-----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, EmuSqP5KhXPfLUVVbwF7FEPD7IPZhpdvDcOxXIYBta2nIo9sVR/4iebGRGzTm4T0 aMbbPZbFNlSmHiiVJaTvQg== 0001012870-97-001195.txt : 19970624 0001012870-97-001195.hdr.sgml : 19970624 ACCESSION NUMBER: 0001012870-97-001195 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970623 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17948 FILM NUMBER: 97627835 BUSINESS ADDRESS: STREET 1: 1450 FASHION ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4155717171 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC ARTS DATE OF NAME CHANGE: 19911211 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended March 31, 1997 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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.) 1450 FASHION ISLAND BOULEVARD SAN MATEO, CALIFORNIA 94404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 571-7171 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value (Title of class) 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 [_] Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, HELD BY NON-AFFILIATES OF THE REGISTRANT ON JUNE 3, 1997 WAS $1,305,458,993. AS OF JUNE 3, 1997, THERE WERE 54,239,439 SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of Registrant's definitive proxy statement (the "Proxy Statement") for its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. This report consists of 56 sequentially numbered pages. The Exhibit Index is located at sequentially numbered page 56. Page 1 of 56 ELECTRONIC ARTS INC. 1997 FORM 10-K ANNUAL REPORT Table of Contents PAGE ---- PART I Item 1. Business 3 Item 2. Properties 17 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 4A. Executive Officers of the Registrant 19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters 22 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 47 PART III Item 10. Directors and Executive Officers of the Registrant 48 Item 11. Executive Compensation 48 Item 12. Security Ownership of Certain Beneficial Owners and Management 48 Item 13. Certain Relationships and Related Transactions 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49 Signatures 54 Exhibit Index 56 2 PART I THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") CONTAINS FORWARD LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES DISCUSSED IN "FACTORS AFFECTING FUTURE PERFORMANCE" BELOW AT PAGES 29 TO 31. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES. ITEM 1: BUSINESS OVERVIEW Electronic Arts' predecessor was incorporated in California in 1982. In September 1991, Electronic Arts was reincorporated under the laws of Delaware. Unless otherwise indicated, the "Company" or "Electronic Arts," refers to Electronic Arts Inc., a Delaware corporation, its California predecessor and its wholly-owned and majority-owned subsidiaries. Electronic Arts' principal executive offices are located at 1450 Fashion Island Boulevard, San Mateo, California 94404. Its telephone number is (415) 571-7171. Electronic Arts creates, markets and distributes interactive entertainment software for a variety of hardware platforms. As of March 31, 1997, the Company marketed approximately 117 titles developed and/or published under one of its brand names, including older titles marketed as "Classics" or "Publisher's Choice." The Company also distributed approximately 51 additional titles developed by other software publishers ("Affiliated Labels") in North America and over 1,000 Affiliated Label titles in the rest of the world. As of March 31, 1997, the Company had developed 53 titles that had each generated life-to-date net revenues in excess of $10,000,000. Since its inception, the Company has developed products for 36 different computer hardware platforms, including the following: IBM PC-CD and compatibles, Amiga, 8-bit Nintendo Entertainment System (the "NES"), 16-bit Sega Genesis video game system (the "Genesis"), 16-bit Super Nintendo Entertainment System (the "SNES"), Sega CD-ROM (Compact Disc-Read Only Memory) peripheral device, Macintosh CD, 3DO Interactive Multiplayer, the PlayStation ("PlayStation"), the Sega Saturn ("Saturn") and the Nintendo 64 ("N64"). The Company's fiscal 1997 product releases were primarily for PC-CD and 32-bit video game platforms and to a lesser degree 16-bit and N64 cartridge products. As of March 31, 1997, the Company was developing products for 5 different hardware platforms. 3 The Company's product development methods and organization are modeled on those used in the entertainment industry, and the Company markets its products with techniques borrowed from other entertainment companies such as record producers, magazine publishers and video distributors. Company employees called "producers," who are each responsible for the development of one or more products, oversee product development and direct teams comprised of both Electronic Arts employees and outside contractors. Electronic Arts' designers regularly work with celebrities and organizations in sports, entertainment and other areas to develop products that provide gaming experiences that are as realistic and interactive as possible. Celebrities and organizations with whom the Company has had contracts include: FIFA, ROAD & TRACK, John Madden, Shaquille O'Neal, the National Basketball Association, the PGA TOUR, the Pebble Beach Company and the National Hockey League. The Company maintains development studios in California, Canada, United Kingdom, Texas, Japan, Washington and Maryland. The Company invests in the creation of state-of-the-art software tools and utilities that are then used in product development. These tools allow for more cost-effective product development and the ability to more efficiently convert products from one hardware platform to another. The Company has also made investments in new facilities and equipment to facilitate the creation and editing of digital forms of video and audio recordings and product development efforts for new hardware platforms. Additionally, the Company produces film, videotape and audio recordings to include in its products. Two of the Company's subsidiaries, Electronic Arts Productions Inc. (d/b/a Crocodile Productions) and Electronic Arts Productions Ltd., have signed agreements with the Screen Actors Guild ("SAG") and American Federation of Television and Radio Artists ("AFTRA") in the United States and with British Actors Equity Association ("Equity") in the UK, respectively, giving the Company access to a wide range of talent for use in Company-produced film and video for inclusion in the Company's products. See Factors Affecting ----------------- Future Performance - Film and Videotape at page 30. - --------------------------------------- Electronic Arts distributes its products and those of its Affiliated Labels primarily by direct sales to retail chains and outlets in the United States and Europe. In Japan and the South Asia Pacific region, the Company distributes products both directly to retailers and through third party distributors. The Company's products are available in over 52,000 retail locations worldwide. In fiscal 1997, approximately 46% of the Company's net revenues were generated by international operations, compared to 42% and 32% in fiscal 1996 and fiscal 1995, respectively. 4 INVESTMENTS AND JOINT VENTURES Acquisitions ------------ On June 4, 1997, the Company entered into a definitive agreement to merge with Maxis, Inc. ("Maxis"), a California-based interactive software developer. Under the proposed transaction, approximately 4.1 million shares of Electronic Arts' stock will be exchanged for all outstanding Maxis common stock. The transaction, which is anticipated to be completed in the quarter ended September 30, 1997, will be accounted for as a pooling of interests. Investments ----------- The Company has made investments as part of its overall strategy and currently holds minority equity interests in several companies, including NovaLogic, Inc., Tiburon Entertainment, Firaxis Software, Inc., Stormfront Studios, Mpath Interactive, Accolade, Inc. and The 3DO Company ("3DO"). See Factors Affecting Future Performance - Investment In Affiliates at page 31. - --------------------------------------------------------------- Joint Ventures -------------- The Company has a majority interest in a joint venture corporation, Electronic Arts Victor Inc. ("EAV") for the development and distribution of entertainment software products in Japan as well as certain Asian countries. See Note 10 of the Notes to the Consolidated Financial Statements, included in Item 8 hereof. The Company and Capital Cities/ABC, Inc. formed a joint venture company in December 1994, Creative Wonders, LLC (formerly ABC/EA Home Software, LLC), to develop and publish children's edutainment and interactive entertainment titles as well as reference products. The Company currently distributes Creative Wonders' products as one of the Company's Affiliated Labels. See Note 10 of the Notes to the Consolidated Financial Statements included in Item 8 hereof. 5 MARKET Historically, no hardware platform or system has achieved long-term dominance in the interactive entertainment market. This phenomenon has resulted in the Company developing products at one time or another for 36 different hardware platforms. Today, the competition in the market for hardware platforms has intensified. In fiscal 1997, the hardware market completed the transition from 16-bit video game platforms to next generation Sony and Sega 32-bit systems and saw the introduction of the Nintendo 64-bit video game system. In addition, the installed base of multimedia-enabled home computers has continued to grow as prices have declined and the quality and choices of software have increased dramatically . The Company develops and publishes products for multiple platforms, and this diversification continues to be a cornerstone of the Company's strategy. Early generation computer systems for which interactive software products were published such as the Apple II and the Commodore 64 were 8-bit floppy-disk-based personal computers. Several years ago these systems were eclipsed by more powerful personal computer systems based on 16-bit microprocessors, such as the IBM PC and compatibles, the Commodore Amiga and the Apple Macintosh. Current computer systems utilize 32-bit microprocessor technology and typically run CD-ROM based products. Video game systems have likewise changed significantly over time. In 1986 and 1987, Nintendo Co., Ltd. ("Nintendo") and Sega Enterprises, Ltd. ("Sega"), respectively, introduced 8-bit video game systems that, compared to existing general-purpose computer systems available at the time, were low in price, easy to use and had more sophisticated audio-video capabilities. In late 1989, Sega began shipping its Genesis system, a more powerful 16-bit video game system. In August 1991, Nintendo introduced its 16-bit SNES video game system. In late 1992, Sega introduced the Sega CD-ROM drive as an add-on peripheral to its Genesis system. 6 The interactive software industry has recently undergone another significant change due in part to the introduction of new hardware platforms, as well as remote and electronic delivery systems. The new generation of systems are based on 32-bit and 64-bit microprocessors that incorporate dedicated graphics chipsets. Many of these systems utilize CD-ROM drives. The Company began development of 32-bit software products over five years ago by creating the original software development system for the first of these advanced products, the 3DO Interactive Multiplayer ("3DO"), which was introduced in calendar year 1993. Sega and Sony each began distribution of their next generation hardware systems (named the "Saturn" and "PlayStation," respectively) in Japan during the quarter ended December 1994. Sega began limited shipment of the Saturn in North America in May 1995 and Sony began shipping the PlayStation in North America in September 1995. In June 1996, Nintendo shipped the N64 in Japan and subsequently introduced the system in North America in September 1996. The N64 is a cartridge-based video game platform which uses a 64-bit microprocessor. Additionally, Matsushita is developing a next generation hardware system based on the 64-bit M2 technology licensed from 3DO. New entrants in the interactive entertainment and multimedia industries, such as cable television, telephone and diversified media and entertainment companies, and a proliferation of new technologies, such as on-line networks and the Internet may increase the competition in the markets in which the Company competes. The Company's new product releases in its 1998 fiscal year will be primarily for the IBM PC-CD and compatibles and 32-bit video game platforms, including the Sony PlayStation and the Sega Saturn. The Company is also scheduled to release one N64 product and two on-line network gaming products during fiscal 1998. See Factors Affecting Future Performance - The Industry and ------------------------------------------------------- Competition at page 29. - ----------- The early investment in products for the 32-bit market, including both Compact Disk personal computer ("PC-CD") and CD-dedicated video game ("CD-video game") platforms, has been strategically important in positioning the Company for the current generation of 32-bit machines. The Company believes that such investment continues to be important and will continue aggressive development activities for 32-bit and 64-bit platforms. Although the PlayStation has achieved significant market acceptance in all geographical territories, there can be no assurance that its growth will continue at the present rates, particularly with the introduction of N64 by Nintendo. The introduction and market acceptance of the N64, particularly in North America, may adversely impact the growth rate of the 32-bit CD-video game platforms. While the Company has a broad range of products available, the Company will not ship products for the N64 in any significant quantities until calendar year 1998. In addition, the Company's revenues and earnings are dependent on its ability to meet its product release schedule and its failure to meet those schedules could result in revenues and earnings which fall short of analysts' expectations for the fiscal year, and in particular the first quarter of fiscal 1998. See Factors Affecting ----------------- Future Performance - Development and Platform Changes, respectively, at page - ------------------------------------------------------ 29. 7 COMPETITION See Factors Affecting Future Performance - The Industry and Competition at ------------------------------------------------------------------- page 29. RELATIONSHIPS WITH SIGNIFICANT HARDWARE PLATFORM COMPANIES Sony ---- In fiscal 1997, approximately 30% of the Company's net revenues were derived from sales of software for the PlayStation compared to 9% in fiscal 1996. PlayStation products were first released during the second quarter of fiscal 1996. During fiscal 1997, the Company released fourteen PlayStation games compared to thirteen in fiscal 1996. Among these releases were Madden Football --------------- '97, Soviet Strike, NBA Live '97, FIFA Soccer '97 and NHL '97. The volume of - --- ------------- ------------ --------------- ------- sales of PlayStation products significantly increased in fiscal 1997 due to the increase in the installed base of PlayStation consoles worldwide and the quality and timely release of the Company's key franchise titles. Although revenues from the sales of PlayStation products in fiscal 1998 are expected to continue to grow, the Company does not expect to maintain these growth rates. See Factors ------- Affecting Future Performance - Development at page 29. - ------------------------------------------ Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America in July 1994 (the "Sony Agreement"), as amended, the Company is authorized to develop and distribute CD-based software products compatible with the PlayStation. Pursuant to the Sony Agreement, the Company engages Sony to supply its PlayStation CDs for distribution by the Company. Accordingly, the Company has limited ability to control its supply of PlayStation CD products or the timing of their delivery. See Factors Affecting ----------------- Future Performance - Hardware Companies at page 30. - --------------------------------------- In connection with the Company's purchases of Sony products to be distributed in Japan, Sony of Japan requires cash deposits totaling one-third of the purchase orders. At March 31, 1997, EAV had no outstanding deposits to Sony. EAV utilizes a line of credit to fund these deposits and other operating needs. At March 31, 1997, EAV had an outstanding balance on this line of approximately $4,024,000. Nintendo -------- During the fourth quarter of fiscal 1997, the Company released one product for the N64, FIFA Soccer 64. In fiscal 1997, approximately 3% of the Company's -------------- net revenues were derived from the sale of N64 products. In March 1997, the Company signed a licensing agreement with Nintendo (the "N64 Agreement") to develop, publish and market certain sports products for the N64. Due to the development time necessary for these products, the Company does not anticipate shipping products for the N64 in any significant quantities until calendar year 1998. 8 Under the terms of the N64 Agreement, the Company engages Nintendo to manufacture its N64 cartridges for distribution by the Company. Accordingly, the Company has limited ability to control its supply of N64 cartridges or the timing of their delivery. A shortage of microchips or other factors outside the control of the Company could impair the Company's ability to obtain an adequate supply of cartridges. In fiscal 1997, approximately 4% of the Company's net revenues were derived from sales of software for the SNES platform compared to 12% in fiscal 1996. The volume of sales of SNES products declined in fiscal 1997 as the market made the transition from 16-bit cartridge based video game platforms to next generation 32-bit systems. The Company released three SNES games in fiscal 1997 compared to five games in fiscal 1996. These releases were Madden Football '97, NBA Live '97 ------------------- ------------ and FIFA Soccer '97. The Company does not expect to release any new SNES titles --------------- in fiscal 1998. Under the terms of its licensing agreement with Nintendo for SNES products, the Company is authorized to develop, publish and market cartridge products for the SNES. SNES cartridges distributed in North America and Europe are manufactured by the Company in Puerto Rico. The Company is required to purchase from Nintendo certain key components for production of these cartridges. A shortage of these components or other factors outside the control of the Company could impair the Company's ability to manufacture an adequate supply of cartridges. The Company's SNES cartridges distributed in the rest of the world are manufactured by Nintendo. In connection with the Company's purchases of N64 and SNES cartridges for distribution in North America, Nintendo requires the Company to provide irrevocable letters of credit prior to Nintendo's acceptance of purchase orders from the company for purchases of these cartridges. For purchases of N64 cartridges for distribution in Japan and Europe, and for SNES cartridges distributed outside of North America and Europe, Nintendo requires the Company to make cash deposits. Furthermore, Nintendo maintains a policy of not accepting returns of either N64 or SNES cartridges. Because of these and other factors, the carrying of an inventory of cartridges entails significant capital and risk. See Factors Affecting Future Performance - Hardware Companies at page --------------------------------------------------------- 30. 9 Sega ---- In the fiscal year ended March 31, 1997, approximately 10% of the Company's net revenue came from sales of Sega Genesis products compared to 26% in fiscal 1996. During fiscal 1997, the Company released six Genesis games compared to ten in fiscal 1996. The volume of sales of Sega Genesis products declined significantly in fiscal 1997 as the market made the transition from 16-bit cartridge based video game platforms to next generation 32-bit systems. The Company currently has planned only limited releases of Sega Genesis products in fiscal 1998 and, accordingly, the volume of Genesis sales is expected to continue to significantly decline in fiscal 1998. Under the terms of a licensing agreement entered into with Sega in July 1992, as amended (the "16-bit Sega Agreement"), the Company is authorized to develop and manufacture ROM-cartridge software products compatible with the Sega Genesis system through December 1997 and to distribute those cartridges through June 1998. Genesis cartridges are manufactured by the Company in Puerto Rico under the 16-bit Sega Agreement. A shortage of components, or other factors outside the control of the Company could impair the Company's ability to obtain an adequate supply of cartridges. In the fiscal year ended March 31, 1997, approximately 6% of the Company's net revenue came from sales of Saturn products compared to 2% in fiscal 1996. During fiscal 1997, the Company released twelve Saturn products compared with four in fiscal 1996. Among these releases were Madden Football '97, Need for ------------------- -------- Speed and NHL '97. During the third quarter of fiscal 1996, the Company had its - ----- ------- initial release of products for the Saturn. Under the terms of a licensing agreement entered into with Sega in January 1995 (the "Sega Saturn Agreement"), the Company is authorized to develop and distribute CD-based software products compatible with the Sega Saturn. Pursuant to the Sega Saturn Agreement, the Company engages various third party manufacturers approved by Sega to supply its Saturn CDs for distribution. Accordingly, the Company has limited ability to control its supply of Saturn CD products or the timing of their delivery. PRODUCTS AND PRODUCT DEVELOPMENT In fiscal 1997, the Company generated approximately three quarters of its revenues from products released during the year. See Factors Affecting Future ------------------------ Performance - Products at page 29. As of March 31, 1997, the Company was - ---------------------- actively marketing approximately 117 titles, comprising approximately 264 stock keeping units ("sku's"), that were published by the Company's development divisions and subsidiaries ("EA Studios"). During fiscal 1997, the Company introduced over 31 EA Studios titles, representing over 63 sku's, compared to 22 EA Studio titles, comprising over 64 sku's, in fiscal 1996. From the inception of the Company through March 31, 1997, the EA Studios organization had created and published 53 titles that have each generated more than $10,000,000 in life-to-date net revenues for the Company. 10 The products published by EA Studios are designed and created by its in-house designers and artists and by independent software developers ("independent artists"). The Company typically pays the independent artists royalties based on the sales of the specific products, as defined in the related independent artist agreements. For fiscal 1997, one title, Madden Football '97, published on five ------------------- platforms, represented 11% of the total 1997 net revenues. For fiscal 1996, the Company had one title, FIFA Soccer '96, published on six platforms, which --------------- represented 11% of the total 1996 net revenues. No one title accounted for more than 10% of the Company's net revenues for fiscal 1995. The Company publishes products in a number of categories such as sports, action and interactive movies, strategy, simulations, role playing and adventure, each of which is becoming increasingly competitive. The Company's sports-related products, marketed under the EA Sports brand name, accounted for a significant percentage of net revenues in fiscal years 1997 and 1996. There can be no assurance that the Company will be able to maintain its market share in the sports category. See Factors Affecting Future Performance - The ------------------------------------------ Industry and Competition at page 29. - ------------------------ The front line retail selling prices in North America of the Company's products, excluding older titles (marketed as "Classics" and "Publisher's Choice"), typically range from $40.00 to $70.00. "Classics" and "Publisher's Choice" titles have retail selling prices that range from $10.00 to $15.00. The retail selling prices of EA titles outside of North America vary based on local market conditions. The Company currently develops or publishes products for 5 different hardware platforms and has from time to time developed and marketed products on 36 different and incompatible platforms in the past. In fiscal 1997, the Company product introductions were predominantly for PC-CD, 32-bit video game platforms and to a lesser degree 16-bit video game systems. The Company's planned product introductions for fiscal 1998 are predominantly for PC-CD and 32-bit video game systems. The Company will also release a limited number of products for the N64 and for on-line network play in fiscal 1998. See Factors Affecting Future ------------------------ Performance - Development and Platform Changes, respectively, at page 29. - ----------------------------------------------- As compact discs have emerged as the preferred medium for interactive entertainment, education, and information software, the Company continued its investment in the development of CD-ROM tools and technologies in fiscal 1997 and currently has more than 37 products in development for new CD-ROM platforms, including the IBM PC and compatibles, the PlayStation and the Saturn. Most of these products will be convertible for use on multiple advanced hardware systems. During the fiscal years 1997, 1996 and 1995, the Company had research and development expenditures of $118.1 million, $99.6 million, and $73.9 million, respectively. See Factors Affecting Future Performance - Development at -------------------------------------------------- page 29. 11 Additionally, the Company produces film and videotape to include in certain products pursuant to agreements between certain of the company's subsidiaries with SAG, AFTRA and Equity. With extensive use of video in some of the Company's products, particularly its products in the interactive movie category, there can be no assurance that the significantly higher sales levels required to make these products profitable will be achieved. During fiscal 1997, the Company released one product with significant video content and expects to release one product with significant video content in fiscal 1998. In addition, the Company's agreements with SAG and AFTRA expire in June 1997 and there can be no assurances that the Company will be able to renegotiate favorable terms. See Factors Affecting Future Performance - Film and Videotape at page 30. - --------------------------------------------------------- MARKETING AND DISTRIBUTION The Company distributes both EA Studio products and products developed and published by other software publishers known as "Affiliated Labels." In most cases, Affiliated Label products are delivered to the Company as completed products. As of March 31, 1997, the Company distributed 51 Affiliated Label titles in North America and over 1,000 Affiliated Label titles in the rest of the world. No single Affiliated Label has accounted for more than 10% of the Company's net revenue in any of the last three fiscal years. During fiscal 1997, the Company entered into a one year agreement with Twentieth Century Fox Home Entertainment outside of North America and multi-year agreements with Accolade, Inc. and DreamWorks Interactive in North America for distribution of their products. Additionally, a significant affiliate was acquired and discontinued distribution through the Company in the second quarter of fiscal 1997. The Company generated approximately 87% of its North American net revenues from direct sales through a field sales organization of professionals and a group of telephone sales representatives. The remaining 13% of its North American sales were made through a limited number of specialized and regional distributors and rack jobbers in markets where the Company believes direct sales would not be economical. The Company had no customers accounting for more than 10% of total net revenues for the years ended March 31, 1997, 1996 and 1995. As discussed above, (See Market above) the video game business has become ------ increasingly "hits" driven, requiring significantly greater expenditures for advertising, particularly for television advertising. There can be no assurance that the Company will continue to produce "hit" products or that advertising expenditures will increase sales sufficiently to recoup the advertising expenditures. 12 The Company has stock-balancing programs for its personal computer products that, under certain circumstances and up to a specified amount, allow for the exchange of personal computer products by resellers. The Company also typically provides for price protection for its personal computer and video game system products that, under certain conditions, allows the reseller a price reduction from the Company for unsold products. The Company maintains a policy of exchanging products or giving credits, but does not give cash refunds. Moreover, the risk of product returns may increase as new hardware platforms become more popular or market factors force the Company to make changes in its distribution system. The Company monitors and manages the volume of its sales to retailers and distributors and their inventories as substantial overstocking in the distribution channel can result in high returns or the requirement for substantial price protection in subsequent periods. The Company believes that it provides adequate reserves for returns and price protection which are based on estimated future returns of products, taking into account promotional activities, the timing of new product introductions, distributor and retailer inventories of the Company's products and other factors, and that its current reserves will be sufficient to meet return and price protection requirements for current in-channel inventory. However, there can be no assurance that actual returns or price protection will not exceed the Company's reserves. See Factors ------- Affecting Future Performance - Revenues and Expenses at page 30. - --------------------------------------------------------------- The Company also has a fulfillment group that sells product directly to consumers through a toll-free number listed in advertising by the Company and its Affiliated Labels. This group is also responsible for targeted direct mail marketing and sells product upgrades, backups and accessories to registered customers. The distribution channels through which consumer software products are sold have been characterized by change, including consolidations and financial difficulties of certain distributors and retailers and the emergence of new retailers such as general mass merchandisers. The development of remote and electronic delivery systems will create further changes. The bankruptcy or other business difficulties of a distributor or retailer could render Electronic Arts' accounts receivable from such entity uncollectible, which could have an adverse effect on the operating results and financial condition of the Company. In the quarter ended September 1996, the Company recorded $2,300,000 in bad debt expenses related to potentially uncollectible receivables from a customer who filed for bankruptcy. In addition, an increasing number of companies are competing for access to these channels. Electronic Arts' arrangements with its distributors and retailers may be terminated by either party at any time without cause. Distributors and retailers often carry products that compete with those of the Company. Retailers of Electronic Arts' products typically have a limited amount of shelf space and promotional resources for which there is intense competition. There can be no assurance that distributors and retailers will continue to purchase Electronic Arts' products or provide Electronic Arts' products with adequate levels of shelf space and promotional support. 13 INTERNATIONAL OPERATIONS The Company has wholly owned subsidiaries in the United Kingdom, France, Spain, Germany, Australia, Canada, South Africa, Singapore, Sweden and Puerto Rico as well as a majority owned subsidiary in Japan. The amounts of net revenues, operating profit and identifiable assets attributable to each of the Company's geographic regions for each of the last three fiscal years are set forth in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8 hereof. International net revenues increased by 28% to $289,239,000, or 46% of consolidated 1997 net revenues, compared to $225,658,000, or 42% of the 1996 total. The increase in international revenues was due to higher worldwide sales of 32-bit CD-video game products and increased sales of PC-CD and Affiliated Label products in Europe and South Asia Pacific. This was partially offset by a decrease in 16-bit video game cartridge products. In fiscal 1997, the Company continued its strategy to expand into emerging world markets by opening offices in Malaysia, Beijing, Shanghai, Taiwan and Holland as well as expanding its European distribution. In fiscal 1997, net revenues from Europe increased by 42% to $223,930,000 compared to $157,999,000 in fiscal 1996. The increase in Europe was mainly attributable to the expansion of distribution in the United Kingdom as well as higher revenues generated by Kingsoft GmbH, EA France and the full year of operations of EA Nordic and EA South Africa. The increase was due mainly to an increase in net revenues derived from higher volume of PlayStation and PC-CD products and Affiliated Label products offset by a decrease in 16-bit products. The increase in European Affiliated Label revenues was, in part, due to a new distribution agreement with Twentieth Century Fox Home Entertainment. In fiscal 1997, Japan net revenues decreased by 19% to $37,237,000 compared to $45,865,000 in fiscal 1996. The decrease in sales in Japan is attributable to the soft demand for PC products and the delay in the introduction of products relevant to the Japanese market. The decrease was partially offset by increased sales of 32-bit products and a title for the N64. In fiscal 1997, net revenues from South Asia Pacific increased by 29% to $28,072,000 compared to $21,794,000 in fiscal 1996. The increase in net revenues was due mainly to sales in new markets, including China, Taiwan and New Zealand. Though international revenues are expected to grow in fiscal 1998, international revenues may not grow at as high a rate as in prior years. 14 MANUFACTURING The Company's Genesis and SNES cartridge products are manufactured by the Company in Puerto Rico under the terms of a manufacturing license agreement with Sega and Nintendo, respectively. A portion of the Company's personal computer CD-ROM products are also manufactured in Puerto Rico. The assembly of the final packaged product is performed by outside organizations under the supervision of the Company's operations organization. The manufacturing process for all software involves the duplication of software code onto ROM chips, or CD, printing of packaging and documentation, and assembly of the final packaged product. Quality control tests are performed on all products by Company employees, and the products are then warehoused and shipped to customers by the Company. In many instances, the Company is able to acquire materials on a volume-discount basis. The Company has multiple potential sources of supply for most materials. Except with respect to its PlayStation and N64 products, the Company also has alternate sources for the manufacture and assembly of most of its products. To date, the Company has not experienced any material difficulties or delays in production of its software and related documentation and packaging. However, a shortage of components or other factors beyond the control of the Company could impair the Company's ability to manufacture, or have manufactured, its products. See Factors Affecting Future Performance - Hardware Companies at page 30. --------------------------------------------------------- BACKLOG The Company normally ships product within a few days after receipt of an order. However, a backlog may occur for EA Studios and Affiliated Label products that have been announced for release but not yet shipped. The Company does not consider backlog to be an indicator of future performance. SEASONALITY The Company's business is highly seasonal. The Company typically experiences its highest revenues and profits in the calendar year-end holiday season and a seasonal low in revenues and profits in the quarter ending in June. In its 1998 fiscal year, and particularly in the June and September quarters, the Company expects these seasonal trends to be magnified by general economic and industry factors. 15 EMPLOYEES As of March 31, 1997, the Company employed approximately 1,700 people, of whom over 900 were outside the United States. The Company believes that its ability to attract and retain qualified employees is an important factor in its growth and development and that its future success will depend, in large measure, on its ability to continue to attract and retain qualified employees. To date, the Company has been successful in recruiting and retaining sufficient numbers of qualified personnel to conduct its business successfully. See Factors ------- Affecting Future Performance - Employees at page 30. - ---------------------------------------- 16 ITEM 2: PROPERTIES The Company's principal administrative, sales and marketing, research and development, and support facility is located in four modern buildings in San Mateo, California, 15 miles south of San Francisco. The Company presently occupies approximately 196,000 sq. ft. in these buildings, under leases that expire at various times between August 1998 and April 1999. In addition, the Company leases and occupies a 54,000 sq. ft. facility used as an office and warehouse in Hayward, California, and a 84,000 sq. ft. warehouse facility in Louisville, Kentucky. The Company also occupies sales offices in the metropolitan areas of Toronto, Chicago, Dallas and New York. The Company also has a manufacturing facility in San Juan, Puerto Rico. The Company's North American research and development activities are supported by a 86,000 sq. ft. development facility in Burnaby, British Columbia, Canada and a 29,000 sq. ft. facility in Seattle, Washington. The Company also owns a 180,000 sq. ft. development facility in Austin, Texas and leases a 5,000 sq. ft. development facility in Baltimore, Maryland. The Company's United Kingdom subsidiary occupies administrative, sales, and distribution facilities in Langley, England, under a long-term lease for a total of 66,000 sq. ft. and a 22,000 sq. ft. development facility in Surrey, England. In Europe, the Company also leases two administrative, sales and distribution facilities in Germany, as well as sales and distribution facilities in Madrid, Spain, Lyon, France, Stockholm, Sweden and Johannesberg, South Africa. In Asia and the South Pacific, the Company maintains a 5,500 sq. ft. sales and distribution facility in Brisbane, Australia. The Company also has sales and distribution facilities in Singapore, Malaysia, Taiwan and New Zealand, and representative offices in Beijing and Shanghai, China. The Company also maintains a 27,000 sq. ft. sales and development office in Tokyo, Japan. See Notes 3 and 8 to Notes to the Consolidated Financial Statements included in Item 8 hereof. In February 1995, the Company entered into a master operating lease for land and buildings to be constructed in Redwood City, California. The facility is to be used as a corporate headquarters for EA. The above mentioned rental space EA currently occupies in San Mateo, California is expected to be vacated upon the completion of the new corporate headquarters. The square footage of the new facilities is expected to be approximately 375,000. The Company expects completion of these facilities in fiscal 1999. The Company believes that these facilities are adequate for its current needs. The Company believes that suitable additional or substitute space will be available as needed to accommodate the Company's future needs. 17 ITEM 3: LEGAL PROCEEDINGS The Company is subject to a number of routine pending litigation matters. Management, after review and consultation with counsel, considers that any liability from the disposition of such matters would not have a material adverse effect upon the financial condition or results of operations of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended March 31, 1997. 18 ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, who are chosen by and serve at the discretion of the Board of Directors, are as follows:
Name Age Position ---- --- -------- Lawrence F. Probst III 47 Chairman of the Board of Directors and Chief Executive Officer William Bingham Gordon 47 Executive Vice President, Marketing Mark S. Lewis 47 Executive Vice President, International E. Stanton McKee, Jr. 52 Executive Vice President, Chief Financial and Administrative Officer Don A. Mattrick 33 Executive Vice President, North American Studios Nancy L. Smith 44 Executive Vice President, North American Sales and Distribution Monty Finefrock 48 Senior Vice President, San Mateo Studios Ruth A. Kennedy 42 Senior Vice President, General Counsel and Secretary David L. Carbone 46 Vice President, Finance
MR. PROBST has been a director of the Company since January 1991 and currently serves as Chairman of the Board of Directors and Chief Executive Officer. He was elected as Chairman in July 1994. Mr. Probst served as President of Electronic Arts since December 1990, as Senior Vice President of EA Distribution, the Company's distribution division, from January 1987 to January 1991, and from September 1984, when he joined the Company, until December 1986, served as Vice President of Sales. Mr. Probst holds a B.S. degree from the University of Delaware. MR. GORDON has served as Executive Vice President, Marketing since October 1995. From August 1993 to October 1995, he served as Executive Vice President of EA Studios. Prior to this, he served as Senior Vice President of Entertainment Production since February 1992. From December 1989 to January 1992, he served as the Senior Vice President of Marketing. He also served as General Manager of EA Studios, as Vice President of Marketing, Director of Advertising and Vice President of the Company's former entertainment division while employed by the Company. Mr. Gordon holds a B.A. degree from Yale University and an M.B.A. degree from Stanford University. 19 MR. LEWIS has served as Executive Vice President, International since October 1996 and previously as Senior Vice President, International from July 1993 to October 1996. From August 1991 to July 1993, he served as President of Electronic Arts, Ltd., a wholly owned subsidiary of the Company which serves the European market from its base in Langley, England. He has also served as Managing Director of Electronic Arts, Ltd., Director of European Publishing, and as a Producer and Manager of Product Support and Acquisitions during his tenure with the Company. He has been employed by the Company since 1984. Mr. Lewis is a graduate of Yale University. MR. MCKEE joined the Company in March 1989 and is currently Executive Vice President and Chief Financial and Administrative Officer. Prior to October 1996, he served as Senior Vice President and Chief Financial and Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford University and is also a Certified Public Accountant. MR. MATTRICK has served as Executive Vice President, North American Studios, since October 1996. From July 1991 to October 1996, he served as Senior Vice President, North American Studios, Vice President of Electronic Arts and Executive Vice President/General Manager for EA Canada. Mr. Mattrick was founder and former chairman of Distinctive Software Inc. from 1982 until it was acquired by the Company in 1991. MS. SMITH has served as Executive Vice President, North American Sales since October 1996. She previously held the position of Senior Vice President of North American Sales and Distribution from July 1993 to October 1996 and as Vice President of Sales from 1988 to 1993. Ms. Smith has also served as Western Regional Sales Manager and National Sales Manager since she joined the Company in 1984. Ms. Smith holds a B.S. degree in management and organizational behavior from the University of San Francisco. MR. FINEFROCK has served as Senior Vice President, San Mateo Studios since October 1995. Prior to this he served as Senior Vice President and General Manager of the EA Entertainment division since March 1994. From February 1992 to March 1994, he served as Vice President of EA Studio Operations and Development. From July 1989 to February 1992, Mr. Finefrock served as Vice President of Studio Operations. Mr. Finefrock joined the Company in April 1983. He holds a B.S. degree in Business Administration from the University of Redlands. MS. KENNEDY has been employed by the Company since February 1990. She served as Corporate Counsel until March 1991 and is currently Senior Vice President, General Counsel and Secretary. Prior to October 1996, she served as Vice President, General Counsel and Secretary. Ms. Kennedy was elected Secretary in September 1994. Ms. Kennedy is a member of the State Bars of California and New York and received her B.A. degree from William Smith College and her Juris Doctor from the State University of New York. 20 MR. CARBONE has been with the Company since February 1991 as Vice President, Finance. He was elected Assistant Secretary of the Company in March 1991. Prior to joining the Company, Mr. Carbone served as Controller for Magnetic Pulse, Inc., a privately held designer of tools for hydrocarbon exploration, and was previously employed as Vice President of Finance for Vicom Systems Inc., a supplier of high-end graphics and imaging systems, from August 1989 to February 1990. Mr. Carbone holds a B.S. degree in accounting from King's College and is a Certified Public Accountant. 21 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the National Market under the symbol "ERTS". The following table sets forth the quarterly high and low closing sales prices of the Company's Common Stock from April 1, 1995 through March 31, 1997. Such prices represent prices between dealers and does not include retail mark-ups, mark-downs or commissions and may not represent actual transactions. Closing Sales Prices -------------------- High Low ---- --- Fiscal Year Ended March 31, 1996: First Quarter $30.00 $20.13 Second Quarter 41.75 27.13 Third Quarter 38.75 23.13 Fourth Quarter 28.50 22.13 Fiscal Year Ended March 31, 1997: First Quarter $34.50 $25.25 Second Quarter 39.13 24.75 Third Quarter 37.63 27.88 Fourth Quarter 36.13 26.25 There were approximately 1,995 holders of record of the Company's Common Stock as of June 3, 1997. The Company believes that a significant number of beneficial owners of its Common Stock hold their shares in street names. DIVIDEND POLICY The Company has not paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. 22 ITEM 6: SELECTED FINANCIAL DATA ELECTRONIC ARTS SELECTED FIVE-YEAR FINANCIAL DATA Year Ended March 31 (In thousands, except per share data)
INCOME STATEMENT DATA 1997 1996 1995 1994 1993 - --------------------- -------- -------- -------- ---- ---- Net revenues $624,766 $531,887 $493,346 $418,289 $298,386 Cost of goods sold 312,044 273,594 263,357 224,606 160,578 -------- -------- -------- -------- -------- Gross profit 312,722 258,293 229,989 193,683 137,808 Operating expenses: Marketing and sales 85,555 72,928 61,951 46,847 38,465 General and administrative 41,742 32,207 29,308 23,767 20,713 Research and development 118,103 99,627 73,902 62,570 37,451 -------- -------- -------- -------- -------- Total operating expenses 245,400 204,762 165,161 133,184 96,629 -------- -------- -------- -------- -------- Operating income 67,322 53,531 64,828 60,499 41,179 Interest and other income, net 11,639 6,021 13,250 3,782 2,537 -------- -------- -------- -------- -------- Income before provision for income taxes and minority interest 78,961 59,552 78,078 64,281 43,716 Provision for income taxes 27,241 18,759 24,980 19,450 13,421 -------- -------- -------- -------- -------- Income before minority interest 51,720 40,793 53,098 44,831 30,295 Minority interest in consolidated joint venture 1,282 (304) 2,620 (94) 563 -------- -------- -------- -------- -------- Net income $ 53,002 $ 40,489 $ 55,718 $ 44,737 $ 30,858 ======== ======== ======== ======== ======== Net income per share $ 0.96 $ 0.75 $ 1.07 $ 0.86 $ 0.62 ======== ======== ======== ======== ======== Number of shares used in computation 55,483 54,163 52,297 52,286 49,992 ======== ======== ======== ======== ======== BALANCE SHEET DATA AT FISCAL YEAR END - ------------------------------------- Cash and short-term investments $230,096 $147,983 $174,121 $130,318 $ 98,029 Marketable securities 5,548 37,869 10,725 11,931 -- Working capital 241,613 199,713 168,742 135,741 85,094 Long-term investments 24,200 24,200 14,200 -- -- Total assets 516,703 424,219 341,239 273,651 181,257 Total liabilities 127,430 100,625 103,018 97,988 67,687 Minority interest 28 1,277 1,148 3,485 2,999 Total stockholders' equity 389,245 322,317 237,073 172,178 110,571
23 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition of Results of Operations", contains forward looking statements regarding Electronic Arts' ("the Company" or "EA") future performance that involve certain risks including those discussed in "Factors Affecting Future Performance" at pages ___ of this Annual Report and under the same heading in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. Future results of the Company may differ materially from any forward looking statement due to such risks. RESULTS OF OPERATIONS Comparison of Fiscal 1997 to 1996 1997 1996 % change - ---------------------------------------------------------------------------- Net revenues $624,766,000 $531,887,000 17.5 - ---------------------------------------------------------------------------- The Company derives revenues from shipments of EA Studio Compact Disk ("CD") products for dedicated entertainment systems ("CD-video game"), EA Studio CD personal computer products ("PC-CD") (primarily entertainment software), EA Studio cartridge products, licensing of EA Studio products, distribution of EA Studio products through hardware companies ("OEMs") and shipments of Affiliated Label CD products that are created by third parties. Total net revenues increased compared to the prior year due to an increase in net revenues derived from a higher volume of CD-based products (CD-video games and PC-CD), Affiliated Label products and a 64-bit video game cartridge product. This was partially offset by a decrease in sales of 16-bit video game cartridges. Net revenues from 32-bit CD-video game products, including the PlayStation and Saturn, were $223,693,000 in fiscal 1997, representing 36% of the total net revenues compared to $76,523,000, or 14% of total net revenues in fiscal 1996. The increase in sales of PlayStation and Saturn products was attributable to the greater installed base of these 32-bit CD-video game consoles and more titles published for these consoles by the Company. Sales of PlayStation products in fiscal 1997 increased to $185,349,000, or 30% of total revenue, compared to $50,491,000, or 9% of total revenue in fiscal 1996. The Company released 14 new PlayStation titles in fiscal 1997 compared to 13 in fiscal 1996. Net revenues derived from the sales of other 32-bit products were $38,344,000 primarily from Saturn products in fiscal 1997 compared to $26,032,000, including 3DO and Saturn products, in fiscal 1996. The Company released 12 new Saturn titles in fiscal 1997 compared to eight 3DO titles and four Saturn titles in fiscal 1996. The Company produced no new games for 3DO in fiscal 1997 and does not expect to release any new titles in fiscal 1998. The Company expects revenues from 32-bit CD-video game products to continue to grow in fiscal 1998, but as revenues for these products increase, the Company does not expect to maintain these growth rates. Net revenues from PC-CD products increased to $178,310,000 in fiscal 1997, representing 29% of total net revenues, from $140,594,000, or 26% of total net revenues in fiscal 1996. The Company released 25 PC-CD titles and two supplemental data disks in fiscal 1997 compared to 22 titles in fiscal 1996. The increase in sales of PC-CD products was attributable to the growth in the PC market worldwide, growth in the sports category, the expansion of the Company's direct distribution worldwide and more PC-CD titles published by the Company. Net revenues generated by 16-bit video game cartridge-based products were $89,160,000, or 14% of total revenues in fiscal 1997, compared to $202,599,000, or 38% of net revenues in fiscal 1996. New generation 32-bit and 64-bit video game consoles are replacing 16-bit video game systems. Accordingly, sales of 16-bit video game hardware and related software have significantly declined and are expected to continue to do so in fiscal 1998. During fiscal 1997, the Company released fewer titles for these platforms and does not expect to release any new titles in fiscal 1998. Sales of EA Studio Genesis cartridge products in fiscal 1997 declined to $62,005,000, or 10% of total revenue, compared to $138,643,000, or 26% of total revenue in fiscal 1996. The Company released six new Genesis titles in fiscal 1997 compared to 10 in fiscal 1996. Net revenues derived from cartridge products for the Super Nintendo Entertainment System ("Super NES") were $27,155,000, or 4% of total revenue, in fiscal 1997 compared to $63,956,000, or 12% of total revenue in fiscal 1996. The Company released three new titles for the Super NES in fiscal 1997 compared to five in fiscal 1996. Licensing of EA Studio products generated $22,095,000 in fiscal 1997, compared to $27,018,000 in fiscal 1996. The decrease primarily resulted from lower volume of distribution of the Company's products through OEMs in North America and Japan. Net revenues derived from N64 were $17,804,000. The Company released its first N64 title during the fourth quarter of fiscal 1997. 24 Net revenues from shipments of Affiliated Label products in fiscal 1997 increased to $93,298,000 from $76,302,000 in fiscal 1996. The increase was due to higher sales of Affiliated Label products in Europe and South Asia Pacific related to an exclusive international distribution agreement with Twentieth Century Fox Home Entertainment and other affiliates. This was partially offset by a decrease in Affiliated Label net revenues in North America and Japan. The decrease in North America was attributable to lower volume of revenue from two exclusive distribution arrangements for certain PC entertainment and 3DO products to key accounts on behalf of other third party publishers which began in fiscal 1996 and the loss of a significant affiliate at the end of the second quarter of fiscal 1997. The decrease in Japan was due to lower volume of sales from existing affiliates. The Company's revenues from floppy disk products, hand-held cartridge products and products from the Sega 32X platform decreased to $406,000 in fiscal 1997 from $8,851,000 in fiscal 1996. Results reflect the now completed market shift away from these products to CD-based products. The Company produced no new games for these platforms in fiscal 1997 and does not expect to release any new titles in fiscal 1998. North American net revenues increased by 10% to $335,527,000 in fiscal 1997 as compared to $306,229,000 in fiscal 1996. The increase was mainly attributable to strong growth in 32-bit CD-video game and PC-CD systems partially offset by the decline in 16-bit sales. Net revenues from sales of CD-video game and PC-CD products increased $113,070,000 while sales of 16-bit cartridge products decreased $82,493,000 in comparison to the prior year. International net revenues increased by 28% to $289,239,000, or 46% of consolidated 1997 net revenues, compared to $225,658,000, or 42% of the 1996 total. The increase in international revenues was due to higher worldwide sales of 32-bit CD-video game products and increased sales of PC-CD and Affiliated Label products in Europe and South Asia Pacific. This was partially offset by a decrease in 16-bit video game cartridge products. ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Cost of goods sold $312,044,000 $273,594,000 14.1 As a percentage of net revenue 49.9% 51.4% - -------------------------------------------------------------------------------- Cost of goods sold as a percentage of revenues in fiscal 1997 reflects lower product costs associated with CD-based products offset by higher professional, celebrity and manufacturing royalties, higher distribution and manufacturing expenses for the operations in Europe and North America and growth in the lower margin distribution business. ================================================================================ OPERATING EXPENSES 1997 1996 % change - -------------------------------------------------------------------------------- Marketing and sales $ 85,555,000 $72,928,000 17.3 As a percentage of net revenues 13.7% 13.7% - -------------------------------------------------------------------------------- General and administrative $ 41,742,000 $32,207,000 29.6 As a percentage of net revenues 6.7% 6.1% - -------------------------------------------------------------------------------- Research and development $118,103,000 $99,627,000 18.5 As a percentage of net revenues 18.9% 18.7% - ------------------------------------------------------------------------------- The increase in marketing and sales expense was due to higher television advertising expenses and higher co-op advertising expenses associated with higher revenues. Additionally, marketing and sales expenses, along with general and administrative expenses, increased due to additional headcount and higher facility expenses related to the opening of new sales offices in international markets. Increases in general and administrative expenses were also due to implementation related costs for new management information systems in North America and Europe. The increase in research and development expenses was primarily due to higher average development costs for CD-based products than for cartridge products and higher depreciation expense. The Company released a total of 63 new products in fiscal 1997 compared to 64 in fiscal 1996. Total CD-based new products released for fiscal 1997 were 53 compared to 47 in fiscal 1996. ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Operating income $67,322,000 $53,531,000 25.8 As a percentage of net revenues 10.8% 10.1% - -------------------------------------------------------------------------------- The increase in operating income was primarily due to higher net revenues and increased gross profit margins, partially offset by higher operating expenses. 25 ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Interest and other income, net $11,639,000 $6,021,000 93.3 As a percentage of net revenues 1.9% 1.1% - -------------------------------------------------------------------------------- The increase in other income was due to gains on sales of marketable securities and higher interest income related to higher average cash balances. The fiscal 1996 balance also included write-offs of certain investments in affiliates. ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Income taxes $27,241,000 $18,759,000 45.2 Effective tax rate 34.5% 31.5% - -------------------------------------------------------------------------------- The effective tax rate for fiscal 1997 increased over the prior year primarily as a result of reported losses in Japan for which no tax benefit could be currently realized. ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Minority interest in consolidated joint venture $1,282,000 $(304,000) N/M As a percentage of net revenues 0.2% (0.1%) - -------------------------------------------------------------------------------- EAV is sixty-five percent owned by the Company and thirty-five percent owned by Victor Entertainment Industries, Inc. ("VEI"), a wholly-owned subsidiary of Victor Company of Japan, Limited. The fiscal 1997 minority interest represents VEI's pro rata share of EAV's net loss for that period. Conversely, minority interest for fiscal 1996 represents VEI's pro rata share of net income from EAV's operations. ================================================================================ 1997 1996 % change - -------------------------------------------------------------------------------- Net income $53,002,000 $40,489,000 30.9 As a percentage of net revenues 8.5% 7.6% - -------------------------------------------------------------------------------- The increase in net income was due to higher revenue and gross profit margins, higher other income, partially offset by higher operating expenses. RESULTS OF OPERATIONS Comparison of Fiscal 1996 to 1995 1996 1995 % change - -------------------------------------------------------------------------------- Net revenues $531,887,000 $493,346,000 7.8 - -------------------------------------------------------------------------------- Total fiscal 1996 net revenues increased compared to fiscal 1995 primarily due to increased net revenues derived from a higher volume of CD-based products (PC-CD and CD-video games), and Affiliated Label products. This was partially offset by decreased sales of 16-bit Sega Genesis video game cartridges ("Genesis") and EA floppy disk products. Net revenues generated by 16-bit video game cartridge-based products were $202,599,000, or 38% of consolidated net revenues in fiscal 1996, compared to $281,933,000, or 57% of net revenues in fiscal 1995. The mix of net revenue in fiscal 1996 reflected the continued impact of the transition from the mature 16-bit cartridge-based market to the emerging CD- based market. As the 16-bit market matured, sales of hardware and software declined. During fiscal 1996, the Company released fewer titles for these platforms as compared to fiscal 1995. Sales of EA Studio Genesis cartridge products in fiscal 1996 declined to $138,643,000, or 26% of total revenue, compared to $213,471,000, or 43% of total revenue in fiscal 1995. The Company released 10 new Genesis titles in fiscal 1996 compared to 17 in fiscal 1995. Net revenues derived from cartridge products for the Super Nintendo Entertainment System were $63,956,000, or 12% of total revenue, in fiscal 1996 compared to $68,462,000, or 14% of total revenue in fiscal 1995. The Company released five new titles for the Super NES in fiscal 1996 compared to six in fiscal 1995. Net revenues from PC-CD products increased to $140,594,000 in fiscal 1996, representing 26% of total net revenues, from $72,227,000, or 15% of total net revenues in fiscal 1995. The Company released 22 PC-CD titles in fiscal 1996 compared to 30 in fiscal 1995. CD-video game products, primarily the PlayStation in fiscal 1996 and the 3DO Interactive Multiplayer in fiscal 1995, generated net revenues of $76,523,000 in fiscal 1996, representing 14% of the total net revenues, compared to $27,230,000, or 6% of total net revenues in fiscal 1995. The Company released 25 CD-video game titles in fiscal 1996 compared to eight in fiscal 1995. Licensing of EA Studio products generated $27,018,000 in fiscal 1996, compared to $21,001,000 in fiscal 1995. The increase primarily resulted from increased distribution of EA's products through OEMs. Net revenues from shipments of Affiliated Label products in fiscal 1996 increased to $76,302,000 from $48,480,000 in fiscal 1995. The increase was primarily attributable to revenues from the exclusive distribution of certain PC entertainment and 3DO products to key accounts on behalf of other third party publishers which began in fiscal 1996. Additionally, the Company had increased Affiliated Label net revenues in Japan and Europe due to higher sales from several new and existing affiliates. Affiliated Label CD-based products represented 96% of total Affiliated Label net revenues in fiscal 1996, compared to 59% in fiscal 1995. The Company's revenues from floppy disk products, hand-held cartridge products and products from the Sega 32X platform decreased to $8,851,000, or 2% of the total in 1996, from $42,475,000, or 9% in fiscal 1995. Results continued to reflect the rapid market shift away from these products to CD-based products. The Company produced no new games for 26 these platforms in fiscal 1996 compared to 14 floppy disk titles in fiscal 1995. International net revenues increased by 43% to $225,658,000, or 42% of consolidated 1996 net revenues, compared to $158,043,000, or 32% of the 1995 total. The increase in international revenues was attributable to higher worldwide sales of CD-based products, primarily PC-CD and PlayStation together with an increase in sales of Super NES products in Europe, which were licensed in 1995. This was partially offset by a decrease in floppy disk and Genesis products. North American net revenues totaled $306,229,000 in fiscal 1996, representing a decrease of 9% over the $335,303,000 generated in fiscal 1995. The decrease was attributable to the decline in 16-bit cartridge revenues partially offset by the increase in shipments of PC-CD products and CD-video games. ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Cost of goods sold $273,594,000 $263,357,000 3.9 As a percentage of net revenues 51.4% 53.4% - ------------------------------------------------------------------------------- Cost of goods sold as a percentage of revenues in fiscal 1996 reflected lower product costs associated with CD-based products offset by higher production costs for multimedia releases, higher professional and celebrity royalties, higher distribution and manufacturing expenses for the operations in Europe and growth in the lower margin distribution business. - -------------------------------------------------------------------------------- OPERATING EXPENSES 1996 1995 % change - -------------------------------------------------------------------------------- Marketing and sales $72,928,000 $61,951,000 17.7 As a percentage of net revenues 13.7% 12.6% - -------------------------------------------------------------------------------- General and administrative $32,207,000 $29,308,000 9.9 As a percentage of net revenues 6.1% 5.9% - ------------------------------------------------------------------------------- Research and development $99,627,000 $73,902,000 34.8 As a percentage of net revenues 18.7% 15.0% - ------------------------------------------------------------------------------- The increase in marketing and sales expenses was affected by higher trade show expenses and higher co-op advertising expenses associated with higher revenues. Additionally, marketing and sales expenses, along with general and administrative expenses, increased due to additional headcount and higher facility expenses related to the prior year acquisitions and the opening of new sales offices in international markets. The increase in general and administrative expenses was partially offset by a decrease in bad debt expenses in Japan as compared to fiscal 1995. The increase in research and development expenses was primarily due to additional headcount relating to increased in-house development capacity, higher average development costs for CD-based products than for cartridge products, increased reserves against artist advances due to product delays, primarily on CD-video game platforms, and the acquisition of Manley & Associates, a Seattle- based development company in 1996. The Company released a total of 64 new products in fiscal 1996 compared to 86 in fiscal 1995. ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Operating income $53,531,000 $64,828,000 (17.4) As a percentage of net revenues 10.1% 13.1% - -------------------------------------------------------------------------------- The decrease in operating income was primarily due to higher operating expenses partially offset by an increase in net revenues. ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Interest and other income, net $6,021,000 $13,250,000 (54.6) As a percentage of net revenues 1.1% 2.7% - -------------------------------------------------------------------------------- The decrease in other income was primarily due to a one-time payment of $10,000,000 from Broderbund Software, Inc. ("Broderbund"), offset by costs of $1,400,000 incurred by the Company, associated with the termination of the merger agreement between the Company and Broderbund in fiscal 1995. In fiscal 1996, the Company also had higher interest income related to higher average cash balances and interest rates worldwide together with gains on the sales of marketable securities and fixed assets. These gains were substantially offset by losses and write-offs of certain investments in affiliates. ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Income taxes $18,759,000 $24,980,000 (24.9) Effective tax rate 31.5% 32.0% - -------------------------------------------------------------------------------- The effective tax rate for fiscal 1996 decreased over the prior year primarily as a result of the fiscal 1995 impact of the operating loss reported by EAV and the use of those losses to offset EAV's profits in 1996. Tax benefits from the Company's Puerto Rico operations were lower in the current year as a result of lower sales of cartridge products. ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Minority interest in consolidated joint venture $(304,000) $2,620,000 N/M As a percentage of net revenues (0.1%) 0.5% - -------------------------------------------------------------------------------- Minority interest for fiscal 1996 represents VEI's pro rata share of net income from EAV's operations. Conversely, the fiscal 1995 minority interest represents VEI's pro rata share of EAV's net loss for that period. 27 ================================================================================ 1996 1995 % change - -------------------------------------------------------------------------------- Net income $40,489,000 $55,718,000 (27.3) As a percentage of net revenues 7.6% 11.3% - --------------------------------------------------------------------------- The decrease in net income was due to higher operating expenses partially reduced by higher revenue combined with the prior year impact of the after-tax net gain of approximately $5,800,000 from the one-time payment of a merger termination fee. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1997, the Company's working capital was $241,613,000 compared to $199,713,000 at March 31, 1996. Cash and short-term investments increased by approximately $82,113,000 in fiscal 1997. The Company generated $80,641,000 of cash from operations in fiscal 1997. In addition, $20,205,000 was provided through the sale of equity securities under the Company's employee stock plans. Reserves for bad debts and sales returns increased from $27,569,000 at March 31, 1996 to $35,486,000 at March 31, 1997. 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. During fiscal 1997 the Company invested approximately $36,000,000 primarily in computer hardware and software purchases required to support the Company's development efforts and new management information systems worldwide. In connection with the Company's purchases of Sony products to be distributed in Japan, Sony of Japan requires cash deposits totaling one-third of purchase orders. Additionally, Nintendo of Japan requires cash deposits on all orders of N64 cartridge products. EAV utilizes lines of credit to fund these deposits for purchases of Sony and Nintendo products and for other operating requirements. At March 31, 1997, EAV had approximately $4,024,000 outstanding on this line. The Company's principal source of liquidity is $230,096,000 in cash 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 for the foreseeable future. 28 FACTORS AFFECTING FUTURE PERFORMANCE FUTURE OPERATING RESULTS OF THE COMPANY DEPEND UPON MANY FACTORS AND ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. SOME OF THOSE IMPORTANT RISKS AND UNCERTAINTIES WHICH MAY CAUSE THE COMPANY'S OPERATING RESULTS TO VARY OR WHICH MAY MATERIALLY AND ADVERSELY AFFECT EA'S OPERATING RESULTS ARE AS FOLLOWS: THE INDUSTRY AND COMPETITION. The interactive software business has historically been a volatile and highly dynamic industry affected by changing technology, limited hardware platform life cycles, hit products, competition, component supplies, seasonality, consumer spending and other economic trends. The business is also intensely competitive. A variety of companies offer products that compete directly with one or more of the Company's products. These direct competitors vary in size from very small companies to companies with financial, managerial and technical resources comparable to or greater than those of the Company. Typically, the Company's chief competitor on dedicated game platforms is the hardware manufacturer/licensor itself, to which the Company must pay royalties, and in the case of Sony and Nintendo, manufacturing charges. For example, Sony has aggressively launched sports product lines that directly compete with the Company's sports products on the PlayStation. In addition, competition for creative talent has intensified, and the attraction and retention of key personnel by the Company is increasingly difficult. PRODUCTS. Interactive entertainment software products typically have life spans of only 3 to 12 months. In addition, the market is crowded with a large number of titles competing for limited shelf space at retail. The Company's future success will depend in large part on its ability to develop and introduce new competitive products on a timely basis and to get those products distributed widely at retail. To compete successfully, new products must adapt to new hardware platforms and emerging industry standards, provide additional functionality and be successfully distributed in numerous changing worldwide markets. If the Company were unable, due to resource constraints or technological or other reasons, to successfully develop and distribute such products in a timely manner, this inability would have a material adverse effect on its operating results and financial condition. DEVELOPMENT. Product development schedules, particularly for new hardware platforms and high-end multimedia 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. CD-ROM products frequently include more content and are more complex, time-consuming and costly to develop than 16-bit cartridge products and, accordingly, cause additional development and scheduling risk. For example, in fiscal year 1996 Madden Football 96 and NHL Hockey 96 for the ------------------ ------------- PlayStation did not ship at all due to significant delays in development that made the delayed completion date untimely for these products. Likewise, Need for -------- Speed II for PC-CD, a high margin product scheduled for shipment in March of - -------- 1997, did not ship until April of 1997 due to last minute development delays. Dungeon Keeper, originally scheduled to ship in the quarter ended June 1996, is - -------------- now expected to ship during the summer of 1997. In addition, 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. Manufacturing lead times during the year for CD-based products have been as brief as one to three weeks; cartridge products more typically have had a six to twelve week lead time for manufacture. PLATFORM CHANGES. A large portion of the Company's revenues are derived from the sale of products designed to be played on proprietary video game platforms such as the PlayStation, Sega Saturn, Super Nintendo Entertainment System, Sega Genesis and the N64. The interdependent nature of the Company's business and that of its hardware licensors brings significant risks to the Company's business. The success of the Company's products is significantly affected by market acceptance of the new video game hardware systems and the life span of older hardware platforms, and the Company's ability to accurately predict these factors with respect to each platform. In many cases, the Company will have expended a large amount of development and marketing resources on products designed for new video game systems (such as the new 32-bit systems) that have not yet achieved large installed bases or will have continued product development for older hardware platforms that may have shorter life cycles than the Company expected. Conversely, if the Company does not choose to develop for a platform that achieves significant market acceptance, or discontinues development for a platform that has a longer life cycle than expected, the Company's revenue growth may be adversely affected. For example, the Company signed an agreement with Nintendo to develop and publish a line of EA SPORTS products for the N64 in March of 1997, nearly seven months after introduction of that platform in North America. Due to long development times associated with this platform, the Company will not ship N64 products in significant quantities until calendar year 1998. The Company believes that investment in products for the 32-bit market, including both PC-CD and CD-video game platforms (particularly the PlayStation) has been strategically important in positioning the Company for the now completed transition to 32 bit machines. The Company continues to believe that such investment is important and will continue its aggressive development activities for 32 bit platforms. Although the PlayStation has achieved significant market acceptance in all geographic territories, there can be no assurance that its growth will continue at the present rates, particularly with the introduction of the N64 by Nintendo. The introduction and market acceptance of the N64, particularly in North America, may adversely affect the growth rate of the 32-bit CD-platforms. While the Company has a broad range of products available and under development for the PlayStation and for PC-CD, the Company will not ship products for the N64 in any significant quantities until calendar year 1998. 29 HARDWARE COMPANIES. The Company's contracts with hardware licensors, which are also some of the Company's chief competitors, often grant significant control to the licensor over the manufacturing of the Company's products. This fact could, in certain circumstances, leave the Company unable to get its products manufactured and shipped to customers. In most events, control of the manufacturing process by hardware companies increases both the manufacturing lead times and the expense to the Company as compared to the lead times and costs that the Company can achieve independently. In both fiscal 1996 and fiscal 1997, for example, the Company experienced delays in the manufacturing of PlayStation products which caused delays in shipping those products. The results of future periods may be affected by similar delays. Finally, the Company's contracts with its hardware licensors often require the Company to take significant risks in holding or prepaying for its inventory of products. In particular, the Company's agreement with Nintendo for N64 products requires prepayment of costly cartridge-based inventory, minimum orders and no rights of return. REVENUE AND EXPENSES. A substantial majority of the revenue of the Company in any quarter typically results from orders received in that quarter and products introduced in that quarter. The Company's expenses are based, in part, on development of products to be released in the future. Certain overhead and product development expenses do not vary directly in relation to revenues. This trend is increasing as the Company increases the proportion of products developed internally. As a result, the Company's quarterly results of operations are difficult to predict, and small delays in product deliveries may cause quarterly revenues, operating results and net income to fall significantly below anticipated levels. The Company typically receives orders shortly before shipments, making backlog an unreliable indicator of quarterly results. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. FILM AND VIDEOTAPE. The Company produces film and videotape to include in certain products pursuant to agreements between certain of the Company's subsidiaries with SAG, AFTRA and Equity. However, the costs of video production are significantly higher than for software production, and for products which include a substantial amount of video such as certain interactive movies, the costs of producing the video component is significantly higher than the cost of developing the software component. Accordingly, more units of such products must be sold to recoup the development and production costs. There can be no assurance that these products which include significant film or videotape components will be commercially successful enough to recoup development costs. In addition, the Company's agreements with SAG and AFTRA expire during the current calendar year, and there can be no assurance that the Company will be able to renegotiate favorable terms. GROSS MARGINS. Although gross margins for the Company's products as a whole have increased over the last three fiscal years, there are no assurances that this trend will continue in the future for several reasons. Professional and celebrity royalties continue to increase. Also, while the costs of development of new products for 32- and 64-bit systems have increased, overall costs of goods are not declining. For products on platforms for which the Company is required to purchase its goods from the hardware companies, the Company is unable to achieve cost reductions through manufacturing efficiencies, and royalties to hardware companies remain fixed or are increasing. As the Company begins to ship N64 products in significant quantities, margins may further decline due to the higher cost of goods associated with this cartridge-based platform. Similarly, higher distribution expenses for operations in Europe and North America and growth of the lower margin distribution business continue to put pressure on margins. In addition, retailers continue to require significant price protection for products, and with an increasing number of titles available for advanced platforms, such requirements for price protection may increase. MARKETING AND DISTRIBUTION. Both the video game and PC businesses have become increasingly "hits" driven. Additional marketing and advertising funds are required to drive and support "hit" products, particularly television advertising. There can be no assurance that the Company will continue to produce "hit" titles, or that advertising for any product will increase sales sufficiently to recoup those advertising expenses. EMPLOYEES. Competition for employees in the interactive software business is intense and increasing as competition in the industry increases. In the last fiscal year, recruiting of the Company's employees generally, and its executive officers in particular, has been intense. Large software and media companies frequently offer significantly larger cash compensation than does the Company, placing pressure on the Company's base salary and cash bonus compensation. Small start-up companies such as those proliferating in the online business areas offer significant potential equity gains which are difficult for more mature companies like the Company to match without significant stockholder dilution. While executive turnover has decreased in fiscal 1997 as compared to fiscal 1996, virtually all of the executives continue to experience intense recruiting pressure. There can be no assurance that the Company will be able to continue to attract and retain enough qualified employees in the future. 30 FOREIGN SALES AND CURRENCY FLUCTUATIONS. For the 1997 fiscal year, international net revenues comprised 46% of total consolidated net revenues. The Company expects foreign sales to continue to account for a significant and growing portion of the Company's 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. INVESTMENTS IN AFFILIATES. The Company has a number of equity investments in affiliates, including small developers, such as Firaxis and Visual Concepts, other publishers, such as NovaLogic, Inc. and Accolade, Inc., and new ventures such as Mpath Interactive. These companies are generally small and without significant financial resources. Financial difficulties for any of these companies could cause a reduction in the value of the Company's investment. For example, in fiscal 1996 the Company wrote off its investment in SportsLab in its entirety. 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 the Company's Common Stock in any given period. As a result of the factors discussed in this annual report and other factors that may arise in the future, the market price of the Company's Common Stock historically has been, and may continue to be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer, software, entertainment, media or electronics industries or the securities markets in general. For example, during the fiscal years 1997 and 1996 the price per share of the Company's common stock ranged from $24.75 to $39.13 and from $20.13 to $41.75, respectively. Because of the foregoing factors, as well as other factors affecting the Company's 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. 31 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Auditors, Consolidated Financial Statements and Notes to Consolidated Financial Statements follow on pages 32 through 46. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Electronic Arts Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Electronic Arts Inc. and subsidiaries as of March 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electronic Arts Inc. and subsidiaries at March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Palo Alto, California May 1, 1997, except as to Note 14 which is as of June 4, 1997 32 ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and short-term investments $230,096 $147,983 Marketable securities 5,548 37,869 Receivables, less allowances of $35,486 and $27,569, respectively 95,356 73,075 Inventories 15,847 14,704 Prepaid royalties 10,311 14,519 Deferred income taxes 3,010 -- Other current assets 8,875 12,188 -------- -------- Total current assets 369,043 300,338 Property and equipment, net 85,132 70,062 Prepaid royalties 9,351 11,030 Long-term investments 24,200 24,200 Investment in affiliates 25,657 15,952 Other assets 3,320 2,637 -------- -------- $516,703 $424,219 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 41,560 $ 37,019 Accrued liabilities 85,870 63,606 -------- -------- Total current liabilities 127,430 100,625 Minority interest in consolidated joint venture 28 1,277 Stockholders' equity: Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- -- Common stock, $0.01 par value. Authorized 70,000,000 shares; issued and outstanding 54,163,398 and 52,741,572, respectively 542 527 Paid-in capital 135,510 108,078 Retained earnings 252,525 199,523 Unrealized appreciation of investments 2,593 16,266 Translation adjustment (1,925) (2,077) -------- -------- Total stockholders' equity 389,245 322,317 -------- -------- $516,703 $424,219 ======== ========
See accompanying notes to consolidated financial statements. 33 ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Years Ended March 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues $ 624,766 $ 531,887 $ 493,346 Cost of goods sold 312,044 273,594 263,357 --------- --------- --------- Gross profit 312,722 258,293 229,989 Operating expenses: Marketing and sales 85,555 72,928 61,951 General and administrative 41,742 32,207 29,308 Research and development 118,103 99,627 73,902 --------- --------- --------- Total operating expenses 245,400 204,762 165,161 --------- --------- --------- Operating income 67,322 53,531 64,828 Interest and other income, net 11,639 6,021 13,250 --------- --------- --------- Income before provision for income taxes and minority interest 78,961 59,552 78,078 Provision for income taxes 27,241 18,759 24,980 --------- --------- --------- Income before minority interest 51,720 40,793 53,098 Minority interest in consolidated joint venture 1,282 (304) 2,620 --------- --------- --------- Net income $ 53,002 $ 40,489 $ 55,718 ========= ========= ========= Net income per share $ 0.96 $ 0.75 $ 1.07 ========= ========= ========= Number of shares used in computation 55,483 54,163 52,297 ========= ========= =========
See accompanying notes to consolidated financial statements. 34 ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1997, 1996 and 1995 (In thousands)
Common Stock Unrealized ---------------- Paid-In Retained Appreciation Translation Shares Amount Capital Earnings of Investments Adjustment Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1994 49,974 $ 477 $ 65,677 $ 108,878 $ 0 $(2,854) $ 172,178 Proceeds from sales of shares through employee stock plans and other plans 954 10 7,210 7,220 Tax benefit related to stock options 4,242 4,242 Adjustment effect of poolings on prior periods 22 15 (1,698) (1,661) Adjustment for change in Kingsoft, GmbH fiscal year end (1,386) (1,386) Unrealized (loss) on investments (1,206) (1,206) Translation adjustment 1,968 1,968 Net income 55,718 55,718 ------ ------ --------- --------- --------- ------- --------- Balances at March 31, 1995 50,928 509 77,144 161,512 (1,206) (886) 237,073 Proceeds from sales of shares through employee stock plans and other plans 1,814 17 21,661 21,678 Tax benefit related to stock options 9,170 9,170 Adjustment effect of immaterial pooling 1 103 (177) (73) Adjustment for change in Manley & Associates fiscal year end (2,301) (2,301) Unrealized gain on investments 17,472 17,472 Translation adjustment (1,191) (1,191) Net income 40,489 40,489 ------ ------ --------- --------- --------- ------- --------- Balances at March 31, 1996 52,742 527 108,078 199,523 16,266 (2,077) 322,317 Proceeds from sales of shares through employee stock plans and other plans 1,421 15 20,190 20,205 Tax benefit related to stock options 7,242 7,242 Unrealized (loss) on investments (13,673) (13,673) Translation adjustment 152 152 Net Income 53,002 53,002 ------ ------ --------- --------- --------- ------- --------- Balances at March 31, 1997 54,163 $ 542 $ 135,510 $ 252,525 $ 2,593 $ (1,925) $ 389,245 ====== ====== ========= ========= ========= ======= =========
See accompanying notes to consolidated financial statements. 35 ELECTRONIC ARTS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31 -------------------- (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 53,002 $ 40,489 $ 55,718 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in consolidated joint venture (1,282) 304 (2,620) Depreciation and amortization 21,461 15,859 10,763 Loss (gain) on sale of fixed assets 164 (2,044) 76 Equity in net loss of affiliates 1,566 1,746 -- Gain on sale of marketable securities (8,393) (4,879) -- Adjustment for change in fiscal year end for pooled subsidiaries -- (2,301) (1,386) Change in assets and liabilities: Receivables (22,281) (16,686) 8,726 Inventories (1,143) (2,346) (2,887) Prepaid royalties 5,887 (10,598) (5,120) Other assets 1,780 (4,214) (11,306) Accounts payable 4,541 2,772 (1,605) Accrued liabilities 24,765 (12,645) 6,635 Deferred income taxes 574 3,219 6,803 --------- --------- --------- Net cash provided by operating activities 80,641 8,676 63,797 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from sale of property and equipment 171 4,221 527 Proceeds from sale of marketable securities 21,152 5,273 -- Capital expenditures (36,212) (56,830) (16,503) Investment in affiliates (11,271) (6,387) (472) Short-term investments (62,132) (11,655) 5,700 Long-term investments -- (10,000) (14,200) Acquisition of DROsoft -- -- (1,397) Acquisition of Vision Software -- (500) -- Adjustment for effect of poolings on prior periods -- (73) (1,661) --------- --------- --------- Net cash used in investing activities (88,292) (75,951) (28,006) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from sales of shares through employee stock plans and other plans 20,205 21,678 7,220 Tax benefit from stock option exercises 7,242 9,170 4,242 --------- --------- --------- Net cash provided by financing activities 27,447 30,848 11,462 --------- --------- --------- Translation adjustment 152 (1,191) 1,968 Minority interest on translation adjustment 33 (175) 282 --------- --------- --------- Increase (decrease) in cash and cash equivalents 19,981 (37,793) 49,503 Beginning cash and cash equivalents 105,628 143,421 93,918 --------- --------- --------- Ending cash and cash equivalents 125,609 105,628 143,421 Short-term investments 104,487 42,355 30,700 --------- --------- --------- Ending cash and short-term investments $ 230,096 $ 147,983 $ 174,121 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 14,889 $ 9,570 $ 6,390 ========= ========= ========= NON-CASH INVESTING ACTIVITIES: Increase (decline) unrealized appreciation of investments ($ 19,562) $ 24,952 $ (1,206) Transfer of assets at net book value to affiliated company -- -- 6,003 ========= ========= =========
See accompanying notes to consolidated financial statements. 36 ELECTRONIC ARTS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997, 1996 and 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying consolidated financial statements include the accounts of Electronic Arts Inc. and its wholly-owned subsidiaries (the "Company") and its majority owned subsidiary Electronic Arts Victor, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements of the Company follows: (a) 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 1997 and 1996 contain 52 and 53 weeks, respectively. Since the results of an additional week are not material, and for clarity of presentation herein, all fiscal periods are treated as ending on a calendar month end. (b) Revenue Recognition Product Sales: Revenue is recognized when the product is shipped. Subject to certain limitations, the Company permits customers to obtain exchanges within certain specified periods and provides price protection on certain unsold merchandise. Revenue is reflected net of an allowance for returns and price protection. Software Licenses: For those agreements which provide the customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized at delivery of the product master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. Revenue from the licensing of software was $22,095,000, $27,018,000, and $21,001,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. (c) Cash and Investments Cash equivalents consist of highly liquid investments with insignificant rate risk and with maturities of three months or less at the date of purchase. Short-term investments include securities with maturities greater than three months and less than one year, except for certain investments with stated maturities greater than one year. Long-term investments consist of securities with maturities greater than one year. The Company accounts for investments under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, ("SFAS 115"). The Company's policy is to protect the value of its investment portfolio and to minimize principal risk by earning returns based on current interest rates. The Company has classified short-term investments as "available-for-sale" and applicable investments are stated at fair value which approximates cost. The cost of securities sold is based upon the specific identification method. (d) Prepaid Royalties Prepaid royalties represent prepayments made to independent software developers under development agreements. Prepaid royalties are expensed at the contractual 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 research and development expense any amounts that management deems unlikely to be amortized at the contract royalty rate through product sales. Royalty advances are classified as current and noncurrent assets based upon estimated net product sales within the next year. (e) Software Development Costs Statement of Financial Accounting Standards No. 86 provides for the capitalization of certain software development costs once technological feasibility is established. The capitalized costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. No software development costs have been capitalized to date as the impact on the financial statements for all periods presented is immaterial. (f) Inventories Inventories are stated at the lower of cost or market. Inventories at March 31, 1997 and 1996 consisted of: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- (in thousands) Raw materials and work in process $ 3,706 $ 2,160 Finished goods 12,141 12,544 - -------------------------------------------------------------------------------- $15,847 $14,704 - -------------------------------------------------------------------------------- (g) Outside Production Costs The Company defers the outside production costs of the film content of its products. Such costs are expensed as cost of goods sold based on actual net product sales. Film costs deferred as of March 31, 1997 and 1996 were $926,000 and $5,500,000, respectively. (h) Advertising costs The Company generally expenses advertising costs as incurred, except for production costs associated with media campaigns which are deferred and charged to expense at the first run of the ad. Cooperative advertising with distributors and retailers is accrued when revenue is recognized. Cooperative advertising credits are reimbursed when qualifying claims are submitted. For the fiscal years ended 37 March 31, 1997, 1996 and 1995, advertising expenses totaled approximately $34,263,000, $28,437,000 and $28,065,000, respectively. (i) Property and Equipment Property and equipment are stated at cost. Depreciation of furniture and equipment is computed using the declining balance method over the estimated useful lives of the respective assets, which range from three to seven years. Depreciation on new management information systems is computed using the straight-line method over the estimated useful lives of the respective assets, which range from four to seven years. Buildings are being depreciated using the straight line method over 20 years. Amortization of leasehold improvements is computed using the declining balance method over the lesser of the lease terms or the estimated useful lives of the improvements. (j) Intangible Assets Intangible assets net of amortization at March 31, 1997 and 1996 of $1,115,000, and $1,752,000, respectively, are included in other current and noncurrent assets and include costs of obtaining product technology and noncompete covenants which are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically no more than five years. Intangibles also include goodwill resulting from the purchase of DROSoft (now known as EA Spain) in November 1994 and Vision Software in March 1996. Amortization expense for fiscal years ended March 31, 1997, 1996 and 1995 was $654,000, $740,000, and $337,000, respectively. (k) Income Taxes Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. (l) Foreign Currency Translation For each of the Company's foreign subsidiaries the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using current exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates. The effects of foreign currency translation adjustments are deferred and included as a component of stockholders' equity. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Included in interest and other income in the statements of income are foreign currency transaction gains (losses) of ($1,024,000), $433,000, and $785,000, for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. (m) Net Income Per Share Net income per share is based on the weighted average number of common stock and common stock equivalents from stock options outstanding during the period. There is no significant difference between primary and fully diluted earnings per share. (n) Employee Benefits The Company has a 401(k) Plan covering substantially all of its U.S. employees. The 401(k) Plan permits the Company to make discretionary contributions to employees' accounts based on the Company's financial performance. The Company contributed $405,000 and $279,000 to the Plan in fiscal 1997 and fiscal 1996, respectively. (o) Stock-based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). (p) Impact of Recently Issued Accounting Standards The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") effective for the fiscal year ended March 31, 1997. SFAS 121 requires that impairment losses be recorded on long-lived assets and certain identifiable intangibles when indicators of impairment are present and the undiscounted cash flows estimated by those assets are less than the assets' carrying amounts. Adoption of this standard did not have a material impact on the Company's consolidated financial statements. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") effective for the fiscal year ended March 31, 1997. SFAS 123 establishes a fair value method of accounting for stock-based employee compensation plans. As allowed under provisions of SFAS 123, the Company has chosen to continue the intrinsic value based method for stock-based employee compensation plans and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS 123 had been adopted. As the Company has elected to adopt only disclosure requirements of SFAS 123, such adoption had no effect on the Company's consolidated net income or cash flows. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic earnings per share ("EPS") and diluted EPS on the face of all statements of earnings issued after December 15, 1997, for all entities with complex capital structures. 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 including stock options, restricted stock awards, warrants, and other convertible securities using the treasury stock method. The Company does not anticipate the effect of the provisions of this new standard on earnings per share to be material. 38 (q) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include provisions for doubtful accounts, sales returns and allowances, warranty provisions, and estimates regarding the recoverability of prepaid royalty advances and inventory. Actual results could differ from those estimates. (r) Reclassifications Certain amounts have been reclassified to conform to fiscal 1997 presentation. (2) FINANCIAL INSTRUMENTS (a) Cash and Investments ======================================================================== MARCH 31, 1997 1996 - ------------------------------------------------------------------------ (in thousands) Cash and equivalents: Cash $58,564 $28,078 Municipal securities 31,940 13,885 Money market funds 35,105 37,843 Commercial paper - 25,822 - ------------------------------------------------------------------------ Cash and equivalents 125,609 105,628 - ------------------------------------------------------------------------ Short-term investments: Commercial paper 17,315 2,805 Municipal securities 9,163 5,600 Money market preferreds 78,009 33,950 - ------------------------------------------------------------------------ Short-term investments 104,487 42,355 - ------------------------------------------------------------------------ Cash and short-term investments $230,096 $147,983 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Long-term investments $24,200 $ 24,200 - ------------------------------------------------------------------------ Long-term investments are in the form of commercial notes with maturities of five to eight years secured by U.S. Treasury Notes. Such investments enable the Company to take advantage of certain tax incentives in its Puerto Rico operation and are treated as held to maturity for financial reporting purposes. (b) Marketable Securities Marketable securities are comprised of equity securities. The Company has accounted for investments in equity securities as "available-for-sale" and has stated applicable investments at fair value, with net unrealized appreciation reported as a separate component of stockholders' equity. Marketable securities had an aggregate cost of $1,559,000 and $14,123,000 at March 31, 1997 and 1996, respectively. At March 31, 1997, marketable securities included gross unrealized gains of $4,174,000 and gross unrealized losses of $185,000. At March 31, 1996 marketable securities included gross unrealized gains of $27,334,000 and gross unrealized losses of $3,588,000. At March 31, 1997, marketable securities included the Company's approximate 7% ownership interest in The 3DO Company ("3DO"). During fiscal 1997, the Company sold 1,220,000 shares of 3DO reducing its ownership interest to 2,013,668 shares. At March 31, 1996, the Company's ownership interest was approximately 12% of the outstanding shares of 3DO. For the fiscal years ended March 31, 1997 and 1996, the fair value of 3DO stock and other securities sold was $21,152,000 and $9,783,000, respectively. The gross realized gains from these sales totaled $8,393,000 and $9,112,000 for fiscal 1997 and 1996, respectively. There were no gains or losses from sales of marketable securities during 1995. The gain on sale of investments is based on the specific identification method. (c) Foreign Currency Forward Exchange Contracts The Company utilizes foreign currency forward exchange contracts to hedge foreign currency market exposures of underlying assets, liabilities and other obligations. The Company does not use forward exchange contracts for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and one-to-one matching of forward exchange contracts to underlying transactions. Gains and losses on currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and recognized in income in the same period that the underlying transactions are settled. Gains and losses on currency forward contracts that are designated and effective as hedges of existing transactions are recognized in income in the same period as losses and gains on the underlying transactions are recognized and generally offset. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. The Company transacts business in various foreign currencies, including European currencies. During fiscal 1997, the Company established hedging programs to protect against exposure on certain intercompany receivables that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. At March 31, 1997, the Company had foreign exchange contracts, all having maturities of 90 days or less, to purchase and sell approximately $27,549,000 in foreign currencies, primarily German Deutschmarks and British Pounds. The difference between the face value and market value of these contracts is not significant. The counterparties to these contracts are substantial and credit worthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be material. 39 (3) COMMITMENTS Lease Obligations The Company leases its current facilities and certain equipment under non-cancelable operating lease agreements. The Company is required to pay property taxes, insurance and normal maintenance costs for certain of its facilities and will be required to pay any increases over the base year of these expenses on the remainder of the Company's facilities. In February 1995, the Company entered into a master operating lease for land and a building to be constructed in Redwood City, California. The initial term of the lease is for a period of three years from the earlier of the date of completion of construction or December 1998. Monthly lease payments are based upon the London Interbank Offered Rate. The Company has the option to purchase the property for the unamortized financed balance at any time after the non-cancelable lease term, or it may terminate the lease at any time after the non-cancelable term by arranging a third party sale or by making a termination payment. Should the Company elect to terminate the lease, it will guarantee a residual value of up to 85% of the unamortized value of the property. As part of the agreement, the Company must also comply with certain financial covenants. Total future minimum lease commitments as of March 31, 1997 are: ============================================================= Year Ending: (in thousands) 1998 $11,110 1999 7,647 2000 2,593 2001 1,570 2002 1,132 Thereafter 9,509 - ------------------------------------------------------------- $33,561 - ------------------------------------------------------------- Total rent expense for all operating leases was $10,158,000, $7,631,000, and $6,451,000, for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. The current portion of deferred rent of $599,000 and $823,000 at March 31, 1997 and 1996, respectively, represents the obligation accrued for rent, calculated on the straight-line method over the lease term and is included in accrued liabilities. (4) CONCENTRATION OF CREDIT RISK The Company extends credit to various companies in the retail and mass merchandising industry. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company's overall credit risk. Although the Company generally does not require collateral, the Company performs ongoing credit evaluations of its customers and reserves for potential credit losses are maintained. The Company had no sales to any one customer in excess of 10% of total net revenues for the fiscal years ended March 31, 1997, 1996 and 1995. Short-term investments are placed with high credit-quality financial institutions or in short-duration high quality securities. The Company limits the amount of credit exposure in any one institution or type of investment instrument. (5) LITIGATION The Company is subject to pending claims and litigation. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits would not have a material adverse effect upon the consolidated financial condition of the Company. (6) PREFERRED STOCK At March 31, 1997 and 1996, the Company had 1,000,000 shares of Preferred Stock authorized but unissued. The rights, preferences, and restrictions of the Preferred Stock may be designated by the Board of Directors without further action by the Company's stockholders. (7) STOCK PLANS (a) Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan whereby eligible employees may authorize payroll deductions of up to 10% of their compensation to purchase shares at 85% of the lower of the fair market value of the Common Stock on the date of commencement of the offering or on the last day of the six-month purchase period. The Plan commenced in September 1991. In fiscal 1997, 184,596 shares were purchased by the Company and distributed to employees at prices ranging from $21.25 to $25.18. In fiscal 1996, 154,516 shares were purchased by the Company and distributed to employees at prices ranging from $15.09 to $21.57. In fiscal 1995, 169,187 shares were purchased by the Company and distributed to employees at prices ranging from $15.09 to $15.51 per share. The weighted average fair value of the fiscal 1997 and fiscal 1996 awards was $10.413 and $8.813, respectively. At March 1997, the Company had 228,638 shares of its Common Stock reserved for future issuance under the Plan. (b) Stock Option Plans The Company's 1991 Stock Option Plan and Directors' Plan ("Option Plans") provide stock options for employees, officers and independent contractors, and for directors, respectively. Pursuant to these Option Plans, the Board of Directors may grant non-qualified and incentive stock options to employees and officers and non-qualified options to independent contractors, and directors, at not less than the fair market value on the date of grant. The options generally expire ten years from the date of grant and are generally exercisable in monthly increments over 50 months. 40 SFAS 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of options pricing models. These models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which characteristics significantly differ from those of the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions used for grants made in 1997 and 1996 under the stock plans: risk-free interest rates of 5.48% to 6.36% in 1997 and 5.12% to 6.25% in 1996; expected volatility of 58% for both years; expected lives in both years of 2.42 years under the Option Plans and one year for the Employee Stock Purchase Plan. No dividends are assumed in the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized when they occur. Had compensation cost for the Company's stock-based plans been determined on the fair value at the grant date for awards consistent with the method of SFAS 123, the Company's pro forma net income and net income per share for fiscal 1997 and 1996 would have been $39,805,000 ($0.73 per share) and $33,959,000 ($0.63 per share) in fiscal 1997 and 1996, respectively. Because SFAS 123 is applicable only to options granted subsequent to March 31, 1995, the impact of non-vested stock options granted prior to this date has been excluded from the pro forma calculation. Accordingly, the fiscal 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments as the pro forma effect will not be fully reflected until subsequent years. 41 Additional information regarding options outstanding as of March 31, 1997 is as follows:
================================================================================ Options Outstanding Options Exercisable -------------------------------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Number of Contractual Exercise Number of Exercise Range of Exercise Prices Shares Life Price Shares Price - ------------------------- ---------- ----------- --------- ---------- ------- $ 0.720 - $ 4.469 841,483 3.94 $3.30 841,282 $3.30 6.250 - 13.500 1,084,505 6.50 13.18 775,466 13.07 13.625 - 18.000 1,182,384 6.20 16.06 948,389 15.71 18.125 - 23.000 528,172 7.81 19.77 228,314 19.81 23.500 - 23.500 1,422,608 8.94 23.50 301,440 23.50 23.750 - 29.750 719,361 8.28 26.13 270,558 26.56 29.875 - 29.875 1,263,984 9.43 29.88 149,983 29.88 30.000 - 38.625 900,637 8.83 32.99 173,306 32.68 - --------------------------------------------------------------------------------------------------------------------------- $ 0.720 - $ 38.625 7,943,134 7.60 $20.92 3,688,738 $15.38 ===========================================================================================================================
The following summarizes the activity under the Company's stock option plans during the fiscal years ended March 31, 1997, 1996 and 1995:
-------------------------------- Options Outstanding -------------------------------- Weighted Average Shares Exercise Price --------------------------------- Balance at March 31, 1994 6,580,797 $13.63 Granted 3,173,931 16.88 Canceled (1,595,618) 25.36 Exercised (810,673) 6.15 ---------- ------ Balance at March 31, 1995 (3,497,818 shares were exercisable at a weighted average price of $10.00) 7,348,437 13.31 Granted 4,312,249 28.25 Canceled (2,321,172) 30.18 Exercised (1,658,953) 11.30 ---------- ------ Balance at March 31, 1996 (3,301,613 shares were exercisable at a weighted average price of $11.84) 7,680,561 17.03 Granted 2,214,089 30.55 Canceled (714,286) 22.77 Exercised (1,237,230) 12.85 ---------- ------ Balance at March 31, 1997 7,943,134 $20.92 ========== ======
42 (8) PROPERTY AND EQUIPMENT Property and equipment at March 31, 1997 and 1996 consisted of: ======================================================================== 1997 1996 - ------------------------------------------------------------------------ (in thousands) Computer equipment $87,077 $62,858 Buildings 21,590 18,921 Office equipment, furniture and fixtures 15,389 11,765 Leasehold improvements 8,931 7,732 Land 6,475 4,766 Warehouse equipment and other 3,127 2,770 - ------------------------------------------------------------------------ 142,589 108,812 Less accumulated depreciation and amortization (57,457) (38,750) - ------------------------------------------------------------------------ $85,132 $70,062 - ------------------------------------------------------------------------ Depreciation and amortization expenses associated with property and equipment amounted to $20,807,000, $15,119,000, and $9,339,000, for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. (9) ACCRUED LIABILITIES Accrued liabilities at March 31, 1997 and 1996 consisted of: ======================================================================== 1997 1996 - ------------------------------------------------------------------------ (in thousands) Accrued expenses $19,105 $18,203 Accrued royalties 31,841 16,889 Accrued compensation and benefits 18,279 11,480 Accrued income taxes 12,611 10,477 Deferred income taxes 3,377 5,878 Deferred revenue 657 679 - ------------------------------------------------------------------------ $85,870 $63,606 - ------------------------------------------------------------------------ (10) JOINT VENTURES (a) ELECTRONIC ARTS VICTOR, INC. The Company has a majority interest in a joint venture corporation, Electronic Arts Victor, Inc. ("EAV"), for the development and distribution of entertainment software products in Japan as well as certain Asian countries. EAV is sixty-five percent owned by the Company and thirty-five percent owned by Victor Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical Industries, Inc.) a wholly-owned subsidiary of Victor Company of Japan, Limited. The Company has consolidated 100% of the assets, liabilities and results of operations for EAV. VEI's 35% interest in EAV and the profits or losses therefrom has been reflected as "Minority interest in consolidated joint venture" on the Company's Consolidated Financial Statements. (b) CREATIVE WONDERS, INC. In December 1994, the Company and Capital Cities/ABC, Inc. formed Creative Wonders, Inc. (formerly ABC/EA Home Software, Inc.), a joint venture company, to publish children's edutainment and interactive entertainment multimedia titles as well as reference products for personal computers and new generation entertainment machines. Each company has a 50% ownership interest in the joint venture company. The investment is accounted for under the equity method. The Company distributes interactive titles sold by the joint venture into the retail channel. 43 (11) INCOME TAXES The Company's pretax income from operations for the fiscal years ended March 31, 1997, 1996 and 1995 consisted of the following components: ========================================================================== (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------- Domestic $30,527 $14,722 $41,330 Foreign 48,434 44,830 36,748 - -------------------------------------------------------------------------- Total pretax income $78,961 $59,552 $78,078 - -------------------------------------------------------------------------- Income tax expense (benefit) for the fiscal years ended March 31, 1997, 1996 and 1995 consisted of: =========================================================================== (in thousands) Current Deferred Total - --------------------------------------------------------------------------- 1997: Federal $7,253 $(4,439) $2,814 State 848 (298) 550 Foreign 16,188 447 16,635 Charge in lieu of taxes from employee stock plans 7,242 - 7,242 - --------------------------------------------------------------------------- $31,531 $(4,290) $27,241 - --------------------------------------------------------------------------- 1996: Federal $(6,075) $2,094 $(3,981) State (523) 395 (128) Foreign 13,980 (282) 13,698 Charge in lieu of taxes from employee stock plans 9,170 - 9,170 - --------------------------------------------------------------------------- $16,552 $2,207 $18,759 - --------------------------------------------------------------------------- 1995: Federal $3,676 $5,955 $9,631 State 353 2,688 3,041 Foreign 8,066 - 8,066 Charge in lieu of taxes from employee stock plans 4,242 - 4,242 - --------------------------------------------------------------------------- $16,337 $8,643 $24,980 - --------------------------------------------------------------------------- The components of the net deferred tax assets as of March 31, 1997 and 1996 consist of: =========================================================================== (in thousands) 1997 1996 - --------------------------------------------------------------------------- Deferred tax assets: Accruals, reserves and other expenses $28,495 $23,415 Federal and State loss carryforwards - 1,553 Foreign loss and credit carryforwards 11,766 8,321 - --------------------------------------------------------------------------- Total gross deferred tax assets 40,261 33,289 Less: valuation allowance (11,766) (8,321) - --------------------------------------------------------------------------- Net deferred tax assets 28,495 24,968 - --------------------------------------------------------------------------- Deferred tax liabilities: Undistributed earnings of DISC (2,081) (2,378) Prepaid royalty expenses (25,385) (20,988) Unrealized gains on marketable securities (1,396) (7,480) - --------------------------------------------------------------------------- Total gross deferred tax liabilities (28,862) (30,846) - --------------------------------------------------------------------------- Net deferred tax asset (liability) $(367) $(5,878) - --------------------------------------------------------------------------- The valuation allowance relates solely to the foreign loss and foreign credit carryforwards, for which the utilization is uncertain in future periods. At March 31, 1997, the Company had no net operating loss carryforwards for Federal or State income tax purposes. The differences between the statutory income tax rate and the Company's effective tax rate, expressed as a percentage of income before provision for income taxes, for the years ended March 31, 1997, 1996 and 1995 were as follows: ============================================================================ 1997 1996 1995 - ---------------------------------------------------------------------------- Statutory Federal tax rate 35.0% 35.0% 35.0% State taxes, net of Federal benefit 0.9 0.5 2.9 Differences between statutory rate and foreign effective tax rate (1.4) (3.0) (1.8) Foreign loss without tax benefit 1.6 - 3.4 Research and development credits - - (1.2) Tax exemptions on Puerto Rico operation (0.8) (0.7) (5.0) Other (0.8) (0.3) (1.3) - ---------------------------------------------------------------------------- 34.5% 31.5% 32.0% - ---------------------------------------------------------------------------- The Company does not provide for U.S. taxes on undistributed earnings of its foreign subsidiaries. At March 31, 1997, the undistributed foreign earnings of the foreign subsidiaries amounted to approximately $76,000,000. If these earnings were distributed to the parent company, foreign tax credits available under current law would substantially eliminate the resulting Federal tax liability. The Company's manufacturing subsidiary in Puerto Rico operates under a Puerto Rican tax incentive program which grants the Company certain percentage exemptions from Puerto Rican income, property and municipal taxes for a period of 20 years from the date of the commencement of operations. The U.S. tax benefit derived for the years ended March 31, 1997, 1996 and 1995 was approximately $600,000, $411,000, and $3,886,000, respectively. Long-term reinvestment in Puerto Rico of the undistributed earnings of the Puerto Rico subsidiary enables the Company to take advantage of certain tax incentives. In addition, the Company has been granted an amendment to expand its exemption for certain additional operations. 44 (12) INTEREST AND OTHER INCOME, NET Interest and other income, net for the years ended March 31, 1997, 1996 and 1995 consisted of: ========================================================================== (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------- Interest income $ 8,059 $6,444 $ 4,748 Interest expense (66) (141) (51) Merger-related fee - - 8,600 Gain on sale of marketable securities 8,393 4,879 - Gain (loss) on sale of property and equipment (164) 2,044 (76) Impairment of investment in affiliates - (4,700) - Foreign currency gains (losses) (1,024) 433 785 Equity in net loss of affiliates (1,566) (1,746) - Other expense, net (1,993) (1,192) (756) - -------------------------------------------------------------------------- $11,639 $6,021 $13,250 - -------------------------------------------------------------------------- (13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, SHORT-TERM INVESTMENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - the carrying amount approximates fair value because of the short maturity of these instruments. MARKETABLE SECURITIES - fair value is based on quoted market prices. (14) SUBSEQUENT EVENT On June 4, 1997, the Company entered into an agreement to merge with Maxis, Inc. ("Maxis"), a California-based interactive software developer. Under the proposed transaction, approximately 4.1 million shares of Electronic Arts' stock will be exchanged for all outstanding Maxis common stock. The transaction, which is anticipated to be completed in the quarter ended September 30, 1997, will be accounted for as a pooling of interests. 45 (15) OPERATIONS BY GEOGRAPHIC AREAS The Company operates in one industry segment. Information about the Company's operations in the North America and foreign areas for the fiscal years ended March 31, 1997, 1996 and 1995 is presented below:
North South Asia (in thousands) America Europe Pacific Japan Eliminations Total - -------------- ------- ------ ------- ----- ------------ ----- FISCAL 1997: Net revenues from unaffiliated customers $335,527 $223,930 $ 28,072 $ 37,237 $ -- $624,766 Intersegment sales 54,530 6,938 603 122 (62,193) -- -------- -------- -------- -------- -------- -------- Total net revenues $390,057 $230,868 $ 28,675 $ 37,359 $(62,193) $624,766 ======== ======== ======== ======== ======== ======== Operating income (loss) $ 23,437 $ 41,468 $ 5,652 $ (3,235) $ -- $ 67,322 Identifiable assets $368,878 $116,405 $ 12,820 $ 18,600 $ -- $516,703 FISCAL 1996: Net revenues from unaffiliated customers $306,229 $157,999 $ 21,794 $ 45,865 $ -- $531,887 Intersegment sales 49,975 9,801 54 100 (59,930) -- -------- -------- -------- -------- -------- -------- Total net revenues $356,204 $167,800 $ 21,848 $ 45,965 $(59,930) $531,887 ======== ======== ======== ======== ======== ======== Operating income $ 14,409 $ 33,126 $ 5,114 $ 882 $ -- $ 53,531 Identifiable assets $309,308 $ 88,446 $ 8,469 $ 17,996 $ -- $424,219 FISCAL 1995: Net revenues from unaffiliated customers $335,303 $112,907 $ 13,139 $ 31,997 $ -- $493,346 Intersegment sales 55,444 3,850 101 34 (59,429) -- -------- -------- -------- -------- -------- -------- Total net revenues $390,747 $116,757 $ 13,240 $ 32,031 $(59,429) $493,346 ======== ======== ======== ======== ======== ======== Operating income (loss) $ 44,276 $ 25,997 $ 2,123 $ (7,568) $ -- $ 64,828 Identifiable assets $272,577 $ 50,910 $ 6,268 $ 11,484 $ -- $341,239
46 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES During the Company's last two fiscal years, there have been no changes in independent accountants nor disagreements with such accountants as to accounting and financial disclosures of the type required to be disclosed in Item 9. 47 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors who are nominated for re-election required by Item 10 is incorporated herein by reference to the information in the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders (the "Proxy Statement") under the caption "Proposal No. 1 - Election of Directors." The information regarding executive officers required by Item 10 is included in Item 4A hereof. ITEM 11: EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the information in the Proxy Statement under the caption "Director and Executive Officer Compensation" specifically excluding the "Compensation Committee Report on Executive Compensation," and "Stock Option Plan." ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the information in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the information in the Proxy Statement under the caption "Certain Transactions." 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Index to Financial Statements. Page(s) in Form 10-K ----------------------------- Independent Auditors' Report 32 Consolidated Balance Sheets as of March 31, 1997 and 1996 33 Consolidated Statements of Income for the Years Ended March 31, 1997, 1996 and 1995 34 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1997, 1996 and 1995 35 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995 36 Notes to Consolidated Financial Statements for the Years Ended March 31, 1997, 1996 and 1995 37-46 2. Financial Statement Schedule. ---------------------------- The following financial statement schedule of Electronic Arts for the years ended March 31, 1997, 1996 and 1995 is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of Electronic Arts. Schedule II - Valuation and Qualifying Accounts Other financial statement schedules are omitted because the information called for is not required or is shown either in the Consolidated Financial Statements or the notes thereto. 3. Exhibits. --------- The following exhibits are filed as part of, or incorporated by reference into, this report: Number Exhibit Title ------ ------------- 3.01 Registrant's Certificate of Incorporation, as amended to December 1, 1992. (1) 3.02 Registrant's Certificate of Amendment of Certificate of Incorporation. (2) 3.03 Registrant's By-Laws, as amended to date. (3) 4.01 Specimen Certificate of Registrant's Common Stock. (4) 10.01 Registrant's 1982 Stock Option Plan, as amended to date, and related documents. (5) (6) 10.02 Registrant's Directors Stock Option Plan and related documents. (6) (7) 10.03 Description of Registrant's FY 1998 Executive Bonus Plan. (6) 10.04 Directors and Officers and Company Reimbursement Indemnity Policy by and between Registrant and certain underwriters at Lloyd's, London and Continental Insurance Company dated June 20, 1992. (8) 10.05 Lease by and between Registrant, Electronic Arts Limited and Allied Dunbar Assurance PLC, dated June 24, 1987, for the Registrant's U.K. facilities. (9) 49 Number Exhibit Title ------ ------------- 10.06 Lease by and between Registrant and H.G.C. Associates, dated June 24, 1992, for the Registrant's warehouse and production facilities. (10) 10.07 Lease Agreement by and between Registrant and 1450 Fashion Island Boulevard Associates, L.P., dated March 22, 1991. (11) 10.08 Registrants' 1991 Stock Option Plan and related documents as amended. (6) (12) 10.09 Form of Indemnity Agreement with Directors. (13) 10.10 Registrants' Employee Stock Purchase Plan and related documents as amended. (6) (14) 10.11 Lease Agreement by and between Registrant and The Canada Life Assurance Company, dated December 20, 1991, for the Registrant's Canadian facilities. (15) 10.13 Amendment to Lease Agreement by and between Registrant and 1450 Fashion Island Boulevard Associates, L.P., dated March 22, 1991. (17) 10.14 Agreement between Registrant and Sega Enterprises, Ltd., dated July 14, 1992. (18) (19) 10.15 Lease Agreement by and between Registrant and Century Centre II Associates, dated July 27, 1992. (19) 10.16 Amendment to Lease Agreement by and between Registrant and 1450 Fashion Island Boulevard Associates, L.P., dated October 1, 1992. (19) 10.17 Amendment to Lease Agreement by and between Registrant and Century Centre II Associates, dated February 2, 1993. (19) 10.18 Amendment to Lease Agreement by and between Registrant and Century Centre II Associates, dated February 22, 1993. (19) 10.19 Directors and Officers and Company Reimbursement Indemnity Policy by and between Registrant and certain underwriters at Lloyd's, London and Continental Insurance Company, dated June 20, 1993. (19) 10.20 Lease by and between Registrant and 1450 Fashion Island Boulevard Associates, L.P., dated August 27, 1992 for additional space at corporate headquarters. (10) 10.22 Lease by and between Registrant, Electronic Arts Limited and Heron Slough Limited, dated June 12, 1992, for the Registrant's U.K. facilities. (20) 10.23 Lease by and between Registrant and the Travelers Insurance Company, dated April 14, 1993, for the Registrant's production facilities. (21) 10.24 Amendment to Lease Agreement by and between Registrant and 1450 Fashion Island Boulevard Associates, L.P., dated June 1, 1993. (22) 10.25 Amendment to Lease Agreement by and between Registrant and the Travelers Insurance Company, dated November 30, 1993. (23) 10.26 Amendment to Lease Agreement by and between Registrant and the Travelers Insurance Company, dated November 30, 1993. (23) 10.27 Lease Agreement by and between Registrant and Arthur J. Rogers & Co., dated January 14, 1994. (24) 10.28 Lease Agreement by and between Registrant and the Prudential Insurance Company of America, dated January 10, 1994. (24) 10.29 Agreement for Lease between Flatirons Funding, LP and Electronic Arts Redwood, Inc. dated February 14, 1995. (25) 10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP dated February 14, 1995. (25) 50 Number Exhibit Title ------ ------------- 10.31 Lease Agreement by and between Registrant and Dixie Warehouse & Cartage Co., dated April 10, 1995. (25) 10.32 Commercial Earnest Money Contract between Novell, Inc. and ORIGIN Systems, Inc. dated April 13, 1995. (26) 10.33 First Amendment to Commercial Earnest Money Contract between Novell, Inc. and ORIGIN Systems, Inc. dated June 1, 1995. (27) 10.34 Amendment No. 1 to Agreement between Registrant and Sega Enterprises, Inc. effective December 31, 1995. (28) 10.35 Lease Agreement by and between Registrant and Don Mattrick dated October 16, 1996. (29) 10.36 Amended and Restated Guaranty from Electronic Arts Inc. to Flatirons Funding LP, dated March 7, 1997. 10.37 Amended and Restated Agreement for Lease between Flatirons Funding, LP and Electronic Arts Redwood Inc. dated March 7, 1997. 10.38 Amendment No. 1 to Lease Agreement between Electronic Arts Redwood Inc. and Flatirons Funding, LP dated March 7, 1997. 11.01 Computation of Per Share Earnings. 21.01 Subsidiaries of the Registrant. 23.01 Report on Financial Statement Schedule and Consent of Independent Auditors. 27 Financial Data Schedule. _________ (1) Incorporated by reference to Exhibit 3.01 to Registrant's Current Report on Form 8-K filed on October 16, 1991. (2) Incorporated by reference to Exhibit 4.01 to Registrant's Registration Statement on Form S-8 filed on December 1, 1992 (File No. 33-55212) (the "1992 Form S-8"). (3) Incorporated by reference to Exhibit 3.02 to Registrant's Current Report on Form 8-K filed on October 16, 1991. (4) Incorporated by reference to Exhibit 4.01 to Registrant's Registration Statement on Form S-4 filed on March 3, 1994 (File No. 33-75892). (5) Incorporated by reference to Exhibit 4.03 to Post-Effective Amendment No. 2 to Registrant's Registration Statement on Form S-8 filed on November 6, 1991 (File No. 33-32616) ("S-8 Amendment No. 2"). (6) Management contract or compensatory plan or arrangement. (7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No. 2. (8) Incorporated by reference to Exhibit 10.08 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1992 (the "1992 Form 10-K"). 51 (9) Incorporated by reference to Exhibit 10.07 to the Registrant's Registration Statement on Form S-1 filed on September 20, 1989, and all amendments thereto (File No. 33-30346) (the "Form S-1"). (10) Incorporated by reference to similarly numbered exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992. (11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended March 31, 1991. (12) Incorporated by reference to Exhibit 4.01 to the Registrant's Registration Statement on Form S-8 filed on July 29, 1993 (File No. 33-66836) (the "1993 Form S-8"). (13) Incorporated by reference to Exhibit 10.09 to the Form S-1. (14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8. (15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K. (16) Not Used. (17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K. (18) Confidential treatment has been granted with respect to certain portions of this document. (19) Incorporated by reference to similarly numbered exhibits to Registrants Annual Report on Form 10-K for the year ended March 31, 1993. (20) Incorporated by reference to Exhibit 19.01 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (21) Incorporated by reference to Exhibit 10.23 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. (22) Incorporated by reference to Exhibit 10.24 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. (23) Incorporated by reference to similarly numbered exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993. (24) Incorporated by reference to similarly numbered exhibits to Registrant's Annual Report on Form 10-K for the year ended March 31, 1994 (the "1994 Form 10-K"). (25) Incorporated by reference to similarly numbered exhibits to Registrant's Annual Report on Form 10-K for the year ended March 31, 1995 (the "1995 Form 10-K"). 52 (26) Incorporated by reference to Exhibit 10.01 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (27) Incorporated by reference to Exhibit 10.02 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (28) Incorporated by reference to similarly numbered exhibits to Registrant's Annual Report on Form 10-K for the year ended March 31, 1996 (the "1996 Form 10-K"). (29) Incorporated by reference to Exhibit 10.35 to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the quarter ended March 31, 1997. (c) EXHIBITS: The Registrant hereby files as part of this Form 10-K the exhibits listed in Item 14(a)3, as set forth above. (d) FINANCIAL STATEMENT SCHEDULE: The Registrant hereby files as part of this Form 10-K the financial statement schedule listed in Item 14(a)2, as set forth on page 55. 53 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECTRONIC ARTS By: /s/ Lawrence F. Probst III ---------------------------------------- (Lawrence F. Probst III, Chairman of the Board and Chief Executive Officer) Date: June 19, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant in the capacities indicated and on the 19th of June 1997. Name Title ---- ----- /s/ Lawrence F. Probst III Chairman of the Board - ---------------------------- and Chief Executive Officer (Lawrence F. Probst III) /s/ E. Stanton McKee, Jr. Executive Vice President and Chief - ---------------------------- Financial and Administrative Officer (E. Stanton McKee, Jr.) /s/ David L. Carbone Vice President, Finance - ---------------------------- (David L. Carbone) Directors: /s/ M. Richard Asher Director - ---------------------------- (M. Richard Asher) /s/ William J. Byron Director - ---------------------------- (William J. Byron) /s/ Daniel H. Case III Director - ---------------------------- (Daniel H. Case III) /s/ Gary M. Kusin Director - ---------------------------- (Gary M. Kusin) /s/ Timothy J. Mott Director - ---------------------------- (Timothy J. Mott) 54 ELECTRONIC ARTS INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997, 1996 AND 1995 (IN THOUSANDS)
Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Period Expenses Accounts (1) Deductions of Period - ----------- ---------- ---------- ------------ ---------- --------- Year Ended March 31, 1997 Allowance for doubtful accounts and returns $27,569 $53,563 $2,240 $47,886 $35,486 ======= ======= ====== ======= ======= Year Ended March 31, 1996 Allowance for doubtful accounts and returns $33,567 $45,346 $ (461) $50,883 $27,569 ======= ======= ====== ======= ======= Year Ended March 31, 1995 Allowance for doubtful accounts and returns $29,113 $56,371 $2,540 $54,457 $33,567 ======= ======= ====== ======= =======
(1) Primarily the translation effect of using the average exchange rate for expense items and the year-ended exchange rate for the balance sheet item (allowance account). 55 ELECTRONIC ARTS INC. 1997 FORM 10-K ANNUAL REPORT EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE PAGE - ------ ------------- ---- 10.03 Description of Registrant's FY 1998 Executive Bonus Plan 10.36 Amended and Restated Guaranty from Electronic Arts Inc. to Flatirons Funding, LP dated March 7, 1997. 10.37 Amended and Restated Agreement for Lease between Flatirons Funding, LP and Electronic Arts Redwood Inc. dated March 7, 1997. 10.38 Amendment No. 1 to Lease Agreement between Electronic Arts Redwood Inc. and Flatirons Funding, LP dated March 7, 1997. 11.01 Computation of Per Share Earnings. 21.01 Subsidiaries of the Registrant. 23.01 Report on Financial Statement Schedule and Consent of Independent Auditors. 27 Financial Data Schedule. 56 EX-10.03 2 REGISTRANT'S FY 1998 EXECUTIVE BONUS PLAN EXHIBIT 10.03 ELECTRONIC ARTS INC. AND SUBSIDIARIES DESCRIPTION OF REGISTRANT'S FISCAL YEAR 1998 EXECUTIVE BONUS PLAN Target annual bonuses are set for each executive based upon a percentage of salary. Bonuses are paid in six parts, five of which relate only to the Company's earnings results: one part measured against the Company's performance in each fiscal quarter for a total of four parts, and one part measured against the Company's performance for the fiscal year. The sixth part is discretionary and is measured against each individual executive's contributions. Bonuses are paid quarterly for the prior quarter, and after the end of the fiscal year for those portions based on fiscal year performance and individual contributions. If profits in any period are less than 90% of plan, no bonus based on the Company's performance is paid for that period. If profits exceed plan by up to 20% during a period, the bonus rate is doubled for the incremental profits above plan. If profits exceed plan by more than 20%, the bonus rate is tripled for profits in excess of 120% of plan. EX-10.36 3 RESTATED GUARANTY FROM ELECTRONIC ARTS EXHIBIT 10.36 AMENDED AND RESTATED GUARANTY from ELECTRONIC ARTS INC. to FLATIRONS FUNDING, LIMITED PARTNERSHIP Dated as of March 7, 1997 AMENDED AND RESTATED GUARANTY ----------------------------- AMENDED AND RESTATED GUARANTY, dated as of March 7, 1997 (the "Guaranty"), from ELECTRONIC ARTS INC., a Delaware corporation (the "Guarantor"), to FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lessor"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Guarantor and the Lessor entered into a Guaranty dated as of February 14, 1995 (the "Original Guaranty") pursuant to which the Guarantor guaranteed to the Lessor the due and punctual payment and performance by Electronic Arts Redwood, Inc., a Delaware corporation and a wholly-owned subsidiary of the Guarantor (the "Guaranteed Subsidiary"), of its obligations under a certain Agreement for Lease (the "Agreement for Lease") and a certain Lease Agreement (the "Master Lease") both dated as of February 14, 1995; and WHEREAS, the Lessor and the Guaranteed Subsidiary propose to enter into an amended and restated Agreement for Lease, (the "Amended and Restated Agreement for Lease") and an amendment to the Lease Agreement (the "Master Lease Amendment") both dated as of the date hereof (the Amended and Restated Agreement for Lease, as it may be further amended, restated, modified, supplemented or extended from time to time, and the Master Lease, as amended by the Master Lease Amendment and as it may be further amended, restated, modified, supplemented, or extended from time to time, are collectively hereinafter referred to as the "Guaranteed Agreements"); and WHEREAS, the Lessor is unwilling to enter into the Amended and Restated Agreement for Lease and the Master Lease Amendment with the Guaranteed Subsidiary unless the Guarantor enters into this Amended and Restated Guaranty amending and restating the Original Guaranty in its entirety. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Original Guaranty is hereby amended and restated in its entirety as follows: 1. Guaranty. (a) The Guarantor hereby unconditionally and -------- irrevocably guarantees to the Lessor the due and punctual performance of and compliance by the Guaranteed Subsidiary with all obligations, covenants, warranties, undertakings and conditions contained in or arising under the Guaranteed Agreements, including, but not limited to, the full and punctual payment by the Guaranteed Subsidiary, when due, whether at the stated due date, by acceleration or otherwise, of any and all rent, obligations, liabilities, indebtedness and other amounts of every kind arising out of the Guaranteed Agreements, all amounts in respect of the indemnities provided for in the Guaranteed Agreements, and all damages (whether provided for in the Guaranteed Agreements or otherwise permitted by law) in respect of any failure or refusal by the Guaranteed Subsidiary to make any such payment, howsoever created, arising or evidenced, voluntary or involuntary, whether direct or indirect, absolute or contingent, now or hereafter existing or owing to the Lessor (all the foregoing obligations and undertakings are collectively referred to hereinafter as the "Obligations"). (b) This Guaranty is an absolute and unconditional guaranty of performance and payment when due under the Guaranteed Agreements and not of collection of any indebtedness contained in or arising under the Guaranteed Agreements. This Guaranty is in no way conditioned upon any attempt to collect from the Guaranteed Subsidiary or upon any other event or contingency, and shall be binding upon and enforceable against the Guarantor without regard to the validity or enforceability of the Guaranteed Agreements or of any term thereof. If for any reason the Guaranteed Subsidiary shall fail or be unable duly and punctually to pay any such amount when due under the Guaranteed Agreements, the Guarantor will forthwith pay, if not already paid by the Guaranteed Subsidiary, the same immediately upon demand. (c) In case either of the Guaranteed Agreements shall be terminated as a result of the rejection thereof by any trustee, receiver or liquidating agent of the Guaranteed Subsidiary or any of its properties in any bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar proceeding, the Guarantor's obligations hereunder shall continue to the same extent as if such agreement had not been so rejected. The Guarantor agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment to the Lessor of the Obligations or any part thereof is rescinded or must otherwise be returned by the Lessor upon the insolvency, bankruptcy or reorganization of the Guaranteed Subsidiary, or otherwise, as though such payment to the Lessor had not been made. (d) The Guarantor shall pay all reasonable costs, expenses and damages incurred (including, without limitation, attorneys' fees and disbursements) in connection with the enforcement of (i) the Obligations to the extent that such costs, expenses and damages are not paid by the Guaranteed Subsidiary and (ii) the obligations of the Guarantor under this Guaranty. 2. Guaranty Continuing and Unlimited. The obligations of the --------------------------------- Guarantor hereunder shall be continuing and unlimited, shall not be subject to any counterclaim, set-off, deduction or defense (other than payment or performance) based upon any claim the Guarantor may have against the Lessor or the Guaranteed Subsidiary or any other Person, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by any circumstance or condition (whether or not the Guarantor shall have any knowledge or notice thereof) whatsoever which might constitute a legal or equitable discharge or defense including, but not limited to (a) any express or implied amendment or modification of or supplement to the Guaranteed Agreements or any other agreement referred to in either thereof, or any other instrument applicable to the Guaranteed Subsidiary or to the Obligations, or any part thereof, or any assignment or transfer of any thereof; (b) any failure on the part of the Guaranteed Subsidiary to perform or comply with the Guaranteed Agreements or any failure of any other Person to perform or comply with any term of the Guaranteed Agreements, or any 2 other agreement as aforesaid; (c) any waiver, consent, change, extension, indulgence or other action or any action or inaction under or in respect of the Guaranteed Agreements, or any other agreement as aforesaid, or this Guaranty, whether or not the Lessor, the Guaranteed Subsidiary or the Guarantor has notice or knowledge of any of the foregoing; (d) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to the Guarantor or the Guaranteed Subsidiary, or their respective properties or their creditors, or any action taken by any trustee or receiver or by any court in any such proceeding; (e) any furnishing or acceptance of additional security or any release of any security (and the Guarantor authorizes the Lessor to furnish, accept or release said security); (f) any limitation on the liability or Obligations of the Guaranteed Subsidiary under the Guaranteed Agreements (other than any limitation expressly provided for therein) or any termination, cancellation, frustration, invalidity or unenforceability, in whole or in part, of the Guaranteed Agreements, or any term of any thereof; (g) any lien, charge or encumbrance on or affecting the Guarantor's or the Guaranteed Subsidiary's respective assets and properties; (h) any act, omission or breach on the part of the Lessor under the Guaranteed Agreements, or any other agreement at any time existing between the Lessor and the Guaranteed Subsidiary or any other law, governmental regulation or other agreement applicable to the Lessor or any Obligation; (i) any claim as a result of any other dealings among the Lessor, the Guarantor or the Guaranteed Subsidiary or any of them; (j) the assignment of the Guaranteed Agreements by the Lessor to any other Person, or the assignment of this Guaranty by the Lessor to any Person permitted under Section 6 of that certain Amended and Restated Guarantor's Consent dated as of the date hereof among the Guarantor, the Lessor and The Dai-Ichi Kangyo Bank, Limited, New York Branch, as Collateral Agent; (k) any change in the name of the Lessor, the Guaranteed Subsidiary or any other person referred to herein; or (l) any failure by the Lessor to perfect or continue the perfection of any lien or security interest in any collateral or any failure by the Lessor to protect the property covered by any such lien or security interest. The unconditional obligations of the Guarantor set forth herein constitute the full recourse obligations of the Guarantor enforceable against it to the full extent of all of its present and future income, assets and properties. 3. Waiver. The Guarantor unconditionally waives: (a) notice of any ------ of the matters referred to in Section 2 hereof; (b) all notices which may be required by statute, rule of law or otherwise to preserve any rights against the Guarantor hereunder, including, without limitation, notice of the acceptance of this Guaranty, or the creation, renewal, extension, modification or accrual of the Obligations or notice of any other matters relating thereto, any presentment, demand, notice of dishonor, protest, nonpayment of any damages or other amounts payable under the Guaranteed Agreements; (c) any requirement for the enforcement, assertion or exercise of any right, remedy, power or privilege under or in respect of the Guaranteed Agreements, including, without limitation, diligence in collection or protection of or realization upon the Obligations or any part thereof or any collateral therefor; (d) any requirement of diligence; (e) any requirement to mitigate the damages resulting from a default by the Guaranteed Subsidiary under the Guaranteed Agreements; (f) the occurrence of every other condition precedent to which the Guarantor or the Guaranteed Subsidiary may otherwise be entitled; (g) the right to require the Lessor to proceed against the Guaranteed Subsidiary or any 3 other Person liable on the Obligations, to proceed against or exhaust any security held from the Guaranteed Subsidiary or any other Person, or to pursue any other remedy in the Lessor's power whatsoever, and the Guarantor waives the right to have the property of the Guaranteed Subsidiary first applied to the discharge of the Obligations; and (h) the defense of any statute of limitations affecting the enforcement of the Guaranty or the liability of the Guarantor, the Guaranteed Subsidiary or any other Person liable on the Obligations. The Lessor may, at its election, exercise any right or remedy it may have against the Guaranteed Subsidiary or any security held by the Lessor, including, without limitation, the right to foreclose upon any such security by judicial or nonjudicial sale, without affecting or impairing in any way the liability of the Guarantor hereunder, except to the extent the Obligations have been paid, and the Guarantor waives any defense arising out of the absence, impairment or loss of any right of reimbursement, contribution or subrogation or any other right or remedy of the Guarantor against the Guaranteed Subsidiary or any such security, whether resulting from such election by the Lessor or otherwise. The Guarantor understands that the liability of the Guaranteed Subsidiary to the Lessor for the Obligations may be secured by real property and that the Guarantor shall be liable for the full amount of its liability hereunder notwithstanding foreclosure on such real property by trustee sale or any other reason impairing the Guarantor's right to proceed against the Guaranteed Subsidiary. The Guarantor waives all rights and defenses that the Guarantor may have because the Guaranteed Subsidiary's Obligations are secured by real property. This means, among other things: (a) the Lessor may collect from the Guarantor without first foreclosing on any real or personal property collateral pledged by the Guaranteed Subsidiary; and (b) if the Lessor forecloses on any real property collateral pledged by the Guaranteed Subsidiary: (i) the amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (ii) the Lessor may collect from the Guarantor even if the Lessor, by foreclosing on the real property collateral, has destroyed any right the Guarantor may have to collect from the Guaranteed Subsidiary. This is an unconditional and irrevocable waiver of any rights and defenses the Guarantor may have because the Guaranteed Subsidiary's Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. The Guarantor waives any defense arising by reason of any disability or other defense of the Guaranteed Subsidiary or by reason of the cessation from any cause whatsoever of the liability, either in whole or in part, of the Guaranteed Subsidiary to the Lessor for the Obligations. The Guarantor hereby waives, to the fullest extent permitted by law, all rights and benefits under Section 2809 of the California Civil Code purporting to reduce a guarantor's obligations in proportion to the principal obligation, all rights and benefits under Section 580a of the California Code of Civil Procedure governing determination of fair market value following the exercise of power of sale, all rights and benefits under Section 580b of the California Code of Civil Procedure stating that no deficiency may be recovered on a real property purchase money obligation, all rights and benefits under Section 580d of the California Code of Civil Procedure stating that no deficiency may be recovered on a note secured by a deed of trust on 4 real property in case such real property is sold under the power of sale contained in such deed of trust, and all rights and benefits under Section 726 of the California Code of Civil Procedure and any and all similar laws now in effect or hereafter enacted in the State of California regarding the procedures to be followed by a creditor with real property security and/or limiting the right of such a creditor to a deficiency judgment, including, without limitation, the California law now in effect stating that the Lessor must first proceed against any real property collateral before commencing an action to collect the Obligations, if such sections, or any of them, have any application hereto or any application to the Guarantor. Without limiting the generality of the foregoing or any other provision hereof, the Guarantor irrevocably waives any defense that the Guarantor may have under Section 580a of the California Code of Civil Procedure including, without limitation, the requirement that (x) the Lessor bring a lawsuit against the Guarantor under this Guaranty (if at all) within three months after the date which the Lessor may hereafter elect to complete a nonjudicial foreclosure sale (if any) under any deed of trust now or hereafter securing the Obligations and (y) the Guarantor be credited with the fair market value (as determined after court hearing) of any real property encumbered by any such deed of trust which the Lessor may hereafter elect to nonjudicially foreclose (if any). The Guarantor expressly waives any and all benefits under the California Civil Code Sections 2808, 2810, 2819, 2821, 2839, 2845, 2848, 2849, 2850 and 2855. The Guarantor understands that the Lessor's exercise of certain rights and remedies contained in the Guaranteed Agreements may affect or eliminate the Guarantor's rights of subrogation against the Guaranteed Subsidiary and that the Guarantor may therefore incur partially or totally nonreimbursable liability hereunder; nevertheless, the Guarantor hereby authorizes and empowers the Lessor, its successors, endorsees and/or assignees, to exercise in its or their sole discretion, any rights and remedies, or any combination thereof, which may then be available, it being the purpose and intent of the Guarantor that its obligations hereunder shall be absolute, independent and unconditional under any and all circumstances. The Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Guaranteed Subsidiary and of all other circumstances bearing upon the risk of nonpayment of the Obligations and agrees that the Lessor shall not have any duty to advise the Guarantor of information regarding any condition or circumstance or any change in such condition or circumstance. The Guarantor acknowledges that the Lessor has not made any representation to the Guarantor concerning the financial condition of the Guaranteed Subsidiary. 5 4. Representations and Warranties of the Guarantor. The Guarantor ----------------------------------------------- represents and warrants to the Lessor that: (a) Corporate Existence. The Guarantor (i) is duly organized, ------------------- validly existing and in good standing under the laws of the State of Delaware, (ii) has the corporate power, authority and legal right to own or operate its properties or to lease the properties it operates and to conduct the business in which it is currently engaged and (iii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, except where such failure to qualify would not have a material adverse effect on the financial condition or business of Guarantor and its subsidiaries, taken as a whole. (b) Corporate Power; Authorization; Enforceable Obligations. The ------------------------------------------------------- Guarantor has the corporate power, authority and legal right to make, deliver and perform this Guaranty and has taken all necessary corporate action to authorize the execution, delivery and performance of this Guaranty. No consent of any other Person (including, without limitation, stockholders and creditors of the Guarantor), and no authorization of, notice to, or other act by any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Guaranty. This Guaranty has been duly executed and delivered on behalf of the Guarantor and constitutes a legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms. (c) No Legal Bar. The execution, delivery and performance by the ------------ Guarantor of this Guaranty will not violate any provision of any law or regulation applicable to the Guarantor or of any award, order or degree applicable to the Guarantor of any court, arbitrator or governmental authority, or of the Certificate of Incorporation or By-Laws of the Guarantor, or of any security issued by the Guarantor or of any material mortgage, indenture, lease, contract or other agreement or undertaking to which the Guarantor is a party or by which the Guarantor or any of its properties or assets may be bound. (d) No Material Litigation. There is no action, suit, proceeding or ---------------------- investigation at law or in equity by or before any court, governmental body, agency, commission or other tribunal now pending or, to the best knowledge of Guarantor, threatened against or affecting the Guarantor or any of its property or rights which questions the enforceability of this Guaranty or which, if adversely determined, would have a material adverse impact on the financial condition or business of the Guarantor and its subsidiaries, taken as a whole, or which, if adversely determined, would materially impair the ability of the Guarantor to perform its obligations hereunder. (e) Employee Benefit Plans. Each Plan and, to the best knowledge of ---------------------- the Guarantor, each Multiemployer Plan, has been administered in accordance with its terms in all material respects and complies in all material respects with all applicable requirements of law and regulations, and, to the extent applicable, (i) no Reportable Event has occurred with respect to any Plan or, to the best knowledge of the Guarantor, any Multiemployer Plan which would have a materially adverse effect on the financial condition or business of the Guarantor and its 6 affiliates, taken as a whole; (ii) no steps have been taken to terminate any Plan or to appoint a receiver to administer any Plan or, to the best knowledge of the Guarantor, to terminate or appoint a receiver to administer any Multiemployer Plan, and neither the Guarantor nor any of its affiliates has withdrawn from any Multiemployer Plan or initiated steps to do so; (iii) there is no Unfunded Vested Liability or withdrawal liability with respect to any Plan or, to the best knowledge of the Guarantor, any Multiemployer Plan, that would have, in the event of termination of such Plan or withdrawal from such Multiemployer Plan, a materially adverse effect on the financial condition or business of the Guarantor and its affiliates, taken as a whole; (iv) no contribution failure has occurred with respect to any Plan sufficient to give rise to a lien under Section 302(f) of the Employee Retirement Income Security Act of 1974, as amended, and any regulations promulgated and rulings issued thereunder ("ERISA"); and (v) no condition exists or event or transaction has occurred with respect to any Plan or, to the best knowledge of the Guarantor, any Multiemployer Plan, which could reasonably be expected to result in the incurrence by the Guarantor or any of its affiliates of any material liability, fine or penalty. For purposes of this Guaranty: (A) Plan shall mean an "employee pension benefit plan", as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Plan) and to which the Guarantor or any corporation, trade or business that is, at any relevant time, required to be aggregated with the Guarantor, under Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated and rulings issued thereunder (the "Code") or Section 4001 of ERISA, may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA, at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA; (B) Multiemployer Plan shall mean a plan described in Section 3(37) of ERISA and to which the Guarantor or any corporation, trade or business that is, at any relevant time, required to be aggregated with the Guarantor, under Sections 414(b), (c), (m) or (o) or of the Code or Section 4001 of ERISA may have any liability; (C) Reportable Event shall mean a "reportable event" as defined in Section 4043 of ERISA and the regulations issued thereunder; and (D) Unfunded Vested Liability shall mean, relative to any Plan, at any time, the excess (if any) of (I) the present value of all vested nonforfeitable benefits under such Plan over (II) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of the Guarantor or any affiliate to the Pension Benefit Guaranty Corporation or any successor thereto (the "PBGC") or the Plan under Title IV of ERISA. Neither the Guarantor nor any entity required (at any relevant time) to be aggregated with the Guarantor under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA has ever sponsored or maintained, had any obligation to contribute to, had liability under or has otherwise been a party to, any (i) "employee pension benefit plan" (as such term is defined in ERISA) subject to Section 412 of the Code, Part 3 of Subtitle B of Title I of ERISA or Title IV of ERISA, or (ii) a "welfare plan" (as such term is defined ERISA) that provides for continuing benefits or coverage for any participant or beneficiary of a participant after such participant's termination of employment except to the extent required by applicable law. 7 (f) Guaranteed Subsidiary. The Guarantor owns and will continue to --------------------- own, directly or indirectly, not less than all of the issued and outstanding shares of capital stock of the Guaranteed Subsidiary. All such shares have been validly issued, are fully paid and non-assessable and are free and clear of any liens or encumbrances. (g) Taxes. The Guarantor and each of its subsidiaries has filed all ----- federal and other income tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been set aside on its books. (h) Compliance with Laws. The Guarantor and each of its subsidiaries -------------------- is in compliance with all applicable laws, rules, regulations and orders of any governmental authority (including, without limitation, all applicable laws, rules, regulations and orders relating to environmental protection, the use and disposal of hazardous substances and building and land use), except those the non-compliance with which would not, either singly or in the aggregate, materially adversely effect the financial condition or business of the Guarantor and its subsidiaries taken as a whole or impair the ability of the Guarantor to perform its obligations hereunder. 5. Payments. Each payment by the Guarantor to the Lessor under this -------- Guaranty shall be made by transferring the amount thereof to the Lessor or an account designated by the Lessor in immediately available funds without set-off or counterclaim. The making of any payments by the Guarantor hereunder shall not constitute a waiver of any rights not waived pursuant hereto that the Guarantor may have against the Lessor or the Guaranteed Subsidiary. 6. Parties. This Guaranty shall inure to the benefit of the Lessor ------- and its successors, assigns or transferees, and shall be binding upon the Guarantor and its successors and assigns. The Guarantor may not delegate any of its duties under this Guaranty without the prior written consent of the Lessor or any Person to whom the Lessor has assigned this Guaranty. Upon notice to the Guarantor, the Lessor and its successors, assigns and transferees may assign its or their rights and benefits under this Guaranty to any financial institution providing financing to the Lessor in connection with the Guaranteed Agreements. 7. Notices. All notices, demands and other communications between ------- the Lessor and the Guarantor under this Guaranty shall be in writing and shall be delivered or sent to the address or telecopier number shown below, or to such other address or telecopier number as either party may by written notice to the other have designated for such purpose. Any such notice, demand or other communication shall not be effective until actually received. If to the Lessor: Flatirons Funding, Limited Partnership 8 c/o ML Leasing Equipment Corp. - Project and Lease Finance Group World Financial Center North Tower - 27th Floor 250 Vesey Street New York, New York 10281-1327 Attention: Jean Tomaselli Telecopier: (212) 449-2854 Telephone: (212) 449-7925 With a copy of each such notice to be simultaneously given, delivered or served to Gerard Haugh at the following address: ML Leasing Equipment Corp. Controllers Office World Financial Center South Tower - 8th Floor 225 Liberty Street New York, New York 10080-6108 Attention: Gerard Haugh Telecopier: (212) 236-7584 Telephone: (212) 236-7203 If to the Guarantor: Electronic Arts Inc. 1450 Fashion Island Boulevard San Mateo, California 94404-2064 Attention: Ruth Kennedy, Esq. Vice President and General Counsel Telecopier: (415) 513-7552 Telephone: (415) 571-6375 8. Remedies. The Guarantor stipulates that the remedies at law in -------- respect of any default or threatened default by the Guarantor in the performance of or compliance with any of the terms of this Guaranty are not and will not be adequate, and that any of such terms may be specifically enforced by a decree for specific performance or by an injunction against violation of any such terms or otherwise. 9. Rights to Deal with the Guaranteed Subsidiary. At any time and --------------------------------------------- from time to time, without terminating, affecting or impairing the validity of this Guaranty or the obligations of the Guarantor hereunder, the Lessor may deal with the Guaranteed Subsidiary in the same manner and as fully as if this Guaranty did not exist and shall be entitled, among other 9 things, to grant the Guaranteed Subsidiary, without notice or demand and without affecting the Guarantor's liability hereunder, such extension or extensions of time to perform, renew, compromise, accelerate or otherwise change the time for payment of or otherwise change the terms of payment or any part thereof contained in or arising under the Guaranteed Agreements, or to waive any Obligation of the Guaranteed Subsidiary to perform, any act or acts as the Lessor may deem advisable. 10. Subrogation. The Guarantor irrevocably waives any and all ----------- rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against the Guaranteed Subsidiary with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by the Guaranteed Subsidiary in respect thereof until the Obligations have been fully, finally and indefeasibly paid in cash to the Lessor and the Guaranteed Agreement and all obligations of the Lessor thereunder terminated. 11. Guarantor's Covenants. The Guarantor hereby covenants and agrees --------------------- that until the Obligations and all obligations of the Guarantor under this Guaranty have been paid or discharged in full: (a) Compliance with Law. The Guarantor shall comply, and shall cause ------------------- each of its subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders of any governmental authority having jurisdiction over its or such subsidiary's business, as the case may be, except (i) such noncompliance as would not materially adversely affect the financial condition or business of the Guarantor and its subsidiaries, taken as a whole, or (ii) such noncompliance as is being contested in good faith by appropriate proceedings. (b) Payment of Taxes. The Guarantor shall, and shall cause each of ---------------- its subsidiaries to, pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or such subsidiary or upon its or such subsidiary's income or properties, as the case may be, prior to the date on which penalties attach thereto, except to the extent that (i) any such tax, assessment, charge or levy is being contested in good faith by appropriate proceedings and adequate reserves therefor have been established by the Guarantor or such subsidiary, as the case may be, or (ii) the failure so to pay or discharge any such tax, assessment, charge or levy would not materially adversely affect the financial condition or business of the Guarantor and its subsidiaries, taken as a whole. (c) Maintenance of Insurance. The Guarantor shall maintain, and ------------------------ shall cause each of its subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its or such subsidiary's properties and business, as the case may be, against loss or damage of the kinds customarily insured against by entities engaged in the same or similarly situated business, of such types and in such amounts as are customarily carried under similar circumstances by such other entities. (d) Consolidated Tangible Net Worth. The Guarantor shall maintain ------------------------------- at all 10 times a consolidated tangible net worth of not less than the sum of (a) $180,000,000 plus (b) 50% of the Guarantor's cumulative positive net income for each of its fiscal quarters that shall have elapsed during the period from the date of the Original Guaranty to the date such determination is being made, commencing with the fiscal quarter ended June 30, 1995; provided, however, that -------- ------- in no event shall the Guarantor's consolidated tangible net worth at any time during the periods set forth below be less than the amount set forth opposite such period:
Period Amount ------ ------ March 7, 1997 to March 30, 1997 $210,000,000 March 31, 1997 to March 30, 1998 $245,000,000 Thereafter $290,000,000
For purposes of this Section 11(d): (i) consolidated tangible net worth shall mean the total stockholder's equity of the Guarantor and its subsidiaries less the amount of all intangible assets (excluding software acquired by the Guarantor or any subsidiary which is capitalized in accordance with generally accepted accounting principles) of the Guarantor and its subsidiaries, in each case determined on a consolidated basis in accordance with generally accepted accounting principles; and (ii) net income shall mean, for any period, the net income (or loss) of the Guarantor and its subsidiaries for such period, less ---- (plus) the amount of any extraordinary or non-recurring gains (or losses) for ---- such period included in net income, determined in each case on a consolidated basis in accordance with generally accepted accounting principles. (e) Fixed Charge Coverage Ratio. The Guarantor shall not permit the --------------------------- ratio of its consolidated EBITDAR to consolidated fixed charges as of the end of any measurement period to be less than 3:1. For purposes of this Section 11(e): (i) EBITDAR shall mean, with respect to the Guarantor and its subsidiaries for any period, the sum of (a) the consolidated net income of the Guarantor and its subsidiaries for such period before any extraordinary items and deduction of interest expenses and income taxes, plus (b) depreciation and ---- amortization expenses of the Guarantor and its subsidiaries for such period to the extent such expenses were deducted in computing the net income of the Guarantor and its subsidiaries for such period, plus (c) the aggregate amount of ---- all rentals paid during such period by the Guarantor and its subsidiaries under any lease (other than leases capitalized or required under generally accepted accounting principles to be capitalized on the balance sheet of the Guarantor and its subsidiaries) to the extent such rentals were deducted in computing the net income of the Guarantor and its subsidiaries for such period, in each case determined on a consolidated basis in accordance with generally accepted accounting principles; (ii) consolidated fixed charges shall mean, with respect to the Guarantor and its subsidiaries for any period, the sum (without duplication) of (a) the aggregate amount of all interest payments due during such period in respect of any Indebtedness (as defined in the Master Lease) or other liabilities of the Guarantor and its subsidiaries (including, without limitation, the portion of any rent payable under any lease capitalized or required under generally accepted accounting principles to be capitalized on the balance sheet of the Guarantor and its subsidiaries attributable to interest), plus (b) the aggregate amount of all rentals paid by the Guarantor and its - ---- subsidiaries during such period under any lease (other than leases capitalized or required under generally accepted accounting principles to 11 be capitalized on the balance sheet of the Guarantor and its subsidiaries), in each case determined on a consolidated basis in accordance with generally accepted accounting principles; and (iii) measurement period shall mean, with respect to any fiscal quarter of the Guarantor, the period of four fiscal quarters ending on the last day of such fiscal quarter. (f) Total Consolidated Debt. The Guarantor shall not at any time ----------------------- permit its total consolidated debt to exceed 60% of its total consolidated capital. As used in this Section 11(f): (i) total consolidated debt shall mean the sum (without duplication) of (a) all Indebtedness (as defined in the Master Lease) of the Guarantor and its subsidiaries, plus (b) the aggregate amount of ---- the Obligations as reasonably determined by the Guarantor in good faith, but in no event less than the total Adjusted Acquisition Cost of all Property (as such terms are defined in the Guaranteed Agreements) and (ii) total consolidated capital shall mean, with respect to the Guarantor and its subsidiaries, the sum of (a) the total consolidated stockholders equity of the Guarantor and its subsidiaries as reflected in accordance with generally accepted accounting principles on its most recent consolidated balance sheet, plus (b) total ---- consolidated debt (as defined in clause (i) above) of the Guarantor and its subsidiaries. (g) Dividends. The Guarantor shall not, nor shall it permit any of --------- its subsidiaries to declare, pay or make any dividend on, or make any payment on account of, or purchase, redeem, defease, return or otherwise acquire, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of stock of the Guarantor or any option or warrant thereon, whether now or hereafter outstanding, or make any other distribution in respect thereof or on any warrant or option thereon, whether directly or indirectly, whether in cash or property or in obligations of the Guarantor or any subsidiary (all of the foregoing, "Dividends"), except that, provided the Guarantor is not in default of any of its obligations under this Guaranty, the Guarantor may (i) during any fiscal year pay Dividends in an amount not in excess of 50% of the Guarantor's net income (as defined in Section 11(d)) for such fiscal year, (ii) repurchase up to two million shares of its common stock (after any adjustment for any stock splits or combinations) pursuant to a share repurchase program authorized by written consent of the Guarantor's Board of Directors on July 22, 1994 (it being understood that amounts paid to repurchase shares pursuant to this clause (ii) shall be excluded for purposes of determining the amount of any Dividends permitted to be paid pursuant to clause (i)) and (iii) declare and pay Dividends on its common stock provided such Dividends are payable solely in additional shares of its common stock or warrants, options or rights to acquire additional shares of its common stock or split-ups combinations of its shares of common stock into more or less such shares, as the case may be). (h) Delivery of Financial Statements, Compliance Certificate and ------------------------------------------------------------ Notices. The Guarantor shall, for so long as this Guaranty shall remain in - ------- effect, furnish to the Lessor and any Assignee each of following: (i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Guarantor, a copy of the audited consolidated balance sheet of the Guarantor as at the end of such year and the related audited consolidated statements of income, stockholders' investment and 12 cash flows for such year, setting forth in each case in comparative form the figures as of the end of and for the previous year, all in reasonable detail, certified, without qualification, by a firm of independent accountants of nationally recognized standing acceptable to the Lessor; (ii) as soon as available, but in any event not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Guarantor, a copy of the unaudited consolidated balance sheet of the Guarantor as at the end of each such fiscal quarter and the related unaudited consolidated statements of income, stockholders' investment and cash flows of the Guarantor for such quarter and the portion of the fiscal year through such date, all in reasonable detail and setting forth in comparative form the figures as of the end of and for the corresponding period of the previous year, certified as to fairness of presentation by the Chief Financial Officer, the Vice President of Finance or the Controller of the Guarantor; all such financial statements to be complete and correct in all material respects (subject, in the case of interim statements, to normal year-end audit adjustments) and to be prepared in reasonable detail and in accordance with generally accepted accounting principles (except, in the case of interim financial statements, that such financial statements need not contain footnotes and shall be prepared substantially in accordance with generally accepted accounting principles) applied consistently throughout the periods reflected therein (except as approved by the Guarantor's independent accountants and disclosed therein); (iii) concurrently with the delivery of the financial statements referred to in clauses (i) and (ii), a certificate signed by the Chief Financial Officer, the Vice President of Finance, the Controller or the Assistant Controller of the Guarantor setting forth (w) computations in reasonable detail demonstrating compliance with the financial covenants set forth in Section 11(d), (e) and (f); (x) the calculation of the ratio of Total Consolidated Debt to Consolidated Tangible Net Worth; (y) the current S&P and Moody's rating, if any, for Guarantor's long-term unsecured debt; and (z) a statement that, to the best of such officer's knowledge, the Guarantor during the relevant period has observed or performed all of its covenants and other agreements hereunder, and satisfied every condition contained herein to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any default hereunder except as described in such certificate (any such description to be in reasonable detail and to include a description of any action to be taken with respect to such default); and (iv) promptly upon obtaining knowledge thereof, notice of the occurrence of a Reportable Event under, or the institution of steps by the Guarantor or any of its affiliates to withdraw from any Multiemployer Plan, or the institution of any steps to terminate any Plan or the failure to make a 13 required contribution to any Plan, or the taking of any action with respect to a Plan or, to the best of its knowledge, any Multiemployer Plan, which could reasonably be expected to result in the requirement that the Guarantor or any of its affiliates furnish a bond or other security to the PBGC or such Plan or Multiemployer Plan, or the occurrence of any event with respect to any Plan or, to the best of its knowledge, any Multiemployer Plan, which could reasonably be expected to result in the incurrence by the Guarantor or any of its affiliates of any material liability, fine or penalty, or the occurrence of any material increase in the contingent liability of the Guarantor or any of its affiliates with respect to any post-retirement "welfare plan" (as such term is defined in ERISA) benefit, and in each case the action which the Guarantor proposes to take with respect thereto. (i) Merger, etc. The Guarantor shall comply with Section 26(b) of ------------ the Master Lease. 12. Survival of Representations, Warranties, etc. All --------------------------------------------- representations, warranties, covenants and agreements made herein and in statements or certificates delivered pursuant hereto shall survive any investigation or inspection made by or on behalf of the Lessor and shall continue in full force and effect until all of the obligations of the Guarantor under this Guaranty shall be fully performed in accordance with the terms hereof, and until the payment in full of all sums payable by the Guaranteed Subsidiary under the Guaranteed Agreements and the performance in full of all obligations of the Guaranteed Subsidiary in accordance with the terms and provisions of such agreements. 13. GOVERNING LAW AND CONSENT TO JURISDICTION; WAIVER OF JURY --------------------------------------------------------- TRIAL. (a) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH - ----- THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED THEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY OR ANY DOCUMENT OR ANY INSTRUMENT REFERRED TO HEREIN OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF 14 ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE GUARANTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS GUARANTY OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. THE REFERENCES IN THIS GUARANTY TO CALIFORNIA STATUTES ARE PRECAUTIONARY ONLY, AND NEITHER THE GUARANTOR NOR THE LESSOR DESIRES OR INTENDS THAT THIS GUARANTY OR THE RIGHTS AND REMEDIES OF THE LESSOR HEREUNDER SHALL IN ANY RESPECT BE GOVERNED BY THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND EXPRESSLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ENFORCING OR DEFENDING ANY RIGHTS ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR ACKNOWLEDGES THAT THE PROVISIONS OF THIS SECTION 13(b) HAVE BEEN BARGAINED FOR AND THAT IT HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION THEREWITH. 15 14. Miscellaneous. If any term of this Guaranty or any application ------------- thereof shall be invalid or unenforceable, the remainder of this Guaranty and any other application of such term shall not be affected thereby. Any term of this Guaranty may be amended, waived, discharged or terminated only by an instrument in writing signed by the Guarantor and the Lessor. The headings in this Guaranty are for purposes of reference only and shall not limit or define the meaning hereof. This Guaranty may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the undersigned have caused this Guaranty to be executed and delivered as of the day and year first above written. ELECTRONIC ARTS INC., as Guarantor By: /s/ David L. Carbone ------------------------------------------ Name: David L. Carbone Title: Vice President, Finance Acknowledged and Agreed: FLATIRONS FUNDING, LIMITED PARTNERSHIP By: Flatirons Capital, Inc., Managing General Partner By: /s/ Jean M. Tomaselli ---------------------------------------------- Name: Jean M. Tomaselli Title: Vice President and Assistant Secretary EX-10.37 4 RESTATED AGMT FOR LEASE BETWEEN FLATIRONS EXHIBIT 10.37 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY ________________________________________________________________________________ AMENDED AND RESTATED AGREEMENT FOR LEASE between Flatirons Funding, Limited Partnership and Electronic Arts Redwood, Inc. Dated as of March 7, 1997 ________________________________________________________________________________ THIS AGREEMENT HAS BEEN ASSIGNED AS SECURITY FOR INDEBTEDNESS OF THE OWNER. SEE SECTION 17. This Agreement has been manually executed in 8 counterparts, numbered consecutively from 1 through 8, of which this is No. 3. To the extent, if any, that this Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any jurisdiction), no security interest in this Agreement may be created or perfected through the transfer or possession of any counterpart other than the original counterpart which shall be the counterpart identified as counterpart No. 1. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY AMENDED AND RESTATED AGREEMENT FOR LEASE ------------------- Amended and Restated Agreement for Lease dated as of March 7, 1997 (as the same may be amended, restated, modified or supplemented from time to time, this "Agreement"), between Flatirons Funding, Limited Partnership, a Delaware limited partnership ("Owner") and Electronic Arts Redwood, Inc., a Delaware corporation ("Agent"). WHEREAS, Owner may from time to time acquire either (i) a fee interest or (ii) a leasehold interest pursuant to a Ground Lease (hereinafter defined) in certain Unit Premises (hereinafter defined); and WHEREAS, Agent is an Affiliate (hereinafter defined) of the Guarantor (hereinafter defined); and WHEREAS, Owner and Agent have entered into a Lease (hereinafter defined), providing for the lease or sublease by Agent of certain Unit Improvements (hereinafter defined) which will be constructed and furnished on such Unit Premises pursuant to the terms of this Agreement; WHEREAS, Owner desires Agent to act as agent for Owner on the terms set forth herein in connection with the selection of Owner's fee and/or leasehold interests in Unit Premises from time to time, and with the construction of Unit Improvements and the installation of Unit FF&E thereon, if any, and in connection with all matters related to such construction, and Agent accepts such appointment; and WHEREAS, Owner and Agent desire to amend and restate, as set forth herein, the Agreement for Lease, dated as of February 14, 1995, as amended by Amendment No. 1 thereto, dated as of August 8, 1996, between them. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Owner and Agent hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. For the purposes of this Agreement each of the ------------- following terms shall have the meaning specified with respect thereto: Accrued Default Obligations: Defined pursuant to subsection 11.2 --------------------------- hereof. 2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Acquisition Certificate: The written certification of Agent to be ----------------------- delivered to Owner in connection with the making of an Initial Advance hereunder, which contains the information and representations of Agent as required by Section 4 of this Agreement, and which is substantially in the form of Exhibit C hereto. Affiliate: Defined pursuant to subsection 1.2 hereof. --------- AFL Unit Leasing Record: An instrument, substantially in the form of ----------------------- Exhibit B hereto, evidencing the sublease of a Unit under the Lease, which Unit is subject to a Ground Lease, or an instrument evidencing the lease of a Unit under the Lease. Agreement: This Agreement for Lease, as the same may be amended, --------- restated, modified or supplemented from time to time. Assignee: Defined pursuant to subsection 1.2 hereof. -------- Available Commitment: At a particular time, an amount equal to the -------------------- excess of (a) the sum of (i) the aggregate commitment to lend under a Credit Agreement or Credit Agreements and (ii) Owner's existing equity capital and additional equity capital contributions which are in Owner's sole judgment then available to Owner over (b) the sum of (i) the aggregate amount of all advances theretofore made pursuant to Section 3 hereof with respect to Units subject to this Agreement at such time, (ii) Financing Costs theretofore incurred by Owner and not reimbursed by Agent with respect to Units subject to this Agreement at such time, (iii) the aggregate Adjusted Acquisition Cost (as defined in the Lease) of all Property and Equipment (as said terms are defined in the Lease) leased under the Lease at such time and (iv) $2,000,000, or such other amount as Owner and Agent may agree to from time to time. For purposes of this definition of Available Commitment, when a Unit is made subject to the Lease pursuant to the terms of subsection 2.3 hereof, such Unit shall cease to be "subject to this Agreement". Business Day: Defined pursuant to subsection 1.2 hereof. ------------ Certificate of Increased Cost: The certificate delivered by Agent to ----------------------------- Owner pursuant to Section 7 hereof in connection with a request for a Completion Advance, and which is substantially in the form of Exhibit F hereto. Certificate of Substantial Completion: The certificate or ------------------------------------- certificates delivered by Agent to Owner pursuant to Section 6 hereof in connection with a request for a Final Advance, and which is substantially in the form of Exhibit E hereto. Commercial Paper: Defined pursuant to subsection 1.2 hereof. ---------------- Completion Advance: Any advance made by Owner upon satisfaction of ------------------ the conditions set forth in Section 7 hereof. Consent: Defined pursuant to subsection 1.2 hereof. ------- 3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Construction Advance: An Interim Advance made in connection with a -------------------- Redwood Unit which includes any Unit Acquisition Costs included in Redwood Phase 2 for such Redwood Unit. Construction Agreement: Each agreement between Agent, acting on ---------------------- behalf of Owner, and a General Contractor, providing for the construction of Unit Improvements, as the same may be amended, restated, modified or supplemented from time to time in accordance with this Agreement. Construction Documents: The collective reference to the Construction ---------------------- Agreement(s), the Unit Plans, the Permits and all other agreements entered into by Agent with respect to constructing, equipping, furnishing and decorating the Unit. Credit Agreement: Defined pursuant to subsection 1.2 hereof. ---------------- Designated Effective Date: With respect to the Headquarters Unit, the ------------------------- earlier of the date of Substantial Completion or November 30, 1998, and with respect to each other Unit, the specific date applicable to such Unit set (i) in the case of each Redwood Unit, by agreement of Owner and Agent prior to the Construction Advance for any such Unit and (ii) in the case of any other Unit, set by agreement of Owner and Agent as a condition to the Initial Advance for such Unit. Effective Date: Defined pursuant to subsection 1.2 hereof. -------------- Event of Default: Any of the events specified in subsection 11.1 ---------------- hereof; provided, that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. Event of Unit Termination: Any of the events specified in subsection ------------------------- 11.3 hereof. FF&E Specifications: The master list, if any, of furniture, fixtures ------------------- and equipment which will be used in connection with the Unit Improvements (which list shall be specific with respect to the kind, quality and quantities) appended hereto as Exhibit G, as the same may be amended, modified, or supplemented from time to time with Owner's prior written consent, which consent shall not be unreasonably withheld or delayed. Final Advance: The advance made by Owner upon satisfaction of the ------------- conditions of Section 6 hereof. Financing Costs: All interest costs (including, without limitation, --------------- interest at a default rate), other costs, fees and expenses incurred by Owner under a Credit Agreement, and all costs incurred (i) in connection with obtaining and maintaining equity financing, including, without limitation, return on equity capital and fees payable under Owner's partnership agreement to any general partner or managing general partner, (ii) in connection with the issuance of 4 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Commercial Paper, including discount on Commercial Paper and (iii) in connection with any other financing arrangement of Owner. Fixed Charge Coverage Ratio: Defined pursuant to 1.2 hereof. --------------------------- Force Majeure Delay: Any delay caused by conditions beyond the ------------------- control of Agent, including, without limitation, acts of God or the elements, fire, strikes, labor disputes, delays in delivery of material and disruption of shipping, which does not have the effect of extending the Unit Completion Date beyond ninety (90) days in the aggregate. General Contractor: Any contractor or contractors as may be engaged ------------------ by Agent from time to time for construction of Unit Improvements. Governmental Action: Defined in subsection 8.5 hereof. ------------------- Governmental Authority: Any nation or government, any state or other ---------------------- political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Ground Lease: Each ground lease (which must be a Mortgageable Ground ------------ Lease) pursuant to which a leasehold interest in a Unit Premises is being leased to Owner. Guaranty: The Guaranty, dated as of the date hereof, by and between -------- Guarantor and Owner, as it may be amended, restated, modified or supplemented, from time to time. Guarantor: Electronic Arts Inc., a Delaware corporation (an Affiliate --------- of Agent), and its successors. Headquarters Build-Out Plans: The plans delivered to Owner in ---------------------------- accordance with the terms of this Agreement providing for the construction to be performed with respect to the Headquarters Unit Improvements. The Headquarters Build-Out Plans shall be treated for all purposes as Unit Plans herein. Headquarters Unit: The Unit consisting of the Headquarters Unit ----------------- Premises, together with the Headquarters Unit Improvements. Headquarters Unit Improvements: Two office buildings with office ------------------------------ space of approximately 380,000 square feet, a conference center of approximately 50,000 square feet, and a parking structure, all to be constructed on approximately 12.5 acres of the Headquarters Unit Premises. Headquarters Unit Premises: The specific Unit Premises described as -------------------------- such on Exhibit L hereto. Indebtedness: Defined pursuant to subsection 1.2 hereof. ------------ 5 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Indemnified Person: Any Person as defined in Section 12 hereof. ------------------ Initial Advance: The advance made by Owner upon satisfaction of the --------------- conditions set forth in Section 4 hereof. Insurance Requirements: Defined pursuant to subsection 1.2 hereof. ---------------------- Interim Advance: An advance made by Owner upon satisfaction of the --------------- conditions set forth in Section 5 hereof. Interim Advance Certificate: The certificate delivered by Agent to --------------------------- Owner pursuant to Section 5 hereof in connection with a request for an Interim Advance, and which is substantially in the form of Exhibit D hereto. Interim Completion Date: The date specified for the completion of ----------------------- Redwood Phase 1 of a particular Redwood Unit as set forth in Section 2.2 hereof. Lease: The Lease Agreement, dated as of February 14, 1995, by and ----- between Owner, as lessor or sublessor, and Agent, as lessee or sublessee, as the case may be, as amended by Amendment No. 1 thereto, dated as of March 7, 1997, as it may be further amended, restated, modified or supplemented from time to time, a copy of which is attached as Exhibit A hereto. Legal Requirements: All laws, judgments, decrees, ordinances and ------------------ regulations and any other governmental rules, orders and determinations and all requirements having the force of law, now or hereinafter enacted, made or issued, whether or not presently contemplated, and all agreements, covenants, conditions and restrictions, applicable to each Unit and/or the construction, ownership, operation or use thereof, including, without limitation, compliance with all requirements of labor laws and environmental statutes, compliance with which is required at any time from the date hereof through the term of this Agreement, whether or not such compliance shall require structural, unforeseen or extraordinary changes to any Unit or the operation, occupancy or use thereof. Lien: Defined pursuant to subsection 1.2 hereof. ---- Level 1: Defined pursuant to subsection 1.2 hereof. ------- Level 2: Defined pursuant to subsection 1.2 hereof. ------- Level 3: Defined pursuant to subsection 1.2 hereof. ------- Level 4: Defined pursuant to subsection 1.2 hereof. ------- Level 5: Defined pursuant to subsection 1.2 hereof. ------- 6 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Merrill: Merrill Lynch Money Markets Inc., a Delaware corporation. ------- Merrill Leasing: ML Leasing Equipment Corp., a Delaware corporation. --------------- Merrill Lynch: Merrill Lynch & Co., Inc., a Delaware corporation. ------------- Mortgageable Ground Lease: Defined pursuant to subsection 1.2 ------------------------- hereof. Owner: Flatirons Funding, Limited Partnership or any successor or ----- successors to all of its rights and obligations as Owner hereunder and, for purposes of Section 12 hereof, shall include any Person or entity which computes its liability for income or other taxes on a consolidated basis with Flatirons Funding, Limited Partnership or the income of which for purposes of such taxes is, or may be, determined or affected directly or indirectly by the income of Owner or its successor or successors. Permits: All consents, licenses, building, and operating permits ------- required for construction, completion, and operation of any Unit in accordance with all Legal Requirements affecting such Unit. Permitted Contest: Defined pursuant to paragraph (a) of Section 16 ----------------- hereof. Permitted Liens: Defined pursuant to subsection 1.2 hereof. --------------- Person: Defined pursuant to subsection 1.2 hereof. ------ Potential Default: Any event which, but for the lapse of time, or ----------------- giving of notice, or both, would constitute an Event of Default. Potential Event of Unit Termination: Any event which, but for the ----------------------------------- lapse of time, or giving of notice, or both, would constitute an Event of Unit Termination. Recordation: Has the meaning ascribed thereto in Section 21 of this ----------- Agreement. Redwood Phase 1: In the case of each Redwood Unit, the installation --------------- of certain infrastructure improvements and the completion of landscaping suitable for outdoor recreational use, all in accordance with the applicable Unit Plans therefor. Redwood Phase 2: In the case of each Redwood Unit, the construction --------------- of office buildings and/or related structures and the installation of related Unit FF&E. Redwood Unit: Each of Redwood Unit Premises No. 2, Redwood Unit ------------ Premises No. 3 or Redwood Unit Premises No. 4 and any Unit Improvements thereon. Redwood Unit Premises No. 2: The specific Unit Premises described as --------------------------- such on Exhibit L. 7 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Redwood Unit Premises No. 3: The specific Unit Premises described as --------------------------- such on Exhibit L. Redwood Unit Premises No. 4: The specific Unit Premises described as --------------------------- such on Exhibit L. Responsible Officer: The chief or senior financial officer of Agent ------------------- and each director of Agent and any other employee of the Agent or, if acting as agent of Agent, any employee of the Guarantor primarily responsible for administering the obligations of Agent hereunder. Substantial Completion: With respect to any Unit, the satisfaction of ---------------------- all requirements of Section 6 hereof. In the case of each Redwood Unit, the requirements for Substantial Completion may be satisfied with reference to the Unit Plans for Redwood Phase 2 only. Taking: Any event which is described in paragraph (k) of subsection ------ 11.3 hereof. Tangible Net Worth: Defined pursuant to subsection 1.2 hereof. ------------------ Title Company: First American Title Insurance Company, or such other ------------- title insurance company as may be specifically approved by Owner in writing, together with such reinsurers or coinsurers of such title company as may be approved by Owner in writing. Unit: Any Unit Premises and any Unit Improvements thereon and related ---- Unit FF&E. Unit Acquisition Cost: With respect to any Unit the sum of (a) the --------------------- aggregate amount of advances made pursuant to this Agreement with respect to the Unit except to the extent reimbursed to Owner by Agent and (b) all other costs of Owner (including, without limitation, costs incurred by Agent but reimbursed by Owner) with respect to the Unit (except costs, whether or not such costs may be capitalized pursuant to generally accepted accounting principles, for which Owner has been or chooses, in lieu of capitalization hereunder, to be reimbursed by Agent pursuant to the provisions of subsection 9.5 or Section 12 hereof) arising from the acquisition, construction, equipping, and financing (including, without limitation, Financing Costs and Owner's out-of-pocket expenses and fee obligations in connection therewith) prior to the lease or sublease of the Unit under the Lease. Unit Acquisition Cost shall include an amount paid, by Agent to the party which shall have assigned to Owner its right to purchase the Headquarters Unit Premises, Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4 in order to terminate any right to sublease the Unit or a portion thereof granted to such party. All costs of Owner related to this Agreement incurred during a calendar year which were not previously allocated to a Unit and not reimbursed by Agent shall be allocated among Units and Parcels of Property (as defined in the Lease) by Owner on or prior to January 10th of the next succeeding year on a pro rata basis based upon the 8 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Unit Acquisition Cost for all Units or Acquisition Cost (as defined in the Lease) for all Parcels of Property with respect to which an Initial Advance was made during such previous calendar year, and such allocation by Owner shall be in Owner's sole judgment and shall be conclusive. Unit Acquisition Cost shall not include Owner's rating agency fees, issuing and paying agency fees and audit fees, which expenses shall be reimbursed by Agent pursuant to subsection 9.5 hereof. No Financing Costs will be included in Unit Acquisition Cost with respect to a Unit after such Unit's Designated Effective Date. As of March 7, 1997, the Unit Acquisition Costs of the following Units are: Headquarters Unit .................. $13,100,532 Redwood Unit Premises No. 2 ........ $ 6,738,193 Redwood Unit Premises No. 3 ........ $10,443,503 Redwood Unit Premises No. 4 ........ $ 4,717,773 Unit Budget: The budget to be prepared by Agent and delivered to ----------- Owner prior to the Initial Advance with respect to any Unit, which budget may include costs relating to such of the following as Agent deems to be appropriate: (a) the installation of Unit FF&E, if any, thereon; (b) all costs, including, without limitation, the purchase price, survey and survey inspection charges, appraisal, architectural, engineering, environmental analysis, soil analysis and market analysis fees, title insurance premiums, brokerage commissions, transfer fees and taxes that are customarily the responsibility of the purchaser, closing adjustments for taxes, utilities and the like, escrow and closing fees, recording and filing fees, the legal fees of Owner and Agent, and all related costs and expenses incurred in acquiring and maintaining marketable fee or leasehold title to such Unit and in leasing or subleasing such Unit to Agent; (c) the costs of completion of the Unit Improvements in conformity with the Unit Plans, the Construction Agreement or any contracts in replacement thereof, including without limitation, costs of site preparation, acquiring or granting easements necessary for completion of the Unit Improvements, making utility connections, demolition, streets, parking areas, landscaping, development, off-site improvements, design and related construction of the Unit Improvements and related facilities and the costs of necessary studies, surveys, plans and permits, insurance and examination and incidental costs and expenses related thereto incurred in acquiring and maintaining marketable fee or leasehold title to such Unit and in leasing or subleasing such Unit and Unit FF&E to Agent; (d) the costs of architects', attorneys', engineers' and other professionals' fees and disbursements, in connection with the development, planning, renovation, construction, and construction financing of the Unit Improvements, including, without limitation, the fees and disbursements of Owner's counsel in connection with this Agreement and the duties of Owner hereunder, the Construction Agreement, and in all other matters involving or reasonably related to this transaction; (e) costs of all charges and assessments for the construction, improvement, maintenance, repair and restoration of streets, roads, walks, sewer, gas, electrical, telephone and water lines and other improvements levied upon the Unit until the Effective Date; (f) the costs of all insurance, real estate, property and excise tax assessments, sales and use taxes on materials used in construction, and other operating and carrying costs paid, accrued, or levied upon the Unit or Owner in connection with the Unit during the period from acquisition of the Unit Premises until the Effective Date for such Unit; (g) costs of Agent's project representatives 9 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (inspectors, consultants, etc.) incurred in its capacity as agent for Owner; and (h) any and all other costs, including, without limitation, estimated capitalization by Owner of Financing Costs, arising from or in connection with the construction period for such Unit Improvements and until the Effective Date for such Unit. Unit Completion Date: With respect to the Headquarters Unit, December -------------------- 31, 1998 and with respect to any other Unit, such date as shall be agreed to in writing between Owner and Agent (i) in the case of a Redwood Unit, as a condition to the Construction Advance for such Unit (which date shall not, in any event, be later than December 31, 2011), and (ii) in the case of any other Unit, as a condition to the Initial Advance for such Unit. Unit FF&E: The specific items, if any, from the FF&E Specifications --------- which are installed or (if such FF&E Specifications have been acquired by Owner for installation) to be installed in a particular Unit Improvement and for which advances are made by Owner hereunder. Unit FF&E Specifications: The list of specific items chosen from FF&E ------------------------ Specifications to be installed with the proceeds of advances hereunder in a particular Unit Improvement. Unit Improvements: The improvements to be constructed on an ----------------- individual Unit Premises in accordance with the Unit Plans for the Unit Improvements to be built on such Unit Premises. Unit Plans: The plans and specifications for the construction of any ---------- Unit Improvements, including, without limitation, installation of curbs, sidewalks, gutters, landscaping, utility connections (whether on or off the Unit Premises) and all fixtures necessary for construction, operation and occupancy of the Unit and certain equipment to be used in connection therewith, prepared or to be prepared by an architect and Agent and approved by Owner and any Assignee, including such amendments, modifications and supplements thereto as may from time to time be made by Agent; provided, that any subsequent material deviation from the Unit Plans selected for the Unit shall be made only with Owner's and Assignee's prior written consent, which consent shall not be unreasonably withheld or delayed. In the case of each Redwood Unit, separate Unit Plans shall be submitted for acceptance by Owner for each of Redwood Phase 1 and Redwood Phase 2. 10 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Unit Premises: Each individual parcel of land, in which either a fee ------------- interest or a leasehold interest has been acquired by Owner for the construction of Unit Improvements thereon. 1.2 Other Definitional Provisions. ----------------------------- (a) For purposes of this Agreement, the terms, "Affiliate", "Assignee", "Business Day", "Commercial Paper", "Consent", "Credit Agreement", "Effective Date", "Fixed Charge Coverage Ratio", "Indebtedness", "Insurance Requirements", "Level 1", "Level 2", "Level 3", "Level 4", "Level 5", "Lien", "Mortgageable Ground Lease", "Permitted Liens", "Person" and "Tangible Net Worth" shall have the meanings set forth opposite those terms in the Lease, except that, for purposes of this Agreement, the terms "the Lessor", "the Lessee" and "this Lease" if used in those definitions in the Lease shall be deemed to be the terms "Owner", "Agent" and "this Agreement, respectively, and, if used in those definitions in the Lease, each of the terms "Parcel", "Parcel of Property" and "Property" shall be deemed to be the phrase "Unit Premises and related Unit Improvements" and each of the terms "Unit of Equipment" and "Unit" shall be deemed to be an item of "Unit FF&E". (b) All terms defined in this Agreement shall have their defined meanings when used in any certificate or other document made or delivered pursuant hereto. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, paragraph, schedule and exhibit references are to this Agreement unless otherwise specified. SECTION 2. APPOINTMENT OF AGENT 2.1 Appointment and Duties of Agent. Subject to the terms hereof, ------------------------------- including, without limitation, the requirements of Section 4 hereof, Owner hereby appoints Agent as its agent for selection of Unit Premises for acquisition, as well as for the design, construction, equipping, and installation on each Unit Premises of the Unit Improvements, and, if and to the extent identified in Exhibit G hereto, Unit FF&E and Agent hereby accepts such appointment. Unit Improvements must be of a type permitted to be leased under the Lease, as set forth in Exhibit A to the Lease. Agent agrees all in accordance with its best business judgment and this Agreement to select Unit Premises for acquisition by Owner and to contract for and supervise the good and workmanlike completion of the Unit Improvements and installation of the Unit FF&E on each Unit Premises, suitable for its intended use. 2.2 Cost and Completion of a Unit. Owner and Agent agree that (a) ----------------------------- the maximum cost for the acquisition of the Headquarters Unit Premises and the construction of the Headquarters Unit Improvements thereon shall be no more than $130,654,240, and the maximum cost for the acquisition of any other Unit Premises and the completion of Unit Improvements thereon shall be such amount as is agreed to in writing between Owner and Agent, and (b) the 11 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY cost of the Unit FF&E constituting personal property and not fixtures shall be zero with respect to the Headquarters Unit, and shall be such amount as is agreed to in writing between Owner and Agent with respect to any other Unit. Owner and Agent agree that the maximum cost for the acquisition of Unit Premises and the completion of Redwood Phase 1 for Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4 shall be $10,560,039, $16,314,230 and $7,471,488, respectively, and Owner and Agent agree to complete Redwood Phase 1 for such Units by December 31, 1999 (such date, the "Interim Completion Date"). Agent agrees to effect Substantial Completion of any Unit Improvements on or before the applicable Unit Completion Date. After receiving the Initial Advance with respect to a Unit, Agent may, without Owner's consent, to the extent permitted hereunder, from time to time amend, modify or supplement the Unit Plans, Unit Budget or Unit FF&E Specifications relating thereto; provided that no such amendment, modification or supplement shall increase the Unit Budget to an amount in excess of the maximum cost set forth in this subsection 2.2 or result in a diminution of the value or usefulness for its intended purpose of the Unit or result in a breach under subsection 10.1 of this Agreement or have the result that completion of the Unit Improvements would occur after the Interim Completion Date or Unit Completion Date, as may be applicable. Whether or not the maximum cost for the acquisition of Unit Premises and the construction of Unit Improvements thereon (which costs shall be inclusive of estimated capitalization of Financing Costs by Owner) fixed pursuant to this Section 2.2 shall aggregate an amount in excess of the Available Commitment at any time, Owner's obligation to pay any such costs shall not exceed the Available Commitment. Agent shall promptly deliver to Owner and any Assignee any such amended, modified or supplemented Unit Plans, Unit Budget or Unit FF&E Specifications. 2.3 Lease of a Unit and Certain Special Provisions Applicable to ------------------------------------------------------------ Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit - ------------------------------------------------------------------------- Premises No. 4. - -------------- (a) Upon Substantial Completion of any Unit Improvements prior to the Designated Effective Date therefor, Agent will deliver to Owner the Certificate of Substantial Completion in the form of Exhibit E hereto with respect to such Unit Improvements (including the AFL Unit Leasing Record), and Agent shall request the Final Advance with respect to such Unit Improvements. If the conditions set forth in Section 6 hereof have been satisfied in the reasonable judgment of Owner, Owner, within five (5) Business Days of receipt of the Certificate of Substantial Completion, a fully completed AFL Unit Leasing Record executed by Agent and the other documents required in Section 6 hereof, shall execute and deliver to Agent such AFL Unit Leasing Record. Such AFL Unit Leasing Record shall have an Effective Date as of the date of execution by Owner of the AFL Unit Leasing Record. The Final Advance shall be made by Owner on the date of execution by Owner of the AFL Unit Leasing Record. Execution and delivery by Agent of the AFL Unit Leasing Record shall constitute (i) acknowledgment by Agent that each Unit included therein is in good condition and has been accepted for lease or sublease by Agent as of the Effective Date of the AFL Unit Leasing Record, (ii) acknowledgment by Agent that each such Unit is subject to all of the covenants, terms and conditions of the Lease, and (iii) certification by Agent that the representations and warranties contained in Section 2 of the Lease are true and correct on and as of the Effective Date of the AFL Unit Leasing Record as though made on and as of such date and that there exists on such date no (1) Event of Default or, 12 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY with respect to such Unit, Event of Unit Termination under this Agreement or Event of Default (as defined in the Lease) or (2) Potential Default or, with respect to such Unit, Potential Event of Unit Termination under this Agreement or Potential Default (as defined in the Lease). (b) If Substantial Completion of any Unit Improvements will not be effected on or before the Designated Effective Date with respect to such Unit, Agent shall prepare and execute an AFL Unit Leasing Record with respect to such Unit and deliver it to Owner at least seven (7) Business Days prior to the applicable Designated Effective Date. Upon receipt of the AFL Unit Leasing Record, Owner shall execute and deliver to Agent such AFL Unit Leasing Record by such Designated Effective Date. Such AFL Unit Leasing Record shall have an Effective Date as of the date of execution by the Owner. Execution and delivery by Agent of the AFL Unit Leasing Record shall constitute (i) acknowledgement by Agent that the Unit is in good condition taking into account its existing state of construction and has been accepted for lease or sublease by Agent as of the Effective Date of the AFL Unit Leasing Record, (ii) acknowledgement by Agent that the Unit is subject to all of the covenants, terms and conditions of the Lease, (iii) certification by Agent that the representations and warranties contained in Section 2 of the Lease are true and correct in all material respects on and as of the Effective Date of the AFL Unit Leasing Record as though made on and as of such date and that there exists on such date no (1) Event of Default, Event of Default (as defined in the Lease), or, with respect to such Unit, Event of Unit Termination or (2) Potential Default, Potential Default (as defined in the Lease), or, with respect to such Unit, Potential Event of Unit Termination and (iv) certification by Agent that the Unit will achieve Substantial Completion prior to its Unit Completion Date. The failure of Agent to execute and deliver an AFL Unit Leasing Record with respect to such Unit prior to the applicable Designated Effective Date shall constitute an Event of Unit Termination pursuant to paragraph (n) of subsection 11.3 hereof. In the event any Unit is made subject to the Lease prior to achieving Substantial Completion, Owner's obligation to make further advances with respect to such Unit under this Agreement shall continue until the Unit Completion Date for such Unit, subject to Agent's satisfaction of the conditions precedent to such advances contained in this Agreement. Owner, within five (5) Business Days of receipt of a request for an advance and subject to satisfaction of the conditions for such advance contained in this Agreement, shall execute and deliver to Agent the revised AFL Unit Leasing Record for such Unit reflecting the amount of such advance, and Agent, within five (5) Business Days of receipt of such revised AFL Unit Leasing Record, shall sign the revised AFL Unit Leasing Record and return it to Owner, upon which such advance shall occur. (c) Notwithstanding the foregoing, but subject to the terms of subsection 3.1 hereof, Agent may, by delivering to Owner a Certificate of Increased Cost, at any time up to three (3) months after the Final Advance has been made with respect to a Unit, request a Completion Advance in order to pay to Agent construction costs that were not the subject of any previous advance. Owner, within five (5) Business Days of receipt and upon Owner's approval of a request for the Completion Advance and the Certificate of Increased Cost, shall execute and deliver to Agent a revised AFL Unit Leasing Record for such Unit reflecting such increased cost, and Agent, within five (5) Business Days of receipt of such revised AFL Unit Leasing Record, shall sign the revised AFL Unit Leasing Record and return it to Owner. The Completion Advance shall be made by Owner upon receipt of the revised AFL Unit Leasing Record signed 13 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY by Agent. (d) Agent acknowledges and agrees that regardless of the Effective Date therefor, in preparing the AFL Unit Leasing Records for the Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4, the respective Schedule B thereto shall provide for amortization of Acquisition Cost beginning with the initial Basic Rent Payment Date (as defined in the Lease) following the Effective Date on a mortgage amortization basis ending in August, 2038, in each case. 2.4 Powers of Agent. Agent shall have the right to act for and on --------------- behalf of Owner with full and complete authority to appear before each applicable Governmental Authority and each land owner's association to resolve issues related to the platting, zoning and use of the Unit Premises, to, so long as no Event of Default has occurred and is continuing, contest on its own and Owner's behalf any proposed taking of a Unit Premises or the amount of any award in connection therewith, to obtain all Permits, to grant and obtain minor easements for the benefit of any Unit Premises or which are deemed reasonably necessary by Agent for the intended use of such Unit Premises, voluntarily to dedicate or convey portions of any Unit Premises for road, highway and other public purposes as required in the good faith judgment of Agent in order to obtain the use of all or part of such Unit Premises for the purposes intended (provided that no such action shall materially adversely affect either the market value of such Unit Premises or the use of such Unit Premises for its intended purpose), appoint, employ and deal with the architects, engineers, consultants and contractors, purchase and arrange for delivery of all materials, supplies, furniture, fixtures, and equipment, and to approve all related vouchers, invoices and statements. Owner agrees, at Agent's request and expense, to confirm to third parties Agent's rights and obligations in this regard. No payment shall be made for any property or services of such architects, engineers, consultants, or contractors relating to the acquisition, construction and equipping of any Unit without the prior approval of Agent, and each amount so approved and paid shall be in accordance with the Unit Budget, and shall be part of the Unit Acquisition Cost of such Unit. If Agent has unreasonably delayed or withheld giving the approvals required to make such payments, Owner may make payments to any architects, engineers, consultants, contractors, vendors or suppliers which are properly due and payable in accordance with the contracts with said parties, and any such payment so made shall be and become a part of the Unit Acquisition Cost of the Unit; provided, however, that Owner shall not make any such payment if it is subject to a Permitted Contest. Agent agrees that, in any contract entered into pursuant to this Agreement in which Owner is identified as an obligor rather than, or in addition to, Agent, the substance of the text of subsection 18.5 hereof shall be included therein. SECTION 3. ADVANCES 3.1 Agreement to Make Advances. Subject to the conditions and upon -------------------------- the terms herein provided, including, without limitation, that the Available Commitment not be exceeded, Owner agrees to make available to Agent advances from time to time for each Unit up to an aggregate principal amount for such Unit determined in accordance with the Unit Budget 14 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY for such Unit and not in excess of the maximum amount per Unit set forth in subsection 2.2 hereof. Subject to the terms of this Agreement, Owner agrees to make (a) an Initial Advance with respect to a Unit in accordance with Section 4 of this Agreement, (b) Interim Advances from time to time in accordance with Section 5 of this Agreement, (c) a Final Advance in accordance with Section 6 of this Agreement and (d) a Completion Advance in accordance with Section 7 of this Agreement. In the event Substantial Completion shall not occur on or before the Designated Effective Date, Agent may request (i) an Interim Advance on such Designated Effective Date pursuant to paragraph (b) of subsection 2.3 hereof and Section 5 hereof and additional Interim Advances thereafter pursuant to paragraph (b) of subsection 2.3 and Section 5 hereof, (ii) a Final Advance pursuant to paragraph (b) of subsection 2.3 and Section 6 hereof, and (iii) a Completion Advance pursuant to paragraph (c) of subsection 2.3 and Section 7 hereof. 3.2 Procedure for Advances. Agent shall give Owner notice in ---------------------- accordance with Sections 4, 5, 6 and 7 hereof of its irrevocable request for an advance pursuant to this Agreement, specifying a Business Day on which such advance is to be made and the amount of the advance. Not later than 2:00 P.M. New York time on the date for the advance specified in such notice, provided all conditions to that advance have been satisfied, Owner shall provide to Agent, in immediately available funds, the amount of the advance then requested. Owner shall have no obligation to make advances with respect to a Unit more often than once every thirty (30) days. 3.3 Determination of Amounts of Advances. ------------------------------------ (a) Initial Advance. The amount of an Initial Advance with respect to a Unit shall be made within the limits of the Unit Budget and in accordance with the Acquisition Certificate, and shall be sufficient to pay in full all acquisition and closing costs of the respective Unit Premises, including, without limitation, the purchase price, survey and survey inspection charges, recording and filing fees, brokerage commissions, appraisal, architectural, engineering, environmental analysis, soil analysis and market analysis fees, transfer fees and taxes that are customarily the responsibility of the purchaser, title insurance premiums, closing adjustments for taxes, utilities, and the like, escrow fees, if any, construction materials and existing structures, and the legal fees of Owner and Agent. All such costs for which the Initial Advance is requested shall be specifically set forth in the Unit Budget attached to the Acquisition Certificate, and in the request for the Initial Advance, and Owner shall have no obligation to advance any funds in the Initial Advance which are not so specifically set forth in such documents. (b) Interim Advances. Disbursements for costs of constructing and ---------------- equipping a Unit shall be within the limits of the Unit Budget, based upon the certifications of the Agent contained in an Interim Advance Certificate. Disbursements may be requested only (a) for costs incurred or (b) for costs expected to be incurred not more than sixty (60) days after the date of such Advance. Owner shall have no obligation to make disbursements for the cost of materials not in place, whether stored on or off site. (c) Final Advance. The amount of the Final Advance shall be made ------------- within 15 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY the limits of the Unit Budget and in accordance with the Certificate of Substantial Completion, and shall be sufficient, subject to the provisions of paragraph (d) of this subsection 3.3, for payment in full of all costs of designing, furnishing, constructing and equipping the Unit in connection with Substantial Completion of the Unit, free of all Liens other than Permitted Liens. Owner shall have no obligation to make the Final Advance unless Owner is satisfied that all such costs as set forth in the Unit Budget, the Certificate of Substantial Completion, and the request for the Final Advance have been actually incurred, or in the case of punch list items will be incurred, in construction and equipping of the Unit, free of all Liens, except for Permitted Liens and shall not cause the Unit Acquisition Cost of the Unit to exceed the Unit Budget. A Final Advance shall not be available in connection with Redwood Phase 1. (d) Completion Advance. The amount of the Completion Advance shall be ------------------ made in accordance with and shall not exceed the amount set forth in the Certificate of Increased Cost, shall not cause the Unit Acquisition Cost of the Unit to exceed the Unit Budget, and shall be sufficient for payment in full of all costs that were not the subject of any previous advance with respect to such Unit. Owner shall have no obligation to make the Completion Advance unless Owner is satisfied that all such costs were reasonably estimated in the Unit Budget and are adequately set forth in the Certificate of Increased Cost and will be sufficient for payment in full of all costs with respect to such Unit. 3.4 Partial Advances. If any or all conditions precedent to any ---------------- advance have not been satisfied on the applicable date for a requested advance, Owner, in its sole discretion, and with the consent of Assignee may, but shall have no obligation to, disburse a part of the requested advance. SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE WITH RESPECT TO A UNIT Owner's acquisition of any Unit Premises and Owner's obligation to make the Initial Advance with respect to a Unit shall both be subject to the satisfaction of the conditions set forth in this Section 4 and to the receipt by Owner and any Assignee of the documents set forth in this Section 4, in each case in form and substance reasonably satisfactory to Owner and any Assignee. Owner shall have at least seven (7) Business Days to review the Acquisition Certificate and its attachments prior to making any Initial Advance. Subject to Exhibit K hereof, the following are the documents to be received by Owner and any Assignee and the conditions to be satisfied: (a) Lease and Guaranty. With respect to the first advance only under ------------------ this Agreement, a fully executed copy of the Lease and a fully executed copy of the Guaranty. (b) Acquisition Certificate. A duly executed copy of the Acquisition ----------------------- Certificate. 16 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (c) Deed. Where fee title is being acquired by Owner, a photocopy of ---- the executed purchase and sale agreement and the warranty deed, or, in the case of Unit Premises located in California, the grant deed to be executed and delivered at the closing of the acquisition of Owner's fee interest in such Unit Premises, conveying marketable title to Owner, free of all Liens other than Permitted Liens. For purposes of the Initial Advance, Permitted Liens shall not include any mechanics' liens or materialmen's liens, or any --- taxes, assessments, governmental charges or levies, except to the extent that such taxes, assessments, governmental charges or levies are due and payable but not yet delinquent, and have been properly apportioned with the seller at closing. (d) Memorandum of Lease Agreement. Two original counterparts of a ----------------------------- memorandum of lease agreement in the appropriate form for recording in the jurisdiction in which the Unit Premises are located, executed by Agent, as lessee, and otherwise reasonably acceptable to Owner and Assignee. (e) Ground Lease. Where a leasehold interest is being acquired by ------------ Owner, an original of each Ground Lease, including a true and complete copy of the metes and bounds legal description of the Unit Premises, intended to be executed and delivered at the closing of the acquisition of Owner's leasehold interest, in a form approved by Owner, and complying and certified by Agent as complying in all respects with this Agreement and with Section 29 of the Lease, and not subject to any Liens other than Permitted Liens, along with a memorandum of ground lease in statutory recordable form and any necessary estoppel certificates, recognition and attornment agreements, confirmations, and subordinations required by Owner's and any Assignee's counsel regarding the Ground Lease. For purposes of the Initial Advance, Permitted Liens shall not include any taxes, assessments, governmental charges or levies, except to the extent that such taxes, assessments, governmental charges or levies are due and payable but not yet delinquent. (f) Taxes. Certification by Agent that all past and current taxes and ----- assessments (excluding those which are due and payable but not yet delinquent) applicable to the Unit Premises have been paid in full. (g) Title Insurance Policy. Satisfactory evidence that Owner shall ---------------------- receive at closing either (i) an ALTA owner's policy (which, if available in the state in which the Unit Premises are located, may be issued as a joint protection policy simultaneously insuring both Owner's interest and Agent's interest in such Unit Premises, provided that Agent shall deliver to Owner in connection with the Acquisition Certificate for such Unit Premises a letter executed by Agent in which Agent explicitly agrees to the conditions set forth on Exhibit J of this Agreement) with a pending improvements clause, or (ii) a construction binder marked at closing for the benefit of Owner and Assignee, constituting the irrevocable commitment of the Title Company to issue a joint protection policy simultaneously insuring both Owner's and Agent's interest in such Unit Premises in accordance with the conditions of (i) above and upon completion of the Unit Improvements, in each case issued by the Title Company with respect to the Unit Premises in the amount of the total Unit Budget, acceptable to Owner and Assignee in all 17 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY respects (including such additional endorsements as may be reasonably requested by Owner or Assignee), together with legible photocopies of all underlying documents of record affecting the Unit Premises. Owner shall have received evidence satisfactory to it that all premiums in respect of such policies have been paid at the closing of title, which policy or binder shall provide the substantive coverage contemplated to be provided above. (h) Survey. A current survey of the Unit Premises certified to Owner ------ and Assignee by an independent, licensed registered public land surveyor, and dated a date within ninety (90) days prior to the date of the Initial Advance. Such survey shall show the following: (i) lot lines of the Unit Premises shown in metes and bounds, and the lines of streets abutting the Unit Premises and the width thereof; (ii) all access and other easements appurtenant to or used in connection with the Unit Premises; (iii) all roadways, paths, driveways, easements, set-backs, encroachments and overhanging projections and similar encumbrances affecting the Unit Premises, whether recorded, apparent from a physical inspection of the Unit Premises, or otherwise known to the surveyor; (iv) any encroachments on any adjoining property by the building structures and improvements on the Unit Premises; and (v) if the Unit Premises are described by reference to a filed map, a legend relating the survey to said map. (i) Site Plan. A site plan prepared by Agent showing the proposed --------- location of the Unit Improvements to be constructed on the Unit Premises. (j) Availability of Utilities. Certification by Agent that all ------------------------- utility services and facilities (including, without limitation, gas, electrical, water and sewage services and facilities) (i) which are necessary and required during the construction period have been completed or will be available in such a manner as to assure Owner that construction will not be impeded by a lack thereof and (ii) which are necessary for operation and occupancy of the Unit are or will be completed in such a manner and at such a time as will assure the opening and operation of the Unit on or before the Unit Completion Date. (k) Flood Zone. A certification by the surveyor or an official of an ---------- appropriate Governmental Authority as to whether the Unit Premises are located in a flood plain. (l) Permits. All Permits and governmental approvals required for the ------- construction of the Unit Improvements have been or will be issued or obtained in such a manner as to assure Owner that construction will not be impeded by a lack thereof and all Permits and governmental approvals required therefor which have been issued or obtained are in full force and effect. (m) Opinion of Counsel for Agent. With respect to the first advance ---------------------------- only under this Agreement, an opinion of Nossaman, Guthner, Knox & Elliott, counsel for Agent, in form and substance reasonably satisfactory to Owner and Assignee and, with respect to an Initial Advance with respect to a Unit Premises in a state in which no Unit 18 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Premises has previously been acquired under this Agreement, an opinion of local counsel for Agent, in form and substance reasonably satisfactory to Owner and Assignee. With respect to an Initial Advance for a Unit Premises in a state in which such opinion of local counsel for Agent has previously been delivered, if Owner and Assignee have reason to believe that the laws of such state have changed since the date of the previous local counsel opinion for Agent in such state, then an opinion of local counsel for Agent shall be delivered, in form and substance reasonably satisfactory to Owner and Assignee. (n) Opinion of Counsel for Guarantor. With respect to the first -------------------------------- advance only under this Agreement, an opinion of Nossaman, Guthner, Knox & Elliott, counsel for Guarantor, in form and substance satisfactory to Owner and Assignee. (o) Construction Agreement. A fully executed and complete copy of the ---------------------- Construction Agreement, if any. (p) Unit Plans. A copy of the Unit Plans satisfactory to Owner and ---------- Assignee. (q) Unit Budget. A copy of the Unit Budget and certification by Agent ----------- that such Unit Budget is (i) true, complete and correct, (ii) accurately representative of all expected costs of the Unit and (iii) within the dollar limits set forth in the first sentence of subsection 2.2 hereof. (r) Certificates of Insurance. Certificates of insurance or other ------------------------- evidence reasonably acceptable to Owner certifying that the insurance then carried or maintained on the Unit required by subsection 9.3 hereof complies with the terms of such subsection. (s) Request for Advance. A duly executed AIA Document G722 (or ------------------- substantially similar document), stating the total amount of the Initial Advance requested, the date on which the advance is to be made, the name, address and, if applicable, the escrow reference number of the escrow or closing agent or party to whom the Initial Advance is to be tendered, wiring instructions and an itemization of the various costs constituting the amount of the Initial Advance in such detail as will be necessary to provide disbursement instructions to the escrow or closing agent, including, specifically, an accounting of all expenditures for costs shown on the Unit Budget for which payment or reimbursement is being requested with respect to the Unit. (t) Continuing Representations of Guarantor. All representations and --------------------------------------- warranties made in the Guaranty are and remain true and correct on and as of the date of the Initial Advance as if made on and as of the date of the Initial Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Initial Advance is to be made or by reason of giving effect to such Initial Advance. (u) Unit FF&E Specifications. If applicable, a true and complete copy ------------------------ of the Unit FF&E Specifications with respect to the Unit. 19 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (v) Environmental Affidavit and Report. An environmental affidavit in ---------------------------------- the form of Exhibit H hereto, duly executed by Agent, and an environmental report certified to Owner and any Assignee and satisfactory to Owner and any Assignee in all respects, prepared by a reputable environmental consulting or environmental engineering firm acceptable to Owner and Assignee which addresses the matters set forth on Exhibit I hereto. If Owner or Assignee shall reasonably require additional assurance as to any matter or matters contained or not adequately addressed in such environmental report, Owner or Assignee may require that a supplemental or additional environmental report with respect to such matter or matters, satisfactory to Owner and Assignee in all respects, be delivered. (w) Use of Proceeds, No Liens and Representations of Agent. (i) All ------------------------------------------------------ costs and expenses which are the subject of the Initial Advance requested have been paid in full or will be paid in full out of the proceeds of the Initial Advance, (ii) there are no Liens on the Unit Premises of which Agent has knowledge that are not Permitted Liens, (iii) all representations and warranties made in this Agreement, in the Lease, and in connection with the Initial Advance, are and remain true and correct on and as of the date of the Initial Advance and (iv) no Event of Default, Potential Default or, with respect to the Unit for which the Initial Advance is requested, Event of Unit Termination or Potential Event of Unit Termination, under this Agreement has occurred and is continuing on the date such Initial Advance is to be made or by reason of giving effect to such Initial Advance. (x) Additional Matters. Such other documents and legal matters in ------------------ connection with a request for an Initial Advance as are reasonably requested by Owner and Assignee. (y) Designated Effective Date. Agent and Owner shall have agreed as ------------------------- to the Designated Effective Date and the Unit Completion Date for such Unit, as evidenced by Agent's and Owner's execution of the Acquisition Certificate as to such matter. SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE INTERIM ADVANCES AFTER THE INITIAL ADVANCE WITH RESPECT TO A UNIT Owner's obligation to make any Interim Advance with respect to a Unit after the Initial Advance with respect to such Unit shall be subject to the satisfaction of the conditions set forth in this Section 5 and to the receipt by Owner and any Assignee of the documents set forth in this Section 5, in each case in form and substance reasonably satisfactory to Owner and any Assignee. Owner shall have at least seven (7) Business Days to review the Interim Advance Certificate and its attachments prior to making any Interim Advance. The following are the documents to be received by Owner and any Assignee and the conditions to be satisfied: (a) Interim Advance Certificate. A duly executed Interim Advance --------------------------- 20 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Certificate. (b) Continuing Representations of Agent. All representations and ----------------------------------- warranties made in this Agreement, in the Lease, and in connection with the Interim Advance, are and remain true and correct on and as of the date of the Interim Advance as if made on and as of the date of the Interim Advance and no Event of Default, Potential Default or, with respect to the Unit for which such Interim Advance is requested, Event of Unit Termination or Potential Event of Unit Termination, under this Agreement has occurred and is continuing on the date such Interim Advance is to be made or by reason of giving effect to such Interim Advance. (c) Continuing Representations of Guarantor. All representations and --------------------------------------- warranties in the Guaranty are and remain true and correct on and as of the date of the Interim Advance as if made on and as of the date of such Interim Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Interim Advance is to be made or by reason of giving effect to such Interim Advance. (d) Satisfactory Title. A notice of title continuation or an ------------------ endorsement to the title insurance policy indicating that since the last disbursement, there have been no changes in the state of title, except Permitted Liens and no additional survey exceptions not theretofore specifically approved in writing by Owner and, if such Unit Premises are subject to a Ground Lease, an estoppel certificate confirming that there are no defaults under the Ground Lease, and such other information as may be requested by Owner or Assignee. (e) Construction Progress. If required by Owner or any Assignee, --------------------- Owner shall have received and approved (i) an inspection report from an independent party satisfactory to Owner or any Assignee, if any, covering conformity of the work to the Unit Plans, quality of work completed, percentage of work completed and (ii) true copies of unpaid invoices, receipted bills and Lien waivers, and such other reasonably available supporting information as Owner or any Assignee may reasonably request. (f) Evidence of Compliance. Agent shall furnish Owner and any ---------------------- Assignee with such additional or updated documents, reports, certificates, affidavits and other information, in form and substance satisfactory to Owner and any Assignee in its reasonable judgment, as Owner and any Assignee may reasonably require to evidence compliance by Agent with all of the provisions of this Agreement. (g) Request for Advance and Reconciliation. A duly executed AIA -------------------------------------- Document G722 (or a substantially similar document), stating the total amount of the Interim Advance requested, the date on which such Interim Advance is to be made, and a specific breakdown of items and costs for which the Interim Advance is being made. Costs may be included in an Interim Advance request only to the extent previously incurred by Owner or by Agent on behalf of Owner or to the extent they will be so incurred within the 21 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY following sixty (60) days. In addition, each Interim Advance request shall identify, with respect to the immediately preceding Interim Advance, any costs for which such preceding Advance was made prior to the incurrence thereof and shall provide evidence reasonably satisfactory to Owner to establish, as a condition to such new Advance, that the amounts received in the prior Advance for payment of costs prior to the incurrence of such costs were utilized for the purposes identified in the Interim Advance request. In the event that prior to expending the proceeds of any Interim Advance for costs that as of the date such Advance was made had not been incurred, the Agent determines not to utilize such proceeds for such purpose, the Agent shall notify the Owner and either reimburse such proceeds to the Owner or with the consent of the Owner amend the request for Advance to provide that such proceeds will be expended in respect of other specified Unit Acquisition Costs. All amounts disbursed by Owner shall be included in Unit Acquisition Cost unless and until reimbursed to Owner. (h) No Other Security Interests. All materials and fixtures --------------------------- incorporated in the construction of the Unit Improvements have been purchased so that title thereto or a leasehold interest therein, as the case may be, shall have vested in Owner immediately upon delivery thereof to the Unit Premises, except for Permitted Liens, and Agent shall have produced and furnished, if required by Owner, the contracts, bills of sale, statements, receipted vouchers, or other documents under which title thereto or a leasehold interest therein is claimed. (i) Statement of Expenditures. At Owner's request,Agent shall supply ------------------------- Owner and any General Contractor with a statement setting forth the names, addresses and amounts due or to become due as well as the amounts previously paid to every contractor, subcontractor or Person furnishing materials, performing labor or entering into the construction of any part of the Unit Improvements. (j) Revised AFL Unit Leasing Record. If such Interim Advance is being ------------------------------- made after the Designated Effective Date for such Unit, a revised AFL Unit Leasing Record pursuant to Section 2.3(b) hereof. (k) Exhibit K Conditions. As a condition to any Interim Advance for -------------------- Unit Acquisition Costs included in Redwood Phase 2 for any Redwood Unit, Agent shall have met the conditions set forth in Exhibit K applicable thereto. (l) License Conditions. In the case of a Redwood Unit, if the Agent ------------------ wishes to obtain the rights provided in Section 20(a) hereof, Redwood Phase 1 of such Unit shall have been completed and the conditions set forth in Section 6(c), 6(d), 6(e), 6(g) and 6(h) shall be satisfied in respect of Redwood Phase 1 for such Unit. SECTION 6. CONDITIONS PRECEDENT TO THE FINAL ADVANCE WITH RESPECT TO A UNIT Owner's obligation to make the Final Advance with respect to a Unit shall be 22 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY subject to the satisfaction of the conditions set forth in this Section 6 and to the receipt by Owner and any Assignee of the documents set forth in this Section 6, in each case in form and substance reasonably satisfactory to Owner and any Assignee. When all of the conditions set forth in this Section 6 shall have been satisfied to the reasonable satisfaction of Owner and any Assignee, Substantial Completion of a Unit shall be deemed to occur. Owner shall have at least seven (7) Business Days to review the Certificate of Substantial Completion and its attachments prior to making a Final Advance. The following are the documents to be received by Owner and any Assignee and the conditions to be satisfied: (a) Certificate of Substantial Completion. A duly executed ------------------------------------- Certificate of Substantial Completion. (b) Satisfactory Title. A notice of title continuation issued by the ------------------ Title Company policy indicating that since the Initial Advance for such Unit Premises, there have been no changes in the state of title, except for Permitted Liens, and no additional survey exceptions not theretofore specifically approved in writing by Owner and, if such Unit Premises are subject to a Ground Lease, an estoppel certificate from the ground lessor certifying that there are no defaults under the Ground Lease, and such other information as may be requested by Owner or Assignee at least three (3) Business Days prior to the making of a Final Advance. (c) Construction and Equipping of the Unit. The Unit Improvements -------------------------------------- (including all interior finish work, but exclusive of punch list items) have been completed within the Unit Budget and in all material respects in accordance with the Unit Plans and are accepted by Agent and all Unit FF&E for that Unit has been installed and conforms in all material respects to the Unit FF&E Specifications and are accepted by Agent. Agent shall deliver to Owner and any Assignee a specific itemization of all items of Unit FF&E installed in such Unit. (d) Permits. All Permits and governmental approvals necessary for ------- the occupancy and primary use and operation of the Unit have been issued or obtained . (e) Liens. The Unit, including interior finish work, has been ----- completed as contemplated in paragraph (c) above, free of all Liens, except for Permitted Liens (all of which are to be itemized as to the nature, amount, claimant and status), and there are no current Permitted Contests with respect to the Unit (or, if any, the nature, amount, claimant and status thereof). (f) Final Survey. A final as-built survey, certified to Owner and any ------------ Assignee by an independent, licensed registered public land surveyor, with a metes and bounds description of the perimeter of the Unit Premises, and showing the completed Unit Improvements, all easements on the Unit Premises, and indicating the location of access to the Unit Premises and all utility and water easements directly affecting the Unit 23 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Premises. No encroachments are to exist by the Unit Improvements or on the Unit Premises other than those that are Permitted Liens or that may have been consented to by Owner and all set-back requirements have been complied with. If any discrepancies exist between the legal description set forth on the survey delivered pursuant to paragraph (h) of Section 4 hereof and the legal description set forth on the final as-built survey, Owner and Agent shall cooperate in amending the legal descriptions in all recorded documents creating or affecting the Unit Premises, including, without limitation, any easements, to reflect the correct as built description. (g) Utilities. Direct connection has been made to all appropriate --------- utility facilities and the Unit Improvements are ready for occupancy and operation. (h) Flood Zone. If the Unit Premises are located in a flood plain, a ---------- policy of flood insurance in an amount equal to the lesser of (A) the maximum limit of coverage available under the National Flood Insurance Act of 1968, as amended, or (B) the amount of the Unit Acquisition Cost for the Unit, unless Agent is self-insured for such risks as permitted in the Lease. (i) Continuing Representations of Agent. All representations and ----------------------------------- warranties made in this Agreement, in the Lease, and in connection with the Final Advance are to remain true and correct on and as of the date of the Final Advance as if made on and as of the date of the Final Advance and no Event of Default, Potential Default or, with respect to the Unit for which the Final Advance is requested, Event of Unit Termination or Potential Event of Unit Termination, under this Agreement has occurred and is continuing on the date such Final Advance is to be made or by reason of giving effect to such Final Advance. (j) Continuing Representations of Guarantor. All representations and --------------------------------------- warranties made in the Guaranty are and remain true and correct on and as of the date of the Final Advance as if made on and as of the date of the Final Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Final Advance is to be made or by reason of giving effect to such Final Advance. (k) AFL Unit Leasing Record. An AFL Unit Leasing Record prepared and ----------------------- duly executed by Agent. (l) Request for Advance. A duly executed AIA Document G722 (or a ------------------- substantially similar document), stating the total amount of the Final Advance requested, the date on which such advance is to be made, wiring instructions and a specific breakdown of items and costs for which the Final Advance is to be made. The Final Advance shall only be made for costs previously incurred. (m) AFL Unit Leasing Record. If the advance is being made before the ----------------------- Designated Effective Date, an AFL Unit Leasing Record prepared and duly executed by 24 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Agent, or if after the Designated Effective Date, a revised AFL Unit Leasing Record prepared and duly executed by Agent. SECTION 7. CONDITIONS PRECEDENT TO THE COMPLETION ADVANCE WITH RESPECT TO A UNIT Owner's obligation to make the Completion Advance with respect to a Unit shall be subject to the satisfaction of the conditions set forth in this Section 7 and to the receipt by Owner and any Assignee of the documents set forth in this Section 7, in each case in form and substance reasonably satisfactory to Owner and Assignee. The proceeds of the Completion Advance shall be used to pay in full all costs relating to completion of such Unit for which Agent has received invoices subsequent to such Effective Date. Owner shall have at least seven (7) Business Days to review the Certificate of Increased Cost and its attachments prior to making the Completion Advance. The following are the documents to be received by Owner and any Assignee and the conditions to be satisfied: (a) Certificate of Increased Cost. A duly executed Certificate of ----------------------------- Increased Cost. (b) Continuing Representations of Agent. All representations and ----------------------------------- warranties made in this Agreement, in the Lease, and in connection with the Completion Advance are and remain true and correct on and as of the date of the Completion Advance as if made on and as of the date of the Completion Advance and no Event of Default, Potential Default or, with respect to the Unit for which the Completion Advance is requested, Event of Unit Termination or Potential Event of Unit Termination under this Agreement has occurred and is continuing on the date such Completion Advance is to be made or by reason of giving effect to such Completion Advance. (c) Continuing Representations of Guarantor. All representations and --------------------------------------- warranties made in the Guaranty are and remain true and correct on and as of the date of the Completion Advance as if made on and as of the date of the Completion Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Completion Advance is to be made or by reason of giving effect to such Completion Advance. (d) Request for Advance. A duly executed AIA Document G722 (or a ------------------- substantially similar document), stating the total amount of the Completion Advance requested, the date on which such advance is to be made, wiring instructions and a specific breakdown of items and costs for which the Completion Advance is to be made. (e) Revised AFL Unit Leasing Record. A revised AFL Unit Leasing ------------------------------- Record prepared by Agent pursuant to subsection 2.3(b) hereof. 25 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT Agent represents and warrants to Owner now and on the date of each advance that: 8.1 Corporate Matters. Agent (i) has been duly incorporated and is ----------------- validly existing as a corporation in good standing under the laws of the State of Delaware, (ii) has full power, authority and legal right to own and operate its properties and to conduct its business as presently conducted and to execute, deliver and perform its obligations under the Lease, this Agreement, any Consent and the Construction Documents and (iii) is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which its ownership or leasing of properties or the conduct of its business requires such qualification. 8.2 Power and Authority. The consummation of the transactions herein ------------------- contemplated and the performance and observance of Agent's obligations under this Agreement and any Consent have been, and the Construction Documents have been or will be, duly authorized by all necessary corporate action on the part of Agent. The execution, delivery and performance by Agent of this Agreement, any Consent and the Construction Documents will not result in any violation of any term of the articles of incorporation or the by-laws of Agent, do not require stockholder approval or the approval or consent of any trustee or holders of indebtedness of Agent except such as have been obtained prior to the date hereof and will not conflict with or result in a breach of any terms or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (other than a Permitted Lien) upon any property or assets of Agent under, any indenture, mortgage or other agreement or instrument to which Agent is a party or by which it or any of its property is bound, or any existing applicable law, rule, regulation, license, judgment, order or decree of any Governmental Authority or court having jurisdiction over Agent or any of its activities or properties. 8.3 Binding Agreement. Each of this Agreement and any Consent has ----------------- been, and each of the Construction Documents will be, duly authorized, executed and delivered by Agent and, assuming the due authorization, execution and delivery of this Agreement and any Consent by Owner and the Construction Documents by the parties thereto other than Agent, this Agreement and any Consent are, and each of the Construction Documents when executed and delivered will be, legal, valid and binding obligations of Agent, enforceable according to their terms. 8.4 No Litigation. There is no action, suit, proceeding or ------------- investigation at law or in equity by or before any court, governmental body, agency, commission or other tribunal now pending or threatened against or affecting Agent or Guarantor or any property or rights of Agent or Guarantor which questions the enforceability of this Agreement, which affects any Unit Premises, Unit Improvements, Unit FF&E, or Unit, which may have a material adverse impact on the financial condition, business, operations or property of Agent or Guarantor or which, if adversely determined, would materially impair the ability of Agent to perform its obligations hereunder or under any of the Construction Documents or of Guarantor to perform its obligations 26 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY under the Guaranty. 8.5 Consents, Approvals, Authorizations, Etc. There are no consents, ---------------------------------------- permits, licenses, orders, authorizations, approvals, waivers, extensions or variances of, or notices to or registrations or filings with (each a "Governmental Action"), any Governmental Authority or public body or authority which are or will be required in connection with the valid execution, delivery and performance of this Agreement, any Consent and the Construction Documents, or any Governmental Action (i) which is or will be required in connection with any participation by Owner in the transaction contemplated by any bill of sale, deed, assignment, assumption, ownership agreement, or operating agreement relating to any Unit Premises, Unit Improvements, Unit FF&E or Unit or (ii) which is or will be required to be obtained by Owner, Agent, Merrill, Merrill Leasing, any Assignee or an Affiliate of the foregoing, during the term of this Agreement, with respect to any Unit Premises, Unit Improvements, Unit FF&E or Unit except such Governmental Actions, (A) as have been duly obtained, given or accomplished, with true copies thereof delivered to the Lessor, and (B) as may be required by applicable law not now in effect. 8.6 Compliance with Legal Requirements and Insurance Requirements. ------------------------------------------------------------- The construction, operation, use, and physical condition of each Unit Premises, the Unit Improvements, Unit, and item of Unit FF&E comply with all Legal Requirements and Insurance Requirements. 8.7 No Default. Neither Agent nor Guarantor is in violation of or in ---------- default under or with respect to any Legal Requirement in any respect which could be materially adverse to the business, operations, properties or financial or other condition of Agent or Guarantor, or which could materially adversely affect the ability of Agent to perform its obligations under this Agreement or any of the Construction Documents or of the Guarantor to perform its obligations under the Guaranty. 8.8 Ownership; Liens. No Unit Premises, Unit Improvements, Unit ---------------- FF&E, or Unit is subject to any Lien, except for Permitted Liens. 8.9 Financial Statements. Agent has furnished to Owner copies of -------------------- Guarantor's Annual Report on Form 10-K for the year ended March 31, 1994, and Guarantor's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1994 and September 30, 1994. The financial statements contained in such documents fairly present the financial position, results of operations and statements of cash flows of Guarantor as of the dates and for the periods indicated therein and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. 8.10 Changes. Since January 31, 1995, in the case of the Agent, and ------- March 31, 1994, in the case of the Guarantor, there has been no material adverse change in the financial condition or business of Agent or of Guarantor, nor any change which would materially impair the ability of Agent to perform its obligations under this Agreement or any of the Construction Documents or which would materially impair the ability of Guarantor to perform its obligations under the Guaranty. 27 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 8.11 Suitability of Each Unit Premises. Each Unit Premises is --------------------------------- suitable in all material respects (including, without limitation, ground conditions, utilities, and condition of title) for the construction of the related Unit Improvements. 8.12 ERISA. Agent has not established and does not maintain or ----- contribute to any employee benefit plan that is covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended from time to time. 8.13 Ground Lease. Each Ground Lease is a Mortgageable Ground Lease ------------ except to the extent agreed to in writing by Owner and Assignee, and is in full force and effect and has not been modified, amended or changed in any manner that has not been disclosed in writing to Owner and any Assignee, nor is there any material default under any Ground Lease nor event which, with the giving of notice or the passage of time or both, would constitute a default under such Ground Lease, nor to the best knowledge of Agent has any party under any Ground Lease commenced any action or given or received any notice for the purpose of terminating any Ground Lease, and all rents, additional rents and other sums due and payable under the Ground Lease have been paid in full. 8.14 Status of Agent. All of Agent's common stock is owned --------------- beneficially and of record by Guarantor. SECTION 9. AFFIRMATIVE COVENANTS Agent hereby agrees that, so long as this Agreement remains in effect, Agent shall keep and perform fully each and all of the following covenants: 9.1 Performance under Other Agreements. Agent shall duly perform and ---------------------------------- observe all of the covenants, agreements and conditions on its part to be performed and observed hereunder and shall duly perform and observe all of the covenants, agreements and conditions on its part which it is obligated to perform or observe under the Construction Documents and all other agreements related to each Unit. 9.2 No Encroachments. The Unit Improvements shall be constructed ---------------- entirely on the related Unit Premises and shall not encroach upon or overhang (unless consented to by the affected property owner) any easement or right-of- way or the land of others, and when erected shall be wholly within any building restriction lines, however established. Upon request of Owner, Agent shall furnish from time to time satisfactory evidence of compliance with the foregoing covenants, including, without limitation, a survey prepared by a registered surveyor or engineer. If any discrepancies exist between the legal description set forth on the survey described in Section 4(h) hereof and the final as-built survey described in Section 6(f) hereof, Owner and Agent shall cooperate, at Agent's expense, in amending the legal descriptions in all recorded documents creating or encumbering or otherwise affecting the Unit Premises, including, without limitation, any easements, to reflect the correct as-built description. 28 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 9.3 Insurance. --------- (a) Insurance with respect to each Unit Premises, the Unit ------------------------------------------------------ Improvements, Unit FF&E and Unit. Agent will maintain or cause to be -------------------------------- maintained on each Unit Premises, the Unit Improvements, Unit FF&E and Unit insurance of the same types, in the same amounts and on the same terms and conditions as the insurance required by paragraph (c) and paragraphs (f) through (1) of Section 10 of the Lease, except that the terms "Owner", "Agent" and "this Agreement" shall substitute for the terms "the Lessor", "the Lessee" and "this Lease", respectively, the phrase "Unit Premises, Unit Improvements, Unit FF&E and Unit" shall substitute for the phrase "Parcel of Property", and references to "Equipment" or "Unit of Equipment" shall be deemed deleted, and the phrase "Unit Acquisition Cost" shall substitute for the phrase "Adjusted Acquisition Cost"; provided, that in -------- lieu of the insurance required by paragraph (c)(i) of Section 10 of the Lease, Agent shall maintain or cause to be maintained All Risk Builders' Risk Completed Value Non-Reporting Form Insurance, including collapse coverage and fire insurance with extended coverage, in an amount not less than one hundred percent (100%) of the completed insurable value of the respective Unit Improvements and Unit FF&E. The term "completed insurable value" as used herein means the actual replacement cost, including the cost of debris removal, but excluding the cost of constructing foundation and footings. (b) Agent covenants that it will not use, carry on construction with respect to, or occupy any Unit or permit the use, construction, or occupancy of any Unit Premises, Unit Improvements, Unit FF&E or Unit at a time when the insurance required by paragraph (a) of this subsection is not in force with respect to such Unit Premises, Unit Improvements, Unit FF&E or Unit. 9.4 Inspection of Books and Records. Upon reasonable notice, Owner ------------------------------- or Assignee or any authorized representatives of either of them, shall have the right of entry and free access to each Unit Premises, the Unit Improvements, Unit FF&E and each Unit and the right to inspect all work done, labor performed and materials furnished in and about each Unit Premises, the Unit Improvements, Unit FF&E and each Unit and at reasonable times the right to inspect all books, contracts and records of Agent relating to each Unit Premises, the Unit Improvements, Unit FF&E and each Unit. 9.5 Expenses. Agent shall pay upon demand all obligations, costs and -------- expenses incurred by Owner with respect to any and all transactions contemplated herein and the preparation of any document reasonably required hereunder and the prosecution or defense of any action or proceeding or other litigation affecting Agent or any Unit Premises, Unit Improvements, Unit FF&E or Unit, including (without limiting the generality of the foregoing) all Financing Costs not capitalized by Owner in Unit Acquisition Cost and amounts required to reimburse Owner for its obligations, costs and expenses arising in connection with the termination of any Credit Agreement (whether as a result of a default thereunder or otherwise), costs incurred in connection with terminating and obtaining Owner's equity financing, costs incurred in connection with obligations of Owner under or in respect of any interest rate swap, 29 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY cap, collar or other financial hedging arrangement, including, without limitation, costs incurred by Owner under any such arrangement to reduce the notional amount thereof by the amount of any prepayment of any borrowing to which such interest rate swap, cap, collar or other financial hedging arrangement relates, title and conveyancing charges, recording and filing fees and taxes, title search fees, rent under the Ground Leases, mortgage taxes, intangible personal property taxes, escrow fees, revenue and tax stamp expenses, insurance premiums (including title insurance premiums), brokerage commissions, finders' fees, placement fees, court costs, surveyors', photographers', appraisers', architects', engineers', rating agencies', accountants' and reasonable attorneys' fees and disbursements, and will reimburse to Owner all expenses paid by Owner of the nature described in this subsection 9.5 which have been or may be incurred by Owner with respect to any and all of the transactions contemplated herein. In the event Agent shall fail to reimburse Owner within ten (10) Business Days after presentation of a bill and demand for payment therefor, Owner may pay or deduct from the advances to be made any of such expenses and any proceeds so applied shall be deemed advances under this Agreement, and deducted from the total funds available to Agent under this Agreement. Notwithstanding anything to the contrary contained in the foregoing, Agent shall not be required to reimburse Owner for any of the foregoing obligations, costs and expenses which constitute properly capitalizable costs and which Owner has agreed to capitalize and to include as an element of the Unit Acquisition Cost of a Unit, provided there is sufficient Available Commitment to allow the Owner to pay such obligations, costs and expenses. Expenses incurred by Owner (including, without limitation, Financing Costs) in financing obligations, costs and expenses pending allocation as a capitalized cost to a Unit shall be payable by Agent hereunder, if not capitalized by Owner. Agent shall pay to any limited partner of Owner an amount equal to commitment fees incurred by any limited partner of Owner in connection with borrowing from a bank amounts to be invested by such limited partner in Owner. 9.6 Certificates: Other Information. Agent shall furnish to Owner: ------------------------------- (a) concurrently with the delivery of the financial statements referred to in subsection 9.6(b) hereof, a certificate of a Responsible Officer stating that, to the best of such Responsible Officer's knowledge, Agent during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and in the Construction Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Event of Default or Potential Default or Event of Unit Termination or Potential Event of Unit Termination except as specified in such certificate; (b) from time to time, (i) promptly upon their becoming available, and, in any event, not more than 120 days after the end of each fiscal year of the Guarantor, copies of Guarantor's Annual Reports on Form 10-K, and, promptly upon their becoming available, and, in any event, not more than sixty (60) days after the end of each fiscal quarter of the Guarantor, copies of the Guarantor's Quarterly Reports on Form 10-Q and, promptly upon filing, any other reports it files with the Securities and Exchange Commission, (ii) promptly, and in any event within five (5) Business Days upon request, such other information with respect to Agent's and Guarantor's operations, business, property, assets, 30 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY financial condition or litigation as Owner or any Assignee shall reasonably request, (iii) promptly, and in any event within five (5) Business Days after a Responsible Officer of Agent obtains knowledge of any Event of Default or Potential Default or Event of Unit Termination or Potential Event of Unit Termination, a certificate of a Responsible Officer of Agent specifying the nature and period of existence of such Event of Default or Potential Default or Event of Unit Termination or Potential Event of Unit Termination, and what action, if any, Agent has taken, is taking, or proposes to take with respect thereto, (iv) promptly, and in any event within five (5) Business Days after a Responsible Officer of Agent obtains knowledge of any material adverse change in the financial condition or business of Agent or Guarantor or of any litigation of the type described in subsection 8.4 hereof, a certificate of a Responsible Officer of Agent describing such change or litigation as the case may be, (v) promptly, and in any event within five (5) Business Days after a Responsible Officer of Agent obtains knowledge of any and all Liens other than Permitted Liens on any Unit Premises, Unit Improvements, Unit FF&E, or Unit, a detailed statement of a Responsible Officer describing each such Lien and (vi) within thirty (30) days of the close of each fiscal quarter, a certificate of a Responsible Officer of Agent which states the applicability to the Guarantor of Level 1, Level 2, Level 3, Level 4, or Level 5, as the case may be and the Guarantor's Tangible Net Worth and Fixed Charge Coverage Ratio. As used in this paragraph the words "obtains knowledge" are intended to mean the receipt of such evidence as to permit a judgment to be formed that an event has occurred. 9.7 Conduct of Business and Maintenance of Existence. Agent shall ------------------------------------------------ preserve, renew and keep in full force and effect its corporate existence (except as otherwise permitted herein), and take all reasonable action to maintain all rights, privileges and franchises material to the conduct of its business, and comply with all Legal Requirements; provided, however, that nothing contained in this subsection 9.7 shall prevent Agent from ceasing or omitting to exercise any rights, privileges or franchises which in the reasonable judgment of Agent can no longer be profitably exercised or prevent Agent from selling, abandoning or otherwise disposing of any property, the retention of which in the reasonable judgment of Agent is inadvisable to the business of Agent, or prevent any liquidation of any subsidiary of Agent, or any merger, consolidation or sale, permitted by the provisions of subsection 10.2 hereof. 9.8 Notices. Agent shall give notice to Owner promptly upon, and in ------- any event not more than five (5) Business Days after, the occurrence of: (a) any litigation or proceeding affecting any Unit Premises, Unit Improvements, Unit FF&E, or Unit in which the amount of damages requested exceeds $100,000 or more and is not covered by insurance or in which injunctive or similar relief is sought; (b) any notice given by or to Agent pursuant to any of the Construction Documents that a default has occurred thereunder; (c) any condition which results or is reasonably likely to result in a Force 31 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Majeure Delay in completion of the Unit Improvements; and (d) notices received from the lessor under any Ground Lease. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action, if any, Agent proposes to take with respect thereto. 9.9 Legal Requirements and Insurance Requirements. Agent shall --------------------------------------------- comply with every Insurance Requirement and Legal Requirement affecting (i) the execution, delivery and performance of this Agreement and the Construction Documents and (ii) any Unit Premises, Unit Improvements, item of Unit FF&E or Unit; and Agent will not do or permit any act or thing which is contrary to any Insurance Requirement or which is contrary to any Legal Requirement, or which might impair, other than in the normal use thereof, the value or usefulness of any Unit Premises, Unit Improvements, item of Unit FF&E or Unit. 9.10 Payment of Taxes. With respect to any Unit Premises, Unit ---------------- Improvements, Unit FF&E, or Unit, Agent shall make all required reports to the appropriate taxing authorities and shall pay during the term of this Agreement the taxes that Agent would be required to pay if such Unit Premises, Unit Improvements or Unit was a Parcel of Property under paragraph (c) of Section 9 of the Lease. Payment of such taxes shall be on the terms set forth in paragraph (c) of Section 9 of the Lease. 9.11 Filings, Etc. Agent shall promptly and duly execute, deliver, ------------ file, and record, at Agent's expense, all such documents, statements, filings, and registrations, and take such further action as Owner shall from time to time reasonably request in order to establish, perfect and maintain Owner's title to and interest in any Unit Premises, Unit Improvements, Unit FF&E and any Unit and any Assignee's interest in this Agreement, any Unit Premises, Unit Improvements, Unit FF&E or any Unit as against Agent or any third party in any applicable jurisdiction. 9.12 Use of Proceeds. The proceeds of each advance shall be used by --------------- Agent for payment of costs specified in the applicable request for the advance and in accordance with the respective Unit Budget. 9.13 Compliance with Other Requirements. Agent shall use every ---------------------------------- precaution to prevent loss or damage to any Unit Premises, Unit Improvements, Unit FF&E, or any Unit and to prevent injury to third Persons or property of third Persons. Agent shall cooperate fully with Owner and all insurance companies providing insurance pursuant to subsection 9.3 hereof in the investigation and defense of any claims or suits arising from the ownership or operation of equipment or ownership, use, or occupancy of any Unit Premises, Unit Improvements, Unit FF&E, or any Unit; provided, that nothing contained in -------- this subsection shall be construed as imposing on Owner any duty to investigate or defend any such claims or suits. Agent shall comply and shall use its best efforts to cause all Persons operating equipment on, using or occupying any Unit Premises, Unit Improvements, Unit FF&E, or any Unit to comply at Agent's 32 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY expense with (i) every Insurance Requirement and Legal Requirement regarding acquiring, titling, registering, leasing, subleasing, insuring, using, occupying, operating and disposing of any Unit Premises, Unit Improvements, Unit FF&E, or any Unit, and, if applicable, the licensing of operators thereof and (ii) any agreement in respect of maintenance, development or use of any Unit Premises entered into by Owner with the seller to Owner of the Unit Premises or any requirements of a property owner or similar association to which the Unit Premises is subject. SECTION 10. NEGATIVE COVENANTS Agent hereby agrees that, so long as this Agreement remains in effect, Agent shall not directly or indirectly: 10.1 Changes in Unit Plans or Unit Budget Plans. (a) Modify or ------------------------------------------ supplement in any material respect any Unit Plans or any Unit Budget without the prior written consent of all Governmental Authorities which previously have approved the matters to be changed, or (b) receive advances with respect to a Unit which exceed the Unit Budget for such Unit. 10.2 Prohibition of Fundamental Changes. Consolidate with or merge ---------------------------------- into any other Person as such prohibition is set forth in Section 26 of the Lease, except that the term "Owner" shall substitute for the term "the Lessor" and the term "Agent" shall substitute for the term "the Lessee". 10.3 Notification of Opening of a Unit. Prior to completion of --------------------------------- Redwood Phase 2 for a Redwood Unit, utilize such Unit except to the extent permitted by the license set forth in Section 20 hereof, or, subject to the foregoing in the case of a Redwood Unit, open or operate any Unit prior to the delivery to Owner of the Certificate of Substantial Completion and the AFL Unit Leasing Record for the Unit. 10.4 Acquire Fee or Leasehold Interest. Acquire a fee or leasehold --------------------------------- interest on behalf of Owner in any Unit Premises until Agent has delivered all documents required by Section 4 hereof and in the reasonable judgment of Owner satisfied the conditions set forth in such Section 4. 10.5 Assignment of Obligations. Assign its obligations hereunder to ------------------------- any other party. SECTION 11. EVENTS OF DEFAULT AND EVENTS OF UNIT TERMINATION 11.1 Events of Default. The occurrence of any of the following shall ----------------- constitute an Event of Default: (a) Failure to Make Payments. Failure to pay the purchase price of a ------------------------ Unit when due in the event of a required purchase by Agent hereunder or failure by Agent to pay any other amount hereunder within ten (10) days from demand for such payment. 33 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (b) Unauthorized Assignments, Etc. Assignment by Agent of any ------------------------------ interest in this Agreement or any advance to be made hereunder or any interest in either. (c) Misrepresentations. Any representation or warranty made herein or ------------------ which is contained in any certificate, document or financial or other statement furnished under or in connection with this Agreement shall prove to have been false or inaccurate in any material respect on or as of the date made or deemed made. (d) Involuntary Bankruptcy, Etc. The entry of a decree or order for ---------------------------- relief in respect of Agent by a court having jurisdiction in the premises, or the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of Agent or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, in an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law and such decree or order remains unstayed and in effect for thirty (30) consecutive days; or the commencement against Agent of an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or State bankruptcy, insolvency or other similar law, and the continuance of any such case unstayed and in effect for a period of thirty (30) consecutive days. (e) Voluntary Bankruptcy, Etc. The suspension or discontinuance of -------------------------- Agent's or Guarantor's business operations, Agent's or Guarantor's insolvency (however evidenced) or Agent's or Guarantor's admission of insolvency or bankruptcy, or the commencement by Agent or Guarantor of a voluntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, or the consent by Agent or Guarantor to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of Agent or Guarantor or of any substantial part of Agent's or Guarantor's property, or the making by Agent or Guarantor of an assignment for the benefit of creditors, or the failure of Agent or Guarantor generally to pay their debts as such debts become due, or the taking of corporate action by Agent or Guarantor in furtherance of any such action. (f) Negative Covenants. Agent shall default in the performance or ------------------ observance of any agreement, covenant or condition contained in Section 10 hereof. (g) Other Defaults. Agent shall default in the performance or -------------- observance of any other term, covenant, condition or obligation contained in this Agreement and, in the case of such default other than a default arising under subsection 9.3 hereof, such default shall continue for ten (10) days after written notice shall have been given to Agent by Owner specifying such default and requiring such default to be remedied; provided, that an Event of Unit Termination shall not constitute an Event -------- of Default hereunder. (h) Default under Lease. An Event of Default (as defined in the ------------------- Lease) shall 34 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY occur under the Lease. (i) Payment of Obligations. A default or event of default, the effect ---------------------- of which is to permit the holder or holders of any Indebtedness, or a trustee or agent on behalf of such holder or holders, to cause such Indebtedness to become due prior to its stated maturity, shall occur under the provisions of any agreement pursuant to which such Indebtedness was created or instrument evidencing such Indebtedness of Agent or Guarantor in excess of $10,000,000 in the aggregate or any obligation of Agent or Guarantor for the payment of such Indebtedness shall become or be declared to be due and payable prior to its stated maturity, or shall not be paid when due. (j) Defaults under Other Agreements. Any material default by Agent ------------------------------- shall occur under any of the material Construction Documents and any required notice shall have been given and/or any applicable grace period shall have expired. (k) Judgment Defaults.Any final non-appealable judgment or judgments ----------------- for the payment of money in excess of $250,000 in the aggregate shall be rendered against Agent or, in excess of $2,000,000 in the aggregate shall be rendered against the Guarantor, by any court of competent jurisdiction and the same shall remain undischarged for a period of thirty (30) days during which execution of such judgment or judgments shall not be effectively stayed. 11.2 Owner's Rights upon an Event of Default. Upon the occurrence and --------------------------------------- continuation of any Event of Default Owner may do any one or more of the following: (a) Terminate this Agreement and/or Owner's obligations to make any further advances hereunder; (b) Take immediate possession of any Unit Premises, Unit Improvements, Unit FF&E, and Unit and remove any equipment or property of Owner in the possession of Agent, wherever situated, and for such purpose, enter upon any Unit Premises, Unit Improvements or Unit without liability to Agent for so doing; (c) Whether or not any action has been taken under paragraph (a) or (b) above, sell any Unit Premises, Unit Improvements, Unit FF&E or Unit (with or without the concurrence or request of Agent) at public or private sale (judicially or non-judicially) pursuant to such notices and procedures as may be required by law, to the extent such requirements are not effectively waived by Agent hereunder, provided that the disposition of any Unit Premises, Unit Improvements, Unit FF&E or Unit shall take place in a commercially reasonable manner; (d) Hold, use, occupy, operate, remove, lease, sublease or keep idle any Unit Premises, Unit Improvements, Unit FF&E, or Unit as Owner in its sole discretion may determine, without any duty to account to Agent with respect to any such action or 35 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY inaction or for any proceeds thereof; and (e) Exercise any other right or remedy which may be available under applicable law and in general proceed by appropriate judicial proceedings, either at law or in equity, to enforce the terms hereof or to recover damages for the breach hereof. Suit or suits for the recovery of any default in the payment of any sum due hereunder or for damages may be brought by Owner from time to time at Owner's election, and nothing herein contained shall be deemed to require Owner to await the date whereon this Agreement or the term hereof would have expired by limitation had there been no such default by Agent or no such termination or cancellation. The receipt of any payments under this Agreement by Owner with knowledge of any breach of this Agreement by Agent or of any default by Agent in the performance of any of the terms, covenants or conditions of this Agreement, shall not be deemed to be a waiver of any provision of this Agreement. No receipt of moneys by Owner from Agent after the termination or cancellation hereof in any lawful manner shall reinstate or continue this Agreement, or operate as a waiver of the right of Owner to recover possession of any Unit Premises, Unit Improvements, Unit FF&E, or Unit by proper suit, action, proceedings or remedy or operate as a waiver of the right to receive any and all amounts owing by Agent to or on behalf of Owner hereunder; it being agreed that, after the service of notice to terminate or cancel this Agreement, and the expiration of the time therein specified, if the default has not been cured in the meantime, or after the commencement of suit, action or summary proceedings or of any other remedy, or after a final order, warrant or judgment for the possession of any Unit Premises, Unit Improvements, Unit FF&E, or Unit, Owner may demand, receive and collect any moneys payable hereunder, without in any manner affecting such notice, proceedings, suit, action, order, warrant or judgment; and any and all such moneys so collected shall be deemed to be payments on account for the use, operation and occupation of the Unit Premises, Unit Improvements, Unit FF&E, or Unit, or at the election of Owner, on account of Agent's liability hereunder. After any Event of Default, Agent shall be liable for, and Owner may recover from Agent, (i) all of Owner's obligations, costs and expenses incurred in connection with its obligations under this Agreement and for which Owner may demand reimbursement pursuant to subsection 9.5 hereof, (ii) all amounts payable pursuant to subsection 11.4 and Section 12 hereof and (iii) in addition, all losses, damages (but not consequential damages), costs and expenses (including, without limitation, attorneys' fees and expenses, commissions, filing fees and sales or transfer taxes) sustained by Owner by reason of such Event of Default and the exercise of Owner's remedies with respect thereto, including, in the event of a sale by Owner of any Unit Premises, Unit Improvements, Unit FF&E or Unit pursuant to this subsection 11.2, all costs and expenses associated with such sale. The amounts payable in clauses (i) through (iii) above are hereinafter sometimes referred to as the "Accrued Default Obligations". After an Event of Default, Owner may sell its interest in any Unit Premises, Unit Improvements, Unit FF&E, and Unit upon any terms that Owner deems satisfactory, free of any rights of Agent or any Person claiming through or under Agent. In the event of any such sale, in addition to the Accrued Default Obligations, Owner shall be entitled to recover from Agent, as liquidated damages, and not as a penalty, an amount equal to the Unit Acquisition Cost of any Unit Premises, Unit Improvements, Unit FF&E or Unit so sold, minus the proceeds of such sale received by Owner. Proceeds of sale received by Owner in excess of the Unit Acquisition Cost of such Unit Premises, Unit Improvements, Unit FF&E or Unit sold shall be credited against the Accrued Default Obligations Agent is required to pay under this subsection 11.2. If such proceeds exceed the Accrued Default Obligations, or, if Agent has paid all amounts required to be paid under this subsection 11.2, such excess shall be paid by Owner to Agent. As an alternative to any such sale, or if Agent converts any Unit Premises, Unit Improvements, Unit FF&E 36 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY or Unit after an Event of Default, or if such Unit Premises, Unit Improvements, Unit FF&E or Unit is lost or destroyed, in addition to the Accrued Default Obligations, Owner may cause Agent to pay to Owner, and Agent shall pay to Owner, as liquidated damages and not as a penalty, an amount equal to the Unit Acquisition Cost of such Unit Premises, Unit Improvements, Unit FF&E or Unit. In the event Owner receives payment pursuant to the previous sentence of this paragraph, Owner shall transfer all of Owner's right, title and interest in and to the Unit Premises, Unit Improvements, Unit FF&E and Unit to Agent. In the event of a sale pursuant to this subsection 11.2, upon receipt by Owner of the amounts payable hereunder, Owner shall transfer all of Owner's right, title and interest in and to the Unit Premises, Unit Improvements, Unit FF&E and Unit to Agent or a purchaser other than Agent, as the case may be. No remedy referred to in this subsection 11.2 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Owner at law or in equity, and the exercise in whole or in part by Owner of any one or more of such remedies shall not preclude the simultaneous or later exercise by Owner of any or all such other remedies. No waiver by Owner of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. With respect to the termination of this Agreement as to any Unit Premises, Unit Improvements, Unit FF&E, or Unit as a result of an Event of Default, Agent hereby waives service of any notice of intention to re-enter. Agent hereby waives any and all rights to recover or regain possession of any Unit Premises, Unit Improvements, Unit FF&E, or Unit or to reinstate this Agreement as permitted or provided by or under any statute, law or decision now or hereafter in force and effect. 11.3 Events of Unit Termination. The occurrence of any of the -------------------------- following shall constitute an Event of Unit Termination with respect to a Unit, except that an Event of Unit Termination applicable to all Units shall occur in the case of (1) or (m) below: (a) Unsatisfactory Title. If at any time title to any Unit Premises, -------------------- Unit Improvements or Unit is not reasonably satisfactory to Owner by reason of any Lien, encumbrance, or other environmental defect (even though the same may have existed at 37 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY the time of any prior advance), except for Permitted Liens, and such Lien, encumbrance or other defect is not corrected within thirty (30) days after notice to Agent. (b) Damage or Destruction. If any Unit Improvements are partially or --------------------- totally damaged or destroyed by fire or any other cause and the restoration thereof cannot reasonably be expected to be completed so that the Unit Improvements will be completed on or before the applicable Unit Completion Date, or, in the case of a Redwood Unit, so that Redwood Phase 1 will not be completed on or before the applicable Interim Completion Date. (c) Cessation of Construction. If there is any cessation of ------------------------- construction of the Unit Improvements for any period after the date construction shall commence in excess of thirty (30) successive calendar days, unless the conditions of each of subparagraphs (1), (2), (3) and (4) hereof shall have been satisfied: (1) the cessation of construction shall have been caused by Force Majeure Delay; (2) Agent shall have made adequate provision, reasonably acceptable to Owner, for the protection of materials stored on site and for the protection of the Unit Improvements, to the extent then constructed, against deterioration and against other loss or damage and theft; (3) Agent shall have furnished to Owner reasonably satisfactory evidence that such cessation of construction will not (i) adversely affect or jeopardize the rights of Agent under material agreements relating to the construction or operation of the Unit Improvements or (ii) materially increase the cost of construction of the Unit Improvements; and (4) from time to time upon Owner's reasonable request therefor during any such cessation of construction, Agent shall furnish to Owner reasonably satisfactory evidence that (notwithstanding such cessation of construction) the completion of the Unit Improvements can be accomplished on or before the respective Unit Completion Date or, in the case of Phase 1 of a Redwood Unit, on or before the Interim Completion Date, and within the Unit Budget. (d) Nonconforming Work. If the construction of the Unit Improvements, ------------------ or any part thereof, is made in a manner other than as herein provided and Agent fails to correct such nonconforming work in a reasonably prompt and satisfactory fashion after notice and demand by Owner, or if Agent shall fail to correct promptly any structural defect in the Unit Improvements upon demand of Owner. (e) Other Security Agreements. If (i) Agent executes any chattel ------------------------- mortgage or other security agreement on any materials, fixtures or articles of personal property used in the construction or operation of the Unit Improvements or if any such materials, fixtures 38 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY or articles are purchased pursuant to any conditional sales contract or other security agreement or otherwise so that the title thereto will not vest in Owner free from encumbrance or (ii) any such materials, fixtures or articles are not in accordance with the Unit Plans or (iii) Agent does not furnish to Owner upon request the contracts, bills of sale, statements, receipted vouchers and other agreements and documents, or any of them, under which Owner claims title to such materials, fixtures or articles. (f) Non-Compliance with Legal Requirements. If Agent fails to comply -------------------------------------- with any Legal Requirement relating solely to such Unit Premises, Unit Improvements, Unit FF&E or Unit. (g) Failure to Complete. If as of the close of business on a Unit ------------------- Completion Date, or, in the case of a Redwood Unit, the applicable Interim Completion Date, the related Unit Improvements have not been completed as herein provided, or if the Certificate of Substantial Completion and AFL Unit Leasing Record have not been executed and delivered by the respective Unit Completion Date, or if Owner shall reasonably determine during the course of construction that the Unit Improvements cannot be completed by the Unit Completion Date, or, in the case of a Redwood Unit, the applicable Interim Completion Date, subject to Force Majeure Delay. (h) Permits. If Agent shall fail to obtain or be unable to obtain any ------- Permit, or if any Permit shall be revoked or otherwise cease to be in full force and effect unless, if such revocation or cessation shall not be due to Agent's negligence or willful misconduct, Agent shall have obtained reinstatement or reissuance of such Permit within thirty (30) days after the revocation or expiration thereof, or if such reinstatement or reissuance is of a nature that it cannot be completely effected within thirty (30) days, Agent shall have diligently commenced application for such reinstatement or reissuance and shall thereafter be diligently proceeding to complete said reinstatement or reissuance. (i) Default under Ground Lease. Agent shall default in the observance -------------------------- or performance of any material term, covenant or condition of the Ground Lease relating to such Unit Premises on the part of Owner, as tenant thereunder, to be observed or performed, unless any such observance or performance shall have been waived or not required by the landlord under such Ground Lease, or if any one or more of the events referred to in such Ground Lease shall occur which would cause such Ground Lease to terminate without notice or action by the landlord thereunder or which would entitle the landlord under such Ground Lease to terminate such Ground Lease and the term thereof by the giving of notice to Owner without opportunity to cure, as tenant thereunder, or if any Ground Lease shall be terminated or canceled for any reason or under any circumstance whatsoever, or if any of the terms, covenants or conditions of any Ground Lease shall in any manner be modified, changed, supplemented, altered or amended in any material respect without the consent of Owner and Assignee. (j) Takings. If the use, occupancy or title to any Unit is taken, ------- requisitioned or sold in, by or on account of actual or threatened eminent domain proceedings or other 39 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY action by any Person or authority having the power of eminent domain (such events collectively referred to as a "Taking") and such Taking relates to all or a substantial portion of a Unit. Upon receipt of proceeds from any award or sale made in connection with such Taking, so long as no Event of Default or Potential Default has occurred and is continuing, and so long as Agent has made all payments to Owner required under subsection 11.4 hereof, Owner shall remit to Agent the net amount of such proceeds remaining after reimbursement for all costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Owner in connection with the negotiation and settlement of any proceedings related to such Taking. If such proceeds are received prior to Agent making the payments required under subsection 11.4 hereof, the net proceeds shall be applied to the amount payable thereunder. A Taking shall be deemed "to affect a substantial portion" of a Unit if after such Taking such Unit is, or will be, unusable for Agent's ordinary business purposes. (k) Insufficient Available Commitment. If Owner shall reasonably --------------------------------- determine that the Available Commitment is not, or will not be, sufficient to allow Owner to make advances for completion of the Unit Improvements and acquisition and installation of Unit FF&E in accordance with the Unit Budget. (l) Fundamental Change. If a "Change of Control Event" (as described ------------------ below) of the Guarantor shall occur. For purposes of this paragraph (1) of subsection 11.3, a "Change of Control Event" shall occur on the earlier of any date on which the Guarantor shall (i) announce its intention to consummate, (ii) shall enter into an agreement to consummate or (iii) shall consummate, any transaction which does or would, if consummated, violate paragraph (b) of Section 26 of the Lease. (m) Material Adverse Change Event. If a "Material Adverse Change ----------------------------- Event" (as described below) shall occur. For purposes of this paragraph (m) of subsection 11.3, a "Material Adverse Change Event" shall mean a change in the condition (financial or otherwise) or business of the Guarantor which could reasonably be expected to cause the Guarantor's Tangible Net Worth to be reduced by 50% or more from that reflected in the Guarantor's most recent audited financial statements delivered to the Lessor pursuant to paragraph (b) of subsection 9.6 hereof, other than any such reduction caused by a change in accounting principles mandated by the Financial Accounting Standards Board, and excluding any write-off of intangibles; provided, that it can be reasonably expected that the -------- impairment which relates to the write-off of such intangibles will be mitigated within two years. (n) Designated Effective Date. If as of the close of business on a ------------------------- Designated Effective Date with respect to any Unit, an AFL Unit Leasing Record with respect to such Unit has not been executed and delivered to Owner for any reason, whether or not as a result of Agent's inability to satisfy the conditions for such delivery. (o) December 31, 2011. On December 31, 2011, as to each of Redwood ----------------- Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4, the 40 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Effective Date shall not have occurred. (p) Interim Completion Date. If as of the close of business on the ----------------------- applicable Interim Completion Date for a Redwood Unit, Agent shall not have completed Redwood Phase 1 in respect of such Unit in accordance with the Unit Plans for such Unit, satisfied the conditions set forth in subparagraph (1) of Section 5 hereof and delivered to Owner on Interim Advance Certificate with respect thereto. (q) Exhibit K. Agent shall breach its obligations under Exhibit K --------- hereto. 11.4 Owner's Rights upon Event of Unit Termination. If any Event of --------------------------------------------- Unit Termination with respect to a Unit shall occur, Owner shall have no further obligation to make advances to Agent with respect to such Unit, and Owner may, as liquidated damages and not as a penalty, require Agent to purchase such Unit within fifteen (15) days after notice by Owner at a price equal to the Unit Acquisition Cost for such Unit. At the time of such sale, Agent shall be required to pay to Owner Owner's obligations, costs, losses, damages, and expenses (including, without limitation, reasonable attorneys' fees and expenses) sustained by Owner by reason of such Event of Unit Termination and exercise of Owner's rights under this subsection 11.4. SECTION 12. INDEMNITIES (a) Agent shall indemnify and hold harmless Owner, Merrill, Merrill Lynch, Merrill Leasing, any Assignee, any successor or successors and any Affiliate of each of them, and their respective officers, directors, incorporators, shareholders, partners (managing general and limited, including, without limitation, the managing general and limited partners of Owner), employees, agents and servants (each of the foregoing an "Indemnified Person") from and against all liabilities (including, without limitation, strict liability in tort and environmental law), taxes, losses, obligations, claims (including, without limitation, strict liability in tort), damages, penalties, causes of action, suits, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) or judgments of any nature relating to or in any way arising out of: a. The ordering, delivery, acquisition, purchase agreement for the acquisition, construction, title on acquisition, rejection, installation, possession, titling, retitling, registration, reregistration, custody by Agent of title and registration documents, ownership, use, non-use, misuse, financing (including, without limitation, all obligations of Owner under or in respect of any interest rate swap, cap, collar or other financial hedging arrangement and any amounts payable by Owner under any such arrangement to reduce the notional amount thereof by the amount of any prepayment of any borrowing to which such interest rate swap, cap, collar or other financial hedging arrangement relates), licensing, lease, sublease, operation, transportation, repair, control or disposition of any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit, or the release of hazardous substances on, under, to or from, or the generation or transportation of hazardous substances to or from, any Unit Premises; and 41 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY b. Any of the claims, liabilities, demands, fees, taxes, violations of contract, or any other matter or situation described in or contemplated by the indemnification provisions of subparagraphs (b), (c), (d) and (e) of Section 11 of the Lease, except that this Agreement shall substitute the terms "Owner" for "the Lessor", "Agent" for "the Lessee", "this Agreement" for "this Lease", and shall substitute the phrase "Unit Premises, Unit Improvements, Unit FF&E or Unit" for the phrase "Property or Equipment." (b) The indemnification required under this Section 12 shall be upon the terms provided in the paragraphs of Section 11 of the Lease following paragraph (d) thereof, except that this Agreement shall substitute the terms in the same manner as described in subparagraph (a)(ii) above. SECTION 13. LEASEHOLD INTERESTS The provisions of Section 29 of the Lease shall govern each Ground Lease hereunder, except this Agreement shall substitute the terms "Owner" for "the Lessor", Agent" for "the Lessee", "Unit Premises, Unit Improvements, Unit FF&E and Unit" for "Parcel of Property" and "Section 13" for "Section 29". SECTION 14. PURCHASES In connection with, and as a condition to, the purchase of any Unit Premises, Unit Improvements, Unit FF&E, or Unit pursuant hereto, (i) Agent shall pay at the time of purchase, in addition to the Unit Acquisition Cost and all other amounts payable by Agent under this Agreement, all transfer taxes, transfer gains taxes, mortgage recording tax, if any, recording and filing fees and all other similar taxes, fees (including, without limitation, brokerage fees), expenses and closing costs (including reasonable attorneys' fees) in connection with the conveyance of such Unit Premises, Unit Improvements, Unit FF&E, or Unit to Agent and all other amounts owing hereunder, and (ii) when Owner transfers title, such transfer shall be on an as-is, non-installment sale basis, without warranty by, or recourse to, Owner, but free of any Lien created pursuant to a Credit Agreement. SECTION 15. OWNER'S RIGHT TO TERMINATE (a) Owner shall have the right, upon written notice to Agent, to terminate this Agreement with respect to each and every Unit Premises, Unit Improvements, Unit FF&E, or Unit as of the date stipulated in such notice if, (i) at any time, for any reason (other than an Event of Default by the Lessor under a Credit Agreement (as therein defined), which has not been caused by or resulted from an Event of Default under this Agreement or an Event of Default (as defined in the Lease) under the Lease or by a breach by Agent of its obligations under any agreement or document executed and delivered in connection with this Agreement or the Lease), Commercial Paper cannot be issued by Owner upon terms reasonably acceptable to Owner, Owner cannot arrange for bank borrowings to finance or refinance its obligations hereunder with 42 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY respect to such Unit Premises, Unit Improvements, Unit FF&E or Unit upon terms reasonably acceptable to Owner, and Owner may no longer make or continue borrowings under a Credit Agreement sufficient to finance or refinance such obligations, (ii) at any time, for any reason (other than an Event of Default by Owner under a Credit Agreement (as therein defined) which has not been caused by or resulted from an Event of Default under this Agreement or from a breach by Agent of its obligations under any agreement or document executed and delivered in connection with this Agreement), a limited partner or partners of Owner cannot arrange for borrowings from the bank or banks acting as lender under a Credit Agreement in an amount equal to such limited partners' limited partnership interest or interests in Owner or (iii) such bank or banks which shall act as lender to a limited partner or partners of the Owner shall make a material change in the terms of any such lending arrangement a condition precedent to the extension of such lending arrangement without a corresponding change being effected under the Credit Agreement to which such lender is a party. (b) In the event of a termination with respect to any Unit Premises, Unit Improvements, Unit FF&E, or Unit pursuant to paragraph (a) of this Section 15, Agent shall be required to purchase, on the date stipulated in the written notice contemplated by paragraph (a) of this Section 15, such Unit or any Unit Premises, Unit Improvements or Unit FF&E constituting a part of such Unit as identified by Owner in such notice, for cash at its or their Unit Acquisition Cost. SECTION 16. PERMITTED CONTESTS (a) Agent shall not be required, nor shall Owner have the right, to pay, discharge or remove any tax, assessment, levy, fee, rent, charge, Lien or encumbrance, or to comply or cause any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit to comply with any Legal Requirement applicable to any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit or the occupancy, use or operation thereof, so long as no Event of Default exists under this Agreement, and, in the opinion of Agent's counsel, Agent shall have reasonable grounds to contest the existence, amount, applicability or validity thereof by appropriate proceedings, which proceedings in the reasonable judgment of Owner, (i) shall not involve any material danger that any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit would be subject to sale, forfeiture or loss, as a result of failure to comply therewith, (ii) shall not affect the payment of any sums due and payable hereunder or result in any such sums being payable to any Person other than Owner or any Assignee, (iii) will not place Owner or any Assignee in any danger of civil liability which is not adequately indemnified (Agent's obligations under Section 12 of this Agreement shall be deemed to be adequate indemnification if no Event of Default or Potential Default exists and if such civil liability is reasonably likely to be less than $100,000 per Unit or $500,000 with respect to all Units) or to any criminal liability, (iv) if involving taxes, shall suspend the collection of the taxes, and (v) shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Agent or any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit is subject and shall not constitute a default thereunder (the "Permitted Contest"). Agent shall conduct all Permitted Contests in good faith and with due diligence and shall promptly after the final determination (including appeals) of any Permitted Contest, pay and discharge all amounts which shall be determined to be payable 43 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY therein. Owner shall cooperate in good faith with Agent with respect to all Permitted Contests conducted by Agent pursuant to this Section 16. (b) In the event Owner deems, in its sole discretion, that its interests under this Agreement or in any Unit Premises, Unit Improvements, item of Unit FF&E or Unit are not adequately protected in connection with a Permitted Contest brought by Agent under this Section 16, Agent shall give such reasonable security, as may be demanded by Owner to insure payment of such tax, assessment, levy, fee, rent, charge or Lien and compliance with any Legal Requirement and to prevent any sale or forfeiture of any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit or any other amount due by reason of such nonpayment or noncompliance. Agent hereby agrees that Owner may assign such security provided by Agent to any Assignee. (c) At least ten (10) days prior to the commencement of any Permitted Contest, Agent shall notify Owner in writing thereof if the amount in contest exceeds $100,000, and shall describe such proceeding in reasonable detail. In the event that a taxing authority or subdivision thereof proposes an additional assessment or levy of any tax for which Agent is obligated to reimburse Owner under this Agreement, or in the event that Owner is notified of the commencement of an audit or similar proceeding which could result in such an additional assessment, then Owner shall in a timely manner notify Agent in writing of such proposed levy or proceeding. SECTION 17. SALE OR ASSIGNMENT BY OWNER (a) Owner shall have the right to obtain equity and debt financing for the acquisition and ownership of any Unit Premises, Unit Improvements, Unit FF&E, and Unit by selling or assigning its right, title and interest in any or all amounts due from Agent or any third Person under this Agreement; provided, -------- that any such sale or assignment shall be subject to the rights and interests of Agent under this Agreement. (b) Any Assignee shall, except as otherwise agreed by Owner and Assignee, have all the rights, powers, privileges and remedies of Owner hereunder, and Agent's obligations as between itself and such Assignee hereunder shall not be subject to any claims or defense that Agent may have against Owner. Upon written notice to Agent of any such assignment, Agent shall thereafter make payments of any and all sums due hereunder to Assignee, to the extent specified in such notice, and such payments shall discharge the obligation of Agent to Owner hereunder to the extent of such payments. Anything contained herein to the contrary notwithstanding, no Assignee shall be obligated to perform any duty, covenant or condition required to be performed by Owner hereunder, and any such duty, covenant or condition shall be and remain the sole obligation of Owner. SECTION 18. GENERAL CONDITIONS The following conditions shall be applicable throughout the term of this Agreement: 44 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 18.1 Survival. All agreements, representations, and warranties, and -------- the obligation to pay Additional Rent (as defined in the Lease) shall survive the expiration or other termination hereof. 18.2 No Waivers. No advance hereunder shall constitute a waiver of ---------- any of the conditions of Owner's obligation to make further advances nor, in the event Agent is unable to satisfy any such condition, shall any waiver of such condition have the effect of precluding Owner from thereafter declaring such inability to be an Event of Default as herein provided. Any advance made by Owner and any sums expended by Owner pursuant to this Agreement shall be deemed to have been made pursuant to this Agreement, notwithstanding the existence of an uncured Event of Default. No advance shall constitute a waiver of the right of Owner to require compliance with the covenant contained in subsection 10.1 hereof with respect to any such defects or material departures from any Unit Plans not theretofore discovered by or called to the attention of Owner. No advance at a time when an Event of Default exists shall constitute a waiver of any right or remedy of Owner existing by reason of such Event of Default, including, without limitation, the right to refuse to make further advances. 18.3 Owner and Assignee Sole Beneficiaries. All conditions of the ------------------------------------- obligation of Owner to make advances hereunder are imposed solely and exclusively for the benefit of Owner and Assignee and their assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Owner will refuse to make advances in the absence of strict compliance with any or all thereof and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Owner, with the consent of Assignee, at any time if in its sole discretion, it deems it advisable to do so. Inspections and approvals of any Unit Plans, Unit Premises, Unit Improvements, Unit FF&E, and Unit and the workmanship and materials used therein impose no responsibility or liability of any nature whatsoever on Owner, and no Person shall, under any circumstances, be entitled to rely upon such inspections and approvals by Owner for any reason. Owner's sole obligation hereunder is to make the advances if and to the extent required by this Agreement. 18.4 No Offsets, Etc. The obligations of Agent to pay all amounts --------------- payable pursuant to this Agreement and to purchase a Unit hereunder shall be absolute and unconditional under any and all circumstances of any character, and such amounts shall be paid without notice, demand, defense, setoff, deduction or counterclaim and without abatement, suspension, deferment, diminution or reduction of any kind whatsoever, except as herein expressly otherwise provided. The obligation of Agent to license, or to lease or sublease and pay Basic Rent (as defined in the Lease), for a Unit upon, in the case of a Redwood Unit, completion of Redwood Phase 1, or Substantial Completion, in the case of any Unit, is without any warranty or representation, express or implied, as to any matter whatsoever on the part of Owner or any Assignee or any Affiliate of either, or anyone acting on behalf of any of them. AGENT HAS SELECTED AND SHALL SELECT ALL UNIT PREMISES, UNIT IMPROVEMENTS, UNITS AND ITEMS OF UNIT FF&E CONSTRUCTED, ACQUIRED OR ORDERED ON THE BASIS OF ITS OWN JUDGMENT. NEITHER 45 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY OWNER NOR ANY ASSIGNEE NOR ANY AFFILIATE OF EITHER, NOR ANYONE ACTING ON BEHALF OF ANY OF THEM, MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE, MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER CHARACTERISTIC, OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E, OR AS TO WHETHER ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E, OR THE OWNERSHIP, USE, OCCUPANCY OR POSSESSION THEREOF COMPLIES WITH ANY LAWS, RULES, REGULATIONS OR REQUIREMENTS OF ANY KIND. AS BETWEEN OWNER AND AGENT, ANY ASSIGNEE OR ANY INDEMNIFIED PERSON, AGENT ASSUMES ALL RISKS AND WAIVES ANY AND ALL DEFENSES, SET-OFFS, DEDUCTIONS, COUNTERCLAIMS (OR OTHER RIGHTS), EXISTING OR FUTURE, TO ITS OBLIGATION TO PAY ALL AMOUNTS PAYABLE HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY RELATING TO: (1) THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE, MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER QUALITY OR CHARACTERISTIC OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E, LATENT OR NOT; (2) ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, ABATEMENT, DEFENSE OR OTHER RIGHT WHICH AGENT MAY HAVE AGAINST OWNER, ANY ASSIGNEE, OR ANY INDEMNIFIED PERSON FOR ANY REASON WHATSOEVER ARISING OUT OF THIS OR ANY OTHER TRANSACTION OR MATTER; (3) ANY DEFECT IN TITLE OR OWNERSHIP OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, OR UNIT OR ANY TITLE ENCUMBRANCE NOW OR HEREAFTER EXISTING WITH RESPECT TO THE UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEMS OF UNIT FF&E; (4) ANY FAILURE OR DELAY IN DELIVERY OR ANY LOSS, THEFT OR DESTRUCTION OF, OR DAMAGE TO, ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E IN WHOLE OR IN PART, OR CESSATION OF THE USE OR POSSESSION OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E BY AGENT FOR ANY REASON WHATSOEVER AND OF WHATEVER DURATION, OR ANY CONDEMNATION, CONFISCATION, REQUISITION, SEIZURE, PURCHASE, TAKING OR FORFEITURE OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, ITEM OF UNIT FF&E OR UNIT, IN WHOLE OR IN PART; (5) ANY INABILITY OR ILLEGALITY WITH RESPECT TO THE USE, OWNERSHIP, OCCUPANCY OR POSSESSION OF THE UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEMS OF UNIT FF&E BY AGENT; 46 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (6) ANY INSOLVENCY, BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDING BY OR AGAINST AGENT OR OWNER OR ANY ASSIGNEE; (7) ANY FAILURE TO OBTAIN, OR EXPIRATION, SUSPENSION OR OTHER TERMINATION OF, OR INTERRUPTION TO, ANY REQUIRED LICENSES, PERMITS, CONSENTS, AUTHORIZATIONS, APPROVALS OR OTHER LEGAL REQUIREMENTS; (8) THE INVALIDITY OR UNENFORCEABILITY OF THIS AGREEMENT OR ANY OTHER INFIRMITY HEREIN OR ANY LACK OF POWER OR AUTHORITY OF OWNER OR AGENT TO ENTER INTO THIS AGREEMENT; OR (9) ANY OTHER CIRCUMSTANCES OR HAPPENING WHATSOEVER, WHETHER OR NOT SIMILAR TO ANY OF THE FOREGOING. AGENT HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME HEREAFTER MAY BE CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE, CANCEL, QUIT, RESCIND OR SURRENDER THIS AGREEMENT EXCEPT IN ACCORDANCE WITH THE EXPRESS TERMS HEREOF. The making of payments under this Agreement by Agent shall not be deemed to be a waiver of any claim or claims that Agent may assert against Owner or any other Person. Owner agrees to repay Agent amounts paid to Owner to the extent such payments were in error and are not required by any of the terms and provisions of this Agreement. 18.5 No Recourse. Owner's obligations hereunder are intended to be ----------- the obligations of the limited partnership and of the corporations which are the managing general partner or general partner thereof only and no recourse for the payment of any amount due under this Agreement or the Construction Documents, or for any claim based thereon or otherwise in respect thereof, shall be had against any limited partner of Owner or any incorporator, shareholder, officer, director or Affiliate, as such, past, present or future, of such corporate managing general partner or general partner or of any corporate limited partner or of any successor corporation to such corporate managing general partner or general partner or any corporate limited partner of Owner, or against any direct or indirect parent corporation of such corporate managing general partner or general partner or of any limited partner of Owner or any other subsidiary or Affiliate or any such direct or indirect parent corporation or any incorporator, shareholder, officer or director, as such, past, present or future, of any such parent or other subsidiary or Affiliate, it being understood that Owner is a limited partnership formed for the purpose of the transactions involved in and relating to this Agreement, the Lease and the Construction Documents on the express understanding aforesaid. Nothing contained in this subsection 18.5 shall be construed to limit the exercise or enforcement, in accordance with the terms of this Agreement, the Lease and the Construction Documents and any other documents referred to herein, of rights and remedies against the limited partnership or the managing 47 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY corporate general partner or general partner of Owner or the assets of the limited partnership or the corporate managing general partner or general partner of Owner. 18.6 Notices. ------- (a) All notices, offers, acceptances, approvals, waivers, requests, demands and other communications hereunder or under any other instrument, certificate or other document delivered in connection with the transactions described herein shall be in writing, shall be addressed as provided below and shall be considered as properly given (i) if delivered in person, (ii) if sent by express courier service (including, without limitation, Federal Express, Emery, DHL, Airborne Express, and other similar express delivery services), (iii) in the event overnight delivery services are not readily available, if mailed by international airmail, postage prepaid, registered or certified with return receipt requested, or (iv) if sent by telecopy and confirmed; provided, -------- that in the case of a notice by telecopy, the sender shall in addition confirm such notice by writing sent in the manner specified in clauses (i), (ii) or (iii) of paragraph (a) of this subsection 18.6. All notices shall be effective upon receipt by the addressee; provided, however, that if any notice is tendered -------- ------- to an addressee and the delivery thereof is refused by such addressee, such notice shall be effective upon such tender. For the purposes of notice, the addresses of the parties shall be as set forth below; provided, however, that any party shall have the right to change its address for notice hereunder to any other location by giving written notice to the other party in the manner set forth herein. The initial addresses of the parties hereto are as follows: If to Owner: Flatirons Funding, Limited Partnership c/o ML Leasing Equipment Corp. Project and Lease Finance Group North Tower - 27th Floor World Financial Center 250 Vesey Street New York, New York 10281-1327 Attention: Jean M. Tomaselli Telephone: (212) 449-7925 Telecopy: (212) 449-2854 With a copy of all notices under this subsection 18.6 to be simultaneously given, delivered, or served to Gerard Haugh at the following address: ML Leasing Equipment Corp. Controller's Office World Financial Center South Tower - 14th Floor 225 Liberty Street 48 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY New York, New York 10080-6114 Telephone: (212) 236-7203 Telecopy: (212) 236-7584 If to Agent: Electronic Arts Redwood, Inc. 1450 Fashion Island Boulevard San Mateo, California 94404 Attention: Ruth Kennedy Secretary Telephone: 415-571-6375 Telecopy: 415-513-7552 With a copy of all notices under this subsection 18.6 to any Assignee at such address as such Assignee may specify by written notice to Owner and Agent. (b) Owner shall within five (5) Business Days give to Agent a copy of all notices received by Owner pursuant to any Credit Agreement and any other notices received with respect to any Unit Premises, Unit Improvements, item of Unit FF&E, or Unit. 18.7 Modifications. Neither this Agreement nor any provision hereof ------------- may be changed, waived or terminated, orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver or termination is sought. 18.8 Rights Cumulative. All rights, powers and remedies herein given ----------------- to Owner are cumulative and not alternative, and are in addition to all statutes or rules of law; any forbearance or delay by Owner in exercising the same shall not be deemed to be a waiver thereof, and the exercise of any right or partial exercise thereof shall not preclude the further exercise thereof, and the same shall continue in full force and effect until specifically waived by an instrument in writing executed by Owner. All representations and covenants by Agent shall survive the making of the advances, and the provisions hereof shall be binding upon and inure to the benefit of the respective successors and permitted assigns, if any, of the parties hereto. Agent may not, however, assign its rights or obligations as agent hereunder. 18.9 Governing Law. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN ------------- THE STATE OF NEW YORK. AGENT AND OWNER AGREE THAT, TO THE MAXIMUM EXTENT PERMITTED BY THE LAWS OF THE STATE OF NEW YORK, THIS AGREEMENT, AND THE RIGHTS AND DUTIES OF AGENT AND OWNER HEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW) IN ALL RESPECTS, INCLUDING, WITHOUT LIMITATION, IN RESPECT OF ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. AGENT HEREBY IRREVOCABLY SUBMITS, 49 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY FOR ITSELF AND ITS PROPERTIES, TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE SUPREME COURT OF THE STATE OF NEW YORK IN THE COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, AGENT HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS AGREEMENT OR ANY DOCUMENT OR ANY INSTRUMENT REFERRED TO HEREIN OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURT. TO THE EXTENT PERMITTED BY APPLICABLE LAW, AGENT AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. AGENT AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. OWNER AND AGENT EXPRESSLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. OWNER AND AGENT ACKNOWLEDGE THAT THE PROVISIONS OF THIS SUBSECTION 18.9 HAVE BEEN BARGAINED FOR AND THAT THEY HAVE BEEN REPRESENTED BY COUNSEL IN CONNECTION THEREWITH. 18.10 Confidentiality. Agent agrees to treat information concerning --------------- the structure and documentation of this Agreement and the Lease confidentially, except to the extent that disclosure is required by law (in which circumstance Agent will notify Owner prior to such disclosure of any information). The foregoing constraint shall not include: (i) information that is now in the public domain or subsequently enters the public domain without fault on the part of Agent; (ii) information currently known to Agent from its own sources as evidenced by its prior written records; and (iii) information that Agent receives from a third party not under any obligation to keep such information confidential. 50 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 18.11 Captions. The captions in this Agreement are for convenience -------- of reference only, and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 18.12 Counterparts. This Agreement may be executed in several ------------ counterparts, each of which when executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. SECTION 19. CERTAIN PURCHASE OPTIONS Provided that no Event of Default or Potential Default shall have occurred and be continuing, and provided that Agent shall not have obtained a Construction Advance for the construction of Unit Improvements thereon, Agent may purchase a Redwood Unit at a price equal to its Unit Acquisition Cost on thirty (30) days written notice. SECTION 20. LICENSE 20.1 Redwood Unit License. Provided that (a) there shall exist no -------------------- Event of Default or Potential Default or, with respect to the related Redwood Unit, Event of Unit Termination or Potential Event of Unit Termination and (b) Recordation shall have occurred, Agent shall have the right to have a license to use each Redwood Unit for outdoor recreational use only, provided that (i) Agent shall have completed Redwood Phase 1 in respect of such Unit and satisfied the conditions set forth in subparagraph (1) of Section 5 hereof and delivered an Interim Advance Certificate with respect thereto, together with a written notice that the Agent is exercising its right to have a license for such Unit in accordance with the terms hereof, (ii) each such Unit shall be in full compliance with the requirements of the Development Agreement dated as of November 7, 1996 between Owner and The City of Redwood City, and any and all documents contemplated thereby, (iii) all Permits and Governmental Actions, if any, required for such recreational uses have been obtained and remain in full force and effect, (iv) Agent shall have no right to develop, encumber or restrict the use of such Unit in any manner whatsoever, (v) such Unit shall remain subject to all other provisions of this Agreement, (vi) no Construction Advance shall have been made for such Unit, and (vii) the work described in the Unit Plans applicable to Redwood Phase 1 at such Unit has been completed by Agent subject to the terms hereof. While such license is in effect, Agent agrees that it will comply with the obligations of the Lessee (as defined in the Lease) set forth in Sections 8, 9, 10, and 11 of the Lease, which provisions shall be deemed incorporated herein by reference for this purpose and deemed to apply to such Unit, and provided, further, that Owner may revoke this license upon the occurrence of an Event of Default or Potential Default, or, with respect to the Unit, Event of Unit Termination or Potential Event of Unit Termination. Agent shall maintain the insurance required by Section 10(c) of the Lease with respect to each Unit occupied pursuant to this license. Except as hereinafter set forth, nothing in this Section shall be deemed to provide to the Agent the rights reserved for the Lessee (as defined in the Lease) in Sections 8, 9 and 10 of the Lease, including without limitation, any right to grant subleases, sublicenses, or any other form of use or occupancy arrangements to third parties. Acceptance of any Unit by Agent pursuant to this license shall constitute (x) acknowledgment by the Agent that such Unit has been delivered to the 51 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Agent in good condition and has been accepted for occupancy pursuant to this license, (y) a representation and warranty by Agent that the conditions for such license contained in this Section 20 have been satisfied, and (z) certification by the Agent that the representations and warranties contained herein and in Section 2 of the Lease are true and correct on and as of the date thereof as though made on and as of such date and that there exists on such date no Event of Default or Potential Default, or, with respect to such Unit, Event of Unit Termination or Potential Event of Unit Termination, or a breach or a default in the Guarantor's covenants or obligations under the Guaranty. The license provided by this Section 20 will cease and be of no further force and effect and Agent will cease all use of a Redwood Unit contemplated by this license upon commencement of Redwood Phase 2 for such Unit. 20.2 Special Redwood Unit Premises No. 3 License. Notwithstanding ------------------------------------------- the foregoing Subsection 20.1, but subject to the precondition that Recordation shall have occurred, Owner hereby grants to Agent a special license with respect to Lot 6 of Redwood Unit Premises No. 3 on the following express conditions: (i) the term of the license shall commence on the date hereof and shall terminate on the earlier to occur of the termination of the sublicense described in the next clause or March 31, 1998; (ii) Agent may enter into a sublicense with Shorebreeze Associates LLC, a Delaware limited liability company ("Shorebreeze"), to allow Shorebreeze to install (at Agent's or Shorebreeze's sole cost and expense and without any right to reimbursement by Owner or any right to include such costs in the Unit Acquisition Cost of Redwood Unit Premises No. 3) and operate a ground-level attended or unattended temporary parking facility for motor vehicles of Shorebreeze's tenants and their visitors while Shorebreeze's existing parking facility on property adjacent to Redwood Unit Premises 3 is being expanded, and for such other purposes as may be incidental thereto, but for no other purpose; (iii) such sublicense shall expire no later than March 31, 1998; (iv) upon termination pursuant to the terms hereof of such license, Agent, at Agent's sole expense, shall remove such parking facility and restore Redwood Unit Premises No. 6 to the condition otherwise contemplated hereby; (v) Shorebreeze shall be prohibited from granting any further sub-sublicenses or other use or occupancy agreements or arrangements of any kind; (vi) such license to Agent shall not diminish any of Agent's obligations under this Agreement, including, without limitation, Section 9.3 and Section 12; (vii) such license shall be not be terminable by Owner except upon the occurrence of an Event of Default or Potential Default, or with respect to such Redwood Unit Premises No. 3, Event of Unit Termination or Potential Event of Unit Termination; and (viii) while such license is in effect, Agent agrees that it will comply with the obligations of the Lessee (as defined in the Lease) set forth in Sections 8, 9, 10, and 11 of the Lease, which provisions shall be deemed incorporated herein by reference for this purpose and be deemed to apply to such Unit. Agent is hereby permitted to record a Notice of this license in the real estate records of the County of San Mateo. If the sublicense with Shorebreeze shall not have been entered into by June 30, 1997, this license shall automatically terminate and be of no further force and effect. SECTION 21. DEVELOPMENT AND SUBDIVISION It is contemplated by Owner and Agent that the real property currently subject to this Agreement will be reconfigured and subdivided into the lots designated on the subdivision map included in Exhibit L hereto (the "Subdivision Map") and that the Subdivision Map will be 52 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY consented to and executed by Owner and other third parties and recorded in the real estate records of San Mateo County, California (such reconfiguration, subdivision and recordation being referred to in this Agreement as the "Recordation"). Agent agrees to effect the Recordation as promptly as practicable and in any event no later than June 15, 1997 and that the failure to do so shall constitute an Event of Unit Termination as described in Exhibit K hereto. It is also contemplated (i) that the parcel designated as "Parcel B" on the Subdivision Map may, at the request of Agent, be conveyed by quitclaim deed from Owner to Agent provided that, simultaneously therewith Agent shall, for no consideration, convey such parcel to Shorebreeze, (ii) that any land currently owned by Owner and designated as "Shoreline Drive" on the Subdivision Map will be conveyed to the City of Redwood City, California via dedication to the City on the Subdivision Map, and (iii) that subsequent easements and rights-of-way will be required, and at the request of Agent will be granted by Owner, for the Headquarters Unit, for the Unit Improvements to be located on each of Redwood Unit Premises Nos. 2, 3, and 4, and in connection with the Shores Business Center of which such real property is a part, provided that in each instance, no easement or right-of-way shall materially impair the intended use or value of any such Unit. In each instance, the request of Agent to Owner to execute such easement or right-of-way shall be deemed to be the representation of the Agent that the grant thereof will not materially impair the intended use or value of any such Unit. The net cash amount of any reimbursements received by Owner from the City of Redwood City pursuant to the Development Agreement dated as of November 7, 1996 between the Owner and the City of Redwood City shall be credited against amounts owed by Agent to Owner under this Agreement or the Lease or, in Owner's sole discretion, deducted from the Unit Acquisition Cost of the Redwood Unit Premises on a pro rata basis. 53 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. Flatirons Funding, Limited Partnership by Flatirons Capital, Inc., its Managing General Partner By /s/ Jean M. Tomaselli -------------------------------------------------- Name: Jean M. Tomaselli Title: Vice President and Assistant Secretary Electronic Arts Redwood, Inc. By /s/ James F. Healey -------------------------------------------------- Name: James F. Healey Title: President THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT A The Lease --------- See Attachment 2 of Tab No. 16(c)(iii) THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT B AFL UNIT LEASING RECORD to Lessor: Flatirons Funding, Limited Partnership the Lease Agreement, dated Lessee: Electronic Arts Redwood, Inc. as of February 14, 1995, between Flatirons Funding, Limited Partnership, as lessor, and Electronic Arts Redwood, Inc., as lessee (the "Lease Agreement"). A. Unit Premises No.: ____ Effective Date of this AFL Unit Leasing Record ("AFL ULR") __________ __, 19__. B. PLEASE COMPLETE THE FOLLOWING STATEMENTS, IF APPLICABLE: 1. This AFL ULR relates to [Deed/Ground Lease] dated __________ __, 19__. UNIT PREMISES DESCRIPTION AND RENTAL INFORMATION. C. Type of Property (use category specified in Exhibit A to the Lease Agreement) D. Specific Description: (See Schedule A hereto if more space needed) __________________________________________________________________________ __________________________________________________________________________ E. Location of Unit Premises ___________________________________________________ State County City F. Unit Acquisition Cost under the Agreement for Lease is $__________. G. If the effective date of this AFL ULR is after the first day of the month and prior to the Lease Rate Date in such month, the partial first month's Basic Rent for Unit Premises placed under lease by this AFL ULR will be paid from the date of this AFL ULR until the end of the month on the Basic Rent Payment Date in such month. If the Effective Date of the AFL ULR falls on or after the Lease Rate Date, the partial first month's Basic Rent will be paid from the date of this AFL ULR until the end of the month on the next succeeding Basic Rent Payment Date. H. The Initial Term, Extended Term and Renewal Term for the Unit Premises placed under lease pursuant to this AFL ULR will be in accordance with Exhibit A to the Lease Agreement. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY I. The Basic Rent is as defined in the Lease Agreement. The Monthly Rent Component will be in accordance with [Schedule B hereto][the definition set forth in the Lease Agreement]. J. Unit Premises will be fully amortized as of the last day of the Lease Term on __________ __, ____. K. The Basic Rent for the Renewal Term (after the Property is fully amortized) equals fair market rental value. L. Termination of the lease of the Equipment leased pursuant to this AFL ULR will be in accordance with the Lease Agreement. M. ACKNOWLEDGMENT AND EXECUTION ---------------------------- The undersigned Lessor hereby leases to the undersigned Lessee, and the Lessee acknowledges delivery to it in good condition of the Unit Premises described on this AFL ULR. The Lessee agrees to pay the Basic Rent, Additional Rent and additional payments set forth in the Lease Agreement. The covenants, terms and conditions of this lease are those appearing in the Lease Agreement, as it may from time to time be amended, which covenants, terms and conditions are hereby incorporated by reference. The terms used herein have the meaning assigned to them in the Lease Agreement. Electronic Arts Redwood, Inc., Flatirons Funding, Limited Partnership, Lessee Lessor By Flatirons Capital, Inc., its Managing General Partner By___________________________ By_____________________________ Name: Name: Title: Title: B-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT C FORM OF ACQUISITION CERTIFICATE WITH RESPECT TO UNIT PREMISES LOCATED AT __________/*/ Electronic Arts Redwood, Inc., as agent ("Agent"), under a certain Amended and Restated Agreement for Lease (the "Agreement for Lease") dated as of March 7, 1997 entered into between Flatirons Funding, Limited Partnership ("Owner") and Agent, hereby certifies to Owner and Assignee as follows: 1. Legal Description. Attached hereto at Tab 1 is a copy of the ----------------- executed purchase and sale agreement and of the warranty deed, or, in the case of Unit Premises located in California, the grant deed or an original of the Ground Lease for the Unit Premises with an accurate and complete description of the metes and bounds or other legally sufficient description for the Unit Premises located at ___________. 2. Unit Plans. Attached hereto at Tab 2 is a copy of the Unit ---------- Plans for the Unit Improvement to be constructed on the Unit Premises, and initialed to show Agent's approval. 3. Unit Budget. Attached hereto at Tab 3 is a true, complete, and ----------- correct copy of the Unit Budget for the Unit, including an itemization of all costs incurred to date or to be incurred in connection with the acquisition of Owner's interest in the Unit Premises and with the construction and equipping of the Unit. 4. Unit FF&E Specifications. Attached hereto at Tab 4 is a true, ------------------------ complete and correct copy of the Unit FF&E Specifications initialed to show Agent's approval. [IF NO UNIT FF&E ARE CONTEMPLATED, PLEASE INDICATE THIS.] 5. Title Insurance Policy and Premiums. Attached hereto at Tab 5 ----------------------------------- is a title insurance commitment or ALTA owner's policy for the benefit of Owner, issued by the Title Company with respect to the Unit Premises (i) where Owner is acquiring a fee interest in the Unit Premises, in the amount of the total Unit Budget, and (ii) where Owner is acquiring a leasehold interest in the Unit Premises, in an amount to be mutually agreed upon among Owner, Agent and any Assignee, together with legible copies of all __________________________ /*/ All capitalized terms used in this Certificate shall have the meanings given to such terms in the Agreement for Lease. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 11. Representations of Guarantor. All representations and warranties ---------------------------- made in the Guaranty are and remain true and correct on and as of the date of the Initial Advance as if made on and as of the date of the Initial Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Initial Advance is to be made or by reason of giving effect to such Initial Advance. 12. Memorandum of Lease Agreement. Attached hereto at Tab 7 are two ----------------------------- original counterparts of a memorandum of lease agreement in the appropriate form for recording in the jurisdiction on which the Unit Premises are located, executed by Agent, as lessee. 13. Taxes. All past and current taxes and assessments (excluding ----- those which are due and payable but not yet delinquent) applicable to the Unit Premises have been paid in full. 14. Site Plan. Attached hereto at Tab 8 is a site plan showing the --------- proposed location of the Unit Improvements to be constructed on the Unit Premises. 15. Insurance. Attached hereto at Tab 9 are certificates of --------- insurance or other evidence certifying that the insurance carried or maintained on the Unit complies with the requirements of subsection 9.3 of the Agreement for Lease. 16. Environmental Affidavit and Report. Attached hereto at Tab 10 is ---------------------------------- an environmental affidavit duly executed by Agent and an environmental report which complies with the requirements of subsection 4(v) of the Agreement for Lease. C-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY underlying documents of record affecting the Unit Premises, and evidence that all premiums in respect of such policies will be paid at the closing of title. If a joint protection policy is to be issued, attached as well is the letter of Agent explicitly agreeing to the conditions set forth in Exhibit J to the Agreement for Lease with respect to such policy. 6. Utilities. All utility services and facilities (including, --------- without limitation, gas, electrical, water and sewage services and facilities) (a) which are necessary and required during the construction period have been completed or will be available in such a manner that construction will not be impeded by a lack thereof and (b) which are necessary for operation and occupancy of the Unit will be completed in such a manner and at such a time as will assure the opening and operation of the Unit on or before the Unit Completion Date. 7. Permits. All Permits and governmental approvals required for ------- the construction of the Unit Improvements have been or will be issued in such a manner that construction will not be impeded by a lack thereof. No work for which a Permit or governmental approval is required will be commenced or continued unless and until such Permit or governmental approval required therefor has been issued or obtained, and once issued or obtained will remain in full force and effect. 8. Construction Agreement. There is [IS NOT] a Construction ---------------------- Agreement, a true, complete, and correct copy of which is enclosed herewith. 9. Request for Advance. Attached hereto at Tab 6 is a duly executed ------------------- AIA Document G722 or a substantially similar document. 10. Representations of Agent. (i) All costs and expenses which are ------------------------ the subject of the Initial Advance requested have been paid in full or will be paid in full out of the proceeds of the Initial Advance, (ii) there are no Liens on the Unit Premises of which Agent has knowledge that are not Permitted Liens, (iii) all representations and warranties made in the Agreement for Lease, in the Lease, and in connection with the Initial Advance, are and remain true and correct on and as of the date of the Initial Advance and (iv) no Event of Default, Potential Default or, with respect to the Unit for which the Initial Advance is requested, Event of Unit Termination or Potential Event of Unit Termination, under the Agreement for Lease has occurred and is continuing on the date such Initial Advance is to be made or by reason of giving effect to such Initial Advance. C-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 17. Additional Matters. Attached hereto at Tab 11 are such other ------------------ documents and legal matters as have been requested by Owner or Assignee. Dated: __________ __, 19__ Electronic Arts Redwood, Inc. By:____________________________________________ Name: Title: Owner and Agent agree that the Designated Effective Date, if any, for such Unit is : ________________________ and the Unit Completion Date is ____________________________. Electronic Arts Redwood, Inc. By:____________________________________________ Name: Title: Flatirons Funding, Limited Partnership By: Flatirons Capital, Inc., its Managing General Partner By:___________________________________________ Name: Title: C-4 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT D FORM OF INTERIM ADVANCE CERTIFICATE WITH RESPECT TO UNIT PREMISES LOCATED AT __________ IN CONNECTION WITH A REQUEST FOR AN INTERIM ADVANCE Electronic Arts Redwood, Inc., as agent ("Agent"), under a certain Amended and Restated Agreement for Lease (the "Agreement"), dated as of March 7, 1997, entered into with Flatirons Funding, Limited Partnership ("Owner"), delivers this Interim Advance Certificate pursuant to Section 5 of the Agreement with respect to the above noted Unit Premises. All terms used in this Certificate shall have the meanings given to such terms in the Agreement. Agent hereby certifies to Owner and Assignee as follows: 1. Continuing Representations of Agent. All representations and ----------------------------------- warranties made in the Agreement, in the Lease, and in connection with the Interim Advance are and remain true and correct on and as of the date of the Interim Advance and no Event of Default, Potential Default or, with respect to the Unit for which the Interim Advance is requested, Event of Unit Termination or Potential Event of Unit Termination under this Agreement has occurred and is continuing on the date such Interim Advance is to be made or by reason of giving effect to such Interim Advance. 2. Continuing Representations of Guarantor. All representations and --------------------------------------- warranties in the Guaranty are and remain true and correct on and as of the date of the Interim Advance as if made on and as of the date of such Interim Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Interim Advance is to be made or by reason of giving effect to such Interim Advance. 3. Construction Progress. If requested by Owner, attached hereto at --------------------- Tab 1 is (a) an inspection report from an independent party and (b) true copies of unpaid invoices, receipted bills and Lien waivers and such other supporting information as may be requested by Owner. 4. No Other Security Interests. All materials and fixtures --------------------------- incorporated in the construction of the Unit Improvements have been purchased so that title thereto shall have vested in Owner immediately upon delivery thereof to the Unit Premises and if requested by Owner, attached hereto at Tab 2 are copies of the contracts, bills of sale, statements, receipted vouchers, or other documents under which title thereto is claimed. 5. Statements of Expenditures. Attached hereto at Tab 3 is a -------------------------- statement THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY setting forth the names, addresses and amounts due or to become due as well as the amounts previously paid to every contractor or subcontractor furnishing materials, performing labor or entering into the construction of any part of the Unit Improvements, and of the use of all proceeds of the previous advance that have been advanced with respect to projected invoices or unincurred costs. 6. Request for Advance. Attached hereto at Tab 4 is a duly executed ------------------- AIA Document G722 or a substantially similar document. 7. Status of Title. Attached hereto as Tab 5 is a notice of the --------------- continuation or an endorsement to the title insurance policy indicating that since the last disbursement there have been no changes in the state of title, except for Permitted Liens, and no additional survey exceptions not theretofore specifically approved in writing by Owner, and if such Unit Premises are subject to a ground lease, an estoppel certificate as to the matters required by Section 5(d) of the Agreement for Lease. 8. Evidence of Compliance. If requested, attached hereto at Tab 6 ---------------------- are such documents, reports, certificates, affidavits and other information as required by Owner and any Assignee to evidence compliance by Agent with all of the provisions of the Agreement. 9. Revised AFL Unit Leasing Record. If such Interim Advance is ------------------------------- being made after the Designated Effective Date, attached hereto at Tab 7 is a revised AFL Unit Leasing Record prepared and executed by Agent. 10. License Conditions. Check if applicable ____. ------------------ (a) Construction and Equipment of the Unit. To the extent -------------------------------------- included in Redwood Phase 1 for a Redwood Unit, the Unit Improvements (including all interior finish work, but exclusive of punch list items) has been completed within the Unit Budget and in all material respects in accordance with the Unit Plans and are accepted by Agent and all Unit FF&E for that Unit has been installed and conforms in all materials respects to the Unit FF&E Specifications and are accepted by Agent. Attached hereto at Tab 8 is a specific itemization of all items of Unit FF&E installed in such Unit. (b) Permits. All Permits and governmental approvals necessary ------- for occupancy and primary use and operation of the Redwood Unit, as contemplated by Redwood Phase 1, have been issued or obtained. D-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY (c) Liens. To the extent contemplated by Redwood Phase 1 for ----- such Unit, the Unit, including interior finish work, has been completed as contemplated in paragraph (e) of Section 6 of the Agreement free of all Liens, except for Permitted Liens (all of which are to be itemized as to the nature, amount, claimant and status) and there are no current Permitted Contests with respect to the Unit (or, if any, the nature, amount, claimant and status thereof). (d) Utilities. Direct connection has been made to all --------- appropriate utility facilities and the Unit Improvements are ready for occupancy and operation, as contemplated by Redwood Phase 1. (e) Flood Insurance. Unless Agent is self-insured for such --------------- risks as permitted under the Lease, if the Unit Premises are located in a flood plain, attached hereto at Tab 10 is a policy of flood insurance in an amount equal to the lesser of (A) the maximum limit of coverage available under the National Flood Insurance Act of 1968, as amended, or (B) the amount of the Unit Acquisition Cost for the Unit. Dated: __________, 19__ Electronic Arts Redwood, Inc. By:__________________________________________ Name: Title: D-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT E FORM OF CERTIFICATE OF SUBSTANTIAL COMPLETION WITH RESPECT TO UNIT PREMISES LOCATED AT __________ IN CONNECTION WITH A REQUEST FOR A FINAL ADVANCE Electronic Arts Redwood, Inc., as agent ("Agent"), under a certain Amended and Restated Agreement for Lease (the "Agreement"), dated as of March 7, 1997, entered into with Flatirons Funding, Limited Partnership ("Owner"), delivers this Certificate of Substantial Completion pursuant to Section 6 of the Agreement with respect to the above noted Unit Premises. All terms used in this Certificate shall have the meanings given to such terms in the Agreement. Agent hereby certifies to Owner and Assignee as follows: 1. Satisfactory Title. Attached hereto at Tab 1 is a notice of title ------------------ continuation issued by the Title Company indicating that since the Initial Advance for such Unit Premises, there have been no changes in the state of title, except for Permitted Liens, and no additional survey exceptions not theretofore specifically approved in writing by Owner and, if such Unit Premises are subject to a Ground Lease, attached hereto is an estoppel certificate confirming that there are no defaults under the Ground Lease, and such other information as may be requested by Owner or Assignee. 2. Construction and Equipping of the Unit. The Unit Improvements -------------------------------------- (including all interior finish work, but exclusive of punch list items) has been completed within the Unit Budget and in all material respects in accordance with the Unit Plans and are accepted by Agent and all Unit FF&E for that Unit has been installed and conforms in all material respects to the Unit FF&E Specifications and are accepted by Agent. Attached hereto at Tab 2 is a specific itemization of all items of Unit FF&E installed in such Unit. 3. Permits. All Permits and governmental approvals necessary for the ------- occupancy and primary use and operation of the Unit have been issued or obtained. 4. Liens. The Unit, including interior finish work, has been completed ----- as contemplated in paragraph (e) of Section 6 of the Agreement free of all Liens, except for Permitted Liens (all of which are to be itemized as to the nature, amount, claimant and status) and there are no current Permitted Contests with respect to the Unit (or, if any, the nature, amount, claimant and status thereof). 5. Final Survey. Attached hereto at Tab 3 is a final survey showing the ------------ completed Unit Improvements, all easements on the Unit Premises and indicating the location of access to the Unit Premises and all utility and water easements directly affecting the Unit Premises. No encroachments exist by the Unit Improvements or on the Unit Premises other than those that are Permitted Liens or that may have THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY been consented to by Owner and all set-back requirements have been complied with. 6. Utilities. Direct connection has been made to all appropriate utility --------- facilities and the Unit Improvements are ready for occupancy and operation. 7. Flood Insurance. Unless Agent is self-insured for such risks as --------------- permitted under the Lease, if the Unit Premises are located in a flood plain, attached hereto at Tab 4 is a policy of flood insurance in an amount equal to the lesser of (A) the maximum limit of coverage available under the National Flood Insurance Act of 1968, as amended, or (B) the amount of the Unit Acquisition Cost for the Unit. 8. Continuing Representations of Agent. All representations and ----------------------------------- warranties made in the Agreement, in the Lease, and in connection with this Final Advance are and remain true and correct on and as of the date of the Final Advance and no Event of Default, Potential Default or, with respect to the Unit for which the Final Advance is requested, Event of Unit Termination or Potential Event of Unit Termination under this Agreement has occurred and is continuing on the date such Final Advance is to be made or by reason of giving effect to such Final Advance. 9. Continuing Representations of Guarantor. All representation and --------------------------------------- warranties made in the Guaranty are and remain true and correct on and as of the date of the Final Advance as if made on and as of the date of the Final Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Final Advance is to be made or by reason of giving effect to such Final Advance. 10. AFL Unit Leasing Record. Attached hereto at Tab 5 is a duly executed ----------------------- AFL Unit Leasing Record, or if the Designated Effective Date has previously occurred, a duly executed revised AFL Unit Leasing Record prepared and executed by Agent. 11. Request for Advance. Attached hereto at Tab 6 is a duly executed AIA ------------------- Document G722 or a substantially similar document. 12. Statements of Expenditures. Attached hereto at Tab 7 is a statement -------------------------- setting forth the names, addresses and amounts due as well as the amounts previously paid to every contractor or subcontractor furnishing materials, performing labor or entering into the construction of any part of the Unit Improvements, and of the use of all proceeds of the previous advance that have been advanced with respect to projected invoices or unincurred costs. Dated: _____________, 19__ Electronic Arts Redwood, Inc. E-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY By:__________________________________________ Name: Title: E-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT F FORM OF CERTIFICATE OF INCREASED COST WITH RESPECT TO UNIT PREMISES LOCATED AT __________ IN CONNECTION WITH A REQUEST FOR A COMPLETION ADVANCE Electronic Arts Redwood, Inc. as agent ("Agent"), under a certain Amended and Restated Agreement for Lease (the "Agreement"), dated as of March 7, 1997, entered into with Flatirons Funding, Limited Partnership ("Owner"), delivers this Certificate of Increased Cost pursuant to Section 7 of the Agreement with respect to the above noted Unit Premises. All terms used in this Certificate shall have the meanings given to such terms in the Agreement. Agent hereby certifies to Owner and Assignee as follows: 1. Continuing Representations of Agent. All representations and ----------------------------------- warranties made in the Agreement, in the Lease, and in connection with this Completion Advance are and remain true and correct on and as of the date of the Completion Advance and no Event of Default, Potential Default or, with respect to the Unit for which the Completion Advance is requested, Event of Unit Termination or Potential Event of Unit Termination under this Agreement has occurred and is continuing on the date such Completion Advance is to be made or by reason of giving effect to such Completion Advance. 2. Continuing Representations of Guarantor. All representations and --------------------------------------- warranties made in the Guaranty are and remain true and correct on and as of the date of the Completion Advance as if made on and as of the date of the Completion Advance (except to the extent such representations and warranties expressly relate specifically to an earlier date) and no default under the Guaranty has occurred and is continuing on the date such Completion Advance is to be made or by reason of giving effect to such Completion Advance. 3. Revised AFL Unit Leasing Record. Attached hereto at Tab 1 is a ------------------------------- revised AFL Unit Leasing Record prepared by Agent. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY 4. Request for Advance. Attached hereto at Tab 2 is a duly executed AIA ------------------- Document G722 or a substantially similar document. Dated: ____________, 19__ Electronic Arts Redwood, Inc. By:_________________________________ Name: Title: F-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT G FF&E SPECIFICATIONS Intentionally left blank at this time. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT H ENVIRONMENTAL AFFIDAVIT STATE OF _________________) ) ss. COUNTY OF ________________) ________________ being duly sworn, hereby deposes and says: 1. Deponent is the __________ of Electronic Arts Redwood, Inc. ("Agent"), the agent under a certain Amended and Restated Agreement for Lease, dated as of March 7, 1997 (the "Agreement for Lease"), entered into with Flatirons Funding, Limited Partnership ("Owner"). Agent is herewith delivering to Owner and ___________ (the "Assignee") an Acquisition Certificate with respect to a [fee] [leasehold] interest in certain premises located at __________, in the City of __________, County of ___________, State of ___________. This Affidavit is made by Deponent to induce (a) Owner to accept the Unit Premises under the Agreement for Lease and (b) the Assignee to extend certain financial accommodations to Owner as referred to in, and to be secured by, inter alia, a [Leasehold] [Deed of Trust] [Mortgage] to encumber the Unit in ----- ---- the principal amount of [up to] $___________. Capitalized terms used herein and not otherwise defined shall have the meaning given such terms in the Agreement for Lease. 2. Except as described in the Environmental Report (hereinafter defined), and after all appropriate inquiry into previous ownership and uses of the Unit in a manner consistent with good commercial or customary practices, Agent has no actual knowledge and has not given or received any notice indicating, and has no reason to believe, that (a) any prior or present owner, operator, tenant, occupant, or licensee of any portion of the Unit has used, handled, treated, generated, imported, processed, produced, stored, spilled, released, transported, disposed of, or discharged (collectively, "managed") any Hazardous Substances (hereinafter defined) on, from, beneath or affecting the Unit or any portion thereof, except in strict compliance with all applicable Environmental Regulations (hereinafter defined); (b) there has been a release of any Hazardous Substances (i) on, from or beneath the Unit Premises or which affects the Unit Premises, or (ii) at any location where any Hazardous Substances managed on or in connection with the Unit Premises have been transported, treated, stored, handled, disposed, transferred, recycled or received, whether by Agent or any other Person for whose conduct Agent is or may be held responsible under applicable Environmental Regulations; (c) any prior or present owner, operator, tenant, occupant, or licensee of any portion of the Unit Premises or any other Person for whose conduct any of the foregoing is or may be held responsible under applicable Environmental Regulations, has received any notice, directive, citation, subpoena, summons, order to show cause, complaint or other communication from any governmental authority or entity or Person with respect to the management of any Hazardous Substances on, from, beneath or affecting the Unit Premises or any portion thereof; (d) any threat exists of a discharge, release, seepage or migration of any Hazardous Substances from any portion of the Unit Premises to the surrounding property or from the surrounding property to any portion of the Unit Premises; (e) THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY there are currently no agreements, consent orders, decrees or other directives of any applicable court or governmental or quasi-governmental agency requiring any tests, studies, inspections, work, monitoring or other removal or remedial activities with respect to the management of any Hazardous Substances on, from, beneath or affecting the Unit Premises or any portion thereof, or any threatened proceeding concerning the Unit Premises or any portion thereof which is related to Environmental Regulations; (f) there are currently any claims, actions, injunctions, decrees, writs, orders, judgments, proceedings, or investigations filed, pending or threatened against Agent or the Unit Premises with respect to the management of any Hazardous Substances on, from or beneath the Unit Premises or in any way affecting the Unit Premises or any portion thereof; (g) there are any underground or above ground storage tanks (whether or not currently in use) located on the Unit Premises, nor to the best of Agent's knowledge after due inquiry have there ever been any such tanks located on the Unit Premises; and (h) there are any dams, reservoirs, wetlands or watercourses at or adjacent to the Unit Premises, and that any wells, water discharges and other water diversions on the Unit Premises are not registered and/or permitted under and in compliance with Environmental Regulations. 3. Agent or any Affiliate of Agent has not given notice to any insurance broker or insurance carrier that there has been an occurrence relating to the management or release of Hazardous Substances on, from, beneath, or affecting the Unit Premises or any portion thereof. 4. Agent has obtained and will maintain and is in compliance with all permits, licenses, registration and authorizations which are required under applicable Environmental Regulations with respect to its intended operation of the Unit Premises. 5. Agent has not, by contract, agreement, or otherwise, arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of any Hazardous Substances to any location which is listed on the National Priorities List under CERCLA (as hereinafter defined) or which is listed for possible inclusion on the National Priorities List, or which is the subject of any regulatory action which may lead to claims under CERCLA. 6. Agent knows of no facts or circumstances related to environmental matters concerning the Unit Premises that are reasonably likely to lead to the assertion of environmental claims against Owner, Agent, or any affiliate of Owner or of Agent. 7. For purposes of this document, the following terms shall have the following meanings: (i) "Environmental Regulations" shall mean each and every applicable federal, state or local law, statute, ordinance, code, rule, order, regulation, or other published requirement (including, but not limited to, consent decrees and administrative orders), regulating, relating or imposing obligations, liabilities or standards of conduct with respect to human health or safety, to the environment, or to Hazardous Substances, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA") (42 U.S.C. (S) 9601, et seq.), as amended -- --- by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. (S)(S) 9601-9675), the Resource Conservation and H-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Recovery Act, as amended (42 U.S.C. (S) 6901, et seq.), the Emergency Planning -- --- and Community Right-To-Know Act, as amended (42 U.S.C. (S) 11001, et seq.), the -- --- Water Pollution Control Act, as amended (33 U.S.C. (S) 1251, et seq.), the -- --- Hazardous Materials Transportation Act, as amended (49 U.S.C. (S) 1801, et -- seq.), the Toxic Substances Control Act, as amended (15 U.S.C. (S) 2601, et - --- -- seq.), and any so called "Superfund" or "Superlien" law, (ii) "Environmental - --- Report" shall mean the environmental report delivered pursuant to paragraph (v) of Section 4 of the Agreement for Lease to and accepted by Owner and the Assignee in connection with the acquisition of the Unit Premises, and (iii) "Hazardous Substances" shall mean, without limitation, any solid, liquid or gaseous wastes, substances or materials containing or constituting urea formaldehyde, polychlorinated biphenyls, petroleum products, methane, radioactive materials, hazardous wastes, hazardous or toxic substances, or related materials, asbestos or any material containing asbestos, pollutants, or any other substance, material, chemical compound, waste or item defined as or determined by a governmental authority having jurisdiction to be hazardous or toxic pursuant to any Environmental Regulations applicable to the Unit Premises or the business operations conducted thereon. 8. It is hereby acknowledged and confirmed that the indemnification obligation of Agent set forth in Section 12 of the Agreement for Lease and in Section 11 of the Lease (referred to therein) to the parties therein named shall include, without limitation, all liabilities, taxes, losses, obligations, claims, damages, penalties, causes of action, suits, costs and expenses (including, without limitation, attorneys' and accountants' fees and expenses) or judgments of any nature relating to or in any way arising out of the noncompliance with any applicable Environmental Regulations by Agent or with respect to the Unit Premises and/or any improvements now or hereafter situated on the Unit Premises. Electronic Arts Redwood, Inc. By:___________________________________ Title:________________________________ Sworn to before me on this ______ day of ___________, 199__ _________________________ Notary Public My commission expires: H-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT I ISSUES TO BE ADDRESSED IN ENVIRONMENTAL REPORT DOCUMENT REVIEW 1. Description of site and improvements and current owner. 2. History of site, including previous and current land uses and business operations (e.g., chemical use, waste disposal practices, manifests, chemical spills, releases). 3. Environmental status of site, including current chemical use and waste disposal practices (storage areas, dumps, treatment, off-site disposal activities), underground storage tanks, emissions and discharges (air, water, hazardous waste, sewage, stormwater, and any notices of violation or consent orders) and neighboring environmental conditions, locating the nearest RCRA generator, the nearest Superfund site, the nearest landfill/disposal area, and the nearest underground storage tanks. 4. Regulatory Agency Records Search (contact Federal, State, County, Municipal, and Township offices for information about permit status, inspections, registrations, violations, judgments, liens, consent orders). AERIAL PHOTO REVIEW (WHERE AVAILABLE) (Contact US/State Geological Survey, Soil Conservation Service, and Local Planning Commission for any available photos) 1. Review for natural features and the progression, over time, of those natural features, e.g., topography (slope, drainage), soil cover (discolored, disturbed, paved), surface water (location of bodies of water relative to slopes, property boundaries, structures; slicks or discoloration; dumping), vegetation, and natural hazards (sinkholes, slides, erosion, flooding). 2. Review for indications of past uses, e.g., location and type of structures, including pipelines and tanks; roads, railroads; truck depots, railroad cars, and other potential means for transporting contaminants/wastes; open trenches, pits and scars, including possible disposal practices; piles of debris, trash, slag, drums, etc.; activities on and condition of adjacent sites. SITE WALKOVER 1. Developed/undeveloped; operating/abandoned; accessibility (roads, paths, THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY railroads); man-made barriers, such as fences; natural barriers, such as water and steep slopes; proximity to towns, bodies of water, highways, railroads, etc.; nature of adjacent sites (residential, industrial, undeveloped) and regional topography. 2. Settling or sinking of land surface, natural surface drainage (direction, on-site or off-site, basins, etc.), bedrock and wetlands. 3. Soil and ground cover: exposed or paved, soil cover (native to area or disturbed, possibility of fill, particularly if trash or debris mixed in); rubble disposal areas; staining, discoloration; odors. 4. Surface water: standing or flowing; apparent depth; overall drainage of site; drainage from pipes and drains of improvements, discoloration of water, surface slicks; trash in surface water, absence of plant or animal life. 5. Ground water, especially any existing wells or monitoring wells which should be checked for discoloration and odor; lagoons, holding ponds. 6. Vegetation: apparent age and condition (healthy, stressed, dying, dead). 7. Natural hazards: sinkholes, natural subsidence, slides, or erosion, and potential for flooding. 8. Transformers/capacitors. 9. Asbestos insulation, fireproofing, etc. 10. Drums (waste, inventory or product). 11. Storage tanks (above or below ground tanks). 12. Urea formaldehyde foam insulation. INTERVIEWS 1. Employees at site, if relevant on basis of other information, residents or businesses adjacent to site, and State, County, Municipal and Township Recording Officers. 2. Information that may be obtained should address property history, and should supplement and confirm the information obtained above through review of documents, aerial photos and site walkover. I-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT J CONDITIONS FOR ACCEPTANCE BY OWNER OF A JOINT PROTECTION TITLE INSURANCE POLICY (the "Title Policy") 1. Unless and until Owner shall have received performance and payment in full of (a) the Unit Acquisition Cost if such Unit Premises are then subject of this Agreement or (b) the Adjusted Acquisition Cost if such Unit is then subject to the Lease, Agent shall not without the prior written consent of Owner, which consent shall not be unreasonably withheld, make any claim under the Title Policy; 2. Any insurance payment, damages or award made under or with respect to any claim made on the Title Policy with respect to such Unit or Unit Premises shall be paid to Owner to the extent of the Unit Acquisition Cost if then subject to this Agreement or the Adjusted Acquisition Cost if then subject to the Lease, and the balance, if any, shall be paid to Agent, provided that if such Unit or Unit Premises is then subject to the Lease, a corresponding reduction in the Monthly Rent Component (as defined in the Lease) shall be made pursuant to the terms of the Lease; 3. Upon any termination of this Amended and Restated Agreement or the Lease with respect to such Unit or Unit Premises, and provided that upon such termination neither Agent nor any purchaser designated by Agent shall acquire title to such Unit or Unit Premises, Agent shall have no further rights or interests under or with respect to the Title Policy with respect to such Unit or Unit Premises or any proceeds thereof; 4. On termination of this Amended and Restated Agreement or the Lease with respect of such Unit or Unit Premises and provided that upon such termination Agent or a party designated by Agent shall have acquired title to such Unit or Unit Premises and Owner shall have received the Unit Acquisition Cost therefor if such Unit or Unit Premises is subject to this Agreement or the Adjusted Acquisition Cost therefor if then subject to the Lease, Owner shall have no further rights or interests under or with respect to the Title Policy with respect to such Unit or Unit Premises or any proceeds thereof; 5. Owner shall hold the original Title Policy so long as Owner has an interest in such policy or any proceeds thereof; and 6. If Agent makes a claim other than as agreed to herein, Owner shall be permitted to treat such action as an Event of Default under this Agreement or if then subject to the Lease, under the Lease. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT K ELECTRONIC ARTS REDWOOD, INC. 1450 Fashion Arts Boulevard San Mateo, California 94404 March 7, 1997 Flatirons Funding, Limited Partnership c/o ML Leasing Equipment Corp. Project and Lease Finance Group World Financial Center North Tower - 27th Floor 250 Vesey Street New York, New York 10281-1327 Re: Amended and Restated Agreement for Lease ---------------------------------------- Gentlemen: Reference is made to the Amended and Restated Agreement for Lease dated as of March 7, 1997 (the "Agreement for Lease") between Flatirons Funding, Limited Partnership ("Owner") and Electronic Arts Redwood, Inc. ("Agent"). Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Agreement for Lease. Agent has received an Initial Advance with respect to the acquisition of certain Unit Premises located at the northwestern corner of the intersection of Twin Dolphin Drive and Redwood Shores Parkway, Redwood City, California, as more particularly described on Schedule A to this Exhibit K (the "Existing Premises"). Subsequent to the date hereof, with the consent of Owner, such Unit Premises will be reconfigured and subdivided into the Headquarters Unit Premises, Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4. Because construction did not commence immediately on the foregoing Unit Premises, the Agent previously received a waiver of certain requirements of Section 4 of the Agreement for Lease until such time as construction of the Unit Improvements thereon was scheduled to commence. Although, pursuant to letter agreement, dated as of February 14, 1995 between Owner and Agent ("Prior Letter Agreement"), Agent was obligated to provide to Owner a certificate substantially in the form of Schedule B hereto in respect of the Unit Premises which includes the Headquarters Unit Premises and the Redwood Units prior to initiating construction activities thereon, construction of the Headquarters Unit Improvements has commenced, and such certificate was not provided. As required by the Prior Letter Agreement, Agent delivers to THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY you herewith completed certificates, in the form attached to the Prior Letter Agreement, for the Headquarters Unit and Redwood Phase 1 of each Redwood Unit. Owner and Assignee (i) acknowledge that such certificates have been accepted and (ii) Owner waives, and Assignee consents to the waiver of, any Event of Unit Termination or Event of Default resulting from the Agent's failure to deliver such certificates prior to the commencement of construction of the Headquarters Unit. In addition, because the Headquarters Unit Premises, Redwood Unit Premises No. 2, Redwood Unit Premises No. 3, and Redwood Unit Premises No. 4 will not legally exist until Recordation, Agent hereby agrees that the Subdivision Map will be recorded in exactly the form of Exhibit L to the Agreement for Lease no later than June 15, 1997 and that failure to do so will constitute an Event of Unit Termination. For purposes hereof, and, except as expressly provided herein, for all other purposes under the Agreement for Lease, including, without limitation, subsection 11.3, until Recordation the Existing Premises shall be deemed to be a Unit Premises, regardless of whether advances made or being made have been allocated to the Headquarters Unit Premises, to one or more Redwood Unit Premises, or to the Existing Premises as a whole. In addition to the foregoing, Agent acknowledges and agrees that until the Subdivision Map has been recorded in accordance with this letter: 1. Agent shall have no rights of purchase under Section 19, no rights to any license under Section 20, and no rights under Section 21; and 2. Agent shall maintain a single policy of title insurance in the amount of $150,000,000 with respect to the Existing Premises, provided that such policy complies in all other respects with the Agreement for Lease, and provided further that upon the recordation of the Subdivision Map, (a) such title policy shall be amended and reissued as four separate title policies, each in the respective amounts of the Unit Budgets for the Headquarters Unit, Redwood Unit Premises No. 2., Redwood Unit Premises No. 3, and Redwood Unit Premises No.4, and otherwise complying with the Agreement for Lease, and (b) Agent shall execute, with respect to the Headquarters Unit and each Redwood Unit, an amended and restated memorandum of lease amending and restating the Memorandum of Lease originally recorded against the Existing Premises, or at Owner's option, Agent shall execute such memoranda prior to recordation of the Subdivision Map. Notwithstanding that the Subdivision Map has not been recorded, Unit Plans, Unit FF&E, and Unit Budgets shall be delivered with respect to the Headquarters Unit and each Redwood Unit, and all advances requested by Agent shall be allocated to the Headquarters Unit or to a Redwood Unit, in the same manner as if the Subdivision Map had been recorded and in order to give maximum effect to the intent of the Agreement for Lease as drafted. The Unit Acquisition Cost of the Existing Unit Premises shall equal the sum of the Unit Acquisition Cost of the Headquarters Unit Premises and the Redwood Unit Premises. In addition, Agent hereby requests your consent to the following with respect to each of the Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit K-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Premises No. 4.: 1. Limitation of the amount of title insurance required for each Redwood Unit pursuant to Subsection 4(g) of the Agreement for Lease to the Unit Budget for Redwood Phase 1 until construction for Redwood Phase 2 is scheduled to commence. At such time, the title policy will be amended to increase the amount of title insurance to the amount of the Unit Budget for Redwood Phase 2 inclusive of a pending improvements endorsement. 2. Waiver of the requirement to deliver the site plan for a Redwood Unit required by Subsection 4(i) in respect of the Unit Plans for Redwood Phase 2 until construction is scheduled to commence on Redwood Phase 2 at such Unit. 3. Waiver of the requirement to make the representation for a Redwood Unit required by Subsection 4(1) in respect of the Unit Plans for Redwood Phase 2 until construction is scheduled to commence on Redwood Phase 2 at such Unit. 4. Waiver of the requirement to deliver a copy of the Construction Agreement for Redwood Phase 2 of a Redwood Unit required by Subsection 4(o) until construction is scheduled to commence on Redwood Phase 2 at such Unit. 5. Waiver of the requirement to deliver a copy of the Unit Plans required for Phase 2 of a Redwood Unit by Subsection 4(p) until construction is scheduled to commence on Redwood Phase 2 at such Unit. 6. Waiver of the requirement to deliver a copy of the Unit Budget required for a Redwood Unit by Subsection 4(q) in respect of the Unit Plans for Redwood Phase 2 until construction is scheduled to commence on Redwood Phase 2 at such Unit. 7. Waiver of the requirement to carry Builders All-Risk insurance required by Subsection 4(r) and Subsection 9.3 for a Redwood Unit with respect to construction for Redwood Phase 2 at such Unit until construction is scheduled to commence on Redwood Phase 2 at such Unit. Agent represents, warrants and covenants to Owner and Assignee that (a) no construction will be commenced in respect of Redwood Phase 2 at a Redwood Unit until Recordation and until Agent has delivered to Owner and any Assignee a Construction Certificate in the form of Schedule A attached hereto, together with all documentation required thereby and Owner and Assignee shall have deemed the contents thereof satisfactory in form and substance, (b) no construction will be commenced on Redwood Phase 2 of Redwood Unit Premises No. 2, Redwood Unit Premises No. 3, and Redwood Premises No. 4 until Agent and Owner shall have agreed as to the Designated Effective Date and the Unit Completion Date applicable thereto, and (c) the commencement of any such construction prior to such agreement and prior to delivery of such Construction Certificate and required documentation to and approval from Owner and any Assignee will constitute an Event of Unit Termination with respect to such Unit. K-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Within seven (7) Business Days following Owner's and any Assignee's receipt of the Construction Certificate and related documents required by this letter, Owner and Assignee (or their respective counsel) shall notify Agent if the contents thereof are satisfactory in form and substance and the conditions for the commencement of construction have been satisfied. If Owner and any Assignee shall not have so notified Agent within such seven Business Day period that such conditions have not been satisfied, then construction may commence. If Agent wishes to request an advance simultaneously with the submission of the Construction Certificate, the advance shall be requested as an Interim Advance, and Agent shall submit a separate Interim Advance Certificate with its attachments along with the Construction Certificate and its attachments. Agent requests that you indicate your agreement and consent to the foregoing by signing and dating in the appropriate space below. Except as specifically modified herein, all other terms, provisions and conditions of the Agreement for Lease remain unmodified and in full force and effect, and are hereby ratified and confirmed. K-4 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY This letter may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one and the same agreement. Very truly yours, ELECTRONIC ARTS REDWOOD, INC. By:___________________________________ Name: Title: Accepted and Agreed this 7th day of March, 1997 FLATIRONS FUNDING, LIMITED PARTNERSHIP By Flatirons Capital, Inc., its Managing General Partner By:__________________________________ Name: Title: Consented to this 7th day of March, 1997 THE DAI-ICHI KANGYO BANK, LIMITED, NEW YORK BRANCH, AS AGENT By:__________________________________ Name: Title: THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY SCHEDULE A TO EXHIBIT K Legal Description of Existing Premises All of that certain real property located in the State of California, County of San Mateo, City of Redwood City, described as follows: Parcel C as shown on that certain map entitled "PARCEL MAP 84-10, CITY OF REDWOOD CITY, SAN MATEO COUNTY, CALIFORNIA", filed in the office of the County Recorder of San Mateo County, State of California on December 31, 1984 in Volume 55 of Parcel Maps at pages 55, 56 and 57. A.P. No.: 095-233-130 JPN 106 003 000 07 All T Lot 2, as shown on that certain map entitled "SHORES CENTER UNIT NO. 2, CITY OF REDWOOD CITY, SAN MATEO COUNTY, CALIFORNIA", filed in the office of the County Recorder of San Mateo County, State of California, on October 15, 1984 in Book 112 of Maps at page(s) 20-22. A.P. No.: 095-221-080 JPN 112 020 000 02 T A.P. No.: 095-221-090 Lot 1 as shown on that certain map entitled "SHORES CENTER UNIT NO. 3 BEING A SUBDIVISION OF A PORTION OF THE LANDS DESCRIBED IN VOLUME 6402 O.R. PAGE 76 AND VOLUME 4982 O.R. PAGE 222 SAN MATEO COUNTY RECORDS, CITY OF REDWOOD CITY, SAN MATEO COUNTY, CALIFORNIA", filed in the office of the County Recorder of San Mateo County, State of California, on October 15, 1984 in Book 112 of Maps at page(s) 23, 24 and 25. A.P. No.: 095-221-100 JPN 112 023 000 01 T Lot 2 as shown on that certain map entitled "SHORES CENTER UNIT NO. 3 BEING A SUBDIVISION OF A PORTION OF THE LANDS DESCRIBED IN VOLUME 6402 O.R. PAGE 76 AND VOLUME 4982 O.R. PAGE 222 SAN MATEO COUNTY RECORDS, CITY OF REDWOOD CITY, SAN MATEO COUNTY, CALIFORNIA", filed in the office of the County Recorder of San Mateo County, State of California, on October 15, 1984 in Book 112 of Maps at page(s) 23, 24 and 25. A.P. No.: 095-221-110 JPN 112 023 000 02 T THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY SCHEDULE B TO EXHIBIT K CONSTRUCTION CERTIFICATE Electronic Arts Redwood, Inc., as Agent under the Amended and Restated Agreement for Lease dated as of March 7, 1997 (the "Agreement for Lease") entered into with Flatirons Funding, Limited Partnership ("Owner") delivers this Construction Certificate with respect to [the Headquarters Unit], [Redwood Unit Premises No. 2], [Redwood Unit Premises No. 3] [Redwood Unit Premises No. 4]. All terms used in this Certificate shall have the meaning given such terms in the Agreement for Lease. Agent hereby certifies to Owner and Assignee as follows: 1. TITLE INSURANCE. Attached hereto at Tab 1 are endorsements --------------- issued by the Title Company to the existing title insurance policy increasing coverage to the amount required under Subsection 4(g) of the Agreement for Lease or, if the Subdivision Map has not been filed, to the amount required by Exhibit K, and adding a pending improvements clause thereto (as well as such additional endorsements as may be requested by Owner and any Assignee), together with legible copies of all underlying documents of record affecting the Unit Premises that have not previously been delivered to Owner and any Assignee, and evidence that the premium in respect of such policy and endorsements has been paid in full. 2. SITE PLAN. Attached hereto at Tab 2 is the site plan prepared by --------- Agent showing the proposed location of the Unit Improvements to be constructed on the Unit Premises pursuant to the Unit Plans therefor. 3. AVAILABILITY OF UTILITIES. All utility services and facilities ------------------------- (including, without limitation, gas, electrical, water and sewage services and facilities) (a) which are necessary and required during the construction period have been completed or will be available in such as manner as to assure Owner that construction will not be impeded by a lack thereof, and (b) which are necessary for operation and occupancy of the Unit are or will be completed in such a manner and at such a time as will assure the opening and operation of the Unit on or before the Unit Completion Date. 4. PERMITS. All Permits and governmental approvals required for the ------- construction of the Unit Improvements have been or will be issued or obtained in such a manner as to assure Owner that construction will not be impeded by a lack thereof, and all Permits and governmental approvals required therefor which have been issued or obtained are in full force and effect. 5. UNIT PLANS. Attached hereto at Tab 3 is a copy of the Unit ---------- Plans. 6. UNIT BUDGET. Attached hereto at Tab 4 is a copy of the Unit ----------- Budget. THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Agent certifies that such Unit Budget (a) is true, complete, and correct, (b) accurately represents all expected costs of the Unit, and (c) is within the dollar limits set forth in the first sentence of subsection 2.2 of the Agreement for Lease. 7. BUILDERS' ALL RISK INSURANCE. Attached hereto at Tab 5 is a ---------------------------- certificate of insurance certifying that the policy of All Risk Builders' Risk Completed Value Non-Reporting Form Insurance, including collapse coverage and fire insurance with extended coverage in an amount not less than one hundred percent (100%) of the completed insurable value of the Unit Improvements and Unit FF&E, in accordance with Subsection 9.3 of the Agreement for Lease, has been obtained and is in full force and effect. Agent further certifies to Owner and Assignee that all insurance carried or maintained on the Unit required by the Agreement for Lease has been obtained and is in full force and effect. 8. UNIT FF&E SPECIFICATIONS. Attached hereto at Tab 6 is a true and ------------------------ complete copy of the Unit FF&E Specifications, if any, with respect to such Unit. 9. ADDITIONAL MATTERS. Attached hereto at Tab 7 are such other ------------------ documents and legal matters in connection with this Construction Certificate as may be reasonably requested by Owner and any Assignee. Dated: _____________ ___, 199__. ELECTRONIC ARTS REDWOOD, INC. By:__________________________________ Name: Title: Owner and Agent agree that the Designated Effective Date, if any, for such Unit is : ________________________ and the Unit Completion Date is ____________________________. B-2 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY Electronic Arts Redwood, Inc. By:___________________________________ Name: Title: Flatirons Funding, Limited Partnership By: Flatirons Capital, Inc., its Managing General Partner By:___________________________________ Name: Title: B-3 THIS AGREEMENT FOR LEASE IS CONFIDENTIAL AND PROPRIETARY EXHIBIT L DESCRIPTION OF HEADQUARTERS UNIT PREMISES, REDWOOD UNIT PREMISES NO. 2, REDWOOD UNIT PREMISES NO. 3 AND REDWOOD UNIT PREMISES NO. 4 A. HEADQUARTERS UNIT PREMISES Lots 3 and 4, and Parcels A and C, as set forth on pages 3 and 4 of the Subdivision Map immediately following this page. B. REDWOOD UNIT PREMISES NO. 2 Lot 2, as set forth on pages 3 and 4 of the Subdivision Map immediately following this page. C. REDWOOD UNIT PREMISES NO. 3 Lots 5 and 6, and Parcel B, as set forth on pages 3 and 4 of the Subdivision Map immediately following this page. D. REDWOOD UNIT PREMISES NO. 4 Lot 1, as set forth on pages 3 and 4 of the attached Subdivision Map immediately following this page. TABLE OF CONTENTS -----------------
Page ---- SECTION 1. DEFINITIONS.................................................................................. 2 1.1 Defined Terms................................................................................ 2 1.2 Other Definitional Provisions................................................................ 11 SECTION 2. APPOINTMENT OF AGENT......................................................................... 12 2.1 Appointment and Duties of Agent.............................................................. 12 2.2 Cost and Completion of a Unit................................................................ 12 2.3 Lease of a Unit and Certain Special Provisions Applicable to Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4............................................................................... 13 2.4 Powers of Agent.............................................................................. 14 SECTION 3. ADVANCES..................................................................................... 15 3.1 Agreement to Make Advances................................................................... 15 3.2 Procedure for Advances....................................................................... 15 3.3 Determination of Amounts of Advances......................................................... 16 (a) Initial Advance......................................................................... 16 (b) Interim Advances........................................................................ 16 (c) Final Advance........................................................................... 16 (d) Completion Advance...................................................................... 17 3.4 Partial Advances............................................................................. 17 SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE WITH RESPECT TO A UNIT............................................................................ 17 (a) Lease and Guaranty...................................................................... 17 (b) Acquisition Certificate................................................................. 17 (c) Deed.................................................................................... 17 (d) Memorandum of Lease Agreement........................................................... 18 (e) Ground Lease............................................................................ 18 (f) Taxes................................................................................... 18 (g) Title Insurance Policy.................................................................. 18 (h) Survey.................................................................................. 19 (i) Site Plan............................................................................... 19 (j) Availability of Utilities............................................................... 19 (k) Flood Zone.............................................................................. 19 (l) Permits................................................................................. 19 (m) Opinion of Counsel for Agent............................................................ 19 (n) Opinion of Counsel for Guarantor........................................................ 20
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Page ---- (o) Construction Agreement.................................................................. 20 (p) Unit Plans.............................................................................. 20 (q) Unit Budget............................................................................. 20 (r) Certificates of Insurance............................................................... 20 (s) Request for Advance..................................................................... 20 (t) Continuing Representations of Guarantor................................................. 21 (u) Unit FF&E Specifications................................................................ 21 (v) Environmental Affidavit and Report...................................................... 21 (w) Use of Proceeds, No Liens and Representations of Agent.................................. 21 (x) Additional Matters...................................................................... 21 (y) Designated Effective Date............................................................... 21 SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE INTERIM ADVANCES AFTER THE INITIAL............................................................................ 22 (a) Interim Advance Certificate............................................................. 22 (b) Continuing Representations of Agent..................................................... 22 (c) Continuing Representations of Guarantor................................................. 22 (d) Satisfactory Title...................................................................... 22 (e) Construction Progress................................................................... 23 (f) Evidence of Compliance.................................................................. 23 (g) Request for Advance and Reconciliation.................................................. 23 (h) No Other Security Interests............................................................. 23 (i) Statement of Expenditures............................................................... 24 (j) Revised AFL Unit Leasing Record......................................................... 24 (k) Exhibit K Conditions.................................................................... 24 (l) License Conditions...................................................................... 24 SECTION 6. CONDITIONS PRECEDENT TO THE FINAL ADVANCE WITH RESPECT TO A UNIT............................. 24 (a) Certificate of Substantial Completion................................................... 24 (b) Satisfactory Title...................................................................... 24 (c) Construction and Equipping of the Unit.................................................. 25 (d) Permits................................................................................. 25 (e) Liens................................................................................... 25 (f) Final Survey............................................................................ 25 (g) Utilities............................................................................... 25 (h) Flood Zone.............................................................................. 25 (i) Continuing Representations of Agent..................................................... 26 (j) Continuing Representations of Guarantor................................................. 26 (k) AFL Unit Leasing Record................................................................. 26 (l) Request for Advance..................................................................... 26 (m) AFL Unit Leasing Record................................................................. 26 SECTION 7. CONDITIONS PRECEDENT TO THE COMPLETION ADVANCE
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Page ---- WITH RESPECT TO A UNIT....................................................................... 26 (a) Certificate of Increased Cost........................................................... 27 (b) Continuing Representations of Agent..................................................... 27 (c) Continuing Representations of Guarantor................................................. 27 (d) Request for Advance..................................................................... 27 (e) Revised AFL Unit Leasing Record......................................................... 27 SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT...................................................... 27 8.1 Corporate Matters............................................................................ 27 8.2 Power and Authority.......................................................................... 28 8.3 Binding Agreement............................................................................ 28 8.4 No Litigation................................................................................ 28 8.5 Consents, Approvals, Authorizations, Etc..................................................... 28 8.6 Compliance with Legal Requirements and Insurance Requirements................................ 29 8.7 No Default................................................................................... 29 8.8 Ownership; Liens............................................................................. 29 8.9 Financial Statements......................................................................... 29 8.10 Changes...................................................................................... 29 8.11 Suitability of Each Unit Premises............................................................ 29 8.12 ERISA........................................................................................ 30 8.13 Ground Lease................................................................................. 30 8.14 Status of Agent.............................................................................. 30 SECTION 9. AFFIRMATIVE COVENANTS........................................................................ 30 9.1 Performance under Other Agreements........................................................... 30 9.2 No Encroachments............................................................................. 30 9.3 Insurance.................................................................................... 31 (a) Insurance with respect to each Unit Premises, the Unit Improvements, Unit FF&E and Unit........................................................................... 31 (b).......................................................................................... 31 9.4 Inspection of Books and Records.............................................................. 31 9.5 Expenses..................................................................................... 31 9.6 Certificates: Other Information.............................................................. 32 9.7 Conduct of Business and Maintenance of Existence............................................. 33 9.8 Notices...................................................................................... 33 9.9 Legal Requirements and Insurance Requirements................................................ 34 9.10 Payment of Taxes............................................................................. 34 9.11 Filings, Etc................................................................................. 34 9.12 Use of Proceeds.............................................................................. 34 9.13 Compliance with Other Requirements........................................................... 35 SECTION 10. NEGATIVE COVENANTS........................................................................... 35
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Page ---- 10.1 Changes in Unit Plans or Unit Budget Plans................................................... 35 10.2 Prohibition of Fundamental Changes........................................................... 35 10.3 Notification of Opening of a Unit............................................................ 35 10.4 Acquire Fee or Leasehold Interest............................................................ 35 10.5 Assignment of Obligations.................................................................... 36 SECTION 11. EVENTS OF DEFAULT AND EVENTS OF UNIT TERMINATION............................................. 36 11.1 Events of Default............................................................................ 36 (a) Failure to Make Payments................................................................ 36 (b) Unauthorized Assignments, Etc........................................................... 36 (c) Misrepresentations...................................................................... 36 (d) Involuntary Bankruptcy, Etc............................................................. 36 (e) Voluntary Bankruptcy, Etc............................................................... 36 (f) Negative Covenants...................................................................... 37 (g) Other Defaults.......................................................................... 37 (h) Default under Lease..................................................................... 37 (i) Payment of Obligations.................................................................. 37 (j) Defaults under Other Agreements......................................................... 37 (k) Judgment Defaults....................................................................... 37 11.2 Owner's Rights upon an Event of Default...................................................... 37 11.3 Events of Unit Termination................................................................... 40 (a) Unsatisfactory Title.................................................................... 40 (b) Damage or Destruction................................................................... 40 (c) Cessation of Construction............................................................... 40 (d) Nonconforming Work...................................................................... 41 (e) Other Security Agreements............................................................... 41 (f) Non-Compliance with Legal Requirements.................................................. 41 (g) Failure to Complete..................................................................... 42 (h) Permits................................................................................. 42 (i) Default under Ground Lease.............................................................. 42 (j) Takings................................................................................. 42 (k) Insufficient Available Commitment....................................................... 43 (l) Fundamental Change...................................................................... 43 (m) Material Adverse Change Event........................................................... 43 (n) Designated Effective Date............................................................... 43 (o) December 31, 2011....................................................................... 43 (p) Interim Completion Date................................................................. 43 (q) Exhibit K............................................................................... 44 11.4 Owner's Rights upon Event of Unit Termination................................................ 44 SECTION 12. INDEMNITIES.................................................................................. 44 SECTION 13. LEASEHOLD INTERESTS.......................................................................... 45
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Page ---- SECTION 14. PURCHASES.................................................................................... 45 SECTION 15. OWNER'S RIGHT TO TERMINATE................................................................... 45 SECTION 16. PERMITTED CONTESTS........................................................................... 46 SECTION 17. SALE OR ASSIGNMENT BY OWNER.................................................................. 47 SECTION 18. GENERAL CONDITIONS........................................................................... 48 18.1 Survival........................................................................................ 48 18.2 No Waivers...................................................................................... 48 18.3 Owner and Assignee Sole Beneficiaries........................................................... 48 18.4 No Offsets, Etc................................................................................. 48 18.5 No Recourse..................................................................................... 50 18.6 Notices......................................................................................... 51 18.7 Modifications................................................................................... 52 18.8 Rights Cumulative............................................................................... 53 18.9 Governing Law................................................................................... 53 18.10 Confidentiality................................................................................. 54 18.11 Captions........................................................................................ 54 18.12 Counterparts.................................................................................... 54 SECTION 19. CERTAIN PURCHASE OPTIONS..................................................................... 54 SECTION 20. LICENSE...................................................................................... 54 20.1 Redwood Unit License............................................................................ 54 20.2 Special Redwood Unit Premises No. 3 License..................................................... 55 SECTION 21. DEVELOPMENT AND SUBDIVISION.................................................................. 56 Exhibit A The Lease Exhibit B Form of AFL Unit Leasing Record Exhibit C Form of Acquisition Certificate Exhibit D Form of Interim Advance Certificate Exhibit E Form of Certificate of Substantial Completion Exhibit F Form of Certificate of Increased Cost Exhibit G FF&E Specifications Exhibit H Environmental Affidavit Exhibit I Issues to be Addressed in Environmental Report Exhibit J Conditions for Acceptance by Owner of Joint Protection Title Insurance Policy Exhibit K Waiver Letter for Unit Premises at Twin Dolphin Drive and Redwood Shares Parkway, Redwood
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Page ---- City, California Exhibit L Description of Headquarters Unit Premises, Redwood Unit Premises No. 2, Redwood Unit Premises No. 3 and Redwood Unit Premises No. 4
vi AMENDMENT NO. 1 Dated as of March 7, 1997 to LEASE AGREEMENT Dated as of February 14, 1995 between Flatirons Funding, Limited Partnership, as Lessor and Electronic Arts Redwood, Inc., as Lessee This Amendment has been manually executed in 8 counterparts, numbered consecutively from 1 through 8, of which this is No. 3. To the extent, if any, that this Amendment constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any jurisdiction), no security interest in this Amendment may be created or perfected through the transfer or possession of any counterpart other than the original executed counterpart which shall be the counterpart identified as counterpart No. 1. Amendment No. 1 dated as of March 7, 1997 to Lease Agreement ("Amendment No. 1"), dated as of February 14, 1995, between Flatirons Funding, Limited Partnership, a Delaware limited partnership ("Lessor"), and Electronic Arts Redwood, Inc., a Delaware corporation ("Lessee"), amending the Lease Agreement referred to below. WHEREAS, Owner and Agent have heretofore entered into a Lease Agreement, dated as of February 14, 1995 (the "Lease Agreement"); and WHEREAS, Owner and Agent wish to amend the Lease Agreement as hereinafter provided; NOW, THEREFORE, Owner and Agent hereby agree that the Lease Agreement is amended as follows: 1. Section 1 of the Lease Agreement is amended by deleting the second sentence of the term "Assignee" and replacing it with the following: "For purposes of paragraph (h) of Section 2, clauses (i), (iv) and (v) of paragraph (f) of Section 10 and Section 11 hereof and subsection 9.6 and 12 of the Agreement for Lease, the term "Assignee" shall include any lender to the Lessor or other Person providing credit support to the Lessor pursuant to a Credit Agreement." 2. Subparagraph (iv) of paragraph (a) of Section 3 of the Lease Agreement is hereby deleted and restated in its entirety as follows: "(iv) with respect to any Property acquired and built pursuant to the Agreement for Lease, Substantial Completion (as defined in the Agreement for Lease) or the Designated Effective Date (as defined in the Agreement for Lease) shall have occurred; and". 3. Section 3 of the Lease Agreement is amended by adding the following as new paragraph (g) thereof: "(g) In the event the Lessee failed to achieve Substantial Completion prior to the Designated Effective Date with respect to any Parcel of Property acquired and built pursuant to the Agreement for Lease, the Lessee may deliver to the Lessor thereafter, but prior to Substantial Completion (as defined in the Agreement for Lease) of such Parcel, Interim Advance Certificates (as defined in the Agreement for Lease) and thereafter a Certificate of Substantial Completion (as defined in the Agreement for Lease) pursuant to the Agreement for Lease setting forth the actual amount expended by the Lessee for items included in the Unit Budget (as defined in the Agreement for Lease) with respect to such Parcel while it is subject to the Agreement for Lease. If the conditions set forth in the Agreement for Lease for Interim Advances (as defined in the Agreement for Lease) or a Final Advance (as defined in the Agreement for Lease) are satisfied, in the applicable case, the Lessee and the Lessor shall execute within seven (7) days of receipt of each 1 such Interim Advance Certificate or Certificate of Substantial Completion from the Lessee a revised AFL Unit Leasing Record to amend the Adjusted Acquisition Cost for such Parcel to reflect the increase in the Acquisition Cost." 4. Section 12 of the Lease Agreement is amended by revising the last sentence of paragraph (a) thereof to read, in its entirety, as follows: "At the time a Parcel of Property or Unit of Equipment is sold pursuant to this Section 12, such Parcel or Unit shall be in compliance with all Legal Requirements, shall not be subject to any Permitted Contest or any Lien and, in the case of a Parcel which had been subject to the Agreement for Lease, Substantial Completion (as defined in the Agreement for Lease) shall be required to have occurred." 5. Section 18 of the Lease Agreement is amended by adding the following as new paragraph (l) thereof: "(l) With respect to a Parcel of Property for which Substantial Completion has not yet been effected, the construction of such Parcel of Property for which Substantial Completion has not yet been effected proceeds or is made in a manner other than as provided in this Lease or the Agreement for Lease and the Lessee fails to correct such nonconformance in a reasonably prompt and satisfactory fashion after notice and demand by the Lessor, or the Lessee shall fail to correct promptly any structural defect in such Parcel of Property upon demand of the Lessor or the Agent shall default in the performance of the covenants contained in Section 2, Section 9 or Section 10 of the Agreement for Lease in respect of any such Parcel of Property after the expiration of any grace period applicable thereto in the Agreement for Lease." 6. Section 23 of the Lease Agreement is amended to delete the name "Martin J. McInerney" and to replace it with the name "Gerard Haugh". 7. This Amendment No. 1 may be executed in several counterparts, each of which when executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute but one and the same Amendment No. 1. 8. This Amendment No. 1 shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, validity and performance. 9. Except as provided herein, all provisions, terms and conditions of the Lease Agreement shall remain in full force and effect. As amended hereby, the Lease Agreement is ratified and confirmed in all respects. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed as of the date first above written. Flatirons Funding, Limited Partnership By Flatirons Capital, Inc., its General Partner By: /S/ Jean M. Tomaselli --------------------- Name: Jean M. Tomaselli Title: Vice President and Assistant Secretary Electronic Arts Redwood, Inc. By: /s/ James F. Healey ------------------- Name: James F. Healey Title: President EX-10.38 5 AMENDMENT NO. 1 DATED MARCH 7, 1997 EXHIBIT 10.38 AMENDMENT NO. 1 Dated as of March 7, 1997 to LEASE AGREEMENT Dated as of February 14, 1995 between Flatirons Funding, Limited Partnership, as Lessor and Electronic Arts Redwood, Inc., as Lessee This Amendment has been manually executed in 8 counterparts, numbered consecutively from 1 through 8, of which this is No. 3. To the extent, if any, that this Amendment constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any jurisdiction), no security interest in this Amendment may be created or perfected through the transfer or possession of any counterpart other than the original executed counterpart which shall be the counterpart identified as counterpart No. 1. Amendment No. 1 dated as of March 7, 1997 to Lease Agreement ("Amendment No. 1"), dated as of February 14, 1995, between Flatirons Funding, Limited Partnership, a Delaware limited partnership ("Lessor"), and Electronic Arts Redwood, Inc., a Delaware corporation ("Lessee"), amending the Lease Agreement referred to below. WHEREAS, Owner and Agent have heretofore entered into a Lease Agreement, dated as of February 14, 1995 (the "Lease Agreement"); and WHEREAS, Owner and Agent wish to amend the Lease Agreement as hereinafter provided; NOW, THEREFORE, Owner and Agent hereby agree that the Lease Agreement is amended as follows: 1. Section 1 of the Lease Agreement is amended by deleting the second sentence of the term "Assignee" and replacing it with the following: "For purposes of paragraph (h) of Section 2, clauses (i), (iv) and (v) of paragraph (f) of Section 10 and Section 11 hereof and subsection 9.6 and 12 of the Agreement for Lease, the term "Assignee" shall include any lender to the Lessor or other Person providing credit support to the Lessor pursuant to a Credit Agreement." 2. Subparagraph (iv) of paragraph (a) of Section 3 of the Lease Agreement is hereby deleted and restated in its entirety as follows: "(iv) with respect to any Property acquired and built pursuant to the Agreement for Lease, Substantial Completion (as defined in the Agreement for Lease) or the Designated Effective Date (as defined in the Agreement for Lease) shall have occurred; and". 3. Section 3 of the Lease Agreement is amended by adding the following as new paragraph (g) thereof: "(g) In the event the Lessee failed to achieve Substantial Completion prior to the Designated Effective Date with respect to any Parcel of Property acquired and built pursuant to the Agreement for Lease, the Lessee may deliver to the Lessor thereafter, but prior to Substantial Completion (as defined in the Agreement for Lease) of such Parcel, Interim Advance Certificates (as defined in the Agreement for Lease) and thereafter a Certificate of Substantial Completion (as defined in the Agreement for Lease) pursuant to the Agreement for Lease setting forth the actual amount expended by the Lessee for items included in the Unit Budget (as defined in the Agreement for Lease) with respect to such Parcel while it is subject to the Agreement for Lease. If the conditions set forth in the Agreement for Lease for Interim Advances (as defined in the Agreement for Lease) or a Final Advance (as defined in the Agreement for Lease) are satisfied, in the applicable case, the Lessee and the Lessor shall execute within seven (7) days of receipt of each 1 such Interim Advance Certificate or Certificate of Substantial Completion from the Lessee a revised AFL Unit Leasing Record to amend the Adjusted Acquisition Cost for such Parcel to reflect the increase in the Acquisition Cost." 4. Section 12 of the Lease Agreement is amended by revising the last sentence of paragraph (a) thereof to read, in its entirety, as follows: "At the time a Parcel of Property or Unit of Equipment is sold pursuant to this Section 12, such Parcel or Unit shall be in compliance with all Legal Requirements, shall not be subject to any Permitted Contest or any Lien and, in the case of a Parcel which had been subject to the Agreement for Lease, Substantial Completion (as defined in the Agreement for Lease) shall be required to have occurred." 5. Section 18 of the Lease Agreement is amended by adding the following as new paragraph (l) thereof: "(l) With respect to a Parcel of Property for which Substantial Completion has not yet been effected, the construction of such Parcel of Property for which Substantial Completion has not yet been effected proceeds or is made in a manner other than as provided in this Lease or the Agreement for Lease and the Lessee fails to correct such nonconformance in a reasonably prompt and satisfactory fashion after notice and demand by the Lessor, or the Lessee shall fail to correct promptly any structural defect in such Parcel of Property upon demand of the Lessor or the Agent shall default in the performance of the covenants contained in Section 2, Section 9 or Section 10 of the Agreement for Lease in respect of any such Parcel of Property after the expiration of any grace period applicable thereto in the Agreement for Lease." 6. Section 23 of the Lease Agreement is amended to delete the name "Martin J. McInerney" and to replace it with the name "Gerard Haugh". 7. This Amendment No. 1 may be executed in several counterparts, each of which when executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute but one and the same Amendment No. 1. 8. This Amendment No. 1 shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, validity and performance. 9. Except as provided herein, all provisions, terms and conditions of the Lease Agreement shall remain in full force and effect. As amended hereby, the Lease Agreement is ratified and confirmed in all respects. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed as of the date first above written. Flatirons Funding, Limited Partnership By Flatirons Capital, Inc., its General Partner By: /S/ Jean M. Tomaselli --------------------- Name: Jean M. Tomaselli Title: Vice Prisident and Assistant Secretary Electronic Arts Redwood, Inc. By: /s/ James F. Healey ------------------- Name: James F. Healey Title: President EX-11.01 6 COMPUTATION PER SHARE EARNINGS EXHIBIT 11.01 ELECTRONIC ARTS INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
Years Ended March 31, 1997 1996 1995 --------------------------------------- Net Income $53,002,000 $40,489,000 $55,718,000 Weighted average number of outstanding shares used in computation: Preferred Stock - - - Common Stock 53,469,650 51,992,165 50,329,131 Number of common stock equivalents as a result of stock options outstanding using the treasury stock method 2,013,310 2,170,355 1,967,643 ----------- ----------- ----------- Total common stock and equivalents 55,482,960 54,162,520 52,296,774 =========== =========== =========== Primary and fully diluted net income per share $ 0.96 $ 0.75 $ 1.07 =========== =========== ===========
EX-21.01 7 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.01 Name in Jurisdiction Corporate Articles Doing Business As of Incorporation - --------------------------- ------------------------- ------------------------ ORIGIN Systems, Inc. ORIGIN Systems, Inc. Texas Electronic Arts, Electronic Arts, Pty. Commonwealth of Proprietary Limited Ltd. (formerly Australia (formerly Entertainment Entertainment and and Computer Proprietary, Computer Proprietary, Limited) Limited) Electronic Arts (Canada) Electronic Arts (Canada) British Columbia, Canada Inc. Inc. (formerly (formerly Distinctive Distinctive Software, Software, Inc.) Inc.) Electronic Arts, Limited Electronic Arts, Limited United Kingdom Electronic Arts S.A. Electronic Arts S.A. France Electronic Arts GmbH Electronic Arts GmbH Germany Electronic Arts Victor Inc. Electronic Arts Victor, Japan Inc. Electronic Arts Crocodile Productions Delaware Productions, Inc. Electronic Arts Puerto Electronic Arts Puerto Delaware Rico Inc. Rico Inc. Electronic Arts Electronic Arts California International Corporation International Corporation Electronic Arts Software Electronic Arts Software Spain S.A. (formerly DROSoft) S.A. (formerly DROSoft) Bullfrog Productions Ltd. Bullfrog Productions Ltd. United Kingdom Kingsoft GmbH Kingsoft GmbH Germany Electronic Arts Electronic Arts United Kingdom Productions Ltd Productions Ltd Electronic Arts Nordic Electronic Arts Nordic AB Sweden Aktienbolag Electronic Arts Asia Electronic Arts Asia Singapore Pacific PTE., LTD Pacific PTE., LTD Electronic Arts Seattle Electronic Arts Seattle Washington Inc. Inc. Vision Software (Pty) Vision Software (Pty) South Africa Limited Limited Electronic Arts V.I., Inc. Electronic Arts V.I., Virgin Islands (U.S.) Inc. Linear Arts, Inc. Linear Arts, Inc. Delaware EA UK Holding Co. EA UK Holding Co. Delaware
EX-23.01 8 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.01 Report on Financial Statement Schedule and Consent of Independent Auditors The Board of Directors Electronic Arts Inc.: The audits referred to in our report dated May 1, 1997, except as to Note 14 which is as of June 4, 1997, include the related financial statement schedule for each of the years in the three-year period ended March 31, 1997, included in the Company's Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements (Nos. 33-66836, 33-55212, 33-53302, 33-41955, 33-82166, 33-61781, 33-61783, 333- 01397, 333-09683 and 333-09893) on Form S-8 of our reports included herein. Palo Alto, California KPMG Peat Marwick LLP June 18, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 230,096 5,548 130,842 35,486 15,847 369,043 142,589 57,457 516,703 127,430 0 0 0 542 388,703 516,703 624,766 624,766 312,044 312,044 245,400 2,875 66 78,961 27,241 51,720 0 0 0 53,002 0.96 0.96
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