landlord
within six (6) months after Tenant's receipt of Landlord's final statement of
actual costs for such Lease Year under Section 5.4(a) above, and shall be
exercisable only once with respect to any Lease Year. If Tenant fails to conduct
such an audit within six (6) months after Tenant's receipt of such final
statement for any Lease Year, then upon the expiration of such six (6) month
period, such final statement shall be deemed conclusive and final as between the
parties with respect to the items contained therein. If, following such audit,
it is determined that the amount actually paid by Tenant (through its payment of
estimated Operating Expenses and through any additional amount paid in response
to Landlord's final annual statement) with respect to such Lease Year is greater
or less than the amount property due for such Lease Year, then the amount of
such excess or shortfall shall be refunded or paid by the appropriate party to
the other party within twenty (20) days after the date such determination is
reached. All costs and expenses of such audit shall be borne by Tenant unless it
is determined, following such audit, that Tenant was overcharged for the
applicable Lease Year by more than five percent (5%) of Tenant's Operating Cost
Share of the actual Operating Expenses for such Lease Year, in which event
Landlord shall reimburse Tenant for all costs and expenses reasonably incurred
by Tenant in connection
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with the audit, which reimbursement shall be paid within twenty (20) days after
written demand from Tenant accompanied by reasonable supporting evidence of the
costs and expenses for which such reimbursement is claimed.
5.5. Proration. If the Rent Commencement Date falls on a day other than
the first day of a Lease Year or if this Lease terminates on a day other than
the last day of a Lease Year, the amount of Tenant's Operating Cost Share
payable by Tenant applicable to such first and last partial Lease Year shall be
prorated on the basis which the number of days during such Lease Year in which
this Lease is in effect bears to 365. The termination of this Lease shall not
affect the obligations of Landlord and Tenant pursuant to Section 5.4 to be
performed after such termination.
6. UTILITIES
6.1. Payment. Commencing with the Commencement Date and thereafter
throughout the term of this Lease, Tenant shall pay, before delinquency, all
charges for water, gas, heat, light, electricity, power, sewer, telephone, alarm
system, janitorial and other services or utilities supplied to or consumed in or
upon the Premises, including any taxes on such services and utilities. It is the
intention of the parties that all such services shall be separately metered to
the Premises. In the event that any of such services supplied to the Premises
are not separately metered, then the amount thereof shall be an item of
Operating Expenses and shall be paid as provided in Article 5. Landlord shall
cooperate in all reasonable respects with Tenant and with the local electrical
utility provider, particularly during (but not limited to) the development of
plans and specifications for the tenant improvements to be constructed in the
Premises, to ensure that the Building, tenant improvements and utility services
will be designed in such a manner as to meet Tenant's electrical power needs as
such needs are identified and described by Tenant to Landlord and the local
electrical utility provider in the course of such design process. Landlord
agrees that within the shared electrical closet for the Building, Tenant shall
have a separate electrical panel, with a separate disconnect, for provision of
electrical service solely to the Premises, which panel shall be installed as
part of the tenant improvements for the Premises. The parties acknowledge that
Tenant presently estimates that it will need at least 2000 amp, 480 volt
electrical service (and possibly 3000 amps or more) through such panel, but
further acknowledge that the primary responsibility for the installation and
provision of such service, once the necessary panel has been installed as part
of the tenant improvements, shall be with the local electrical utility provider.
6.2. Interruption. There shall be no abatement of rent or other charges
required to be paid hereunder and Landlord shall not be liable in damages or
otherwise for interruption or failure of any service or utility furnished to or
used in the Premises because of accident, making of repairs, alterations or
improvements, severe weather, difficulty or inability in obtaining services or
supplies, labor difficulties or any other cause. Notwithstanding the foregoing,
however, if there is an interruption or failure of any service or utility
furnished to or used in the Premises as a result of the negligence or willful
misconduct of Landlord or its agents or employees and if such interruption or
failure of service deprives Tenant of reasonable access to or use of the
Premises for a
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period of more than five (5) consecutive business days, then all rent payable by
Tenant hereunder shall be equitably abated, in proportion to the extent to which
Tenant's use of the Premises is impaired, during the period commencing with the
day following such fifth (5th) consecutive business day and ending on the day
that the applicable services are restored to such an extent that Tenant's access
to and use of the Premises are no longer subject to any material impairment.
7. ALTERATIONS
7.1. Right To Make Alterations. Tenant shall make no alterations,
additions or improvements to the Premises, other than interior non-structural
alterations costing less than Ten Thousand Dollars ($10,000.00) in each
instance, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld, conditioned or delayed. All such alterations,
additions and improvements shall be completed with due diligence in a
first-class workmanlike manner, in compliance with all applicable laws,
ordinances, rules and regulations and, in the case of alterations, additions or
improvements requiring Landlord's prior written consent hereunder, in compliance
with plans and specifications approved in writing by Landlord, such approval not
to be unreasonably withheld, conditioned or delayed. Any request for Landlord's
approval pursuant to this Section (following completion of the initial tenant
improvements in the Premises, which shall be governed by Sections 2.3 and 2.4
and Exhibit C) shall be responded to within five (5) business days after the
date of Landlord's receipt of Tenant's request for such approval, and if
Landlord fails to respond within such five (5) business days, Landlord's
approval shall be deemed conclusively to have been granted.
7.2. Title To Alterations. All alterations, additions and improvements
installed in, on or about the Premises shall be part of the Building and the
property of Landlord, unless Landlord elects to require Tenant to remove the
same upon the termination of this Lease; provided, however, that the foregoing
shall not apply to Tenant's equipment, furniture, trade fixtures and personal
property (collectively, "Tenant's Personal Property"), all of which items Tenant
may, at Tenant's expense, remove from the Premises. Tenant shall promptly and
diligently repair, at Tenant's sole cost and expense, any damage to the Premises
resulting from the installation or removal of Tenant's Personal Property.
7.3. Tenant Fixtures. Notwithstanding the provisions of Sections 7.1
and 7.2, Tenant may install, remove and reinstall trade fixtures without
Landlord's prior written consent, except that any fixtures which affect the
exterior or structural portions of the Building shall require Landlord's written
approval, which approval shall not be unreasonably withheld, conditioned or
delayed. The foregoing shall apply to Tenant's signs, logos and insignia, all of
which Tenant shall have the right to place and remove and replace solely with
Landlord's prior written consent as to location, size and composition. Tenant
shall immediately repair any damage caused by installation and removal of
fixtures under this Section 7.3. Landlord acknowledges that Tenant shall have
the right, at Tenant's sole cost and expense, to install monument identity
signage in front of the main entrance to the Premises and small identity signage
on or adjacent to the main entrance door to the Premises, subject to any
required municipal approvals and/or
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permitting (to be obtained at Tenant's sole cost and expense) and to any
established sign criteria generally enforced throughout the Center. Tenant shall
not be permitted to have any other signage on the exterior of the Building,
except that (a) during any period in which Tenant leases the entire Building or
(b) during any period in which any other tenant is permitted to have signage on
the exterior of the Building (other than identity signage comparable to that
otherwise permitted for Tenant under this Section 7.3), Tenant in either such
event shall also be permitted to place exterior signage on the facade of the
Building at Tenant's sole cost and expense, subject to any required municipal
approvals and/or permitting (to be obtained at Tenant's sole cost and expense)
and to any established sign criteria generally enforced throughout the Center.
7.4. No Liens. Tenant shall at all times keep the Premises free from
all liens and claims of any contractors, subcontractors, materialmen, suppliers
or any other parties employed either directly or indirectly by Tenant in
construction work on the Premises. Tenant may contest any claim of lien, but
only if, prior to such contest, Tenant either (i) posts security in the amount
of the claim, plus estimated costs and interest, or (ii) records a bond of a
responsible corporate surety in such amount as may be required to release the
lien from the Premises. Tenant shall indemnify, defend and hold Landlord
harmless against any and all liability, loss, damage, cost and other expenses,
including, without limitation, reasonable attorneys' fees, arising out of claims
of any lien for work performed or materials or supplies furnished at the request
of Tenant or persons claiming under Tenant.
8. MAINTENANCE AND REPAIRS
8.1. Landlord's Work.
(a) Landlord shall repair and maintain or cause to be repaired
and maintained those portions of the Building outside of the Premises, the
common areas of the Property and the Center, the lines and facilities for
delivery of Building systems (other than HVAC) and utilities to the perimeter of
the Premises (to the extent such lines and facilities are exterior to the
Premises or provide shared service to Tenant and to one or more other tenants or
occupants of the Building), and the roof, foundation, exterior walls and other
structural portions of the Building. The cost of all work performed by Landlord
under this Section 8.1 (a) shall be an Operating Expense hereunder, except to
the extent such work (i) is required due to the negligence of Landlord or any of
its agents or employees or of any other tenant of the Building, (ii) is a
service to a specific tenant or tenants, other than Tenant, for which Landlord
has received or has the right to receive full reimbursement, (iii) is a capital
expense not includible as an Operating Expense under Section 5.2 hereof, or (iv)
is required due to the negligence or willful misconduct of Tenant or its agents,
employees or invitees (in which event Tenant shall bear the full cost of such
work pursuant to the indemnification provided in Section 10.6 hereof). Tenant
knowingly and voluntarily waives the right to make repairs at Landlord's
expense, or to offset the cost thereof against rent, under any law, statute,
regulation or ordinance now or hereafter in effect, except to the limited extent
specifically provided in Section 8.1(b) hereof. In performing its work under
this Section 8.1, Landlord shall use reasonable efforts not to materially impair
Tenant's access to and from the Premises or Tenant's
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ability to conduct its activities in the Premises in the normal manner;
provided, however, that subject to the exercise of such reasonable efforts by
Landlord, the foregoing shall not limit or restrict Landlord's right to
undertake the maintenance and repair work that it is obligated to perform under
this Section 8. 1.
(b) If Landlord fails to perform any of Landlord's work under
Section 8.1(a) hereof with respect to any portion of the Premises, and if such
failure creates or permits to exist a condition which materially impairs
Tenant's access to or use of the Premises or creates a material risk of damage
to persons or property within the Premises, and if Landlord receives written
notice of such failure from Tenant and thereafter fails to commence performance
of the applicable work within ten (10) days after receipt of such notice or
fails, following such commencement, to pursue the applicable work diligently to
completion, then Tenant shall have the right to perform such work on behalf of
Landlord and Landlord shall reimburse Tenant for the reasonable out-of-pocket
expenses incurred by Tenant in performing such work within twenty (20) days
after Landlord's receipt of Tenant's invoice for such reimbursement, accompanied
by reasonable supporting documentation evidencing the expenses for which
reimbursement is claimed. Nothing in this Section 8.1(b) shall authorize or
permit Tenant to perform any obligations or work of Landlord under Section
8.1(a) with respect to Common Areas of the Center or with respect to any portion
of the Building or Property outside the boundaries of the Premises.
8.2. Tenant's Obligation For Maintenance.
(a) Good Order, Condition And Repair. By accepting possession
of the Premises, Tenant acknowledges that the Premises are in good and sanitary
order, condition and repair, subject to the provisions of Section 2.4 hereof.
Except as provided in Section 8.1 hereof, Tenant at its sole cost and expense
shall keep and maintain in good and sanitary order, condition and repair the
Premises and every part thereof, wherever located, including but not limited to
the signs, interior, the face of the ceiling over Tenant's floor space, HVAC
equipment and related mechanical systems serving the Premises (for which HVAC
and related equipment and systems Tenant shall enter into a service contract
with a person or entity designated or approved by Landlord), all doors, door
checks, windows, plate glass, door fronts, exposed plumbing and sewage and other
utility facilities, fixtures, lighting, wall surfaces, floor surfaces and
ceiling surfaces and all other interior repairs, foreseen and unforeseen, as
required, except to the extent caused by the negligence or willful misconduct of
Landlord, its agents or employees, in which event the required repairs shall to
that extent be performed by Landlord, and Landlord's sole cost and expense,
subject to the waiver of subrogation provisions in Section 10.4 hereof in the
case of any insured damage.
(b) Landlord's Remedy. If Tenant fails to make or perform
promptly any repairs or maintenance which are the obligation of Tenant hereunder
and such failure continues for more than ten (10) days after written notice from
Landlord to Tenant, Landlord shall have the right, but shall not be required, to
enter the Premises and make the repairs or perform the maintenance necessary to
restore the Premises to good and sanitary order, condition and repair. The cost
of such repairs shall be due and payable by Tenant to Landlord within twenty
(20) days after Tenant's receipt of a written invoice
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from Landlord, accompanied by reasonable supporting documentation evidencing the
expenses reflected in such invoice.
(c) Condition Upon Surrender. At the expiration or sooner
termination of this Lease, Tenant shall surrender the Premises, including any
additions, alterations and improvements thereto, broom clean, in good and
sanitary order, condition and repair, ordinary wear and tear and damage by
casualty (which shall be governed by Article 13 hereof) excepted, first,
however, removing all goods and effects of Tenant and all of Tenant's Personal
Property any and all fixtures and items required to be removed or specified to
be removed at Landlord's election pursuant to this Lease, and repairing any
damage caused by such removal. Tenant expressly waives any and all interest in
any personal property and trade fixtures not removed from the Premises by Tenant
at the expiration or termination of this Lease, agrees that any such personal
property and trade fixtures may, at Landlord's election, be deemed to have been
abandoned by Tenant, and authorizes Landlord (at its election and without
prejudice to any other remedies under this Lease or under applicable law) to
remove and either retain, store or dispose of such property at Tenant's cost and
expense, and Tenant waives all claims against Landlord for any damages resulting
from any such removal, storage, retention or disposal.
9. USE OF PREMISES
9.1. Permitted Use. Tenant shall use the Premises solely for a
twenty-four (24) hour data center or any other lawful purpose which does not
violate any recorded use restrictions applicable to the Building or the
Property, and for no other purpose.
9.2. [Omitted.]
9.3. No Nuisance. Tenant shall not use the Premises for or carry on or
permit upon the Premises or any part thereof any offensive, noisy or dangerous
trade, business, manufacture, occupation, odor or fumes, or any nuisance or
anything against public policy, nor interfere with the rights or business of any
other tenants or of Landlord in the Building or the Property, nor commit or
allow to be committed any waste in, on or about the Premises, nor make any other
unreasonable use of the Premises. Tenant shall not knowingly do or permit
anything to be done in or about the Premises, nor bring nor keep anything
therein, which will in any way cause the Premises to be uninsurable with respect
to the insurance required by this Lease or with respect to standard fire and
extended coverage insurance with vandalism, malicious mischief and riot
endorsements.
9.4. Compliance With Laws. Tenant shall not use the Premises or permit
the Premises to be used in whole or in part for any purpose or use that is in
violation of any applicable laws, ordinances, regulations or rules of any
governmental agency or public authority. Tenant shall keep the Premises equipped
with all safety appliances required by law, ordinance or insurance on the
Premises, or any order or regulation of any public authority because of Tenant's
particular use of the Premises. Tenant shall procure all licenses and permits
required for use of the Premises. Tenant shall use the Premises in strict
accordance with all applicable ordinances, rules, laws and regulations and shall
comply with all requirements of all governmental authorities now in force or
which may
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hereafter be in force pertaining to the use of the Premises by Tenant,
including, without limitation, regulations applicable to noise, water, soil and
air pollution, and making such nonstructural alterations and additions thereto
as may be required from time to time by such laws, ordinances, rules,
regulations and requirements of governmental authorities or insurers of the
Premises (collectively, "Requirements") because of Tenant's construction of
improvements in or other particular use of the Premises. Any structural
alterations or additions required from time to time by applicable Requirements
because of Tenant's construction of improvements in or other particular use of
the Premises shall, at Landlord's election, either (i) be made by Tenant, at
Tenant's sole cost and expense, in accordance with the procedures and standards
set forth in Section 7.1 for alterations by Tenant, or (ii) be made by Landlord
at Tenant's sole cost and expense, in which event Tenant shall pay to Landlord
as additional rent, within ten (10) days after demand by Landlord, an amount
equal to all costs incurred by Landlord in connection with such alterations or
additions. The judgment of any court, or the admission by Tenant in any
proceeding against Tenant, that Tenant has violated any law, statute, ordinance
or governmental rule, regulation or requirement shall be conclusive of such
violation as between Landlord and Tenant.
9.5. Liquidation Sales. Tenant shall not conduct or permit to be
conducted any auction, bankruptcy sale, liquidation sale, or going out of
business sale, in, upon or about the Premises or the Property, whether said
auction or sale be voluntary, involuntary or pursuant to any assignment for the
benefit of creditors, or pursuant to any bankruptcy or other insolvency
proceeding.
9.6. Environmental Matters. Without limiting the generality of Tenant's
obligations set forth in Section 9.4 of this Lease:
(a) Tenant shall not cause or permit any hazardous or toxic
substance or hazardous waste (as defined in any federal, state or local law,
ordinance or regulation applicable to such substances or wastes) (collectively,
"Hazardous Materials") to be brought upon, kept, stored or used on or about the
Property without the prior written consent of Landlord; provided, however, that
nothing in this Section 9.6 shall be construed to prohibit Tenant from keeping,
storing and using in and about the Premises ordinary commercial cleaning
products, lubricants and other similar products incidental to the conduct of
Tenant's business, so long as such products are kept, stored and used only in
commercially reasonable quantities consistent with the nature and extent of
Tenant's use thereof, in compliance with all applicable Environmental Laws (as
defined in paragraph (b) below), and only in such quantities, in such manner and
for such duration as will not violate any Environmental Laws or require any
regulatory authorizations, permits or approvals to be obtained.
(b) Tenant shall comply with all applicable laws, rules,
regulations, orders, permits, licenses and operating plans of any governmental
authority with respect to the receipt, use, handling, generation,
transportation, storage, treatment, release and/or disposal of Hazardous
Materials (collectively, "Environmental Laws") in the course of or in connection
with the conduct of Tenant's business on the Property, and shall provide
Landlord with copies of any and all permits, licenses, registrations and other
similar
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documents that authorize Tenant to conduct any such activities in connection
with Tenant's use of the Property.
(c) Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all claims, losses, damages, liabilities, costs, legal
fees and expenses of any sort arising out of or relating to (i) any failure by
Tenant to comply with any provisions of subparagraph (a) or (b) above, or (ii)
any receipt, use, handling, generation, transportation, storage, treatment,
release and/or disposal of any Hazardous Materials on or about the Property in
connection with Tenant's use or occupancy of the Property or as a result of any
intentional or negligent acts or omissions of Tenant or of any agent or employee
of Tenant.
(d) Landlord shall indemnify, defend and hold Tenant harmless
from and against any and all claims, losses, damages, liabilities, costs, legal
fees and expenses of any sort arising out of or relating to (i) the presence on
the Property of any Hazardous Materials present on the Property or in the
Building and/or Premises as of the Commencement Date (except to the extent their
presence is the result of any intentional or negligent acts or omissions of
Tenant or of any agent or employee of Tenant), and/or (ii) any unauthorized
release into the environment of Hazardous Materials to the extent they result
from the negligence of or willful misconduct or omission by Landlord or its
agents or employees.
(e) The provisions of this Section 9.6 shall survive the
termination of this Lease.
10. INSURANCE AND INDEMNITY
10.1. Insurance.
(a) Tenant shall procure and maintain in full force and effect
at all times during the term of this Lease, at Tenant's cost and expense,
comprehensive public liability and property damage insurance to protect against
any liability to the public, or to any invitee of Tenant or Landlord, arising
out of or related to the use of or resulting from any accident occurring in,
upon or about the Premises, with limits of liability of not less than (i) One
Million Dollars ($ 1,000,000.00) for injury to or death of one person, (ii)
Three Million Dollars ($3,000,000.00) for personal injury or death, per
occurrence, and (iii) Five Hundred Thousand Dollars ($500,000.00) for property
damage, or a combined single limit of public liability and property damage
insurance of not less than Five Million Dollars ($5,000,000.00). Such insurance
shall name Landlord and its general partners, Managing Agent and lender(s) as
additional insureds thereunder. The amount of such insurance shall not be
construed to limit any liability or obligation of Tenant under this Lease.
(b) Tenant shall procure and maintain in full force and effect
at all times during the term of this Lease, at Tenant's cost and expense, an
"all risk" (or special form causes of loss) policy of casualty insurance,
insuring all alterations, additions and improvements installed by Tenant in or
about the Building or the Property (including, but
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not limited to, the initial tenant improvements constructed by Tenant under
Section 2.4 and Exhibit C) and all Tenant's Personal Property. Such insurance
shall be in the amount of the full replacement cost thereof (with no coinsurance
or, if coverage without co-insurance is not reasonably available, then on an
"agreed amount" basis), and may have such commercially reasonable deductibles
and other terms as Tenant in its discretion determines to be appropriate.
(c) Landlord shall procure and maintain in full force and
effect at all times during the term of this Lease, at Landlord's cost and
expense (but reimbursable as an Operating Expense under Article 5 hereof),
commercial general liability insurance to protect against liability arising out
of or related to the use of or resulting from any accident occurring in, upon or
about the Property, with combined single limit of liability of not less than
Five Million Dollars ($5,000,000) per occurrence for bodily injury and property
damage.
(d) Landlord shall procure and maintain in full force and
effect at all times during the term of this Lease, as Landlord's cost and
expense (but reimbursable as an Operating Expense under Article 5 hereof), an
"all risk" (or special form causes of loss) policy of casualty insurance,
insuring all improvements constructed by Landlord in or about the Premises, the
Building and the Property, including the Common Areas thereof. Such insurance
shall be in the amount of the full replacement cost thereof (with no
co-insurance or, if coverage without co-insurance is not reasonably available,
then on an "agreed amount" basis), may include earthquake coverage to the extent
Landlord in its discretion elects to carry such coverage, and may have such
commercially reasonable deductibles and other terms as Landlord in its
discretion determines to be appropriate. Landlord shall have no obligation to
carry property damage insurance for any alterations, additions or improvements
installed by Tenant in the Premises or on or about the Property, or for Tenant's
Personal Property.
10.2. Quality Of Policies And Certificates. All policies of insurance
required hereunder shall be issued by responsible insurers and, in the case of
policies carried or required to be carried by Tenant, shall be written as
primary policies not contributing with and not in excess of any coverage that
Landlord may carry. Tenant shall deliver to Landlord copies of policies or
certificates of insurance showing that said policies are in effect. The coverage
provided by such policies shall include the clause or endorsement referred to in
Section 10.4. If Tenant fails to acquire, maintain or renew any insurance
required to be maintained by it under this Article 10 or to pay the premium
therefor, then Landlord, at its option and in addition to its other remedies,
but without obligation so to do, may procure such insurance, and any sums
expended by it to procure any such insurance shall be repaid within ten (10)
days after Tenant's receipt of Landlord's demand (including reasonable
supporting documentation for the expenses claimed in such demand), with interest
as provided in Section 3.2 hereof. Tenant shall obtain written undertakings from
each insurer under policies required to be maintained by it to notify all
insureds thereunder at least thirty (30) days prior to cancellation, amendment
or revision of coverage.
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10.3. Workers' Compensation. Tenant shall maintain in full force and
effect during the term of this Lease workers' compensation insurance covering
all of Tenant's employees working on the Premises to the extent required by any
applicable laws.
10.4. Waiver Of Subrogation. To the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
(i) damages for injury to or death of persons, (ii) damage to property, (iii)
damage to the Premises, the Building, the Property or any parts thereof, or (iv)
claims arising by reason of any of the foregoing, but only to the extent that
any of the foregoing damages and claims under subparts (i)-(iv) hereof are
covered, and only to the extent of such coverage, by casualty insurance actually
carried or required to be carried hereunder by either Landlord or Tenant. This
provision is intended to waive fully, and for the benefit of each party, any
rights and claims which might give rise to a right of subrogation in any
casualty insurance carrier. Each party shall procure a clause or endorsement on
any casualty insurance policy required under this Article 10 denying to the
insurer rights of subrogation against the other party to the extent rights have
been waived by the insured prior to the occurrence of injury or loss. Coverage
provided by insurance maintained by Tenant or Landlord under this Article 10
shall not be limited, reduced or diminished by virtue of the subrogation waiver
herein contained.
10.5. Increase In Premiums. Tenant shall do all acts and pay all
expenses necessary to insure that the Premises are not used for purposes
prohibited by any applicable fire insurance, and that Tenant's use of the
Premises complies with all requirements necessary to obtain any such insurance.
If Tenant uses or permits the Premises to be used in a manner which increases
the existing rate of any insurance on the Premises carried by Landlord, Tenant
shall pay the amount of the increase in premium caused thereby, and Landlord's
costs of obtaining other replacement insurance policies, including any increase
in premium, within ten (10) days after Tenant's receipt of Landlord's written
demand therefor (including reasonable supporting documentation for the amounts
for which reimbursement is claimed).
10.6. Indemnification.
(a) Tenant shall indemnify, defend and hold Landlord, its
partners, shareholders, officers, directors, affiliates, agents, employees and
contractors, harmless from any and all liability for injury to or death of any
person, or loss of or damage to the property of any person, and all actions,
claims, demands, costs (including, without limitation, reasonable attorneys'
fees), damages or expenses of any kind arising therefrom which may be brought or
made against Landlord or which Landlord may pay or incur by reason of the use,
occupancy and enjoyment of the Premises by Tenant or any invitees, sublessees,
licensees, assignees, employees, agents or contractors of Tenant or holding
under Tenant, to the extent arising from any cause whatsoever other than
negligence or willful misconduct or omission by Landlord, its agents or
employees. Landlord, its partners, shareholders, officers, directors,
affiliates, agents, employees and contractors shall not be liable for, and
Tenant hereby waives all claims against such persons for, damages to goods,
wares and merchandise in or upon the Premises, or for injuries to
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Tenant, its agents or third persons in or upon the Premises, to the extent
arising from any cause whatsoever other than negligence or willful misconduct or
omission by Landlord, its agents or employees. Tenant shall give prompt notice
to Landlord of any casualty or accident in, on or about the Premises.
(b) Landlord shall indemnify, defend and hold Tenant, its
partners, shareholders, officers, directors, affiliates, agents, employees and
contractors, harmless from any and all liability for injury to or death of any
person or loss of or damage to the property of any person, and all actions,
claims, demands, costs (including, without limitation, reasonable attorneys'
fees), damages or expenses of any kind arising therefrom which may be brought or
made against Tenant or which Tenant may pay or incur, to the extent such
liabilities or other matters arise by reason of any negligence or willful
misconduct or omission by Landlord, its agents or employees.
10.7. Blanket Policy. Any policy required to be maintained hereunder
may be maintained under a so-called "blanket policy" insuring other parties and
other locations so long as the amount of insurance required to be provided
hereunder is not thereby diminished.
11. SUBLEASE AND ASSIGNMENT
11.1. Assignment And Sublease Of Premises.
(a) Except as otherwise expressly provided herein, Tenant
shall not have the right or power to assign its interest in this Lease, or make
any sublease, nor shall any interest of Tenant under this Lease be assignable
involuntarily or by operation of law, without on each occasion obtaining the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, conditioned or delayed. Any purported sublease or assignment of
Tenant's interest in this Lease requiring but not having received Landlord's
consent thereto shall be void. Without limiting the generality of the foregoing,
Landlord may withhold consent to any proposed subletting or assignment solely on
the ground that the use by the proposed subtenant or assignee is incompatible
with Landlord's use of the balance of the Building or Property. Any dissolution,
consolidation, merger or other reorganization of Tenant, or any sale or transfer
of the stock of or other interest in Tenant, or any series of one or more of
such events, involving in the aggregate a change of fifty percent (50%) or more
in the beneficial ownership of Tenant or its assets shall be deemed to be an
assignment hereunder and shall be void without the prior written consent of
Landlord as required above. Notwithstanding the foregoing provisions, however,
Tenant shall have the right to assign this Lease and/or to sublet all or any
portion of the Premises without the prior written consent of Landlord (but with
prior or concurrent written notice to Landlord), subject only to the provisions
of Section 11.2(a) below and not to the provisions of Section 11.2(b) or (c)
below, to (i) any corporation or other entity that is a parent, subsidiary or
affiliate of Tenant, or that controls, is controlled by or is under common
control with Tenant; (ii) any corporation or other entity that is a successor
(immediate or remote) to the initial Tenant named herein by merger or
consolidation in accordance with applicable law; or (iii) any purchaser of all
or substantially all of the assets or substantially all of the voting stock and
equity interests in Tenant.
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(b) Notwithstanding any other provisions of this Section 11.1,
Landlord acknowledges that as part of the ordinary course of Tenant's business,
Tenant permits customers or clients to maintain equipment owned by such
customers or clients on Tenant's premises and/or to share equipment and data
located or maintained on Tenant's premises. The parties agree that (i) so long
as Tenant's arrangements with such clients or customers are not called
"subleases" but are instead called licenses or some other form or arrangement
other than a sublease, such arrangements shall not be considered to be subleases
for purposes of this Section 11.1 and shall not trigger any obligation of Tenant
to Landlord under Section 11.2(c) hereof, (ii) any such arrangements which are
called "subleases" shall require Landlord's consent (not to be unreasonably
withheld, delayed or conditioned) but shall not trigger any obligation of Tenant
to Landlord under Section 11.2(c) hereof, (iii) any such arrangements shall be
evidenced by a written agreement between Tenant and the applicable client or
customer and such written agreement shall be expressly subordinate and subject
to the terms and provisions of this Lease, and (iv) Tenant shall remain fully
responsible to Landlord for the due and prompt performance of all obligations of
Tenant under this Lease for the entire Premises, notwithstanding any such
arrangements.
11.2. Rights Of Landlord.
(a) Consent by Landlord to one or more assignments of this
Lease, or to one or more sublettings of the Premises, or collection of rent by
Landlord from any assignee or sublessee, shall not operate to exhaust Landlord's
rights under this Article 11, nor constitute consent to any subsequent
assignment or subletting. No assignment of Tenant's interest in this Lease and
no sublease shall relieve Tenant of its obligations hereunder, notwithstanding
any waiver or extension of time granted by Landlord to any assignee or
sublessee, or the failure of Landlord to assert its rights against any assignee
or sublessee, and regardless of whether Landlord's consent thereto is given or
required to be given hereunder. In the event of a default by any assignee,
sublessee or other successor of Tenant in the performance of any of the terms or
obligations of Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against any such assignee,
sublessee or other successor. In addition, Tenant immediately and irrevocably
assigns to Landlord, as security for Tenant's obligations under this Lease, all
rent from any subletting of all or a part of the Premises as permitted under
this Lease, and Landlord, as Tenant's assignee, or any receiver for Tenant
appointed on Landlord's application, may collect such rent and apply it toward
Tenant's obligations under this Lease; except that, until the occurrence of an
Event of Default as defined in Section 14.1 hereof, Tenant shall have the
irrevocable right to collect such rent and to retain all sublease profits
(subject to the provisions of Section 11.2(b) and (c) below).
(b) Upon any assignment of Tenant's interest in this Lease for
which Landlord's consent is required under Section 11.1 hereof, Tenant shall pay
to Landlord, within fifteen (15) days after receipt thereof by Tenant from time
to time, one-half (1/2) of all cash sums and other economic considerations
received by Tenant in connection with or as a result of such assignment, after
first deducting therefrom (i) the unamortized cost of any leasehold improvements
previously made in the Buildings and paid for by
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Tenant, (ii) any costs incurred by Tenant for leasehold improvements (including,
but not limited to, third-party architectural and space planning costs) in the
Buildings in connection with such assignment, (iii) any real estate commissions
and/or attorneys' fees incurred by Tenant in connection with such assignment,
and (iv) any economic consideration received by Tenant as bona fide, reasonable
compensation for services rendered by Tenant to the assignee, for Tenant's
Personal Property (if sold or leased by Tenant to the assignee) and/or for
Tenant's business, goodwill, stock and/or other tangible or intangible items not
comprising part of the Premises and not reflecting the value of Tenant's
leasehold interest under this Lease or of the improvements and tangible assets
which are the property of Landlord under this Lease, all of which consideration
described in this clause (iv) shall remain the sole property of Tenant.
(c) Upon any sublease of all or any portion of the Buildings
for which Landlord's consent is required under Section 11.1 hereof, Tenant shall
pay to Landlord, within fifteen (15) days after receipt thereof by Tenant from
time to time, one-half (1/2) of all cash sums and other economic considerations
received by Tenant in connection with or as a result of such sublease, after
first deducting therefrom (i) the rental due hereunder for the corresponding
period, prorated (on the basis of the average per-square-foot cost paid by
Tenant for the entire Buildings for the applicable period under this Lease) to
reflect the size of the subleased portion of the Buildings, (ii) any costs
incurred by Tenant for leasehold improvements in the subleased portion of the
Buildings (including, but not limited to, third-party architectural and space
planning costs) for the specific benefit of the sublessee in connection with
such sublease, amortized over the term of the sublease, (iii) any real estate
commissions and/or attorneys' fees incurred by Tenant in connection with such
sublease, amortized over the term of such sublease, (iv) the unamortized cost of
any leasehold improvements previously made and paid for by Tenant with respect
to the subleased portion of the Buildings, and (v) any economic consideration
received by Tenant as bona fide, reasonable compensation for services rendered
by Tenant to the sublessee, for Tenant's Personal Property (if sold or leased by
Tenant to the sublessee) and/or for Tenant's business, goodwill, stock and/or
other tangible or intangible items (to the extent sold or leased by Tenant to
the sublessee) not comprising part of the Premises and not reflecting the value
of Tenant's leasehold interest under this Lease or of the improvements and
tangible assets which are the property of Landlord under this Lease, all of
which consideration described in this clause (v) shall remain the sole property
of Tenant.
12. RIGHT OF ENTRY AND QUIET ENJOYMENT
12.1. Right Of Entry. Landlord and its authorized representatives shall
have the right to enter the Premises at any time during the term of this Lease
during normal business hours and upon not less than twenty-four (24) hours prior
notice, except in the case of emergency (in which event no notice shall be
required and entry may be made at any time), for the purpose of inspecting and
determining the condition of the Premises or for any other proper purpose
including, without limitation, to make repairs, replacements or improvements
which Landlord may deem necessary, to show the Premises to prospective
purchasers, to show the Premises to prospective tenants, and to post notices of
nonresponsibility. Tenant shall have the right to require that Landlord or its
authorized
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representatives be accompanied by Tenant's designated agent or representative
during any permitted entry into the Premises hereunder. Landlord shall not be
liable for inconvenience, annoyance, disturbance, loss of business, quiet
enjoyment or other damage or loss to Tenant by reason of making any repairs or
performing any work upon the Premises, the Building or the Property, and the
obligations of Tenant under this Lease shall not thereby be affected in any
manner whatsoever, provided, however, Landlord shall use reasonable efforts to
minimize the inconvenience to Tenant's normal business operations caused
thereby.
12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the
rent and performing its obligations hereunder and subject to all the terms and
conditions of this Lease, shall peacefully and quietly have, hold and enjoy the
Premises throughout the term of this Lease, or until this Lease is terminated as
provided by this Lease.
13. CASUALTY AND TAKING
13.1. Termination Or Reconstruction. If during the term of this Lease
the entire Premises or Building, or any substantial part of either, (i) is
damaged materially by fire or other casualty or by action of public or other
authority in consequence thereof, (ii) is taken by eminent domain or by reason
of any public improvement or condemnation proceeding, or in any manner by
exercise of the right of eminent domain (including any transfer in avoidance of
an exercise of the power of eminent domain), or (iii) receives irreparable
damage by reason of anything lawfully done under color of public or other
authority, this Lease shall terminate as to the entire Premises at Landlord's
election by written notice given to Tenant within thirty (30) days after the
damage or taking has occurred. If Landlord so terminates the Lease, the Lease
shall terminate as of the date of the damage or taking, as the case may be, but
to the extent applicable and reasonable under the circumstances, Tenant shall be
permitted a reasonable period of time (not to exceed twenty (20) days in any
event) following any such termination by Landlord in which to remove Tenant's
Personal Property from the Premises. If Landlord does not elect to terminate
this Lease as hereinabove provided, Landlord shall repair any such damage and
restore the Premises (to the extent of Landlord's Work therein under Section 2.4
and Exhibit C) and the Building shell as nearly as reasonably possible to the
condition existing before the damage or taking and Tenant shall repair any such
damage and restore the Premises (to the extent of Tenant's Work therein under
Section 2.4 and Exhibit C) as nearly as reasonably possible to the condition
existing before the damage or taking, subject to the provisions of Section 13.4
hereof. If Landlord fails to commence its portion of the required restoration,
rebuilding or repair within sixty (60) days after the date of the damage or
taking, or if Landlord thereafter fails to diligently pursue its portion of the
required restoration, rebuilding or repair to completion and such failure
continues for more than ten (10) days after written notice from Tenant to
Landlord, then in either such event Tenant may terminate this Lease upon written
notice to Landlord; provided, however, that there shall be excluded from the
calculation of all applicable time periods under this sentence, and Landlord
shall not be deemed to be failing to diligently pursue required restoration,
rebuilding or repair by reason of, any periods of delay that are attributable to
further casualties, acts of God, unavailability of permits or materials, strikes
or other circumstances beyond the reasonable control of Landlord (but excluding
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any financial inability of Landlord, which shall not be deemed to be such a
circumstance).
13.2. Tenant's Rights. If any portion of the Premises is so taken by
condemnation, Tenant may elect to terminate this Lease if the portion of the
Premises taken is of such extent and nature as substantially to handicap, impede
or permanently impair Tenant's use of the balance of the Premises for the normal
operation of Tenant's business. Tenant must exercise its right to terminate by
giving notice to Landlord within thirty (30) days after Tenant receives written
notice from Landlord that the nature and extent of the taking have been finally
determined. If Tenant elects to terminate this Lease, Tenant shall also notify
Landlord of the date of termination, which date shall not be earlier than thirty
(30) days nor later than ninety (90) days after Tenant has notified Landlord of
its election to terminate, except that this Lease shall terminate on the date of
taking if the date of taking falls on any date before the date of termination
designated by Tenant.
13.3. Lease To Remain In Effect. If neither Landlord nor Tenant
terminates this Lease as hereinabove provided, this Lease shall continue in full
force and effect, except that minimum monthly rental and Tenant's Operating Cost
Share shall abate to the extent Tenant's use of the Premises for normal business
operations is impaired for any period that any portion of the Premises is
unusable or inaccessible because of Landlord's failure to complete Landlord's
portion of the required rebuilding, restoration or repair with respect to a
casualty or taking hereinabove described. Each party waives the provisions of
Code of Civil Procedure Section 1265.130, allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial condemnation of
the Premises.
13.4. Reservation Of Compensation.
(a) Landlord reserves, and Tenant waives and assigns to
Landlord, all rights to any award or compensation for damage to the Premises,
Building, Property and the leasehold estate created hereby, accruing by reason
of any taking in any public improvement, condemnation or eminent domain
proceeding or in any other manner by exercise of the right of eminent domain or
of anything lawfully done by public authority, except that Tenant shall be
entitled to any and all compensation or damages paid for or on account of (a)
Tenant's moving expenses, trade fixtures, equipment and any leasehold
improvements in the Premises, the cost of which was borne by Tenant, but only to
the extent of the then remaining unamortized value of such improvements computed
on a straight-line basis over the term of this Lease, and (b) such amounts (if
any) as may be payable by statute or ordinance or otherwise recoverable by
Tenant toward Tenant's damages for Tenant's loss of or interruption and/or
damage to business. Tenant covenants to deliver such further assignments of the
foregoing rights (other than those expressly reserved to Tenant as specified
herein) as Landlord may from time to time request.
(b) If this Lease is terminated under Section 13.1 as a result
of damage from fire or other casualty or from action of public or other
authority in consequence
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thereof, Tenant shall diligently pursue recovery under its insurance policy
described in Section 10.1 (b) hereof for damage to the tenant improvements
originally installed by Tenant in the Premises as part of Tenant's Work under
Section 2.4 and Exhibit C and shall pay over to Landlord in cash the amount of
all such insurance proceeds recovered by Tenant up to a maximum amount equal to
the unamortized portion of the portion of the TI Allowance (as defined in
Exhibit C) paid by Landlord for Tenant's Work in connection with the initial
construction of tenant improvements under Section 2.4 and Exhibit C, assuming
amortization of such amount on a straight-line basis over the primary term of
this Lease. Any insurance proceeds in excess of the amount payable to Landlord
pursuant to the preceding sentence shall be the sole property of Tenant.
13.5. Restoration Of Fixtures. If this Lease is not terminated pursuant
to the provisions of this Article 13 and Landlord repairs or causes repair of
the portion of the Premises for which Landlord is responsible under Section 13.1
after such damage or taking, Tenant at its sole expense shall, in addition to
the repair of the portion of the Premises for which Tenant is responsible under
Section 13.1 after such damage or taking, repair and replace promptly all
fixtures, equipment and other property of Tenant located at, in or upon the
Premises and all additions, alterations and improvements and all other items
installed or paid for by Tenant under this Lease that were damaged or taken, so
as to restore the Premises to a condition substantially equal to that which
existed immediately prior to the damage or taking; provided, however, that
nothing in this Section 13.5 shall require Tenant to repair, restore or replace
any improvements originally constructed by Landlord pursuant to Section 2.4 and
Exhibit C. Tenant shall have the right to make modifications to the Premises,
fixtures and improvements, subject to the prior written approval of Landlord. In
its review of Tenant's plans and specifications, Landlord may take into
consideration the effect of the proposed modifications on the exterior
appearance, the structural integrity and the mechanical and other operating
systems of the Building.
14. DEFAULT
14.1. Events Of Default. The occurrence of any of the following shall
constitute an event of default on the part of Tenant (an "Event of Default"):
(a) [Omitted.]
(b) Nonpayment. Failure to pay, when due, any amount payable
to Landlord hereunder, such failure continuing for a period of five (5) days
after Tenant's receipt of written notice from Landlord of such failure;
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 Section 1161 et
seq., as amended from time to time;
(c) Other Obligations. Failure to perform any obligation,
agreement or covenant under this Lease other than those matters specified in
subsection (b) hereof, such failure continuing for fifteen (15) days after
Tenant's receipt of written notice from Landlord of such failure, or, if it is
not reasonably possible to cure such default within fifteen (15) days, failure
to commence cure within said fifteen (15) day period and
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thereafter to proceed diligently to complete cure; 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 Section 1161 et sea., as amended from
time to time;
(d) General Assignment. A general assignment by Tenant for the
benefit of creditors;
(e) Bankruptcy. The filing of any voluntary petition in
bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of sixty
(60) days. In the event that under applicable law the trustee in bankruptcy or
Tenant has the right to affirm this Lease and continue to perform the
obligations of Tenant hereunder, such trustee or Tenant shall, in such time
period as may be permitted by the bankruptcy court having jurisdiction, cure all
defaults of Tenant hereunder outstanding as of the date of the affirmance of
this Lease and provide to Landlord such adequate assurances as may be necessary
to ensure Landlord of the continued performance of Tenant's obligations under
this Lease. Specifically, but without limiting the generality of the foregoing,
such adequate assurances must include assurances that the Premises continue to
be operated only for the use permitted hereunder. The provisions hereof are to
assure that the basic understandings between Landlord and Tenant with respect to
Tenant's use of the Premises and the benefits to Landlord therefrom are
preserved, consistent with the purpose and intent of applicable bankruptcy laws;
(f) Receivership. The employment of a receiver appointed by
court order to take possession of substantially all of Tenant's assets or the
Premises, if such receivership remains undissolved for a period of forty-five
(45) days;
(g) Attachment. The attachment, execution or other judicial
seizure of all or substantially all of Tenant's assets or the Premises, if such
attachment or other seizure remains undismissed or undischarged for a period of
forty-five (45) days after the levy thereof; or
(h) Insolvency. The admission by Tenant in writing of its
inability to pay its debts as they become due, the filing by Tenant of a
petition seeking any reorganization or arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, the filing by Tenant of an answer admitting or failing timely
to contest a material allegation of a petition filed against Tenant in any such
proceeding or, if within sixty (60) days after the commencement of any
proceeding against Tenant seeking any reorganization or arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such Proceeding shall not have
been dismissed.
14.2. Remedies Upon Tenant's Default
(a) Upon the occurrence of any Event of Default described in
Section 14.1 hereof, Landlord, in addition to and without prejudice to any other
rights or
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remedies it may have, shall have the immediate right to re-enter the Premises or
any part thereof and repossess the same, expelling and removing therefrom all
persons and property (which property may be stored in a public warehouse or
elsewhere at the cost and risk of and for the account of Tenant, as to which
Tenant hereby waives any claim for loss or damage that may thereby occur). In
addition to or in lieu of such re-entry, and without prejudice to any other
rights or remedies it may have, Landlord shall have the right either (i) to
terminate this Lease and recover from Tenant all damages incurred by Landlord as
a result of Tenant's default, as hereinafter provided, or (ii) to continue this
Lease in effect and recover rent and other charges and amounts as they become
due.
(b) Even if Tenant has breached this Lease or abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession under subsection (a) hereof and Landlord
may enforce all of its rights and remedies under this Lease, including the right
to recover rent as it becomes due, and Landlord, without terminating this Lease,
may exercise all of the rights and remedies of a lessor under California Civil
Code Section 1951.4 (lessor may continue lease in effect after lessee's breach
and abandonment and recover rent as it becomes due, if lessee has right to
sublet or assign, subject only to reasonable limitations), or any successor Code
section. Acts of maintenance, preservation or efforts to relet the Premises or
the appointment of a receiver upon application of Landlord to protect Landlord's
interests under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) If Landlord terminates this Lease pursuant to this Section
14.2, Landlord shall have all of the rights and remedies of a landlord provided
by Section 1951.2 of the Civil Code of the State of California, or any successor
Code section, which remedies include Landlord's right to recover from Tenant (i)
the worth at the time of award of the unpaid rent and additional rent which had
been earned at the time of termination, (ii) the worth at the time of award of
the amount by which the unpaid rent and additional 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, (iii) the
worth at the time of award of the amount by which the unpaid rent and additional
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided, and (iv) any
other amount necessary to compensate Landlord for all the detriment proximately
caused by Tenant's failure to perform its obligations under this Lease or which
in the ordinary course of things would be likely to result therefrom, including,
but not limited to, the cost of recovering possession of the Premises, expenses
of reletting, including necessary repair, renovation and alteration of the
Premises, reasonable attorneys' fees, and other reasonable costs. The "worth at
the time of award" of the amounts referred to in clauses (i) and (ii) above
shall be computed by allowing interest at ten percent (10%) per annum from the
date such amounts accrued to Landlord. The "worth at the time of award" of the
amounts referred to in clause (iii) above shall be computed by discounting such
amount at one percentage point above the discount rate of the Federal Reserve
Bank of San Francisco at the time of award.
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14.3. Remedies Cumulative. All rights, privileges and elections or
remedies of Landlord contained in this Article 14 are cumulative and not
alternative to the extent permitted by law and except as otherwise provided
herein.
15. SUBORDINATION, ATTORNMENT AND SALE
15.1. Subordination To Mortgage. This Lease, and any sublease entered
into by Tenant under the provisions of this Lease, shall be subject and
subordinate to any ground lease, mortgage, deed of trust, sale/leaseback
transaction or any other hypothecation for security now or hereafter placed upon
the Building, the Property, or both, and the rights of any assignee of Landlord
or of any ground lessor, mortgagee, trustee, beneficiary or leaseback lessor
under any of the foregoing, and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. If any mortgagee, trustee, beneficiary, ground lessor,
sale/leaseback lessor or assignee elects to have this Lease be an encumbrance
upon the Property prior to the lien of its mortgage, deed of trust, ground lease
or leaseback lease or other security arrangement and gives notice thereof to
Tenant, this Lease shall be deemed prior thereto, whether this Lease is dated
prior or subsequent to the date thereof or the date of recording thereof.
Tenant, and any sublessee, shall execute within ten (10) days after written
demand from Landlord such documents as may reasonably be requested by any
mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or
assignee to evidence the subordination herein set forth or to make this Lease
prior to the lien of any mortgage, deed of trust, ground lease, leaseback lease
or other security arrangement, as the case may be. Upon any default by Landlord
in the performance of its obligations under any mortgage, deed of trust, ground
lease, leaseback lease or assignment, Tenant (and any sublessee) shall,
notwithstanding any subordination hereunder, attorn to the mortgagee, trustee,
beneficiary, ground lessor, leaseback lessor or assignee thereunder upon demand
and become the tenant of the successor in interest to Landlord, at the option of
such successor in interest, and shall execute and deliver any instrument or
instruments confirming the attornment herein provided for. Notwithstanding any
other provisions of this Section 15.1, (a) Landlord shall use reasonable efforts
to obtain for Tenant, within sixty (60) days after the Lease Date, a
Non-Disturbance Agreement (as hereinafter defined) from the lender holding the
existing deed of trust on the Property, and (b) Tenant shall not be required to
subordinate this Lease to any future ground lease, mortgage, deed of trust,
sale/leaseback transaction or other security arrangement affecting the Property
unless Tenant receives, concurrently therewith, a Non-Disturbance Agreement from
the applicable ground lessor, mortgagee, trustee, beneficiary, sale/leaseback
lessor or other security holder. For purposes of the preceding sentence, a
"Non-Disturbance Agreement" shall mean a non-disturbance and attornment
agreement in commercially reasonable form which acknowledges the existence of
this Lease and of Tenant's rights hereunder, agrees that so long as no Event of
Default occurs and is continuing, Tenant's rights hereunder shall not be
disturbed, and does not materially increase Tenant's obligations or materially
decrease Tenant's rights hereunder.
15.2. Sale Of Landlord's Interest. Upon sale, transfer or assignment of
Landlord's entire interest in the Building and Property and the written
assumption by the purchaser, transferee or assignee of all obligations and
liabilities of Landlord accruing
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hereunder from and after the date of such sale, transfer or assignment, Landlord
shall be relieved of its obligations hereunder with respect to all such
liabilities accruing from and after the date of such sale, transfer or
assignment. Tenant shall be entitled to receive a copy of such written
assumption agreement from Landlord within ten (10) days after Tenant's written
request therefor.
15.3. Estoppel Certificates. Either party shall at any time and from
time to time, within ten (10) days after written request by the other party,
execute, acknowledge and deliver to the requesting party a certificate in
writing stating: (i) that this Lease is unmodified and in full force and effect,
or if there have been any modifications, that this Lease is in full force and
effect as modified and stating the date and the nature of each modification;
(ii) the date to which rental and all other sums payable hereunder have been
paid; (iii) that to the best of such party's knowledge, the requesting party is
not in default in the performance of any of its obligations under this Lease,
that the responding party has given no notice of default to the requesting party
and that no event has occurred which, but for the expiration of the applicable
time period, would constitute an event of default hereunder, or if the
responding party alleges that any such default, notice or event has occurred,
specifying the same in reasonable detail; and (iv) such other matters as may
reasonably be requested by the requesting party or any institutional lender,
mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or
prospective purchaser of the Property or of Tenant's leasehold interest, as the
case may be. Any such certificate provided under this Section 15.3 may be relied
upon by any lender, mortgagee, trustee, beneficiary, assignee or successor in
interest to Landlord or Tenant, as the case may be, by any prospective
purchaser, by any purchaser on foreclosure or sale, by any grantee under a deed
in lieu of foreclosure of any mortgage or deed of trust on the Property or
Premises, or by any other third party.
15.4. Subordination to CC&R's. This Lease, and any permitted sublease
entered into by Tenant under the provisions of this Lease, shall be subject and
subordinate (a) to any declarations of covenants, conditions and restrictions
affecting the Property as of the date of this Lease and to any other such
declarations hereafter recorded with respect to the Property from time to time,
provided that the terms of such future declarations are reasonable, do not
discriminate against Tenant relative to other similarly situated tenants
occupying portions of the Property and do not materially impair Tenant's use of
and reasonable access to and egress from the Premises, and (b) to the
Declaration of Covenants, Conditions and Restrictions dated June 20, 1979 and
recorded on July 5, 1979 as Instrument No. 79-130777, Alameda County Records, as
amended from time to time (the "Master Declaration"), the provisions of which
Master Declaration are an integral part of this Lease. Tenant agrees to execute,
upon request by Landlord, any documents reasonably required from time to time to
evidence such subordination.
16. SECURITY
16.1. Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of Twenty Thousand Two Hundred Fifty
and No/100 Dollars ($20,250.00), which sum (the "Security Deposit") shall be
held by Landlord as security for the faithful performance of all of the terms,
covenants, and conditions of this
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Lease to be kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provision of this Lease, including, without
limitation, the provisions relating to the payment of rental and other sums due
hereunder, Landlord shall have the right, but shall not be required, to use,
apply or retain all or any part of the Security Deposit for the payment of
rental or any other amount which Landlord may spend or become obligated to spend
by reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of the Security Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor accompanied by reasonable supporting
documentation of the sums expended by Landlord, deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount and
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep any deposit under this Section separate from
Landlord's general funds, and Tenant shall not be entitled to interest thereon.
The Security Deposit, or any balance thereof remaining after application of any
portion thereof by Landlord in accordance with this Section 16.1, shall be
returned to Tenant or, at Landlord's option, to the last assignee of Tenant's
interest hereunder, at the expiration of the term of this Lease and after Tenant
has vacated the Premises. In the event of termination of Landlord's interest in
this Lease, Landlord shall transfer all deposits then held by Landlord under
this Section to Landlord's successor in interest, in which event, upon written
assumption of Landlord's obligations with respect to such Security Deposit by
such successor in interest, Landlord shall be released from all liability for
the return of such deposit or the accounting thereof.
17. MISCELLANEOUS
17.1. Notices. All notices, consents, waivers and other communications
which this Lease requires or permits either party to give to the other shall be
in writing and shall be deemed given upon receipt or refusal of delivery when
delivered either personally (including delivery by private courier or receipted
express delivery service) or by United States mail, registered or certified
mail, postage prepaid, return receipt requested, in each instance addressed to
the parties at their respective addresses as follows:
To Tenant: Applied Theory Corporation
125 Elwood Davis Road
Liverpool, NY 13088
Attn: Terri Kennett
with copy to: Applied Theory Corporation
1500 Broadway, Suite 300
New York, NY 10036
Attn: Diane Barker
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and, after the Commencement Date, with copy to:
Applied Theory Corporation
4030 Point Eden Way
Hayward, CA 94545
Attn:_____________________________
To Landlord: Hayward Point Eden I Limited Partnership
1939 Harrison Street, Suite 715
Park Plaza Building
Oakland, CA 94612
Attn: T. J. Bristow
with copy to: Folger Levin & Kahn LLP
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, CA 94111
Attn: Donald E. Kelley, Jr.
or to such other address as may be contained in a notice at least fifteen (15)
days prior to the address change from either party to the other given pursuant
to this Section. Rental payments and other sums required by this Lease to be
paid by Tenant shall be delivered to Landlord at Landlord's address provided in
this Section, or to such other address as Landlord may from time to time specify
in writing to Tenant, and shall be deemed to be paid only upon actual receipt.
17.2. Successors And Assigns. The obligations of this Lease shall run
with the land, and this Lease shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, except that the
original Landlord named herein and each successive landlord under this Lease
shall be liable only for obligations accruing during the period of its ownership
of the Property, said liability terminating upon the express written assumption
of the obligations and liabilities of "Landlord" under this Lease by the
successor landlord. A copy of such written assumption shall be provided to
Tenant upon written request.
17.3. No Waiver. The failure of either party to seek redress for
violation, or to insist upon the strict performance, of any covenant or
condition of this Lease shall not be deemed a waiver of such violation, or
prevent a subsequent act which would originally have constituted a violation
from having all the force and effect of an original violation.
17.4. Severability. If any provision of this Lease or the application
thereof is held to be invalid or unenforceable, the remainder of this Lease or
the application of such provision to persons or circumstances other than those
as to which it is invalid or unenforceable shall not be affected thereby, and
each of the provisions of this Lease shall be valid and enforceable and be
enforced to the fullest extent permitted by law, unless enforcement of this
Lease as modified by the removal of the invalidated provision(s)
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would be unreasonable or grossly inequitable under all the circumstances or
would materially frustrate the purposes of this Lease.
17.5. Litigation Between Parties. In the event of any litigation or
other dispute resolution proceedings between the parties hereto arising out of
or in connection with this Lease, the prevailing party shall be reimbursed for
all reasonable costs, including, but not limited to, reasonable accountants'
fees and attorneys' fees, incurred in connection with such proceedings
(including, but not limited to, any appellate proceedings relating thereto) or
in connection with the enforcement of any judgment or award rendered in such
proceedings. "Prevailing party" within the meaning of this Section shall
include, without limitation, a party who dismisses an action for recovery
hereunder in exchange for payment of the sums allegedly due, performance of
covenants allegedly breached or consideration substantially equal to the relief
sought in the action.
17.6. Surrender. A voluntary or other surrender of this Lease by
Tenant, or a mutual termination thereof between Landlord and Tenant, shall not
result in a merger but shall, at the option of Landlord, operate either as an
assignment to Landlord of any and all existing subleases and subtenancies, or a
termination of all or any existing subleases and subtenancies; provided,
however, that Landlord shall not be entitled to elect such an assignment of any
subleases to or subtenancies by entities controlling, controlled by or under
common control with Tenant and such subleases or subtenancies shall simply
terminate concurrently with such surrender or termination of this Lease; and
provided further, however, that in the event Landlord elects an assignment of
any subleases to or subtenancies by any entities not controlling, controlled by
or under common control with Tenant, it shall be a condition of such assignment
that Landlord shall expressly assume in writing, for the benefit of the
sublessee or subtenant, all obligations and liabilities of the sublandlord
arising under the applicable sublease or subtenancy agreement from and after the
date of such assignment and assumption, and that Landlord shall (and hereby
does) release Tenant from and indemnify Tenant against any and all such
obligations and liabilities of the sublandlord arising under the applicable
sublease or subtenancy agreement from and after the date of such assignment and
assumption, but nothing in the preceding clause shall be construed to release
Tenant from or indemnify Tenant against any obligations or liabilities arising
under the applicable sublease or subtenancy agreement prior to the date of such
assignment and assumption. This provision (or terms substantially and
substantively equivalent thereto) shall be contained in any and all assignments
or subleases made pursuant to this Lease.
17.7. Interpretation. The provisions of this Lease shall be construed
as a whole, according to their common meaning, and not strictly for or against
Landlord or Tenant. The captions preceding the text of each Section and
subsection hereof are included only for convenience of reference and shall be
disregarded in the construction or interpretation of this Lease.
17.8. Entire Agreement. This written Lease, together with the exhibits
hereto, contains all the representations and the entire understanding between
the parties hereto with respect to the subject matter hereof. Any prior
correspondence, memoranda or
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agreements are replaced in total by this Lease and the exhibits hereto. This
Lease may be modified only by an agreement in writing signed by each of the
parties.
17.9. Governing Law. This Lease and all exhibits hereto shall be
construed and interpreted in accordance with and be governed by all the
provisions of the laws of the State of California.
17.10. No Partnership. The relationship between Landlord and Tenant is
solely that of a lessor and lessee. Nothing contained in this Lease shall be
construed as creating any type or manner of partnership, joint venture or joint
enterprise with or between Landlord and Tenant.
17.11. Financial Information. So long as Tenant is subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, and
is reasonably current in making its required filings under that Act, the
provisions of this Section 17.11 shall not apply. During any period in which
Tenant is no longer subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, or is not reasonably current in making its
required filings under that Act, then from time to time (but not more often than
twice in any calendar year):
(a) Tenant shall promptly provide directly to prospective
lenders and purchasers of the Property designated by Landlord a copy of Tenant's
most recent annual financial statement and a copy of Tenant's most recent
interim financial statement (if any) dated subsequent to the date of such annual
financial statement; provided, Tenant shall be permitted to provide such
financial information in a manner which Tenant deems reasonably necessary to
protect the confidentiality of such information; and
(b) Tenant shall provide Landlord with a copy of Tenant's most
recent annual financial statement and a copy of Tenant's most recent interim
financial statement (if any) dated subsequent to the date of such annual
financial statement. Landlord agrees that all financial information supplied to
Landlord by Tenant shall be treated as confidential material, and shall not be
disseminated to any person or entity without Tenant's prior written consent,
except that Landlord shall be entitled to provide such information, subject to
reasonable precautions to protect the confidential nature thereof, (i) to
Landlord's partners and professional advisors, solely for use in connection with
Landlord's execution and enforcement of this Lease, and (ii) to prospective
lenders and/or purchasers of the Property, solely for use in connection with
their bona fide consideration of a proposed financing or purchase of the
Property, provided that such prospective lenders and/or purchasers are not
engaged in businesses directly competitive with the business then being
conducted by Tenant.
For purposes of this Section, any annual or interim financial statements to be
provided by Tenant that are not audited statements shall be accompanied by a
certificate of Tenant's chief financial officer or other executive officer of
Tenant certifying that such financial statements fairly present Tenant's
financial condition as of the date(s) indicated. Landlord and Tenant recognize
the need of Tenant to maintain the confidentiality of information regarding its
financial status and the need of Landlord to be informed of, and
34
<PAGE> 35
to provide to its partners and to prospective lenders and purchasers of the
Property financial information pertaining to, Tenant's financial status.
Landlord and Tenant agree to cooperate with each other in achieving these needs
within the context of the obligations set forth in this Section.
17.12. [Omitted.]
17.13. Time. Time is of the essence of this Lease, and of every term
and condition hereof.
17.14. Rules And Regulations. Tenant shall observe, comply with and
obey, and shall cause its employees, agents and, to the best of Tenant's
ability, invitees to observe, comply with and obey such rules and regulations as
Landlord may promulgate and deliver to Tenant in writing from time to time for
the safety, care, cleanliness, order and use of the Premises, the Building and
the Property.
17.15. Brokers. Landlord agrees to pay a brokerage commission to
Cornish & Carey Commercial in connection with the consummation of this Lease in
accordance with a separate agreement, and understands that such commission will
be shared by Cornish & Carey Commercial with The Widewaters Group, Inc. in
accordance with brokerage industry custom and practice. Each of the parties
represents and warrants that no other broker participated in the consummation of
this Lease and agrees to indemnify, defend and hold the other party harmless
against any liability, cost or expense, including, without limitation,
reasonable attorneys' fees, arising out of any claims for brokerage commissions
or other similar compensation in connection with any conversations, prior
negotiations or other dealings by the indemnifying party with any other broker.
17.16. Memorandum Of Lease. This Lease may not be recorded. At any time
during the term of this Lease, either party, at its sole expense, shall be
entitled to record a memorandum of this Lease and, if either party so elects,
both parties agree to cooperate in the preparation, execution, acknowledgement
and recordation of such document in reasonable form.
17.17. Authority. Each of the persons signing this Lease on behalf of
Landlord or Tenant, respectively, warrants that he or she is fully authorized to
do so and, by so doing (jointly with any other person signing for such party as
designated below, if applicable), to bind such respective party. Landlord and
Tenant each represents and warrants that it has full power and authority to
enter into this Lease and to perform its obligations hereunder.
17.18. Execution and Delivery. Submission of this Lease for examination
or signature by Tenant does not constitute an agreement or reservation of or
option for lease of the Premises. This instrument shall not be effective or
binding upon either party, as a lease or otherwise, until executed and delivered
by both Landlord and Tenant. This Lease may be executed in one or more
counterparts and by separate parties on separate counterparts, but each such
counterpart shall constitute an original and all such counterparts together
shall constitute one and the same instrument. A signature which is
35
<PAGE> 36
transmitted by facsimile by or on behalf of any party to this Lease shall be
valid, effective and binding upon such party as of the time the facsimile
signature transmission is received by the other party. The parties shall
thereafter cooperate diligently to exchange original ink signatures of this
Lease within ten (10) days after the exchange of facsimile signatures, but any
failure to deliver such original ink signatures shall not impair or affect the
binding and enforceable nature of this Lease once facsimile signatures have been
exchanged.
17.19. Landlord's Waiver. Upon written request by Tenant in connection
with any proposed financing by Tenant of equipment, leasehold improvements,
trade fixtures, inventory or personal property, Landlord agrees to execute a
waiver of any claims of Landlord with respect to the equipment, leasehold
improvements, trade fixtures, inventory or personal property financed or to be
financed by Tenant, provided that the form of waiver that Landlord is requested
to execute shall not require Landlord to waive or surrender its rights with
respect to alterations, additions or improvements that would otherwise be or
become the property of Landlord under the terms of this Lease, shall provide a
period of not more than twenty (20) days following any termination or expiration
of this Lease in which Tenant and/or the lender shall have the right to remove
the financed property from the Premises, shall require payment of a per diem
charge for the Premises at a rate equivalent to the final month's minimum
monthly rent due under this Lease, prorated on a daily basis, for each day after
such termination or expiration during which the financed property remains on the
Premises, shall authorize Landlord to remove and/or dispose of any property
remaining on the Premises after such 20-day period without any liability to
Tenant or the lender, and shall otherwise be in form and substance satisfactory
to Landlord in its reasonable discretion.
17.20. Satellite Dish, Emergency Generator and Other Equipment. Subject
to the provisions of Article 7 of this Lease governing alterations, additions
and improvements by Tenant:
(a) Tenant shall have the right to install a satellite dish
and all ancillary equipment necessary for the operation thereof (collectively,
the "Dish") on the roof of the Building above the Premises, subject to the
following conditions: (i) Tenant shall install, operate, maintain and repair the
Dish at Tenant's sole cost and expense, in accordance with all applicable legal
and insurance requirements, and Tenant shall be solely responsible (at its sole
cost and expense) for obtaining all governmental licenses, permits and approvals
necessary for the installation and operation of the Dish; (ii) if requested by
Landlord, Tenant shall screen the Dish in a manner reasonably satisfactory to
Landlord; (iii) the proposed location of and plans and specifications for the
Dish shall be subject to Landlord's prior written approval in accordance with
Article 7 hereof and/or Sections 2.3 and 2.4 and Exhibit C, as applicable; (iv)
Tenant shall provide, as part of the installation of the Dish, at Tenant's sole
cost and expense, all pads, foundations, walkways, bracing and other structures
necessary to permit the roof of the Building to support the Dish and to permit
any necessary access to the Dish, in each case in a safe manner and without
damaging the integrity of the roof; and (v) Tenant shall take all commercially
reasonable precautions to ensure that the installation and operation of the Dish
do not interfere with the ordinary business operations of any of the other
tenants of
36
<PAGE> 37
the Building or of the remainder of the Center. Landlord and Tenant shall
cooperate reasonably with one another, in connection with the development of the
approved plans and specifications for Landlord's work under Section 2.4 and
Exhibit C, to identify a reasonable site or sites for the Dish on the roof of
the Building above the Premises.
(b) Tenant shall have the right to install an emergency
generator and all ancillary equipment necessary for the operation thereof,
including, without limitation, an above ground integral fuel tank (collectively,
the "Generator") at a location to be designated by Landlord at the side or in
the rear of the Building and reasonably near the Building, subject to the
following conditions: (i) Tenant shall install, operate, maintain and repair the
Generator at Tenant's sole cost and expense, in accordance with all applicable
legal and insurance requirements, and Tenant shall be solely responsible (at its
sole cost and expense) for obtaining all governmental licenses, permits and
approvals necessary for the installation and operation of the Generator; (ii) if
requested by Landlord, Tenant shall screen the Generator in a manner reasonably
satisfactory to Landlord; (iii) the proposed location of and plans and
specifications for the Generator shall be subject to Landlord's prior written
approval in accordance with Article 7 hereof and/or Sections 2.3 and 2.4 and
Exhibit C, as applicable, subject to the provisions of Exhibit C hereto with
respect to the proposed location of the Generator; (iv) Tenant shall provide, as
part of the installation of the Generator, at Tenant's sole cost and expense,
all pads, foundations, walkways, enclosures, bracing and other structures
necessary to permit the Generator to be properly supported, to permit any
necessary access by Tenant to the Generator and preclude access by unauthorized
persons to the Generator, in each case in a safe manner and without damaging the
integrity of the Building and exterior improvements in the vicinity of the
Generator; and (v) Tenant shall take all commercially reasonable precautions to
ensure that the installation and operation of the Generator do not interfere
with the ordinary business operations of any of the other tenants of the
Building or of the remainder of the Center. Landlord and Tenant shall cooperate
reasonably with one another, in connection with the development of the approved
plans and specifications for Landlord's work under Section 2.4 and Exhibit C, to
identify a reasonable site or sites for the Generator in the vicinity of the
Building, but Landlord shall have the final right to designate such site in
accordance with the standards set forth above.
(c) Tenant shall also have the right to install condensers or
dry cooler units to support independent AC plant(s) serving portions of the
Premises on the roof of the Building above the Premises, subject to the
following conditions: (i) Tenant shall install, operate, maintain and repair
such units at Tenant's sole cost and expense, in accordance with all applicable
legal and insurance requirements, and Tenant shall be solely responsible (at its
sole cost and expense) for obtaining all governmental licenses, permits and
approvals necessary for the installation and operation of such units; (ii) if
requested by Landlord, Tenant shall screen such units in a manner reasonably
satisfactory to Landlord; (iii) the proposed location of and plans and
specifications for such units shall be subject to Landlord's prior written
approval in accordance with Article 7 hereof and/or Sections 2.3 and 2.4 and
Exhibit C, as applicable; (iv) Tenant shall provide, as part of the installation
of such units, at Tenant's sole cost and expense, all pads, foundations,
walkways, bracing and other structures necessary to permit the roof of the
Building to
37
<PAGE> 38
support such units and to permit any necessary access to such units, in each
case in a safe manner and without damaging the integrity of the roof, and (v)
Tenant shall take all commercially reasonable precautions to ensure that the
installation and operation of such units do not interfere with the ordinary
business operations of any of the other tenants of the Building or of the
remainder of the Center. Landlord and Tenant shall cooperate reasonably with one
another, in connection with the development of the approved plans and
specifications for Landlord's Work and Tenant's Work under Section 2.4 and
Exhibit C, to identify a reasonable site or sites for such units on the roof of
the Building above the Premises.
(d) Tenant shall also have the right to install underground
conduit on the Property, outside the exterior of the Premises, in order to bring
additional utility service into the Premises and/or to bring fiber and/or telco
lines into the Premises, subject to the following conditions: (i) Tenant shall
install, operate, maintain and repair such conduit and the cables, lines and
other facilities placed therein at Tenant's sole cost and expense, in accordance
with all applicable legal and insurance requirements, and Tenant shall be solely
responsible (at its sole cost and expense) for obtaining all governmental
licenses, permits and approvals necessary for the installation and operation of
such conduit, cables, lines and other facilities; (ii) the proposed location of
and plans and specifications for such conduit, cables, lines and other
facilities shall be subject to Landlord's prior written approval in accordance
with Article 7 hereof and/or Sections 2.3 and 2.4 and Exhibit C, as applicable;
(iii) Tenant shall repair, at Tenant's sole cost and expense, any damage to the
landscaping or other common area improvements on the Property caused by Tenant's
installation or maintenance of such conduit, cables, lines or other facilities;
and (iv) Tenant shall take all commercially reasonable precautions to ensure
that the installation and operation of such conduit, cables, lines and other
facilities do not interfere with the ordinary business operations of any of the
other tenants of the Building or of the remainder of the Center.
(e) Neither the roof space occupied by the Dish or
supplemental AC equipment nor the exterior area occupied by the Generator or
underground conduit described in the preceding paragraphs shall be considered
part of the square footage of the Premises or Building for purposes of
determining Tenant's minimum monthly rental obligation under Section 3.1 or
Tenant's Operating Cost Share under Section 5.1 of this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this
Lease as of the day and year first set forth above.
"Landlord" "Tenant"
HAYWARD POINT EDEN I LIMITED APPLIED THEORY CORPORATION, a
PARTNERSHIP, a Delaware limited Delaware corporation
partnership
By: Britannia Developments, Inc., a By: /s/ Angelo A. Gencarelli III
California corporation, Its General Its: Sr. Director of Accounting &
Partner Controller
38
<PAGE> 39
By: /s/ T.J. Bristow By: /s/ James D. Luckett
T.J. Bristow Its: Sr. V.P. - Business Development
President and Chief
Financial Officer
39
<PAGE> 1
EXHIBIT 11.1
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 21,147,902
Weighted average shares issued during three months
ended September 30, 1999 (45,674 shares) 32,250
------------
21,180,152
============
Net loss $ (3,605,000)
============
Loss per share attributable to common stockholders $ (0.17)
============
</TABLE>
- --------------------------------------------------------------------------------
(1)For a discussion of loss per share, see Note B of the Notes to the Financial
Statements provided in Part I, Item 1 of our Form 10-Q for the period ended
September 30, 1999.
40
<PAGE> 1
EXHIBIT 11.2
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 11,040,751
Weighted average shares issued during three months
ended September 30, 1998 (4,003,432 shares) 2,498,984
------------
13,539,735
============
Net loss $ (1,255,000)
============
Loss per share attributable to common stockholders $ (0.09)
============
</TABLE>
- --------------------------------------------------------------------------------
(1)For a discussion of loss per share, see Note B of the Notes to the Financial
Statements provided in Part I, Item 1 of our Form 10-Q for the period ended
September 30, 1999.
41
<PAGE> 1
EXHIBIT 11.3
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 15,094,336
Weighted average shares issued during nine months
ended September 30, 1999 (6,099,241 shares) 3,764,080
------------
18,858,416
============
Net loss $ (7,630,000)
============
Loss per share attributable to common stockholders $ (0.40)
============
</TABLE>
- --------------------------------------------------------------------------------
(1)For a discussion of loss per share, see Note B of the Notes to the Financial
Statements provided in Part I, Item 1 of our Form 10-Q for the period ended
September 30, 1999.
42
<PAGE> 1
EXHIBIT 11.4
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 9,810,000
Weighted average shares issued during nine months
ended September 30, 1998 (5,234,182 shares) 2,024,585
------------
11,834,585
============
Net loss $ (3,488,000)
============
Loss per share attributable to common stockholders $ (0.29)
============
</TABLE>
- --------------------------------------------------------------------------------
(1)For a discussion of loss per share, see Note B of the Notes to the Financial
Statements provided in Part I, Item 1 of our Form 10-Q for the period ended
September 30, 1999.
43
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998 JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998 JUN-30-1999 SEP-30-1998
<EXCHANGE-RATE> 1 1 1 1
<CASH> 0 0 3,290 0
<SECURITIES> 0 0 51,646 0
<RECEIVABLES> 0 0 6,108 0
<ALLOWANCES> 0 0 208 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 63,103 0
<PP&E> 0 0 12,416 0
<DEPRECIATION> 0 0 4,884 0
<TOTAL-ASSETS> 0 0 76,631 0
<CURRENT-LIABILITIES> 0 0 11,764 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 212 0
<OTHER-SE> 0 0 59,292 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 76,631 0
<SALES> 10,177 6,188 25,737 16,304
<TOTAL-REVENUES> 10,177 6,188 25,737 16,304
<CGS> 6,818 3,433 16,710 9,237
<TOTAL-COSTS> 6,818 3,433 16,710 9,237
<OTHER-EXPENSES> 7,591 3,817 17,408 9,974
<LOSS-PROVISION> 22 15 68 45
<INTEREST-EXPENSE> 129 141 455 424
<INCOME-PRETAX> (3,605) (1,203) (7,557) (3,331)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (3,605) (1,203) (7,557) (3,331)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (3,605) (1,203) (7,557) (3,331)
<EPS-BASIC> (0.17) (0.09) (0.40) (0.29)
<EPS-DILUTED> (0.17) (0.09) (0.40) (0.29)
</TABLE>
