-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UE/MRTVKQ4rgG6764gfOjtxIAiELY+4DGHCB4JfqkfIyA081u5BFYvd4oo84JVpK W7c0q7OoWo3f0haIgNqMdQ== 0000912057-99-005926.txt : 19991117 0000912057-99-005926.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005926 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COBALT GROUP INC CENTRAL INDEX KEY: 0001036290 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 911674947 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26623 FILM NUMBER: 99753818 BUSINESS ADDRESS: STREET 1: 2030 FIRST AVE STE 300 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2063867535 10-Q 1 FORM 10-Q COMPANY DATA: COMPANY CONFORMED NAME: THE COBALT GROUP INC CENTRAL INDEX KEY: STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION IRS NUMBER: 911674947 STATE OF INCORPORATION: WA FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26623 FILM NUMBER: BUSINESS ADDRESS: STREET 1: 2030 FIRST AVENUE, SUITE 300 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2062696363 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [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 For the transition period from ____________________ to ______________________ Commission File No. 000-26623 THE COBALT GROUP, INC. (Exact name of registrant as specified in its charter) Washington 91-1674947 ---------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2030 FIRST AVENUE, SUITE 300, SEATTLE, WASHINGTON 98121 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (206) 269-6363 - ------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of October 31, 1999, 16,848,926 shares of the Company's common stock, $.01 par value, were outstanding. 1 THE COBALT GROUP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I - Financial Information Item 1. - Financial Statements Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook 9 Results of Operations 10 Liquidity and Capital Resources 12 Year 2000 Readiness 13 Risk Factors 14 Item 3. - Quantitative and Qualitative Disclosures about Market Risk 22 Part II - Other Information Item 2. - Changes in Securities and Use of Proceeds 23 Item 6. - Exhibits and Reports on Form 8-K 23 Signatures 24 2 ITEM 1. FINANCIAL STATEMENTS THE COBALT GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 5,756 $ 18,205 Short-term investments 983 -- Accounts receivable, net of allowance for doubtful accounts of $85 and $203 (unaudited), respectively 1,250 3,847 Other current assets 130 1,816 -------- -------- 8,119 23,868 Capital assets, net of accumulated depreciation of $410 and $1,252 (unaudited), respectively 1,453 3,863 Intangible assets, net of accumulated amortization of $321 and $2,686 (unaudited), respectively 479 28,661 Other assets 11 1,047 -------- -------- Total assets $ 10,062 $ 57,439 -------- -------- -------- -------- LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities Accounts payable $ 191 $ 1,786 Accrued liabilities 776 1,158 Deferred revenue 1,290 1,838 Software financing contract, current portion -- 433 Capital lease obligations, current portion 328 862 -------- -------- 2,585 6,077 -------- -------- Non-current liabilities Software financing contract, non-current portion -- 119 Capital lease obligations, non-current portion 557 1,264 -------- -------- 557 1,383 Mandatorily redeemable convertible preferred stock Series A; $0.01 par value per share; 2,106,282 and 0 (unaudited) shares issued and outstanding, respectively; redemption and liquidation value of $1,158 and $0 (unaudited), respectively 1,116 -- Series B; $0.01 par value per share; 7,047,620 and 0 (unaudited) shares issued and outstanding, respectively; redemption and liquidation value of $29,600 plus unpaid dividends and $0 (unaudited), respectively 30,046 -- -------- -------- 31,162 -- -------- -------- Shareholders' (deficit) equity Preferred stock; $0.01 par value per share; 100,000,000 shares authorized; 9,153,902 and 0 shares issued and outstanding as mandatorily redeemable convertible preferred stock (unaudited), respectively -- -- Common stock; $0.01 par value per share; 200,000,000 shares authorized; 1,343,898 and 16,836,811 (unaudited) issued and outstanding, respectively 13 168 Additional paid-in capital 2,435 90,879 Deferred compensation (1,686) (4,392) Notes receivable from shareholders (144) (144) Accumulated deficit (24,860) (36,532) -------- -------- (24,242) 49,979 -------- -------- Total liabilities, mandatorily redeemable convertible preferred stock and shareholders' (deficit) equity $ 10,062 $ 57,439 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 3 THE COBALT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1998 1999 1998 1999 ---------------------------- ---------------------------- Revenues $ 1,647 $ 7,049 $ 3,984 $ 14,911 Cost of revenues 333 1,506 746 3,143 ------------ ------------ ------------ ------------ Gross profit 1,314 5,543 3,238 11,768 Operating expenses Sales and marketing 1,218 3,675 2,566 7,776 Product development 261 834 609 1,835 General and administrative 1,275 3,893 2,712 8,385 Amortization of intangible assets 74 1,378 225 2,364 Stock based compensation 172 1,051 279 2,382 ------------ ------------ ------------ ------------ Total operating expenses 3,000 10,831 6,391 22,742 ------------ ------------ ------------ ------------ Loss from operations (1,686) (5,288) (3,153) (10,974) Gain on sale of HomeScout -- -- 1,626 -- Interest expense (43) (374) (58) (926) Other income, net 13 135 48 228 ------------ ------------ ------------ ------------ Net loss $ (1,716) $ (5,527) $ (1,537) $ (11,672) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (1,719) $ (5,830) $ (1,545) $ (13,213) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic and diluted net loss per share $ (0.50) $ (0.52) $ (0.45) $ (2.67) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted-average shares outstanding 3,438,216 11,286,321 3,423,258 4,955,322 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Pro forma net loss available to common shareholders (unaudited) $ (5,527) $ (11,672) ------------ ------------ ------------ ------------ Pro forma basic and diluted net loss per share (unaudited) $ (0.37) $ (0.94) ------------ ------------ ------------ ------------ Pro forma weighted-average shares outstanding (unaudited) 14,938,073 12,389,063 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 4 THE COBALT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1998 1999 ---------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,537) $(11,672) Adjustments to reconcile net loss to net cash used in operating activities Amortization of deferred compensation 279 2,382 Depreciation and amortization 404 3,221 Net (gain) loss on sale of assets (1,616) 7 Changes in: Accounts receivable (496) (2,597) Other assets (100) (2,722) Accounts payable and accrued liabilities 837 1,977 Deferred revenues 163 548 -------- -------- Total adjustments (529) 2,816 -------- -------- Net cash used in operating activities (2,066) (8,856) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of capital assets (395) (765) Proceeds from sale of short term investments -- 983 Investment in PartsVoice -- (3,281) Proceeds from sale of HomeScout 1,626 -- -------- -------- Net cash provided by (used in) investing activities 1,231 (3,063) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from initial public offering and direct sale, net of costs -- 49,776 Proceeds from sale of preferred stock -- 100 Proceeds from exercise of stock options 7 149 Payments of dividends on preferred stock -- (2,059) Payment of notes payable (177) (26,600) Proceeds from notes payable 1,000 3,600 Payment of capital lease obligation and software contract (68) (598) -------- -------- Net cash provided by financing activities 762 24,368 -------- -------- Net (decrease) increase in cash and cash equivalents (73) 12,449 Cash and cash equivalents, beginning of period 241 5,756 -------- -------- Cash and cash equivalents, end of period $ 168 $ 18,205 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 5 THE COBALT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF THE BUSINESS The Cobalt Group, Inc. (the "Company") is a provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise automobile dealer groups and automobile manufacturers in the United States. The Company enables its clients to develop and implement e-business strategies and to capitalize on the increasing use of the Internet by consumers to research, evaluate and buy new and pre-owned vehicles, parts and accessories and automotive-related services such as financing and insurance. The Company's current service offerings include comprehensive Web site design, development and management; data extraction, aggregation and maintenance; Internet advertising and promotion; and Internet training and support. The Company also operates YachtWorld.com which provides prospective yacht buyers with access to approximately 21,000 photo listings of boats and yachts from hundreds of brokers, dealers and manufacturers, a directory of nearly 18,000 marine related businesses, content from several leading boat publications, and other marine related content. The Company sold its HomeScout business, a real estate search service, in 1998. The accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the three and nine-month periods ended September 30, 1999 are not necessarily indicative of future financial results. Investors should read these interim statements in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto for the fiscal year ended December 31, 1998 (audited) and the three months ended March 31, 1999 (unaudited) included in our registration statement on Form S-1, SEC File No. 333-79483 filed with the United States Securities and Exchange Commission. 2. ACQUISITION OF PARTSVOICE On April 30, 1999, the Company acquired all of the equity interests in PartsVoice, LLC, whose principal business is vehicle parts data acquisition and management services. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. At closing, the Company paid aggregate purchase consideration for the PartsVoice equity of (i) $3.0 million in cash; (ii) promissory notes in the principal amount of $23.0 million; (iii) 500,000 shares of Series C convertible preferred mandatorily redeemable stock at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The warrants were valued at $381,000 using the Black Scholes option-pricing model. The acquisition was accounted for using the purchase method of accounting. The aggregate purchase price was allocated to the net assets acquired, based upon their respective fair market values. The excess of the purchase price, including acquisition costs, over the fair market value of the assets acquired was allocated to intangible assets. 6 The following summarizes the unaudited pro forma results of operations, on a combined basis, as if the Company's acquisition of PartsVoice occurred as of the beginning of each of the periods presented, after including the impact of certain adjustments, such as amortization of goodwill and interest on acquisition indebtedness:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1999 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues $ 4,015 $ 7,049 $ 11,068 $ 18,346 Net loss (2,287) (5,527) (3,599) (12,382) Basic and diluted net loss per share $ (0.67) $ (0.52) $ (1.05) $ (2.81)
The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. 3. NET LOSS PER SHARE The following table sets forth the computation of the numerators and denominators in the basic and diluted net loss and pro forma net loss per share calculations for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1999 1998 1999 ---------- ----------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator: Net loss $ (1,716) $ (5,527) $ (1,537) $ (11,672) Dividends on mandatorily redeemable convertible preferred stock -- (300) -- (1,524) Accretion of mandatorily redeemable convertible preferred stock (3) (3) (8) (17) ---------- ----------- ---------- ----------- Net loss available to common shareholders $ (1,719) (5,830) $ (1,545) (13,213) ---------- ---------- ---------- ---------- Effect of pro forma conversion of preferred shares: Dividends on mandatorily redeemable convertible preferred stock 300 1,524 Accretion of mandatorily redeemable convertible preferred stock 3 17 ----------- ----------- Pro forma net loss available to common shareholders $ (5,527) $ (11,672) ----------- ----------- ----------- ----------- Denominator: Weighted-average shares outstanding 3,438,216 11,286,321 3,423,258 4,955,322 ---------- ---------- ---------- ---------- Weighted-average effect of pro forma conversion of preferred shares 3,651,752 7,433,741 ----------- ----------- Pro forma weighted average shares outstanding 14,938,073 12,389,063 ----------- ----------- ----------- -----------
Pro forma net loss per share is computed using the weighted-average number of common shares outstanding, including the pro forma effects of conversion of the Company's preferred stock on the date the shares were originally issued. 7 4. INTANGIBLE ASSETS Intangible assets consist of the following:
USEFUL LIVES DECEMBER 31, 1998 SEPTEMBER 30, 1999 ------------ ----------------- ------------------ (YEARS) (IN THOUSANDS) (AUDITED) Goodwill 6 $ -- $ 13,247 Trademarks/trade name 6 -- 1,200 PartsVoice customer list 6 -- 13,800 DealerNet customer list 3 800 800 Existing technology 5 -- 1,100 Workforce 5 -- 1,200 ----------------- ------------------ 800 31,347 Accumulated amortization (321) (2,686) ----------------- ------------------ $ 479 $ 28,661 ----------------- ------------------ ----------------- ------------------
These assets are amortized over their respective estimated useful lives. 5. STOCK OPTIONS During the six month period from March 31 to September 30, 1999, the Company granted stock options that resulted in deferred compensation costs of $4.7 million. Of this amount, $4.0 million is related to 783,028 options granted to employees at less than market value and is being amortized over the vesting period, generally four years. An additional $250,000 is related to 50,000 options granted to employees at less than market value and is being amortized over periods not to exceed one year. The remaining $400,000 is related to 68,500 options granted to third parties and is being amortized over the respective service periods of up to one year. 6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest during the nine months ended September 30, 1998 and 1999 was $54,000 and $926,000, respectively. During the nine months ended September 30, 1998 and 1999, the Company purchased capital assets under capital leases and a software financing contract of $627,000 and $2.4 million, respectively. Depreciation expense for the nine months ended September 30, 1998 and 1999 was $180,000 and $857,000, respectively. Amortization expense for the nine months ended September 30, 1998 and 1999 was $224,000 and $2.4 million, respectively. 7. INITIAL PUBLIC OFFERING On August 10, 1999, the Company completed an initial public offering in which proceeds, net of underwriting discount and commission, of approximately $46.0 million were raised. An additional $5.0 million was raised in a direct sale of 454,545 shares of Common Stock to General Electric Capital Assurance Company. A portion of the proceeds was used to retire the notes payable ($26.6 million at August 10, 1999) and pay all accumulated dividends ($2.1 million) on mandatorily redeemable convertible preferred stock. Upon completion of the initial public offering on August 10, 1999 by the Company, all outstanding shares of the Company's mandatorily redeemable convertible preferred stock were converted to shares of common stock. One share of common stock was exchanged for each share of preferred stock, resulting in an increase in shareholder equity of $34.4 million. 8 ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT, AS AMENDED, THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. YOU SHOULD READ THE CAUTIONARY STATEMENTS MADE IN THIS REPORT AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 14. YOU SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR OPINION AS OF THE DATE OF THIS REPORT. WE DO NOT ASSUME ANY OBLIGATION TO REVISE FORWARD-LOOKING STATEMENTS. OVERVIEW AND OUTLOOK We derive our revenues from fees charged to our automobile dealership, dealer group and manufacturer clients for Web site design, development and maintenance and data extraction and aggregation services, as well as for Internet advertising and promotional services. Revenues from Web site design, development and maintenance and data extraction and aggregation services are recognized ratably over the applicable service period. Revenues from initial setup fees and custom projects are recognized at the time of activation. Our obligations for Internet advertising services typically include guarantees of a minimum number of "impressions," or times that an advertisement is viewed. To the extent that minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until the remaining guaranteed impression levels are achieved. The majority of our services are sold to clients under short-term service agreements with an initial term of six or twelve months and month-to-month thereafter. Revenues are recognized net of promotional discounts. We offer some of our services on an initial "free trial" basis, generally for periods of one to three months, in which case revenue is not recognized until the end of the free trial period and the client continues service on a paying basis. We expect to continue to increase our revenues by acquiring more customers and by increasing and improving our product offerings, although we may not sustain the same rate of growth as is reported in these interim statements. Our cost of revenues consists of the costs associated with production, maintenance and delivery of our services. These costs include the costs of production, processing and design personnel, communication expenses related to data transfer, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web and database servers used to host client data. Some strategic new products may be lower margin products. Further, we have experienced increased demand for custom design and development projects, which carry higher costs. As we respond to the customer demand for these products our gross margin may decline. In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability company, whose principal business is vehicle parts data acquisition and management services. The purchase price, including transaction expenses, was $30.7 million, of which $3.0 million was paid in cash and $4.4 million was paid by issuance of preferred stock and warrants at closing. The balance of the purchase price was paid by issuance of short-term notes, which were paid in full on August 10, 1999 with proceeds from the Company's initial public offering. See "Liquidity and Capital Resources." The PartsVoice acquisition was accounted for as a purchase transaction, and substantially all of the purchase price was allocated to intangible assets. The consolidated results of operations include PartsVoice for the period May 1, 1999 to September 30, 1999. 9 We may in the future pursue additional acquisitions of businesses, products or technologies that could complement or expand our business. Integrating newly acquired businesses or technologies may be expensive and time-consuming. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources and could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on our business, results of operations and financial condition. Since inception, but increasingly during the past year, we have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. Over the last twelve months we have hired more than 183 employees, excluding the addition of PartsVoice employees, and invested more than $3.6 million in capital assets. These investments are intended to improve our service to clients, including backup computer systems and more stable and scalable database systems. Our planned growth will require additional staff and facilities. The Company is in the process of reorganizing its development, design and production staff to improve focus on new product development and to reduce turnaround time for client requests. We expect these changes may increase our product development and production staff expenses relative to sales, marketing and administrative costs. Our continued growth and the PartsVoice acquisition have placed and will continue to place a significant strain on our managerial and operational resources. To manage our anticipated growth, we must continue to implement and improve our operational and financial systems and must expand, train and manage our employee base. We intend to continue to invest in technology infrastructure development, marketing and promotion, services development and strategic relationships. As a result, we expect to continue to incur net losses and negative cash flows from operations at least through 2000. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES. Revenues increased from $1.6 million for the three months ended September 30, 1998 to $7.0 million for the same period in 1999, an increase of $5.4 million, or 328.0%. Of the increase, $2.8 million, or 52.0% of the change, is attributable to revenues generated by PartsVoice. The remaining 48.0% of the change is due to an increase in our client base and the sale of additional services to existing clients. The revenue increase is net of client attrition of 1.6% during the three months ended September 30, 1999 compared with a client attrition rate of 3.1% for the same period for 1998. Attrition rates were determined based on total dealer clients as of September 30, 1999 and 1998, respectively. As of September 30, 1999 Cobalt was paid to manage and maintain Web sites for 4,647 dealer clients, compared to 3,699 at June 30, 1999. COST OF REVENUES. Cost of revenues increased from $333,000 for the three months ended September 30, 1998 to $1.5 million for the same period in 1999, an increase of $1.2 million or 352.1%. Of this increase, $414,000, or 35.3%, is related to increased staffing required to accommodate our increased client base, $373,000, or 31.8%, is attributable to PartsVoice, and $224,000, or 19.1%, is associated with the costs of advertising and distribution of vehicle inventory data to third party Web sites. Cost of sales as a percentage of sales has increased from 20.2% to 21.4% for the quarter ended September 30, 1999 compared to the same period for 1998. Improvement in the product mix toward higher-margin parts locating and hosting and maintenance services was offset by the increase in production and design staff and service delivery facilities required to support current and future growth in our customer base. 10 SALES AND MARKETING. Sales and marketing expenses consist primarily of compensation for sales and marketing personnel, including sales commissions, travel expenses and expenses for promotional advertising and marketing. Sales and marketing expenses increased from $1.2 million for the three months ended September 30, 1998 to $3.7 million for the same period in 1999, an increase of $2.5 million, or 201.6%. Of this increase, $814,000 or 33.2%, is due to the increase in the number of our sales and marketing personnel, $658,000, or 26.7%, is attributable to an increase in commissions paid to sales staff and management which reflects the significant increase in customers during the third quarter, $401,000, or 16.3%, is attributable to PartsVoice, and $333,000, or 13.6%, is attributable to increased corporate brand advertising. PRODUCT DEVELOPMENT. Our product development expenses consist primarily of compensation for product development personnel and costs of related computer equipment. We expense product development costs as they are incurred. We increased our product development costs from $261,000 for the three months ended September 30, 1998 to $834,000 for the same period in 1999, an increase of $573,000, or 220.1%. This increase is due to the increase in the number of our product development personnel and associated computer related costs, resulting from the increased emphasis on product development initiatives. GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist primarily of compensation for administrative personnel, facilities and communications expenses and fees for outside professional advisors. General and administrative expenses increased from $1.3 million for the three months ended September 30, 1998 to $3.9 million for the same period in 1999, an increase of $2.6 million, or 205.5%. Of this increase, $1.1 million, or 40.5% is attributable to the increase in the number of staff and management personnel, $403,000, or 15.4%, is due to PartsVoice, and $301,000, or 11.5%, is attributable to the increase in facilities and general office expenses. AMORTIZATION OF INTANGIBLE ASSETS. The increase is due to amortization of the intangible assets and goodwill related to the PartsVoice acquisition on April 30, 1999. STOCK BASED COMPENSATION. Stock based compensation increased from $172,000 for the three months ended September 30, 1998 to $1.1 million for the same period in 1999, an increase of $879,000, or 510.9%. The increase is due to an increase in the number of options that were granted to employees with exercise prices below the fair value of the underlying stock. NET LOSS. Our net loss for the three months ended September 30, 1998 was $1.7 million compared to a net loss of $5.5 million for the same period in 1999, an increase of $3.8 million or 222.0%. Increased operating expenses described above, including the increase in non-cash charges of $1.3 million for goodwill amortization and $879,000 for stock based compensation, offset the increase in revenues. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES. Revenues increased from $4.0 million for the nine months ended September 30, 1998 to $14.9 million for the same period in 1999, an increase of $10.9 million, or 274.2%. Of this increase $4.6 million or 42.2% is attributable to PartsVoice. The remaining increase is due in part to the significant net increase in our client base and the sale of additional services to existing customers. The increase is net of dealer client attrition of 5.2% during the nine months ended September 30, 1999 compared with a client attrition rate of 6.7% for the same period for 1998. Attrition rates were determined based on total dealer clients as of September 30, 1999 and 1998, respectively. COST OF REVENUES. Cost of revenues increased from $746,000 for the nine months ended September 30, 1998 to $3.1 million for the same period in 1999, an increase of $2.4 million, or 321.0%. Of this increase, $735,000, or 30.7% is due to an increase in costs related to increased staffing required to accommodate our increased client base, $664,000, or 27.7%, is associated with increased sales of advertising and distribution of vehicle inventory data to third party Web sites, and $579,000, or 24.2%, is attributable to PartsVoice. Cost of sales as a percentage of sales increased from 18.7% to 21.1% for the nine-month period ended September 30, 1999 compared to the same period for 1998. During this period, the product mix had shifted to lower margin products, creative and development services and resale of third party products, in addition to the increase in production and design staff and service delivery facilities required to support current and future growth in our customer base. Since PartsVoice was acquired on April 30, 1999, the year-to-date period reflects only five months of the higher margin parts locating service revenues. On a pro forma basis, assuming PartsVoice had been acquired at the beginning of the period, our reported margins would have been 22.1% for the nine-month period ended September 30, 1999. 11 SALES AND MARKETING. Sales and marketing expenses increased from $2.6 million for the nine months ended September 30, 1998 to $7.8 million for the same period in 1999, an increase of $5.2 million, or 203.0%. Of this increase, $2.0 million or 38.3%, is due to the increase in the number of our sales and marketing personnel, $1.1 million, or 21.0%, is attributable to increased corporate brand advertising, $932,000, or 17.9%, is attributable to an increase in commissions paid on sales, and $613,000, or 11.8% is due to PartsVoice. PRODUCT DEVELOPMENT. Our product development costs increased from $609,000 for the nine months ended September 30, 1998 to $1.8 million for the same period in 1999, an increase of $1.2 million, or 201.5%. This increase is due to the increase in the number of our product development personnel and associated computer equipment costs, resulting from the increased emphasis on product development initiatives. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from $2.7 million for the nine months ended September 30, 1998 to $8.4 million for the same period in 1999, an increase of $5.7 million, or 209.2%. Of this cost increase, $2.4 million, or 43.0% is due to the increase in the number of staff and management personnel, $758,000, or 13.4%, is attributable to increased consulting, legal and accounting fees, and $687,000, or 12.1%, is attributable to the increase in facilities and general office expenses. AMORTIZATION OF INTANGIBLE ASSETS. The increase is due to amortization of the intangible assets and goodwill related to the PartsVoice acquisition on April 30, 1999. STOCK BASED COMPENSATION. Stock based compensation increased from $279,000 for the nine months ended September 30, 1998 to $2.4 million for the same period in 1999, an increase of $2.1 million. The increase is due to an increase in the number of options that were granted to employees with exercise prices below the fair value of the underlying stock. NET LOSS. During the nine months ended September 30, 1998 we sold the assets of our HomeScout real estate search service division and realized a gain of $1.6 million. Excluding the gain on sale of HomeScout, our net loss for the nine months ended September 30, 1998 was $3.2 million compared to a net loss of $11.7 million for the same period in 1999, an increase of $8.5 million. Increased operating expenses described above, including the increase in non cash charges of $2.2 million for goodwill amortization and $2.1 million for stock based compensation, offset the increase in revenues. As a strategic initiative or as a response to the competitive environment, we may from time to time make pricing, service, technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on our short-term operating results. We also may experience seasonality in our business in the future resulting in diminished revenues as a result of diminished demand for our services during seasonal periods that correspond to seasonal fluctuations in the automotive industry or to fluctuations in industry spending for Internet marketing services. Due to all or any of the foregoing factors, in some future quarter our operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock would likely be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily from sales of common and preferred stock, cash flow from operations and, to a lesser extent, borrowings under short-term debt facilities. Our initial public offering in August 1999 yielded proceeds of $46.0 million, net of underwriting discounts. A direct sale of common stock to General Electric Capital Assurance Company in August 1999 yielded an additional $5.0 million in proceeds. These proceeds were used to repay the PartsVoice acquisition indebtedness of $23.0 million and borrowings of $3.6 million outstanding under a line of credit. In addition, we used approximately $2.1 million of the net proceeds to pay dividends on preferred stock. Net cash used in operating activities was $8.9 million for the nine months ended September 30, 1999. Cash used in operating activities consisted primarily of net operating losses after non-cash charges and increases in accounts receivable and other assets, offset by increases in current liabilities. 12 Net cash used in investing activities was $3.1 million for the nine months ended September 30, 1999. Cash used in investing activities consisted of the initial cash payment and expenses for the PartsVoice acquisition and the investment in capital assets offset by proceeds from short-term investment maturities. Net cash provided by financing activities was $24.4 million for the nine months ended September 30, 1999. Cash provided by financing activities consisted primarily of proceeds from the initial public offering and direct sale of common stock offset by payments of notes and dividends on preferred stock. We believe that the net proceeds from our initial public offering and the direct sale to General Electric Capital Assurance Company, together with cash flow from operations, will be sufficient to meet our cash requirements for the next twelve months. Depending on our rate of growth and cash requirements, we may require additional equity or debt financing to meet future working capital needs. We cannot assure you that such additional financing will be available or, if available, that such financing can be obtained on satisfactory terms. YEAR 2000 READINESS Many existing computer programs and hardware use only two digits to identify a year. These computer programs and hardware were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer programs and hardware could fail or create erroneous results by, at or beyond the year 2000. We have evaluated our internal and third party hardware and software systems and, based on this evaluation and statements published by our hardware and software suppliers, which we have not verified, we have determined that substantially all of our systems are Year 2000 compliant. All of our non-compliant purchased software is used for internal processes only. We have replaced or upgraded several such software products and will complete this process prior to December 31, 1999. We also intend to replace all of our non-compliant hardware prior to December 31, 1999. We are in the process of remediating our internally developed software for Year 2000 compliance and intend to have all such software fully compliant prior to December 31, 1999. We have executed a substantial number of test scenarios that simulate the date change for all critical systems and intend to continue execution of such testing during the remainder of 1999. The products and services used by our clients in connection with our services may not be Year 2000 compliant and as a result may lead to claims against us, the impact of which cannot be currently estimated. The aggregate cost of defending and resolving these claims, if any, could be significant. Year 2000 issues also could affect the purchasing patterns of our clients and potential clients as many automobile dealers, dealer groups and manufacturers are expending significant resources to replace or remedy their current hardware and software systems in order to resolve Year 2000 issues. In addition, our clients may experience interruptions to their businesses as a result of their failure to timely correct their Year 2000 issues. As a result, our clients may postpone or cancel purchases of our services, potentially causing interruptions to our revenue that could have a material adverse effect on our business, operating results and financial condition. In addition, we utilize other services developed and provided by third party vendors that may fail due to Year 2000 issues. We are currently assessing the Year 2000 readiness of services provided by our third party vendors. If we identify specific risks we will develop and implement a remediation plan with respect to third party services that may fail to be Year 2000 compliant. To date, we have expended internal resources associated with assessment and remediation of Year 2000 issues. Total costs associated with our entire review and assessment are expected to be less than $25,000. The failure of our software and computing systems and of our third party vendors to be Year 2000 compliant could have a material adverse effect on our business, results of operations and financial condition. We will be developing contingency plans to respond to unanticipated issues associated with unremediated Year 2000 problems. 13 RISK FACTORS You should carefully consider the risks and uncertainties described below and the other information in this report in evaluating our business, operations and prospects. AS AN EARLY STAGE COMPANY IN A NEW AND RAPIDLY CHANGING MARKET, OUR BUSINESS STRATEGY IS UNPROVEN. ACCORDINGLY, IT IS DIFFICULT TO PREDICT OUR FUTURE GROWTH OR OPERATING RESULTS. We began operations in March 1995. Accordingly, we have only a limited operating history and our business is in an early stage of development. You should evaluate the risks and challenges that an early stage company like ours will face in the rapidly changing and competitive environment of the Internet. We may not successfully meet the challenges of growing our company. OUR LIMITED OPERATING HISTORY AND UNPROVEN, EVOLVING BUSINESS MODEL MAKE IT DIFFICULT TO EVALUATE OUR PROSPECTS. We began offering our services to automobile dealers in November 1995. We must achieve broad market acceptance of our services and continue to expand our service offerings for our business to succeed. Our client base represents a relatively small percentage of the total franchised automobile dealer community in the United States, and many of our dealer clients have been clients for only a short time. We cannot assure you that our new and planned future offerings will be successful or that our broader business model, as it evolves, will succeed. WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, OUR OPERATIONS MAY NOT BE FINANCIALLY VIABLE. We have incurred net losses each year since we began operations and we expect that we will not be profitable at least through the year 2000. We cannot guarantee that our business strategy will be successful or that we will ever achieve or maintain significant revenues or profitability. After giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $12.4 million for the nine months ended September 30, 1999. As of September 30, 1999, we had an accumulated deficit of $36.5 million. We have not had operating profits on a quarterly or annual basis. We expect to continue to incur significant operating expenses and, as a result, we will need to generate significant quarterly revenue increases to achieve and maintain profitability. ANY FAILURE TO INTEGRATE PARTSVOICE WITH COBALT COULD COMPROMISE OUR GROWTH STRATEGY AND ADVERSELY AFFECT OUR BUSINESS. To execute our business plan, we must continue to integrate PartsVoice and Cobalt operations and services into a cohesive, combined entity. Cobalt's acquisition of PartsVoice has significantly increased the size and the geographic dispersion of our workforce and operations and has expanded our physical facilities. In addition, as the integration of PartsVoice has progressed certain employees of PartsVoice have chosen to leave the company, including Brian Allen, the former president of PartsVoice. Geographic dispersion and the loss of PartsVoice personnel increases the risk that we will fail to effectively gather, store, and communicate information and ideas, including technical knowledge and expertise, throughout our organization, which in turn would negatively impact our business. Also, if we fail to effectively integrate PartsVoice, we will not achieve the increases in sales to our existing client base that are a key element of our future growth. Finally, we may fail to realize operating efficiencies from combining operations such as extracting parts inventory and other data from automobile dealerships and consequently our results of operations may suffer. 14 ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY WILL ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. We are experiencing rapid growth that places significant strain upon our management and operational systems and resources. Failure to manage our growth effectively will have a material adverse effect upon our business, results of operations and financial condition. Our ability to compete effectively as a provider of Internet marketing services to the automobile industry and to manage future growth requires us to continue to improve our operational systems, software development organization and our financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel. We recently have hired a significant number of new employees, including key executives, and we will continue to add personnel to maintain our ability to grow in the future. For example, we have hired more than 153 new full-time employees in the first nine months of 1999 and our Vice Presidents of Development, Business Development, and Field Sales, each have been with us for less than one year. We must integrate our key executives into a cohesive management team and at the same time train and manage our employee work force in a timely and effective manner to expand our business. We cannot guarantee that we will be able to do so successfully. WE HAVE RELIED ON ISSUANCES OF EQUITY SECURITIES AND BORROWINGS TO FINANCE OUR OPERATIONS AND MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS. ANY FAILURE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED OR ON SATISFACTORY TERMS COULD DAMAGE OUR BUSINESS AND PROSPECTS. We do not generate sufficient cash to fully fund operations. To date we have financed our operations principally through the issuance of equity securities and through borrowings, and expect that we may need to raise additional capital in the future to fund our ongoing operations. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and, in the case of equity offerings, may result in dilution to our shareholders. Any difficulty in obtaining additional financial resources could force us to curtail our operations or prevent us from pursuing our growth strategy. ANY FAILURE TO BUILD STRONG RELATIONSHIPS WITH CURRENT AND PROSPECTIVE FRANCHISED DEALERSHIP, MULTI-FRANCHISE DEALER GROUP AND AUTOMOBILE MANUFACTURER CLIENTS COULD LIMIT OUR GROWTH PROSPECTS AND ADVERSELY AFFECT OUR BUSINESS. For our business to succeed, we must continue to develop relationships with franchised dealerships and multi-franchise dealer groups. We derive a substantial portion of our revenues from fees paid by our automobile dealer clients and our future growth depends in part on expanding our base of dealer clients. We also must maintain close working relationships with manufacturers. While we have established relationships with a number of manufacturers, these relationships are relatively new and we have little experience in maintaining them. In addition, manufacturers may elect to implement their own Internet strategies, which could reduce our potential client base. For example, during the period ended September 30, 1999 Hyundai Motor America chose to consolidate all of their Internet services with a single vendor and notified us of their intent not to renew its contract. EXCESSIVE TURNOVER OF OUR DEALERSHIP CLIENTS COULD INCREASE OUR COSTS, DAMAGE OUR REPUTATION AND SLOW OUR GROWTH. Our service agreements with dealerships generally are short-term and cancelable on 30 days' notice. To be successful, we will need to maintain low dealer client turnover. During 1998, 262 dealer clients, or approximately 8.0% of our total dealer clients as of year-end, were terminated. For the nine months ended September 30, 1999, 242 dealer clients, or approximately 5.2% of our total dealer clients as of September 30, 1999 were terminated. Our rate of dealer client turnover may fluctuate from period to period, and may exceed recent levels. A material decrease in the number of dealer clients purchasing our services could have a material adverse effect on our business, results of operations and financial condition. 15 WE EXPEND CONSIDERABLE RESOURCES IN SELLING OUR SERVICES TO PROSPECTIVE NEW CLIENTS. SALES EFFORTS THAT TAKE LONGER THAN EXPECTED TO COMPLETE OR THAT ARE UNSUCCESSFUL COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The time, expense and effort of securing dealership engagements may exceed our expectations. The length of the sales cycle varies by dealership and dealer group, but can range from four to eight months. Because the decision to purchase Internet marketing services often involves adoption by a dealership of a new way of thinking about the automobile sales process, we often devote significant time and resources to a prospective dealership client, including costs associated with multiple site visits and demonstrations, without any assurance that the prospective client will decide to purchase our services. Larger engagements and efforts to secure manufacturer endorsements have a longer sales cycle. WE WILL FACE INTENSE COMPETITION AND, IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL BE SERIOUSLY HARMED. The market for Internet marketing and data aggregation services is very competitive. We face competition from Internet development firms, automobile sales lead generation services and data aggregation businesses. Our parts inventory data services, for example, face competition from data aggregation service providers such as Universal Computer Systems, Inc., The Reynolds and Reynolds Company and Automatic Data Processing, Inc., or ADP. Similarly, our Web site design, development and maintenance services face competition from local and national Internet development firms and services provided by AutoTrader.com, and Autobytel.com, Inc. In addition, we compete indirectly with automobile sales lead generation service companies, such as Autobytel.com, AutoVantage, AutoTrader.com, Microsoft CarPoint and Autoweb.com, and advertising agencies because their service offerings compete with ours for a share of the automobile dealership's Internet marketing budget. We anticipate that competition in the market for automotive industry Internet services will increase significantly over time. Barriers to entry on the Internet are relatively low, and we expect to face competitive pressures from numerous companies, particularly those with existing data aggregation capabilities that may be readily integrated with Internet services. Furthermore, our existing and potential competitors may develop offerings that equal or exceed the quality of our offerings or achieve greater market acceptance than ours. Many of our current and future competitors have and will continue to have substantially greater capital, resources and access to additional financing than we do or will. We cannot assure you that we will be able to compete successfully against our current and future competitors or that competition will not have a material adverse effect on our business, results of operations or financial condition. IF AUTOMOBILE MANUFACTURERS DECIDE TO PROVIDE INTERNET MARKETING AND DATA AGGREGATION SERVICES DIRECTLY TO THEIR DEALERSHIP NETWORKS, OUR REVENUES AND GROWTH PROSPECTS WILL BE SEVERELY IMPAIRED. It is possible that some or all automobile manufacturers may attempt to provide services comparable to those that we provide to our clients. If this occurs, our ability to maintain or expand our client base and revenues will be impaired. In 1997, DaimlerChrysler Corporation announced an internal initiative to bring elements of our parts locator service in-house. This initiative could significantly reduce our contract revenues from parts data services that we currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected to host the parts locator data internally, although we continue to extract and aggregate parts inventory from its dealers. For the nine months ended September 30, 1999, revenues from parts data services provided to the MOPAR division of DaimlerChrysler represented 20.9% of our pro forma combined revenues. 16 IF WE ARE UNSUCCESSFUL IN QUICKLY AND EFFECTIVELY INTEGRATING FUTURE ACQUISITIONS, OUR BUSINESS AND RESULTS OF OPERATIONS COULD SUFFER. A key element of our growth strategy is to pursue strategic acquisitions. Integrating newly acquired businesses or technologies may be expensive and time-consuming. We may fail to manage these integration efforts successfully. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources. We may not be able to operate any acquired businesses profitably or otherwise implement our growth strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our business and results of operations could suffer. Acquisitions may cause us to incur contingent liabilities and to amortize expenses related to goodwill and other intangible assets, which could adversely affect our results of operations. OUR QUARTERLY RESULTS LIKELY WILL FLUCTUATE, WHICH MAY SUBJECT THE MARKET PRICE OF OUR COMMON STOCK TO RAPID AND UNPREDICTABLE CHANGE. As our business grows and the market for Internet marketing services matures, we expect that our quarterly operating results will fluctuate. Factors that we expect to lead to such period-to-period changes include: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the rate and volume of additions to our client base; - the amount and timing of expenditures by clients for our services; - the introduction of new products or services by us or our competitors; - the amounts and timing of expenses such as those affected with increased headcount and sales commissions; - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or our infrastructure; and - economic conditions generally and those specific to the automotive industry. We expect our business to experience seasonality, reflecting seasonal fluctuations in the automotive industry, Internet and commercial online service usage and advertising expenditures. Our expenses are relatively fixed in the short term and are based in part on our expectations of future revenues, which may vary significantly. If we do not achieve expected revenue targets, we may be unable to adjust our spending quickly enough to offset any revenue shortfall. If this were to occur, our results of operations could be significantly affected. WE MAY FAIL TO RETAIN OUR KEY EXECUTIVES AND TO ATTRACT AND RETAIN TECHNICAL PERSONNEL, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS. The loss of the services of one or more of our executive officers could have a material adverse effect on the development of our business and, accordingly, on our operating results and financial condition. We generally do not enter into employment agreements with our key executive officers and cannot guarantee that we will be able to retain them. Qualified technical personnel are in great demand throughout the Internet industry. Our future growth will depend in large part upon our ability to attract and retain highly skilled technical and engineering personnel. Our failure to attract and retain the technical personnel that are integral to our expanding service development needs may limit the rate at which we can develop new services, which could have a material adverse effect on our business, results of operations and financial condition. 17 IF THE USE OF THE INTERNET AS A COMMERCIAL MEDIUM DOES NOT GROW AS WE ANTICIPATE, OUR BUSINESS WILL BE SERIOUSLY HARMED. We depend heavily on the growth and use of the Internet. Automobile manufacturers and dealerships will not widely accept and adopt an Internet strategy if the Internet fails to provide consumers with a satisfactory experience. For example, transmission of graphical and other complex information may lead to delays. If data transmission speeds do not increase in step with the complexity of the information available, consumers may become frustrated with their Internet experiences, which could lead users to seek alternatives to Internet-based information retrieval. Furthermore, the recent growth in Internet traffic generally has caused periods of decreased performance. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. If Internet delays occur frequently, overall Internet usage or usage of our clients' Web sites could increase more slowly or not at all. Our future success and revenue growth will depend substantially upon continued growth in the use of the Internet in the sales and service process. The Internet may prove not to be a viable commercial marketing medium for vehicles and related products and services. If use of the Internet does not continue to increase, our business, results of operations and financial condition would be materially and adversely affected. IF WE BECOME UNABLE TO EXTRACT DATA FROM OUR CLIENTS' INTERNAL MANAGEMENT SYSTEMS, THE VALUE OF OUR SERVICES WOULD DECREASE DRAMATICALLY. A significant component of our business and revenues depends on our ability to extract various data types from our clients' internal management systems. Most dealership information management systems have been developed and sold by The Reynolds and Reynolds Company and ADP and our ability to interface with these systems is essential to the success of our data aggregation service offerings. It is possible that new products, services or information management systems installed by dealerships could limit or otherwise impair our ability to collect data from dealerships. This could have a material adverse effect on our business, results of operations and financial condition. WE ARE VULNERABLE TO DISRUPTIONS IN OUR COMPUTER SYSTEMS AND NETWORK INFRASTRUCTURE. SYSTEM OR NETWORK FAILURES WOULD ADVERSELY AFFECT OUR OPERATIONS. We depend on the continued performance of our systems and network infrastructure. Any system or network failure that causes interruption or slower response time for our services could result in less traffic to our clients' Web sites and, if sustained or repeated, could reduce the attractiveness of our services to clients. An increase in the volume of Internet traffic to sites hosted by us could strain the capacity of our technical infrastructure, which could lead to slower response times or system failures. Any failure of our servers and networking systems to handle current or future volumes of traffic would have a material adverse effect on our business and reputation. In addition, our operations depend upon our ability to maintain and protect our computer systems, which are located at facilities in Seattle, Washington; Portland, Oregon; and Austin, Texas. Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain back-up systems and capabilities and also maintain insurance against fires and general business interruptions, our back-up systems and our insurance coverages may not be adequate in any particular case. The occurrence of a catastrophic event could have a material adverse effect on our business, results of operations and financial condition. 18 UNKNOWN SOFTWARE DEFECTS OR SYSTEM FAILURES COULD CAUSE SERVICE INTERRUPTIONS, WHICH COULD DAMAGE OUR REPUTATION AND ADVERSELY AFFECT OUR BUSINESS. Our service offerings depend on complex systems as well as software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are created. Although we conduct extensive testing, we may not discover software defects that affect our new or current services or enhancements until after they are deployed. Complex systems may not perform properly, particularly when first deployed or when upgraded or reconfigured. Software or system defects could cause service interruptions, which could damage our reputation or increase our service costs. They also could cause us to lose revenue and divert our development resources. IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES RELATING TO THE INTERNET AND E-COMMERCE, CLIENTS MAY STOP BUYING OUR SERVICES AND OUR REVENUES WILL DECREASE. The market for Internet services is characterized by rapid technological developments, evolving industry standards and customer demands and frequent new service introductions and enhancements. Our future success will significantly depend on our ability to continually improve the quality of our data aggregation and management, product development, Web site maintenance, management and related services as well as content on our clients' Web sites. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature of Internet-based content, which could adversely affect our business, results of operations and financial condition. ECONOMIC TRENDS THAT NEGATIVELY AFFECT THE AUTOMOTIVE RETAILING INDUSTRY MAY ADVERSELY AFFECT OUR BUSINESS BY DECREASING THE NUMBER OF AUTOMOBILE DEALERS PURCHASING OUR SERVICES, DECREASING THE AMOUNT OUR CLIENTS SPEND ON OUR SERVICES, OR BOTH. Purchases of new vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the economy. The success of our business will depend upon a number of factors influencing the spending patterns of automobile dealerships and manufacturers for marketing and advertising services. These patterns are in part influenced by factors relating to discretionary consumer spending for automobile and automobile-related purchases, including economic conditions affecting disposable consumer income, such as employment, wages and salaries, business conditions, interest rates and availability of credit for the economy as a whole and in regional and local markets. Because the purchase of a vehicle is often a significant investment, any reduction in disposable income and the impact such reduction may have on our clients may affect us more significantly than businesses serving other industries or segments of the economy. OUR BUSINESS DEPENDS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND SUCH PROTECTION IS COSTLY AND MAY BE INADEQUATE. THE LOSS OF ANY OF THESE RIGHTS OR PROPERTY WOULD SERIOUSLY HARM OUR BUSINESS. Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and still evolving, and we cannot predict the future viability or value of any of our proprietary rights. We also cannot assure you that the steps that we have taken to protect our intellectual property rights and confidential information will prevent unauthorized disclosure, misappropriation or infringement of these valuable assets. In addition, our business activities may infringe upon the intellectual property rights of others and other parties may assert infringement claims against us. Any litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others might result in substantial costs and diversion of resources and management attention. Moreover, if we infringe upon the rights of others, we may be required to pay substantial amounts and may be required to either license the infringed intellectual property or to develop alternative technologies independently. We may not be able to obtain suitable substitutes for the infringed technology on acceptable terms or in a timely manner, which could adversely affect our business, results of operations and financial condition. 19 OUR ABILITY TO USE THE TRADEMARKS AROUND WHICH WE HAVE BUILT OUR BRAND IDENTITIES MAY BE LIMITED, WHICH COULD DIMINISH MARKET ACCEPTANCE OF OUR SERVICES AND UNDERMINE OUR MARKETING EFFORTS. We have filed for federal trademark protection for our trademark "Cobalt," which we use in both word and logo form. Other organizations within the computer and software industries also have filed trademark registration applications for "Cobalt." We have filed an opposition proceeding before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office with respect to two of these competing registration applications. That opposition is pending and we are in discussions with a third party applicant regarding a potential trademark use consent agreement. We may be unsuccessful in these proceedings or negotiations and may be required to limit the use of the tradenames or marks around which we have attempted to build brand identities. WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET AND LIABILITY FOR PRODUCTS SOLD OVER THE INTERNET. We could be exposed to liability with respect to third party information that is accessible through Web sites we create. These claims might assert that, by directly or indirectly providing links to Web sites operated by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by third parties through these sites. It is also possible that if any information provided on our clients' Web sites contains errors, consumers and our clients could make claims against us for losses incurred in relying on this information. We access the systems and databases of our clients and, despite precautions, we may adversely affect these systems. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and our reputation could suffer dramatically. While we believe our insurance is adequate, our general liability insurance and contractual indemnity and disclaimer provisions may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition. INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR INTERNET SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS. Due to concerns arising from the increasing use of the Internet, a number of laws and regulations have been and may be adopted covering issues such as user privacy, pricing, acceptable content, taxation and quality of products and services. This legislation could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications and commercial medium. Further, due to the global nature of the Internet, it is possible that multiple federal, state or foreign jurisdictions might attempt to regulate Internet transmissions or levy sales or other taxes relating to Internet-based activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. We cannot assess the impact of any future regulation of the Internet on our business. THE FAILURE OF OUR SOFTWARE, TECHNOLOGY AND OTHER SYSTEMS, AND OF THE SOFTWARE, TECHNOLOGY AND SYSTEMS OF OUR KEY SUPPLIERS AND CLIENTS, TO BE YEAR 2000 COMPLIANT MAY NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. We may not accurately identify all potential Year 2000-related problems that could affect our business, and the corrective measures that we implement may be ineffective or incomplete. Any Year 2000-related problems could interrupt our ability to provide services to our clients, process orders or accurately report operating and financial data. Similar problems and consequences could result if any of our key suppliers and clients experience Year 2000-related problems. To the extent that our clients rely on hardware or software that may not be Year 2000 compliant, our ability to provide our services, in particular our data extraction, aggregation and management services, could be materially and adversely affected. Our failure or the failure of our significant suppliers and clients to adequately address the Year 2000 issue could adversely affect our business, operating results and financial condition. 20 SUBSTANTIAL SALES OR THE PERCEPTION OF FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE MARKET PRICE FOR OUR STOCK. Future sales of substantial amounts of our common stock in the public market could adversely affect the market prices for our common stock. Approximately 10.9 million shares are subject to lock-up agreements that prohibit the sale of these shares until February 2000. Immediately after the lock-up period expires, these shares will become available for sale. Additional shares of common stock will become available for sale at various times thereafter upon the expiration of one-year holding periods. OUR PRINCIPAL SHAREHOLDER AND ITS AFFILIATES WILL CONTINUE TO INFLUENCE MATTERS AFFECTING US, WHICH COULD CONFLICT WITH YOUR INTERESTS. As of September 30, 1999, E.M. Warburg, Pincus & Co., LLC beneficially owned approximately 46% of our common stock and is able to exercise significant influence over us, including on matters submitted to our shareholders for a vote, such as: - the election of our board of directors; - the removal of any of our directors; - the amendment of our articles of incorporation or bylaws; and - the adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. Actions taken by Warburg could conflict with interests of other shareholders. As a result of Warburg's significant shareholdings, a potential acquirer could be discouraged from attempting to obtain control of us, which could have a material adverse effect on the market price of our common stock. OUR ARTICLES OF INCORPORATION AND WASHINGTON LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE THIRD PARTIES FROM ACQUIRING US OR LIMIT THE PRICE THAT THEY WOULD BE WILLING TO PAY FOR OUR STOCK. Our articles of incorporation and the Washington Takeover Act could have the effect of delaying or preventing a change in control. ARTICLES OF INCORPORATION. Our board of directors, without shareholder approval, has the authority under our articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change in control of Cobalt or make removal of management more difficult. Our articles of incorporation provide for the division of our board of directors into three classes, as nearly equal in number as possible, with the directors in each class serving for a three-year term, and one class being elected each year by our shareholders. Directors may be removed only for cause. Because this system of electing and removing directors generally makes it more difficult for shareholders to replace a majority of the board of directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to gain control of Cobalt. WASHINGTON TAKEOVER ACT. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a corporation, with some exceptions, from engaging in significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the corporation's board of directors prior to the time of acquisition. Significant business transactions include: - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the corporation as a result of the acquiring person's acquisition of 10% or more of the shares; and - allowing the acquiring person to receive any disproportionate benefit as a shareholder. 21 After the five-year period, a significant business transaction may occur, as long as it complies with the fair price provisions of the statute. A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of Cobalt. OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL SHAREHOLDERS. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of new services by us or our competitors, market conditions in the automobile industry, changes in financial estimates by securities analysts or other events or factors, many of which are beyond our control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology and services companies and that often have been unrelated to the operating performance of these companies. IF OUR STOCK PRICE IS VOLATILE, THE LIKELIHOOD THAT WE WILL BE SUBJECT TO SECURITIES CLASS ACTION LITIGATION WILL INCREASE. In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we were sued in a securities class action, it could result in substantial costs and a diversion of management's attention and resources, and could cause our stock price to decline. WE HAVE NOT DESIGNATED A SPECIFIC USE FOR ALL OF THE NET PROCEEDS FROM OUR INITIAL PUBLIC OFFERING. OUR MANAGEMENT MAY FAIL TO ALLOCATE A PORTION OF THE PROCEEDS TO PRODUCTIVE USES. Our management has significant discretion in applying the remainder of the net proceeds of our initial public offering. We currently expect to use the remaining net proceeds of the offering for general corporate purposes, including capital expenditures and working capital. We also may use a portion of the net proceeds for the acquisition of companies, technology or services that complement our business or for strategic alliances with, or investments in, companies that provide complementary products and services. Failure to allocate these proceeds to productive uses would adversely affect our business, operations and revenues. ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of our cash equivalents and marketable securities are at fixed interest rates, and, as such, the fair value of these instruments is affected by changes in market interest rates. However, all of our cash equivalents and marketable securities mature within one year. As a result, we believe that the market risk arising from our holding of these financial instruments is minimal. In addition, all of our current clients pay in U.S. dollars and, consequently, our foreign currency exchange rate risk is immaterial. We do not have any derivative instruments and do not engage in hedging transactions. 22 PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 1. On August 4, 1999, Cobalt's Registration Statement on Form S-1, Registration No. 333-79483 (the "Registration Statement"), was declared effective by the SEC. The Registration Statement registered 5,559,615 shares of common stock to be offered and sold in Cobalt's initial public offering and in a direct sale to General Electric Capital Assurance Company. 2. On August 10, 1999, 2,106,282, 7,047,620, and 512,500 shares of Series A, B, and C mandatorily redeemable convertible preferred stock, respectively, were converted to common stock. One share of common stock was exchanged for each share of preferred stock. 3. As of September 30, 1999, Cobalt had realized and used the proceeds from its initial public offering as follows:
(in thousands) Proceeds from sale of 4,500,000 shares, less underwriters' discounts of $3,465,000 $ 46,035 Proceeds from the direct sale to General Electric Capital Assurance Company 5,000 Expenses related to the initial public offering (564) --------- Total proceeds $ 50,471 --------- --------- Use of proceeds: Repayment of PartsVoice acquisition notes $ 23,000 Repayment of notes payable 3,600 Payment of preferred stock dividends to related parties 2,100 Payment of management fee to related party 150 Acquisition of capital assets 141 Working capital 3,275 --------- Use of proceeds $ 32,266 --------- ---------
The balance of proceeds were invested in short-term (less than one year) investments. ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K: a. Exhibits Exhibit 27 - Financial Data Schedule Exhibit 10.1 - Lease Agreement (office form dated October 24, 1999) Exhibit 10.2 - Lease Agreement (parking dated October 24, 1999) b. Reports on Form 8-K. No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 1999. 23 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, thereunto duly authorized. THE COBALT GROUP, INC. By: /s/ David M. Douglass ------------------------ David M. Douglass Chief Financial Officer, Vice President Operations, and Secretary DAVID DOUGLASS Dated: NOVEMBER 15, 1999 24 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 2200 FIRST AVENUE SOUTH LEASE AGREEMENT (OFFICE FORM) This Lease is made as of August 24, 1999, by and between 2200 First Avenue South LLC, a Washington limited liability company ("Landlord"), and The Cobalt Group, Inc., a Washington corporation ("Tenant"). In consideration of the obligations of Tenant to pay rent and other charges as provided in this Lease and in consideration of the other terms, covenants and conditions of this Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises described in this Lease for the term and subject to the terms and conditions set forth in this Lease. 1. LEASE SUMMARY. Certain Lease provisions are summarized in this Section for convenient reference: 1.1 Tenant's Trade Name..................................The Cobalt Group 1.2 Term......................6 years and 2 months (74 months total) plus any partial month at the beginning of the Lease Term......(Section 4) 1.3 Renewal Terms.........................two consecutive five year terms .......................................................(Sections 4, 6) 1.4 Premises Address.................Suite 400, 2200 First Avenue South, Seattle, WA 98134 (all of the second, third and fourth floors of the Building) 1.5 GLA in Premises....................................75,433 square feet ..................................................(Sections 5.1, 5.4) 1.6 GLA in Building....................................92,560 square feet .........................................................Section 5.4) 1.7 Tenant's Pro Rata Share.........................................81.5% ........................................................(Section 5.4) 1.8 Initial Basic Rent Per Sq. Ft. of Gross Leasable Area ("GLA")..$21.00 ($132,007.75 per month)...................................(Section 5) 1.9 Rent Adjustment ..........................................(Section 6)
Effective Date of Rent Increase New Basic Rent Per Monthly Basic Rent Square Foot of GLA November 1, 2000 $22.00 $138,293.83 November 1, 2001 $23.00 $144,579.92 November 1, 2002 $24.00 $150,866.00 November 1, 2003 $25.00 $157,152.08 November 1, 2004 $26.00 $163,438.17
1.10 Commencement Date: The earlier of (i) sixty (60) days after the Notice Date, or (ii) the date on which Tenant first opens for business in the Premises, but not earlier than November 1, 1999; provided, however, if Landlord's Work is not completed to the extent required for Tenant to open for business in the Premises on the Commencement Date, then the Commencement Date shall be delayed until the date Landlord's Work is sufficiently completed to enable Tenant to open for business in the Premises; notwithstanding the foregoing, there shall be no delay of the Commencement Date for any delay in the performance of Landlord's Work caused by Tenant or its agents, employees, contractors or subcontractors............................................(Section 4) 1.11 Use: General office use and for no other purpose.........(Section 14) 1.12 Guarantors.......................................................None 1.13 Security Deposit..........................................$861,193.42 ..........................................................(Section 3) 1.14 First Month Basic Rent Deposit..................................$None ..........................................................(Section 3) 1.15 Operational Expenses Base Year: .................................2000 ..........................................................(Section 7) 1.16 Brokers.............................Colliers International represents Landlord; Flinn Ferguson Corporate Real Estate represents Tenant; both brokers' commissions payable by Landlord.................(Section 28) PAGE - 1 1.17 Address for Notice Purposes: To Landlord: c/o Zarett Properties 114 Alaskan Way South, Suite 120 Seattle, WA 98101 To Tenant: Suite 400 2200 First Avenue South Seattle, WA 98134 References appearing in Section 1 are to designate some of the other places in this Lease where additional provisions applicable to the particular Lease provisions appear. Each reference in this Lease to any of the Lease provisions contained in Section 1 shall be construed to incorporate all of the terms provided for under such provisions, and such provisions shall be read in conjunction with all other applicable provisions of this Lease. If there is any conflict between any of the Lease provisions set forth in Section 1 and any other provisions of this Lease, the terms of the more specific clause shall prevail. 2. LEASE. Landlord leases to Tenant the exclusive use of the interior of the area outlined on the floor plan attached as EXHIBIT A (the "Premises") being a portion of the building located at 2200 First Avenue South, Seattle, Washington ("Building"), which constitutes a portion of the real property legally described in EXHIBIT B ("Property"). Tenant acknowledges and agrees that the Premises will be delivered to Tenant in its current "as-is" condition with the addition of only those items of work described on EXHIBIT C. Tenant's exclusive rights of occupancy are of the Premises only; Landlord also grants a non-exclusive license to Tenant for the term of this Lease to use the Common Area, exclusive of the parking areas, for access and uses expressly provided in this Lease only. Landlord reserves for itself, the right from time to time to install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces and within the walls of the Building and Premises. 3. DEPOSITS. Tenant has deposited with Landlord the amount set forth in Section 1.14 to be credited toward payment of the Basic Rent for the initial month of the Lease term with any balance to be credited toward payment of the Basic Rent for the following month(s) of the Lease term in the absence of a default by Tenant. If Tenant defaults, Landlord may apply the deposits set forth in Sections 1.13 and 1.14 to payment of any default. If Landlord sells or otherwise transfers the Property, Landlord may transfer the deposit(s) to the purchaser and Tenant shall look solely to such purchaser for return of the deposit(s) and Landlord shall be released from all liability and obligations under this Lease arising out of any act, occurrence or omission relating to the Premises or this Lease occurring after such sale or transfer. Landlord may commingle all deposits with other funds of Landlord; provided, however, Landlord shall not commingle the deposit set forth in Section 1.13 ("Security Deposit") with other funds of Landlord. Landlord shall notify Tenant of the separate account where the Security Deposit is kept. All interest accrued on the Security Deposit shall be the sole property of Landlord. Landlord shall refund to Tenant any unapplied portion of the Security Deposit, without interest, within thirty (30) days after termination of this Lease for any reason other than Tenant's default. In the event of termination of this Lease due to Tenant's default, Landlord shall refund to Tenant any unapplied portion of the Security Deposit, without interest, within thirty (30) days after a final determination as to the amount due Landlord, or other remedy to which Landlord is entitled as a result of Tenant's default, and payment to Landlord of the full amount due and fulfillment of any other remedy to which Landlord is entitled. So long as Tenant is not then in default beyond expiration of any applicable cure period, Landlord shall apply any unapplied portion of the Security Deposit, without interest, towards payment of the Basic Rent due for the first, thirteenth, fourteenth, twenty-fifth, twenty-sixth and seventy-fourth months of this Lease (exclusive of any partial month at the beginning of the Lease term). Landlord shall not withdraw any portion of the Security Deposit from the Security Deposit account except under the following circumstances: (i) for the payment of Basic Rent when due for the first, thirteenth, fourteenth, twenty-fifth, twenty-sixth and seventy-fourth months of this Lease; (ii) to cure a default of Tenant which has continued beyond expiration of any applicable cure period, and (iii) interest may be withdrawn at any time. The Security Deposit shall be paid to Landlord in cash in full no later than the next business day after execution of this Lease by both Landlord and Tenant. If the Security Deposit is not timely paid, this Lease may be terminated immediately upon delivery of notice of termination by Landlord to Tenant. 4. TERM. 4.1 The term of this Lease is as set forth in Section 1.2 beginning on the Commencement Date as defined in Section 1.10. Tenant shall have no duty to pay rent until the Commencement Date. Tenant agrees to sign a memorandum stating the Commencement Date at the request of Landlord. 4.2 The first Lease Year shall begin on the Commencement Date and end on the last day of the twelfth full calendar month thereafter (unless the Commencement Date is the first day of the month, in which event the first Lease Year shall end on the last day of the eleventh full calendar month thereafter. For example, if the Commencement Date is November 1, 1999, the first Lease Year would end on October 31, 2000; if the Commencement Date is November 2, 1999, the first Lease Year would end on November 30, 2000. After the first Lease Year, "Lease Year" means each successive twelve (12) month period during the term of this Lease. PAGE - 2 4.3 If Tenant occupies the Premises prior to the Commencement Date for the purpose of completing Tenant's Work or for any other purpose with Landlord's prior written consent, such early occupancy shall be subject to all of the terms and conditions of this Lease, including without limitation, the provisions of Section 15, except that provided Tenant does not commence the operation of business from the Premises, Tenant will not be obligated to pay rent during the period of such early occupancy. Tenant agrees to provide Landlord with prior notice of any such intended early occupancy and to cooperate with Landlord during the period of any such early occupancy so as not to interfere with Landlord in the completion of Landlord's Work. 4.4 The work on the Premises to be performed by Landlord is described in EXHIBIT C ("Landlord's Work"). The work on the Premises to be performed by Tenant is described in EXHIBIT D ("Tenant's Work"). When Landlord has substantially completed Landlord's Work such that Tenant may reasonably commence Tenant's Work and installation of equipment (even though a portion of Landlord's Work may remain to be completed during or after Tenant's Work), Landlord shall notify Tenant that the Premises are available for the commencement of Tenant's Work; the date of such notice shall be the "Notice Date." 4.5 Landlord shall not be liable for nor shall this Lease be affected by any delay in the occurrence of the Commencement Date because of delays caused to Landlord's Work by strikes, riots, fire, shortage of required materials, acts of God, governmental intervention, delays or the like which are not within its reasonable control. In the event Landlord fails to deliver possession of the Premises to Tenant within one hundred and twenty (120) days after execution of this Lease by both Landlord and Tenant, with Landlord's Work sufficiently completed so that Tenant may reasonably commence Tenant's Work, then Tenant shall have the right to terminate this Lease upon thirty (30) days written notice to Landlord unless Landlord so delivers possession of the Premises to Tenant before expiration of the thirty (30) days notice. In the event of termination of this Lease by Tenant under this paragraph, all deposits and prepaid rents shall be refunded in full to Tenant without interest. 4.6 Tenant shall have the right to extend the term of this Lease for the additional number of consecutive five-year periods stated in Section 1.3 (each a "Renewal Term") on the conditions set forth in this paragraph. Tenant shall exercise its right to extend the term of this Lease through the first Renewal Term by written notice delivered to Landlord no earlier than twelve (12) months but no later than six (6) months before the last day of the initial term of this Lease. Tenant shall exercise its right to extend the term of this Lease through each following Renewal Term by written notice delivered to Landlord no earlier than twelve (12) months but no later than six (6) months before the last day of the then Renewal Term. During the Renewal Terms, all of the terms and conditions of this Lease shall continue to apply, including but not limited to Tenant's payment of Tenant's Pro Rata Share of Excess Operational Expenses, except that there shall be no Landlord's Work performable by Landlord and there shall be no additional Renewal Terms. After the exercise of an option to extend, all references in this Lease to the term shall be considered to mean the term as extended, and all references to the end of the term shall be considered to mean the term as extended. Tenant's option to extend the term of this Lease under this paragraph may not be exercised if an event of default exists beyond expiration of any applicable cure period. Tenant's option to extend the term of this Lease under this paragraph shall also be deemed null and void if Tenant has been late in the payment of rent on three (3) or more occasions within any twelve (12) month period. For purposes of the preceding sentence, a payment shall be deemed to be late if it is received by Landlord after the fifth day of the month for which such rent is due. 5. RENT. 5.1 The initial annual Basic Rent shall be the product of the GLA in the Premises as set forth in Section 1.5 multiplied by the Basic Rent per square foot of GLA as set forth in Section 1.8. The annual Basic Rent shall be paid monthly in twelve equal installments due and payable on the first day of each month during each Lease Year. At Landlord's request, Tenant shall pay all rent due under this Lease including Basic Rent and additional rent, by direct deposit to such account as Landlord may designate from time to time. 5.2 In the event that the Commencement Date is other than the first day of a calendar month, the rent for the initial partial month of the first Lease Year shall be prorated accordingly and shall be due and payable on the Commencement Date. 5.3 Basic Rent shall be increased periodically to the amounts and at the times set forth in Section 1.9. 5.4 It is understood and agreed that the GLA figures set forth in Sections 1.5 and 1.6 are approximations as the Building is presently undergoing renovation. At any time within ninety (90) days after the Commencement Date, Landlord or Tenant may remeasure the Premises and Building in accordance with the Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA Z65.1-1996, as promulgated by the Building Owners and Managers Association ("BOMA Standard"). In the event that subsequent remeasurement of the Premises and Building, within the time period specified above, indicates that the actual GLA of the Building or Premises is greater or less than the GLA set forth in Section 1, any payments due to Landlord from Tenant based upon the amount of GLA shall be proportionally, retroactively and prospectively reduced or increased, as appropriate, to reflect the actual number of GLA, as properly remeasured under the BOMA Standard. If either party disputes the final accuracy of the remeasurement, such dispute will be resolved pursuant to binding arbitration with a single arbitrator in accordance with Washington law. If the parties do not agree as to the identity of the arbitrator, the then Presiding Judge of the Superior Court for the county in which the Premises are PAGE - 3 located, upon an appropriate request which either party may make, shall appoint the arbitrator. The Premises and Building shall not otherwise be again remeasured except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Building. Tenant's Pro Rata Share is set forth in Section 1.7 and is equal to the GLA of the Premises divided by the GLA of the Building and shall be revised to comport with any remeasurement. The Tenant Improvement Allowance and any deposits paid by Tenant shall also be revised to comport with any remeasurement. Landlord and Tenant shall at the request of the other execute a memorandum to memorialize the actual GLA of the Building and Premises, Tenant's Pro Rata Share, and Basic Rent over the term of this Lease, based upon any remeasurement under this paragraph. 6. RENEWAL TERM BASIC RENT. 6.1 During the first Lease Year of each Renewal Term, the Basic Rent per square foot of GLA shall be an amount equal to one hundred percent (100%) of the Fair Market Rental Rate of the Premises as of the commencement of such Renewal Term; provided, however, that the Basic Rent shall not be less than one hundred percent (100%) nor more than one hundred and fifty percent (150%) of the Basic Rent payable during the immediately preceding Lease Year. For the purposes of this Lease, the term "Fair Market Rental Rate" shall mean the annual amount per leasable square foot that Landlord has accepted in current transactions between non-affiliated parties from new, non-expansion, non-renewal and non-equity tenants of comparable credit-worthiness, for comparable space, for a comparable use for a comparable period of time ("Comparable Transactions") in the Building, or if there are not a sufficient number of Comparable Transactions in the Building, what a landlord of a comparable building in the vicinity of the Building would accept in Comparable Transactions. In any determination of Comparable Transactions for the first Renewal Term, expenses associated with a new lease will be disregarded including but not limited to brokerage fees, tenant improvement allowances, free rent periods, and so forth (i.e., the Fair Market Rental Rate will not be adjusted to take into account such factors so that Landlord retains the benefit of not having to realize those expenses). In any determination of Comparable Transactions for the second Renewal Term, expenses associated with a new lease will be taken into account including but not limited to brokerage fees, tenant improvement allowances, free rent periods, and so forth (i.e., the Fair Market Rental Rate will be adjusted to take into account such factors so that Landlord realizes those expenses). For both Renewal Terms, appropriate consideration shall be given to the annual rental rates per leasable square foot, the type of escalation clause (e.g., whether rent increases over the applicable period), and the costs passed through to the tenant compared to the payment by Tenant of Tenant's Pro Rata Share of Excess Operational Expenses under this Lease. 6.2 If, after bargaining in good faith, either party determines that the parties cannot agree on the Fair Market Rental Rate of the Premises, the Fair Market Rental Rate shall be established by binding arbitration with a single arbitrator in accordance with Washington law. If the parties do not agree as to the identity of the arbitrator, the then Presiding Judge of the Superior Court for the county in which the Premises are located, upon an appropriate request which either party may make, shall appoint the arbitrator. Within ten (10) days of the appointment of the arbitrator, each party shall submit in writing to the arbitrator the amount which each proposes be established as the Fair Market Rental Rate at the commencement of the Renewal Term ("Submissions"). The arbitrator shall not disclose any Submission to the other party until the arbitrator has received both parties' Submissions. The arbitrator shall study such evidence and information as the arbitrator deems appropriate to determine the Fair Market Rental Rate of the Premises; provided that the Arbitrator's determination of the Fair Market Rental Rate of the Premises shall be confined and strictly limited to selection, as the more reasonable approximation of the Fair Market Rental Rate of the Premises, of the amount stated in the Submission of Tenant or the Submission of Landlord, and the arbitrator may not select or declare any third number to be the Fair Market Rental Rate of the Premises. Any Submission which proposes a Fair Market Rental Rate which is less than one hundred percent (100%) or more than one hundred and fifty percent (150%) of the Basic Rent payable during the immediately preceding Lease Year shall be disregarded by the arbitrator. In its determination of Fair Market Rental Rate, the arbitrator shall take into account the factors set forth in the preceding paragraph. Except as to the Parties' Submissions, any other communication by a party to the arbitrator shall be in writing with a copy to the other party. Upon completion of the arbitrator's investigation of the Fair Market Rental Rate of the Premises, the arbitrator shall report in writing to each of the parties which party's Submission has been selected by the arbitrator as the more reasonable approximation of the Fair Market Rental Rate of the Premises without requirement of further substantiation or information. Upon receipt of such report from the arbitrator, the arbitrator's assignment shall be complete, and each of the parties to this Lease agrees to accept such determination by the arbitrator as binding and conclusive without any right of appeal. Tenant and Landlord each shall pay its own costs of arbitration and one-half of the fee due to the arbitrator for the arbitration services. 7. ADDITIONAL RENT. 7.1 In addition to Basic Rent, Tenant shall pay to Landlord, as additional rent, Tenant's Pro Rata Share of the Operational Expenses incurred by Landlord in excess of the Operational Expenses for the Base Year set forth in Section 1.15 ("Tenant's Pro Rata Share of Excess Operational Expenses"). Landlord shall reasonably estimate the monthly amount of Operational Expenses payable by Tenant, and Tenant shall pay Landlord such estimated amount together with Tenant's monthly payment of Basic Rent, but failure by Landlord to give such estimate shall not constitute a waiver by Landlord of its right to require payment by Tenant of Tenant's Pro Rata Share of Excess Operational Expenses. Landlord may adjust the estimated monthly amount to be paid based upon Landlord's actual Operational Expenses. 7.2 On or before April 1st of each calendar year during the term of this Lease, Landlord shall endeavor to compute any charge or credit to the Tenant for any difference between the actual and the PAGE - 4 estimated Excess Operational Expenses, but failure by Landlord to complete such computation by said date shall not constitute a waiver by Landlord of its right to require payment of Tenant's Pro Rata Share of Excess Operational Expenses. Any deficit shall be paid by Tenant within ten (10) days after notice. If overpaid, Landlord may either apply such overpayment to Tenant's rent obligations next coming due or reimburse Tenant. Landlord may establish a reserve account for the payment of Excess Operational Expenses, commingle such reserve with other funds and, subject to an accounting, withdraw when payments are due without notice to Tenant. No interest shall be due on any reserve account. The reserve account shall not exceed five percent (5%) of the annual Operational Expenses. Tenant's obligation for Tenant's Pro Rata Share of Excess Operational Expenses for any partial calendar year during the term of the Lease shall be prorated. 7.3 Operational Expenses shall include all costs of operation and maintenance of the Property (including any other areas which Landlord may elect to add for use for tenant, customer or employee parking) incurred by Landlord including but not limited to: water, electricity, natural gas if supplied, heat, sewer and garbage removal; licenses, permits and inspection fees; landscaping, irrigation, parking lot and garage maintenance, directional and other signage, lighting, repaving and restriping; roof maintenance; customary and reasonable property management fees not to exceed three percent (3%) of gross rents; maintaining and repairing sewer main, ducts, conduits and similar items, fire protection systems, sprinkler and security alarm systems, elevators, storm and sanitary drainage systems and other utility and mechanical systems; backflow prevention; expenses of any special events conducted by Landlord in the Common Area; materials and services for operation, maintenance or the security or protection of the Property including any janitorial services, pest control, HVAC service contracts and any other repair and maintenance by Landlord; Insurance Premiums and Taxes; but shall not include cost of improvements for individual tenants, depreciation on the Building, Capital Improvements, any insurance deductible in excess of $10,000, any uninsured casualty loss, costs of repair of latent defects in the Building, remediation of any environmental condition not caused by Tenant, and any alteration of the Building required by any laws in force on the date of execution of this Lease by Landlord and not required due to Tenant's use of the Premises. Capital Improvements shall be defined as repairs by Landlord of foundations, roofs and exterior walls, exclusive of glass, painting, signage, and routine maintenance, which are classified as capital expenditures under standard and reasonable accounting principles employed by Landlord. Operational Expenses shall include capital improvements required by any law newly enacted after execution of this Lease or which will improve operating efficiency, provided that such capital expenditures shall be amortized by dividing the original cost of such capital expenditure by the number of years of useful life of the subject of the capital expenditure and provided, further, that capital expenditures to improve operating efficiency shall be limited to the savings generated by the operating efficiency. "Insurance Premiums" are the expense of insurance maintained by Landlord as contemplated by this Lease together with any reasonably required insurance including rental loss insurance for an amount equal to the then gross rents of the Property for a loss period of approximately twelve months. "Taxes" are all real estate taxes, any installment of any improvement or other special assessment or personal property taxes charged to the Property now or in the future and all other governmental charges or requirements whether ordinary or extraordinary and including those intended to benefit the environment (exclusive of charges for remediation of any environmental condition on the Property not caused by Tenant and not general to the geographical area of the Property). Landlord shall elect to pay any new assessments or charges over the longest period available and Tenant shall pay only those installments allocable to Tenant's Lease term. Federal and state income taxes computed on Landlord's net income shall not be included in Taxes. If the assessed value of the Property in the Base Year does not reflect the renovation of the Building and the Tenant Improvements made to the Premises, then the real estate taxes charged in the Base Year shall be adjusted, for the purpose of calculating Excess Operational Expenses payable by Tenant, to the amount of real estate taxes which would have been charged if the assessed value of the Property in the Base Year took into account the renovation of the Building and the Tenant Improvements made to the Premises. 7.4 If less than one hundred percent (100%) of the GLA of the Building is occupied during any calendar year period, then the variable portion of the Operational Expenses for such period shall be deemed to be equal to the total of the variable portion of Operational Expenses which would have been incurred by Landlord if one hundred percent (100%) of the GLA of the Building had been occupied for the entirety of such calendar year with all tenants paying full rent, as contrasted with free rent, half rent or the like. Notwithstanding the foregoing, Landlord shall not recover as Excess Operational Expenses more than 100% of the Excess Operational Expenses actually paid by Landlord. Operational Expenses shall be computed according to the cash or accrual basis of accounting, as Landlord may elect in accordance with standard and reasonable accounting principles employed by Landlord. In the event of any change during the term of this Lease between a cash and accrual basis of accounting, the amount of Excess Operational Expenses payable by Tenant shall not be more than five percent (5%) greater than if such change had not been made. Landlord presently uses a cash basis of accounting. 7.5 If Landlord causes utilities for the Premises to be separately metered from utilities for other portions of the Property or otherwise provides services (including air conditioning and heating) separately for either the Premises or other portions of the Property, Landlord may elect to require the recipient of such services or utilities to pay directly for all such separately metered or provided utilities or services as received. In the event that such utilities or services to the Premises or other areas of the Property are so separately metered or charged, Tenant's Pro Rata Share of Excess Operational Expenses (as to such utilities or services) shall be adjusted to equitably compensate for separate charging of such utilities or services. Landlord shall not be liable for any interruption or failure in utility services. PAGE - 5 7.6 Tenant shall pay directly and when due any personal property tax assessed against any personal property or leasehold improvements owned by Tenant and any governmental charges resulting from Tenant's use or occupancy of the Premises. 7.7 Should any governmental taxing authority acting under any present or future law, ordinance or regulation levy, assess or impose a tax, excise or assessment (other than an income or franchise tax) upon or against or measured by rent, or any part of it, Tenant shall pay such tax, excise and/or assessment when due or shall on demand reimburse Landlord for the amount thereof, as the case may be. 7.8 Any Lease provision providing for Landlord to pay an expense or perform a service shall not limit Tenant's agreement to pay, as additional rent, Tenant's Pro Rata Share of Excess Operational Expenses. 8. PAYMENT. 8.1 Tenant will pay all rents, without any deduction or offset, at the office of Landlord, in advance, on or before the first day of each calendar month, at such reasonable location as Landlord designates. 8.2 A late charge shall be paid for any payment not received by Landlord within five (5) days of its due date, which late charge shall be equal to ten percent (10%) of the late payment. The first time in any calendar year that a late charge is due, Landlord shall deliver a three (3) day notice to Tenant of the payment due and the late charge. If the payment due is paid before expiration of the three (3) day notice, no late charge shall be due. No notices shall be required with respect to any subsequent late charges in the calendar year. 8.3 In the event any payment is not received within twenty days of its due date, an additional late charge shall be assessed, which additional late charge shall be equal to 5% of the payment so due for each calendar month or portion thereof until paid in full, together with any other late charges. 9. QUIET ENJOYMENT. Landlord warrants it has the right to make this Lease, and Tenant, if not in default, shall have quiet and peaceful possession and enjoyment of the Premises for the term of this Lease. 10. ASSIGNMENT AND SUBLETTING. 10.1 Without Landlord's prior written consent, Tenant shall not assign, mortgage, or in any manner transfer this Lease whether voluntarily or involuntarily or by operation of law, or sublet or license the Premises or any part of it. Consent to an assignment or sublease shall not be considered to be consent to any subsequent assignment or sublease. Landlord shall not unreasonably withhold, delay or condition Landlord's consent to an assignment or sublease. Landlord's consent to an assignment or sublease shall be deemed granted if Landlord fails to deliver to Tenant Landlord's reasons for withholding Landlord's consent to such assignment or sublease, in writing, within ten (10) business days after delivery to Landlord of Tenant's written request for such consent together with information respecting the proposed subtenant or assignee, financial statements of the proposed subtenant or assignee, the terms of the proposed sublease or assignment, and any other information or documents reasonably requested by Landlord. 10.2 If Landlord's consent to an assignment or sublease is requested on or after November 1, 2001, Landlord reserves the right to terminate this Lease, or if consent is requested for subletting less than the entire Premises, Landlord reserves the right to terminate this Lease with respect to the portion for which such consent is requested at the proposed effective date of such subletting. In such event, Landlord may enter into the relationship of Landlord and Tenant with any such subtenant or assignee based on the rent (and/or other compensation) and the term agreed to by such subtenant or assignee and otherwise upon the terms and conditions of this Lease. Landlord will notify Tenant in writing of Landlord's election under this paragraph to terminate this Lease with respect to all or any portion of the Premises ("Termination Notice"). Tenant may notify Landlord in writing, within five (5) business days after delivery of the Termination Notice to Tenant, that Tenant withdraws its request for Landlord's consent to the assignment or sublease and no assignment or sublet shall occur. In the event of Tenant's timely withdrawal notice, the Termination Notice shall be void. 10.3 One-half of all rent or other consideration received by Tenant from its subtenants or assignees in excess of the rent payable by Tenant to Landlord under this Lease for the applicable portion of the Premises (and net of expenses reasonably incurred by Tenant in connection with such sub-let or assignment including but not limited to brokerage fees), with respect to the time period on and after November 1, 2001, shall be paid to Landlord. Any sums to be paid by a subtenant or assignee to Tenant in consideration of the assignment of this Lease or sublease of the Premises or any portion of the Premises, if paid in one or more lump sums before November 1, 2001, shall be amortized in equal monthly payments over the term of the sublease or assignment and one-half of the amount allocable to the period of time on and after November 1, 2001, shall be paid to Landlord no later than November 1, 2001. 10.4 Tenant shall reimburse Landlord for any expense incurred by Landlord as a result of any request for such consent including any new or revised signage and attorney fees for review or preparation of related documents. Subtenants or assignees shall become directly liable to Landlord for all of Tenant's Lease obligations without limiting the liability of Tenant for the full, complete and prompt performance of PAGE - 6 Tenant's obligations under this Lease. Tenant agrees that any modification, release or extension granted by Landlord to any subtenant or assignee shall not relieve Tenant of any liability to Landlord. If Tenant is an entity other than a natural person, any change in the ownership of, or power to vote, a controlling interest in the entity shall constitute an assignment for the purposes of this paragraph, except for changes resulting from (i) publicly traded stock, and (ii) mergers or acquisitions so long as the surviving entity has a net worth equal to or greater than the previously existing tenant and the surviving entity assumes all of Tenant's obligations under this Lease. In connection with any sublease or assignment, Tenant shall provide Landlord with copies of all assignments, sublease and assumption instruments. 11. ALTERATIONS. 11.1 Tenant shall not alter the Premises without first obtaining the written consent of Landlord. Landlord may impose reasonable conditions on its consent including approval of plans, contractor and waiver of lien rights, and the provision by Tenant of "Builder's All Risk" insurance in a customary and reasonable amount approved by Landlord covering the construction of such alterations. Tenant shall provide to Landlord, before commencement of Tenant's Work, sufficiently detailed drawings and specification of Tenant's Work together with copies of all required building permits for Landlord's advance review and approval. Prior to the termination of the Lease, Tenant shall, at Tenant's expense, remove any alterations made by Tenant (other than the original Tenant's Work), designated by Landlord to be removed, and repair any damage to the Premises caused by the alteration or removal. Unless designated by Landlord for removal, any alterations made by Tenant shall become the property of Landlord at the termination of the Lease. If Tenant desires any alteration requiring boring or cutting, Landlord will direct where and how the boring and cutting for installation will be permitted. All work done by Tenant with respect to any alterations must be done in a good and workmanlike manner and diligently prosecuted to completion. 11.2 No approval by Landlord of Tenant's construction plans for Tenant's Work or any other alterations shall be deemed to be any warranty or assurance of the completeness or feasibility of such plans. Tenant agrees that it will not install any equipment that will exceed or overload the capacity of any equipment serving the Property and that, if any equipment installed by Tenant shall require additional capacity, the same shall be installed at Tenant's expense. Tenant shall not install any automatic teller machine or other remote banking device. 12. SERVICES AND UTILITIES. 12.1 Landlord agrees to furnish to the Premises between the hours of 7:00 a.m. through 6:00 p.m., Monday through Friday, and 7:00 a.m. through noon Saturday, exclusive of holidays, electricity for normal lighting and fractional horsepower office machines, and heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises. Tenant shall pay as additional rent the cost of heat, air conditioning and utilities furnished during other than the normal hours established by Landlord, at a minimum hourly fee as determined by Landlord from time to time and in no event less than Thirty and No/100 Dollars ($30.00) per hour of such use. Tenant shall provide Landlord with Forty-Eight (48) hours advance written notice of the need for such additional use. Landlord shall provide janitorial service as provided in this Lease. Landlord shall provide lamp replacement for Landlord-furnished lighting, toilet room supplies, and exterior glass washing with reasonable frequency. Landlord shall also maintain and keep lighted the common stairs, common entries and toilet rooms in the Building. Landlord shall not be liable for, and Tenant shall not be entitled to, any reduction of Rent by reason of Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, utility outages, lockouts or other labor disturbances or labor disputes of any character or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord, and; no temporary interruption or failure of such services incident to the making of repairs, alterations or improvements shall be deemed as an eviction of Tenant or relieve Tenant from any of Tenant's obligations hereunder. Landlord shall not be liable under any circumstances for a loss or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises, and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. 12.2 Tenant shall not, without written consent of Landlord, use any apparatus or device in the Premises, including, but without limitation thereto, electronic data processing machines and punch card machines, which will in any way increase the amount of electricity usually furnished or supplied for the use of the Premises as general office space; nor connect with electric current except through existing electrical outlets in the Premises, any apparatus or device, for the purpose of using electric current. If Tenant shall require water or electric current in excess of that usually furnished or supplied for the use of the Premises as general office space, Tenant shall first procure the written consent of Landlord, which Landlord may refuse, to the use thereof, and Landlord may cause a water meter or electrical current meter to be installed in the Premises, so as to measure the amount of water and electric current consumed for any such use. The cost of any such meters and of installation, maintenance and repair thereof shall be paid for by the Tenant, and Tenant agrees to pay Landlord promptly upon demand therefor by Landlord for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not PAGE - 7 installed, such excess cost for such water and electric current will be established by an estimate made by a utility company or consulting engineer. 12.3 Tenant acknowledges, understands and agrees that Landlord shall have no obligation or responsibility to provide guard service or other security measures for the benefit of the Premises or the Property other than the card-key access system which is part of Landlord's Work. Tenant assumes sole responsibility for the protection of Tenant, its agents and invitees and the property of Tenant and of Tenant's agents and invitees from acts of third parties. Landlord may, at its sole option, however, provide security protection for the Premises or Property, in which event such costs and expenses shall be included within the definition of Operational Expenses. 13. MAINTENANCE. Landlord shall provide daily janitorial service to the Premises (exclusive of Saturdays, Sundays and holidays) including vacuuming, dusting, trash removal and such regular maintenance as is normally conducted in a comparable class office building in the geographical area of the Premises including but not limited to window cleaning, pest control and snow shoveling; provided that janitorial service shall not include shampooing the carpets. Tenant shall make repairs and replacements to the Premises and Common Area, or Building needed because of any negligent or intentional act or omission of Tenant or Tenant's agents, employees or invitees, except to the extent that the repairs or replacements are covered by or required by the terms of this Lease to be covered by Landlord's insurance. Except for the repairs and replacements that Tenant must make under the preceding sentence, Landlord shall pay for and make all other repairs and replacements to the Premises, Common Area and Building, and shall maintain the Building in good condition including but not limited to: the foundations, bearing and exterior walls (including glass), subflooring and roof (including skylights), electrical, plumbing and sewage systems, gutters and down spouts, the heating, ventilating and air conditioning system, interior walls, floors, ceilings, interior and exterior doors and windows and their appurtenant sills and frames, together with all fixtures, appliances, elevators, equipment, and plumbing and utility lines. Landlord shall have no obligation to perform any maintenance under the preceding sentence until a reasonable time after receipt of written notice of the need for such maintenance. In no event shall Tenant be entitled to undertake any such maintenance or repairs, whether at the expense of Tenant or Landlord, and Tenant hereby waives the benefits of any law now or hereafter in effect which would otherwise provide Tenant with such right. Notwithstanding the foregoing, if action on the part of Tenant is required immediately to prevent property damage, personal injury or material interference with Tenant's business conducted at the Premises, then Tenant may take such reasonably required preventative action and request reimbursement for the cost of such action from Landlord. Landlord shall promptly reimburse Tenant for such cost if the action taken by Tenant was reasonable and required due to a cause for which Landlord is responsible under the terms of this Lease. If Landlord fails to reimburse Tenant for an amount due under the preceding sentence within thirty (30) days of Tenant's notice to Landlord of the amount due, then the amount due shall bear interest at the rate of twelve percent (12%) per annum. Tenant shall in no event be entitled to offset against rents any amount claimed to be owed by Landlord. The Lease and Tenant's obligations hereunder shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease due to fire, earthquake, inclement weather or other acts of God, acts of the public enemy, riot, insurrection, governmental regulation of the sales of materials or supplies or the transportation thereof, strikes or boycotts, shortages of materials or labor, or any other cause beyond the control of Landlord. 14. USE OF PREMISES. 14.1 Tenant shall use the Premises solely for the purposes set forth in Section 1.11 and for no other purpose. Neither Landlord nor any agent of Landlord has made any representation or warranty respecting the Premises or the Property or the suitability of the Premises or the Property for the conduct of Tenant's business, nor has Landlord agreed to undertake any alteration or improvement to the Premises or the Property, except for the Landlord's Work. Landlord may from time to time, in its sole discretion, make such alterations, deletions or improvements to the Property as Landlord may deem necessary or desirable, without compensation or notice to Tenant. Tenant shall promptly comply with and be responsible for its agents, employees or invitees complying with all laws, orders and regulations affecting its use of the Property. Tenant shall not do or permit anything to be done in or about the Premises or Property or bring or keep anything in the Premises that will in any way increase the premium for fire or casualty insurance. Tenant will not perform any act or carry on any practice that may injure the Premises or the Property; that may be a nuisance or menace to other tenants of the Property; or that shall in any way interfere with the quiet enjoyment of such other tenants. 14.2 Tenant shall faithfully observe and comply with the rules that Landlord shall from time to time promulgate. Landlord reserves the right from time to time to make all reasonable modifications to such rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant; provided, however, that such additions or modifications shall not impose additional monetary obligations on Tenant. Landlord shall not be responsible to Tenant for the non-compliance with any such rules by other tenants or occupants. The parties acknowledge that the rules attached hereto as EXHIBIT E are presently the rules which are in effect. 14.3 Tenant will not permit anything in the Premises that will increase the rate of any insurance or prevent Landlord from taking advantage of any ruling of an insurance bureau which would allow reduced rates for insurance policies or that may be dangerous to any person or the Property; Tenant will not permit any objectionable noise or odor to be emitted from the Premises, and; Tenant will not permit the Premises to be used for any illegal purpose. Tenant will comply at Tenant's own cost and expense with all orders, notices, regulations, or requirements of any municipality, state or other PAGE - 8 governmental authority arising from Tenant's use of said Premises. No article or articles which in the aggregate would exceed the design standard of the Premises shall be moved into the Premises; Landlord shall have the right to fix the position within the Premises of any article of unusual weight. 14.4 Tenant agrees that the opening of its business in the Premises will be its acknowledgement that it has inspected and examined the Premises, knows the condition thereof, and accepts same from Landlord in its present condition, and Landlord has satisfactorily completed all of Landlord's Work and thereby fulfilled any obligations of Landlord to prepare the Premises for Tenant's use; provided, however, Landlord shall remain responsible for the repair of latent defects in the following portions of the Building: (i) structural portions, (ii) the roof, and (iii) the utility systems. 14.5 Tenant shall not use or permit the use of the Premises for the generation, storage, treatment, use, transportation, handling or disposal of any chemical, material or substance which is regulated as toxic or hazardous or exposure to which is prohibited, limited or regulated by any governmental authority, or which, even if not so regulated, may or could pose a hazard to the health or safety of persons on the Premises or other tenants or occupants of the Property or property adjacent thereto, and no such chemical, material or substance shall be brought onto the Premises without the Landlord's express written approval. Tenant agrees that it will at all times observe and abide by all laws and regulations relating to the handling of such materials and will promptly notify Landlord of (a) the receipt of any warning notice, notice of violation, or complaint received from any governmental agency or third party relating to environmental compliance and (b) any release by Tenant, or otherwise known to Tenant, of hazardous materials on the Premises and/or Property. Tenant shall, in accordance with all applicable laws, carry out, at its sole cost and expense, any remediation required as a result of the release of any hazardous substance by Tenant or by Tenant's agents, employees, contractors or invitees, from the Premises and/or Property. Notwithstanding the foregoing, Tenant shall have the right to bring on to the Premises reasonable amounts of cleaning material and the like necessary for the operation of the Tenant's business, but Tenant's liability with respect to such materials shall be as set forth in this paragraph. 15. MECHANICS' LIEN. Tenant agrees that it will pay, when due, all costs for work caused to be done by it on the Premises, and will keep the Premises free and clear of all mechanics' liens and other liens on account of work done for it. Tenant agrees to and shall indemnify, defend and hold Landlord harmless against liability, loss, damage, costs, attorneys' fees and all other expenses on account of claims of lien of laborers or materialmen or others for work performed or material or supplies furnished for Tenant. If Tenant shall desire to contest any claim of lien, it shall furnish Landlord adequate security in the value or in the amount of the claim, plus estimated costs and interest. If a judgment establishing a lien for any amount is entered which affects the Premises or Landlord, Tenant shall pay and satisfy the same at once. Should any claims of lien be filed against the Premises or any action affecting the title to the Property be commenced, Tenant shall forthwith give Landlord written notice thereof and provide adequate security to Landlord for the payment of such claim. 16. INSURANCE BY LANDLORD. 16.1 Landlord shall maintain insurance covering the Property, including any alterations by Landlord for full insurable replacement cost during the term of this Lease, providing protection against any peril included within the classification "fire and extended coverage," together with insurance against sprinkler damage, vandalism and malicious mischief. Any insurance proceeds payable under such policy shall be used to perform any obligation of Landlord to repair or rebuild the Premises or Property, if Landlord elects to repair or rebuild as provided in this Lease. 16.2 In addition to the insurance described in Section 16.1, Landlord may maintain all risk, casualty and liability, including boiler and machinery, rental abatement, flood, earthquake and other insurance coverages deemed necessary by Landlord with respect to the Building and its operation. 16.3 The premiums, costs and deductibles of all such insurance policies carried by Landlord shall be Operational Expenses with respect to which Tenant shall pay Tenant's Pro Rata Share of Excess Operational Expenses. Notwithstanding the foregoing, in the event Landlord adds a new type of insurance coverage after the Base Year (unless such addition is required by law), then the additional premium charged for the new type of insurance coverage will not be included in Tenant's Pro Rata Share of Excess Operational Expenses but all increases in such premium shall be included in future years. 17. INSURANCE BY TENANT. Tenant shall maintain, at its expense, and naming Landlord as an additional insured, the following insurance policies and furnish Landlord a certificate from the insurance carrier evidencing the insurance (at the beginning of this Lease and at each renewal of the insurance), that Landlord is a named insured, and that the insurance cannot be terminated, discontinued or diminished without giving Landlord at least twenty (20) days prior written notice. 17.1 Comprehensive general liability insurance ("Liability Policy") with an insurance company having a Best's Rating of A-XI or higher with minimum limits of $500,000 (per accident) for property damage and $1,000,000 (per person) and $3,000,000 (per accident or occurrence) for bodily injuries and death, naming as insureds Tenant, and as additional insureds, Landlord and any lender secured by the Premises whose name has been provided to Tenant. Tenant may carry said insurance under a blanket policy. The Liability Policy shall insure against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the use, occupancy or maintenance of the Premises and all areas appurtenant thereto. The Liability Policy shall include an "Additional Insured - Managers or Landlords of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The Liability Policy shall PAGE - 9 not contain any inter-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Tenant's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Tenant shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance required to be carried by Tenant under this Lease shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance shall be considered excess insurance only. 17.2 Insurance covering Tenant's property including Tenant's original improvements to the Premises and any Tenant alterations in the Premises in an amount not less than one hundred percent (100%) of their full insurable replacement cost from time to time during the term of this Lease providing protection against any peril included within the classification "fire and extended coverage," together with insurance against sprinkler damage, vandalism and malicious mischief. Policy proceeds shall be used to repair or replace property damaged or destroyed, and to return the Premises to a condition generally approximating the condition existing prior to such damage. 18. WAIVER OF SUBROGATION. Landlord and Tenant hereby waive any rights they may have against each other and other tenants on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, their respective property, the Premises, or its contents or to other portions of the Property, arising from any risk generally covered by fire and extended coverage insurance; and the parties each, on behalf of their respective insurance companies insuring the property of either Landlord or Tenant against any such loss, waive any right of subrogation that it may have against Landlord or Tenant or other tenants, as the case may be. The foregoing waivers of subrogation shall be operative only to the extent of the policy limits provided for above or the actual policy limits, whichever are greater and so long as available in the state in which the Property is located. If necessary, Landlord and Tenant agree to cause appropriate riders to be attached to their insurance policies to effectuate such waivers. 19. INDEMNITY AND RISK OF LOSS. 19.1 Tenant will save and hold Landlord harmless from all loss, damage, liability or expense resulting from any injury to any person or property including the Premises or Property, caused by or resulting from any act or omission of Tenant, its employees, customers or suppliers except to the extent that the loss is covered by insurance maintained by Landlord or Tenant and subrogation is waived under this Lease. Tenant's obligation to indemnify Landlord under this paragraph includes an obligation to indemnify for losses resulting from death or injury to Tenant's employees, and Tenant accordingly hereby waives any and all immunities it now has or hereafter may have under any Industrial Insurance Act, or other worker's compensation, disability benefit or other similar act which would otherwise be applicable in the case of such a claim. The parties acknowledge that the foregoing provisions of this paragraph have been specifically and mutually negotiated between the parties. 19.2 Landlord shall not be liable for damage to property or to any person occurring in the Premises, Common Area or the Property arising out of any act or omission of any tenant, its employees, customers or suppliers. 19.3 All property (whether owned by Tenant, its employees or others) in the Premises shall be at Tenant's sole risk. Landlord shall not be liable for any damage to or loss of such property. 20. SECTION 20 INTENTIONALLY DELETED. 21. REMEDIES FOR DEFAULT. 21.1 If Tenant fails to pay any sum for more than three (3) business days after notice that payment of such sum is due or in the event of Tenant's default in performing any of the other terms of this Lease for more than ten (10) days after notice of such non-monetary default (or within such additional time as is reasonably required to correct any default other than payment of money by Tenant), or if Tenant assigns or otherwise transfers this Lease or subleases the Premises without Landlord's prior written consent, Landlord, in addition to the other rights or remedies it may have, shall have the right to immediately terminate this Lease or re-enter and attempt to relet without terminating this Lease and remove all persons and property from the Premises (which property may be removed and stored in a public warehouse or elsewhere at the cost and risk of, and for the account of Tenant) all without service of notice or resort to legal process and without being deemed guilty of trespass, or any liability of Landlord for any loss or damage which may be occasioned thereby. 21.2 It shall be a material breach of this Lease if Tenant or any guarantor of Tenant shall become bankrupt or insolvent, or commence any proceedings under any bankruptcy or insolvency laws, or if Tenant or any guarantor of Tenant shall take or have taken against it in federal or state court a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's or such guarantor's property, if Tenant or any guarantor makes an assignment for the benefit of creditors, of if any assets of Tenant (whether located in the Premises or elsewhere) are seized or attached by any creditor of Tenant or a governmental agency. 21.3 If Landlord, without terminating this Lease, either (1) elects to re-enter the Premises and attempt to relet or (2) takes possession of the Premises pursuant to legal proceedings, or (3) takes possession of the Premises pursuant to any notice provided by law, then Landlord may, from time to time, make such alterations and repairs as may be necessary in order to relet the Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rent and other terms as Landlord in its reasonable discretion deems advisable. Upon such reletting, all PAGE - 10 rents received by Landlord from such reletting shall be applied, first, to the payment of any indebtedness of Tenant (other than any rents due hereunder) to Landlord; second, to the payment of any costs and expenses of obtaining possession and any such reletting, including expense of alterations and repairs, brokerage fees and attorney's fees; third, to the payment of any rents due and unpaid hereunder. If such rents and any other amounts received from such reletting during any month be less than that to be paid during that month by Tenant, Tenant shall immediately pay such deficiency to Landlord. No such re-entry or taking possession of the Premises by Landlord shall be construed as an election by Landlord to terminate this Lease unless a notice of such intention be given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, Landlord may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Premises, reimbursement of any brokerage fees incurred by Landlord in connection with Tenant's lease, and all rent as follows which, at Landlord's election, shall be accelerated and be due in full on demand: 21.3.1 The unpaid rent and additional rent payable hereunder which had been earned at the date of such termination plus interest at the rate of 18% per annum from the date due until paid in full; plus 21.3.2 The present worth of the amount by which the unpaid rent and additional rent which would have been earned after termination for the balance of the term exceeds the amount of such rental loss which Tenant proves could reasonably have been avoided. 21.3.3 As used in subparagraph 21.3.2 above, the "present worth" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco as of the date of termination plus one percent. The present worth amount due under subparagraph 21.3.2 shall bear interest at the rate of 18% per annum from the date of termination until paid in full. 21.4 Landlord's rights and remedies in this Lease are cumulative and no one of such rights and remedies shall be exclusive at law or in equity of the rights and remedies which Landlord might otherwise have by virtue of a default under this Lease, and the exercise of one such right or remedy by Landlord shall not impair Landlord's standing to exercise any other right or remedy. Landlord and Tenant shall, and do hereby, waive trial by jury in any action, suit or proceeding related to, arising out of or in connection with the terms, conditions and covenants of this Lease. 21.5 In the event that Tenant and Landlord are parties to any other agreement in addition to this lease, any breach of such other agreement shall also be deemed, at the sole election of Landlord, to be a breach of this Lease and vice versa. 22. DAMAGE BY CASUALTY. In the event of damage to the Property or the Premises by casualty which renders the Property, in whole or in part, or the Premises untenantable, Landlord shall within ninety (90) days after said casualty notify the Tenant whether or not Landlord elects to reconstruct ("Reconstruction Notice"). If in Landlord's good faith estimation, the Premises cannot be restored within one hundred eighty (180) days after Landlord receives notice of damage, Landlord shall so notify Tenant in Landlord's Reconstruction Notice. Tenant may terminate this Lease by delivery of notice to Landlord within thirty (30) days after delivery of Landlord's Reconstruction Notice notifying Tenant that the Premises cannot be restored within one hundred eighty (180) days. If Landlord elects not to reconstruct or if Tenant elects under the preceding sentence to terminate this Lease, this Lease shall be terminated as of the date of such damage and rents will be prorated as of that date. If the Lease is not so terminated, there shall be an abatement of rent and additional rent for the entire period of time between the date of such destruction and the date on which the Premises shall be placed in tenantable condition. If the Property is partially destroyed by casualty and the damage does not amount to the above extent, Landlord shall repair the Property with all convenient speed and shall have the right to take possession of and occupy, to the exclusion of Tenant, all or any portion of the Property necessary to complete repairs, in which event there shall be an abatement of rent and additional rent as the nature of the damage and its interference with the occupancy of the Premises by Tenant shall warrant. If the Premises are only slightly damaged so as not to cause any material interference with Tenant's occupancy, there shall be no abatement of rent and Landlord shall repair the damage as soon as possible. In the event of any casualty (with or without election to rebuild), Landlord shall have no obligation to replace, rebuild or repair any property of Tenant including alterations by Tenant, but such Tenant property or alterations shall be replaced, rebuilt or repaired by Tenant as soon as possible. 23. CONDEMNATION. If the entire Premises, or a portion of the Property required for reasonable use of the Premises, shall be taken by virtue of any condemnation or eminent domain proceeding, this Lease shall automatically terminate as of the date of such condemnation, or as of the date possession is taken by the condemning authority, whichever is earlier. Rent shall be apportioned as of the date of such termination. In case of a taking of a part of the Premises or a portion of the Property not required for the reasonable use of the Premises, then this Lease shall continue in full force and effect and the rental shall be equitably reduced based on the proportion by which the floor area of Premises is reduced, effective as of the date of such partial taking. No award for any partial or entire taking or any taking of Common Area shall be apportioned, and Tenant hereby assigns to Landlord any award which may be made in such taking or condemnation together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof; provided, however, that nothing herein shall be deemed to give Landlord any PAGE - 11 interest in or to require Tenant to assign to Landlord any award made to Tenant for interruption of Tenant's business or Tenant's moving expenses. 24. PRIORITY AND ATTORNMENT. 24.1 So long as the mortgagee or lienholder shall agree to recognize this Lease in the event of foreclosure if the Tenant is not in default, this Lease shall be subordinate to any mortgages now a lien or hereafter placed upon the Property and to all advances made thereunder, all interest thereon and to all sums secured thereby, and all renewals, replacements, consolidations and extensions thereof together with such other restrictions or covenants as may be placed of public record during the term of this Lease. Any mortgagee may elect to have this Lease prior in right to its mortgage, and in the event of such election, and upon notification by such mortgagee to Tenant to that effect, this Lease shall be deemed to have priority over the lien of such mortgage, whether this Lease is dated prior or subsequent to such mortgage. Tenant shall execute and deliver whatever instruments may be required from time to time by any mortgagee for any of the foregoing purposes, and in the event Tenant fails so to do within ten (10) days after demand, Tenant hereby makes and irrevocably appoints Landlord as its attorney-in-fact and in its name, place and stead so to do. 24.2 Tenant waives any right of election to terminate this Lease in the event any foreclosure proceeding is brought by any mortgagee. Tenant agrees, in the event of any foreclosure proceedings, to attorn to the purchaser, at such purchaser's request, at such foreclosure sale and to recognize such purchaser as Landlord under this Lease. 24.3 Tenant covenants and agrees that, in the event of one or more sales or assignments of Landlord's interest in the Property, Tenant will attorn to the transferee(s) of Landlord's interest in the Property and will recognize such transferee(s) as Tenant's Landlord under this Lease. Tenant agrees, on ten (10) days' prior notice by Landlord, to execute and deliver, from time to time, any instrument which may be appropriate to evidence Tenant's attornment and Tenant irrevocably appoints Landlord its attorney-in-fact to execute, acknowledge, and deliver for and on behalf of Tenant any such instrument. 24.4 "Mortgage" and "mortgagee" herein shall include a mortgage, deed of trust or security agreement and the mortgagee, the beneficiary of a deed of trust or secured party. Tenant shall within ten (10) days of request by Landlord deliver an executed and acknowledged instrument amending this Lease in such respects as may be required by any present or future mortgagee, provided that such amendment does not materially alter or impair Tenant's rights or remedies under this Lease or increase its rent. 24.5 In the event of any default by Landlord, Tenant will give notice by registered or certified mail to any mortgagee holding a mortgage covering the Premises or any leasehold interest therein whose address shall have been furnished to Tenant, and shall offer such mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 24.6 Promptly upon execution of this Lease by Landlord and Tenant, Landlord shall request ____________________, its lender holding a security interest in the Property, to execute an agreement to not disturb Tenant's possession of the Premises under this Lease so long as Tenant performs its obligations under this Lease (commonly known as, and referred to herein as, a "subordination, non-disturbance and attornment agreement" and/or as an "SNDAA"). If the executed SNDAA has not been delivered to Tenant within fifteen (15) days after execution of this Lease by Landlord and Tenant, then Tenant may terminate this Lease by written notice delivered to Landlord no later than thirty (30) days after execution of this Lease by Landlord and Tenant. Upon such termination, all prepaid rents and/or deposits shall be refunded in full to Tenant without interest. If Tenant does not timely terminate this Lease, Tenant shall be deemed to have forever waived any requirement of delivery of the SNDAA. 25. RULES, REGULATIONS AND MISCELLANEOUS. 25.1 REGULATIONS. Landlord may from time to time make regulations appropriate for the use and operation of the Property and Common Area so long as not inconsistent with the terms, covenants and conditions of this Lease and so long as such regulations do not unreasonably, adversely affect Tenant's business. Landlord may condition its approval of Tenant's use of Common Area for special events upon increased insurance coverage for the duration of such special events. 25.2 SIGNAGE. Landlord shall install a sign on each floor of the Premises, in the main lobby of the Building, and if one exists the building monument near the entrance to the Building. Each sign shall be in Landlord's standard building form, which form may be changed from time to time by Landlord in its sole discretion, and shall identify Tenant's name and suite number. Tenant shall not place any additional signs on the Property including on any entrance to Tenant's suite without prior written consent of Landlord. Landlord shall not unreasonably withhold its consent to Tenant signage on the exterior of the Building (exclusive of the south side) which, if such consent is granted, shall be installed at Tenant's sole expense and in compliance with all applicable sign ordinances. Withholding of Landlord's consent to Tenant signage on the exterior of the Building for the purpose of reserving reasonable signage area for the ground floor tenants of the Building shall be deemed to be reasonable. Landlord may also withhold consent to Tenant signage on the south side of the Building in Landlord's sole discretion. Any sign erected or maintained in violation hereof may be removed by Landlord at Tenant's expense. Landlord may at any time during the last one hundred eighty (180) days of the term of the Lease place on or about the Premises "for rent" signs. Landlord may at any time place on or about the Premises "for sale" signs. Tenant shall not obliterate or hide Landlord's "for rent" or "for sale" signs. PAGE - 12 25.3 LANDLORD ACCESS AND ALTERATIONS. Landlord reserves the right to make alterations to the Property and Common Area and to enter the Premises for such purpose or to accomplish any repairs for which Landlord is responsible or Landlord deems to be necessary to avoid damage to the Property or Premises. Such entry and/or actions shall not constitute an assumption of responsibility for such repairs by Landlord or an eviction and, except as may be specifically provided in this Lease, shall not cause any abatement of rent. Landlord may also enter the Premises for purposes of inspection and to show the Premises to prospective purchasers, mortgagees and tenants. Landlord will exercise its rights under the preceding sentence in a manner that will not cause unreasonable interference with Tenant's business. Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults and safes. Tenant shall not alter any lock or install a new or additional lock or bolt on any door of the Premises without prior written consent of Landlord. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. 25.4 DELIVERIES. Deliveries shall be received and trash removed only at such hours and in such manner as shall least inconvenience other tenants. Landlord retains the right to designate both point of entry to the Property for use by such trucks, unloading and loading areas and the hours during which deliveries may be received or trash removed. 25.5 NAME AND USE OF NAME. The name of the Property may be changed by Landlord during the term of this Lease unless the Building has been named after The Cobalt Group pursuant to Section 30 of this Lease. 25.6 SECTION 25.6 INTENTIONALLY DELETED. 25.7 COMMON AREA. From time to time during the term of this Lease Landlord shall designate as Common Area such portions of the Property which are licensed for use in common by the tenants of the Property. No area which is subject to lease or exclusive rights of occupancy by any person shall be considered to be Common Area. Landlord shall be entitled, from time to time, to lease portions of the Common Area to others, to change the location, size, entrances to or the configuration of the Common Area or any improvement on the Property or to otherwise increase or decrease the area designated as Common Area so long as Landlord does not violate the applicable zoning code. Landlord shall be entitled to allow the use of the Common Area by such other persons and on such terms and for such uses as Landlord deems appropriate. 25.8 FUTURE PARKING AGREEMENTS. Tenant agrees that Landlord shall have the right, but not the obligation, to agree with owners of other properties to impose joint parking rights on the Property and such other properties; any such action by Landlord shall have no effect on this Lease except that Tenant shall be subject to the terms of such agreement. 25.9 PARKING. Tenant acknowledges that the Property is subject to a Transportation Management Plan and that all parking on the Property is subject to the terms of the Transportation Management Plan. Any rights of Tenant to parking on or about the Property shall be solely by separate agreement entered into by Landlord and Tenant and shall not arise under this Lease. Landlord shall have the sole right to regulate and allow usage of and to lease parking areas located on the Property including parking by tenants of the Property or adjacent properties and any parking which is a condition of complying with a governmental regulation or is a condition of a building or occupancy permit. 25.10 MEMORANDUM OF LEASE. This Lease shall not be recorded. Upon request of either party, the parties hereto will execute a memorandum of lease which may be recorded by either party to provide record notice of the existence of this Lease but shall not disclose any of the economic terms. 25.11 CERTIFICATES. At Landlord's request from time to time after the beginning of the Lease term, Tenant agrees within fifteen (15) days of demand to execute, acknowledge and deliver to Landlord a certificate which acknowledges tenancy and possession of the Premises and recites such other facts concerning any provision of this Lease or payment made under this Lease which a prospective mortgagee or purchaser may reasonably request. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance or, at Landlord's option, such failure shall constitute a default by Tenant under this Lease. At Landlord's request from time to time, Tenant further agrees to provide to Landlord Tenant's most recent profit and loss statement and balance sheet. 25.12 NOTICES. Any notice provided for in this Lease shall be considered received on the third (3rd) day following deposit of the notice into the mails or the date actually received, whichever is earlier. Any notices may be given to the other party at the address set forth in Section 1.17. Either party may change its address by giving notice of such change. 25.13 REMEDY. Tenant agrees, at all times, to look only to Landlord's interest in the Property (and the proceeds of the rental, sale, insured losses or condemnation of the Property) for satisfaction of any claim whatsoever against Landlord and not to any other property or assets of Landlord. 25.14 TENANT AUTHORITY. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant. If Tenant is an entity other than a natural person, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord a certified copy of a resolution of Tenant's governing board or other governing persons, committee or organization, authorizing or ratifying the execution of this Lease. PAGE - 13 25.15 LEASES ARE INDEPENDENT. Tenant shall not be deemed to be a third party beneficiary of any other lease of the Property; Landlord retains the sole right to determine, in its discretion, whether to enforce and the method of enforcement of compliance by other tenants and their employees with the terms of their respective leases including any restrictions on use and parking; the existence of any violation of any lease provision by any other tenant shall not be deemed to be a violation of this Lease by Landlord. 25.16 ENTIRE AGREEMENT. This Lease and any attachments or exhibits attached hereto, if any, set forth all of the agreements and understandings between Tenant and Landlord as to the subject matter of this Lease and all prior negotiations, discussions or agreements are replaced by this Lease. No subsequent alteration, amendment, change or addition to this lease shall be binding upon Tenant or Landlord unless in writing and signed by both Tenant and Landlord. 25.17 LANDLORD'S CONSENT. Any consent required by Landlord under this Lease must be granted in writing and may be withheld by Landlord in its sole and absolute discretion, except where otherwise expressly stated in this Lease, and any delay in consenting will not be a breach of this Lease. 25.18 SECTION 25.18 INTENTIONALLY DELETED. 25.19 INTERPRETATION. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Premises are located. When required by the context of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. The headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. "Party" shall mean Landlord or Tenant. If more than one person or entity constitutes Landlord or Tenant, the obligations imposed upon that party shall be joint and several. The enforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal. All provisions, whether conditions or covenants on the part of Tenant, shall be deemed to be both conditions and covenants. Subject to the restrictions on assignment or subletting, the rights, liabilities and remedies provided for herein shall extend to the heirs, legal representatives, successors and, as far as the terms of this Lease permit, assigns of the parties hereto. 25.20 WAIVER. No delay or omission in the exercise of any right or remedy or acceptance of any payment or portion thereof due hereunder by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including, without limitation, acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only written notice from Landlord to Tenant of such acceptance shall constitute acceptance of the surrender of the Premises and accomplish termination of this Lease. Landlord's consent to any act by Tenant shall not be deemed to waive or render unnecessary Landlord's consent to any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 25.21 SECTION 25.21 INTENTIONALLY DELETED. 25.22 SECTION 25.22 INTENTIONALLY DELETED. 25.23 ATTORNEYS' FEES. In the event of any default under this Lease, the defaulting party agrees to pay the cost of legal counsel incurred by the other party, whether incurred with or without commencement of litigation and on appeal or in the course of collection. 25.24 HOLDING OVER. If Tenant shall hold over after the expiration of the term of this Lease, and shall not have agreed in writing with Landlord upon the terms and provisions of a new lease prior to such expiration, Tenant shall remain bound by all the terms, covenants and agreements hereof, except that the tenancy shall be from month to month and the Basic Rent shall be equal to one hundred fifty percent (150%) of the Basic Rent due for the last month of the term of the Lease. 25.25 SUBMISSION OF LEASE. Submission of this Lease for examination, even though executed by Tenant, shall not bind Landlord in any manner, and no Lease or other obligation on the part of the Landlord shall arise, until this Lease is executed and delivered by Landlord to Tenant. 26. SURRENDER OF PREMISES. Tenant shall surrender and deliver to Landlord possession of the Premises upon the expiration or earlier termination of this Lease, broom clean, free of debris, and in substantially the same condition as the date Tenant opened for business at the Premises (except as may be Landlord's obligation under this Lease, damage by casualty or condemnation, and ordinary wear and tear), and shall deliver the keys to Landlord. 27. FUTURE SUBDIVISION OF PROPERTY. In the event Landlord elects to subdivide the Property or to declare all or parts of the Property to be condominiums, Tenant agrees to cooperate with Landlord in such process and to disclaim any interest in the Property, except for Tenant's Premises so long as the area of Tenant's Premises is not reduced and the parking available to Tenant, if any, is not materially, adversely affected. 28. BROKERS. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for the broker(s) identified in Section 1.16, who shall be compensated by the party identified in Section 1.16. To the extent Landlord does not pay when due a commission payable by Landlord under Section 1.16, Tenant shall have the right, but not the obligation, to pay such commission and deduct the amount of same from the rents next due and PAGE - 14 owing under this Lease, together with interest at the rate of twelve percent (12%) per annum (computed from the date such commission was paid by Tenant until the date of the offset). Tenant shall deliver written notice to Landlord of Tenant's intention to pay any commission at least ten (10) days before the date of payment. 29. RIGHT OF FIRST REFUSAL. On condition that Tenant is not then in default beyond expiration of any applicable cure period, Tenant shall have the Right of First Refusal to lease space ("Expansion Space") in the remainder of the Building (exclusive of the roof and basement). Tenant's Right of First Refusal shall not be effective with respect to the lease of space on the ground floor of the Building until after the first Lease Year. Expansion Space leased by Tenant pursuant to exercise of the Right of First Refusal shall become part of the Premises under all the terms and conditions of this Lease, including, without limitation, Tenant's payment of Tenant's Pro Rata Share of Excess Operational Expenses, and the then current Lease term and options to extend the term, except that the Basic Rent for the Expansion Space shall be established as provided in this Section of this Lease and except that any tenant improvement allowance or other concessions with respect to the Expansion Space shall be established as provided in this section of this Lease. 29.1 If and when Landlord procures an executed letter of intent to lease all or part of the Expansion Space to another tenant, Landlord shall notify Tenant in writing and provide Tenant a copy of such letter of intent ("Preliminary Notice"). Tenant shall have ten (10) days within which to notify Landlord in writing ("Tenant's Notice") of its agreement to lease the Expansion Space described in the Preliminary Notice on the terms described in the Preliminary Notice as adjusted to take into account the terms and conditions of this Lease, including, without limitation, Tenant's payment of Tenant's Pro Rata Share of Excess Operational Expenses, and the then current Lease term. For example, if the letter of intent in the Preliminary Notice provides for a lease term of ten (10) years and a tenant improvement allowance of $20 per useable square foot and there are only two (2) years remaining on the term of this Lease, then the tenant improvement allowance of $20 per useable square foot would be pro-rated to $4 per useable square foot (2/10th of $20). If Landlord would be required to pay a leasing commission in connection with lease of the Expansion Space to another tenant but would be required to pay no leasing commission or a smaller leasing commission if Tenant exercises its Right of First Refusal with respect to the Expansion Space, then Tenant shall receive no payment, rent credit or other concession in lieu of payment of the leasing commission. Tenant shall begin paying rent with respect to the Expansion Space (regardless of the terms of the Preliminary Notice) on the earlier of (i) sixty (60) days after the date of delivery of Landlord's Preliminary Notice to Tenant (or thirty (30) days after delivery of possession of the Expansion Space to Tenant, if later), or (ii) the date Tenant commences business in the Expansion Space. If Tenant does not timely deliver Tenant's Notice to Landlord, then Tenant shall be deemed to have waived its Right of First Refusal with respect to the Expansion Space identified in the Preliminary Notice and Landlord shall be free to lease such Expansion Space on such terms as are no more favorable to the tenant than those described in the Preliminary Notice. 29.2 If, after bargaining in good faith, the parties cannot agree on and execute an amendment to this Lease to add the Expansion Space to the Premises on the terms set forth in the Preliminary Notice, as adjusted to take into account the terms and conditions of this Lease ("Expansion Space Lease Amendment"), within thirty (30) days after delivery to Tenant of the Preliminary Notice, then the terms of the Expansion Space Lease Amendment shall be established by binding arbitration with a single arbitrator in accordance with Washington law. If the parties do not agree as to the identity of the arbitrator, the then Presiding Judge of the Superior Court for the county in which the Premises are located, upon an appropriate request which either party may make, shall appoint the arbitrator. Within ten (10) days of the appointment of the arbitrator, each party shall submit in writing to the arbitrator its proposed Expansion Space Lease Amendment and any supporting documentation ("Submissions"). The arbitrator shall not disclose any Submission to the other party until the arbitrator has received both parties' Submissions. The arbitrator shall study such evidence and information as the arbitrator deems appropriate to determine the terms of the Expansion Space Lease Amendment; provided that the Arbitrator's determination of the terms of the Expansion Space Lease Amendment shall be confined and strictly limited to selection, as the more reasonable interpretation of the terms of this Lease, of the proposed Expansion Space Lease Amendment set forth in the Submission of Tenant or the Submission of Landlord, and the arbitrator may not draft a third Expansion Space Lease Amendment. Except as to the Parties' Submissions, any other communication by a party to the arbitrator shall be in writing with a copy to the other party. Upon completion of the arbitrator's investigation of the terms of the Expansion Space Lease Amendment, the arbitrator shall report in writing to each of the parties which party's Submission has been selected by the arbitrator as the more reasonable interpretation of this Lease without requirement of further substantiation or information. Upon receipt of such report from the arbitrator, the arbitrator's assignment shall be complete, and each of the parties to this Lease agrees to accept such determination by the arbitrator as binding and conclusive without any right of appeal. Tenant and Landlord each shall pay its own costs of arbitration and one-half of the fee due to the arbitrator for the arbitration services. 30. BUILDING NAME. Landlord will rename the Building after The Cobalt Group at Tenant's option on condition that all of the following conditions are satisfied: 30.1 Tenant delivers written notice to Landlord of Tenant's desired Building name on or before October 1, 1999; 30.2 The Building name proposed by Tenant is approved by Landlord which approval Landlord will not unreasonably withhold; and PAGE - 15 30.3 The Building name does not violate any applicable laws, rules, ordinances or regulations with respect to building names or addresses including but not limited to any rules of the U.S. Post Office. In the event the Building is named after The Cobalt Group, Landlord may continue use of the Building name after termination of this Lease, in Landlord's sole discretion, unless Tenant requests Landlord to remove Tenant's name from the Building name. If Tenant requests Landlord to remove Tenant's name from the Building name, Landlord shall do so within a reasonable period of time on condition that Tenant pays all of the expenses related to the name change including changes in signage, stationery, and so forth. 31. ROOFTOP DECK. Tenant shall have the exclusive right to install a deck on the roof of the Building for the use of Tenant's employees as a "break" area. The deck shall not exceed six thousand (6,000) square feet in area and shall be located on the roof in an area approved by Landlord which approval Landlord shall not unreasonably withhold. Installation and maintenance of the deck shall be at Tenant's sole expense, and shall be subject to all of the requirements with respect to alterations set forth in Section 11 of this Lease. Tenant shall be strictly liable for the repair of and payment for any damages caused by or resulting from roof damage caused by installation or use of the deck. Construction and use of the deck shall comply with all applicable safety regulations, building codes, and any requirements or restrictions imposed by any insurer issuing liability or property insurance in connection with the Building. Tenant understands that access to the roof of the Building is limited. Landlord shall have no obligation to improve such access. In the event such access is required to be improved due to the application of the Americans with Disabilities Act or pursuant to any other law, Tenant shall at its sole expense effect such access improvements unless the improvements are required solely as a result of use of the rooftop by Landlord or another tenant of Landlord. If the access improvements are required due to a combination of the use by Tenant and other tenants or Landlord, then the cost to effect such access improvements will be equitably divided between the relevant parties in a manner determined by Landlord. If the access improvements would not be required if Tenant ceased use of the rooftop deck, then Tenant shall be relieved of any obligation to make such access improvements if Tenant agrees to cease use of the rooftop deck and complies with such requirements as may be imposed by the relevant governing agency as a condition of rescinding the requirement of access improvements. For all purposes under this Lease, the rooftop deck shall be deemed part of the Premises, provided, however, Tenant shall not be required to pay any additional Basic Rent or any greater Pro Rata Share of Excess Operational Expenses as a result of such rooftop deck. 32. OTHER ROOF USE. Tenant may install on the roof of the Building a generator and telecommunications equipment subject to Landlord's approval, other's equipment and related agreements. Tenant acknowledges that it has been advised that Landlord has entered into or will enter into cell site leases for the lease of space on the roof of the Building to communications providers regulated by the Federal Communications Commission including but not necessarily limited to AirTouch Communications, Inc., Nextel West Corp., and Western PCS BTA Development Corporation ("Communications Providers"). Tenant agrees that it will not install or operate on the roof of the Building any telecommunications equipment which constitutes a transmission facility of the type operated by Communications Providers without first obtaining the written consent of those Communications Providers operating equipment on the roof of the Building. Landlord acknowledges that use of roof space by Communications Providers may not reduce the area available to Tenant for Tenant's rooftop deck. Landlord shall include in any cell site lease with a Communications Provider the obligation of the Communications Provider to comply with all Federal Communications Commission requirements and to operate its facilities in a manner that will not cause interference to tenants of the Building. For all purposes under this Lease, the rooftop area used by Tenant under this paragraph shall be deemed part of the Premises, provided, however, Tenant shall not be required to pay any additional Basic Rent or any greater Pro Rata Share of Excess Operational Expenses as a result of such rooftop use. 33. TENANT IMPROVEMENTS. 33.1 Tenant will contract, with a general contractor who meets with Landlord's reasonable approval to make certain tenant improvements to the Premises at Tenant's sole expense ("Tenant Improvements"). Tenant shall have final working drawings and specifications prepared which show all improvements to be constructed in the Premises ("Final Plans") and the Final Plans shall be submitted to Landlord for approval which approval shall not be unreasonably withheld. The Final Plans may be submitted in one or more parts and at one or more times, provided, however, that all of the Final Plans shall be submitted no later than September 30, 1999. The Final Plans shall be a reasonable extrapolation of the preliminary plans previously reviewed and approved by Landlord (and addressing any concerns expressed by Landlord with respect to the preliminary plans), with the scope and magnitude of the Tenant Improvements not being materially reduced. If Landlord fails to deliver to Tenant approval or disapproval, in writing, within five (5) business days after delivery of the Final Plans to Landlord, then Landlord shall be deemed to have approved the Final Plans. Landlord may condition Landlord's approval of the Final Plans on Tenant's agreement to remove and restore, upon the termination of this Lease, any floor penetrations such as stairwells or slides between floors of the Premises. Any disapproval must specifically point out what was disapproved and why. The Final Plans to the extent approved by Landlord shall be itemized on Exhibit D attached to this Lease. After Landlord's approval of the Final Plans, no material changes shall be made without the approval of Landlord and the Tenant Improvements shall be constructed in material accordance with the Final Plans. If Tenant requests a change to the Final Plans, Landlord shall not unreasonably withhold its consent, and Landlord shall approve or disapprove any change order within two (2) business days of receipt. Any change in Tenant's contractor shall be subject to Landlord's reasonable approval. Tenant shall assume responsibility for assuring that the Final Plans PAGE - 16 are satisfactory for the operation of its business, all permits for construction of the Tenant Improvements are obtained, and that the Tenant Improvements are made in accordance with all building code and other governmental requirements. Tenant shall retain an architect who meets with Landlord's reasonable approval to prepare and monitor construction of the Tenant Improvements, to assure compliance with the Final Plans approved by Landlord, and to issue a certificate of completion to Landlord attesting to the fact that the Tenant Improvements have been substantially completed in accordance with the approved Final Plans (as amended by any change orders) and the date of such substantial completion. 33.2 As a condition of Landlord's approval of its contractor, Tenant shall cause its contractor to acknowledge that (i) its contract is solely with Tenant, (ii) Tenant is neither the statutory nor actual agent of Landlord and (iii) that Landlord is not responsible for any payment due from Tenant to such contractor and (iv) such contractor will not allow any laborer, supplier, equipment renter or subcontractor to assert a lien against the Premises. Tenant shall further require its contractor to provide such warranties and insurance for Landlord's benefit as Landlord reasonably requires. As between Landlord and Tenant's contractor, the contractor shall specifically assume potential liability for actions brought by the contractor's own employees against Landlord and for that purpose shall specifically waive any immunity against claims by Landlord under the Workers Compensation Act, RCW Title 51; and the contractor shall acknowledge that such waiver was specifically entered into pursuant to the provisions of RCW 4.24.115 and was the subject of mutual negotiation. 33.3 Landlord's rights of consent or approval are for the benefit and protection of Landlord only. No consent or approval given by Landlord shall be construed as any assurance to Tenant or anyone else as to the suitability or sufficiency of any such matter receiving Landlord's consent or approval. 33.4 In addition to all of its other obligations of indemnity under this Lease, Tenant shall indemnify, defend and hold Landlord harmless from any and all damages, claims, liabilities, attorneys' fees and expenses (including attorneys' fees and expenses incurred in enforcing this indemnity) relating to any claim of or loss of life, personal injury or damage to real and personal property arising from or related to the Tenant Improvements or acts or omissions of Tenant, its contractors, subcontractors or agents or any failure of Tenant to strictly comply with all laws or governmental requirements. Tenant's obligation to indemnify Landlord arising from bodily injury or damage to property caused by or resulting from the concurrent negligence of Landlord, its agents or employees, and the Tenant, its agents or employees, shall be valid and enforceable only to the extent of the negligence of the Tenant, its agents and employees. Furthermore, in the situations described in this section, Tenant shall not be obligated to indemnify Landlord for the sole negligence of Landlord, its agents or employees. 33.5 Landlord shall receive no fee for supervision, profit, overhead or general conditions in connection with the Tenant Improvements, unless Landlord's services are required in connection with the Tenant Improvements. 33.6 Neither Tenant nor its contractor shall be charged for, and Landlord shall provide for Tenant's architects, designers, contractors and subcontractors (including those people working on the Tenant Improvements), electricity, water, and elevators, during the construction of the Tenant Improvements and during the move into the Premises. 34. TENANT IMPROVEMENT ALLOWANCE. 34.1 Landlord shall pay to Tenant in cash a tenant improvements allowance in the amount of twenty-five and no/100 dollars ($25.00) per leasable square foot in the Premises ("Tenant Improvement Allowance") (i.e., the product of $25 multiplied by the GLA in the Premises as set forth in Section 1.5 subject to the remeasurement terms of this Lease). The Tenant Improvement Allowance shall be available thirty (30) days after the commencement of the Tenant Improvements work at the Premises, and shall be paid to Tenant or to one or more contractors, designers and/or subcontractors designated by Tenant within ten (10) days after Tenant has confirmed in writing to Landlord that the portion of the Tenant Improvements covered by the request by Tenant have been completed to Tenant's satisfaction and accepted by Tenant and that all lien releases applicable thereto have been obtained by Tenant. Landlord may also condition advance of any of the Tenant Improvement Allowance on the following: 34.1.1 Receipt by Landlord of lien waivers from all persons supplying labor or materials for the Tenant Improvements and a certification from Tenant's architect that the percentage of the total work and materials constituting the Tenant Improvements which has been completed in accordance with the approved construction contract exceeds the percentage of the total amount of the Tenant Improvement Allowance which, together with the then current draw request, has been disbursed to date; 34.1.2 Written documentation in the form of confirmation of funds or otherwise providing reasonable assurance to Landlord that Tenant has available sufficient funding for the full performance of the Tenant Improvements; and 34.1.3 There is no material default under the Lease by Tenant beyond expiration of any applicable cure period. 34.2 To the extent Landlord does not pay the Tenant Improvement Allowance within thirty (30) days of the date due, Tenant may deduct the unpaid amount from the rents next due and owing under PAGE - 17 this Lease, together with interest at the rate of twelve percent (12%) per annum (computed from the date such payment was due until the date of the offset). 34.3 In addition to payment of the Tenant Improvement Allowance, Landlord shall reimburse Tenant upon execution of this Lease up to fifteen cents ($0.15) per leasable square foot in the Premises for costs of preliminary space planning. Preparation of construction documents, engineering, city permits and working drawing costs shall be paid out of the Tenant Improvement Allowance. 34.4 In addition to payment of the Tenant Improvement Allowance, Landlord shall pay to Tenant at the time that the last installment of the Tenant Improvement Allowance is due, the following amounts: (i) $2,900 in lieu of Landlord's installation of the upper floor lobby carpeting and lighting (which shall be installed by Tenant at Tenant's expense as part of the Tenant Improvements), and (ii) $2,500 in lieu of Landlord's installation of a ramp or handicap lift to provide handicapped access to a portion of the second floor of the Building (Tenant shall install a handicap lift at Tenant's expense as part of the Tenant Improvements). LANDLORD: TENANT: 2200 First Avenue South LLC, The Cobalt Group, Inc., a Washington limited liability company a Washington corporation By: By: ----------------------------------- --------------------------------- David Zarett, Member By: --------------------------------- LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that David Zarett is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as a member of 2200 First Avenue South LLC, to be the free and voluntary act of such party for the uses and purposes stated therein. Dated ______________________________. ------------------------------------- Name: -------------------------------- NOTARY PUBLIC, State of Washington My appointment expires -------------- TENANT ACKNOWLEDGMENT REPRESENTATIVE FORM OF ACKNOWLEDGMENT STATE OF _________________ ) ) ss. COUNTY OF _______________ ) I certify that I know or have satisfactory evidence that ______________________ and ______________________ are the persons who appeared before me, and said persons acknowledged that they signed this instrument, on oath stated that they are authorized to execute the instrument and acknowledged it as the President and Secretary, respectively, of The Cobalt Group, Inc., to be the free and voluntary act of such party for the uses and purposes stated therein. Dated ______________________________. ------------------------------------- Name: -------------------------------- NOTARY PUBLIC, State of Washington My appointment expires -------------- PAGE - 18 EXHIBIT A (FLOOR PLAN OF PREMISES) EXHIBIT B (LEGAL DESCRIPTION OF PROPERTY) LOTS 1, 2, 3 AND 4 IN BLOCK 317 OF SEATTLE TIDE LANDS; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON. EXHIBIT C (LANDLORD'S WORK) a. Finished common areas including all restrooms, elevators, elevator lobbies, stairways and parking areas (finish to be consistent with similar class office building); b. HVAC stubbed to Tenant's space (HVAC to be distributed by Tenant); c. Exterior windows installed and sealed; d. Finished window systems including frames, sills, casing and Building standard window coverings; e. Landlord shall install electrical panels providing capability for Tenant to operate standard office computer equipment, HVAC, and lighting in its Premises; f. Emergency lighting shall be installed and operational throughout all Building common areas as required by code; g. Life Safety: sprinkler heads installed and operational throughout the Building; h. Floor ready for Tenant's floor coverings; i. Parking lot blacktopped and striped; underground garage shall be remote controlled and secured by steel doors; lighting of exterior of Building and parking lot. j. Utility costs during Tenant's build-out; k. A telecommunications conduit in central location for Tenant's use; l. Landlord shall provide Tenant with 200 card keys. Additional cards shall be at Tenant's cost. m. The Building envelope shall comply with all applicable energy code requirements. n. Landlord's Work shall be executed in substantial compliance with the following plans and specifications: - Building Shell and Core Improvement Detail attached (note that the upper floor lobby carpeting and lighting is to be installed by Tenant at Tenant's expense as part of the Tenant Improvements as provided in Section 34.4 of the Lease; run out ducts and diffusers also to be installed by Tenant at Tenant's expense as part of the Tenant Improvements as provided in the HVAC System section of the attached Detail) - Basement Plan dated June 6, 1998 by Broderick Architects attached - Second Floor Plan by Burgess Design, Inc. attached - Third Floor Plan by Burgess Design, Inc. attached - Fourth Floor Plan by Burgess Design, Inc. attached Tenant acknowledges that it is the sole responsibility of Tenant to assure the adequacy of any improvements to the Premises and that Landlord is relying on Tenant to determine Tenant's needs; the expense of any improvements beyond those listed in this Exhibit shall be paid by Tenant. EXHIBIT D (TENANT'S WORK) A. TENANT'S WORK. All work not specifically described as Landlord's Work in EXHIBIT C shall be the obligation of the Tenant and shall be performed in accordance with approved plans and specifications at the sole cost of Tenant. B. GENERAL. 1. Landlord, Tenant or utility company shall have the right, subject to Landlord's approval, to run utility lines, pipes, roof drainage pipes, conduit, wire or duct work, where necessary, through attic space, column space or other parts of the Premises, and to maintain same in a manner which does not interfere unnecessarily with Tenant's use thereof. 2. The Tenant shall prepare all its plans and perform all its work to comply with all governing statutes, ordinances, regulations, codes and insurance rating boards; take out all necessary permits and obtain certificates of occupancy for the work performed by Tenant - all subject to Landlord's approval. Tenant shall further pay all utility deposits and government impact fees. 3. The floor will be designed to support a uniformly distributed loan. Should the Tenant desire a heavier loading, Tenant agrees to pay the cost of engineering and the cost of providing such heavier loading capacity. 4. All work done on the Premises by Tenant must be performed by licensed contractors approved by Landlord. Tenant's contractors shall be required to waive all lien rights against Landlord's interest in the Property. C. FINAL PLANS. The Finals Plans for the Tenant Improvements to be constructed by Tenant are as follows: [TO BE INSERTED AS PROVIDED IN LEASE] EXHIBIT E LANDLORD RULES 1. ENTRANCE AND EXITS The sidewalks, entrances, elevators, stairways and halls shall not be obstructed or used for any purpose other than ingress or egress. The common areas of the Property are not for the use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation or interests of the Property and its tenants, provided that nothing herein contained shall be construed to prevent such access by persons with whom Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant shall not enter the mechanical rooms, air handler rooms, electrical closets or janitorial closets or go upon the roof of the Building without the prior written consent of Landlord. 2. AWNINGS No awning or other projections shall be attached to the outside walls of the Building, and no window shades, blinds, drapes or other window coverings shall be hung in the Premises, without the prior written consent of Landlord. Except as otherwise specifically approved by Landlord, all electrical ceiling fixtures hung in the Building must be approved by Landlord. 3. RESTROOMS The toilets, wash basins and other plumbing fixtures shall be used solely for the purposes for which they were constructed, and no garbage shall be thrown therein. All damage resulting from any misuse of such fixtures shall be borne by the tenant who, or whose employees, agents, or invitees shall have caused the same. 4. DEFACEMENT No tenant shall in any way deface any part of the Premises or the Property. No boring or cutting for wires, stringing of wires or laying of linoleum or other similar floor coverings shall be permitted without the prior written consent of Landlord and then only as Landlord may direct. 5. PROHIBITED ACTIVITIES No vehicles or animals of any kind shall be brought into or kept in or about the Premises, and no cooking shall be done or permitted on the Premises without the prior written consent of Landlord, except the preparation of coffee, tea and other beverages for the tenant, its employees and visitors. No tenant shall cause or permit any unusual or objectionable odors to escape the Premises. The Premises shall not be used for lodging or sleeping or for any immoral or illegal purposes. No tenant shall make, or permit to be made, any unseemly or disturbing noises, sounds or vibrations, or otherwise disturb or interfere with occupants of the Property or those having business with them. No tenant shall throw anything out of doors or in the corridors, stairways or other common areas of the Property. Tenant shall not obtain access to, or permit its agents, servants, employees or contractors to obtain access to utility lock boxes, janitorial and building storage areas, or other storage compartments not leased to Tenant, without Landlord's prior written approval. 6. DELIVERIES AND PICK -UPS All removals or deliveries of freight must take place during normal business hours and in the locations designated by Landlord from time to time. The moving of fixtures, furniture or other large objects must be made upon previous notice to the manager of the Property and under its supervision, and the persons employed by Tenant for such work must be acceptable to Landlord. Landlord reserves the right to prohibit or impose conditions upon the installation in the Premises of heavy objects which might overload the Building floors. 7. ENTRY Landlord reserves the right to exclude unauthorized parties from the Property or the Building at all times other than the reasonable hours of generally recognized business days determined by Landlord. All doors opening onto public corridors shall be kept closed, except when in use for ingress or egress. On weekends and legal holidays, and on other days between the hours of 6 p.m. and 8 a.m. the following day, access to the Property, the Building or the Premises may be refused unless the person who seeks access is known to the employees of the Property in charge or is properly identified. Landlord shall in no case be liable for damages for any error respecting the admission to or exclusion from the Property, the Building or the Premises of any person. In case of riot or other commotion, Landlord reserves the right to prevent access to the Property or the Building during the continuance of the same by closing the door or otherwise, for the safety of the tenants and protection of property at the Property. All of Tenant's agents, employees and invitees shall comply with all security regulations established from time to time by Landlord. 8. SOLICITORS Canvassing, soliciting and peddling on the Property are prohibited, and Tenant shall cooperate to prevent the same. 9. TELEPHONES Landlord will direct technicians as to where and how telephone wires are to be installed. The location of telephones and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 10. EXPLOSIVES OR FIREARMS No explosives, firearms or flammables of any kind shall be brought into the Premises or onto the Property. 11. BUILDING DIRECTORY The bulletin board or directory of the Building (1) will be provided exclusively for the display of the name and location of tenants only, (2) shall be maintained exclusively by Landlord, and (3) shall be in the form determined by Landlord in its sole discretion. 12. EXPULSION Landlord reserves the right to exclude or expel from the Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner violate the rules of the Property. 13. REFUSE AND GARBAGE Refuse and garbage shall be removed from the Premises at such times and intervals, through such exits thereof and over such routes of egress therefrom as Landlord may designate from time to time. No refuse or garbage will be stored anywhere except inside the Premises or in areas designated by Landlord. "NOTICE DATE" RIDER TO 2200 FIRST AVENUE SOUTH LEASE AGREEMENT (OFFICE FORM) This "Notice Date" Rider is dated as of the date of the 2200 First Avenue South Lease Agreement (Office Form) ("Lease") to which this Rider is attached and modifies the attached Lease by and between 2200 First Avenue South LLC, a Washington limited liability company ("Landlord"), and The Cobalt Group, Inc., a Washington corporation ("Tenant"), concerning certain premises commonly referred to as Suite 400, 2200 First Avenue South, Seattle, Washington, and legally described in the Lease ("Premises"). References in this Rider to the Lease shall refer to the attached Lease as modified by the terms of this Rider unless the context requires otherwise. To the extent the terms of this Rider are inconsistent with the other terms of the Lease, the terms of this Rider shall control. Unless specifically stated otherwise, all capitalized terms in this Rider shall have the same meaning as defined in the Lease. 1. "NOTICE DATE." Section 4.4 of the Lease provides in part: When Landlord has substantially completed Landlord's Work such that Tenant may reasonably commence Tenant's Work and installation of equipment (even though a portion of Landlord's Work may remain to be completed during or after Tenant's Work), Landlord shall notify Tenant that the Premises are available for the commencement of Tenant's Work; the date of such notice shall be the "Notice Date." Landlord and Tenant acknowledge and agree that the Premises will be available for the commencement of Tenant's Work before final inspection and approval of all of Landlord's Work by the City of Seattle building department. In the event, after the Notice Date, Tenant's Work is subject to a "stop work" order issued by the City of Seattle building department based upon incorrectly completed or uncompleted Landlord's Work, then the Notice Date shall be deemed to be extended one day for each day that such "stop work" order remains in effect with respect to Tenant's Work after Tenant delivers to Landlord notice of the "stop work" order based upon which Tenant is entitled to extension of the Notice Date, together with a copy of the "stop work" order, any associated correspondence and a description of the corrective action required to be taken by Landlord. Notwithstanding the foregoing, if the "stop work" order with respect to Tenant's Work is lifted within twenty-four (24) hours (exclusive of weekends and holidays) after Tenant delivers written notice to Landlord of the "stop work" order, then there shall be no extension of the Notice Date based upon such "stop work" order. If a "stop work" order with respect to Tenant's Work is issued for reasons other than incorrectly completed or uncompleted Landlord's Work or if a "stop work" order with respect to Tenant's Work is erroneously issued, then there shall be no extension of the Notice Date based upon such "stop work" order. 2. DELIVERY OF NOTICE. Any notice delivered under this Rider shall be delivered in writing either personally, by mail or by facsimile transmission. In the event notice is delivered by mail, it shall be deemed to have been delivered, whether actually received or not, on the date three days after the day the notice is deposited in the United States mail, certified mail, return receipt requested, addressed to the party entitled thereto at the address of such party set forth below; provided, however, that notice by mail shall not be deemed delivered until actually received if the address to which such notice is sent is outside of the United States. In the event notice is delivered by facsimile transmission, it shall be deemed to have been delivered, whether actually received or not, on the date the facsimile machine of the party sending the notice prints a confirmation report that the facsimile transmission was received by the facsimile machine at the facsimile number set forth below as the facsimile number of the party receiving the notice; provided, however, if the time of delivery at the receiver's facsimile machine was not between the hours of 9:00 a.m. and 5:00 p.m. local time on a business day, then the notice shall be deemed to have been delivered the next business day, and provided, further, that contemporaneously with the facsimile transmission the party sending the notice shall telephone the party receiving the notice at the telephone number set forth below and leave a message concerning the facsimile transmission being sent. Copies of all notices delivered by facsimile shall be promptly mailed to the parties being notified but such mailing shall only be for the convenience of the parties and shall not affect the effectiveness of the notice delivered by facsimile. The address and facsimile number to which notice shall be delivered may be changed by notice to the other parties. Copies of notice shall be simultaneously delivered to the counsel of the party receiving the notice as indicated below. To Landlord: c/o Zarett Properties 114 Alaskan Way South, Suite 120 Seattle, WA 98101 Facsimile No. 206-682-9439 Telephone No. 206-621-8949 With a copy to: Camille Taylor Ralston Montgomery, Purdue, Blankinship & Austin P.L.L.C. 5800 Columbia Seafirst Center 701 - Fifth Avenue Seattle, Washington 98104 Fax: (206) 625-9534 Telephone: (206) 682-7090 To Tenant: Suite 400 2200 First Avenue South Seattle, WA 98134 With a copy to: David Rockwell Stoel Rives 600 University Street, #3600 Seattle, Washington 98101 Fax: (206) 386-7510 Telephone: (206) 386-7694 3. RATIFICATION. Except as specifically amended herein, all of the terms, conditions and covenants of the Lease are hereby ratified and shall continue in full force and effect. LANDLORD: TENANT: 2200 First Avenue South LLC, The Cobalt Group, Inc., a Washington limited liability company a Washington corporation By: By: ----------------------------------- -------------------------------- David Zarett, Member By: -------------------------------- EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 2200 FIRST AVENUE SOUTH PARKING LEASE AGREEMENT This Lease is made as of August 24, 1999, by and between 2200 First Avenue South LLC, a Washington limited liability company ("Landlord"), and The Cobalt Group, Inc., a Washington corporation ("Tenant"). In consideration of the obligations of Tenant to pay rent and other charges as provided in this Lease and in consideration of the other terms, covenants and conditions of this Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises described in this Lease for the term and subject to the terms and conditions set forth in this Lease. 1. LEASE. Landlord leases to Tenant the exclusive use of the entire underground parking garage outlined on the floor plan attached as EXHIBIT A-1 ("Garage") being a portion of the building located at 2200 First Avenue South, Seattle, Washington ("Building"), which constitutes a portion of the real property legally described in EXHIBIT B ("Property"); provided, however, Landlord shall retain the exclusive use of three (3) regular sized parking stalls in the Garage ("Landlord's Stalls") to be designated by Landlord from time to time together with non-exclusive ingress and egress to and from the Garage for access to Landlord's Stalls. Landlord's Stalls initially designated by Landlord are shown on EXHIBIT A-1. Landlord may use Landlord's Stalls for Landlord's use or to lease to others. Landlord also leases to Tenant the exclusive use of the parking stalls and the non-exclusive use of the drive aisles located in that portion of the outside parking area outlined on the site plan attached as EXHIBIT A-2 ("Outside Parking Area") being on and/or in the vicinity of the Property. The Garage and Outside Parking Area are collectively referred to in this Lease as the "Leased Parking Area." References to the Garage shall be deemed to be exclusive of Landlord's Stalls unless the context requires otherwise. Landlord shall provide to Tenant, on or before the commencement date of this Lease, one remote opener device ("Opener Device") for each parking stall in the Garage portion of the Leased Parking Area. Additional Opener Devices desired by Tenant at the beginning of this Lease shall be available at a cost of fifty dollars ($50.00) each. 2. TERM. The term of this Lease shall commence and terminate on the same days as the commencement and termination (by expiration of the term or earlier termination) of the term (as it may be extended) of the 2200 First Avenue South Lease Agreement (Office Form) of even date between Landlord and Tenant for the lease of the second, third and fourth floors of the Building ("Office Lease"). During the term of this Lease, Tenant shall have use of the Garage 24 hours per day, seven days per week, and use of the Outside Parking Area from 6:00 a.m. to 6:00 p.m. Monday through Friday; provided, however, there shall be no admission of automotive vehicles to the Outside Parking Area after 5:00 p.m. Tenant shall have no duty to pay rent until the Commencement Date as defined in the Office Lease. In the event of a partial termination of the Office Lease (i.e., termination of the Office Lease with respect to less than all of the premises leased under the Office Lease), then Landlord reserves the right to terminate this Lease with respect to a proportionate portion of the Leased Parking Area in both the Garage and Outside Parking Area. 3. RENT AND DEPOSITS. 3.1 Tenant shall pay monthly rent ("Rent") to Landlord for the Leased Parking Area on the first day of each month during the term of this Lease. At Landlord's request, Tenant shall pay all Rent due under this Lease by direct deposit to such account as Landlord may designate from time to time. In the event that the first day of the term of this Lease is other than the first day of a calendar month, the rent for the initial partial month shall be prorated accordingly and shall be due and payable on the first day of the term of this Lease. 3.2 The Rent shall be equal to the product of the number of parking stalls located in the Leased Parking Area multiplied by the prevailing market rate for the monthly rental of such parking stalls on an individual basis. Landlord and Tenant agree that, as of the date of execution of this Lease, the prevailing market rate for the monthly rental of the parking stalls in the Garage is $85 per month and the prevailing market rate for the monthly rental of the parking stalls in the Outside Parking Area is $65 per month. The initial Rent shall therefore be $4,840 per month (34 stalls in the Garage @ $85/month plus 30 stalls in the Outside Parking Area @ $65/month). 3.3 Landlord may adjust the Rent no more frequently than once in any calendar year to reflect the prevailing market rate for the monthly rental of the parking stalls located in the Leased Parking Area. Landlord shall provide at least thirty (30) days written notice to Tenant of the amount and effective date of any such Rent adjustment. There shall be no Rent adjustment during the first Lease Year of the Office Lease (as defined in the Office Lease). PAGE 1 3.4 Should any governmental taxing authority acting under any present or future law, ordinance or regulation levy, assess or impose a tax, excise or assessment (other than an income or franchise tax) upon or against or measured by rent, or any part of it, Tenant shall pay such tax, excise and/or assessment when due or shall on demand reimburse Landlord for the amount thereof, as the case may be. 3.5 Tenant shall deposit with Landlord fifty dollars ($50.00) for each Opener Device upon receipt (except for Opener Devices purchased by Tenant under this Lease). The deposit shall secure the return of each Opener Device to Landlord in good condition, ordinary wear and tear excepted. If Landlord sells or otherwise transfers the Property, Landlord may transfer the deposit(s) to the purchaser and Tenant shall look solely to such purchaser for return of the deposit(s) and Landlord shall be released from all liability and obligations under this Lease arising out of any act, occurrence or omission relating to the Leased Parking Area or this Lease occurring after such sale or transfer. Landlord may commingle all deposits with other funds of Landlord. Landlord shall refund to Tenant any unapplied portion of the deposit with respect to each Opener Device, without interest, within thirty (30) days after return to Landlord of such Opener Device in accordance with the terms of this Lease. 4. PAYMENT. 4.1 Tenant will pay all rents, without any deduction or offset, at the office of Landlord, in advance, on or before the first day of each calendar month, at such reasonable location as Landlord designates. 4.2 A late charge shall be paid for any payment not received by Landlord within five (5) days of its due date, which late charge shall be equal to ten percent (10%) of the late payment. The first time in any calendar year that a late charge is due, Landlord shall deliver a three (3) day notice to Tenant of the payment due and the late charge. If the payment due is paid before expiration of the three (3) day notice, no late charge shall be due. No notices shall be required with respect to any subsequent late charges in the calendar year. 4.3 In the event any payment is not received within twenty days of its due date, an additional late charge shall be assessed, which additional late charge shall be equal to 5% of the payment so due for each calendar month or portion thereof until paid in full, together with any other late charges. 5. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent, Tenant shall not assign, mortgage, or in any manner transfer this Lease whether voluntarily or involuntarily or by operation of law, or sublet or license the Leased Parking Area or any part of it. Notwithstanding the foregoing, Tenant may charge its employees working at the premises leased under the Office Lease for parking in the Leased Parking Area. In the event of an authorized assignment by Tenant of its interest in the Office Lease, Tenant shall be entitled to assign this Lease to the same assignee. Consent to an assignment or sublease shall not be considered to be consent to any subsequent assignment or sublease. Landlord may otherwise withhold or condition Landlord's consent to an assignment or sublease in Landlord's discretion. Tenant shall reimburse Landlord for any expense incurred by Landlord as a result of any request for such consent including any new or revised signage and attorney fees for review or preparation of related documents. Subtenants or assignees shall become directly liable to Landlord for all of Tenant's Lease obligations without limiting the liability of Tenant for the full, complete and prompt performance of Tenant's obligations under this Lease. Tenant agrees that any modification, release or extension granted by Landlord to any subtenant or assignee shall not relieve Tenant of any liability to Landlord. If Tenant is an entity other than a natural person, except for changes resulting from publicly traded stock, any change in the ownership of, or power to vote, a controlling interest in the entity shall constitute an assignment for the purposes of this paragraph. In connection with any sublease or assignment, Tenant shall provide Landlord with copies of all assignments, sublease and assumption instruments. 6. ALTERATIONS. Tenant shall not alter the Leased Parking Area without first obtaining the written consent of Landlord which Landlord may withhold or condition in its discretion. Landlord may alter the Leased Parking Area as required from time to time to comply with the Transportation Management Program for the Property or any other laws applicable to use of the Leased Parking Area, including but not limited to designating parking stalls for use exclusively by certified High Occupancy Vehicles at no cost, designating disabled parking and installing directional signage. In the event alteration of the Leased Parking Area results in a reduced number of parking stalls, the Rent from the date of such alteration shall be reduced by a commensurate amount; in the event alteration of the Leased Parking Area results in an increased number of parking stalls, the Rent from the date of such alteration shall be increased by a commensurate amount. 7. SERVICES, UTILITIES, AND MAINTENANCE. PAGE 2 7.1 No utilities, except for lighting, shall be provided to the Leased Parking Area. 7.2 Landlord shall maintain the Leased Parking Area in a manner comparable to parking lot maintenance in the geographical area of the Building including sweeping, snow removal, asphalt maintenance, re-striping, directional signage and lighting. Tenant shall not be entitled to any reduction of Rent by reason of Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, utility outages, lockouts or other labor disturbances or labor disputes of any character or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord, and; no temporary interruption or failure of such services incident to the making of repairs, alterations or improvements shall be deemed as an eviction of Tenant or relieve Tenant from any of Tenant's obligations hereunder. 7.3 Landlord shall not be liable under any circumstances for a loss or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Landlord shall not be in breach of any obligation to perform any maintenance to the Leased Parking Area unless the maintenance is reasonably necessary and until a reasonable time after receipt of written notice of the need for such maintenance. In no event shall Tenant be entitled to undertake any such maintenance or repairs, whether at the expense of Tenant or Landlord, and Tenant hereby waives the benefits of any law now or hereafter in effect which would otherwise provide Tenant with such right. Tenant shall in no event be entitled to offset against rents any amount claimed to be owed by Landlord. The Lease and Tenant's obligations hereunder shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease due to fire, earthquake, inclement weather or other acts of God, acts of the public enemy, riot, insurrection, governmental regulation of the sales of materials or supplies or the transportation thereof, strikes or boycotts, shortages of materials or labor, or any other cause beyond the control of Landlord. 7.4 Tenant acknowledges, understands and agrees that Landlord shall have no obligation or responsibility to provide guard service or other security measures for the benefit of the Leased Parking Area or the Property. Tenant assumes sole responsibility for the protection of Tenant, its agents and invitees and the property of Tenant and of Tenant's agents and invitees from acts of third parties. 7.5 Tenant acknowledges and agrees that the Leased Parking Area will be delivered to Tenant in its current "as-is" condition with the addition of only those items of work described on EXHIBIT C. Landlord reserves for itself, the right from time to time to install, use, maintain, repair, replace and relocate underground pipes, ducts, conduits, wires and appurtenant meters and equipment above the ground in the Leased Parking Area. 8. USE OF LEASED PARKING AREA. 8.1 Tenant shall use the Leased Parking Area solely to provide parking for Tenant and its employees and invitees and for no other purpose. Neither Landlord nor any agent of Landlord has made any representation or warranty respecting the Leased Parking Area or the Property or the suitability of the Leased Parking Area or the Property for the conduct of Tenant's business, nor has Landlord agreed to undertake any alteration or improvement to the Leased Parking Area or the Property, except for that expressly provided in this Lease. Landlord may from time to time, in its sole discretion, make such alterations, deletions or improvements to the Property as Landlord may deem necessary or desirable, without compensation or notice to Tenant. Tenant shall promptly comply with and be responsible for its agents, employees or invitees complying with all laws, orders and regulations affecting its use of the Property including but not limited to the Transportation Management Program for the Property as it may be modified from time to time to comply with laws and regulations. Tenant shall not do or permit anything to be done in or about the Leased Parking Area or Property or bring or keep anything in the Leased Parking Area that will in any way increase the premium for fire or casualty insurance. Tenant will not perform any act or carry on any practice that may injure the Leased Parking Area or the Property; that may be a nuisance or menace to other tenants of the Property; or that shall in any way interfere with the quiet enjoyment of such other tenants. Tenant shall not install any automatic teller machine or other remote banking device. 8.2 Tenant shall faithfully observe and comply with the rules that Landlord shall from time to time promulgate. Landlord reserves the right from time to time to make all reasonable modifications to such rules; provided that the rules will not restrict Tenant's parking rights under this Lease nor increase Tenant's cost of parking under this Lease. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant; provided, however, that such additions or modifications shall not impose additional monetary obligations on Tenant. Landlord shall not be responsible to Tenant for the non-compliance with any such rules by other tenants or occupants. PAGE 3 8.3 Tenant shall not use or permit the use of the Leased Parking Area for the generation, storage, treatment, use, transportation, handling or disposal of any chemical, material or substance which is regulated as toxic or hazardous or exposure to which is prohibited, limited or regulated by any governmental authority, or which, even if not so regulated, may or could pose a hazard to the health or safety of persons on the Leased Parking Area or other tenants or occupants of the Property or property adjacent thereto, and no such chemical, material or substance shall be brought onto the Leased Parking Area without the Landlord's express written approval. Tenant agrees that it will at all times observe and abide by all laws and regulations relating to the handling of such materials and will promptly notify Landlord of (a) the receipt of any warning notice, notice of violation, or complaint received from any governmental agency or third party relating to environmental compliance and (b) any release by Tenant, or otherwise known to Tenant, of hazardous materials on the Leased Parking Area and/or Property. Tenant shall, in accordance with all applicable laws, carry out, at its sole cost and expense, any remediation required as a result of the release of any hazardous substance by Tenant or by Tenant's agents, employees, contractors or invitees, from the Leased Parking Area and/or Property. Notwithstanding the foregoing, Tenant shall have the right to bring on to the Leased Parking Area reasonable amounts of cleaning material and the like necessary for the operation of the Tenant's business, but Tenant's liability with respect to such materials shall be as set forth in this paragraph. 8.4 Tenant shall promptly advise Landlord of lost or misplaced Opener Devices. Replacement Opener Devices will be available at a cost of fifty dollars ($50.00) each or such greater cost as may then be incurred by Landlord to provide replacement Opener Devices. Tenant shall not use any Opener Devices other than those provided by Landlord. 8.5 Within fifteen (15) days after Landlord's request from time to time, Tenant shall furnish Landlord with its and its employees' license numbers. If Tenant or its agents, employees, contractors or invitees park their vehicles on the Property outside the Leased Parking Area, Landlord may cause the vehicle to be towed away at the risk and expense of the owner of the vehicle and/or charge Tenant a minimum of thirty dollars ($30.00) per day for each day or partial day per car improperly parked by Tenant or its agents, employees, contractors or invitees; provided, however, Landlord agrees to give Tenant written notice of the first violation of this provision and Tenant shall have two (2) days thereafter within which to cause the violation to be discontinued; and if not discontinued within such two-day period then the $30.00 per day fine shall commence. After notice of such first violation, no prior notice of any subsequent violation shall be required. All amounts due under the provisions of this section shall be payable by Tenant within ten (10) days after demand therefor. 9. INSURANCE BY TENANT. Tenant shall maintain, at its expense, and naming Landlord as an additional insured, the following insurance policies and furnish Landlord a certificate from the insurance carrier evidencing the insurance (at the beginning of this Lease and at each renewal of the insurance), that Landlord is a named insured, and that the insurance cannot be terminated, discontinued or diminished without giving Landlord at least twenty (20) days prior written notice. 9.1 Comprehensive general liability insurance ("Liability Policy") with an insurance company having a Best's Rating of A-XI or higher with minimum limits of $500,000 (per accident) for property damage and $1,000,000 (per person) and $3,000,000 (per accident or occurrence) for bodily injuries and death, naming as insureds Tenant, and as additional insureds, Landlord and any lender secured by the Leased Parking Area whose name has been provided to Tenant. Tenant may carry said insurance under a blanket policy. The Liability Policy shall insure against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the use, occupancy or maintenance of the Leased Parking Area and all areas appurtenant thereto. The Liability Policy shall include an "Additional Insured Managers or Landlords of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The Liability Policy shall not contain any inter-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Tenant's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Tenant shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance required to be carried by Tenant under this Lease shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance shall be considered excess insurance only. 9.2 Insurance covering Tenant's property including Tenant's original improvements to the Leased Parking Area and any Tenant alterations in the Leased Parking Area, if any, in an amount not less than one hundred percent (100%) of their full insurable replacement cost from time to time during the term of this Lease providing protection against any peril included within the classification "fire and extended coverage," together with insurance against sprinkler PAGE 4 damage, vandalism and malicious mischief. Policy proceeds shall be used to repair or replace property damaged or destroyed, and to return the Leased Parking Area to a condition generally approximating the condition existing prior to such damage. 10. WAIVER OF SUBROGATION. Landlord and Tenant hereby waive any rights they may have against each other and other tenants on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, their respective property, the Leased Parking Area, or its contents or to other portions of the Property, arising from any risk generally covered by fire and extended coverage insurance; and the parties each, on behalf of their respective insurance companies insuring the property of either Landlord or Tenant against any such loss, waive any right of subrogation that it may have against Landlord or Tenant or other tenants, as the case may be. The foregoing waivers of subrogation shall be operative only to the extent of the policy limits provided for above or the actual policy limits, whichever are greater and so long as available in the state in which the Property is located. If necessary, Landlord and Tenant agree to cause appropriate riders to be attached to their insurance policies to effectuate such waivers. 11. INDEMNITY AND RISK OF LOSS. 11.1 Tenant will save and hold Landlord harmless from all loss, damage, liability or expense resulting from any injury to any person or property including the Leased Parking Area or Property, caused by or resulting from any act or omission of Tenant, its employees, customers or suppliers except to the extent that the loss is covered by insurance maintained by Landlord or Tenant and subrogation is waived under this Lease. Tenant's obligation to indemnify Landlord under this paragraph includes an obligation to indemnify for losses resulting from death or injury to Tenant's employees, and Tenant accordingly hereby waives any and all immunities it now has or hereafter may have under any Industrial Insurance Act, or other worker's compensation, disability benefit or other similar act which would otherwise be applicable in the case of such a claim. The parties acknowledge that the foregoing provisions of this paragraph have been specifically and mutually negotiated between the parties. 11.2 Landlord shall not be liable for damage to property or to any person occurring in the Leased Parking Area or the Property arising out of any act or omission of any tenant, its employees, customers or suppliers. 11.3 All property (whether owned by Tenant, its employees or others) in the Leased Parking Area shall be at Tenant's sole risk. Landlord shall not be liable for any damage to or loss of such property. 12. REMEDIES FOR DEFAULT. 12.1 If Tenant fails to pay any sum for more than three (3) business days after notice that payment of such sum is due or in the event of Tenant's default in performing any of the other terms of this Lease for more than ten (10) days after notice of such non-monetary default (or within such additional time as is reasonably required to correct any default other than payment of money by Tenant), or if Tenant assigns or otherwise transfers this Lease or subleases the Leased Parking Area without Landlord's prior written consent, Landlord, in addition to the other rights or remedies it may have, shall have the right to immediately terminate this Lease or re-enter and attempt to relet without terminating this Lease and remove all persons and property from the Leased Parking Area (which property may be removed and stored in a public warehouse or elsewhere at the cost and risk of, and for the account of Tenant) all without service of notice or resort to legal process and without being deemed guilty of trespass, or any liability of Landlord for any loss or damage which may be occasioned thereby. 12.2 It shall be a material breach of this Lease if Tenant is in default under the Office Lease, if Tenant or any guarantor of Tenant shall become bankrupt or insolvent, or commence any proceedings under any bankruptcy or insolvency laws, or if Tenant or any guarantor of Tenant shall take or have taken against it in federal or state court a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's or such guarantor's property, if Tenant or any guarantor makes an assignment for the benefit of creditors, of if any assets of Tenant (whether located in the Leased Parking Area or elsewhere) are seized or attached by any creditor of Tenant or a governmental agency. 12.3 If Landlord, without terminating this Lease, either (1) elects to re-enter the Leased Parking Area and attempt to relet or (2) takes possession of the Leased Parking Area pursuant to legal proceedings, or (3) takes possession of the Leased Parking Area pursuant to any notice provided by law, then Landlord may, from time to time, make such alterations and repairs as may be necessary in order to relet the Leased Parking Area or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rent and other terms as Landlord in its reasonable discretion deems advisable. Upon such reletting, all rents received by Landlord from such reletting shall be applied, first, to the payment PAGE 5 of any indebtedness of Tenant (other than any rents due hereunder) to Landlord; second, to the payment of any costs and expenses of obtaining possession and any such reletting, including expense of alterations and repairs, brokerage fees and attorney's fees; third, to the payment of any rents due and unpaid hereunder. If such rents and any other amounts received from such reletting during any month be less than that to be paid during that month by Tenant, Tenant shall immediately pay such deficiency to Landlord. No such re-entry or taking possession of the Leased Parking Area by Landlord shall be construed as an election by Landlord to terminate this Lease unless a notice of such intention be given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, Landlord may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Leased Parking Area, reimbursement of any brokerage fees incurred by Landlord in connection with Tenant's lease, and all rent as follows which, at Landlord's election, shall be accelerated and be due in full on demand: 12.3.1 The unpaid rent and additional rent payable hereunder which had been earned at the date of such termination plus interest at the rate of 18% per annum from the date due until paid in full; plus 12.3.2 The present worth of the amount by which the unpaid rent and additional rent which would have been earned after termination for the balance of the term exceeds the amount of such rental loss which Tenant proves could reasonably have been avoided. 12.3.3 As used in subparagraph 12.3.2 above, the "present worth" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco as of the date of termination plus one percent. The present worth amount due under subparagraph 12.3.2 shall bear interest at the rate of 18% per annum from the date of termination until paid in full. 12.4 Landlord's rights and remedies in this Lease are cumulative and no one of such rights and remedies shall be exclusive at law or in equity of the rights and remedies which Landlord might otherwise have by virtue of a default under this Lease, and the exercise of one such right or remedy by Landlord shall not impair Landlord's standing to exercise any other right or remedy. Landlord and Tenant shall, and do hereby, waive trial by jury in any action, suit or proceeding related to, arising out of or in connection with the terms, conditions and covenants of this Lease. 12.5 In the event that Tenant and Landlord are parties to any other agreement in addition to this lease, any breach of such other agreement shall also be deemed, at the sole election of Landlord, to be a breach of this Lease and vice versa. 13. DAMAGE BY CASUALTY. In the event of damage to the Property which results in abatement of rent or termination of the Office Lease under the Office Lease, the rent under this Lease shall be comparably abated or this Lease shall be terminated, whichever is applicable. 14. CONDEMNATION. If the entire Leased Parking Area, or a portion of the Property required for reasonable use of the Leased Parking Area, shall be taken by virtue of any condemnation or eminent domain proceeding, this Lease shall automatically terminate as of the date of such condemnation, or as of the date possession is taken by the condemning authority, whichever is earlier. Rent shall be apportioned as of the date of such termination. In case of a taking of a part of the Leased Parking Area or a portion of the Property not required for the reasonable use of the Leased Parking Area, then this Lease shall continue in full force and effect and the rental shall be equitably reduced based on the proportion by which the number of parking stalls in the Leased Parking Area is reduced, effective as of the date of such partial taking. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award which may be made in such taking or condemnation together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof; provided, however, that nothing herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any award made to Tenant for interruption of Tenant's business or Tenant's moving expenses. 15. PRIORITY AND ATTORNMENT. 15.1 So long as the mortgagee or lienholder shall agree to recognize this Lease in the event of foreclosure if the Tenant is not in default, this Lease shall be subordinate to any mortgages now a lien or hereafter placed upon the Property and to all advances made thereunder, all interest thereon and to all sums secured thereby, and all renewals, PAGE 6 replacements, consolidations and extensions thereof together with such other restrictions or covenants as may be placed of public record during the term of this Lease. Any mortgagee may elect to have this Lease prior in right to its mortgage, and in the event of such election, and upon notification by such mortgagee to Tenant to that effect, this Lease shall be deemed to have priority over the lien of such mortgage, whether this Lease is dated prior or subsequent to such mortgage. Tenant shall execute and deliver whatever instruments may be required from time to time by any mortgagee for any of the foregoing purposes, and in the event Tenant fails so to do within ten (10) days after demand, Tenant hereby makes and irrevocably appoints Landlord as its attorney-in-fact and in its name, place and stead so to do. 15.2 Tenant waives any right of election to terminate this Lease in the event any foreclosure proceeding is brought by any mortgagee. Tenant agrees, in the event of any foreclosure proceedings, to attorn to the purchaser, at such purchaser's request, at such foreclosure sale and to recognize such purchaser as Landlord under this Lease. 15.3 Tenant covenants and agrees that, in the event of one or more sales or assignments of Landlord's interest in the Property, Tenant will attorn to the transferee(s) of Landlord's interest in the Property and will recognize such transferee(s) as Tenant's Landlord under this Lease. Tenant agrees, on ten (10) days' prior notice by Landlord, to execute and deliver, from time to time, any instrument which may be appropriate to evidence Tenant's attornment and Tenant irrevocably appoints Landlord its attorney-in-fact to execute, acknowledge, and deliver for and on behalf of Tenant any such instrument. 15.4 "Mortgage" and "mortgagee" herein shall include a mortgage, deed of trust or security agreement and the mortgagee, the beneficiary of a deed of trust or secured party. Tenant shall within ten (10) days of request by Landlord deliver an executed and acknowledged instrument amending this Lease in such respects as may be required by any present or future mortgagee, provided that such amendment does not materially alter or impair Tenant's rights or remedies under this Lease or increase its rent. 15.5 In the event of any default by Landlord, Tenant will give notice by registered or certified mail to any mortgagee holding a mortgage covering the Leased Parking Area or any leasehold interest therein whose address shall have been furnished to Tenant, and shall offer such mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Leased Parking Area by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 15.6 Promptly upon execution of this Lease by Landlord and Tenant, Landlord shall request ____________________, its lender holding a security interest in the Property, to execute an agreement to not disturb Tenant's possession of the Leased Parking Area under this Lease so long as Tenant performs its obligations under this Lease (commonly known as, and referred to herein as, a "subordination, non-disturbance and attornment agreement" and/or as an "SNDAA"). If the executed SNDAA has not been delivered to Tenant within fifteen (15) days after execution of this Lease by Landlord and Tenant, then Tenant may terminate this Lease by written notice delivered to Landlord no later than thirty (30) days after execution of this Lease by Landlord and Tenant. Upon such termination, all prepaid rents and/or deposits shall be refunded in full to Tenant without interest. If Tenant does not timely terminate this Lease, Tenant shall be deemed to have forever waived any requirement of delivery of the SNDAA. 16. RULES, REGULATIONS AND MISCELLANEOUS. 16.1 REGULATIONS. Landlord may from time to time make regulations appropriate for the use and operation of the Property so long as not inconsistent with the terms, covenants and conditions of this Lease and so long as such regulations do not (i) unreasonably, adversely affect Tenant's business, or (ii) restrict Tenant's parking rights under this Lease or increase Tenant's cost of parking under this Lease. Tenant agrees that it will not, without Landlord's consent, park or allow its agents, employees and invitees to park on the east side of the Building. 16.2 SIGNAGE. Tenant shall not place any signs in the Leased Parking Area or otherwise on the Property without prior written consent of Landlord. Landlord shall not unreasonably withhold its consent to Tenant signage in the Leased Parking Area which, if such consent is granted, shall be installed at Tenant's sole expense and in compliance with all applicable sign and traffic ordinances. Any sign erected or maintained in violation hereof may be removed by Landlord at Tenant's expense. Landlord may at any time during the last one hundred eighty (180) days of the term of the Lease place on or about the Leased Parking Area "for rent" signs. Landlord may at any time place on or about the Leased Parking Area "for sale" signs. Tenant shall not obliterate or hide Landlord's "for rent" or "for sale" signs. PAGE 7 16.3 LANDLORD ACCESS AND ALTERATIONS. Landlord reserves the right to make alterations to the Property and to enter the Leased Parking Area for such purpose or to accomplish any repairs for which Landlord is responsible or Landlord deems to be necessary to avoid damage to the Property or Leased Parking Area. Such entry and/or actions shall not constitute an assumption of responsibility for such repairs by Landlord or an eviction and, except as may be specifically provided in this Lease, shall not cause any abatement of rent. Landlord may also enter the Leased Parking Area for purposes of inspection and to show the Leased Parking Area to prospective purchasers, mortgagees and tenants. Landlord will exercise its rights under the preceding sentence in a manner that will not cause unreasonable interference with Tenant's business. Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Leased Parking Area. Tenant shall not alter any lock or install a new or additional lock or bolt on any door of the Leased Parking Area without prior written consent of Landlord. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. 16.4 ADJUSTMENT OF OUTSIDE PARKING AREA. At any time during the term of the Lease, the location and configuration of the Outside Parking Area shall be subject to such changes as Landlord deems desirable, provided that such change does not reduce the number of parking stalls in the Outside Parking Area and the Outside Parking Area remains within reasonable proximity to the Building. No such change shall invalidate this Lease and the parties upon request shall execute and deliver any documents which may be reasonably necessary or convenient to evidence such change. 16.5 MEMORANDUM OF LEASE. This Lease shall not be recorded. Upon request of either party, the parties hereto will execute a memorandum of lease which may be recorded by either party to provide record notice of the existence of this Lease but shall not disclose any of the economic terms. 16.6 CERTIFICATES. At Landlord's request from time to time after the beginning of the Lease term, Tenant agrees within fifteen (15) days of demand to execute, acknowledge and deliver to Landlord a certificate which acknowledges tenancy and possession of the Leased Parking Area and recites such other facts concerning any provision of this Lease or payment made under this Lease which a prospective mortgagee or purchaser may reasonably request. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance or, at Landlord's option, such failure shall constitute a default by Tenant under this Lease. At Landlord's request from time to time, Tenant further agrees to provide to Landlord Tenant's most recent profit and loss statement and balance sheet. 16.7 NOTICES. Any notice provided for in this Lease shall be considered received on the third (3rd) day following deposit of the notice into the mails or the date actually received, whichever is earlier. Any notices may be given to the other party at the following address (either party may change its address by giving notice of such change): To Landlord: c/o Zarett Properties 114 Alaskan Way South, Suite 120 Seattle, WA 98101 To Tenant: Suite 400 2200 First Avenue South Seattle, WA 98134 16.8 REMEDY. Tenant agrees, at all times, to look only to Landlord's interest in the Property (and the proceeds of the rental, sale, insured losses or condemnation of the Property) for satisfaction of any claim whatsoever against Landlord and not to any other property or assets of Landlord. 16.9 TENANT AUTHORITY. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant. If Tenant is an entity other than a natural person, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord a certified copy of a resolution of Tenant's governing board or other governing persons, committee or organization, authorizing or ratifying the execution of this Lease. 16.10 QUIET ENJOYMENT. Landlord warrants it has the right to make this Lease, subject to the terms of the Transportation Management Program for the Property, and Tenant, if not in default, shall have quiet and peaceful possession and enjoyment of the Leased Parking Area for the term of this Lease. To the extent that the terms of this Lease conflict with the terms of the Transportation Management Program for the Property, as amended from time to time, the PAGE 8 terms of this Lease shall be deemed to be amended to the extent necessary to conform to the terms of the Transportation Management Program for the Property and all of the other terms of this Lease shall remain in full force and effect. 16.11 LEASES ARE INDEPENDENT. Tenant shall not be deemed to be a third party beneficiary of any other lease of the Property; Landlord retains the sole right to determine, in its discretion, whether to enforce and the method of enforcement of compliance by other tenants and their employees with the terms of their respective leases including any restrictions on use and parking; the existence of any violation of any lease provision by any other tenant shall not be deemed to be a violation of this Lease by Landlord. 16.12 ENTIRE AGREEMENT. This Lease and any attachments or exhibits attached hereto, if any, set forth all of the agreements and understandings between Tenant and Landlord as to the subject matter of this Lease and all prior negotiations, discussions or agreements are replaced by this Lease. No subsequent alteration, amendment, change or addition to this lease shall be binding upon Tenant or Landlord unless in writing and signed by both Tenant and Landlord. 16.13 LANDLORD'S CONSENT. Any consent required by Landlord under this Lease must be granted in writing and may be withheld by Landlord in its sole and absolute discretion, except where otherwise expressly stated in this Lease, and any delay in consenting will not be a breach of this Lease. 16.14 INTERPRETATION. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Leased Parking Area are located. When required by the context of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. The headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. "Party" shall mean Landlord or Tenant. If more than one person or entity constitutes Landlord or Tenant, the obligations imposed upon that party shall be joint and several. The enforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal. All provisions, whether conditions or covenants on the part of Tenant, shall be deemed to be both conditions and covenants. Subject to the restrictions on assignment or subletting, the rights, liabilities and remedies provided for herein shall extend to the heirs, legal representatives, successors and, as far as the terms of this Lease permit, assigns of the parties hereto. 16.15 WAIVER. No delay or omission in the exercise of any right or remedy or acceptance of any payment or portion thereof due hereunder by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including, without limitation, acceptance of the keys to the Leased Parking Area, shall constitute an acceptance of the surrender of the Leased Parking Area by Tenant before the expiration of the term. Only written notice from Landlord to Tenant of such acceptance shall constitute acceptance of the surrender of the Leased Parking Area and accomplish termination of this Lease. Landlord's consent to any act by Tenant shall not be deemed to waive or render unnecessary Landlord's consent to any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 16.16 ATTORNEYS' FEES. In the event of any default under this Lease, the defaulting party agrees to pay the cost of legal counsel incurred by the other party, whether incurred with or without commencement of litigation and on appeal or in the course of collection. 16.17 HOLDING OVER. If Tenant shall hold over after the expiration of the term of this Lease, and shall not have agreed in writing with Landlord upon the terms and provisions of a new lease prior to such expiration, Tenant shall remain bound by all the terms, covenants and agreements hereof, except that the tenancy shall be from month to month and the Basic Rent shall be equal to one hundred fifty percent (150%) of the Basic Rent due for the last month of the term of the Lease. 16.18 SUBMISSION OF LEASE. Submission of this Lease for examination, even though executed by Tenant, shall not bind Landlord in any manner, and no Lease or other obligation on the part of the Landlord shall arise, until this Lease is executed and delivered by Landlord to Tenant. 17. SURRENDER OF PREMISES. Tenant shall surrender and deliver to Landlord possession of the Leased Parking Area upon the expiration or earlier termination of this Lease, free of debris, and in substantially the same condition as the date Tenant opened for business at the Leased Parking Area (except as may be Landlord's obligation under this Lease, damage PAGE 9 by casualty or condemnation, and ordinary wear and tear), and shall deliver the keys to Landlord. 18. FUTURE SUBDIVISION OF PROPERTY. In the event Landlord elects to subdivide the Property or to declare all or parts of the Property to be condominiums, Tenant agrees to cooperate with Landlord in such process and to disclaim any interest in the Property, except for Tenant's Leased Parking Area so long as the area of Tenant's Leased Parking Area is not reduced and the parking available to Tenant, if any, is not materially, adversely affected. 19. BROKERS. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for Colliers International representing Landlord and Flinn Ferguson Corporate Real Estate representing Tenant. Both brokers' commissions are payable by Landlord. LANDLORD: TENANT: 2200 First Avenue South LLC, The Cobalt Group, Inc., a Washington a Washington limited liability company corporation, By:___________________________________ By:__________________________________ David Zarett, Member By:__________________________________ STATE OF WASHINGTON ) ) ss. LANDLORD ACKNOWLEDGMENT COUNTY OF KING ) I certify that I know or have satisfactory evidence that David Zarett is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as a member of 2200 First Avenue South LLC, to be the free and voluntary act of such party for the uses and purposes stated therein. Dated ______________________________. _________________________________________ Name:____________________________________ NOTARY PUBLIC, State of Washington My appointment expires___________________ STATE OF WASHINGTON ) ) ss. TENANT ACKNOWLEDGMENT (Representative) COUNTY OF KING ) I certify that I know or have satisfactory evidence that ______________________ and ______________________ are the persons who appeared before me, and said persons acknowledged that they signed this instrument, on oath stated that they are authorized to execute the instrument and acknowledged it as the President and Secretary, respectively, of The Cobalt Group, Inc., to be the free and voluntary act of such party for the uses and purposes stated therein. Dated ______________________________. _________________________________________ Name:____________________________________ NOTARY PUBLIC, State of _________________ My appointment expires___________________ NOTARY PUBLIC, State of _________________ My appointment expires___________________ PAGE 10 EXHIBIT A-1 (FLOOR PLAN OF GARAGE) [attached] PAGE 1 EXHIBIT A-2 (FLOOR PLAN OF OUTSIDE PARKING AREA) [attached] PAGE 1 EXHIBIT B (LEGAL DESCRIPTION OF PROPERTY) LOTS 1, 2, 3 AND 4 IN BLOCK 317 OF SEATTLE TIDE LANDS; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON. EXHIBIT C (LANDLORD'S WORK) Leased Parking Area paved (Outside Parking Area may be blacktopped), lined, and lighted; underground garage shall be remote controlled and secured by steel doors. Landlord's Work shall be executed in substantial compliance with the following plans and specifications: - Basement Plan (showing Garage) dated June 6, 1998 by Broderick Architects attached - Parking Plan (showing Outside Parking Area) dated June 6, 1998 by Broderick Architects attached EX-27 4 EX-27
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 18,205 0 4,050 203 0 23,868 5,115 1,252 57,439 6,077 0 0 0 168 49,811 57,439 0 7,049 0 1,506 10,831 94 374 0 0 (5,527) 0 0 0 (5,527) (.52) (.52)
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