-----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, J/rqIQqCT5x3NvYeNd5S3AY/1bH/9Tf0AC9thH7pI3LGd8K/7GxIuMmRqIliXW63 M79H2Wvi+HNjgkpgJ5WB2A== 0000950005-01-000141.txt : 20010214 0000950005-01-000141.hdr.sgml : 20010214 ACCESSION NUMBER: 0000950005-01-000141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONIC ARTS INC CENTRAL INDEX KEY: 0000712515 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942838567 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17948 FILM NUMBER: 1537070 BUSINESS ADDRESS: STREET 1: 209 REDWOOD SHORES PARKWAY CITY: REDWOOD CITY STATE: CA ZIP: 94065 BUSINESS PHONE: 4155717171 MAIL ADDRESS: STREET 1: 209 REDWOOD SHORES PARKWAY CITY: REDWOOD CITY STATE: CA ZIP: 94065 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC ARTS DATE OF NAME CHANGE: 19911211 10-Q 1 0001.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2000 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. 0-17948 ELECTRONIC ARTS INC. (Exact name of registrant as specified in its charter) Delaware 94-2838567 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 209 Redwood Shores Parkway Redwood City, California 94065 (Address of principal executive offices) (Zip Code) (650) 628-1500 (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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock February 8, 2001 --------------------- ---------------- $0.01 par value per share 133,003,609 ELECTRONIC ARTS INC. AND SUBSIDIARIES INDEX Page ---- Part I - Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets at December 31, 2000 and March 31, 2000 3 Consolidated Statements of Operations for the Three Months Ended December 31, 2000 and 1999 and the Nine Months Ended December 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 45 Part II - Other Information Item 1. Legal Proceedings 47 Item 4. Submission of Matters to a Vote of Security Holders 47 Item 6. Exhibits and Reports on Form 8-K 47 Signatures 48 Exhibit Index 49 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (unaudited)
December 31, March 31, 2000 2000 ----------- ----------- ASSETS Current assets: Cash, cash equivalents and short-term investments $ 295,377 $ 339,804 Marketable securities 17,249 236 Receivables, less allowances of $82,660 and $65,067, respectively 356,484 234,087 Inventories, net 19,852 22,986 Deferred income taxes 27,143 26,963 Other current assets 93,305 81,247 ----------- ----------- Total current assets 809,410 705,323 Property and equipment, net 340,187 285,466 Long-term investments 8,400 8,400 Investments in affiliates 18,780 22,601 Goodwill and other intangibles, net 103,889 117,236 Other assets 56,610 53,286 ----------- ----------- $ 1,337,276 $ 1,192,312 =========== =========== LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 68,192 $ 97,703 Accrued and other liabilities 251,861 167,599 ----------- ----------- Total current liabilities 320,053 265,302 Minority interest in consolidated joint venture 4,307 3,617 Stockholders' equity: Preferred stock, $0.01 par value. Authorized 10,000,000 shares -- -- Common Stock Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 132,733,250 and 128,869,088 shares, respectively 1,327 1,288 Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 6,250,000 and 6,000,000, respectively 63 60 Paid-in capital 488,190 412,038 Retained earnings 523,166 516,368 Accumulated other comprehensive income (loss) 170 (6,361) ----------- ----------- Total stockholders' equity 1,012,916 923,393 ----------- ----------- $ 1,337,276 $ 1,192,312 =========== =========== See accompanying notes to consolidated financial statements.
3 ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended December 31, December 31, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net revenues $ 640,319 $ 600,691 $ 1,015,018 $ 1,125,698 Cost of goods sold 306,146 299,423 502,828 562,821 ----------- ----------- ----------- ----------- Gross profit 334,173 301,268 512,190 562,877 ----------- ----------- ----------- ----------- Operating expenses: Marketing and sales 65,394 67,475 138,850 147,422 General and administrative 28,480 28,237 76,981 68,246 Research and development 110,250 73,424 281,471 187,025 Amortization of intangibles 4,681 2,596 14,051 7,800 ----------- ----------- ----------- ----------- Total operating expenses 208,805 171,732 511,353 410,493 ----------- ----------- ----------- ----------- Operating income 125,368 129,536 837 152,384 Interest and other income, net 2,690 4,382 10,628 11,653 ----------- ----------- ----------- ----------- Income before provision for income taxes and minority interest 128,058 133,918 11,465 164,037 Provision for income taxes 39,698 41,214 3,554 50,852 ----------- ----------- ----------- ----------- Income before minority interest 88,360 92,704 7,911 113,185 Minority interest in consolidated joint venture (382) 157 (1,113) 134 ----------- ----------- ----------- ----------- Net income $ 87,978 $ 92,861 $ 6,798 $ 113,319 =========== =========== =========== =========== Net income per share: Basic N/A $ 0.73 N/A $ 0.91 Diluted N/A $ 0.69 N/A $ 0.86 Number of shares used in computation: Basic N/A 126,651 N/A 124,780 Diluted N/A 134,955 N/A 131,670 Class A common stock: Net income: Basic $ 95,416 N/A $ 21,942 N/A =========== =========== Diluted $ 87,978 N/A $ 6,798 N/A =========== =========== Net income per share: Basic $ 0.72 N/A $ 0.17 N/A Diluted $ 0.63 N/A $ 0.05 N/A Number of shares used in computation: Basic 132,339 N/A 130,716 N/A Diluted 138,904 N/A 137,372 N/A Class B common stock: Net loss, net of retained interest in EA.com $ (7,438) N/A $ (15,144) N/A =========== =========== Net loss per share: Basic $ (1.24) N/A $ (2.52) N/A Diluted $ (1.24) N/A $ (2.52) N/A Number of shares used in computation: Basic 6,000 N/A 6,000 N/A Diluted 6,000 N/A 6,000 N/A
See accompanying notes to consolidated financial statements. 4 ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)
Nine Months Ended December 31, ---------------------- 2000 1999 --------- --------- Operating activities: Net income $ 6,798 $ 113,319 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Minority interest in consolidated joint venture 1,113 (134) Equity in net (income) loss of affiliates 452 (625) Gain on sale of affiliate (214) (842) Depreciation and amortization 50,272 31,430 Loss on sale of fixed assets 1,542 402 Gain on sale of marketable securities -- (6,063) Provision for doubtful accounts 6,091 6,427 Tax benefit from exercise of stock options 15,332 24,797 Change in assets and liabilities, net of acquisitions: Receivables (128,488) (234,879) Inventories 3,134 (462) Other assets (9,814) (71,249) Accounts payable (29,511) 26,092 Accrued liabilities 83,652 53,016 Deferred income taxes 966 (535) --------- --------- Net cash provided by (used in) operating activities 1,325 (59,306) --------- --------- Investing activities: Proceeds from sale of property and equipment 3,958 56 Proceeds from sales of marketable securities, net -- 7,037 Purchase of marketable securities, net (2,479) -- Proceeds from sale of affiliate -- 8,842 Capital expenditures (104,860) (85,023) Investment in affiliates, net 662 (2,949) Change in short-term investments, net 22,443 (20,630) Acquisition of subsidiaries, net of cash acquired -- (582) --------- --------- Net cash used in investing activities (80,276) (93,249) --------- --------- Financing activities: Proceeds from sales of shares through employee stock plans and other plans 60,862 68,477 --------- --------- Net cash provided by financing activities 60,862 68,477 --------- --------- Translation adjustment (3,886) (718) --------- --------- Decrease in cash and cash equivalents (21,975) (84,796) Beginning cash and cash equivalents 246,265 242,208 --------- --------- Ending cash and cash equivalents 224,290 157,412 Short-term investments 71,087 89,758 --------- --------- Ending cash, cash equivalents and short-term investments $ 295,377 $ 247,170 ========= =========
5 ELECTRONIC ARTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) (unaudited) Nine Months Ended December 31, -------------------- 2000 1999 ------- ------- Supplemental cash flow information: Cash paid during the year for income taxes $10,706 $ 9,711 ======= ======= Non-cash investing activities: Change in unrealized appreciation of investments and marketable securities $ 9,458 $(4,441) ======= ======= See accompanying notes to consolidated financial statements. 6 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. Certain amounts have been reclassified to conform to the fiscal 2001 presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Electronic Arts Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended March 31, 2000 as filed with the Securities and Exchange Commission ("Commission") on June 29, 2000. Note 2. Fiscal Year The Company's fiscal year is reported on a 52/53-week period that ends on the Saturday nearest to March 31 in each year. The results of operations for fiscal 2001 will contain 53 weeks. Accordingly, the results of operations for the first three quarters of fiscal 2001 and the first three quarters of fiscal 2000 contain 40 weeks and 39 weeks, respectively. The results of operations for the fiscal quarter ended June 30, 2000 and the fiscal quarter ended June 30, 1999 contain 14 weeks and 13 weeks, respectively. Since the results of an additional week are not material, and for clarity of presentation, all fiscal periods are treated as ending on a calendar month. Note 3. Approval of the Tracking Stock Proposal On March 22, 2000, the shareholders of Electronic Arts approved the "Tracking Stock Proposal" which authorized the issuance of a new series of common stock, designated as Class B common stock ("Tracking Stock"). The Tracking Stock is intended to reflect the performance of Electronic Arts' online and e-Commerce division ("EA.com"). As a result of the approval of the Tracking Stock Proposal, Electronic Arts' existing common stock has been re-classified as Class A common stock ("Class A Stock") and that stock reflects the performance of Electronic Arts' other businesses ("EA Core"). Note 4. Stock Split On August 14, 2000, the Company's Board of Directors authorized a two-for-one stock split of its Class A common stock which was distributed on September 8, 2000 in the form of a stock dividend for shareholders of record at the close of business on August 25, 2000. All authorized and outstanding share and per share amounts of Class A common stock in the accompanying consolidated financial statements for all periods have been restated to reflect the stock split. 7 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 5. Prepaid Royalties Prepaid royalties consist primarily of prepayments for manufacturing royalties, original equipment manufacturer (OEM) fees and license fees paid to celebrities and professional sports organizations for use of their trade name. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the contractual or effective royalty rate as cost of goods sold based on actual net product sales. Management evaluates the future realization of prepaid royalties quarterly and charges to income any amounts that management deems unlikely to be realized through product sales. Royalty advances are classified as current and non-current assets based upon estimated net product sales for the following year. The current portion of prepaid royalties, included in other current assets, was $51,501,000 and $54,970,000 at December 31, 2000 and March 31, 2000, respectively. The long-term portion of prepaid royalties, included in other assets, was $9,326,000 and $11,373,000 at December 31, 2000 and March 31, 2000, respectively. Note 6. Inventories Inventories are stated at the lower of cost or market. Inventories at December 31, 2000 and March 31, 2000 consisted of (in thousands): December 31, March 31, 2000 2000 -------- -------- Raw materials and work in process $ 1,141 $ 920 Finished goods 18,711 22,066 -------- -------- $ 19,852 $ 22,986 ======== ======== Note 7. Accrued and Other Liabilities Accrued liabilities at December 31, 2000 and March 31, 2000 consisted of (in thousands): December 31, March 31, 2000 2000 -------- -------- Accrued expenses $ 77,650 $ 37,840 Accrued compensation and benefits 67,469 59,580 Accrued royalties 54,430 36,566 Accrued income taxes 26,543 22,682 Deferred revenue 17,098 1,847 Warranty reserve 7,863 8,886 Deferred income taxes 808 198 -------- -------- $251,861 $167,599 ======== ======== 8 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 8. Segment Information In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes standards for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product lines for purposes of making operating decisions and assessing financial performance. As a result of the issuance of Class B common stock, which is intended to reflect the performance of EA.com, management considers EA.com to be a separate reportable segment. Accordingly, prior period information has been restated to disclose separate segments. The Company operates in two principal business segments globally: * Electronic Arts core ("EA Core") business segment: creation, marketing and distribution of entertainment software. * EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and related advertising. Please see the discussion regarding segment reporting in the MD&A. 9 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Information about Electronic Arts business segments is presented below for the three and nine months ended December 31, 2000 and 1999 (in thousands):
Three Months Ended December 31, 2000 ----------------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts ----------- ----------- ----------- ----------- Net revenues from unaffiliated customers $ 629,145 $ 11,174 $ -- $ 640,319 Group sales 752 -- (752)(a) -- ----------- ----------- ----------- ----------- Total net revenues 629,897 11,174 (752) 640,319 ----------- ----------- ----------- ----------- Cost of goods sold from unaffiliated customers 304,036 2,110 -- 306,146 Group cost of goods sold -- 752 (752)(a) -- ----------- ----------- ----------- ----------- Total cost of goods sold 304,036 2,862 (752) 306,146 ----------- ----------- ----------- ----------- Gross profit 325,861 8,312 -- 334,173 Operating expenses: Marketing and sales 56,690 4,233 4,471 (c) 65,394 General and administrative 25,722 2,758 -- 28,480 Research and development 65,081 25,544 19,625 (b) 110,250 Network development and support -- 19,625 (19,625)(b) -- Carriage fee -- 4,471 (4,471)(c) -- Amortization of intangibles 3,184 1,497 -- 4,681 ----------- ----------- ----------- ----------- Total operating expenses 150,677 58,128 -- 208,805 ----------- ----------- ----------- ----------- Operating income (loss) 175,184 (49,816) -- 125,368 Interest and other income, net 2,456 234 -- 2,690 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes and minority interest 177,640 (49,582) -- 128,058 Provision for income taxes 39,698 -- -- 39,698 ----------- ----------- ----------- ----------- Income (loss) before minority interest 137,942 (49,582) -- 88,360 Minority interest in consolidated joint venture (382) -- -- (382) ----------- ----------- ----------- ----------- Net income (loss) before retained interest in EA.com $ 137,560 $ (49,582) $ -- $ 87,978 =========== =========== =========== =========== Interest income $ 3,147 $ 22 $ -- $ 3,169 Depreciation and amortization 7,539 11,150 -- 18,689 Identifiable assets 1,172,112 165,164 -- 1,337,276 Capital expenditures 10,192 7,807 -- 17,999
10 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended December 31, 1999 ----------------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts ----------- ----------- ----------- ----------- Net revenues from unaffiliated customers $ 595,761 $ 4,930 $ -- $ 600,691 Group sales 557 -- (557)(a) -- ----------- ----------- ----------- ----------- Total net revenues 596,318 4,930 (557) 600,691 ----------- ----------- ----------- ----------- Cost of goods sold from unaffiliated customers 297,883 1,540 -- 299,423 Group cost of goods sold -- 557 (557)(a) -- ----------- ----------- ----------- ----------- Total cost of goods sold 297,883 2,097 (557) 299,423 ----------- ----------- ----------- ----------- Gross profit 298,435 2,833 -- 301,268 Operating expenses: Marketing and sales 66,192 1,283 -- 67,475 General and administrative 26,545 1,692 -- 28,237 Research and development 55,318 12,240 5,866 (b) 73,424 Network development and support -- 5,866 (5,866)(b) -- Carriage fee -- -- -- -- Amortization of intangibles 2,567 29 -- 2,596 ----------- ----------- ----------- ----------- Total operating expenses 150,622 21,110 -- 171,732 ----------- ----------- ----------- ----------- Operating income (loss) 147,813 (18,277) -- 129,536 Interest and other income, net 4,382 -- -- 4,382 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes and minority interest 152,195 (18,277) -- 133,918 Provision for income taxes 41,214 -- -- 41,214 ----------- ----------- ----------- ----------- Income (loss) before minority interest 110,981 (18,277) -- 92,704 Minority interest in consolidated joint venture 157 -- -- 157 ----------- ----------- ----------- ----------- Net income (loss) $ 111,138 $ (18,277) $ -- $ 92,861 =========== =========== =========== =========== Interest income $ 3,301 $ -- $ -- $ 3,301 Depreciation and amortization 10,186 589 -- 10,775 Identifiable assets 1,127,445 53,324 -- 1,180,769 Capital expenditures 33,303 4,382 -- 37,685
11 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Nine Months Ended December 31, 2000 ----------------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts ----------- ----------- ----------- ----------- Net revenues from unaffiliated customers $ 985,754 $ 29,264 $ -- $ 1,015,018 Group sales 1,795 -- (1,795)(a) -- ----------- ----------- ----------- ----------- Total net revenues 987,549 29,264 (1,795) 1,015,018 ----------- ----------- ----------- ----------- Cost of goods sold from unaffiliated customers 496,620 6,208 -- 502,828 Group cost of goods sold -- 1,795 (1,795)(a) -- ----------- ----------- ----------- ----------- Total cost of goods sold 496,620 8,003 (1,795) 502,828 ----------- ----------- ----------- ----------- Gross profit 490,929 21,261 -- 512,190 Operating expenses: Marketing and sales 126,702 7,677 4,471 (c) 138,850 General and administrative 69,611 7,370 -- 76,981 Research and development 182,935 59,712 38,824 (b) 281,471 Network development and support -- 38,824 (38,824)(b) -- Carriage fee -- 4,471 (4,471)(c) -- Amortization of intangibles 9,645 4,406 -- 14,051 ----------- ----------- ----------- ----------- Total operating expenses 388,893 122,460 -- 511,353 ----------- ----------- ----------- ----------- Operating income (loss) 102,036 (101,199) -- 837 Interest and other income, net 10,387 241 -- 10,628 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes and minority interest 112,423 (100,958) -- 11,465 Provision for income taxes 3,554 -- -- 3,554 ----------- ----------- ----------- ----------- Income (loss) before minority interest 108,869 (100,958) -- 7,911 Minority interest in consolidated joint venture (1,113) -- -- (1,113) ----------- ----------- ----------- ----------- Net income (loss) before retained interest in EA.com $ 107,756 $ (100,958) $ -- $ 6,798 =========== =========== =========== =========== Interest income $ 11,546 $ 71 $ -- $ 11,617 Depreciation and amortization 29,449 20,823 -- 50,272 Capital expenditures 39,442 65,418 -- 104,860
12 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Nine Months Ended December 31, 1999 ----------------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts ----------- ----------- ----------- ----------- Net revenues from unaffiliated customers $ 1,111,598 $ 14,100 $ -- $ 1,125,698 Group sales 1,465 -- (1,465)(a) -- ----------- ----------- ----------- ----------- Total net revenues 1,113,063 14,100 (1,465) 1,125,698 ----------- ----------- ----------- ----------- Cost of goods sold from unaffiliated customers 558,845 3,976 -- 562,821 Group cost of goods sold -- 1,465 (1,465)(a) -- ----------- ----------- ----------- ----------- Total cost of goods sold 558,845 5,441 (1,465) 562,821 ----------- ----------- ----------- ----------- Gross profit 554,218 8,659 -- 562,877 Operating expenses: Marketing and sales 145,417 2,005 -- 147,422 General and administrative 65,924 2,322 -- 68,246 Research and development 152,077 22,877 12,071 (b) 187,025 Network development and support -- 12,071 (12,071)(b) -- Carriage fee -- -- -- -- Amortization of intangibles 7,742 58 -- 7,800 ----------- ----------- ----------- ----------- Total operating expenses 371,160 39,333 -- 410,493 ----------- ----------- ----------- ----------- Operating income (loss) 183,058 (30,674) -- 152,384 Interest and other income, net 11,653 -- -- 11,653 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes and minority interest 194,711 (30,674) -- 164,037 Provision for income taxes 50,852 -- -- 50,852 ----------- ----------- ----------- ----------- Income (loss) before minority interest 143,859 (30,674) -- 113,185 Minority interest in consolidated joint venture 134 -- -- 134 ----------- ----------- ----------- ----------- Net income (loss) $ 143,993 $ (30,674) $ -- $ 113,319 =========== =========== =========== =========== Interest income $ 9,903 $ -- $ -- $ 9,903 Depreciation and amortization 30,680 750 -- 31,430 Capital expenditures 71,716 13,307 -- 85,023 - ---------- (a) Represents elimination of intercompany sales of Electronic Arts packaged goods products to EA.com, and represents elimination of royalties paid to Electronic Arts by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support to Research and Development. (c) Represents reclassification of amortization of the AOL Carriage Fee to Marketing.
13 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Information about the Company's operations in North America and foreign areas for the three and nine months ended December 31, 2000 and 1999 is presented below:
(In thousands) Asia Pacific North (excluding America Europe Japan) Japan Eliminations Total ---------- ---------- ---------- ---------- ---------- ---------- Three months ended December 31, 2000 Net revenues from unaffiliated customers $ 416,904 $ 189,943 $ 19,887 $ 13,585 $ -- $ 640,319 Intercompany revenues 3,692 11,161 3,569 2,071 (20,493) -- ---------- ---------- ---------- ---------- ---------- ---------- Total net revenues 420,596 201,104 23,456 15,656 (20,493) 640,319 ========== ========== ========== ========== ========== ========== Operating income 82,257 39,588 2,941 1,411 (829) 125,368 Interest income 2,598 494 77 -- -- 3,169 Depreciation and amortization 15,393 2,932 218 146 -- 18,689 Identifiable assets 876,560 406,952 29,083 24,681 -- 1,337,276 Capital expenditures 15,361 2,202 328 108 -- 17,999 Long-lived assets 323,825 160,420 4,146 3,967 -- 492,358 Nine months ended December 31, 2000 Net revenues from unaffiliated customers $ 641,502 $ 291,786 $ 41,526 $ 40,204 $ -- $1,015,018 Intercompany revenues 8,971 19,979 10,126 2,071 (41,147) -- ---------- ---------- ---------- ---------- ---------- ---------- Total net revenues 650,473 311,765 51,652 42,275 (41,147) 1,015,018 ========== ========== ========== ========== ========== ========== Operating income (loss) 2,547 (11,624) 4,812 4,800 302 837 Interest income 8,847 2,430 340 -- -- 11,617 Depreciation and amortization 41,053 8,202 591 426 -- 50,272 Capital expenditures 88,796 14,683 999 382 -- 104,860 Three months ended December 31, 1999 Net revenues from unaffiliated customers $ 366,467 $ 210,855 $ 16,976 $ 6,393 $ -- $ 600,691 Intercompany revenues 16,031 11,499 1,755 -- (29,285) -- ---------- ---------- ---------- ---------- ---------- ---------- Total net revenues 382,498 222,354 18,731 6,393 (29,285) 600,691 ========== ========== ========== ========== ========== ========== Operating income (loss) 86,896 41,670 1,723 (437) (316) 129,536 Interest income 2,693 542 66 -- -- 3,301 Depreciation and amortization 7,748 2,652 154 221 -- 10,775 Identifiable assets 751,490 383,204 32,257 13,818 -- 1,180,769 Capital expenditures 16,238 20,731 432 284 -- 37,685 Long-lived assets 211,827 137,151 3,518 3,821 -- 356,317 Nine months ended December 31, 1999 Net revenues from unaffiliated customers $ 694,125 $ 367,649 $ 42,430 $ 21,494 $ -- $1,125,698 Intercompany revenues 23,751 24,145 4,660 -- (52,556) -- ---------- ---------- ---------- ---------- ---------- ---------- Total net revenues 717,876 391,794 47,090 21,494 (52,556) 1,125,698 ========== ========== ========== ========== ========== ========== Operating income (loss) 114,520 35,535 3,907 (222) (1,356) 152,384 Interest income 8,676 1,071 156 -- -- 9,903 Depreciation and amortization 22,216 8,099 396 719 -- 31,430 Capital expenditures 36,700 46,883 1,024 416 -- 85,023
14 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Information about the Company's net revenues by product line for the three and nine months ended December 31, 2000 and 1999 is presented below: Three Months Ended Nine Months Ended (In thousands) December 31, December 31, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- PC $ 153,246 $ 123,771 $ 305,396 $ 289,154 PlayStation 183,309 291,002 277,967 471,690 PlayStation 2 144,611 -- 157,629 -- N64 49,241 57,066 60,008 114,873 Online Subscription 6,753 3,941 22,209 10,915 License, OEM and Other 5,218 8,488 14,953 16,532 Advertising 2,591 -- 2,591 -- Affiliated label 95,350 116,423 174,265 222,534 ---------- ---------- ---------- ---------- $ 640,319 $ 600,691 $1,015,018 $1,125,698 ========== ========== ========== ========== Note 9. Comprehensive Income The components of comprehensive income, net of tax, for the three and nine months ended December 31, 2000 and 1999 were as follows:
(In thousands) Three Months Ended Nine Months Ended December 31, December 31, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net income $ 87,978 $ 92,861 $ 6,798 $ 113,319 --------- --------- --------- --------- Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of a tax provision (benefit) of $(112), $117, $(536) and $519 (100) 248 9,994 1,103 Reclassification adjustment for gains realized in net income for 1999, net of a tax benefit of $(1,528) and $(1,940) -- (3,249) -- (4,123) Foreign currency translation adjustments 2,280 (4,666) (3,463) (1,171) --------- --------- --------- --------- Total other comprehensive income (loss) 2,180 (7,667) 6,531 (4,191) --------- --------- --------- --------- Total comprehensive income $ 90,158 $ 85,194 $ 13,329 $ 109,128 ========= ========= ========= =========
The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Note 10. Earnings (Loss) Per Share The following summarizes the computations of Basic Earnings Per Share ("EPS") and Diluted EPS. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method. 15 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Net income (loss) per share was calculated on a consolidated basis until Class A common stock and Class B common stock were created as a result of the approval of the Tracking Stock Proposal, see Note 3. Subsequent to the approval of the Tracking Stock Proposal, net income (loss) per share is computed individually for Class A common stock and Class B common stock. (in thousands, except per share amounts):
Three months ended December 31, ------------------------------------------------------- 2000 2000 2000 1999 Class A common Class A common Class B Electronic stock-EA Core stock-EA Core common Arts common Basic Diluted stock-EA.com stock -------- -------- -------- -------- Net income (loss) $ 95,416 $ 87,978 $ (7,438) $ 92,861 -------- -------- -------- -------- Shares used to compute net income (loss) per share: Weighted-average common shares 132,339 132,339 6,000 126,651 Dilutive stock equivalents -- 6,565 -- 8,304 -------- -------- -------- -------- Dilutive potential common shares 132,339 138,904 6,000 134,955 ======== ======== ======== ======== Net income (loss) per share: Basic $ 0.72 N/A $ (1.24) $ 0.73 Diluted N/A $ 0.63 $ (1.24) $ 0.69 Nine months ended December 31, ------------------------------------------------------- 2000 2000 2000 1999 Class A common Class A common Class B Electronic stock-EA Core stock-EA Core common Arts common Basic Diluted stock-EA.com stock -------- -------- -------- -------- Net income (loss) $ 21,942 $ 6,798 $(15,144) $113,319 -------- -------- -------- -------- Shares used to compute net income (loss) per share: Weighted-average common shares 130,716 130,716 6,000 124,780 Dilutive stock equivalents -- 6,656 -- 6,890 -------- -------- -------- -------- Dilutive potential common shares 130,716 137,372 6,000 131,670 ======== ======== ======== ======== Net income (loss) per share: Basic $ 0.17 N/A $ (2.52) $ 0.91 Diluted N/A $ 0.05 $ (2.52) $ 0.86
16 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Diluted EPS calculation for Class A common stock, presented above, includes the potential dilution from the conversion of Class B common stock to Class A common stock in the event that the initial public offering for Class B common stock does not occur. Net income used for the calculation of Diluted EPS for Class A common stock is $87,978,000 and $6,798,000 for the three and nine months ended December 31, 2000, respectively. This net income includes the remaining 15% interest in EA.com, which is directly attributable to outstanding Class B shares, which would be included in the Class A common stock EPS calculation in the event that the initial public offering for Class B common stock does not occur. Excluded from the above computation of weighted-average shares for diluted EPS were options to purchase 4,142,646 and 2,617,667 shares of common stock for the three and nine months ended December 31, 2000, respectively, as the options' exercise price was greater than the average market price of the common shares. For the three and nine months ended December 31, 2000, the weighted-average exercise price of the respective options was $49.55 and $46.99, respectively. Excluded from the above computation of weighted-average shares for diluted EPS were options to purchase 151,256 and 293,456 shares of common stock for the three and nine months ended December 31, 1999, respectively, as the options' exercise price was greater than the average market price of the common shares. For the three and nine months ended December 31, 1999, the weighted-average exercise price of the respective options was $45.97 and $37.57, respectively. Note 11. New Accounting Pronouncements In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)". FIN 44 clarifies the application of APB Opinion No. 25 for certain issues: (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, FIN 44 is effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial position or results of operations. In March 2000, the Emerging Issues Task Force issued No. 00-03 ("EITF 00-03"), "Application of AICPA SOP 97-2, "Software Revenue Recognition," to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware", which discusses the effect on revenue recognition of a software vendor's obligation to host its software that previously was licensed to a customer. The EITF has reached the conclusion that, if the customer is unable to utilize the software on the customer's hardware or contract with another party unrelated to the vendor to host the software, then the arrangement with the customer is outside the scope of SOP 97-2 and should be treated as a service contract. The adoption of 17 ELECTRONIC ARTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EITF 00-03 did not have a material impact on the Company's financial position and results of operations. In March 2000, the Emerging Issues Task Force issued No. 00-02 ("EITF 00-02"), "Accounting for Web Site Development Costs". EITF 00-02 states that all costs relating to software used to operate a web site and relating to development of initial graphics and web page design should be accounted for using Statement of Position ("SOP") 98-1. Under this SOP, costs incurred in the preliminary project stage should be expensed as incurred, as should most training and data conversion costs. External direct costs of materials and services and internal direct payroll-related costs should be capitalized once certain criteria are met. EITF 00-02 is effective for all fiscal quarters beginning after June 30, 2000. The Company's accounting policy for internal-use software, as required by SOP 98-1, incorporated the requirements of EITF 00-02. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. SAB 101 is effective the fourth fiscal quarter of fiscal years beginning after December 15, 1999 as amended by SAB 101B. The Company believes the adoption of SAB 101 will not have a material impact on the Company's financial position and results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133" and SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133" which establish accounting and reporting standards for derivative instruments and hedging activities. The terms of SFAS 133 and SFAS 138 are effective as of the beginning of the first quarter of the fiscal year beginning after June 15, 2000. The Company is determining the effect of SFAS 133, 137 and 138 on its financial statements. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q and, in particular, the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as "anticipate", "believe" or "expect" and statements in the future tense are forward-looking statements. These forward-looking statements are subject to business and economic risks and actual events or our actual future results could differ materially from those set forth in the forward-looking statements due to such risks and uncertainties. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those discussed under the heading "Risk Factors" below at pages 35 to 44, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2000 as filed with the Securities and Exchange Commission on June 29, 2000 and other documents filed with the Commission. We derive revenues primarily from shipments of entertainment software, which includes EA Studio products for dedicated entertainment systems (that we call video game systems or consoles such as PlayStation, PlayStation 2 and Nintendo 64), EA Studio personal computer products (or PC), Co- Publishing products that are co-published and distributed by us, and Affiliated Label (or AL) products that are published by third parties and distributed by us. We also derive revenues from licensing of EA Studio products and AL products through hardware companies (or OEM), online subscription, advertising and e-Commerce revenues. Information about our net revenues for North America and foreign areas for the three and nine months ended December 31, 2000 and 1999 is summarized below (in thousands): December 31, December 31, Increase/ 2000 1999 (Decrease) % change ----------- ----------- ---------- -------- Net Revenues for the Three Months Ended: North America $ 416,904 $ 366,467 $ 50,437 13.8% ----------- ----------- ---------- ------ Europe 189,943 210,855 (20,912) (9.9%) Asia Pacific 19,887 16,976 2,911 17.1% Japan 13,585 6,393 7,192 112.5% ----------- ----------- ---------- ------ International 223,415 234,224 (10,809) (4.6%) ----------- ----------- ---------- ------ Consolidated Net Revenues $ 640,319 $ 600,691 $ 39,628 6.6% =========== =========== ========== ====== 19 December 31, December 31, Increase/ 2000 1999 (Decrease) % change ----------- ----------- ---------- -------- Net Revenues for the Nine Months Ended: North America $ 641,502 $ 694,125 $ (52,623) (7.6%) ----------- ----------- ---------- ------ Europe 291,786 367,649 (75,863) (20.6%) Asia Pacific 41,526 42,430 (904) (2.1%) Japan 40,204 21,494 18,710 87.0% ----------- ----------- ---------- ------ International 373,516 431,573 (58,057) (13.5%) ----------- ----------- ---------- ------ Consolidated Net Revenues $ 1,015,018 $ 1,125,698 $ (110,680) (9.8%) =========== =========== ========== ====== North America Net Revenues The increase in North America net revenues for the three months ended December 31, 2000, compared to the same period last year was primarily due to: * The launch of PlayStation 2 platform in North America generated $97,800,000 in revenue for the quarter from titles such as Madden NFL 2001, SSX and NHL 2001. * A 32% increase in PC revenues due to the shipment of key releases including Command & Conquer Red Alert 2 and American McGee's Alice and continued strong sales of The Sims and The Sims: Livin' Large. * These increases were offset by a 34% decrease in PlayStation revenues related to the console transition. With the exception of Madden NFL 2001, which was released in the second quarter of the current fiscal year, all franchise titles are showing a significant decrease from prior year releases. * These increases were also partially offset by a decrease in N64 revenues due to the console transition. We released two titles in the current quarter compared to three in the comparable prior year period. The decrease in North America net revenues for the nine months ended December 31, 2000, compared to the same period last year was primarily due to: * A 43% decrease in PlayStation revenues due to the console transition to PlayStation 2. We released 16 titles in the nine months ended December 31, 2000 compared to 20 in the comparable prior year period. * A 48% decrease in N64 revenues also related to the console transition. We released three titles in the nine months ended December 31, 2000 compared to seven in the comparable prior year period. * These decreases were partially offset by a 23% increase in PC revenues due to the strong sales of The Sims, Command & Conquer Red Alert 2 and The Sims: Livin' Large. International Net Revenues The decrease in international net revenues for the three months ended December 31, 2000, compared to the same period last year was primarily attributable to: * Europe's net revenues decreased 10% primarily due to market weakness, the PlayStation 2 console transition as well as weakness in the Euro currency. PlayStation revenues 20 decreased 41% compared to the same period last year but were partially offset by revenues generated from PlayStation 2 titles, such as FIFA 2001 and SSX. * European AL sales decreased 33% due to a weaker market, fewer hit titles and product release slips from large ALs as compared to the prior year. * Offset by Asia Pacific's net revenues, which increased 17% mainly in PC revenues, due to the release of Command & Conquer Red Alert 2 in the current period, and revenues generated from PlayStation 2 titles. * Offset by Japan's net revenues, which increased 113% due to revenues generated from PlayStation 2 titles, such as FIFA Soccer World Championship and SSX. The decrease in international net revenues for the nine months ended December 31, 2000, compared to the same period last year was primarily attributable to: * Europe's net revenues decreased 21% primarily due to market weakness, lower AL sales due to product release slips and fewer hit titles released in the current year, lower PC sales with fewer titles shipping in the period, the strong sales of Command & Conquer Tiberian Sun for the PC in the comparable prior year period, and weakness in the Euro currency. In addition, PlayStation revenue decreased 37% due to fewer titles shipping during the console transition period with most franchise titles showing significant decreases from the prior year releases. * Asia Pacific's net revenues decreased 2%, mainly due to the decrease in PlayStation revenues as there were no significant new titles released in the current year. This was offset by sales of PlayStation 2 titles such as SSX and FIFA 2001. * Offset by Japan's net revenues which increased 87% compared to the prior year primarily due to the shipment of PlayStation 2 titles such as FIFA Soccer World Championship, FIFA 2001 and SSX. Information about our net revenues by product line for the three and nine months ended December 31, 2000 and 1999 is presented below (in thousands): December 31, December 31, Increase/ 2000 1999 (Decrease) % change ----------- ----------- ----------- -------- Net Revenues for the Three Months Ended: EA Studio: PC $ 153,246 $ 123,771 $ 29,475 23.8% PlayStation 183,309 291,002 (107,693) (37.0%) PlayStation 2 144,611 -- 144,611 N/A N64 49,241 57,066 (7,825) (13.7%) Online Subscriptions 6,753 3,941 2,812 71.4% License, OEM and Other 5,218 8,488 (3,270) (38.5%) Advertising 2,591 -- 2,591 N/A ----------- ----------- ----------- ----- 544,969 484,268 60,701 12.5% Affiliated Label: 95,350 116,423 (21,073) (18.1%) ----------- ----------- ----------- ----- Consolidated Net Revenues $ 640,319 $ 600,691 $ 39,628 6.6% =========== =========== =========== ===== 21 December 31, December 31, Increase/ 2000 1999 (Decrease) % change ----------- ----------- ----------- -------- Net Revenues for the Nine Months Ended: EA Studio: PC $ 305,396 $ 289,154 $ 16,242 5.6% PlayStation 277,967 471,690 (193,723) (41.1%) PlayStation 2 157,629 -- 157,629 N/A N64 60,008 114,873 (54,865) (47.8%) Online Subscriptions 22,209 10,915 11,294 103.5% License, OEM and Other 14,953 16,532 (1,579) (9.6%) Advertising 2,591 -- 2,591 N/A ----------- ----------- ----------- ----- 840,753 903,164 (62,411) (6.9%) Affiliated Label: 174,265 222,534 (48,269) (21.7%) ----------- ----------- ----------- ----- Consolidated Net Revenues $ 1,015,018 $ 1,125,698 $ (110,680) (9.8%) =========== =========== =========== ===== Personal Computer Product Net Revenues The increase in sales of PC products for the three and nine months ended December 31, 2000 was primarily attributable to the continued strong sales of The Sims, which shipped in the prior year. Key current year releases were Command and Conquer Red Alert 2 and The Sims: Livin' Large. We released five PC titles in the third quarter of the current fiscal year compared to ten for the same period last year. We released 13 PC titles in the nine months ended December 31, 2000 compared to 21 in the same period last year. PlayStation Product Net Revenues We released ten PlayStation titles in the third quarter of the current fiscal year and the same period last year. We released 16 PlayStation titles in the nine months ended December 31, 2000 compared to 20 in the same period last year. As expected, PlayStation sales decreased for the three months and nine months ended December 31, 2000 compared to the prior year primarily attributable to the PlayStation 2 platform transition. With the exception of Madden NFL, all of our franchises experienced significant decreases from the prior year release. Although our PlayStation products are playable on the PlayStation 2 console, we expect sales of current PlayStation products to continue to decline in fiscal 2001. Under the terms of a licensing agreement with Sony Computer Entertainment of America in July 1994 (the "Sony Agreement"), as amended, we are authorized to develop and distribute CD-based software products compatible with the PlayStation. Pursuant to the Sony Agreement, we engage Sony to supply PlayStation CDs for distribution by us. Accordingly, we have limited ability to control our supply of PlayStation CD products or the timing of their delivery. See Risk Factors - "Our platform licensors are our chief competitors and frequently control the manufacturing of our video game products", below. PlayStation 2 Product Net Revenues We released ten titles worldwide for the three months and nine months ended December 31, 2000 for the PlayStation 2. Key releases for the quarter included Madden NFL 2001, SSX, FIFA 2001 and NHL 2001. Revenue was lower than expected due to the shortage of 22 PlayStation 2 hardware in the quarter resulting from component shortages which limited the number of units that could be manufactured, according to Sony. We anticipate that the hardware shortage will continue to have an adverse impact on our PlayStation 2 net revenues in the fourth quarter of the fiscal year 2001, but expect Sony to correct these issues for the next fiscal year. N64 Product Net Revenues We released two N64 titles in the third quarter of fiscal 2001 compared to three titles during the same period last year. We released three N64 titles in the nine months ended December 31, 2000 compared to seven in the same period last year. The expected decrease in N64 revenues for the three months and nine months ended December 31, 2000, compared to the same period last year was primarily due to fewer releases. The decrease is also due to the weaker market for Nintendo 64 products in the current year. We expect revenues for N64 products to continue to decline significantly in fiscal 2001. The key release for the quarter was The World Is Not Enough. Under the terms of the N64 Agreement, we engage Nintendo to manufacture our N64 cartridges for distribution by us. Accordingly, we have little ability to control our supply of N64 cartridges or the timing of their delivery. A shortage of microchips or other factors outside our control could impair our ability to obtain an adequate supply of cartridges. In connection with our purchases of N64 cartridges for distribution in North America, Nintendo requires us to provide irrevocable letters of credit prior to Nintendo's acceptance of purchase orders from us for purchases of these cartridges. For purchases of N64 cartridges for distribution in Japan and Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo maintains a policy of not accepting returns of N64 cartridges. Because of these and other factors, the carrying of an inventory of cartridges entails significant capital and risk. See Risk Factors - "Our platform licensors are our chief competitors and frequently control the manufacturing of our video game products", below. Online Net Revenues The increase in online revenues for the three and nine months ended December 31, 2000 as compared to the three and nine months ended December 31, 1999 was attributable to the following: * The average number of monthly customers for Ultima Online increased to over 200,000 for the three months ended December 31, 2000 as compared to over 130,000 for the same period last year and was over 196,000 for the nine months ended December 31, 2000 as compared to over 121,000 for the same period last year. This increase was due to continued strong sales of Ultima Online, the addition of new events and parties within the Ultima worlds and the release of Ultima Renaissance in April 2000. Ultima Renaissance added features including new houses and land mass. * We generated over $740,000 in revenues for Kesmai and Wordplay products in the current quarter and over $4,600,000 for the nine months ended December 31, 2000. These products were not part of EA.com last year due to the Kesmai acquisition in the fourth quarter of fiscal 2000. It is anticipated that revenues associated with these services will continue to decrease significantly as these products are either shut-down or converted into 23 our free, advertising supported offerings. Certain products will be retained as part of our new subscription offerings. License, OEM and Other Revenues The decrease in license, OEM and other revenues for the three and nine months ended December 31, 2000 was primarily a result of higher license revenue in the prior year of certain titles on the Game Boy platform. Advertising We began selling advertising following the launch of the EA.com/AOL Games Channel in October 2000. Affiliated Label Product Net Revenues The decrease in Affiliated Label net revenues for the three and nine months ended December 31, 2000 compared to the same periods last year was primarily due to the strong sales of Final Fantasy VIII in the prior year, our acquisition of DreamWorks Interactive, formerly an AL, in the fourth quarter of the prior year, fewer hit AL product releases and product release slips in Europe. Operations by Segment As a result of the approval of the issuance of a new series of common stock designated as Class B common stock, intended to reflect the performance of EA.com, management considers EA.com to be a separate reportable segment. Accordingly, prior period information has been restated to disclose this separate segment. We operate in two principal business segments globally: * Electronic Arts core ("EA Core") business segment: creation, marketing and distribution of entertainment software. * EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and related advertising. EA.com, a division of Electronic Arts Inc., represents Electronic Arts' online and e-Commerce businesses. EA.com's business includes subscription revenues collected for Internet game play on our websites, related website advertising, sales of packaged goods for Internet-only based games and sales of Electronic Arts games sold through EA.com websites. The statement of operations includes all revenues and costs directly attributable to EA.com, including charges for shared facilities, functions and services used by EA.com and provided by Electronic Arts. Certain costs and expenses have been allocated based on management's estimates of the cost of services provided to EA.com by Electronic Arts. 24 Information about our operations by segment for fiscal 2001 and 2000 is presented below (in thousands):
Three Months Ended December 31, 2000 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Net revenues from unaffiliated customers $ 629,145 $ 11,174 $ -- $ 640,319 Group sales 752 -- (752)(a) -- --------- --------- --------- --------- Total net revenues 629,897 11,174 (752) 640,319 --------- --------- --------- --------- Cost of goods sold from unaffiliated customers 304,036 2,110 -- 306,146 Group cost of goods sold -- 752 (752)(a) -- --------- --------- --------- --------- Total cost of goods sold 304,036 2,862 (752) 306,146 --------- --------- --------- --------- Gross profit 325,861 8,312 -- 334,173 Operating expenses: Marketing and sales 56,690 4,233 4,471 (c) 65,394 General and administrative 25,722 2,758 -- 28,480 Research and development 65,081 25,544 19,625 (b) 110,250 Network development and support -- 19,625 (19,625)(b) -- Carriage fee -- 4,471 (4,471)(c) -- Amortization of intangibles 3,184 1,497 -- 4,681 --------- --------- --------- --------- Total operating expenses 150,677 58,128 -- 208,805 --------- --------- --------- --------- Operating income (loss) 175,184 (49,816) -- 125,368 Interest and other income, net 2,456 234 -- 2,690 --------- --------- --------- --------- Income (loss) before provision for income taxes and minority interest 177,640 (49,582) -- 128,058 Provision for income taxes 39,698 -- -- 39,698 --------- --------- --------- --------- Income (loss) before minority interest 137,942 (49,582) -- 88,360 Minority interest in consolidated joint venture (382) -- -- (382) --------- --------- --------- --------- Net income (loss) before retained interest in EA.com $ 137,560 $ (49,582) $ -- $ 87,978 ========= ========= ========= ========= Allocation of retained interest (in thousands): Three Months Ended December 31, 2000 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Net income (loss) before retained interest in EA.com $ 137,560 $ (49,582) $ -- $ 87,978 Net loss related to retained interest in EA.com (42,144) 42,144 -- -- --------- --------- --------- --------- Net income (loss) $ 95,416 $ (7,438) $ -- $ 87,978 ========= ========= ========= =========
25
Three Months Ended December 31, 1999 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Net revenues from unaffiliated customers $ 595,761 $ 4,930 $ -- $ 600,691 Group sales 557 -- (557)(a) -- --------- --------- --------- --------- Total net revenues 596,318 4,930 (557) 600,691 --------- --------- --------- --------- Cost of goods sold from unaffiliated customers 297,883 1,540 -- 299,423 Group cost of goods sold -- 557 (557)(a) -- --------- --------- --------- --------- Total cost of goods sold 297,883 2,097 (557) 299,423 --------- --------- --------- --------- Gross profit 298,435 2,833 -- 301,268 Operating expenses: Marketing and sales 66,192 1,283 -- 67,475 General and administrative 26,545 1,692 -- 28,237 Research and development 55,318 12,240 5,866 (b) 73,424 Network development and support -- 5,866 (5,866)(b) -- Carriage fee -- -- -- -- Amortization of intangibles 2,567 29 -- 2,596 --------- --------- --------- --------- Total operating expenses 150,622 21,110 -- 171,732 --------- --------- --------- --------- Operating income (loss) 147,813 (18,277) -- 129,536 Interest and other income, net 4,382 -- -- 4,382 --------- --------- --------- --------- Income (loss) before provision for income taxes and minority interest 152,195 (18,277) -- 133,918 Provision for income taxes 41,214 -- -- 41,214 --------- --------- --------- --------- Income (loss) before minority interest 110,981 (18,277) -- 92,704 Minority interest in consolidated joint venture 157 -- -- 157 --------- --------- --------- --------- Net income (loss) $ 111,138 $ (18,277) $ -- $ 92,861 ========= ========= ========= =========
26
Nine Months Ended December 31, 2000 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- ---------- Net revenues from unaffiliated customers $ 985,754 $ 29,264 $ -- $1,015,018 Group sales 1,795 -- (1,795)(a) -- --------- --------- --------- ---------- Total net revenues 987,549 29,264 (1,795) 1,015,018 --------- --------- --------- ---------- Cost of goods sold from unaffiliated customers 496,620 6,208 -- 502,828 Group cost of goods sold -- 1,795 (1,795)(a) -- --------- --------- --------- ---------- Total cost of goods sold 496,620 8,003 (1,795) 502,828 --------- --------- --------- ---------- Gross profit 490,929 21,261 -- 512,190 Operating expenses: Marketing and sales 126,702 7,677 4,471 (c) 138,850 General and administrative 69,611 7,370 -- 76,981 Research and development 182,935 59,712 38,824 (b) 281,471 Network development and support -- 38,824 (38,824)(b) -- Carriage fee -- 4,471 (4,471)(c) -- Amortization of intangibles 9,645 4,406 -- 14,051 --------- --------- --------- ---------- Total operating expenses 388,893 122,460 -- 511,353 --------- --------- --------- ---------- Operating income (loss) 102,036 (101,199) -- 837 Interest and other income, net 10,387 241 -- 10,628 --------- --------- --------- ---------- Income (loss) before provision for income taxes and minority interest 112,423 (100,958) -- 11,465 Provision for income taxes 3,554 -- -- 3,554 --------- --------- --------- ---------- Income (loss) before minority interest 108,869 (100,958) -- 7,911 Minority interest in consolidated joint venture (1,113) -- -- (1,113) --------- --------- --------- ---------- Net income (loss) before retained interest in EA.com $ 107,756 $(100,958) $ -- $ 6,798 ========= ========= ========= ========== Allocation of retained interest (in thousands): Nine Months Ended December 31, 2000 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- ---------- Net income (loss) before retained interest in EA.com $ 107,756 $(100,958) $ -- $ 6,798 Net loss related to retained interest in EA.com (85,814) 85,814 -- -- --------- --------- --------- ---------- Net income (loss) $ 21,942 $ (15,144) $ -- $ 6,798 ========= ========= ========= ==========
27
Nine Months Ended December 31, 1999 ------------------------------------------------------ EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts ---------- --------- --------- ---------- Net revenues from unaffiliated customers $1,111,598 $ 14,100 $ -- $1,125,698 Group sales 1,465 -- (1,465)(a) -- ---------- --------- --------- ---------- Total net revenues 1,113,063 14,100 (1,465) 1,125,698 ---------- --------- --------- ---------- Cost of goods sold from unaffiliated customers 558,845 3,976 -- 562,821 Group cost of goods sold -- 1,465 (1,465)(a) -- ---------- --------- --------- ---------- Total cost of goods sold 558,845 5,441 (1,465) 562,821 ---------- --------- --------- ---------- Gross profit 554,218 8,659 -- 562,877 Operating expenses: Marketing and sales 145,417 2,005 -- 147,422 General and administrative 65,924 2,322 -- 68,246 Research and development 152,077 22,877 12,071 (b) 187,025 Network development and support -- 12,071 (12,071)(b) -- Carriage fee -- -- -- -- Amortization of intangibles 7,742 58 -- 7,800 ---------- --------- --------- ---------- Total operating expenses 371,160 39,333 -- 410,493 ---------- --------- --------- ---------- Operating income (loss) 183,058 (30,674) -- 152,384 Interest and other income, net 11,653 -- -- 11,653 ---------- --------- --------- ---------- Income (loss) before provision for income taxes and minority interest 194,711 (30,674) -- 164,037 Provision for income taxes 50,852 -- -- 50,852 ---------- --------- --------- ---------- Income (loss) before minority interest 143,859 (30,674) -- 113,185 Minority interest in consolidated joint venture 134 -- -- 134 ---------- --------- --------- ---------- Net income (loss) $ 143,993 $ (30,674) $ -- $ 113,319 ========== ========= ========= ========== - ---------- (a) Represents elimination of intercompany sales of Electronic Arts packaged goods products to EA.com, and represents elimination of royalties paid to Electronic Arts by EA.com for intellectual property rights. (b) Represents reclassification of Network Development and Support to Research and Development. (c) Represents reclassification of amortization of the AOL carriage fee to marketing.
28 The following table presents pro-forma results of operations allocating taxes between EA Core and EA.com. Consolidated taxes have been allocated to EA Core and EA.com on a pro rata basis based on the consolidated effective tax rates, thereby giving EA.com the tax benefit of its losses which is utilized by the consolidated group. Such tax benefit could not be recognized by EA.com on a stand-alone basis. The sum of tax expense and tax benefit for EA Core and EA.com is the same as consolidated tax expense and tax benefit. This presentation represents how management analyzes each segment of the business (in thousands):
Three Months Ended December 31, 2000 ----------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Income (loss) before provision for (benefit from) income taxes and minority interest $ 177,640 $ (49,582) $ -- $ 128,058 Provision for (benefit from) income taxes 55,068 (15,370) -- 39,698 --------- --------- --------- --------- Income (loss) before minority interest 122,572 (34,212) -- 88,360 Minority interest in consolidated joint venture (382) -- -- (382) --------- --------- --------- --------- Net income (loss) $ 122,190 $ (34,212) $ -- $ 87,978 ========= ========= ========= ========= Three Months Ended December 31, 1999 ----------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Income (loss) before provision for (benefit from) income taxes and minority interest $ 152,195 $ (18,277) $ -- $ 133,918 Provision for (benefit from) income taxes 46,755 (5,541) -- 41,214 --------- --------- --------- --------- Income (loss) before minority interest 105,440 (12,736) -- 92,704 Minority interest in consolidated joint venture 157 -- -- 157 --------- --------- --------- --------- Net income (loss) $ 105,597 $ (12,736) $ -- $ 92,861 ========= ========= ========= ========= Nine Months Ended December 31, 2000 ----------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Income (loss) before provision for (benefit from) income taxes and minority interest $ 112,423 $(100,958) $ -- $ 11,465 Provision for (benefit from) income taxes 34,851 (31,297) -- 3,554 --------- --------- --------- --------- Income (loss) before minority interest 77,572 (69,661) -- 7,911 Minority interest in consolidated joint venture (1,113) -- -- (1,113) --------- --------- --------- --------- Net income (loss) $ 76,459 $ (69,661) $ -- $ 6,798 ========= ========= ========= ========= Nine Months Ended December 31, 1999 ----------------------------------------------------- EA Core Adjustments and (excl. EA.com) EA.com Eliminations Electronic Arts --------- --------- --------- --------- Income (loss) before provision for (benefit from) income taxes and minority interest $ 194,711 $ (30,674) $ -- $ 164,037 Provision for (benefit from) income taxes 60,361 (9,509) -- 50,852 --------- --------- --------- --------- Income (loss) before minority interest 134,350 (21,165) -- 113,185 Minority interest in consolidated joint venture 134 -- -- 134 --------- --------- --------- --------- Net income (loss) $ 134,484 $ (21,165) $ -- $ 113,319 ========= ========= ========= =========
29 Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income Information about our costs and expenses, interest and other income, net, income taxes and net income for the three and nine months ended December 31, 2000 and 1999 is presented below: Percent of Net Percent of Net Revenues Revenues Three Months Nine Months Ended Dec 31, Ended Dec 31, -------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Cost of goods sold 47.8% 49.8% 49.5% 50.0% Marketing and sales 10.2 11.2 13.7 13.1 General and administrative 4.5 4.7 7.6 6.1 Research and development (includes Network development and support) 17.2 12.2 27.7 16.6 Amortization of intangibles 0.7 0.5 1.4 0.7 Interest and other income, net 0.4 0.7 1.0 1.0 Income taxes - effective tax rate 31.0 30.8 31.0 31.0 Net income 13.7% 15.5% 0.7% 10.1% Cost of Goods Sold. Cost of goods sold as a percentage of net revenues decreased for the three months and nine months ended December 31, 2000 compared to the same period last year primarily due to: * An increase in sales of higher margin PC titles. The current year included higher sales on higher margin internally developed titles such as The Sims, Command & Conquer Red Alert 2, and The Sims: Livin' Large. * The introduction of higher margin PlayStation 2 products in the current year. * A decrease in sales of lower margin AL and N64 titles. * Offset by a decrease in sales of PlayStation titles combined with the decrease in average margins on PlayStation products due to a decrease in the average sales price on front line and catalogue products. Marketing and Sales. Marketing and sales expenses for the three months ended December 31, 2000 decreased as a percentage of revenue, primarily attributed to: * Lower television and print advertising in North America and Europe. * Offset by an increase in EA.com marketing and sales expense due to increased staff required to support the live game site and advertising campaigns run on the AOL service promoting the Games Channel. In future periods, EA.com intends to further increase marketing and advertising spending in order to promote our game site and the Games Channel on AOL. * Offset by the amortization of the AOL carriage fee, which began with the launch of EA.com in October of the current fiscal year. The Carriage Fee will be amortized straight-line over the term of the AOL agreement. 30 Marketing and sales expenses for the nine months ended December 31, 2000 increased as a percentage of revenue, primarily attributed to: * Higher EA.com marketing and sales expense due to increased staff required to support the live game site and advertising campaigns run on the AOL service promoting the Games Channel. In future periods, EA.com intends to further increase marketing and advertising spending in order to promote our game site and the Games Channel on AOL. * The amortization of the AOL carriage fee, which began with the launch of EA.com in October of the current fiscal year. The Carriage Fee will be amortized straight-line over the term of the AOL agreement. * Offset by lower television and print advertising in North America and Europe due to fewer number of releases compared to the same period last year. * Offset by a decrease in cooperative advertising associated with lower revenues in North America. General and Administrative. General and administrative expenses increased for the three months ended December 31, 2000 in absolute dollars by 0.9% and increased 12.8% for the nine months ended December 31, 2000, primarily attributed to: * The expansion of the EA.com staff and additional administrative-related costs required to support the growth of the EA.com business. We anticipate a continued increase in the absolute dollars spent on general and administrative related expenses. * Increase in depreciation expense for Europe due to the implementation of a new transaction processing system. Research and Development (excluding Network Development and Support). Research and development expenses increased for the three months ended December 31, 2000 in absolute dollars by 34.1% and 38.7% for the nine months ended December 31, 2000, primarily attributed to: * Increase in research and development expenses by EA.com (including expenses incurred by EA core on behalf of EA.com) due to an increase in the number of online projects in development and increased development staff to support these products. This includes headcount-related costs associated with the acquisition of Kesmai in the fourth quarter of fiscal 2000. The type of games that will be in development will most likely increase in complexity and depth. To support this effort, EA.com may be required to increase its development and production expenses. * An increase in development spending for next generation console products including development for the PlayStation 2 console. * The increase is also due to research and development expenses related to the acquisition of DreamWorks Interactive, a software development company, in the fourth quarter of the prior fiscal year. Network Development and Support. The increase in network development and support expenses was primarily due to increased spending for the EA.com network infrastructure, the formation of the support organization for the live game site and the Games Channel on the AOL service and the amortization of capitalized costs associated with the pre-launch network infrastructure build including costs capitalized in accordance with SOP 98-1. The amortization cost for the quarter associated with the launch of the website in October 2000 was $1,900,000. 31 As a result, we expect network development and support expenses to increase in absolute dollars in the future. Amortization of Intangibles. The amortization of intangibles results primarily from the acquisitions of Westwood, Kesmai, DreamWorks Interactive, ABC Software and other acquisitions. Amortization of intangibles was $3,184,000 for EA Core and $1,497,000 for EA.com for the three months ended December 31, 2000. Amortization of intangibles was $2,567,000 for EA Core and $29,000 for EA.com for the three months ended December 31, 1999. Amortization of intangibles was $9,645,000 for EA Core and $4,406,000 for EA.com for the nine months ended December 31, 2000. Amortization of intangibles was $7,742,000 for EA Core and $58,000 for EA.com for the nine months ended December 31, 1999. Interest and Other Income, Net. Interest and other income, net, decreased in absolute dollars for the three months and nine months ended December 31, 2000 primarily due to gains on the sale of marketable securities in the prior year. Income Taxes. Our effective tax rate was 31% for the nine months ended December 31, 2000 and 1999. The effective tax rate was 31% and 30.8% for the three months ended December 31, 2000 and 1999, respectively. Net Income. In absolute dollars, reported net income decreased for the three months ended December 31, 2000 primarily related to higher product development expenses, as a percent of net revenues, compared to the same period last year. The increase in development expense is due to an increase in the number of products in development by EA Core and EA.com and higher network development and support costs in preparation for new online products and the launch of our game site on the worldwide web and the AOL service which occurred in October 2000. In absolute dollars, reported net income decreased for the nine months ended December 31, 2000 primarily related to lower revenues as well as higher costs and expenses compared to the same period last year. The decrease was also due to an increase in the number of products in development by EA Core and EA.com and higher network development and support costs in preparation for new online products and the launch of our game site on the worldwide web and the AOL service which occurred in October 2000. Excluding goodwill and non-cash compensation charges in the amount of $3,479,000, net of taxes, for the three months ended December 31, 2000, net income would have been $91,457,000. Excluding goodwill and non-cash compensation charges in the amount of $1,995,000, net of taxes, for the three months ended December 31, 1999, net income would have been $94,856,000. Excluding goodwill and non-cash compensation charges in the amount of $11,028,000, net of taxes, for the nine months ended December 31, 2000, net income would have been $17,826,000. Excluding goodwill and non-cash compensation charges in the amount of $5,833,000, net of taxes, for the nine months ended December 31, 1999, net income would have been $119,152,000. 32 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, our working capital was $489,357,000 compared to $440,021,000 at March 31, 2000. Cash, cash equivalents and short-term investments decreased by approximately $44,427,000 during the nine months ended December 31, 2000 as we used $104,860,000 of cash in capital expenditures, offset by $60,862,000 provided through the sale of equity securities under our stock plans, $3,958,000 of proceeds from the sale of property and equipment and $1,325,000 provided by operating activities. Reserves for bad debts and sales returns increased from $65,067,000 at March 31, 2000 to $82,660,000 at December 31, 2000. Reserves have been charged for returns of product and price protection credits issued for products sold in prior periods. Management believes these reserves are adequate based on historical experience and its current estimate of potential returns and allowances. Our principal source of liquidity is $295,377,000 in cash, cash equivalents and short-term investments. Management believes the existing cash, cash equivalents, short-term investments, marketable securities and cash generated from operations will be sufficient to meet cash and investment requirements on both a short-term and long-term basis. Included in the amounts above is the following for the EA.com business: * To date, EA.com has been funded solely by Electronic Arts. No interest charge has been reflected in the accompanying consolidated financial statements. Excess cash generated from operations is transferred to Electronic Arts. We anticipate these funding procedures will continue in the near-term. Electronic Arts may, at its discretion, provide funds to EA.com under a debt arrangement, instead of treating such funding as a capital contribution. * During the nine months ended December 31, 2000, EA.com used $93,934,000 of cash in operations, $65,418,000 in capital expenditures for computer equipment, network infrastructure and related software (including $41,263,000 of consulting, hardware, software and direct payroll and payroll-related costs associated with the implementation of customized internal-use software), offset by $159,667,000 provided through the capital contribution from Electronic Arts. * As of December 31, 2000, the Company has $8,375,000 of capitalized costs associated with the effort to build the EA.com website and infrastructure that have been put into service related to SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". As of October 2000, EA.com began to amortize $39,100,000 of costs associated with this pronouncement. Impact of Recently Issued Accounting Standards In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)". FIN 44 clarifies the application of APB Opinion No. 25 for certain 33 issues: (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, FIN 44 is effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial position or results of operations. In March 2000, the Emerging Issues Task Force issued No. 00-03 ("EITF 00-03"), "Application of AICPA SOP 97-2, "Software Revenue Recognition," to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware", which discusses the effect on revenue recognition of a software vendor's obligation to host its software that previously was licensed to a customer. The EITF has reached the conclusion that, if the customer is unable to utilize the software on the customer's hardware or contract with another party unrelated to the vendor to host the software, then the arrangement with the customer is outside the scope of SOP 97-2 and should be treated as a service contract. The adoption of EITF 00-03 did not have a material impact on the Company's financial position and results of operations. In March 2000, the Emerging Issues Task Force issued No. 00-02 ("EITF 00-02"), "Accounting for Web Site Development Costs". EITF 00-02 states that all costs relating to software used to operate a web site and relating to development of initial graphics and web page design should be accounted for using Statement of Position ("SOP") 98-1. Under this SOP, costs incurred in the preliminary project stage should be expensed as incurred, as should most training and data conversion costs. External direct costs of materials and services and internal direct payroll-related costs should be capitalized once certain criteria are met. EITF 00-02 is effective for all fiscal quarters beginning after June 30, 2000. The Company's accounting policy for internal-use software, as required by SOP 98-1, incorporated the requirements of EITF 00-02. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. SAB 101 is effective the fourth fiscal quarter of fiscal years beginning after December 15, 1999 as amended by SAB 101B. The Company believes the adoption of SAB 101 will not have a material impact on the Company's financial position and results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133" and SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133" which establishes accounting and reporting standards for derivative instruments and hedging activities. The terms of SFAS 133 and SFAS 138 are effective as of the beginning of the first quarter of the fiscal year beginning after June 15, 2000. The Company is determining the effect of SFAS 133, 137 and 138 on its financial statements. 34 RISK FACTORS Electronic Arts' business is subject to many risks and uncertainties which may affect our future financial performance. Some of those important risks and uncertainties which may cause our operating results to vary or which may materially and adversely affect our operating results are as follows: Risk Factors Relating to Our Core Business Platform Transitions Such as the One Now Occurring Typically Depress the Market for Video Game Software Until New Platforms Achieve a Wide Market Acceptance When new video game platforms are announced or introduced into the market, consumers typically reduce their purchases of video games for current platforms in anticipation of new platforms being available. During that period, sales of our video game products can be expected to slow or even decline until new platforms have achieved a wide market and consumer acceptance. We are currently in such a transition. Sony shipped its PlayStation 2 product in Japan, North America and Europe in calendar year 2000. For the December quarter, manufacturing shortages, resulting in the delay of a significant number of shipments of PlayStation 2 units in North America and Europe, have adversely affected our results of operations. Consequently, these manufacturing shortages pose serious uncertainty for our current fourth quarter and fiscal year results. In addition, Nintendo and Microsoft have announced that their new console systems will be released in calendar year 2001. Current sales of our products for the existing PlayStation and Nintendo 64 platforms have been adversely affected. We expect this trend to continue until one or more of these new consoles achieve a wide installed base of consumers. New Video Game Platforms Create Additional Technical and Business Model Uncertainties Large portions of our revenues are derived from the sale of products for play on proprietary video game platforms such as the Sony PlayStation. The success of our products is significantly affected by acceptance of the new video game hardware systems and the life span of older hardware platforms and our ability to accurately predict which platforms will be most successful. Sometimes we will spend development and marketing resources on products designed for new video game systems that have not yet achieved large installed bases or will continue product development for older hardware platforms that may have shorter life cycles than we expected. Conversely, if we do not develop for a platform that achieves significant market acceptance, or discontinue development for a platform that has a longer life cycle than expected, our revenue growth may be adversely affected. For example, the Sega Dreamcast console launched in Japan in early 1999 and in the United States in September of 1999. We have developed no products for this platform. Had this platform achieved wide market acceptance, our revenue growth would have been adversely affected. Similarly, we released a variety of products for the new Sony platform, the PlayStation 2. The shortages of PlayStation 2 units has adversely affected our results, and if 35 that platform does not achieve wide acceptance by consumers, we will have spent a disproportionate amount of our resources for this platform. Additionally, we have not negotiated a publishing agreement with Nintendo for their next generation platform and we do not know whether the terms of this agreement will be favorable. Product Development Schedules Are Frequently Unreliable and Make Predicting Quarterly Results Difficult Product development schedules, particularly for new hardware platforms and high-end multimedia personal computers, or PCs, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process, research and experimentation associated with development for new technologies. For example, The World is Not Enough for the PlayStation 2 and EMPEROR: Battle for Dune for the PC, which were expected to ship in fiscal 2001 will not be released until fiscal 2002 due to development delays. Additionally, development risks for CD-ROM products can cause particular difficulties in predicting quarterly results because brief manufacturing lead times allow finalizing products and projected release dates late in a quarter. Our revenues and earnings are dependent on our ability to meet our product release schedules, and our failure to meet those schedules could result in revenues and earnings which fall short of analysts' expectations for any individual quarter and the fiscal year. Our Business Is Both Seasonal and Cyclical Our business is highly seasonal with a significant percentage of our revenues occurring in the December quarter. In our fourth quarter of fiscal 2001, we expect these seasonal trends to be magnified by general industry factors, including the current platform transition, the manufacturing shortages for the PlayStation 2 as noted above, and the economic slowdown in the United States. In addition, we are continuing to invest significantly in our online operation, EA.com. Our business is also cyclical; video game platforms have historically had a life cycle of four to six years, and decline as more advanced platforms are being introduced. As one group of platforms is reaching the end of its cycle and new platforms are emerging, buying patterns may change. Purchases of products for older platforms may slow at a faster rate than sales of new platforms. We are currently in such a platform transition. Sega introduced its latest platform in calendar year 1999, and Sony shipped its PlayStation 2 console in Japan, North America and Europe in calendar year 2000. Nintendo and Microsoft have announced that their new console systems will be released in calendar year 2001. Sales of our current products for the current Nintendo and Sony platforms have already been adversely affected, and we expect this trend to continue until one or more new platforms achieves a wide installed base of consumers. The Impact of e-Commerce and Online Games on Our Business Is Not Known While we do not currently derive significant revenues from online sales of our packaged products, we believe that such form of distribution will become a more significant factor in our business in the future. E-commerce is becoming an increasingly popular method for conducting business with consumers. How that form of distribution will affect the more traditional retail distribution, at which we have historically had success, and over what time period, is uncertain. In addition, we expect the number and popularity of online games to increase and become a significant factor in the interactive games business generally. We do not know how that 36 increase generally, or the emerging business of EA.com specifically, will affect the sales of packaged goods. Our Business, Our Products, and Our Distribution Are Subject to Increasing Regulation in Key Territories Legislation is increasingly introduced which may affect the content of our products and their distribution. For example, privacy rules in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory while of course the Internet recognizes no geographical boundaries. Other countries such as Germany have adopted laws regulating content transmitted over the Internet that are stricter than current United States laws. In the United States, in response to recent events, the federal and several state governments are considering content restrictions on products such as those made by us as well as restrictions on distribution of such products. Any one or more of these factors could harm our business. Our Platform Licensors Are Our Chief Competitors and Frequently Control the Manufacturing of Our Video Game Products Our agreements with hardware licensors, which are also our chief competitors, typically give significant control to the licensor over the approval and manufacturing of our products. This fact could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. In most events, control of the approval and manufacturing process by the platform licensors increases both our manufacturing lead times and costs as compared to those we can achieve independently. For example, in prior years, we experienced delays in obtaining approvals for and manufacturing of PlayStation products which caused delays in shipping those products. The potential for additional delay or refusal to approve or manufacture our products continues with our platform licensors. Such occurrences would harm our business and adversely affect our financial performance. Proliferation and Assertion of Patents Poses Serious Risks to our Business Many patents have been issued that may apply to widely used game technologies. Additionally, many recently issued patents are now being asserted against Internet implementations of existing games. Several such patents have been asserted against us. For example, we currently have a lawsuit pending regarding our publication of games that can be played both alone and with others over the Internet in which the patent holder has moved to enjoin the sale of EA personal computer products that can be played alone and over the Internet. Such claims can harm our business. We will incur substantial expenses in evaluating and defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third party patent, we could incur significant monetary liability and be prevented from using the rights in the future. 37 Risk Factors Relating to Our Online Business Because of EA.com's Limited Operating History, It Will Be Difficult To Evaluate its Business and Prospects EA.com's business is still in the developing stages, so evaluating its business and prospects will be more difficult than would be the case for a more mature business. We will continue to encounter the risks and difficulties faced in launching a new business, and we may not achieve our goals or may be compelled to change the manner in which we seek to develop the business. These uncertainties as to the future operations of EA.com will increase the difficulty we face in completing and pursuing the essential plans for the development of the business and will also make it more difficult for our stockholders and securities analysts to predict the operating results of this business. EA.com Has a History of Losses and Expects To Continue To Incur Losses and May Never Achieve Profitability EA.com has incurred substantial losses to date, including the current fiscal year. We expect EA.com to continue to incur losses as it develops its business. EA.com will be required to maintain the significant support, service and product enhancement demands of online users, and we cannot be certain that EA.com will produce sufficient revenues from its operations to support these costs. Even if profitability is achieved, EA.com may not be able to sustain it over a period of time. Our Agreements with America Online May Not Prove Successful to the Development of EA.com's Business We have a series of agreements with America Online ("AOL") for the offering of our games for online play. These agreements require that we make substantial guaranteed payments to AOL and that we commit our resources to the pursuit of the online game opportunity. We cannot be assured that the substantial costs associated with the AOL agreements will be justified by the revenues generated from that relationship. In addition, restrictions included in the AOL agreements limiting other channels we may develop for offering online games may limit our ability to diversify our online distribution strategies. The success for us of the AOL agreements will also be a result of AOL's performance under the agreements, a factor over which we will have very little control. We Have Very Limited Experience with Online Games and May Not Be Able To Operate This Business Effectively Offering games solely for online play is a substantial departure from our traditional business of selling packaged software games. We have employed various pricing models, including subscription fees, "pay to play fees" and advertising. We have very little experience with developing optimal pricing strategies for online games and no experience in "pay to play" pricing or in securing advertising revenue for online services. Similarly, we are inexperienced in predicting usage patterns for our games. Because of our inexperience in this area, we may not be effective in achieving success that may otherwise be attainable from offering our games online. 38 Online Games Have Risks That Are Not Associated with Our Traditional Business Online games, particularly multiplayer games, pose risks to player enjoyment that do not generally apply to packaged game sales. Players frequently would not be acquainted with other players, which may adversely affect the playing experience. Social issues raised by a player's conduct may impact the experience for other players. We have not determined whether or how we might monitor or proctor player behavior that impairs the game experience. In addition, there are substantial technical challenges to be met both in the introduction of our games online and in maintaining an effective game playing environment over time. Also, hacking and spamming has become a serious problem for online sites, and significant hacking and spamming could seriously interfere with online game play. If these risks are not successfully controlled and technical challenges resolved, potential customers for our games may be unwilling to play in sufficient volume to allow us to attain or sustain profitability. We May Not Be Able To Obtain the Required Licenses To Offer Our Games Online If we are unable to reach terms with certain licensors for our games, we will not be able to offer certain of our games for online play. Many of Electronic Arts' most popular games feature characters, trademarks, people or concepts for which we have licenses from third parties. As an example, our EA SPORTS products typically contain content licensed from a sports and players' association. In certain instances, the terms of these licenses will not allow us to offer the games for online play without negotiating an additional license. We cannot be certain that the licensors will be amenable to a license for online games involving their content or, even if they are, that we will be able to reach terms with them for such use. We may be forced to agree to terms that ultimately materially impair the economic value to us of the online game market. Proliferation and Assertion of Patents Poses Serious Risks to the Business of EA.com Many patents have been issued that may apply to widely used Internet technologies. Additionally, many recently issued patents are now being asserted against Internet implementations of older technologies. Several such patents have been asserted against us. For example, we currently have a lawsuit pending regarding our publication of games that can be played both alone and with others over the Internet in which the patent holder has moved to enjoin the sale of EA personal computer products that can be played alone and over the Internet. Such claims can harm our business. We will incur substantial expenses in evaluating and defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third party patent, we could incur significant monetary liability and be prevented from using the rights in the future. Development of EA.com's Business Will Require Significant Capital, and We Cannot Be Assured That It Will Be Available EA.com will not be successful if it does not receive the very substantial financing that will be required to launch its business. Electronic Arts has agreed to provide a limited amount of funding to EA.com, but this financing alone will not be sufficient for the development of EA.com's business. Any additional funding that is obtained from EA may either be treated as a revolving credit advance or would increase EA's retained interest in EA.com and correspondingly decrease the interest of the holders of outstanding shares of Class B common stock. The attraction of additional equity or debt financing for EA.com from third parties may 39 not be possible or may only be possible on terms that result in significant dilution to Class A and Class B common stockholders or interest or other costs and debt-related restrictions on the operation of the business. If Use of the Internet Does Not Continue To Develop and Reliably Support the Demands Placed on It by Electronic Commerce, EA.com's Business Will Be Harmed EA.com's success depends upon growth in the use of the Internet as a medium for playing games. The use of the Internet for sophisticated games like ours is relatively new. Our business would be seriously harmed if: * use of the Internet does not continue to increase or increases more slowly than expected, * the infrastructure for the Internet does not effectively support online game play, * concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of conducting commercial transactions, or * government regulations regarding Internet content, privacy or other conditions impede the effectiveness of the Internet to users. Capacity Restraints May Restrict the Use of the Internet as a Forum for Game Play, Resulting in Decreased Demand for Our Products The Internet infrastructure may not be able to support the demands placed on it by increased usage or the limited capacity of networks to transmit large amounts of data. Other risks associated with commercial use of the Internet could slow its growth, including: * outages and other delays resulting from the inadequate reliability of the network infrastructure, * slow development of enabling technologies and complementary products, and * limited availability of cost-effective, high speed access. Delays in the development or adoption of new equipment standards or protocols required to handle increased levels of Internet activity, or increased governmental regulation, would cause the Internet to fail to gain, or lose, viability as a means of game playing. If these or any other factors cause use of the Internet for commerce to slow or decline, the Internet may not prove viable as a commercial marketplace. This, in turn, would result in decreased demand for EA.com's products and services. 40 To Become and Remain Competitive, EA.com Must Continually Develop and Expand New Content. This Is Inherently Risky and Expensive. EA.com's success depends on our ability to develop products and services for the EA.com site and our ability to continually expand the content on that site. Our agreement with AOL requires us to develop new games under our relationship with AOL. We cannot assure you that products will be developed on time, in a cost effective manner, or that they will be successful. We May Not Be Able To Respond to Rapid Technological Change The market for Internet products and services is characterized by rapid technological change and evolving industry standards. Both in completing the design and implementation of our network infrastructure and thereafter, we will be required to continually improve performance, features, reliability and capacity of our network infrastructure. We cannot assure you that we will be successful in responding rapidly or in a cost effective manner to such developments. Increasing Governmental Regulation of the Internet Could Limit the Market for Our Products As Internet commerce continues to evolve, we expect that federal, state and foreign governments will adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided over the Internet, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in electronic commerce to liability, taxation or other increased costs, any of which could limit the growth of electronic commerce generally. Legislation could dampen the growth in Internet usage and decrease its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit the market for EA.com's products. If We Do Not Maintain Our Relationship with Outside Consultants, Our Ability To Develop Our Online Business Will Be Impaired Because approximately 16% of the staff creating, designing, and developing the infrastructure for EA.com's website and network interface is being provided by outside consultants, losing the business relationship with such consultants would cause EA.com to lose an important component of its website implementation team. Given the intense competition for qualified technical consultants, EA.com may not be able to retain these consultants or, if necessary, replace them. If it cannot do so, its ability to develop its business will be impaired. Our Revenues Have Been Heavily Dependent on a Single Product and Would Be Adversely Affected if That Product's Popularity Were To Decline In the near term, EA.com's revenues to date have consisted primarily of revenues from sales of our online product Ultima Online, and we would be adversely affected if revenues from that product were to decline for any reason and not be replaced. We expect the online game market to become increasingly competitive, and it is possible that other producer's current or future games could cause our revenue from Ultima Online to decline. In addition, 41 popularity of Ultima Online could decline over time simply because of consumer preference for new game experiences. We Invest Very Heavily in Research and Development and Network Development and Support for EA.com, and We Cannot Be Assured That We Will Achieve Revenues That Validate This Level of Spending We have invested, and expect to continue to invest, very heavily in research and development and network development and support for our website and online games. We will need to expand EA.com's revenues substantially for it to achieve profitability with these levels of expenditure being required, and we may not be able to do so. If we cannot increase revenues to profitable levels, the value of EA.com will be impaired. In order to develop the broad games offerings that we envision for our online operations it will be necessary to engage in significant developmental efforts both to adapt existing EA games to the online format and to create new online games. Our agreements with AOL require us to maintain a substantial commitment to online game development and we cannot be assured that we will realize acceptable returns from this investment. Online Product Development Schedules Are Unreliable and Make Predicting Quarterly Results Difficult Online product development schedules, particularly for Internet based games are difficult to predict because they involve creative processes, use of new development tools, Internet latency issues, a learning process to better understand Internet based game mechanics, and research and experimentation associated with development for new online technologies. Additionally, development risks for Internet based products can cause particular difficulties in predicting quarterly results because of the challenges associated with game testing, live Beta testing, integration into network servers and integration on to the Games web site and may impact the release ("go live") dates of products during a particular quarter. Several online products currently under development are experiencing development delays and will be released later than planned. Our revenues and operating costs are dependent on our ability to meet our product "go live" schedules, and our failure to meet those schedules could result in revenues falling short of analysts' expectations, with no corresponding decrease in expenses, resulting in increased operating losses for EA.com. General Risk Factors Because of the Intense Competition for Qualified Technical, Creative, Marketing and Other Personnel, We May Not Be Able To Attract and Retain the Personnel Necessary for our Businesses The market for technical, creative, marketing and other personnel essential to the development of online businesses and management of our online and core businesses continues to be extremely competitive, and we may not be able to attract and retain the employees we need. In addition, the cost of real estate in the San Francisco Bay area - the location of our headquarters and largest studio has increased dramatically, and has made recruiting from other areas and relocating employees to our headquarters more difficult. If we cannot successfully 42 recruit and retain the employees we need, our ability to develop and manage our businesses will be impaired. Foreign Sales and Currency Fluctuations For the nine months ended December 31, 2000 international net revenues comprised 37% of total consolidated net revenues. For the fiscal year ended March 31, 2000 international net revenues comprised 40% of total consolidated net revenues. We expect foreign sales to continue to account for a significant and growing portion of our revenues. Such sales are subject to unexpected regulatory requirements, tariffs and other barriers. Additionally, foreign sales are primarily made in local currencies which may fluctuate. While we hedge against foreign currency fluctuations, we cannot control translation issues. For example, our European revenues in the nine months ended December 31, 2000 were adversely impacted by a devaluation of the Euro and British Pound as compared to the prior year. The devaluation will have an adverse effect for the year on our sales and net income. Any of these factors may significantly harm our business. Increased Difficulties in Forecasting Results During platform transition periods, where the success of our products is significantly impacted by the changing market for our products, forecasting our revenues and earnings is more difficult than in more stable or rising product markets. The demand for our products may decline during a transition faster than we anticipate, negatively impacting both revenues and earnings. At launch, Sony shipped only half of the number of PlayStation 2 units to retail in North America than it had originally planned, and it shipped significantly fewer units than planned at launch in Europe as well. Shortages were announced as being caused by shortages of components for manufacturing. Due to these shortages, our results of operations for the quarter ended December 31, 2000 have been adversely affected. Consequently, depending on the number and the timing of units actually available for the quarter ended March 31, 2001, these shortages may adversely impact our sales of PlayStation 2 products for the fourth quarter and fiscal year. We cannot predict the impact of recent actions and comments by the SEC and FASB Recent actions and comments from the SEC have focused on the integrity of financial reporting. In addition, the FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, some of which represent a significant change from current industry practices. For example, in December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. In response to numerous requests for interpretive guidance of SAB 101, the effective date of the standard has been delayed twice. SAB 101 became effective during the first quarter of fiscal 2001. SAB 101 did not have a material effect on the underlying strength or weakness of our consolidated business operations as measured by the dollar value of our product shipments and cash flows. 43 Fluctuations in Stock Price Due to analysts' expectations of continued growth and other factors, any shortfall in earnings could have an immediate and significant adverse effect on the trading price of our common stock in any given period. As a result of the factors discussed in this report and other factors that may arise in the future, the market price of our common stock historically has been, and we expect will continue to be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to us, to changes in analysts' earnings estimates, or to factors affecting the computer, software, Internet, entertainment, media or electronics businesses or the securities markets in general. For example, during fiscal year ended March 31, 2000, the price per share of our common stock ranged from $22.82 to $60.47 and $26.59 to $55.38 during the nine months ended December 31, 2000. Because of these and other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 44 Item 3: Quantitative and Qualitative Disclosures About Market Risk Market Risk We are exposed to various market risks, including the changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange contracts used to hedge foreign currency exposures and short-term investments are subject to market risk. We do not consider our cash and cash equivalents to be subject to interest rate risk due to their short maturities. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Foreign Currency Exchange Rate Risk We utilize foreign exchange contracts to hedge foreign currency exposures of underlying assets and liabilities, primarily certain intercompany receivables that are denominated in foreign currencies thereby limiting our risk. Gains and losses on foreign exchange contracts are reflected in the income statement. At December 31, 2000, we had foreign exchange contracts, all with maturities of less than six months to purchase and sell approximately $395,982,000 in foreign currencies, primarily British Pounds, European Currency Units ("Euro"), Canadian Dollars, Japanese Yen and other currencies. Fair value represents the difference in value of the contracts at the spot rate and the forward rate. The counter parties to these contracts are substantial and creditworthy multinational commercial banks. The risks of counter party nonperformance associated with these contracts are not considered to be material. Notwithstanding our efforts to manage foreign exchange risks, there can be no assurances that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. The table below provides information about our foreign currency forward exchange contracts at December 31, 2000. The information is provided in U.S. dollar equivalents and presents the notional amount (forward amount), the weighted average contractual foreign currency exchange rates and fair value. Weighted- Average Contract Amount Contract Rate Fair Value --------------- ------------- ---------- (in thousands) (in thousands) Foreign currency to be sold under contract: British Pound $200,457 1.4675 $(3,850) Euro 91,578 0.9022 (4,068) Canadian Dollar 22,238 1.5064 (106) Japanese Yen 12,820 110.76 409 Sweden Krone 9,518 9.5611 (149) South African Rand 4,347 7.5914 (7) Australian Dollar 3,744 0.5349 (167) Norway Krone 3,131 8.9418 (48) Denmark Krone 3,043 8.2166 (113) Swiss Franc 2,367 1.6903 (115) Brazilian Real 902 1.9950 (21) -------- ------- ------- 45 Total $354,145 $(8,235) -------- ------- ------- Foreign currency to be purchased under contract: British Pound $ 41,837 1.4957 $(1,134) -------- ------- ------- Total $ 41,837 $(1,134) -------- ------- Grand Total $395,982 $(9,369) ======== ======= While the contract amounts provide one measurement of the volume of these transactions, they do not represent the amount of our exposure to credit risk. The amounts (arising from the possible inabilities of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed our obligations as these contracts can be settled on a net basis at our option. We control credit risk through credit approvals, limits and monitoring procedures. Interest Rate Risk Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments of high credit quality and relatively short average maturities. We also manage our interest rate risk by maintaining sufficient cash and cash equivalent balances such that we are typically able to hold our investments to maturity. At December 31, 2000, our cash equivalents, short-term and long-term investments included debt securities of $203,603,000. Notwithstanding our efforts to manage interest rate risks, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations. The table below presents the amounts and related weighted-average interest rates of our investment portfolio at December 31, 2000: Average Interest Rate Cost Fair Value ------------- -------- ---------- (Dollars in thousands) Cash equivalents Fixed rate 0.00% $ -- $ -- Variable rate 6.19% $124,116 $124,116 Short-term investments Fixed rate 4.07% $ 60,798 $ 61,087 Variable rate 6.22% $ 10,000 $ 10,000 Long-term investments Fixed rate 0.00% $ -- $ -- Variable rate 6.35% $ 8,400 $ 8,509 Maturity dates for short-term investments range from 6 months to 3 years. 46 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to pending claims. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits in the aggregate would not have a material adverse effect upon the consolidated financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - the following exhibit is filed as part of this report: 10.45 Master Lease and Deed of Trust by and between Registrant and Selco Service Corporation, dated December 6, 2000. (b) Reports on Form 8-K: None 47 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELECTRONIC ARTS INC. (Registrant) /s/ E. STANTON MCKEE ------------------------------------------ DATED: E. STANTON MCKEE February 13, 2001 Executive Vice President and Chief Financial and Administrative Officer 48 ELECTRONIC ARTS INC. AND SUBSIDIARIES FORM 10-Q QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE PAGE - ------ ------------- ---- 10.45 Master Lease and Deed of Trust by and between Registrant and Selco Service Corporation, dated December 6, 2000 50 49 EX-10.45 2 0002.txt MASTER LEASE AND DEED OF TRUST EXECUTION VERSION ================================================================================ MASTER LEASE AND DEED OF TRUST Dated as of December 6, 2000 among ELECTRONIC ARTS REDWOOD, INC., as Lessee and SELCO SERVICE CORPORATION, as Lessor and FIRST AMERICAN TITLE INSURANCE COMPANY, as Trustee under the Deed of Trust Lease Financing of Corporate Headquarters Buildings Located in Redwood City, San Mateo County, California ================================================================================ This Master Lease and Deed of Trust is subject to a lien in favor of KeyBank National Association, as the Agent ("Agent") under the Participation Agreement. This Master Lease and Deed of Trust has been executed in several counterparts. To the extent, if any, that this Master Lease and Deed of Trust constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no lien on this Master Lease and Deed of Trust may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on or following the signature page hereof. This counterpart is [not] the original counterpart. MASTER LEASE AND DEED OF TRUST THIS MASTER LEASE AND DEED OF TRUST (as amended, restated or otherwise modified and in effect from time to time, this "Master Lease"), dated as of December 6, 2000, is entered into by and among ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation, as lessee (in such capacity, together with its permitted successors and assignees, the "Lessee"), SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation, as lessor (in such capacity, together with its permitted successors and assigns, the "Lessor") and acknowledged by FIRST AMERICAN TITLE INSURANCE COMPANY, as Trustee under the Deed of Trust contained in this Master Lease. W I T N E S S E T H: - - - - - - - - - - WHEREAS, this Master Lease pertains to certain real property situated in San Mateo County, California, described on Exhibit A attached to the Participation Agreement (as more fully defined in Appendix A to the Participation Agreement, the "Land") and the improvements (the "Improvements") now or hereafter located on the Land (the Land together with the Improvements, as more fully defined in Appendix A to the Participation Agreement, the "Property"); and WHEREAS, pursuant to a Participation Agreement (as amended, restated or otherwise modified and in effect from time to time, the "Participation Agreement"), dated as of December 6, 2000, by and among the Lessee, the Construction Agent, the Guarantor, the Lessor, the Note Purchaser, the Conduit Agent, the Liquidity Banks, the Letter of Credit Issuer and the Agent, the Lessor and the Lessee have agreed, subject to the terms and conditions thereof, to finance the acquisition of the Land and the construction of the Improvements; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions; Interpretation. Capitalized terms used but not otherwise defined in this Master Lease have the respective meanings specified in Appendix A to the Participation Agreement and the rules of interpretation set forth therein shall apply to this Master Lease. ARTICLE II LEASE OF IMPROVEMENTS Section 2.1. Acceptance and Lease of the Property. On the terms and subject to the conditions set forth in the Participation Agreement and set forth herein, (i) the Lessor hereby agrees to lease the Lessor's interest in the Property (including any and all of the Lessor's Master Lease contractual rights and benefits relating thereto) to the Lessee for the Lease Term and (ii) the Lessee hereby agrees to lease such interest from the Lessor for the Lease Term. Section 2.2. Acceptance Procedure. The Lessee hereby agrees that the execution and delivery by the Lessee of this Master Lease shall, without further act, constitute the irrevocable acceptance by the Lessee of all of the Property for all purposes of this Master Lease and the other Operative Documents on the terms set forth therein and herein, and that all of the Property shall be deemed to be included in the leasehold estate of this Master Lease and shall be subject to the terms and conditions of this Master Lease as of the Initial Funding Date. Section 2.3. Lease Term. The term of this Master Lease shall be for five and one-half (5 1/2) years (the "Lease Term"). The Lease Term shall commence on (and include) the Initial Funding Date and end on (but exclude) the Maturity Date, unless earlier terminated pursuant to the terms hereof or pursuant to Section 6.5 of the Construction Agency Agreement. Section 2.4. Title/Risk of Loss. The Property is leased to the Lessee without any representation or warranty, express or implied, by the Lessor and subject to the rights of parties in possession, the existing state of title on the Initial Funding Date (including all Liens other than Lessor Liens) and Applicable Law. The Lessee shall not in any event have any recourse against the Lessor for any defect in or exception to title to the Property other than those resulting from Lessor Liens. Notwithstanding the Lessor's holding of title to the Property hereunder, the Lessee shall retain all risk of loss with respect thereto, except to the extent expressly provided herein or in the Construction Agency Agreement. ARTICLE III PAYMENT OF RENT Section 3.1. Basic Rent. (a) Basic Rent. On each Basic Rent Payment Date during the Lease Term, the Lessee shall pay directly for the account of the Lessor, or as otherwise directed by the Lessor, the accrued and unpaid Basic Rent then due. The Lessor hereby irrevocably directs that the proceeds of all Basic Rent allocable to the Notes and the Equity Investment shall be paid to Agent in accordance with the provisions of the Participation Agreement. (b) Payment of Basic Rent. Basic Rent shall be payable on each Basic Rent Payment Date, as provided in the Participation Agreement. Section 3.2. Supplemental Rent. The Lessee shall pay as Supplemental Rent hereunder the following: (a) If the Lessee acquires the Lessor's interest in and to the Property pursuant to Section 16.1 hereof or exercises its Purchase Option pursuant to Section 18.1(a) hereof, then the Lessee will pay, as Supplemental Rent hereunder, an amount equal to the Outstanding Lease Balance. (b) If a third party or parties acquires the Lessor's interest in and to the Property pursuant to Section 18.3 hereof, then the Lessee shall pay, or cause to be paid, in the case of 2 Master Lease proceeds received pursuant to Section 18.3 hereof, as Supplemental Rent, the Gross Remarketing Proceeds (as determined in accordance with Section 18.3 hereof). (c) If the Remarketing Option is exercised pursuant to Section 18.3 hereof, then the Lessee shall pay, as Supplemental Rent whether or not a sale of the Property occurs, an amount equal to the Maximum Recourse Amount (if any) (determined in accordance with Section 18.3 hereof). (d) If a third party or parties acquires the Lessor's interest in and to the Property pursuant to Section 17.8 hereof, then the Lessee shall pay, or cause to be paid, in the case of proceeds received pursuant to Section 17.8 hereof, as Supplemental Rent, the Unwind Proceeds (as determined in accordance with Section 17.8 hereof). (e) If the Unwind Option is exercised pursuant to Section 17.8 hereof, then the Lessee shall pay, as Supplemental Rent, whether or not a sale of the Property occurs, an amount equal to the Maximum Unwind Amount (if any) (determined in accordance with Section 17.8 hereof). (f) Without duplication of any of the foregoing, whenever any make whole premium, yield maintenance premium or brokerage cost is due on any of the Notes, Loans or Equity Investment pursuant to Section 4.3, 4.4 or 4.6 of the Participation Agreement or any UpFront Fees, Commitment Fees, Issuance Fees, Structuring Fees or other fees due to any Lessor Party under the Operative Documents, the Lessee shall pay to the Lessor the same amount hereunder as Supplemental Rent. (g) All other amounts (other than Basic Rent and the amounts set forth in clauses (a) - (f) above) payable by the Lessee under this Master Lease and the other Operative Documents. The Lessee shall pay to the Lessor or any other Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable or, if no date is specified for the payment of any such amount, within five (5) Business Days after written demand of the Lessor or any other Lessor Party to whom such amount is payable. Section 3.3. Non-Payment of Rent. If the Lessee fails to pay any Rent when due, the Lessee shall pay to the Lessor or the Person entitled thereto, as Supplemental Rent, among other things, on demand, to the extent permitted by Applicable Law, interest at the applicable Overdue Rate on any installment of Basic Rent and on any payment of any Supplemental Rent not paid when due or demanded by the Lessor or any Indemnitee for the period from and including the due date thereof to but excluding the date paid. The expiration or other termination of the obligations of the Lessee to pay Basic Rent hereunder shall not limit or modify the obligations of the Lessee with respect to accrued Supplemental Rent. Unless expressly provided otherwise in this Master Lease or the Participation Agreement, in the event of any failure on the part of the Lessee to pay and discharge any Basic Rent or any Supplemental Rent as and when due, the Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added under any Operative Document for nonpayment or late payment of such Basic Rent or Supplemental Rent, all of which shall also constitute Supplemental Rent. 3 Master Lease Section 3.4. Security Deposit. On the first Rent Payment Date of the Base Lease Term, the Lessee shall make a payment to the Lessor in an amount of $16,000,000 (such amount, the "Security Deposit"), the proceeds of which shall be used by the Lessor to retire a portion of the outstanding balance of the Notes (in the aggregate principal amount of such Security Deposit so paid). Section 3.5. Method of Payment. Each payment of Basic Rent or Supplemental Rent payable by the Lessee pursuant to this Master Lease or any other Operative Document shall be made by wire transfer prior to 2:00 p.m., New York time on the date due, to the relevant account specified on Schedule I of the Participation Agreement in immediately available funds consisting of Dollars. Payments received after 2:00 p.m., New York time, on the date due shall, solely for the purpose of Section 17.1, be deemed to have been received on such day; provided, however, that for the purpose of the second sentence of Section 3.3, such payments shall be deemed to have been received on the next succeeding Business Day and subject to interest at the Overdue Rate as provided in such Section 3.3. Section 3.6. Non-Business Day Payments. If any Basic Rent Payment Date falls on a day that is not a Business Day, the amount of Basic Rent otherwise due on such Basic Rent Payment Date shall instead be due on the next succeeding Business Day and Basic Rent shall be recalculated as if such next succeeding Business Day were such Basic Rent Payment Date. Section 3.7. Assignment of Basic Rent and Other Payments . The Lessor hereby irrevocably directs that each payment of Basic Rent, Supplemental Rent, Outstanding Lease Balance, Purchase Option Price, Maximum Recourse Amount, and Maximum Unwind Amount payable by the Lessee under this Master Lease or any other Operative Document shall be made for its account to or as directed by the Agent pursuant to the payment instructions set forth in Schedule I of the Participation Agreement and applied in accordance with the relevant provisions of Article XI of the Participation Agreement. To the extent that the Lessee shall have timely made such payments in full in immediately available funds to the Agent or as directed by the Agent, the Lessee's obligation with respect to such payment under the Operative Documents shall be deemed satisfied in the amount of such payment and none of the Lessee Parties shall be responsible for any undue delay or failure on the part of the Agent in remitting the appropriate amounts to the other Lessor Parties or any other Person entitled to such payment. ARTICLE IV RIGHTS OF THE LESSEE; INSPECTION RIGHTS; REPORTS Section 4.1. Rights of the Lessee. Subject to Section 4.2 hereof, and subject to the terms of the other Operative Documents to which the Lessee is a party, during the Lease Term at any time when no Lease Event of Default shall exist, the Lessee shall be entitled to receive, enjoy, distribute and otherwise dispose of the income, royalties, payments, recoveries and other proceeds with respect to (or included as a part of) the Property without the consent or joinder of the Lessor. Section 4.2. Inspection Rights. Without limiting any Lessor Party's rights set forth in Section 8.1(e) of the Participation Agreement, upon five (5) Business Days prior notice to the Lessee, each of the Lessor Parties and their respective authorized representatives (the "Inspecting 4 Master Lease Parties") may inspect (a) the Property, including, to the extent relevant, environmental testing and sampling, and (b) the books and records of the Lessee relating to the Property and make copies and abstracts therefrom, but only after material related to matters other than the Property shall have been redacted therefrom. All such inspections shall be at the expense and risk of the Inspecting Parties, except that if a Lease Event of Default or Lease Default has occurred and is continuing, the Lessee shall reimburse the Inspecting Parties for the reasonable costs of such inspections and such inspections shall be at the Lessee's risk, excluding the gross negligence or willful misconduct of an Inspecting Party. The Lessee shall furnish to the Inspecting Parties statements that are, to the best of the Lessee's knowledge after reasonable inquiry, accurate in all material respects, regarding the condition and state of repair of the Property at such times as may be reasonably requested; provided, however, the Lessor Parties shall not require such statements more than once a year so long as no Lease Default or Lease Event of Default shall have occurred and be continuing. No inspection shall unreasonably interfere with the Lessee's operations or the operations of any other occupant of the Property. None of the Inspecting Parties shall have any duty to make any such inspection or inquiry and none of the Inspecting Parties shall incur any liability or obligation by reason of not making any such inspection or inquiry. None of the Inspecting Parties shall incur any liability or obligation by reason of making any such inspection or inquiry unless and to the extent, so long as no Lease Default or Lease Event of Default has occurred and is continuing at the time of inspection, such Inspecting Party causes damage to the Property or any property of the Lessee or any other Person during the course of such inspection. Section 4.3. Reports. To the extent permissible under Applicable Law, the Lessee shall prepare and file in a timely fashion, or, where the Lessor shall be required to file, the Lessee shall prepare and make available to the Agent on behalf of the Lessor Parties within a reasonable time prior to the date for filing and the Lessor shall timely file, any reports with respect to the condition or operation of the Property that shall be required to be filed with any Governmental Authority. ARTICLE V NET LEASE, ETC. Section 5.1. Net Lease. This Master Lease shall constitute a net lease and the Lessee's obligations to pay all Basic Rent and Supplemental Rent shall be absolute and unconditional under any and all circumstances. Any present or future law to the contrary notwithstanding, this Master Lease shall not terminate, nor shall the Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Basic Rent or Supplemental Rent nor shall the obligations of the Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of: (i) any defect in the condition, merchantability, design, construction, quality or fitness for use of the Property or any part thereof, or the failure of any Improvements or the Land to comply with all Applicable Laws, including any inability to use any Improvements or Land by reason of such non-compliance; (ii) any damage to, removal, abandonment, salvage, loss, contamination of, scrapping or destruction of or any requisition or taking of any Improvements or the Land or any part thereof, (iii) any restriction, prevention or curtailment of or interference with the use of any Improvements or the Land or any part thereof; (iv) any defect in the Lessor's title to or rights to any Improvements or the Land or any Lien on such title or rights or on any Improvements or the Land; (v) any change, waiver, extension, indulgence or other action or 5 Master Lease omission or breach in respect of any obligation or liability of or by any of the Lessor Parties; (vi) to the extent permitted by Applicable Law, any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to any Transaction Party or any action taken with respect to this Master Lease by any trustee or receiver of any Transaction Party or by any court, in any such proceeding; (vii) any claim that the Lessee has or might have against any Person, including the Lessor or any vendor, manufacturer, or supplier of any of the Improvements; (viii) any failure on the part of the Lessor to perform or comply with any of the terms of this Master Lease or any of the terms of any other Operative Document or any other agreement; (ix) any invalidity or unenforceability or illegality or disaffirmance of this Master Lease against or by the Lessee or any provision hereof or any of the other Operative Documents or any provision of any thereof; (x) the impossibility or illegality of performance by the Lessee or the Lessor; (xi) any action by any court, administrative agency or other Governmental Authority; (xii) any Adverse Environmental Condition, or (xiii) any other cause or circumstances whether similar or dissimilar to the foregoing and whether or not the Lessee shall have notice or knowledge of any of the foregoing. The agreement of the Lessee in the preceding sentence shall not affect any claim, action or right that the Lessee may have against the Lessor or any other Person, including pursuant to Section 20.1 hereof. The parties intend that the obligations of the Lessee hereunder shall be covenants and agreements that are separate and independent from any obligations of the Lessor hereunder or under any other Operative Document and the obligations of the Lessee shall continue unaffected unless such obligations shall have been modified or terminated in accordance with an express provision of this Master Lease. Section 5.2. No Termination or Abatement. The Lessee shall remain obligated under this Master Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Master Lease (except as provided herein) notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding affecting any Transaction Party or any action with respect to this Master Lease which may be taken by any trustee, receiver or liquidator of any Transaction Party or by any court with respect to any Transaction Party. The Lessee hereby waives all right (i) to terminate or surrender this Master Lease (except as provided herein) or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Basic Rent or Supplemental Rent. The Lessee shall remain obligated under this Master Lease in accordance with its terms and to the extent waivable under applicable law, the Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Master Lease. Notwithstanding any such statute or otherwise, the Lessee shall be bound by all of the terms and conditions contained in this Master Lease. ARTICLE VI ASSIGNMENT BY THE LESSEE; SUBLEASING Section 6.1. General. THE LESSEE SHALL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF THE CONSENTING PARTIES, TRANSFER, ASSIGN OR ENCUMBER (OTHER THAN UNDER THE OPERATIVE DOCUMENTS) THIS MASTER LEASE OR ANY OF ITS RIGHTS OR OBLIGATIONS HEREUNDER OR SUBLEASE THE PROPERTY OR ANY PART THEREOF EXCEPT AS PERMITTED BY SECTION 6.2 HEREOF, AND ANY SUCH TRANSFER, ASSIGNMENT, ENCUMBRANCE 6 Master Lease OR SUBLEASE THAT IS NOT PERMITTED BY SECTION 6.2 HEREOF AND MADE WITHOUT SUCH WRITTEN CONSENTS THERETO SHALL BE NULL AND VOID. Section 6.2. Subletting. At the beginning of the Base Lease Term, the Lessee may sublease the Property or any portion thereof to any Person; provided, however, that: (a) no sublease or other relinquishment of possession of the Property shall in any way discharge or diminish any of the obligations of the Lessee to the Lessor and the other Lessor Parties under this Master Lease and the other Operative Documents and the Lessee shall remain directly and primarily liable under this Master Lease and the other Operative Documents to which it is a party; (b) any sublease of the Property shall expressly be made subject to and subordinated to this Master Lease and to the rights of the Lessor hereunder; (c) each sublease prohibits the sublessee from engaging in any activities on the Property that are not consistent with those permitted by Section 8.2 or that are otherwise prohibited by Section 8.2; (d) each sublease shall expressly provide for the immediate surrender of the Property to the Lessor after notice from the Lessor to such sublessee of the occurrence of a Lease Event of Default and a request for such surrender; (e) each sublease shall have a term which expires on or prior to the Maturity Date (or, if longer, includes a provision which expressly provides for automatic termination at or prior to the earlier of (i) the Maturity Date and (ii) the occurrence of a Lease Event of Default unless the Lessee shall have exercised its Purchase Option and purchased the Property pursuant to Section 18.1 hereof; and (f) no sublease has a Material Adverse Effect. Section 6.3. Assignment of Subleases. As additional security to the Lessor for the performance of all of the Obligations, the Lessee hereby assigns to the Lessor and grants to the Lessor a security interest in all of the following, to the extent assignable: all of the Lessee's right, title and interest in and to (x) all leases and subleases, whether now or hereafter in effect, of the Property (or any portion thereof), and (y) all rents, fees and other sums payable to the Lessee under any lease or sublease of the Property (or any portion thereof). The Lessor shall have no obligation to perform, and the Lessee shall not by reason of this Section 6.3 be relieved of its obligation to perform, any of the Lessee's covenants or agreements under this Master Lease or covenants or agreements of the Lessee, as sublessor under any such lease or sublease. ARTICLE VII LESSEE ACKNOWLEDGMENTS Section 7.1. Condition of the Property. THE LESSEE ACKNOWLEDGES AND AGREES THAT ALTHOUGH THE LESSOR OWNS AND HOLDS TITLE TO THE PROPERTY, THE LESSEE IS LEASING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY THE LESSOR, OR ANY OTHER TRANSACTION PARTY AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE (EXCLUDING LESSOR LIENS), (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, AND (D) VIOLATIONS OF APPLICABLE LAW WHICH MAY EXIST ON ANY FUNDING DATE. NO TRANSACTION PARTY HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE (OTHER THAN FOR LESSOR LIENS ATTRIBUTABLE TO SUCH PERSON), VALUE, 7 Master Lease HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE LAND OR THE IMPROVEMENTS (OR ANY PART THEREOF) AND NO TRANSACTION PARTY (EXCEPT FOR THE LESSEE AND THE GUARANTOR, BUT SOLELY TO THE EXTENT EXPRESSLY PROVIDED IN THE PARTICIPATION AGREEMENT) SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN (OTHER THAN FOR LESSOR LIENS ATTRIBUTABLE TO SUCH PERSON) OR THE FAILURE OF THE LAND OR THE IMPROVEMENTS, OR ANY PART THEREOF, TO COMPLY WITH ANY APPLICABLE LAW AND SHALL ASSUME ALL RISKS OF DEFECTS AND ADVERSE PHYSICAL OR ENVIRONMENTAL CONDITION IN CONNECTION WITH EACH AND EVERY SITE, INCLUDING, WITHOUT LIMITATION, THE RISK THAT ITS EXAMINATION DID NOT REVEAL ALL DEFECTS OR ADVERSE CONDITIONS. Section 7.2. Acknowledgment of Note Purchases, Equity Investment and Lease Assignment. The Lessor and the Lessee hereby acknowledge that the right of the Lessor to receive Basic Rent and Supplemental Rent and certain other rights under this Master Lease has been pledged to the Agent to secure repayment of the outstanding balance of the Notes and the Equity Investment, which Notes and/or Equity Investment may, to the extent permitted by the Operative Documents, be transferred from time to time pursuant to the Note Purchase Agreement and/or the Liquidity Documentation. Until all amounts payable to the Agent and the other Lessor Parties under this Master Lease and the Operative Documents are paid in full, the Lessee shall give all notices to the Lessor under this Master Lease to the Agent at the office or facsimile number as provided in Section 15.3 of the Participation Agreement and notices so given to the Agent shall be deemed to have been given to the Lessor. The rights and remedies provided to the Lessor under this Master Lease may be exercised by the Lessor itself, by the Agent pursuant to Article XIV of the Participation Agreement, by a court-appointed receiver or by any other Person appointed by any of the foregoing to act on its behalf. All of the benefits afforded to the Lessor under this Master Lease and the other Operative documents shall accrue to the benefit of the Agent in accordance with Article XIV of the Participation Agreement. ARTICLE VIII POSSESSION AND USE OF THE PROPERTY, ETC. Section 8.1. Utility Charges. The Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on the Property during the Lease Term. The Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by the Lessee and the amount of any credit or refund received by the Lessor on account of any utility charges paid by the Lessee, net of the actual costs and expenses, if any, reasonably incurred by the Lessor in obtaining such credit or refund, shall be promptly paid over to the Lessee. Section 8.2. Possession and Use of the Property. Upon Substantial Completion of the Improvements, the Property shall be used for any lawful purpose in the regular course of the Lessee's business, and the Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Property as contemplated by this Master Lease. The Lessee shall 8 Master Lease not commit or permit any waste of the Property or any part thereof. The Lessee further agrees to carry out any and all maintenance and security activities required by local regulation or ordinance with respect to the Property, including the utilization, where required by law, of security guards or other personnel. Section 8.3. Compliance with Applicable Laws and Insurance Requirements. Subject to the terms of Article XII hereof relating to permitted contests, the Lessee, at its sole cost and expense, shall (i) comply in all material respects with all Applicable Laws (including all Environmental Laws) and Insurance Requirements relating to the Property, including the use, construction, operation, maintenance, repair and restoration thereof and the remarketing thereof pursuant to Article XVIII hereof, whether or not compliance therewith shall require structural or extraordinary changes in the Property or interfere with the use and enjoyment of the Property, and (ii) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the use, operation, maintenance, repair and restoration of the Property. ARTICLE IX MAINTENANCE AND REPAIR Section 9.1. Construction of Improvements. The Lessee shall cause the Improvements to be constructed and completed in accordance with the Construction Agency Agreement. In furtherance and not in limitation of the foregoing, the Lessee shall cause to be maintained (a) the Required Builders' Risk Insurance and (b) Additional Construction Period Insurance, in each case naming the Lessor and the other Lessor Parties as additional insureds throughout the Construction Period. Section 9.2. Maintenance and Repair. After Substantial Completion of the Improvements, the Lessee, at its sole cost and expense, shall at all times (a) maintain all Improvements in as good of condition as they existed on the date of Final Completion (ordinary wear and tear excepted, and in safe repair and condition (b) make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all Applicable Law and Insurance Requirements (except to the extent any such noncompliance with Applicable Law is permitted pursuant to Section 12.1 hereof) and (c) maintain the Improvements on a basis consistent with the operation and maintenance of improvements comparable in type and location to the Improvements, subject, however, to the provisions of Article XIV hereof with respect to Casualties and Condemnations. Section 9.3. Return of Property to the Lessor. The Lessee shall, upon the expiration or earlier termination of this Master Lease (other than as a result of the Lessee's (or its designee's) acquisition of all of the Lessor's interest in the Property as provided herein), vacate and surrender all of the Property to the Lessor in its then-current, "AS IS" condition, subject to the Lessee's obligations under Sections 8.3, 9.2, 10.2, 11.1, 14.2, 14.3 and 18.3 hereof. Section 9.4. No Duty of the Lessor to Maintain. Except to the extent and as expressly provided in the Construction Agency Agreement, the Lessor shall under no circumstances be required to build any improvements on the Land, make any repairs, replacements, alterations or 9 Master Lease renewals of any nature or description to any Land or Improvements, make any expenditure whatsoever in connection with this Master Lease or maintain the Improvements or the Land in any way. The Lessee waives any right to (1) require the Lessor to maintain, repair, or rebuild all or any part of any Improvements or the Land or (2) make repairs at the expense of the Lessor pursuant to any Applicable Law, Insurance Requirement, contract, agreement, or covenant, condition or restriction in effect at any time during the Lease Term. ARTICLE X MODIFICATIONS Section 10.1. Modifications During the Construction Period. Any and all Modifications during the Construction Period shall be governed by the Construction Agency Agreement. Section 10.2. Modifications During the Base Lease Term. (a) Subject to Section 10.3 hereof, the Lessee, at its sole cost and expense, may at any time and from time to time after Final Completion, make, or permit a Subtenant to make, alterations, renovations, improvements and additions to the Improvements or any part of any thereof and substitutions and replacements therefor (collectively, "Modifications") provided, however that: (i) except for any Modification required to be made pursuant to any Applicable Law or Insurance Requirement (each, a "Required Modification"), no Modification shall reduce the Fair Market Value, residual value or useful life or materially adversely affect the utility of the Improvements or the Land from that which existed immediately prior to such Modification, except for Modifications the adverse effect of which is no more than de minimis; (ii) the Modification shall be done in a good and workmanlike manner; (iii) the Lessee shall comply in all material respects with all Applicable Laws (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all Permits and certificates of occupancy, and such Modification shall not violate the terms of any restriction, easement, condition or covenant or other matter affecting title to the applicable Improvements or the Land; (iv) subject to the terms of Article XII hereof relating to permitted contests, the Lessee shall pay all costs and expenses and shall discharge (or cause to be insured or bonded over) within sixty (60) days after the same shall be filed (or otherwise become effective) any Liens arising with respect to the Modification; and (v) such Modifications shall comply with Sections 8.3 and 9.2 hereof. All such Modifications shall remain part of the realty and shall be subject to this Master Lease and title thereto shall immediately vest in the Lessor; provided, however, that Modifications that (w) are not subject to the Master Lease (x) are not Required Modifications, (y) were not financed, or otherwise paid for (directly or indirectly) pursuant to the Participation Agreement by the Lessor (including any portion of the Improvements originally financed by the 10 Master Lease Lessor on the Initial Funding Date) and (z) are readily removable without impairing the value, utility or remaining useful life of the Improvements or the Land, shall remain the personal property of the Lessee, shall not be subject to this Master Lease and may be removed by the Lessee at any time. (b) After Substantial Completion of the construction of the Improvements, the Lessee may place upon the Land any fixtures, machinery, equipment, inventory or other property belonging to the Lessee or third parties and may remove the same at any time during the Lease Term, subject, however, to the terms of Sections 8.3, 9.2 and 10.2(a) hereof; provided, however, that subject to Section 10.2(a) hereof, such fixtures, machinery, equipment, inventory or other property do not impair the value or useful life of the Land or the Improvements, except such placement or removal which does not impair the value, utility or useful life of the Land or the Improvements in more than a de minimis manner or materially and adversely affect the Lessee's ability to perform its obligations hereunder; and provided further, that the Lessee shall keep and maintain at the Land or the Improvements, and shall not remove from such property, any fixtures, machinery, equipment, inventory or other property financed or otherwise paid for (directly or indirectly) by the Lessor pursuant to the Participation Agreement. Section 10.3. Consent to Modifications. Notwithstanding anything else to the contrary in this Article X, and except as otherwise provided in the Construction Agency Agreement during the Construction Period, the Lessee shall not make any Modification which the Lessee reasonably expects will cost greater than $2,000,000 unless the Lessee shall have delivered to the Agent on behalf of the Lessor Parties a brief written narrative of the work to be performed in connection with such Modification and the Lessee shall have received the written consent of Agent on behalf of the Consenting Parties to the making of such Modification, which consent shall not unreasonably be withheld. ARTICLE XI WARRANTY OF TITLE; EASEMENTS Section 11.1. Warranty of Title. (a) Except as otherwise provided herein and subject to the terms of Section 12.1 hereof, the Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien (other than any Lessor Lien), defect, attachment, levy, title retention agreement or claim upon the Property or any Modifications or any Lien (other than any Lessor Lien), attachment, levy or claim with respect to the Rent or with respect to any amounts held by any of the Lessor Parties other than Permitted Liens and Liens on machinery, equipment, general intangibles and other personal property not constituting part of the Improvements. (b) Nothing contained in this Master Lease shall be construed as constituting the request of the Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any alteration, addition, repair or demolition of or to the Land or Improvements or any part thereof. NOTICE IS HEREBY GIVEN THAT NONE OF THE TRANSACTION PARTIES (OTHER THAN THE LESSEE PARTIES) SHALL BE LIABLE 11 Master Lease FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING ANY PROPERTY, IMPROVEMENTS OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF ANY OF THE LESSOR PARTIES IN AND TO THE PROPERTY. Section 11.2. Lessee's Grants and Releases of Easements; Lessor's Waivers. Provided that no Lease Default, Lease Event of Default, Acceleration Event or Unmatured Acceleration Event shall have occurred and be continuing and subject to the provisions of Articles VII, VIII, IX and X hereof (and during the Construction Period, subject to the relevant provisions of the Construction Agency Agreement), the Lessor hereby consents in each instance to the following actions by the Lessee, in the name and stead of the Lessor and as the true and lawful attorney-in-fact of the Lessor with full power and authority to execute documents on behalf of the Lessor for the following purposes, but at the Lessee's sole cost and expense: (i) the granting of licenses and other rights and privileges reasonably necessary or desirable for the use, repair, or maintenance of the Property as herein provided; (ii) the release of existing easements or other rights in the nature of easements which are for the benefit of the Property; (iii) the seeking of any zoning variances or modifications to existing zoning; and (iv) the imposition of and the execution of amendments to, or waivers or releases of any covenants, easements, licenses, and restrictions affecting the Property; provided, however that in each case (1) such grant, release, dedication, transfer or amendment does not impair the value, operation or remaining useful life of the Property or materially and adversely affect the Lessee's ability to perform its obligations hereunder, except such impairments which are not material, (2) such grant, release, dedication, transfer or amendment is reasonably necessary or desirable in connection with the use, maintenance, alteration or improvement of the Land or the Improvements, (3) such grant, release, dedication, transfer or amendment will not cause the Land or the Improvements or any portion thereof to fail to comply with the provisions of this Master Lease or any other Operative Document or any Applicable Law (including all applicable zoning, planning, building and subdivision ordinances, all applicable restrictive covenants and all applicable architectural approval requirements), (4) all governmental and other consents or approvals required prior to such grant, release, dedication, transfer, annexation or amendment or other action have been obtained, and all filings required prior to such action have been made, (5) the Lessee shall remain obligated under this Master Lease and under any instrument executed by the Lessee consenting to the assignment of the Lessor's interest in this Master Lease as security for indebtedness, in each such case in accordance with their terms, as though such grant, release, dedication, transfer or amendment had not been effected, and (6) the Lessee shall pay and perform any obligations of the Lessor under such grant, release, dedication, transfer or amendment. The Lessor acknowledges the Lessee's and any existing or future sublessee's right to finance and to secure under the Uniform Commercial Code, inventory, furnishings, furniture, equipment, machinery, and other personal property located at the Property other than to the extent such property would constitute a fixture relative to the Improvements, and the Lessor agrees to execute (but need not prepare) lessor waiver forms and release of Lessor's Liens in favor of any purchase money seller, lessor or lender which has financed or may finance in the future such items. Without limiting the effectiveness of the foregoing, and provided, that no Lease Default or Lease Event of Default shall have occurred and be continuing, the Lessor shall, upon the request of the Lessee, and at the Lessee's sole cost and expense, execute and deliver any instruments necessary or appropriate to 12 Master Lease confirm any such grant, release, dedication, transfer, annexation or amendment to any Person permitted under this Section 11.2 including landlord waivers with respect to any of the foregoing. ARTICLE XII PERMITTED CONTESTS Section 12.1. Permitted Contests in Respect of Applicable Law, Mechanics' Liens and Utility Charges. If, to the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any Applicable Law, mechanics' or materialmen's liens, or utility charges payable pursuant to Article VIII hereof relating to the Property or the obligation to comply therewith shall be prosecuted diligently and in good faith in appropriate proceedings by the Lessee or (b) compliance with such Applicable Law shall have been excused or exempted by a valid nonconforming use, variance permit, waiver, extension or forbearance, the Lessee shall not be required to comply with such Applicable Law or pay such mechanics' or materialmen's liens, utility charges and the Lessor agrees not to pay, settle or otherwise compromise any such item if and so long as, in each case, such test, challenge, appeal, proceeding, waiver, extension, forbearance or noncompliance shall not, in the reasonable opinion of the Agent involve (i) any risk of criminal liability being imposed on any of the Lessor Parties or the Property for failure to comply therewith or (ii) any significant risk of (1) the foreclosure, forfeiture or loss of the Property, or any part thereof, (2) the nonpayment of Rent, (3) the sale of, or the creation of any Lien (other than a Permitted Lien) on, any part of the Property, (4) civil liability being imposed on any of the Lessor Parties with respect to any component of the Property for which the Lessee is not obligated to indemnify such parties under the Operative Documents, or (5) enjoinment of, or interference with, the use, possession or disposition of any portion of the Property in any respect, except for uses, possessions or dispositions which are not material. Provided that no Lease Default or Lease Event of Default shall have occurred and be continuing and subject to the provisions of Articles VII, VIII, IX and X hereof, the Lessor hereby consents in each instance to such actions by the Lessee as may be necessary in order to maintain any test, challenge, appeal or proceeding for review permitted to be maintained by the Lessee pursuant to this Section 12.1, in the name and stead of the Lessor and as the true and lawful attorney-in-fact of the Lessor with full power and authority to execute documents on behalf of the Lessor for such purposes, but at the Lessee's sole cost and expense; provided, however, that the Lessee indemnifies the Lessor Parties with respect to any such action. The Lessor shall, at the written request of the Lessee and at the Lessee's sole cost and expense, execute and deliver to the Lessee such authorizations and other documents as may be reasonably required in such test, challenge, appeal or proceeding. The Lessor will not be required to join in any proceedings pursuant to this Section 12.1 unless a provision of any Applicable Law requires that such proceedings be brought by or in the name of the Lessor or it is customary in the applicable jurisdiction for the title holder to join in such proceedings; and in that event the Lessor will join in the proceedings or permit them or any part thereof to be brought in its name if and so long as (1) the Lessee has not elected the Remarketing Option, (2) no Lease Default or Lease Event of Default shall have occurred and be continuing and (3) the Lessee pays all related expenses and indemnifies each of the Lessor Parties with respect to such proceedings. 13 Master Lease ARTICLE XIII INSURANCE Section 13.1. Description of Required Coverage. (a) Coverage Prior to the Final Completion Date. During the Construction Period, the Lessee shall purchase and maintain the insurance policies and coverages, and shall comply with all insurance requirements, as set forth in the Construction Agency Agreement, including, but not limited to, the Additional Construction Period Insurance. (b) Coverage after Final Completion. During the Base Lease Term, the Lessee shall, at its own expense, maintain insurance as set forth herein (or the Guarantor in lieu of the Lessee) will purchase and maintain, or cause to be purchased and maintained, insurance described below with respect to the Property in such amounts, with such deductibles or self-insurance amounts, and in such forms as is customary of corporations engaged in the same or similar business, but in no event less than that maintained with respect to other facilities similar to the Improvements or operated by the Guarantor: (i) Property Insurance: Insurance for the full replacement cost (without depreciation) against physical damage to the Improvements (with a deductible or self-insured retention of $100,000 per occurrence) caused by perils now or hereafter embraced by or defined in an "all risks" insurance policy, including, but not limited to, fire, lightning, windstorm, hail, explosion, riot and civil commotion, vandalism and malicious mischief, and smoke, with coverage for flood and earthquake to the extent available on commercially reasonable terms for the Lessee. (ii) Commercial General Liability Insurance: Comprehensive general liability (including contractual, completed operations and product liability) insurance against claims for bodily injury (including death) and third party property damage occurring on, in or in respect of the Land and Improvements or resulting from activities on or related to the Land and Improvements and other property and improvements of the Guarantor and its Subsidiaries, in the minimum amount of $50,000,000, per occurrence and in the annual aggregate, with a deductible or self-insured retention which shall not exceed $1,000,000 per occurrence without the prior written approval of the Consenting Parties; in no event shall such insurance be provided on a claims made coverage basis; and (iii) Workers' Compensation Insurance: Workers' compensation insurance at statutory levels and employers' liability insurance or self-insurance as permitted by Law. All insurance required under this Section 13.1 shall be written by companies that are recognized national or international insurers having claims paying ability ratings of at least "A minus" in the most recent edition of Best's Key Rating Guide, or similar ratings by other rating services and BBB by S&P. (c) Required Endorsements, etc. The insurance referred to in clause (b)(i) for the Property (as appropriate) may be a blanket policy and shall (i) at all times be in an amount at least equal to the Improvements Construction Cost; (ii) name the Agent as loss payee and the other Lessor Parties as additional insureds (collectively, the "Insured Loan Parties") as their 14 Master Lease respective interests may appear; (iii) provide that the interests of the Insured Loan Parties shall be insured regardless of any intentional or willful breach or violation by the Lessee or the Guarantor of any warranties, declarations or conditions contained in such insurance; (iv) provide that such insurance shall not be invalidated by any act, omission or negligence of the Lessee, the Guarantor, the Lessor, or the Insured Loan Parties nor by any foreclosure or other proceedings or notices thereof relating to the Property (as appropriate) or any part thereof, nor by legal title to, or ownership of the Property or any part thereof becoming vested in or by the Lessor or its agents, nor by occupancy or use of the Property or any part thereof for purposes more hazardous than permitted by such policy; and (v) subject to Section 13.4 hereof, provide that all partial loss insurance claims pertaining to the Property (as appropriate) or any part thereof shall be adjusted by the insurers thereunder with the Lessee. All policies of insurance required to be maintained pursuant to clause (b)(ii) which cover liability for bodily injury or property damage shall provide that all provisions of such insurance, except the limits of liability (which shall be applicable to all insureds as a group) and insurance premiums (which shall be solely a liability of the Lessee), shall operate in the same manner as if there were a separate policy covering each such insured and/or additional insured, without right of contribution from any other insurance which may be carried by an insured and/or additional insured. Every policy required under clause (a) and clause (b) above shall (i) expressly provide that it will not be canceled or terminated except upon thirty (30) days' written notice (or in the case of non-payment of premium, ten (10) days' written notice) to the Lessor, and the Insured Loan Parties; (ii) name the Insured Loan Parties as additional insureds, as their respective interests may appear; (iii) provide that the interests of the Lessor and the Insured Loan Parties shall be insured regardless of any intentional or willful breach or violation by the Lessee or the Guarantor of any warranties, declarations or conditions contained in such insurance; (iv) provide that such insurance shall not be invalidated by any act, omission or negligence of the Lessee, the Guarantor, the Lessor or any of the other Lessor Parties, nor by any foreclosure or other proceedings or notices thereof relating to the Property or any part thereof, nor by legal title to, or ownership of, the Property or any part thereof becoming vested in or by the Lessor or its agents, nor by occupancy or use of the Property or any part thereof for purposes more hazardous than permitted by such policy; (v) except for liability coverage and workers' compensation insurance, include a waiver of all rights of subrogation against the Lessor and the Insured Loan Parties and any recourse against the Lessor and the Insured Loan Parties for payment of any premiums or assessments under any policy; (vi) provide that such insurance is primary with respect to any other policies of insurance covering the Improvements or any part thereof carried by or available to the Lessor or the Insured Loan Parties; (vii) expressly provide that all payments of insurance proceeds shall be made payable to the Lessee and the Agent for the benefit of the Lessor Parties as co-payees. The Lessee shall advise the Lessor promptly of any policy cancellation or any change adversely affecting the coverage provided thereby. Section 13.2. Delivery of Certificate of Insurance. The Lessee shall deliver to the Lessor the certificate of insurance evidencing the existence of all insurance which is required to be maintained by the Contractor or the Lessee hereunder, such delivery to be made (i) as provided in Sections 6.1(q) and 6.3(g) of the Participation Agreement, (ii) within thirty (30) days after the issuance of any additional policies or amendments or supplements to any of such 15 Master Lease insurance, and (iii) upon issuance of any such insurance. The Lessee shall notify the Lessor and the other Insured Loan Parties of any nonrenewal of any policy required hereunder and shall cause each insurer under each policy required hereunder to give the Lessor notice of any lapse under any such policy. The Lessee shall not obtain or carry separate insurance concurrent in form, or contributing in the event of loss, with that required by this Article XIII unless the Agent is named as loss payee and the Lessor and the other Insured Loan Parties are named as additional insureds therein. The Lessee shall immediately notify the Lessor and the other Insured Loan Parties whenever any such separate insurance is obtained and shall deliver to the Lessor the certificates of insurance and any other documentation (other than blanket policies) required by the Lessor evidencing the same as is required hereunder. Section 13.3. No Negation of Certain Other Obligations. The requirements of this Article XIII shall not be construed to negate or modify any obligations of the Lessee and the Guarantor under the Operative Documents. Section 13.4. Adjustment and Disbursement of Proceeds, etc. All insurance proceeds in respect of any loss or occurrence for which the proceeds related thereto, in the absence of the occurrence and continuance of a Lease Default or Lease Event of Default, which are payable to the Lessee, shall be adjusted by the Lessee and such proceeds (other than liability insurance proceeds) shall be made available by the Lessor to the Lessee (with the endorsement of the Agent as co-payee) for the sole purpose of reconstruction, repair or refurbishment of the Property; provided, however, that in the event that (i) such reconstruction, repair or refurbishment cannot be completed prior to the end of the Lease Term, or (ii) the Lessee shall elect not to use such proceeds for the reconstruction, repair or refurbishment of the Property, or (iii) if a Lease Default or Lease Event of Default has occurred and is continuing, then such proceeds shall be adjusted solely by the Lessor and held by the Agent for application in accordance with Article XIV or XVII hereof, as applicable. Section 13.5. No Insurance by the Lessor, Note Purchaser, the Conduit Agent or the Agent. At any time, each of the Lessor Parties may at its own expense carry insurance with respect to its interest in the Improvements; except that such insurance shall not interfere with the Lessee's or the Contractor's ability to insure the Improvements as required by this Article XIII or adversely affect the Lessee's insurance or the cost thereof, or the ability of the Lessee or the Contractor to collect a claim under any such insurance policy. Any insurance payments received from policies maintained by any of the Lessor Parties pursuant to the previous sentence shall be retained by such Lessor Party, as the case may be, without reducing or otherwise affecting the Lessee's obligations hereunder. ARTICLE XIV RISK OF LOSS; CASUALTY AND CONDEMNATION; ENVIRONMENTAL MATTERS Section 14.1. Risk of Loss, Damage or Destruction During the Construction Period. Subject to the provisions of this Article XIV, during the Construction Period, to the extent arising as a result of any Lessee Party's actions or failures to act, the risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by the Lessee. In 16 Master Lease addition, during the Construction Period, so long as no Lease Default or Lease Event of Default shall have occurred, and to the extent not arising as a result of any Lessee Party's actions or failures to act, the risk of loss of or decrease in the enjoyment and beneficial use of the Property arising solely as a result of (a) an Unwind Event (the occurrence of which shall have been finally determined and not subject to appeal) or (b) an Event of Loss, shall be borne by the Lessor; provided, however, with respect to any Unwind Event, the Lessor shall be entitled to receive all Unwind Proceeds and the Maximum Unwind Amount payable to the Lessor, and with respect to any Event of Loss, the Lessor shall be entitled to all Casualty Proceeds or Condemnation Proceeds related thereto. Notwithstanding the foregoing, if the Lessee chooses to exercise the Purchase Option after the occurrence of such an Unwind Event or Event of Loss, the Lessor shall be entitled to receive the full Purchase Option Price pursuant to Section 18.1 hereof. Section 14.2. Risk of Loss, Damage or Destruction During the Base Lease Term or Following the Occurrence and Continuance of a Lease Default or Lease Event of Default or To the Extent Arising as a Result of Any of the Lessee's Actions or Failures To Act. During the Base Lease Term, and under all circumstances during the entire Lease Term upon the occurrence and continuance of a Lease Default or Lease Event of Default or to the extent arising as a result of any Lessee Party's actions or failures to act, the risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or other acts of God, taking, destruction, confiscation, requisition or commandeering, partial or complete, of or to the Improvements and any part thereof, however caused or occasioned, shall be borne by the Lessee until the Property has been returned to the Lessor in accordance with the provisions of this Master Lease or has been purchased by the Lessee or another Person in accordance with the provisions of this Master Lease. The Lessee agrees that no occurrence specified in the preceding sentencing shall impair, in whole or in part, any obligation of the Lessee under this Master Lease, including the obligation to pay Basic Rent and Supplemental Rent. Section 14.3. Casualty and Condemnation. (a) Subject to the provisions of this Article XIV, including, without limitation, Section 14.1 and the second paragraph of this Section 14.3, and, during the Construction Period, to Section 3.2 of the Construction Agency Agreement, if all or a portion of the Property is damaged or destroyed in whole or in part by a Casualty (other than a Casualty constituting an Event of Loss), any insurance proceeds under the Lessee's policies payable with respect to such Casualty shall be paid directly to the Lessee (subject to the provisions of Section 13.1 of this Master Lease), or if received by any of the Lessor Parties, shall be paid over to the Lessee, for the reconstruction, refurbishment and for repair of the Property and if the use, access, occupancy, easement rights or title to the Property or any part thereof is the subject of a Condemnation (other than a Condemnation constituting an Event of Loss), then any award or compensation relating thereto shall be paid to the Lessee. All amounts held by the Lessor or any other Lessor Party on account of any award, compensation or insurance proceeds either paid directly to any Lessor Party or turned over to any Lessor Party, in each case in accordance with the preceding sentence, shall (in the absence of any Lease Default or Lease Event of Default) be paid to the Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with clause (d) of this Section 14.3. 17 Master Lease Notwithstanding the foregoing, if any Lease Default, Lease Event of Default, Acceleration Event or Unmatured Acceleration Event shall have occurred and be continuing, any award, compensation or insurance proceeds described above shall be paid directly to the Agent or, if received by the Lessee, shall be held in trust for the Agent and shall be paid over by the Lessee to the Agent to be distributed by the Agent in accordance with the relevant provisions of Article XI of the Participation Agreement. Furthermore, if any Lease Default shall have occurred and continuing, any such award, compensation or insurance proceeds shall be paid directly to the Agent or, if received by the Lessee, shall be held in trust by the Lessee for the benefit of the Agent and shall be paid to the Agent for deposit in an Eligible Account until (i) such Lease Default has been cured, in which case such money shall be paid to the Lessee for the uses described in the first sentence of this Section 14.3(a) or (ii) such Lease Default becomes a Lease Event of Default, in which case, such money shall be distributed in accordance with the preceding sentence. (b) The Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At the Lessee's reasonable request, and at the Lessee's sole cost and expense, the Lessor Parties shall participate in any such proceeding, action, negotiation, prosecution or adjustment. The Lessor and the Lessee agree that this Master Lease shall control the rights of the Lessor and the Lessee in and to any such award or compensation payment. (c) If the Lessor or the Lessee shall receive notice of a Casualty for which the reasonable anticipated cost of restoration equals or exceeds $1,000,000 (whether individually or in the aggregate with all other Improvements affected by the event giving rise to such Casualty) or of an actual, pending or threatened Condemnation of any Land or Improvements or any interest therein (other than an interest which is not material), the Lessor or the Lessee, as the case may be, shall give notice thereof to the other party and to Agent who will in turn notify the other Lessor Parties promptly after the receipt of such notice. (d) If neither the Lessor nor any Lessor Party exercises its termination rights pursuant to Section 16.1 hereof below following an Event of Loss, this Master Lease shall continue in full force and effect following a Casualty or Condemnation that occurs after Final Completion, the Lessee shall, at its sole cost and expense (and, without limitation, if any award, compensation or insurance payment is not sufficient to restore such affected Improvement in accordance with this clause (d), the Lessee shall pay the shortfall), promptly and diligently repair any damage to the Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 8.3, 9.2 and 10.2 hereof, so as to restore the Property to at least the same or similar condition, operation, function and value as existed immediately prior to such Casualty or Condemnation with such Modifications as the Lessee may elect in accordance with Section 10.2 hereof. In such event, title to such Property shall remain with the Lessor subject to the terms of this Master Lease. Upon completion of such restoration, the Lessee shall furnish the Lessor an architect's certificate of substantial completion or a Responsible Officer's Certificate confirming that such restoration has been completed pursuant to this Master Lease. (e) In no event shall a Casualty or Condemnation affect the Lessee's obligations to pay Basic Rent or Supplemental Rent pursuant to Section 3.1 hereof or otherwise to perform its 18 Master Lease obligations and pay any amounts due on the Lease Termination Date or pursuant to Articles XVII, XVIII and XIX hereof. (f) Any excess Casualty Proceeds or Condemnation Proceeds received by the Lessor or any of the other Lessor Parties in respect of a Casualty or Condemnation constituting an Event of Loss with respect to the Property shall be turned over to the Agent for application in accordance with the provisions of Section 11.4 of the Participation Agreement; provided, however, if the Lessee elects to exercise its right to purchase the Property pursuant to Section 17.6 hereof, then such excess proceeds shall be not be applied pursuant to Section 11.4 of the Participation Agreement and instead, be returned to the Lessee upon payment of the full purchase price for the Property pursuant to Section 17.6 hereof. Section 14.4. Environmental Matters. (a) Remediation of Environmental Claims. The Lessee shall, at the Lessee's sole cost and expense, promptly and diligently commence any Remedial Action necessary to remove, clean up or remediate all Adverse Environmental Conditions and all Environmental Claims relating to the Property in accordance with the terms of Section 8.3, unless the Early Termination Date has occurred with respect thereto in accordance with Section 16.2. (b) Notices and Reports Concerning Environmental Matters. The Lessee shall promptly, but in any event within fifteen (15) Business Days from the date the Lessee has actual knowledge thereof, provide to the Agent on behalf of the Lessor Parties written notice of any pending Adverse Environmental Condition or Environmental Claim relating to the Property for which the Remediation Costs could reasonably be expected to exceed, or where the aggregate costs of all such matters could reasonably be expected to exceed, $2,000,000, or of any Release (in quantities or in a manner that may violate applicable Environmental Laws) on, at, under or from the Property. All such notices shall describe in reasonable detail the Adverse Environmental Condition, Environmental Claim, or Release and the nature of the claim, action or proceeding and the Lessee's proposed response thereto. In addition, the Lessee shall provide to the Agent on behalf of the Lessor Parties within ten (10) Business Days of receipt, copies of all written communications with any Governmental Authority relating to any Adverse Environmental Condition or Environmental Claim in connection with the Property with respect to which the claims described in the first sentence of this Section 14.4(b are pending. The Lessee shall also promptly provide such detailed reports of any Adverse Environmental Condition or Environmental Claims relating to the Property as may reasonably be requested by the Lessor Parties. In the event that the Lessor receives written notice of any Adverse Environmental Condition, Environmental Claim or any Release on or in connection with the Property, the Lessor shall promptly give notice thereof to the Lessee and the other Lessor Parties. Upon completion of any required Remedial Action of such Environmental Claims by the Lessee, the Lessee shall provide to the Agent on behalf of the Lessor Parties (i) a report by a consultant reasonably acceptable to such parties describing such Adverse Environmental Conditions or Environmental Claims and the actions taken by the Lessee (or its agents) in response to such Adverse Environmental Conditions or Environmental Claims, (ii) a statement by the consultant that such Adverse Environmental Conditions or Environmental Claims have been remedied in compliance with all applicable Environmental Law, and (iii) a "No Further 19 Master Lease Action" letter or similar documentation by an applicable Governmental Authority, if applicable and available in a reasonable time and at reasonable expense. The Lessee shall provide the Agent on behalf of the Lessor Parties with copies of each such document promptly following its preparation or receipt by the Lessee. Each Environmental Claim and Adverse Environmental Condition relating to the Property shall, regardless of the cost of its remediation, be remedied in accordance with the terms of Section 8.3 hereof prior to the Lease Termination Date unless the Property shall have been purchased by the Lessee (or its designee) in accordance with Article XVI or Section 18.1 hereof. (c) Upon the request of the Lessor, at any time and from time to time after the occurrence of a Lease Event of Default under Section 17.1 hereof or at such other time as the Lessor has reasonable grounds to believe that Hazardous Substances have been Released, stored (in quantities or a manner that may violate Environmental Laws) or disposed of on or around the Property or that the Property may be in violation of the Environmental Laws, the Lessee shall provide, at the Lessee's sole expense, an inspection or audit of the Property prepared by a hydrogeologist or environmental engineer or other appropriate consultant reasonably approved by the Agent on behalf of the Lessor indicating the presence or absence of Hazardous Substances on the Property. If the Lessee fails to provide such inspection or audit within thirty (30) days after such request, the Lessor may order the same, and the Lessee hereby grants to the Lessor access to the Property and an irrevocable license to undertake such inspection or audit. The cost of such inspection or audit shall be paid by the Lessee. (d) No Reduction of Other Obligations. Nothing in this Article XIV shall reduce or limit the Lessee's other obligations under the other Operative Documents. ARTICLE XV GRANT OF LIEN; FORECLOSURE OF LESSEE'S INTEREST; FURTHER ASSURANCES Section 15.1. Grant of Lien by the Lessee, Foreclosure of the Lessee's Interest. (a) The Lessee hereby mortgages, grants, bargains, sells, releases, confirms, conveys, assigns, transfers and sets over to First American Title Insurance Company, as deed of trust trustee (together with all successor trustees, the "Trustee") IN TRUST, WITH POWER OF SALE, and grants to the Trustee a security interest in, and all of the Lessee's right, title and interest in and to, the Property, including, without limitation, all buildings, structures and other improvements, and all fixtures and other property now or hereafter attached to or affixed to the Land, and any additions and alterations thereto or replacements thereof, now or hereafter built, constructed or located upon the Land, all rents, additional rents, issues, income, revenues, distributions, royalties and profits now or in the future payable in respect of the Property, together with all of the right, power and authority of the Lessee to alter, modify or change the terms, conditions and provisions of this Master Lease and any other lease pertaining to the Property, to consent to any request made by a tenant or landlord pursuant thereto, or to surrender, cancel or terminate the same or to accept any surrender, cancellation or termination of the same, together with all of the options, rights, powers and privileges of the Lessee under any lease pertaining to the Property, whether heretofore or hereafter existing, including, without limitation, the rights and options to purchase the Property contained in Article XVIII hereof, and all present 20 Master Lease and future right, title and interest of the Lessee in and to (i) all refunds, tax abatement agreements, rebates, reserves, deferred payments, deposits, cost savings, awards and payments of any kind due from or payable by (A) any Governmental Authority, or (b) any insurance or utility company, in each case under clause (A) or (B) above in respect of the Property, and (ii) all refunds, rebates and payments of any kind due from or payable by any Governmental Authority for any taxes, assessments, or governmental or quasi-governmental charges or levies imposed upon the Lessee in respect of the Property, and all plans and specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Property or any construction on the Land, and all additional estates, rights and interests hereafter acquired by the Lessee in all or any of the Land or any portion thereof, together with all proceeds (including claims and demands therefor) of the conversion, whether voluntary or involuntary, of any of the foregoing into cash or other liquidated claims, including without limitation, all awards, payments or proceeds, including interest thereon, and the right to receive the same, which may be made as a result of any casualty, any exercise of the right of eminent domain or deed in lieu thereof, any injury to any Improvements, and any defect in title to the Property or other matter insured under any policy of title insurance, together with attorney's fees, costs and disbursements incurred by the Lessor in connection with the collection of such awards, payments and proceeds, and the Lessee further grants to the Trustee and the Lessor, as applicable, pursuant to the UCC of the State of California, a security interest in all present and future right, title and interest of the Lessee in and to any portion of the Improvements for which a security interest may be created under the UCC. TO HAVE AND TO HOLD the same whether now owned or held or hereafter acquired unto the Trustee, and its successors and assigns forever, IN TRUST, WITH POWER OF SALE, to secure to the Lessor the payment and performance of the obligations under the Operative Documents (other than the Guaranty) which directly relate to or are a benefit to the rights afforded to the Lessor Parties under the Operative Documents (other than the Guaranty), provided always that these presents are upon the express condition that, if all amounts owing to the Lessor Parties under this Master Lease and the other Operative Documents shall have been paid and satisfied in full, then, this instrument and the estate hereby granted shall cease and become void and shall be cancelled and surrendered. In no event shall this Master Lease be deemed or construed to secure the Guaranty. This Master Lease secures all present and future loan disbursements made by the Lessor to the Lessee pursuant to the Participation Agreement, the Note Purchase Agreement, the Notes, the Equity Investment and all other sums from time to time owing to the Lessor Parties under this Master Lease and the other Operative Documents (other than the Guaranty). (b) In the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting the Lessee and the Lessor, or any enforcement or collection actions, the transactions evidenced by this Master Lease are loans made by the Lessor as unrelated third party lender to the Lessee secured by all of the Property, all to secure such loans, effective on the date hereof. 21 Master Lease (c) In the event of the occurrence of a Lease Event of Default, then the entire Outstanding Lease Balance together with all accrued and unpaid Basic Rent and Supplemental Rent shall, subject to the Participation Agreement, at the option of the Lessor and notice to the Lessee, immediately become due and payable for all purposes, whether or not due according to the maturity date or dates thereof; and all other indebtedness, the payment of which is secured by this Master Lease, shall likewise become due and payable. Subject to the Participation Agreement, the Lessor and the other Lessor Parties and each of them are authorized prior or subsequent to the institution of any foreclosure proceedings to enter upon the Property or any part thereof, to take possession of all or any of the Property or any part thereof and exercise without interference from the Lessee, any and all rights which the Lessee has with respect to the management, possession, operation, protection or preservation of the Property. (d) Subject to Article XI of the Participation Agreement, and subject to applicable law, upon the request of the Lessor, the Trustee is hereby granted a power of sale and may sell the Property, or such part or parts thereof or interests therein as the Lessor may select, after first having given such notice of hearing as to commencement of foreclosure proceedings and obtained such findings or leave of court as then may be required by law and then having given such notice and advertised the time and place of such place of such sale in such manner as then may be provided by law, and upon such sale and any resale and upon compliance with the law then relating to foreclosure proceedings, to convey title to the purchaser. Following a foreclosure sale, the Trustee shall deliver or cause to be delivered to the purchaser the Trustee's deed, assignment of lease and/or bills of sale or other conveyance documents as necessary to convey the property so sold without any covenant or warranty, express or implied. (e) No action of the Lessor or the Trustee based upon the provisions contained herein or based upon applicable law, including, without limitation, the giving of a notice of default or election to sell or a notice of sale, shall constitute an election of remedies which would preclude the Lessor from pursuing judicial foreclosure before a completed sale pursuant to the power of sale contained herein. The Lessor shall have the right, with the irrevocable consent of the Lessee hereby given and evidenced by the execution of this instrument, following the occurrence of a Lease Event of Default to obtain appointment of a receiver by any court of competent jurisdiction without further notice to the Lessee, to the fullest extent permitted by law, as a matter of right and without regard to, or the necessity to disprove, the adequacy of the security for the Obligations or the solvency of the Lessee or any other obligor, and the Lessee to the fullest extent permitted by law irrevocably waives such necessity and consents to such appointment, without notice. Said receiver shall be authorized and empowered, to the extent permitted by applicable law, to enter upon and take possession of any or all of the Property, including all personal property used upon or in connection with the Property herein conveyed, to let any or all of the Property, to receive all the rents, issues and profits, if any, which may be due or become due in respect to the leasing of the Property to another party ("Property Rents"), and apply the Property Rents after payment of all necessary charges and expenses to reduction of the related Obligations in such order, proportion and priority as provided in the Participation Agreement. At the option of the Lessor, to the extent permitted by applicable law, said receiver shall accomplish entry and taking possession of the Property by actual entry and possession or by notice to the Lessee. Said receiver shall be empowered to issue receiver's certificates for funds advanced by the Lessor for the purpose of protecting the value of the Property as security for the related Obligations. The amounts evidenced by receiver's certificates shall bear interest at the 22 Master Lease Overdue Rate and may be added to the related Obligations if the Lessee or a junior lienholder purchases any or all of the Property at a trustee's or foreclosure sale. The Lessor shall not be obligated to require the appointment of a receiver or conservator for the Property either pending a foreclosure sale or otherwise, irrespective of whether or not the Property is adequate security for the Secured Obligations. (f) The Trustee or any successor acting hereunder may resign and thereupon be discharged of the trusts hereunder upon thirty (30) days' prior written notice to the Lessor. Regardless of whether Trustee resigns, the Lessor may, from time to time, substitute a successor or successors to any Trustee named herein or acting hereunder in accordance with any applicable statutory procedure for such substitution; or if the Lessor, in its sole and absolute discretion, so elects, and if permitted by law, the Lessor may substitute such successors or successors by recording, in the office of the clerk or recorder (as applicable) of the county or counties where the Property is located, a document executed by the Lessor and containing the name of the original Lessee and Lessor hereunder, the book and page where the memorandum of this Master Lease is recorded (and/or instrument number, as applicable) and the name of the new Trustee, which instrument shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall, without conveyance from the predecessor Trustee, succeed to the rights, powers and duties hereunder. It is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. A POWER OF SALE MAY ALLOW THE TRUSTEE TO TAKE POSSESSION OF ANY OR ALL OF THE PROPERTY AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE LESSEE UNDER THIS INSTRUMENT. (g) One or more exercises of the powers herein granted shall not extinguish nor exhaust such powers until all of the Property has been sold or until the entire amounts evidenced and/or secured by this Master Lease and the other Operative Documents are paid in full. (h) With respect to that portion of the Property constituting personal property, for the purpose of securing the Lessee's obligations for the repayment of the above-described obligations: (i) this Master Lease shall be deemed to be a security agreement and financing statement within the meaning of Article 9 of the UCC; (ii) the conveyance provided for in this Master Lease shall be deemed to be a grant by the Lessee to the Lessor, of a lien and security interest in all of the Lessee's present and future right, title and interest in and to such portion of the Property, including, but not limited to, the Lessee's leasehold estate therein and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property to secure such obligations, effective on the date hereof, to have and to hold such interests in the Property unto the Lessor and its successors and assigns; (iii) the possession by the Lessor of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the UCC; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. The Lessee shall, to the extent consistent with this Master Lease, and the Lessor shall (at the sole cost and expense of the Lessee) if so directed by the Agent, take such actions and execute, deliver, file and record such 23 Master Lease other documents, financing statements, continuation statements, mortgages and deeds of trust as may be necessary to ensure that the security interest in the Property created by this Master Lease are deemed to be a perfected security interest with priority over all Liens other than Permitted Liens and will be maintained as such throughout the Lease Term. (i) The remedies provided herein shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise. The only limitation upon the foregoing agreements as to the exercise of remedies is that there shall be but one full and complete satisfaction of the indebtedness secured hereby. ARTICLE XVI TERMINATION OF LEASE UPON CERTAIN EVENTS WITH RESPECT TO THE PROPERTY Section 16.1. Termination upon Certain Events. If any of the following occurs with respect to the Property: (a) an Event of Loss occurs during the Base Lease Term; or (b) a Material Adverse Environmental Condition exists; the Lessor or any of the other Lessor Parties may give written notice (an "Early Termination Notice") to the Lessee that, as a consequence of such event, the Memorandum of Lease and this Master Lease are to be terminated, then the Lessee shall, at the Lessor's election be obligated to acquire the Lessor's interest in the Property on the next occurring Basic Rent Payment Date that occurs no earlier than thirty (30) days and no more than ninety (90) days after the date the Lessee receives the Early Termination Notice by paying to the Lessor an amount equal to the sum of (x) the Outstanding Lease Balance on the date of such purchase, plus (y) all accrued and unpaid Basic Rent on the date of such purchase, plus (z) all Supplemental Rent due and owing on the date of such purchase after giving effect thereto. Section 16.2. Early Termination Procedures. On the date of the payment by the Lessee of the Outstanding Lease Balance and all other amounts then due in accordance with Section 16.1 hereof (such date, the "Early Termination Date"), the Memorandum of Lease covering this Master Lease shall terminate and concurrently with the Lessor's receipt of such payment: (a) the Lessor shall execute and deliver to the Lessee (or to the Lessee's designee), at the Lessee's cost and expense, a grant deed and a bill of sale or other appropriate conveyance instrument with respect to the Property containing representations and warranties of grantor regarding the absence of Lessor Liens and an assignment of the Lessor's entire interest in the Property, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Master Lease and the Memorandum of Lease covering the Property and any Lessor Liens attributable to the Lessor; (b) the Property shall be conveyed to the Lessee "AS IS" and in its then present physical condition; 24 Master Lease (c) the Lessor shall, at the Lessee's sole cost and expense and as a condition to the Lessee's obligation to acquire the Lessor's interest in the Property, (x) execute and deliver to the Lessee a statement of termination of this Master Lease and the Memorandum of Lease and releases of any Liens on the Property created by the Operative Documents attributable to the Lessor and (y) obtain terminations of any Liens on the Property which may be held by the Agent or any other Lessor Party, including, in each case, termination statements for any financing statements (to the extent relating to the Property) which are then of record naming the Lessor, the Agent or any other Lessor Party, as the case may be, as the secured party with respect to the Property; and (d) in the case of a termination pursuant to clause (a) of Section 16.1 hereof, the Lessor shall convey to the Lessee any net insurance proceeds therefor received by the Lessor or assign the Lessor's right to receive all insurance proceeds with respect to the Casualty or Condemnation giving rise to the termination of this Master Lease or at the request of the Lessee, such amounts shall be applied against sums due hereunder. ARTICLE XVII EVENTS OF DEFAULT; UNWIND EVENTS Section 17.1. Lease Events of Default. The occurrence of any one or more of the following events (whether such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall constitute a "Lease Event of Default": (a) the Lessee shall fail to make any payment of Basic Rent or in the case of a purchase pursuant to Section 18.1(a) or 16.1 hereof, the Outstanding Lease Balance, Purchase Option Price or Maximum Recourse Amount within five (5) Business Days of the due date thereof; or (b) the Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in clause (a) of this Section 17.1) within five (5) Business Days after receipt of written demand therefor from the Lessor or any assignee thereof; or (c) the Lessee shall fail on the Lease Termination Date to make any payment of the Purchase Option Price or, in the event the Lessee has elected to remarket the Property and satisfied the requirements of Section 18.4 hereof, Maximum Recourse Amount or Gross Remarketing Proceeds; (d) the Lessee shall fail to maintain the insurance required under Article XIII hereof, shall assign this Master Lease or sublease the Property other than in accordance with Article VI hereof or shall fail to observe or perform any term, covenant or condition to be performed by it under Section 18.3 or 18.4 hereof, or the Guarantor shall fail to observe or perform any term, covenant or condition to be performed by it under the Guaranty or Sections 8.1, 8.2 or 8.3 of the Participation Agreement; provided, however, that during the Base Lease Term, the Lessee's failure to maintain the insurance required under Article XIII hereof shall not become a Lease 25 Master Lease Event of Default if the Lessee corrects such failure within one (1) Business Day following such lapse or failure; or (e) the Lessee or the Guarantor shall fail to observe or perform any material term, covenant or condition of the Lessee or the Guarantor under this Master Lease or any other Operative Document to which it is a party other than those described in this Section 17.1 and, in each such case, such failure shall have continued for thirty (30) days or such shorter period as may be specified in any other Operative Document after the earlier of (x) the date on which any Responsible Officer of the Lessee having direct responsibility for the Property of the Lessee or the Guarantor, as applicable, shall have actual knowledge thereof and (y) delivery to the Lessee or the Guarantor of written notice thereof from the Lessor; or (f) any representation or warranty made by the Lessee or the Guarantor in any of the Operative Documents to which it is a party shall have been inaccurate at the time made, except for such inaccuracies or misstatements which are not material, and if capable of remedy, shall remain unremedied for thirty (30) days after the earlier of (x) the date on which any Responsible Officer of the Lessee having direct responsibility for the Property or the Guarantor shall have actual knowledge thereof, and (y) delivery to the Lessee or the Guarantor of written notice thereof from the Lessor or any permitted assignee thereof; or (g) the Guarantor or any Material Subsidiary shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of the Guarantor or any Material Subsidiary or of any substantial part of the assets of the Guarantor or any Material Subsidiary or shall commence any case or other proceeding relating to the Guarantor or any Material Subsidiary under any bankruptcy, arrangement, insolvency, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against the Guarantor or any Material Subsidiary and the Guarantor or any Material Subsidiary shall indicate its approval thereof, consent thereto or acquiescence therein or if such petition or application shall not have been dismissed within forty-five (45) days following the filing thereof; or (h) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating the Guarantor or any Material Subsidiary bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of the Guarantor or any Material Subsidiary in any involuntary case under federal bankruptcy laws as now or hereafter constituted; or (i) the Conduit Agent shall have delivered a Notice of Default to the Lessee; or (j) any provision under any Operative Document with respect to the Property or the payment obligations of the Lessee or the Guarantor or any Lien granted under any Operative Document shall, in whole or in part, other than solely as the result of an intentional act of a Lessor Party, terminate, cease to be effective against, or cease to be the legally valid, binding and enforceable obligation of, the Lessee or the Guarantor, as the case may be, the effect of which, in 26 Master Lease any such case, shall deprive any party to such Operative Document of any material benefits and rights intended to be created thereby, or Guarantor denies or disaffirms its obligations under the Guaranty or, except as permitted under any Operative Document, any Lien securing any Obligation shall, in whole or in part, cease to be a perfected first priority Lien; or (k) the Lessee or the Guarantor shall directly or indirectly contest in any manner the effectiveness, validity, binding nature or enforceability of any Operative Document or any Lien granted under any Operative Document; or (l) the Guarantor or any of its Subsidiaries shall (i) default in the payment of any portion of the principal of or interest on any Indebtedness (including, without limitation, payments under the Flatirons Lease) beyond any grace period provided with respect thereto, or (ii) default in the performance or observance of any other term, condition or agreement contained in any such obligation or in any agreement relating thereto if the effect of such default is to cause, or permit (or, with the giving of notice or lapse of time or both, to cause or permit) the holder or holders of Indebtedness the aggregate outstanding principal amount of which is at least $10,000,000 (or a trustee on behalf of holder or holders) to cause any such Indebtedness to become due (or be prepaid or purchased) prior to its stated maturity; or (m) a final judgment for more than $10,000,000 in the aggregate (net of acknowledged insurance proceeds receivable) shall be rendered against the Guarantor or any of its Subsidiaries and if within sixty (60) days after entry thereof such judgment shall not have been discharged or execution thereof stayed pending appeal; or (n) with respect to any Guaranteed Pension Plan, an ERISA Reportable Event shall have occurred and the Lessor Parties shall have determined in their reasonable discretion that such event reasonably could be expected to result in liability of the Guarantor or any of its Subsidiaries to the PBGC or such Guaranteed Pension Plan in an aggregate amount exceeding $500,000 and such event in the circumstances occurring reasonably could constitute grounds for the termination of such Guaranteed Pension Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Guaranteed Pension Plan; or a trustee shall have been appointed by the United States District Court to administer such Guaranteed Pension Plan; or the PBGC shall have instituted proceedings to terminate such Guaranteed Pension Plan; (o) with respect to any Multi-Employer Plan, an event shall have occurred and the Lessor Parties shall have determined in their reasonable discretion that such event reasonably could be expected to result in liability of the Guarantor or any of its Subsidiaries in an aggregate amount exceeding $500,000 and such event in the circumstances occurring reasonably could constitute grounds for, or result in, the termination, reorganization or insolvency of such Multi-Employer Plan; (p) Guarantor fails to pay amounts due under the Guaranty when due; or (q) a Construction Agency Agreement Event of Default of the type described in clauses (a), (d), (e) or (f) of Section 6.1 of the Construction Agency Agreement occurs. 27 Master Lease Section 17.2. Remedies. Upon the occurrence and continuance of any Lease Event of Default of the type described in clause (g) or (h) of Section 17.1, the Lessee shall immediately become obligated to pay the then outstanding amount of the Outstanding Lease Balance together with all accrued and unpaid Basic Rent and Supplemental Rent, without presentment, demand, protest, notice of acceleration or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or any other Operative Document to the contrary notwithstanding. Upon written notice by the Lessor to the Lessee after the occurrence and continuance of any other Lease Event of Default, the Lessee shall immediately become obligated to pay the then outstanding amount of the Outstanding Lease Balance together with all accrued and unpaid Basic Rent and Supplemental Rent. Section 17.3. Lessor's Remedies. At any time after the occurrence of any Lease Event of Default, so long as such Lease Event of Default exists, the Lessor (which term shall include the Lessor's permitted assignees) may do one or more of the following as the Lessor in its sole discretion shall determine, without limiting any other right or remedy the Lessor may have on account of such Lease Event of Default, and without impairment of the acceleration of the obligations of the Lessee pursuant to Section 17.2 hereof: (a) The Lessor may, by notice to the Lessee, rescind or terminate this Master Lease with respect to all or any portion of the Property as of the date specified in such notice; provided, however, (1) no reletting, reentry or taking of possession of the Property (or any portion thereof) by the Lessor will be construed as an election on the Lessor's part to terminate this Master Lease unless a written notice of such intention is given to the Lessee, (2) notwithstanding any reletting, reentry or taking of possession, the Lessor may at any time thereafter elect to terminate this Master Lease for a continuing Lease Event of Default and (3) no act or thing done by the Lessor or any of its agents, representatives or employees and no agreement accepting a surrender of the Property shall be valid unless the same be made in writing and executed by the Lessor; (b) The Lessor may demand that the Lessee shall, upon the written demand of the Lessor, return the Property promptly to the Lessor in compliance with the Return Conditions and in the manner and condition required by, and otherwise in accordance with all of the provisions of, Articles VIII and IX hereof as if the Property was being returned at the end of the Lease Term, and the Lessor shall not be liable for the reimbursement of the Lessee for any costs and expenses incurred by the Lessee in connection therewith and without prejudice to any other remedy which the Lessor may have for possession of the Property, and to the extent and in the manner permitted by Applicable Law, enter upon the Land and take immediate possession of (to the exclusion of the Lessee) the Property therein or any part thereof and expel or remove the Lessee, by summary proceedings or otherwise, all without liability to the Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise and, in addition to the other damages of the Lessor, the Lessee shall be responsible for all costs and expenses incurred by the Lessor in connection with any reletting of all or any of the Property (including reasonable brokers' fees) and all costs of any repairs or alterations made by the Lessor; (c) The Lessor may (i) sell all or any part of the Property at public or private sale, as the Lessor may determine, free and clear of any rights of the Lessee (except that Excess Sales Proceeds shall be paid to the Lessee) with respect thereto (except to the extent required by 28 Master Lease clause (ii) below if the Lessor shall elect to exercise its rights thereunder) in which event the obligation of the Lessee to pay Basic Rent hereunder for periods commencing after the date of such sale shall be terminated with respect to the Property so sold; and (ii) if the Lessor shall so elect, demand that the Lessee pay to the Lessor, and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (the parties agreeing that the Lessor's actual damages would be difficult to predict, but the aforementioned liquidated damages represent a reasonable approximation of such amount) (in lieu of Basic Rent due for periods commencing after the Basic Rent Payment Date coinciding with such date of sale (or, if the sale date is not a Basic Rent Payment Date, the Basic Rent Payment Date next preceding the date of such sale)), an amount equal to (A) the excess, if any, of (1) the Outstanding Lease Balance calculated as of such Basic Rent Payment Date (plus all Basic Rent and Supplemental Rent due and unpaid to and including such Basic Rent Payment Date), over (2) the net proceeds of such sale (that is, after deducting all costs and expenses incurred by the Lessor or incident to such conveyance, including, without limitation, repossession costs, brokerage commissions, prorations, transfer taxes, fees and expenses for counsel, title insurance fees, survey costs, recording fees, and any repair costs); plus (B) interest at the Overdue Rate on the foregoing amount from such Basic Rent Payment Date until the date of payment; (d) If the Lessee has breached this Master Lease and abandoned the Property, this Master Lease shall continue in effect for so long as the Lessor does not terminate the Lessee's right to possession, and the Lessor may enforce all of the Lessor's rights and remedies under this Master Lease, including the right to recover the Basic Rent and Supplemental Rent hereunder as it becomes due under this Master Lease. The Lessee's right to possession shall not be deemed to have been terminated by the Lessor except pursuant to clause (a) above. The following do not constitute a termination of the Lessee's right to possession: (i) Acts of maintenance or preservation or efforts to relet the Property or any portion thereof; (ii) The appointment of a receiver upon the initiative of the Lessor to protect the Lessor's interest under this Master Lease; (iii) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by the Lessee. (e) The Lessor may, at its option, elect not to terminate this Master Lease with respect to any or all of the Property and continue to collect all Basic Rent, Supplemental Rent, and all other amounts due to the Lessor (together with all costs of collection) and enforce the Lessee's obligations under this Master Lease as and when the same become due, or are to be performed. During the continuance of a Lease Event of Default, the Lessor may enter the Property in accordance with applicable law without terminating this Master Lease and sublet all or any part of the Property for the Lessee's account to any Person, for such term (which may be a period beyond the remaining Lease Term), at such rents and on such other terms and conditions as are commercially reasonable. If the rents received by the Lessor from such subletting, after application as provided above, are insufficient in any period to pay Basic Rent and Supplemental Rent due and payable hereunder for such period, the Lessee shall pay such deficiency to the Lessor upon demand. Notwithstanding any such subletting for the Lessee's account without 29 Master Lease termination, the Lessor may at any time thereafter, by written notice to the Lessee, elect to terminate this Master Lease by virtue of a previous Lease Event of Default. Regardless of the Lessor's consent, no subletting or assignment of the Property shall release the Lessee of the Lessee's obligation or alter the primary liability of the Lessee to pay Rent hereunder (including Basic Rent and Supplemental Rent ) and to perform all other obligations to be performed by the Lessee hereunder. The acceptance of Rent by the Lessor from any other Person shall not be deemed to be a waiver by the Lessor of any provision hereof. Consent to one assignment or subletting of the Property shall not be deemed consent to any subsequent or further assignment, subletting, hypothecation or third party use of the Property. The Lessor may proceed directly against the Lessee without the necessity of exhausting remedies against said assignee or successor. The Lessor may consent to subsequent assignments or subletting of this Master Lease or amendments or modifications to this Master Lease with assignees of the Lessee, without notifying the Lessee, or any successor of the Lessee, and without obtaining its or their consent thereto and such action shall not relieve the Lessee or any successor of the Lessee of liability under this Master Lease. (f) Unless the Property has been sold in its entirety, the Lessor may, whether or not the Lessor shall have exercised or shall thereafter at any time exercise any of its rights under clauses (b), (c), (d) or (e) of this Section 17.3 with respect to the Property or any portions thereof, demand, by written notice to the Lessee, that the Lessee purchase, on the date specified in such notice such date in all cases to be at least twenty (20) days from the date of notice, the Property (or any remaining unsold portions thereof) for the Outstanding Lease Balance plus all other amounts then due and owing hereunder in accordance with the provisions of Section 19.1(a) hereof; (g) The Lessor may exercise any other right or remedy that may be available to it under Applicable Law, or proceed by appropriate court action (legal or equitable) to enforce the terms hereof or to recover damages for the breach hereof. Separate suits may be brought to collect any such damages for any period(s), and such suits shall not in any manner prejudice the Lessor's right to collect any such damages for any subsequent period(s), or the Lessor may defer any such suit until after the expiration of the Lease Term, in which event such suit shall be deemed not to have accrued until the expiration of the Lease Term; (h) The Lessor may retain and apply against the Outstanding Lease Balance all sums which the Lessor would, absent such Lease Event of Default, be required to pay to, or turn over to, the Lessee pursuant to the terms of this Master Lease; (i) The Lessor, as a matter of right and with notice to the Lessee, shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers of the Property, and the Lessee hereby irrevocably consents to any such appointment. Any such receiver(s) shall have all of the usual powers and duties of receivers in like or similar cases and all of the powers and duties of the Lessor in case of entry, and shall continue as such and exercise such powers until the date of confirmation of the sale of the Property unless such receivership is sooner terminated; or 30 Master Lease (j) The Lessor may exercise the remedies described in Article XV hereof, as applicable. Section 17.4. Other Rights of the Lessor. To the maximum extent permitted by law, the Lessee hereby waives the benefit of any appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshaling in the event of any sale of the Property or any interest therein. The Lessor shall be entitled to enforce payment of the indebtedness and performance of the obligations secured hereby and to exercise all rights and powers under this instrument or under any of the other Operative Documents pursuant to any laws now or hereafter in force, notwithstanding the fact that some or all of the obligations secured hereby may now or hereafter be otherwise secured, whether by security agreement, pledge, lien, assignment or otherwise. Neither the acceptance of this instrument nor its enforcement shall prejudice or in any manner affect the Lessor's right to realize upon or enforce any other security and/or title now or hereafter held by the Lessor, it being agreed that the Lessor shall be entitled to enforce this instrument and any other security now or hereafter held by the Lessor in such order and manner as the Lessor may determine in its absolute discretion. No remedy herein conferred upon or reserved to the Lessor is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Operative Documents to the Lessor or to which it may otherwise be entitled may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by the Lessor. In no event shall the Lessor, in the exercise of the remedies provided in this instrument (including in connection with the assignment of rents to the Lessor, or the appointment of a receiver and the entry of such receiver onto any or all of the Property or any part thereof), be deemed a "mortgagee in possession", and the Lessor shall not in any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies. Section 17.5. Excess Proceeds. If, pursuant to the exercise by the Lessor of its remedies pursuant to Section 17.3 hereof, an amount equal to the Outstanding Lease Balance plus all other amounts due and owing from the Lessee under this Master Lease and the other Operative Documents (including all accrued and unpaid Basic Rent and all Supplemental Rent then due and owing) shall have been paid in full in cash, then the Lessor shall promptly remit to the Lessee any excess amounts received by the Lessor. Section 17.6. Lessee's Right to Purchase. Notwithstanding anything to the contrary contained in this Master Lease, after the occurrence and during the continuance of an Unwind Event, an Event of Loss, a Lease Default, Lease Event of Default, Acceleration Event or Unmatured Acceleration Event other than a Lease Event of Default pursuant to clause (a), (g) or (h) of Section 17.1 hereof, the Lessee shall have the right to pay an amount equal to the Outstanding Lease Balance of this Master Lease plus all accrued and unpaid Basic Rent plus any Supplemental Rent due and owing hereunder and under the Participation Agreement or any other Operative Document, with the amount of such Outstanding Lease Balance, Basic Rent and Supplemental Rent to be determined as of such date of payment, and upon such payment, the Property shall be reconveyed to the Lessee or its designee in accordance with the provisions of Section 19.1(a) hereof; provided, however, that such right of the Lessee shall terminate on the earliest of (i) the date occurring thirty (30) days after notice to the Lessee from the Lessor or any 31 Master Lease assignee thereof of the applicable Lease Event of Default, (ii) the date occurring thirty (30) days after the Lessor has commenced its exercise of remedies under Section 17.3 and (iii) the occurrence of any Lease Event of Default under clause (a), (g) or (h) of Section 17.1 hereof. Section 17.7. [Intentionally Omitted]. Section 17.8. Unwind Event Remedies. (a) Upon the occurrence and continuance of an Unwind Event (the occurrence of which shall have been finally determined and not subject to appeal), unless the Lessee shall have exercised its option to purchase the Property under Section 17.6 hereof, the Lessee shall be deemed to have elected to offer the Property for sale to third parties (such option, the "Unwind Option"). (b) Upon the occurrence and continuance of an Unwind Event, the Lessee shall pay to the Lessor the Maximum Unwind Amount. (c) The following actions shall be taken by the Lessee (at the direction and expense of the Lessor) as of a date no later than ninety (90) days after the date on which the Unwind Option is exercised (such date, the "Unwind Date"): (1) No less than sixty (60) days prior to the Unwind Date, the Lessee shall have delivered to the Lessor Parties (x) an Environmental Audit for the Property and (y) an ALTA Survey with respect to the Land and the Improvements prepared in accordance with the requirements of Section 18.3(c) hereof. If any such Environmental Audit indicates any exceptions, the Lessee shall have also delivered prior to the date of exercise of the Unwind Option, a Phase Two environmental assessment prepared in accordance with the requirements of Section 18.3(c) hereof. (2) For a period of ninety (90) days after the exercise by the Lessee of the Unwind Option, (such period, the "Unwind Marketing Period"), the Lessee shall, as nonexclusive agent for the Lessor, use best commercial efforts to obtain cash bids for the acquisition of all of the Lessor's interest in and to the Property and will attempt in good faith to obtain the highest purchase price for the Property and for not less than the Fair Market Value of the Property. In the event that the Lessee receives any bid(s) for any Property, the Lessee shall, within five (5) Business Days after its receipt thereof, certify to the Lessor Parties in writing the amount and terms of such bid(s), and the name and address of the party or parties submitting such bid. (3) The Lessee shall promptly upon request permit inspection of the Property and any maintenance records relating to the Property by the Lessor and any potential purchaser(s), and shall otherwise do all things reasonably necessary to sell and deliver possession of the Property to any purchaser(s) thereof. (4) The Lessee shall use all efforts reasonably requested by the Agent to procure bids from one or more bona fide prospective purchasers and deliver the same, if any, to the Lessor (with a copy to the Agent), within five (5) days of receipt thereof. No such purchaser shall be the Lessee or any Subsidiary or Affiliate of the Lessee or any Person with 32 Master Lease whom the Lessee has an understanding or arrangement regarding the future use of the Property by the Lessee or such Subsidiary or Affiliate, but such purchaser may be the Lessor, the Note Purchaser, the Agent, any Liquidity Bank, any Affiliate of the foregoing or any Person contacted by the Lessor, the Agent, the Note Purchaser, or any Liquidity Bank. Each written offer must specify an effective date of sale falling on or prior to the Unwind Date, unless the Lessor, the Agent, and the Note Purchaser shall otherwise agree, each in its sole discretion. (5) The Lessee shall submit all bids, if any, to the Lessor (with a copy to the Agent) and the Lessor, and the Note Purchaser will have the right to submit any one or more bids. Any sale by the Lessee shall be for the highest cash bid submitted to the Lessor. The determination of the highest bid shall be made by the Agent prior to the Unwind Date. All bids shall be on an all-cash basis unless the Agent, the Lessor, the Note Purchaser and the Liquidity Banks shall otherwise agree. (6) In connection with any such sale of the Lessor's interest in and to the Property, the Lessee will provide to the purchaser all customary "seller's" indemnities and representations and warranties regarding title, absence of Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) (to the extent expressly consented to in writing by the Lessor on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2 and (x) of the definition of "Permitted Liens") and the condition of the Property as reasonably required by the Lessor, to the extent the same are reasonably requested by the purchaser and factually accurate. The Lessee shall have obtained, at no cost or expense to the Lessor, all required governmental and regulatory consents and approvals and shall have made all filings as required by Applicable Law in order to carry out and complete the transfer of the Property. As to the Lessor, any such sale shall be made on an "as is, with all faults" basis without representation or warranty by the Lessor other than as to the absence of Lessor Liens. Any agreement as to such sale shall be made subject to the Lessor's rights to receive the proceeds of such sale in cash up to an amount equal to the Outstanding Lease Balance on the date of such sale, plus all accrued and unpaid Basic Rent plus any Supplemental Rent due and owing (including any amounts due under the Participation Agreement and any other Operative Document). (7) The Lessee shall pay directly, and not from the sale proceeds, all prorations, credits, costs and expenses of any such sale of the Property, whether incurred by the Lessor or the Lessee, including the cost of all title insurance, surveys, Environmental Audits and other environmental reports, appraisals, transfer taxes, the reasonable attorneys' fees of the Lessor, commissions, escrow fees, recording fees and all applicable documentary and other transfer taxes. (8) On or prior to the Unwind Date, the Lessee shall, whether or not any or all of the Property has been sold, pay or cause to be paid to the Agent for repayment of the outstanding balance of the Notes and the Equity Investment in the manner and priority specified in Article XI of the Participation Agreement (or in the case of Supplemental Rent to the Person entitled thereto), in the type of funds specified in Section 3.2 hereof, an amount equal to (x) all unpaid Basic Rent due on or prior to the Unwind Date, plus (y) without duplication, all Supplemental Rent due and owing on the Unwind Date after giving effect to such payment plus 33 Master Lease (z) all other amounts under the Operative Documents which have accrued or will accrue prior to or as of the Unwind Date. (9) To the extent that the gross sale proceeds (without deduction for any marketing, closing or other costs, prorations or commissions) (the "Unwind Proceeds") from such sale, exceeds the Outstanding Lease Balance, the excess arising therefrom (the "Excess Unwind Proceeds"), shall be paid to the Lessee on the Unwind Date (provided that the Lessee shall have paid all amounts due as set forth above pursuant to this clause (9)). If the Property has not been sold on or prior to the Unwind Date and any such sale is consummated at any time thereafter, then, if after giving effect to such sale and any payments previously paid by the Lessee to the Lessor there would be any Excess Unwind Proceeds, the Lessor shall remit to the Lessee, promptly after the consummation of such sale, an amount equal to the Excess Unwind Proceeds minus the Imputed Return, determined as of the date of such sale. (10) The purchaser of the Property shall be Solvent. Section 17.9. Procedures If No Sale in Connection with the Exercise of the Unwind Option. If the Lessee effectively elects the Unwind Option and each of the conditions and requirements set forth hereinabove shall have been satisfied, but, nevertheless, the Lessee is unable to obtain bids for the Property satisfactory to the Agent as provided above and the Property remains unsold as of the date ninety (90) days thereafter, then the Lessee shall, in addition to making any payments required pursuant to Sections 17.8(c)(8) above, return the Property to the Lessor (or to any other Person specified by the Lessor). In connection with each such return of the Property, the Lessee shall, at its own cost and expense, on or prior to the date of transfer, do each of the following: (a) the Lessee shall execute and deliver to the Lessor (or to the Lessor's designee) (A) a certificate of the Lessee containing representations and warranties regarding the absence of Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) (to the extent expressly consented to in writing by the Lessor on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2) hereof and (x) of the definition of "Permitted Liens"), (B) a bill of sale with respect to all equipment and other personal property comprising part of the Property and (C) a deed or other conveyance instrument of the Lessee's entire interest in the Property (which shall include an assignment of all of the Lessee's right, title and interest in and to any insurance proceeds with respect to the Property not previously received by the Lessee and an assignment of all leases and subleases of the Property), in each case in recordable form and otherwise in conformity with local custom and free and clear of any Liens attributable to the Lessee; (b) the Lessee shall execute and deliver to the Lessor and the Lessor's title insurance company an affidavit in customary form as to the absence of any Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) of the definition of Permitted Liens (to the extent expressly consented to in writing by the Lessor on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2 hereof) and (x) of the definition of "Permitted Liens"), and shall execute and deliver to the Lessor a statement of termination of this Master Lease; 34 Master Lease (c) the Lessee shall, as of such transfer date, (i) vacate the Property and, at the request of the Lessor, cause any Subtenant or other sublessee of the Property to vacate the Property, and (ii) transfer possession of the Property to the Lessor or any Person designated by the Lessor, in each case by surrendering the same into the possession of the Lessor or such Person, as the case may be, in the condition required by the Return Conditions and in compliance with Applicable Law; (d) the Lessee shall deliver to the Lessor or any Person designated by the Lessor copies of all books and records regarding the maintenance and ownership of the Property, a current copy of the plans and specifications for the Improvements, an assignment of all assignable licenses and shall cause to be delivered all necessary easements required for the operation and maintenance of the Property; (e) the Lessee will cooperate reasonably with the Lessor and/or any Person designated by the Lessor to receive the Property, which cooperation shall include seeking and obtaining all necessary Governmental Action; and (f) in the event that the Lessor disposes of the Property after the Unwind Date, the Lessee shall be entitled to receive the surplus, if any of Unwind Proceeds over (ii) the sum of (A) the Outstanding Lease Balance plus (B) any costs incurred by the Lessor in respect of the Property which have not been otherwise paid by the Lessee or the Guarantor plus (C) any unpaid Basic Rent or Supplemental Rent plus (D) the Imputed Returns. Section 17.10. Failure to Comply with Remarketing Conditions in Connection with Exercise of Unwind Option. If the Lessee shall fail to carry out any obligation specified in Section 17.8 or 17.9 hereof (it being understood that the failure to have received a bid on the Property in the absence of any failure to act, or wrongful act, on the part of the Lessee shall not constitute a failure on the part of the Lessee to have performed such obligations), then the Lessor shall declare by written notice to the Lessee that as a consequence of the Lessee's failure to comply with such remarketing conditions, the Lessee shall be deemed to have exercised its Purchase Option with respect to the Property and the Lessee shall purchase all of the Property as of such date substantially in accordance with the provisions of Section 18.1(b) hereof. ARTICLE XVIII PURCHASE; RENEWAL; REMARKETING Section 18.1. Purchase Option. Subject to the conditions contained herein, the Lessee shall have the option ("Purchase Option") to purchase from the Lessor all of the Lessor's interest in and to the Property for the price ("Purchase Option Price") set forth below. (a) Purchase of Property. The Lessee shall have the irrevocable option to acquire all, but not less than all, of the Lessor's interest in and to the Property on (x) any Basic Rent Payment Date or (y) the Maturity Date, at a Purchase Option Price equal to the Outstanding Lease Balance of this Master Lease plus all accrued and unpaid Basic Rent and any Supplemental Rent due and owing under the Participation Agreement and the other Operative Documents, with the amount of such Outstanding Lease Balance, Basic Rent and Supplemental 35 Master Lease Rent to be determined as of such date of purchase. The Lessee's exercise of its option pursuant to this clause (a) shall be subject to the following conditions: (i) if the purchase date is not the Maturity Date, then the Lessee shall have delivered a Purchase Notice at least sixty (60) days prior to such purchase date; (ii) if the Lessee has not delivered to the Lessor a Remarketing Notice pursuant to Section 18.3(a) hereof three hundred and sixty-four (364) days prior to the Maturity Date, then a Purchase Notice designating the Maturity Date as the purchase date shall be deemed delivered; and (iii) no Lease Default or Lease Event of Default shall have occurred and be continuing, unless such Lease Default or Lease Event of Default can be reasonably expected to be cured prior to the purchase date. Any Purchase Notice delivered in connection with an acquisition of the Lessor's fee interest in and to the Property pursuant to this clause (a) shall be irrevocable upon delivery thereof. Provided that no Lease Default, Lease Event of Default, Acceleration Event or Unmatured Acceleration Event shall have occurred and be continuing, the Lessor shall act in good faith to accommodate any refinancing activities undertaken by the Lessee which are scheduled to take effect within ninety (90) days prior to the Maturity Date. (b) Procedures Upon Exercise of a Purchase Option. If the Lessee exercises the Purchase Option pursuant to this Section 18.1 then, upon the receipt by the Lessor of the Purchase Option Price and all other amounts due in connection therewith and the satisfaction of any additional conditions specified in Section 18.1(a) hereof, the Lessor shall transfer to the Lessee or its designee all of the Lessor's right, title and interest in and to the Property in accordance with the terms and procedures set forth in Section 19.1(a) hereof, such transfer to be effective as of the date specified in the Purchase Notice. The Lessee may designate, in a notice given to the Lessor not less than ten (10) Business Days prior to the closing of such purchase (time being of the essence), the transferee or transferees to whom the conveyance shall be made (if other than to the Lessee), in which case such conveyance shall (subject to the terms and conditions set forth herein) be made to such designee; provided, however, that such designation of a transferee or transferees shall not cause the Lessee to be released, fully or partially, from any of its Obligations, including, without limitation, the obligation to pay to the Lessor the Purchase Option Price on the date specified in the Purchase Notice. Section 18.2. Renewal Option. (a) Renewal Option. Subject to the fulfillment of each of the conditions set forth in this Section 18.2, the Lessee shall have the option (the "Renewal Option") to extend the Lease Term for all (but not less than all) of the Property for one (1) year (the "Renewal Term") with such Renewal Term to commence on the first day following the last day of the Lease Term and to end on (but not include) the first anniversary of such day (or, if such anniversary is not a Business Day, the next succeeding Business Day). (b) Conditions to Exercise of Renewal Option. The effective exercise and consummation of the Renewal Option by the Lessee and the extension of the Lease Term 36 Master Lease through the Renewal Term shall be subject to the due and timely fulfillment of each of the following provisions as of the dates set forth below: (i) Not later than four hundred (400) days prior to the Maturity Date, the Lessee shall have delivered to the Agent on behalf of the Lessor an irrevocable written notice of its election of the Renewal Option (a "Renewal Notice"); (ii) On both the date of delivery of the Renewal Notice and on the Maturity Date then in effect, (x) no Lease Event of Default or Lease Default under this Master Lease shall exist, and (y) by delivery of the Renewal Notice, the Lessee shall be deemed to represent to the Lessor as to the matters set forth in clause (x) of this condition (b)(ii); (iii) The Lessee shall not have given notice of its intention to exercise the Remarketing Option under this Master Lease; (iv) The Liquidity Banks or other Eligible Assignees shall have extended the Expiration Date as provided pursuant to Section 15.17(a) of the Participation Agreement and shall have made a coextensive extension under the Liquidity Documentation; (v) The conditions precedent set forth in Section 15.17(g) of the Participation Agreement shall have been satisfied; and (vi) The Lessor and the Lessee shall have agreed to execute mutually acceptable documentation governing the terms of the renewal, based upon the then market conditions. Section 18.3. Remarketing Option. Subject to the fulfillment of each of the conditions set forth in this Section 18.3 and in Section 18.4 hereof (all of such conditions, collectively, the "Return Conditions"), the Lessee may elect to remarket the Property (such election being referred to as the "Remarketing Option"). The effective exercise and consummation of the Remarketing Option by the Lessee shall be subject to the due and timely fulfillment of each of the following provisions as of the dates set forth below. (a) Not later than three hundred and sixty-four (364) days prior to the Maturity Date, the Lessee shall have given to the Lessor and the other Lessor Parties written notice (a "Remarketing Notice") of the Lessee's exercise of the Remarketing Option, which exercise shall be irrevocable. (b) On the date of the Lessee's notice to the Lessor of the Lessee's exercise of the Remarketing Option, no Lease Event of Default or Lease Default under this Master Lease or Acceleration Event or Unmatured Acceleration Event shall exist, and thereafter, no Lease Event of Default or Lease Default under this Master Lease or Acceleration Event or Unmatured Acceleration Event shall occur. (c) Not later than sixty (60) days prior to the Lease Termination Date, the Lessee shall deliver to the Lessor and the other Lessor Parties (x) an Environmental Audit for the 37 Master Lease Property and (y) an ALTA Survey with respect to the Property. Each Environmental Audit described in this clause (c) shall be prepared by an environmental consultant selected by the Agent in the Agent's reasonable discretion and shall contain conclusions reasonably satisfactory to the Agent as to the environmental status of the Property. If any such Environmental Audit indicates any exceptions, the Lessee shall have also delivered prior to the Lease Termination Date a Phase Two environmental assessment by such environmental consultant and a written statement by such environmental consultant indicating that all such exceptions have been remedied in compliance with Applicable Law. Each ALTA Survey delivered pursuant to this clause(c) shall be reasonably satisfactory to the Agent. (d) The Lessee shall have completed all Modifications, restoration and rebuilding of the Property required pursuant to Sections 10.2 and 14.2 hereof (as the case may be) and shall have fulfilled all of the conditions and requirements in connection therewith pursuant to such Sections, in each case prior to the date on which the Lessee delivers its Remarketing Notice (time being of the essence), regardless of whether the same shall be within the Lessee's control. The Lessee shall have also paid the cost of all Modifications commenced prior to the Lease Termination Date. All Modifications shall have been completed in compliance with all Applicable Laws and Insurance Requirements. The Lessee shall not be relieved pursuant to Section 12.1 from complying with any Applicable Law relating to the Property that involved the extension of the ultimate imposition of such Applicable Law beyond the Lease Termination Date. All Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) of the definition of Permitted Liens (to the extent expressly consented to in writing by the Lessor on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2) and (x) of the definition of "Permitted Liens") on the Property or any part thereof shall have been removed. (e) During the Marketing Period, the Lessee shall, as nonexclusive agent for the Lessor, use best commercial efforts to obtain cash bids for the acquisition of all of the Lessor's interest in and to the Property and will attempt in good faith to obtain the highest purchase price for the Property and for not less than the Fair Market Value of the Property; provided, however that the Lessor or the Agent may, but shall be under no obligation to, market the Property during the Marketing Period. In the event that the Lessee receives any bid(s) for the Property, the Lessee shall, within five (5) Business Days after its receipt thereof and at least twenty (20) Business Days prior to the Lease Termination Date, certify to the Lessor and the Agent in writing the amount and terms of such bid(s), and the name and address of the party or parties submitting such bid. The Lessee shall bear its own expenses and pay, as Supplemental Rent, the expenses of the Lessor, the Note Purchaser, the Agent and the Liquidity Banks in connection with any such bidding and sale process pursuant to this Section 18.3, as well as all costs and expenses incurred by any Person (including a buyer or potential buyer) to cause the Property to be in the condition required by this Section 18.3 and all costs of repairs, modifications or improvements desired by any such buyer(s). (f) The Lessee shall promptly upon request permit inspection of the Property and any maintenance records relating to the Property by the Lessor and any potential purchaser(s), and shall otherwise do all things reasonably necessary to sell and deliver possession of the Property to any purchaser(s) thereof. 38 Master Lease (g) The Lessee shall use all efforts reasonably requested by the Agent to procure bids from one or more bona fide prospective purchasers and deliver the same, if any, to the Lessor (with a copy to the Agent) not less than twenty (20) days prior to the Lease Termination Date. No such purchaser shall be the Lessee or any Subsidiary or Affiliate of the Lessee or any Person with whom the Lessee has an understanding or arrangement regarding the future use of the Property by the Lessee or such Subsidiary or Affiliate, but such purchaser may be the Lessor, the Note Purchaser, the Agent, any Liquidity Bank, any Affiliate of the foregoing or any Person contacted by the Lessor, the Agent, the Note Purchaser or any Liquidity Bank. Each written offer must specify the Lease Termination Date as the effective date of the sale unless the Lessor, the Agent, and the Note Purchaser shall otherwise agree, each in its sole discretion. (h) The Lessee shall submit all bids, if any, to the Lessor (with a copy to the Agent) and the Lessor and the other Lessor Parties will have the right to submit any one or more bids. Any sale by the Lessee shall be for the highest cash bid submitted to the Lessor. The determination of the highest bid shall be made by the Agent prior to the end of the Marketing Period, but in no event shall the Agent have any obligation to approve any bid unless such bid, together with the Maximum Recourse Amount, if funded, equals or exceeds the sum of the Outstanding Lease Balance and all accrued and unpaid Basic Rent and Supplemental Rent. All bids shall be on an all-cash basis unless the Agent, the Lessor and the other Lessor Parties shall otherwise agree. (i) In connection with any such sale of the Lessor's interest in and to the Property, the Lessee will provide to the purchaser all customary "seller's" indemnities and representations and warranties regarding title, absence of Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) of the definition of Permitted Liens (to the extent expressly consented to in writing by the Lessor on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2) and (x) of the definition of "Permitted Liens") and the condition of the Property as reasonably required by the Lessor, including, without limitation, an environmental indemnity, to the extent the same are reasonably requested by the purchaser and factually accurate. The Lessee shall have obtained, at no cost or expense to the Lessor, all required governmental and regulatory consents and approvals and shall have made all filings as required by Applicable Law in order to carry out and complete the transfer of the Property. As to the Lessor, any such sale shall be made on an "as is, with all faults" basis without representation or warranty by the Lessor other than as to the absence of Lessor Liens. Any agreement as to such sale shall be made subject to the Lessor's rights to receive the proceeds of such sale in cash up to an amount equal to the Outstanding Lease Balance on the date of such sale, plus all accrued and unpaid Basic Rent plus any Supplemental Rent due and owing (including any amounts due under the Participation Agreement). (j) The Lessee shall pay directly, and not from the sale proceeds, all prorations, credits, costs and expenses of any such sale of the Property, whether incurred by the Lessor or the Lessee, including the cost of all title insurance, surveys, Environmental Audits and other environmental reports, appraisals, transfer taxes, the reasonable attorneys' fees of the Lessor, commissions, escrow fees, recording fees and all applicable documentary and other transfer taxes. 39 Master Lease (k) On or prior to the Lease Termination Date, the Lessee shall, whether or not any or all of the Property has been sold, pay or cause to be paid to the Agent for repayment of the outstanding balance of the Notes and the Equity Investment in the manner and priority specified in Article XI of the Participation Agreement (or in the case of Supplemental Rent, to the Person entitled thereto) on a Basic Rent Payment Date, in the type of funds specified in Section 3.2 hereof, an amount equal to the sum of (u) all unpaid Basic Rent due on or prior to the Lease Termination Date, plus (v) the gross sale proceeds, if any (less any marketing, closing or other costs, prorations for property taxes and utility charges or commissions related to the sale of the Property) (the "Gross Remarketing Proceeds") of the sale of the Property pursuant to this Section 18.3 hereof, plus (x) the excess, if any, of the Outstanding Lease Balance over the Gross Remarketing Proceeds (provided, that so long as no Lease Default, Lease Event of Default, Acceleration Event or Unmatured Acceleration Event shall have occurred and be continuing, the amount of such excess so payable shall not be greater than the Maximum Recourse Amount ), plus (y) without duplication, all Supplemental Rent due and owing on the Lease Termination Date after giving effect to such payment plus (z) all other amounts under the Operative Documents which have accrued or will accrue prior to or as of the Lease Termination Date. (l) The Lessee shall pay to the Lessor on or prior to the Lease Termination Date the amounts, if any, required to be paid pursuant to the Participation Agreement. (m) The sale of the Property shall be consummated on the Lease Termination Date and the Gross Remarketing Proceeds of the sale of the Property shall be paid directly to the Lessor. (n) To the extent that the Gross Remarketing Proceeds from such sale exceeds the Outstanding Lease Balance, any Supplemental Rent then due and owing, and together with any unpaid Basic Rent, then the excess arising hereunder (the "Excess Remarketing Proceeds"), shall be paid to the Lessee on the Lease Termination Date (provided that the Lessee shall have paid all amounts due pursuant to clause (k) above). If the Property has not been sold on or prior to the Lease Termination Date and any such sale is consummated at any time thereafter, then, if after giving effect to such sale there would be any Excess Remarketing Proceeds, the Lessor shall remit to the Lessee, promptly after the consummation of such sale, an amount equal to the Excess Remarketing Proceeds minus the Imputed Return, determined as of the date of such sale. Section 18.4. Procedures If No Sale During Marketing Period. If the Lessee effectively elects the Remarketing Option and each of the conditions and requirements set forth in Section 18.3 hereof shall have been satisfied, but, nevertheless, the Lessee is unable to obtain bids for the Property satisfactory to the Agent pursuant to Section 18.3(h) above and the Property remains unsold at the end of the Marketing Period, then the Lessee shall, in addition to making the payments required pursuant to Sections 18.3(k) and 18.3(l) above, return the Property to the Lessor (or to any other Person specified by the Lessor). In connection with such return of the Property, the Lessee shall, at its own cost and expense, do each of the following or otherwise comply with this Section 18.4: (a) the Lessee shall, on or prior to the Lease Termination Date, execute and deliver to the Lessor (or to the Lessor's designee) (A) a certificate of the Lessee containing representations and warranties regarding the absence of Liens (other than Permitted Liens of the type described 40 Master Lease in clauses (i), (vii), (viii) and (ix) (to the extent expressly consented to in writing by the Lessor by or on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2 hereof) and (x) of the definition of "Permitted Liens"), (B) if applicable or required, a bill of sale with respect to all equipment and other personal property comprising part of the Property and (C) a deed or other conveyance instrument of the Lessee's entire interest in the Property (which shall include an assignment of all of the Lessee's right, title and interest in and to any Loss Proceeds with respect to the Property and an assignment of all leases and subleases the Property), in each case in recordable form and otherwise in conformity with local custom and free and clear of any Liens attributable to the Lessee; (b) the Lessee shall execute and deliver to the Lessor and the Lessor's title insurance company an affidavit in customary form as to the absence of any Liens (other than Permitted Liens of the type described in clauses (i), (vii), (viii) and (ix) (to the extent expressly consented to in writing by the Lessor by or on behalf of the Consenting Parties) or relating to an easement, dedication or other transfer that was permitted at the time made pursuant to Section 11.2 hereof) and (x) of the definition of "Permitted Liens"), and shall execute and deliver to the Lessor a statement of termination of this Master Lease; (c) the Lessee shall, on the Lease Termination Date, (i) vacate the Property and, at the request of the Lessor, cause any Subtenant or other sublessee of the Property to vacate the Property, and (ii) transfer possession of the Property to the Lessor or any Person designated by the Lessor, in each case by surrendering the same into the possession of the Lessor or such Person, as the case may be, in the condition required by the Return Conditions and in compliance with Applicable Law; (d) on or prior to the Lease Termination Date, the Lessee shall deliver to the Lessor or any Person designated by the Lessor copies of all books and records in any Lessee Parties' possession or control regarding the maintenance and ownership of the Property, a current copy of the plans and specifications for the Improvements and an assignment of all assignable licenses necessary for the operation and maintenance of the Property; (e) the Lessee shall, for so long as the Lessor shall own the Property, cooperate reasonably with the Lessor and/or any Person designated by the Lessor to receive the Property, which cooperation shall include seeking and obtaining all necessary Governmental Action. The obligations of the Lessee under this paragraph shall survive the expiration or termination of this Master Lease; and (f) in the event that the Lessor disposes of the Property after the Remarketing Period, the Lessee shall be entitled to receive the surplus, if any of (i) the sum of (A) all amounts paid to the Lessor pursuant to Sections 18.3(k) and 18.3(l) hereof plus (B) the net sales proceeds of the disposition of the Property, over (ii) the sum of (A) the Outstanding Lease Balance plus (B) any costs incurred by the Lessor in respect of the Property which have not been otherwise paid by the Lessee or the Guarantor plus (C) any unpaid Basic Rent or Supplemental Rent plus (D) the Imputed Returns. Section 18.5. Failure to Comply with Remarketing Conditions. If one or more of the provisions of the Return Conditions shall not be fulfilled as of the applicable date set forth in such provision (time being of the essence), then the Lessor (without prejudice by any delay in doing so) shall declare by written notice to the Lessee the Remarketing Option to be null and void (whether or not it has been theretofore exercised by the Lessee), in which event all of the rights of the Lessee under Section 18.3 hereof shall immediately terminate and, as a consequence of the Lessee's failure to comply with such Remarketing Conditions, the Lessee shall be deemed to have exercised its Purchase Option with respect to the Property and the Lessee shall purchase all of the Property on the Lease Termination Date in accordance with the provisions of Section 18.1(b) hereof. 41 Master Lease Section 18.6. Sales. Except as expressly set forth in Section 18.3 hereof, the Lessee shall not have the right, power or authority to bind the Lessor in connection with any proposed sale of any Property. The Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of the Lessee to obtain bids or otherwise to take action in connection with any such sale. Section 18.7. Certain Obligations Continue. During the Marketing Period, the obligations of the Lessee to pay Basic Rent and Supplemental Rent with respect to the Property (including any installment of Rent due on the Lease Termination Date) shall continue undiminished. Section 18.8. Deemed Election. Failure by the Lessee to deliver a Remarketing Notice or Purchase Notice on or prior to the date occurring three hundred and sixty-four (364) days prior to the Maturity Date shall be deemed to be an election by the Lessee, without further act thereby, of the Purchase Option described in Section 18.1(a) hereof, with such purchase to be consummated on the Lease Termination Date. ARTICLE XIX PROCEDURES RELATING TO PURCHASE OR REMARKETING Section 19.1. Provisions Relating to the Exercise of Purchase Option, Conveyance Upon Remarketing and Conveyance Upon Certain Other Events. (a) Conveyance Upon Purchase by the Lessee, Etc. In connection with any termination of this Master Lease with respect to the Property pursuant to the terms of Article XVI hereof, in connection with any purchase or in connection with the Lessee's acquisition of the Lessor's interest in and to the Property in accordance with Section 18.1 hereof or in connection with the Lessee's obligations under Article XVI or Section 17.3(f) or 18.5 hereof, then, upon the date on which this Master Lease is to terminate with respect to the Property and upon tender by the Lessee of the amounts set forth in Article XVI, Sections 17.3(f), 18.1(a), or 18.5 hereof as applicable: (i) the Lessor shall execute and deliver to the Lessee (or to the Lessee's designee), at the Lessee's cost and expense, a grant deed and a bill of sale or other appropriate conveyance document with respect to all buildings and containing representations and warranties of grantor regarding the absence of Lessor Liens and a 42 Master Lease conveyance of the Lessor's entire interest in the Property (which shall include an assignment of all of the Lessor's right, title and interest in and to any net insurance proceeds with respect to the Property not previously received by the Lessor and an assignment and assumption of leases of such Property), in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Master Lease and the Memoranda of Lease, any other Liens created by the Operative Documents that are attributable to the Lessor Parties, and any Lessor Liens; (ii) the Property shall be conveyed to the Lessee "AS IS" and in its then present physical condition; and (iii) the Lessor shall, at the Lessee's sole cost and expense, execute and deliver to the Lessee and the Lessee's title insurance company an affidavit as to the Lessor's title to the Property and the absence of Lessor Liens attributable to the Lessor on the Property, and shall, at the Lessee's sole cost and expense, (x) execute and deliver to the Lessee a statement of termination of this Master Lease with respect to the Property and the Memorandum of Lease covering the Property and releases of any Liens on the Property created by the Operative Documents attributable to the Lessor and (y) use reasonable commercial efforts to obtain terminations of any Liens on the Property which may be held by the Agent, including, in each case, termination statements for any financing statements which are then of record naming the Lessor or the Agent, as the case may be, as the secured party with respect to the Property. (b) Conveyance Upon Remarketing. If the Lessee properly exercises the Remarketing Option in accordance with the terms hereof, then the Lessee shall, on the Lease Termination Date and at its own cost, transfer possession of each Improvement (including all Property thereon) to the Lessor or, if such Property is to be sold in accordance with Section 18.3 hereof, to the independent purchaser thereof, in each case in accordance with the provisions of Section 18.3 hereof. ARTICLE XX RIGHT OF QUIET ENJOYMENT Section 20.1. Quiet Enjoyment. Subject to Section 4.2 and Articles XVI and XVII hereof, Section 8.1(e) of the Participation Agreement and Article VI of the Construction Agency Agreement, the Lessor agrees that so long as no Lease Event of Default has occurred and is continuing, it shall not interfere in the Lessee's use of the Property in accordance with this Master Lease during the Lease Term; it being agreed that the Lessee's remedies for breach of the foregoing covenant shall be limited to a claim for damages or the commencement of proceedings to enjoin such breach. Such right is independent of, and shall not affect, the Lessor's rights otherwise to initiate legal action to enforce the obligations of the Lessee under this Master Lease. ARTICLE XXI ACCEPTANCE OF SURRENDER; NO MERGER OF TITLE; ESTOPPEL EQUITY INVESTMENT Section 21.1. Acceptance of Surrender. Except as otherwise provided herein, no surrender to the Lessor of this Master Lease or of any or all of the Property or of any part of any thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by the Lessor and prior to the payment or performance of all obligations required to be paid or performed hereunder and no act by the Lessor or any representative or agent of the Lessor, other than a written acceptance, shall constitute an acceptance of any such surrender. Section 21.2. No Merger of Title. There shall be no merger of this Master Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (i) this Master Lease or the leasehold estate created hereby or any interest in this Master Lease or such leasehold estate or (ii) the fee or leasehold estate in any or all of the Property, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person. 43 Master Lease Section 21.3. Estoppel Certificate. At any time and from time to time upon not less than ten (10) Business Days' prior request by the Lessor or the Lessee (the "Requesting Party"), the other party (whichever party shall have received such request, the "Certifying Party") shall furnish to the Requesting Party a certificate in a form prepared by the Requesting Party and reasonably satisfactory to the Certifying Party, signed by an authorized officer of the Certifying Party (or, in the case of the Lessee, a Responsible Officer) certifying that this Master Lease is in full force and effect (or that this Master Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not the Requesting Party is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Master Lease as the Requesting Party may reasonably request. Any such certificate furnished pursuant to this Article XXI may be relied upon by the Requesting Party, and any existing or prospective mortgagee, Purchaser or lender, and any accountant or auditor, of, from or to the Requesting Party (or any Affiliate thereof). ARTICLE XXII LESSOR'S RIGHT TO CURE Section 22.1. The Lessor's Right to Cure the Lessee's Lease Defaults. The Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to), remedy any Lease Event of Default for the account and at the sole cost and expense of the Lessee, including the failure by the Lessee to maintain the insurance required by Article XIII hereof, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of the Lessee or any Subtenant, enter upon the Property for such purpose and take all such action thereon as the Lessor may reasonably determine to be necessary or appropriate therefor, and the Lessor shall give prompt notice thereof to the Lessee. No such entry shall be deemed an eviction of the Lessee. All reasonable out-of-pocket costs and expenses so incurred (including fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by the Lessor, shall be paid by the Lessee to the Lessor or to such other Person as may be entitled thereto as Supplemental Rent. ARTICLE XXIII INTENT OF THE PARTIES Section 23.1. Nature of Transaction. (a) It is the intent of the parties hereto that for bankruptcy and federal, state and local income tax purposes, but not for financial accounting purposes, the transaction contemplated hereby is a financing arrangement and preserves ownership of Property in the Lessee. 44 Master Lease (b) Notwithstanding anything to the contrary contained herein, it is the intent of the parties hereto that the obligations of the Lessee under this Master Lease to pay (x) Basic Rent and Supplemental Rent and (y) Outstanding Lease Balance or Purchase Option Price in connection with any purchase of the Property pursuant to this Master Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the other Lessor Parties to the Lessee, and this Master Lease, the Memorandum of Lease, or the Precautionary Deed of Trust, covering the Property grant a security interest and deed of trust or lien, as the case may be, on all of the Property to the Lessor to secure the Lessee's performance under and payment of all amounts under this Master Lease and the other Operative Documents (other than the Guaranty), including all amounts advanced by the Lessor, Note Purchaser and/or the Liquidity Banks for the payment of the Outstanding Lease Balance under the Participation Agreement and all other amounts payable under the Operative Documents in connection therewith. Section 23.2. Agreement to Pay Maximum Recourse Amount . In furtherance of the intent of the parties as set forth in Section 23.1 above and as set forth in Article V of the Participation Agreement, the Lessee hereby absolutely, unconditionally and irrevocably (1) agrees to pay in full when due (after giving effect to any applicable grace period), whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, all amounts owing to the Lessor Parties (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. ss.502(b) and ss.506(b)), and (2) indemnifies and holds harmless the Lessor Parties for any and all costs and expenses (including reasonable attorneys' fees and expenses) incurred by such Person in enforcing any rights under this Section 23.2. ARTICLE XXIV MISCELLANEOUS Section 24.1. Survival, Severability; etc. Anything contained in this Master Lease to the contrary notwithstanding, all claims against and liabilities of the Lessee or the Lessor arising from events commencing prior to the expiration or earlier termination of this Master Lease shall survive such expiration or earlier termination for a period of one year except as to indemnification which shall continue to survive. If any term or provision of this Master Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Master Lease and any other application of such term or provision shall not be affected thereby. Section 24.2. Amendments and Modifications. Subject to the requirements of the Participation Agreement, neither this Master Lease nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by the Lessor and the Lessee and consented to by the Consenting Parties. The Lessor agrees that, at any time that Commercial Paper is outstanding, it shall provide (x) Moody's and S&P with written notice of any material amendment to this Master Lease and (y) the Lessee and the Lessor Parties with a copy of any such notice delivered to Moody's or S&P. Section 24.3. No Waiver. No failure by the Lessor or the Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Master Lease, and this Master Lease shall continue in full force and effect with respect to any other then existing or subsequent default. 45 Master Lease Section 24.4. Notices. All notices, demands, requests, consents, approvals and other communications hereunder shall be in writing and directed to the address described in, and deemed received in accordance with the provisions of Section 15.3 of the Participation Agreement. Section 24.5. Successors and Assigns. All the terms and provisions of this Master Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Lessee may not assign this Master Lease or any of its rights or obligations hereunder in whole or in part to any Person without the prior written consent of the Lessor Parties (each in its sole and absolute discretion); provided, however, that the Lessee may sublease the Property as permitted under Section 6.1 hereof. The Lessor may not assign this Master Lease or any of its rights or obligations hereunder in whole or in part to any Person except as permitted or as may be contemplated by the Operative Documents. Section 24.6. Headings and Table of Contents. The headings and table of contents in this Master Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Section 24.7. Counterparts. Subject to Section 24.10 hereof, this Master Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. Section 24.8. GOVERNING LAW. THIS MASTER LEASE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. Section 24.9. WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS MASTER LEASE AND/OR ANY OF THE OTHER OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF SUCH PARTIES. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT THEY HAVE RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS MASTER LEASE AND EACH SUCH OTHER OPERATIVE DOCUMENT. 46 Master Lease Section 24.10. Original Lease. The single executed original of this Master Lease marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof shall be the original Executed Counterpart of this Master Lease (the "Original Executed Counterpart"). To the extent that this Master Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Master Lease may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. Section 24.11. Tax Representation; Tax Forms. (a) The Lessor represents that, with respect to indebtedness of the Lessee for federal income tax purposes (and assuming that the payments of (x) Basic Rent and (y) Purchase Option Price, Outstanding Lease Balance or Maximum Recourse Amount, as the case may be, are treated for federal income tax purposes as payments of interest and principal, respectively), it is entitled to receive any payments to be made to it by the Lessee hereunder without the withholding of any U.S. federal income tax and will furnish to the Lessee such certifications, statements and other documents as are reasonably requested by the Lessee to evidence the Lessor's exemption from the withholding of any U.S. federal income tax or to enable the Lessee to comply with any applicable laws or regulations relating thereto. (b) Without limiting the effect of the foregoing clause (a), if the Lessor is not created or organized under the laws of the United States or any state or political subdivision thereof, the Lessor will furnish to the Lessee, to the extent required for U.S. federal income tax purposes and permitted by applicable law, Internal Revenue Service Form W-8 BEN or Form W-8 ECI or any subsequent versions of such forms or successors thereto as evidence of the Lessor's complete exemption from the withholding of U.S. federal income tax with respect to indebtedness of the Lessee for federal income tax purposes. Such forms shall be delivered by the Lessor (i) on or before the date the Lessor becomes a party to this Master Lease and promptly before the expiration, obsolescence or invalidity of any form previously delivered by the Lessor and (ii) before or promptly after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Lessee pursuant to this Section 24.11, unless, in the case of either clause (i) or (ii), as a result of the adoption of or a change in applicable law (including any statute, treaty, ruling or regulation by a governmental, judicial or taxing authority) occurring after the date on which a form was originally required to be provided, the Lessor is not entitled to 47 Master Lease provide such a form. The Lessee shall be entitled to rely on such forms in its possession until receipt of any revised or successor form pursuant to the preceding sentence. (c) For any period with respect to which the Lessor is required under clause (b) above to furnish the Lessee with the appropriate forms described in such clause (b) but has failed to do so (other than if such failure is due to the adoption of or a change in applicable law as described in the second sentence of clause (b) above), the Lessor shall not be entitled to any indemnification with respect to Impositions under Section 13.5 of the Participation Agreement, increased costs with respect to Section 4.4 of the Participation Agreement or additional payments with respect to Other Taxes under Section 4.6 of the Participation Agreement to the extent that such Impositions, increased costs or Other Taxes are imposed as a result of such failure. Section 24.12. Limitation on Liability of the Lessor. The parties hereto agree that the Lessor shall have no personal liability whatsoever to the Lessee or its respective successors and assigns for any Claim based on or in respect of this Master Lease or any of the other Operative Documents or arising in any way from the transactions contemplated hereby or thereby; provided, however, that the Lessor shall be liable for its own willful misconduct or gross negligence (or negligence in the handling of funds), for liabilities that may result from the incorrectness of any representation or warranty expressly made by it in Section 7.4 of the Participation Agreement or from the failure of the Lessor to perform its covenants and agreements set forth in the Participation Agreement, or for any Tax based on or measured by any fees, commission or compensation received by it for acting as a Lessor as contemplated by the Operative Documents. It is understood and agreed that, except as provided in the preceding proviso, the Lessor shall have no personal liability under any of the Operative Documents as a result of acting pursuant to and consistent with any of the Operative Documents; all obligations of the Lessor to the Lessee are solely nonrecourse obligations except, as to the Lessor, to the extent that the Lessor has received payment from others; all such personal liability of the Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Documents by the Lessor. Section 24.13. No Joint Venture. Any intention to create a joint venture or partnership relation between the Lessor and the Lessee is hereby expressly disclaimed. Section 24.14. No Accord and Satisfaction. The acceptance by the Lessor of any sums from the Lessee (whether as Basic Rent or otherwise) in amounts which are less than the amounts due and payable by the Lessee hereunder is not intended, nor shall be construed, to constitute an accord and satisfaction of any dispute between the Lessor and the Lessee regarding sums due and payable by the Lessee hereunder, unless the Note Purchaser and the Agent specifically deem it as such in writing. Section 24.15. Further Assurances. Each party hereto shall promptly and duly execute and deliver to the other party such documents and assurances and take such further action as the requesting party may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Master Lease and the other Operative Documents to which the Lessee is a party, to establish and protect the rights and remedies created or intended to be created in favor of the parties hereunder and thereunder, and to establish, perfect and maintain the right, title and interest of the Lessor in and to the Property established hereunder. 48 Master Lease IN WITNESS WHEREOF, the parties have caused this Master Lease be duly executed and delivered as of the date first above written. ELECTRONIC ARTS REDWOOD, INC., as the Lessee By: ------------------------------------------ Name: Khuyen Dang Title: Chief Financial Officer 49 Master Lease -Master Lease- SELCO SERVICE CORPORATION, as the Lessor By: ----------------------------------------- Name: Donald Davis Title: Vice President 50 Master Lease - Master Lease - Acknowledged by: FIRST AMERICAN TITLE INSURANCE COMPANY By: ------------------------------------------ Authorized Signatory 51 Master Lease - Master Lease - THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART. Receipt of this original counterpart of the foregoing Master Lease is hereby acknowledged as of the date hereof. KEYBANK NATIONAL ASSOCIATION, as the Agent By: ----------------------------------- Name: Title: 52
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS................................................................................1 Section 1.1. Definitions; Interpretation...........................................................1 ARTICLE II LEASE OF IMPROVEMENTS......................................................................1 Section 2.1. Acceptance and Lease of the Property..................................................1 Section 2.2. Acceptance Procedure..................................................................2 Section 2.3. Lease Term............................................................................2 Section 2.4. Title/Risk of Loss....................................................................2 ARTICLE III PAYMENT OF RENT............................................................................2 Section 3.1. Basic Rent............................................................................2 Section 3.2. Supplemental Rent.....................................................................2 Section 3.3. Non-Payment of Rent...................................................................3 Section 3.4. Security Deposit......................................................................4 Section 3.5. Method of Payment.....................................................................4 Section 3.6. Non-Business Day Payments.............................................................4 Section 3.7. Assignment of Basic Rent and Other Payments...........................................4 ARTICLE IV RIGHTS OF THE LESSEE; INSPECTION RIGHTS; REPORTS...........................................4 Section 4.1. Rights of the Lessee..................................................................4 Section 4.2. Inspection Rights.....................................................................4 Section 4.3. Reports...............................................................................5 ARTICLE V NET LEASE, ETC.............................................................................5 Section 5.1. Net Lease.............................................................................5 Section 5.2. No Termination or Abatement...........................................................6 ARTICLE VI ASSIGNMENT BY THE LESSEE; SUBLEASING.......................................................6 Section 6.1. General...............................................................................6 Section 6.2. Subletting............................................................................7 Section 6.3. Assignment of Subleases...............................................................7 ARTICLE VII LESSEE ACKNOWLEDGMENTS.....................................................................7 Section 7.1. Condition of the Property.............................................................7 Section 7.2. Acknowledgment of Note Purchases, Equity Investment and Lease Assignment..............8 -i- ARTICLE VIII POSSESSION AND USE OF THE PROPERTY, ETC....................................................8 Section 8.1. Utility Charges.......................................................................8 Section 8.2. Possession and Use of the Property....................................................8 Section 8.3. Compliance with Applicable Laws and Insurance Requirements............................9 ARTICLE IX MAINTENANCE AND REPAIR.....................................................................9 Section 9.1. Construction of Improvements..........................................................9 Section 9.2. Maintenance and Repair................................................................9 Section 9.3. Return of Property to the Lessor......................................................9 Section 9.4. No Duty of the Lessor to Maintain.....................................................9 ARTICLE X MODIFICATIONS.............................................................................10 Section 10.1. Modifications During the Construction Period.........................................10 Section 10.2. Modifications During the Base Lease Term.............................................10 Section 10.3. Consent to Modifications.............................................................11 ARTICLE XI WARRANTY OF TITLE; EASEMENTS..............................................................11 Section 11.1. Warranty of Title....................................................................11 Section 11.2. Lessee's Grants and Releases of Easements; Lessor's Waivers..........................12 ARTICLE XII PERMITTED CONTESTS........................................................................13 Section 12.1. Permitted Contests in Respect of Applicable Law, Mechanics' Liens and Utility Charges..............................................................................13 ARTICLE XIII INSURANCE.................................................................................14 Section 13.1. Description of Required Coverage.....................................................14 Section 13.2. Delivery of Certificate of Insurance.................................................15 Section 13.3. No Negation of Certain Other Obligations.............................................16 Section 13.4. Adjustment and Disbursement of Proceeds, etc.........................................16 Section 13.5. No Insurance by the Lessor, Note Purchaser, the Conduit Agent or the Agent...........16 ARTICLE XIV RISK OF LOSS; CASUALTY AND CONDEMNATION; ENVIRONMENTAL MATTERS............................16 Section 14.1. Risk of Loss, Damage or Destruction During the Construction Period...................16 Section 14.2. Risk of Loss, Damage or Destruction During the Base Lease Term or Following the Occurrence and Continuance of a Lease Default or Lease Event of Default or To the Extent Arising as a Result of Any of the Lessee's Actions or Failures To Act...............................................................................17 -ii- Section 14.3. Casualty and Condemnation............................................................17 Section 14.4. Environmental Matters................................................................19 ARTICLE XV GRANT OF LIEN; FORECLOSURE OF LESSEE'S INTEREST; FURTHER ASSURANCES.......................20 Section 15.1. Grant of Lien by the Lessee, Foreclosure of the Lessee's Interest....................20 ARTICLE XVI TERMINATION OF LEASE UPON CERTAIN EVENTS WITH RESPECT TO THE PROPERTY.....................24 Section 16.1. Termination upon Certain Events......................................................24 Section 16.2. Early Termination Procedures.........................................................24 ARTICLE XVII EVENTS OF DEFAULT; UNWIND EVENTS..........................................................25 Section 17.1. Lease Events of Default..............................................................25 Section 17.2. Remedies.............................................................................28 Section 17.3. Lessor's Remedies....................................................................28 Section 17.4. Other Rights of the Lessor...........................................................31 Section 17.5. Excess Proceeds......................................................................31 Section 17.6. Lessee's Right to Purchase...........................................................31 Section 17.7. [Intentionally Omitted]..............................................................32 Section 17.8. Unwind Event Remedies................................................................32 Section 17.9. Procedures If No Sale in Connection with the Exercise of the Unwind Option...........34 Section 17.10. Failure to Comply with Remarketing Conditions in Connection with Exercise of Unwind Option........................................................................35 ARTICLE XVIII PURCHASE; RENEWAL; REMARKETING............................................................35 Section 18.1. Purchase Option......................................................................35 Section 18.2. Renewal Option.......................................................................36 Section 18.3. Remarketing Option...................................................................37 Section 18.4. Procedures If No Sale During Marketing Period........................................40 Section 18.5. Failure to Comply with Remarketing Conditions........................................41 Section 18.6. Sales................................................................................42 Section 18.7. Certain Obligations Continue.........................................................42 Section 18.8. Deemed Election......................................................................42 -iii- ARTICLE XIX PROCEDURES RELATING TO PURCHASE OR REMARKETING............................................42 Section 19.1. Provisions Relating to the Exercise of Purchase Option, Conveyance Upon Remarketing and Conveyance Upon Certain Other Events.................................42 ARTICLE XX RIGHT OF QUIET ENJOYMENT..................................................................43 Section 20.1. Quiet Enjoyment......................................................................43 ARTICLE XXI ACCEPTANCE OF SURRENDER; NO MERGER OF TITLE; ESTOPPEL EQUITY INVESTMENT...................43 Section 21.1. Acceptance of Surrender..............................................................43 Section 21.2. No Merger of Title...................................................................43 Section 21.3. Estoppel Certificate.................................................................44 ARTICLE XXII LESSOR'S RIGHT TO CURE....................................................................44 Section 22.1. The Lessor's Right to Cure the Lessee's Lease Defaults...............................44 ARTICLE XXIII INTENT OF THE PARTIES.....................................................................44 Section 23.1. Nature of Transaction................................................................44 Section 23.2. Agreement to Pay Maximum Recourse Amount.............................................45 ARTICLE XXIV MISCELLANEOUS.............................................................................45 Section 24.1. Survival, Severability; etc..........................................................45 Section 24.2. Amendments and Modifications.........................................................45 Section 24.3. No Waiver............................................................................45 Section 24.4. Notices..............................................................................46 Section 24.5. Successors and Assigns...............................................................46 Section 24.6. Headings and Table of Contents.......................................................46 Section 24.7. Counterparts.........................................................................46 Section 24.8. GOVERNING LAW........................................................................46 Section 24.9. WAIVER OF JURY TRIAL.................................................................46 Section 24.10. Original Lease.......................................................................47 Section 24.11. Tax Representation; Tax Forms........................................................47 Section 24.12. Limitation on Liability of the Lessor................................................48 Section 24.13. No Joint Venture.....................................................................48 Section 24.14. No Accord and Satisfaction...........................................................48 Section 24.15. Further Assurances...................................................................48 -iv-
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