-----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, CVcvIB2G0I5Yf9Yp9MVgAgzRKpWCpS+TAAxNyk4G1KEwtwyo9GtNqpmjlx5kCRCx Cvn2kz5GgMOJi/HKykNTfw== 0000891618-96-002081.txt : 19960921 0000891618-96-002081.hdr.sgml : 19960921 ACCESSION NUMBER: 0000891618-96-002081 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960919 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08341 FILM NUMBER: 96632257 BUSINESS ADDRESS: STREET 1: 300 CONSTITUTION DR STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 BUSINESS PHONE: 4153613333 MAIL ADDRESS: STREET 1: 300 CONSTITUTION DRIVE STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 FORMER COMPANY: FORMER CONFORMED NAME: RAYTHERM CORP DATE OF NAME CHANGE: 19720526 10-K 1 FORM 10-K FOR PERIOD ENDED 6/30/96 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 2-15299 RAYCHEM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-1369731 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 361-3333 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED - -------------------------------------------------------------------------------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate 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 voting stock held by nonaffiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the registrant) as of August 19, 1996, (based on the closing sale price as reported on the New York Stock Exchange composite tape on such date) was $3,036,803,270. Number of shares of Common Stock outstanding as of August 19, 1996: 44,801,889 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV: Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1996 Part III: Portions of the Proxy Statement dated September 19, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Raychem Corporation, founded in 1957, is a broadly based materials science company serving both domestic and international markets. The terms "company" or "Raychem" mean Raychem Corporation and its consolidated subsidiaries. The company develops, manufactures, and sells a variety of high-performance products used by customers in the aerospace, appliance, automotive, cable television, communications, computer, defense, industrial and commercial infrastructure, mass transit, medical, and telephone industries. For information regarding the company's restructuring actions, see the Note entitled "Restructuring and Divestitures" and the section entitled "Financial Review" in the company's 1996 Annual Report to Stockholders (the "1996 Annual Report"), which are incorporated herein by reference and are included in this filing as Exhibit 13. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The company's business is organized into three industry segments designated as electronics, industrial, and telecommunications (which collectively, along with corporate groups, is referred to as the "core business"). Due to the formation of the Ericsson Raynet joint venture with LM Ericsson, a Swedish telecommunications company, in November 1994, the operations of Raynet Corporation and subsidiaries (Raynet), are included in the consolidated financial statements using the equity method of accounting for the period July 1, 1994, through December 31, 1995; Raynet's operations were consolidated in prior years. During the third quarter of fiscal 1996, the company, along with LM Ericsson, amended their joint venture agreement resulting in a reorganization of Ericsson Raynet. Following the reorganization, effective January 1, 1996, the company's interest in the joint venture is accounted for using the cost basis of accounting and the company no longer shares in ongoing operating losses of the joint venture. For information regarding the amendment, see the Note entitled "Raynet" of the 1996 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. For financial and other information concerning the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1996 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. (C) NARRATIVE DESCRIPTION OF BUSINESS For information regarding operating results, principal products produced, and industries served by the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1996 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. METHODS OF DISTRIBUTION The products of the company's industry segments are marketed primarily through Raychem's worldwide sales force as well as through outside distribution channels both within and outside the United States. SOURCES AND AVAILABILITY OF RAW MATERIALS Materials required by the company's industry segments in their continuing manufacturing operations, or substitutes for such materials, are generally available from multiple sources worldwide. No significant delays have been experienced by the company in obtaining the materials needed to satisfy its requirements. 1 3 PATENTS AND PROPRIETARY INFORMATION The company applies for patents in the United States and other countries, as appropriate, to protect its significant patentable developments. As of June 30, 1996, the company had in force 910 U.S. patents and 3,399 foreign patents, and had pending 320 U.S. patent applications and 3,197 foreign patent applications. Patents held by the company in the aggregate are of material importance in the operation of the company's business. Certain patents are the subject of litigation. Management, however, does not believe that any single patent, or group of related patents, is essential to the company's business as a whole or to that of any of its industry segments. Additionally, the company owns and uses in its business a substantial body of proprietary information and numerous trademarks. In the normal course of business, the company from time to time makes and receives inquiries with regard to possible patent infringement. The company believes that it is unlikely that the outcome of these inquiries will have a material adverse effect on the company's financial position. The company is active and intends to continue to be active in the protection of its intellectual property, including its patents. WORKING CAPITAL Information relative to working capital is included in the section entitled "Financial Review" of the 1996 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. CUSTOMERS The company's industry segments sell to many customers. Management does not believe that the loss of any one customer would have a material adverse effect on the business of the company. During 1996, there was no single customer that accounted for 10% or more of the company's revenues. BACKLOG The company's business is characterized by short lead times and the absence of a significant backlog. The company expects that substantially all of the backlog at June 30, 1996, will be shipped in fiscal 1997. Unfilled orders may be canceled by customers prior to shipment of goods; however, such cancellations historically have not been material. Set forth below is the backlog at June 30, 1996 and 1995, for each of the company's industry segments.
JUNE 30, ------------- 1996 1995 ---- ---- (IN MILLIONS) Electronics........................................................... $150 $130 Industrial............................................................ 55 62 Telecommunications.................................................... 71 83 ---- ---- Total....................................................... $276 $275 ==== ====
GOVERNMENT CONTRACTS No material portion of the company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. COMPETITION The company's key competitive elements in its core business include: developing products that provide innovative solutions to customers' technical problems; providing high product quality and performance; continually introducing new products as well as improvements to existing products; and providing ongoing customer support. The products of the company's core industry segments are sold in highly competitive markets. The company's total sales are often a small fraction of total sales within the markets in which it operates. 2 4 Raychem's products compete with those of a large number of companies and divisions within companies that are both larger and smaller than Raychem. RESEARCH AND DEVELOPMENT For financial information on research and development expense, see the sections entitled "Consolidated Statement of Operations" and "Financial Review" of the 1996 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. ENVIRONMENTAL REGULATIONS For information regarding the effect of environmental regulations on the company, see the section entitled "Financial Review," the Note entitled "Summary of Significant Accounting Policies," and the Note entitled "Contingencies" of the 1996 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. Additional information regarding environmental administrative and judicial proceedings is set forth in Part I, Item 3 of this Form 10-K under the caption "Legal Proceedings." EMPLOYEES As of June 30, 1996, the company employed 8,697 people. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The company's international operations are conducted primarily through wholly owned subsidiaries that are responsible for sales, distribution and, in some cases, research, development, and manufacturing activities. At June 30, 1996, these operations employed approximately 4,663 people, representing 54% of the company's total work force. For additional information regarding the company's international and domestic operations and export sales, see the Note entitled "Worldwide Operations" and the section entitled "Financial Review" of the 1996 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. ITEM 2. PROPERTIES The company's principal domestic facilities are located in Menlo Park and Redwood City, California, and in Fuquay-Varina, North Carolina. Additional facilities of significant size are located in Belgium, France, Germany, Ireland, Japan, the People's Republic of China, and the United Kingdom. The company owns approximately 223 acres of land in the United States and 276 acres abroad for a total of 499 acres. The company owns and leases a total of 5,825,000 square feet of manufacturing, distribution, research and development, and sales and administrative facilities worldwide. Of this total, electronics uses approximately 37%; industrial, 25%; telecommunications, 21%; and corporate, 17%. None of the property owned by the company is held subject to any major encumbrances. The company's facilities are suitable for their respective uses and, in general, are adequate to support the current and anticipated volume of business. The company conducts continuing reviews of its facilities under improvement programs aimed at modernization and cost reduction. For information on capital expenditures, see the section entitled "Financial Review" of the 1996 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. For information regarding leased properties, see the Note entitled "Commitments" of the 1996 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. 3 5 ITEM 3. LEGAL PROCEEDINGS I. The company and its subsidiaries are parties to lawsuits involving various types of commercial matters, including, but not limited to, product liability, unfair competition, breach of contract, and intellectual property matters. The principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze protection products. Certain major cases, which do not necessarily meet the disclosure threshold of Item 103 of Regulation S-K, include: A. On March 7, 1995, a complaint entitled All Alaskan Seafoods, Inc., AAS-DMP Management Partnership, L.P. by Kodiak Marine Protein, Inc., General Partner, Holding Company Dalmoreproduct, Sandra Kegley, and Shin Nihon Global Co., Ltd. v. Raychem Corporation and Rubatex Corporation was filed in the United States District Court, Western District of Washington at Seattle, asserting liability against the company for alleged fire damage to a ship and its cargo and the death of one crew member. Subsequently, on September 5, 1995, plaintiffs filed an amended complaint adding Marine Electric, Inc. and Westinghouse Electrical Supply Co. as third- and fourth-party defendants, respectively. The shipowner plaintiff claimed in discovery compensatory damages of approximately $150 million plus exemplary damages based on claims of strict product liability and negligence. However, on June 2, 1996, the court granted the company's motion to limit compensatory damages claimed by the shipowner plaintiffs to the value of the cargo lost/destroyed (alleged to be between $1 million and $3 million) on account of the incident. B. On May 10, 1995, a decision was rendered on an appeal of a judgment in the company's favor in a lawsuit originally filed on September 9, 1988, in the Supreme Court of Newfoundland, Canada, Trial Division, Bow Valley, et al. v. Saint John Shipbuilding and Raychem. The Court of Appeal found the company 20% responsible for property damage of approximately $5 million (Canadian). On May 2, 1996, the Supreme Court of Canada granted plaintiffs' appeal petition to hear the case. No hearing date has been set. The plaintiffs had alleged claims for damages arising out of a fire on an offshore drilling platform and made allegations attributing the cause and spread of the fire to heat-tracing and cladding products manufactured by the company. On November 30, 1993, a Petition by joint venturers of the plaintiffs in the Bow Valley lawsuit making similar claims was filed in the Supreme Court of Newfoundland, Canada, Trial Division and was served on the company on March 25, 1994. This action is stayed. A New Brunswick lawsuit filed by Saint John Shipbuilding against Raychem Canada, Ltd. arising out of the same incident has also been stayed by prior agreement of the parties. C. In November 1995, the company agreed to a settlement in the matter of Raychem Corporation v. Federal Insurance Company, originally filed in the United States District Court for the Northern District of California on December 16, 1991. In that action, the company sought recovery from Federal, its insurer, of payments made by the company in settlement of a class action securities suit. Pursuant to the settlement with Federal, the company received $6.6 million in the second quarter of fiscal 1996. On December 11, 1995, the company filed for settlement and dismissal of this matter. D. On August 4, 1995, a motion filed by the company and other defendants for judgment on the pleadings was granted by the United States District Court, Northern District of California, in a lawsuit originally filed on August 27, 1993, West County Landfill, Inc. v. Raychem International Corporation; FMC Corporation; Kaiser Aluminum & Chemical Corporation; Flint Ink Corporation; Stauffer Chemical Company; Rhone-Poulenc Basic Chemicals Co.; Rhone-Poulenc Inc.; Pacific Gas & Electric Company; Union Oil Company of California; Chevron U.S.A. Inc.; Chevron Chemical Company; Shell Oil Company; Desoto, Inc.; Occidental Chemical Corporation; General Motors Corporation; Romic Chemical Corporation; United Airlines, Inc.; United States Department of Defense; United States Department of Navy, striking the plaintiff's claim that the company and other defendants were jointly and severally liable for response costs at a site operated by the plaintiff. The allegations in the original complaint contend that the defendants generated hazardous materials which were disposed of at the site. Raychem International Corporation is alleged to have done so during the period 1975 through 1979 and perhaps at other times. The plaintiff seeks recovery of response costs which plaintiff has allegedly incurred in an amount exceeding $25 million and a declaratory judgment regarding unspecified future costs. As a result of the District Court's grant of the company's motion, the company's potential liability, if any, for response costs at the site would be based on the company's 4 6 disposal of wastes at the site. The company believes that its wastes constitute less than 2% of the total amount of wastes disposed of at the site. E. On July 10, 1991, the company received written notice from the California Department of Health Services, the predecessor agency to the California Department of Toxic Substances Control ("DTSC"), that it intended to issue an administrative order relating to the investigation of soil contamination at the company's administrative and manufacturing site in Menlo Park, California. On June 27, 1996, the company and DTSC entered into a consent agreement for remedial investigation by the company over a two year period with a maximum oversight cost by the DTSC of $110,000. F. During the first quarter of fiscal 1996, the company settled the administrative proceedings filed on March 23, 1989, by the United States Environmental Protection Agency, as well as a matter originally initiated by the California Environmental Protection Agency on September 1, 1992. Each was concluded for amounts which were not material. G. On February 10, 1995, Creole Engineering Co., Unit Process Company, and the three other plaintiffs appealed the grant on January 13, 1995, by the United States District Court, Northern District of California, of the company's motion to dismiss related lawsuits filed on August 19, 1993, Creole Engineering Co. v. Raychem Corporation, Tri-Systems, and Tracer Construction Company, and on June 29, 1993, Unit Process Company; Brock Easley, Inc.; Bylin Heating Systems, Inc.; and Fluid Flow Control Contractors v. Raychem Corporation; Debenham Electrical Supply Company, Inc.; and K.V.A. Electrical Supply Corp. This appeal was made to the United States Court of Appeals for the Ninth Circuit; no decision has been rendered. In addition, on February 10, 1995, the plaintiffs filed lawsuits against the company alleging violations of similar provisions of the laws of four states (California, Colorado, Louisiana, and Washington), based on essentially the same facts alleged in the federal action. The California, Louisiana, and Washington actions have been consolidated in the Superior Court of San Mateo County, California, and the Colorado action is in the District Court of Jefferson County, Colorado. The company has pending motions to dismiss the California and Colorado lawsuits, however, both matters are stayed pending resolution of the Federal appeal. The complaints in each of the two lawsuits seek damages in excess of $15 million (prior to trebling) arising out of distributor terminations and other alleged antitrust violations by the company. H. On May 2, 1995, a Complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, in response to the company's action, filed December 19, 1994, in the Superior Court of the State of California, County of San Mateo, Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. Bourns' action alleges violation of federal antitrust laws. The company's state court action alleges, among other claims, misappropriation of trade secrets and breach of contract and seeks in excess of $5 million in damages. Mr. Hogge has filed a cross-complaint alleging interference with the pursuit of a lawful occupation and unfair competition. Neither the federal complaint nor Mr. Hogge's counterclaim specify a claim for monetary damages. On August 28, 1995, Bourns AG, a subsidiary of Bourns, Inc. filed an arbitration proceeding against the company with the International Chamber of Commerce in Paris seeking damages for breach of a private brand agreement in an amount in excess of $1.5 million. On May 14, 1996, Bourns Inc. filed a petition in the United Kingdom in the High Court of Justice Chancery Division, Patents Court seeking revocation of certain patents owned by the company. I. In the second quarter of fiscal 1996, the company and PSI Telecommunications, Inc. settled the patent infringement lawsuit originally filed by the company on November 30, 1993, in the United States District Court, Northern District of California, as well as all related counterclaims. II. Legal proceedings tend to be unpredictable and costly. Based on currently available information, however, management believes that the resolution of pending claims, regulatory inquiries, and legal proceedings will not have a material adverse effect on the company's operating results or financial position. The company maintains insurance to cover product liability and certain other claims in excess of deductibles. Effective March 31, 1996, the company increased its insurance deductibles for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. 5 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the fourth quarter. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of all executive officers of the company as of June 30, 1996, their positions with the company, and the date each was first elected as, or otherwise deemed to be, an executive officer of the registrant. This table is included as an unnumbered item in Part I of this Form 10-K.
DATE APPOINTED NAME AGE POSITION AN OFFICER - ------------------------- --- --------------------------------------------- -------------- Richard A. Kashnow....... 54 President and Chief Executive Officer 1995 Michael T. Everett....... 47 Senior Vice President 1987 Ralph H. Harnett......... 48 Senior Vice President 1993 Raymond J. Sims.......... 45 Senior Vice President and Chief Financial 1988 Officer Joseph G. Wirth.......... 60 Senior Vice President and Chief Technical 1991 Officer Deidra D. Barsotti....... 40 Vice President and Controller 1991 L. Frans Berthels........ 51 Vice President 1995 Peter L. Brooks.......... 50 Vice President 1995 Timothy S. Jenks......... 41 Vice President 1995 John D. McGraw........... 49 Vice President 1995 Andrew F. Roake.......... 44 Vice President 1995 Hus Tigli................ 42 Vice President 1995 Eric Van Zele............ 48 Vice President 1994
There are no family relationships between any executive officers. All of the executive officers except Dr. Kashnow have been employed by or associated with the company in their present or other managerial and executive capacities for more than five years. Dr. Kashnow was President of Schuller International Group, a subsidiary of Manville Corporation, from 1991 to 1995, before becoming President and Chief Executive Officer of Raychem in 1995. 6 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section entitled "Quarterly Financial Data (Unaudited)" of the 1996 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The section entitled "Ten-Year Summary" of the 1996 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Financial Review" of the 1996 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, together with the Notes thereto and the report thereon of Price Waterhouse LLP, dated July 17, 1996, and the section entitled "Quarterly Financial Data (Unaudited)" of the 1996 Annual Report are incorporated herein by reference and are included in this filing as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the company's directors is presented in the subsection entitled "Nominees" appearing on pages 2 to 3 of the Proxy Statement dated September 19, 1996 (the "1996 Proxy Statement"), which pages are incorporated herein by reference. Information regarding the company's executive officers is set forth in Part I of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding the company's compensation of its executive officers is set forth on pages 5 to 11 of the 1996 Proxy Statement, which pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth on pages 3 to 4 of the 1996 Proxy Statement, which pages are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding transactions with the company's directors and executive officers is set forth on page 13 of the 1996 Proxy Statement, which page is incorporated herein by reference. 8 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements
PAGE IN 1996 ANNUAL REPORT* -------------- Financial Review............................................... 12-20 Report of Independent Accountants.............................. 21 Consolidated Balance Sheet at June 30, 1996 and 1995........... 22 Consolidated Statement of Operations for the three years ended June 30, 1996................................................ 23 Consolidated Statement of Cash Flows for the three years ended June 30, 1996................................................ 24 Consolidated Statement of Stockholders' Equity for the three years ended June 30, 1996.................................... 25 Notes to Consolidated Financial Statements..................... 26-40 Quarterly Financial Data (Unaudited)........................... 41 Ten-Year Summary............................................... 42-43
- --------------- * Incorporated herein by reference and included in this filing as Exhibit 13. (2) Financial Statement Schedules
PAGE IN 1996 FORM 10-K ------------ Report of Independent Accountants on Financial Statement Schedule....................................................... 14 Schedule II -- Valuation and Qualifying Accounts................. 15
The financial statement schedule should be read in conjunction with the financial statements in the 1996 Annual Report to Stockholders. All other Financial Statement Schedules are omitted because they are not required or are not applicable, or the required information is included in the Consolidated Financial Statements or the Notes. (3) Index to Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 2(a) Ericsson Raynet Formation Agreement dated as of October 10, 1994(11) 2(b) Amendment to Ericsson Raynet Formation Agreement dated as of November 16, 1994(11) 2(c) Ericsson Raynet Joint Venture Agreement dated as of November 16, 1994(11) 2(d) Reorganization Agreement dated as of March 27, 1996(16) 2(e) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996(16) 3(a) Amended and Restated Certificate of Incorporation(6) 3(b) Bylaws(1) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(5) 4(b) Credit Agreement dated as of September 29, 1994(10) 4(c) Term Loan Agreement dated as of September 29, 1994(10) 10(a) Amended and Restated 1981 Incentive Stock Option Plan(2) 10(b) Amended and Restated 1981 Supplemental Stock Option Plan(2) 10(c) Executive Long Term Incentive Plan(3)
9 11
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 10(d) Bonus Deferral Plan(3) 10(e) Amended and Restated 1987 Directors Stock Option Plan(8) 10(f) Supplemental Executive Retirement Plan(4) 10(g) Amended and Restated 1990 Incentive Plan(8) 10(h) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(6) 10(i) Description of Bonus Plan(7) 10(j) Consulting Agreement dated as of April 18, 1994, between Raynet Corporation and Robert M. Halperin(9) 10(k) 1995 Executive Deferred Compensation Plan(12) 10(l) Consulting Agreement effective July 1, 1994, between the company and Isaac Stein and Waverley Associates, Inc.(13) 10(m) Revolving Credit Line Agreement dated as of January 2, 1995, between the company and Ericsson Raynet(13) 10(n) Executive Termination Compensation Policy dated as of June 1, 1995(13) 10(o) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich(13) 10(p) Employment letter between the company and Dr. Richard Kashnow dated August 11, 1995(14) 10(q) Supplemental agreement between the company and Dr. Richard Kashnow dated February 5, 1996(15) 10(r) Agreement and release between the company and Mr. Harry O. Postlewait dated November 16, 1995(15) 10(s) Participation Agreement between the company and U.S. Bancorp Leasing & Financial dated April 11, 1996 10(t) Participation Agreement between the company and Metlife Capital Limited Partnership dated April 11, 1996 10(u) Headlease Agreement A between the company and Fleet National Bank dated April 11, 1996 10(v) Headlease Agreement B between the company and Fleet National Bank dated April 11, 1996 10(w) Lease Agreement A between the company and Fleet National Bank dated April 11, 1996 10(x) Lease Agreement B between the company and Fleet National Bank dated April 11, 1996 10(y) Agreement and release between the company and Mr. Michael T. Everett dated July 22, 1996 13 Portions of the 1996 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule 99(a) List of subsidiaries whose employees are participating in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. 99(b) List of subsidiaries whose employees are participating in the 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries.
- --------------- (1) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, (File No. 2-15299) and incorporated by reference. (2) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1987, (File No. 2-15299) and incorporated by reference. 10 12 (3) Filed as an exhibit to the company's Proxy Statement dated September 12, 1988, mailed to stockholders in connection with the 1988 Annual Meeting of Stockholders and incorporated by reference. (4) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1988, (File No. 2-15299) and incorporated by reference. (5) Filed as an exhibit to the Registration Statement on Form 8-A filed by the company on February 3, 1989, (File No. 2-15299) and incorporated by reference. (6) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, (File No. 2-15299) and incorporated by reference. (7) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (File No. 2-15299) and incorporated by reference. (8) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on October 25, 1993, (Registration No. 33-50737) and incorporated by reference. (9) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, (File No. 2-15299) and incorporated by reference. (10) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, (File No. 2-15299) and incorporated by reference. (11) Filed as an exhibit to the company's Form 8-K dated November 16, 1994, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on April 5, 1995, (Registration No. 33-58437) and incorporated by reference. (13) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, (File No. 2-15299) and incorporated by reference. (14) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, (File No. 2-15299) and incorporated by reference. (15) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, (File No. 2-15299) and incorporated by reference. (16) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (File No. 2-15299) and incorporated by reference. (b) Reports on Form 8-K None. 11 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION REGISTRANT By /s/ RICHARD A. KASHNOW ------------------------------------ Richard A. Kashnow President and Chief Executive Officer Date: September 19, 1996 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Richard A. Kashnow and Raymond J. Sims, or either of them, as his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ---------------------------------------- -------------------------------- ------------------- /s/ RICHARD A. KASHNOW President, Chief Executive September 19, 1996 - ---------------------------------------- Officer, and Chairman of the Richard A. Kashnow Board (Principal Executive Officer) /s/ RAYMOND J. SIMS Senior Vice President and Chief September 19, 1996 - ---------------------------------------- Financial Officer Raymond J. Sims (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI Vice President and Controller September 19, 1996 - ---------------------------------------- (Principal Accounting Officer) Deidra D. Barsotti /s/ RICHARD DULUDE Director September 19, 1996 - ---------------------------------------- Richard Dulude /s/ JAMES F. GIBBONS Director September 19, 1996 - ---------------------------------------- James F. Gibbons /s/ JOHN P. MCTAGUE Director September 19, 1996 - ---------------------------------------- John P. McTague
12 14
SIGNATURE TITLE DATE - ---------------------------------------- -------------------------------- ------------------- /s/ DEAN O. MORTON Director September 19, 1996 - ---------------------------------------- Dean O. Morton /s/ ISAAC STEIN Director September 19, 1996 - ---------------------------------------- Isaac Stein /s/ CHANG-LIN TIEN Director September 19, 1996 - ---------------------------------------- Chang-Lin Tien /s/ CYRIL J. YANSOUNI Director September 19, 1996 - ---------------------------------------- Cyril J. Yansouni
13 15 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Raychem Corporation: Our audits of the consolidated financial statements referred to in our report dated July 17, 1996, appearing on page 21 of the 1996 Annual Report (which is incorporated herein by reference and is included in this filing as Exhibit 13) also included an audit of the Financial Statement Schedule II listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Jose, California July 17, 1996 14 16 SCHEDULE II RAYCHEM CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS* YEARS ENDED JUNE 30, 1996, 1995, AND 1994
ADDITIONS BALANCE AT CHARGED TO FOREIGN BALANCE BEGINNING COSTS AND ACCOUNTS CURRENCY AT END DESCRIPTION OF YEAR EXPENSES WRITTEN OFF TRANSLATION OF YEAR - ------------------------------------ ---------- ---------- ----------- ----------- ------- (IN THOUSANDS) 1996: Accounts receivable............... $ 10,348 $3,145 $ 3,204 $(256) $10,033 ======= ====== ====== ===== ======= 1995: Accounts receivable............... $ 11,599 $2,857 $ 4,509** $ 401 $10,348 ======= ====== ====== ===== ======= 1994: Accounts receivable............... $ 8,557 $6,288 $ 2,395 $(851) $11,599 ======= ====== ====== ===== =======
- --------------- * Allowances are deducted from assets to which they apply. ** Includes $1,044 effect of deconsolidation of certain Raychem subsidiaries. 15 17 199610K EX-10.S 2 PARTICIPATION AGREEMENT 1 Exhibit 10 (s) PARTICIPATION AGREEMENT dated as of April 11, 1996 among RAYCHEM CORPORATION, as Lessee, U.S. BANCORP LEASING & FINANCIAL as Owner Participant, FLEET NATIONAL BANK as Owner Trustee, DEUTSCHE BANK AG as Agent, BANK BRUSSELS LAMBERT, NEW YORK BRANCH BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY DEUTSCHE BANK AG, KREDIETBANK NV, AND SOCIETE GENERALE FINANCIAL CORP. as Loan Participants, and FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION as Indenture Trustee Manufacturing Equipment 2 TABLE OF CONTENTS
PAGE ARTICLE I Definitions and Rules of Usage ............................................................... 1 ARTICLE II Closing....................................................................................... 1 SECTION 2.01. Agreements To Participate............................................................... 1 SECTION 2.02. Additional Loan Participants............................................................ 2 SECTION 2.03. Payments on Closing Date................................................................ 2 SECTION 2.04. Time and Place of Closing; Notice....................................................... 2 ARTICLE III Closing Conditions............................................................................. 5 SECTION 3.01. Conditions Precedent to Participations in Lessor's Cost................................. 5 SECTION 3.02. Conditions Precedent to the Obligations of the Lessee on the Closing Date.......................................................................... 11 ARTICLE IV Representations and Warranties ............................................................... 13 SECTION 4.01. Representations and Warranties of the Lessee............................................ 13 SECTION 4.02. Representations and Warranties of the Owner Participant................................. 16 SECTION 4.03. Representations and Warranties of the Indenture Trustee................................. 17 SECTION 4.04. Representations and Warranties of Loan Participants..................................... 18 SECTION 4.05. Representations and Warranties of the Owner Trustee..................................... 18 ARTICLE V Covenants..................................................................................... 20 SECTION 5.01. No Lessor Liens......................................................................... 20 SECTION 5.02. Further Assurances, etc................................................................. 20 SECTION 5.03. Lessee To Defend Rights of Owner Trustee................................................ 21 SECTION 5.04. Reports................................................................................. 21 SECTION 5.05. Merger, Consolidation, etc., of Lessee.................................................. 22 SECTION 5.06. Financial Statements.................................................................... 23 SECTION 5.07. Trust Agreement......................................................................... 23 SECTION 5.08. Advertising; Trademarks................................................................. 23 SECTION 5.09. Involuntary Proceeding.................................................................. 24 SECTION 5.10. ERISA................................................................................... 24 SECTION 5.11. Withholding Taxes....................................................................... 24 SECTION 5.12. Payment of Lessor Paid Amounts.......................................................... 25 SECTION 5.13. Auxiliary Payments...................................................................... 25 SECTION 5.14. Covenants .............................................................................. 25 SECTION 5.15. Determinations.......................................................................... 26 ARTICLE VI General Indemnity ............................................................................ 26 SECTION 6.01. General Indemnity....................................................................... 26 SECTION 6.02. Subrogation............................................................................. 28
i 3 TABLE OF CONTENTS (CONTINUED)
PAGE SECTION 6.03. Claims.................................................................................. 29 SECTION 6.04. Tax Savings............................................................................. 30 ARTICLE VII General Tax Indemnity................................................................ 31 SECTION 7.01. General Tax Indemnity................................................................... 31 7.01.1 General Tax Indemnity................................................................. 31 7.01.2 Excluded Taxes........................................................................ 31 7.01.3 Credits for Foreign Taxes............................................................. 33 7.01.4 Refunds and Other Credits............................................................. 34 7.01.5 Consolidated Reporting................................................................ 34 SECTION 7.02. Contests................................................................................ 35 7.02.1 Notice of Claims...................................................................... 35 7.02.2 Conduct of Contest.................................................................... 35 7.02.3 Failure to Contest.................................................................... 36 SECTION 7.03 Returns.................................................................................. 36 SECTION 7.04. Payments................................................................................ 37 7.04.1 Due Dates for Payments................................................................ 37 7.04.2 No Payment Obligation During Lease Event of Default................................... 37 SECTION 7.05. Verification............................................................................ 37 SECTION 7.06. Withholding on Rent..................................................................... 37 ARTICLE VIII Special Tax Indemnity................................................................ 38 SECTION 8.01. Certain Tax Assumptions................................................................. 38 SECTION 8.02. Tax Representations..................................................................... 40 SECTION 8.03. Definition of Loss...................................................................... 42 SECTION 8.04. Indemnity............................................................................... 44 SECTION 8.05. Tax Savings............................................................................. 50 SECTION 8.06. Contests................................................................................ 50 8.06.1 Notification.......................................................................... 51 8.06.2 Obligation to Contest................................................................. 51 8.06.3 Control of Contest.................................................................... 51 8.06.4 Advances.............................................................................. 52 8.06.5 Settlements........................................................................... 52 8.06.6 Offsets and Refunds................................................................... 52 SECTION 8.07. Combined Returns........................................................................ 53 SECTION 8.08. Certain Adjustments..................................................................... 53 ARTICLE IX Expenses............................................................................. 54 SECTION 9.01. Transaction Expenses Payable by the Owner Participant................................... 54 SECTION 9.02. Agreed Transaction Expenses............................................................. 54 SECTION 9.03. Amendments, Waivers, etc................................................................ 54
ii 4 TABLE OF CONTENTS (CONTINUED)
PAGE SECTION 9.04. Fees of Trustees........................................................................ 54 ARTICLE X Recomputation of Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values............................... 55 SECTION 10.01. Making of Adjustments.................................................................. 55 SECTION 10.02. Stipulated Loss Values; Termination Values; EBO Prices................................. 56 SECTION 10.03. Computation of Adjustments............................................................. 56 SECTION 10.04. Tax Assumption Changes................................................................. 57 SECTION 10.05 Post-Closing Adjustment for Pre-Closing Tax................................. 57 ARTICLE XI Transfer of Owner Participant's Interest............................................. 58 SECTION 11.01. Transfers.............................................................................. 58 ARTICLE XII Refunding............................................................................ 60 SECTION 12.01. Refunding.............................................................................. 60 SECTION 12.02. Notice................................................................................. 63 ARTICLE XIII Reserved............................................................................. 63 ARTICLE XIV Miscellaneous........................................................................ 64 SECTION 14.01. Documentary Conventions................................................................ 64 SECTION 14.02. No Recourse to Owner Participant....................................................... 64 SECTION 14.03. Confidentiality........................................................................ 64 SECTION 14.04. Owner Trustee Not Acting in Individual Capacity........................................ 65 SCHEDULE I ADDRESSES SCHEDULE II Name of Loan Participants and Amounts EXHIBIT A-1 to the Participation Agreement EXHIBIT A-2 to the Participation Agreement EXHIBIT A-3 to the Participation Agreement EXHIBIT A-4 to the Participation Agreement EXHIBIT A-5 to the Participation Agreement EXHIBIT B-1 to the Participation Agreement
iii 5 TABLE OF CONTENTS (CONTINUED)
PAGE EXHIBIT B-2 to the Participation Agreement EXHIBIT B-3 to the Participation Agreement EXHIBIT B-4 to the Participation Agreement EXHIBIT B-5 to the Participation Agreement EXHIBIT B-6 to the Participation Agreement EXHIBIT 4.01(i) to the Participation Agreement Exhibit 8.02(h) to the Participation Agreement Appendix A to the Participation Agreement
iv 6 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT ("Agreement") is entered into as of April 11, 1996 among RAYCHEM CORPORATION, a Delaware corporation, as Lessee; U.S. BANCORP LEASING & FINANCIAL, an Oregon corporation, as Owner Participant, BANK BRUSSELS LAMBERT, NEW YORK BRANCH, a Belgian bank, BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY, a German bank, DEUTSCHE BANK AG, LOS ANGELES BRANCH AND/OR CAYMAN ISLANDS BRANCH, a German bank, KREDIETBANK NV, a Belgian bank, and SOCIETE GENERALE FINANCIAL CORP., a Delaware corporation, as Loan Participants, FLEET NATIONAL BANK a national banking association, not in its individual capacity, except as expressly stated herein, but solely in its capacity as Owner Trustee, and FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, a national banking association, not in its individual capacity except as expressly stated herein, but solely as Indenture Trustee. The parties hereto agree as follows: ARTICLE I Definitions and Rules of Usage Unless the context otherwise requires, terms used herein shall have the meanings assigned to them in Appendix A, which also contains rules of usage. ARTICLE II Closing SECTION 2.01. Agreements To Participate. In reliance on the agreements, representations and warranties herein contained or made pursuant hereto, and subject to the terms and conditions hereinafter set forth: (a) Loan Participants. The Loan Participants will participate in the payment of Lessor's Cost of the Items delivered on the Closing Date by making one or more Secured Loans to the Owner Trustee on the Closing Date in the principal amount or amounts specified in Schedule II hereto (as such may be supplemented in accordance with Section 2.02). Each Secured Loan shall be evidenced as provided in the Indenture by one or more Loan Certificates, as specified in Schedule II hereto, in the aggregate principal amount of such Secured Loan. 2 7 (b) Owner Participant. The Owner Participant will participate in the payment of Lessor's Cost on the Closing Date by making an equity investment on the Closing Date with respect to the Equipment to be delivered to the Lessor on the Closing Date in an amount, with respect to the Owner Participant, equal to the result of subtracting from the Lessor's Cost of the Production Unit or Units to be allocated to the Owner Participant under the Trust Agreement the amount of Secured Loans specified in Schedule II hereto with respect to such Production Unit; provided, that the aggregate equity investment (excluding fees and expenses) of the Owner Participant shall not exceed $10,755,189.99. (c) Headlease Payment. The Owner Trustee will acquire rights to the Equipment under the Headlease on the Closing Date by executing the Headlease and paying Lessor's Cost of the Items delivered on the Closing Date pursuant to the Headlease. SECTION 2.02. Additional Loan Participants. The Lessee, on behalf of the Owner Trustee, may designate one or more institutional investors unrelated to the Lessee or any Affiliate of the Lessee that shall have agreed to become additional Loan Participants hereunder in connection with a Refunding. Following compliance by the Lessee with Article XII, each such institutional investor shall become a party to this Agreement, with all rights and obligations specified for a Loan Participant herein, by delivering to each of the other Participants, the Owner Trustee, the Indenture Trustee and the Lessee counterparts of this Agreement executed in the space provided for such purpose at the foot hereof, or an instrument or instruments agreeing to be bound by this Agreement and making the representations and warranties set forth in Section 4.04, with an addendum to Schedules I and II hereto showing the principal amount of Loan Certificates with respect to the Refunding Date to be purchased by such institutional investor, such Loan Participant's percentage of the aggregate principal amount of Loan Certificates to be purchased on the Refunding Date, the interest rate to be borne by each such Loan Certificate and each Loan Participant's name and address for payments and for notices. Upon such delivery, and upon approval by the Lessee and the Owner Participant of such dollar amounts and such percentages, each such institutional investor shall thereafter constitute a Loan Participant for all purposes of this Agreement and the other Operative Documents. SECTION 2.03. Payments on Closing Date. Subject to the terms and conditions of this Agreement, by noon, Eastern time on the Closing Date the Loan Participants and the Owner Participant will each make available the amount required to be made available by them pursuant to Section 2.01 through wire transfer in Federal or other funds immediately available on the Closing Date to the account of FSBU specified in Schedule I, and FSBU will pay the amount required to be paid by it pursuant to Section 2.01 through wire transfer in Federal or other funds to the account of the Lessee specified in Schedule I. SECTION 2.04. Time and Place of Closing; Notice. (a) The closing of the transactions contemplated by this Participation Agreement shall take place at the offices of 3 8 Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California at 9:00 a.m. on the Closing Date. (b) Change in Closing Date. If the Closing Date is later than the estimated closing date noticed by the Lessee, then the Lessee agrees to pay the Owner Participant any expense which such Participant may sustain or incur as a consequence of the delay in the Closing Date. Such payment shall not exceed an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the equity investment, to be made by the Owner Participant hereunder at the then current Debt Rate over (ii) if at least one Business Day's notice is not given by the Lessee of the delay in the Closing Date, but the Owner Participant has not transferred funds to the Indenture Trustee, the amount of interest (as reasonably determined by the Owner Participant) which would have accrued to the Owner Participant on such amount. If the Owner Participant actually transmits the required funds to the Indenture Trustee on the estimated Closing Date, the Lessee shall pay to Owner Participant interest on such Participant's funds for the period (if any) from and including such Closing Date to but excluding the earlier of (A) the date on which the transactions to occur on such Closing Date are concluded and (B) the date such funds are returned to such Participant (which shall in no event occur later than two Business Days following such scheduled Closing Date) or in each case the following Business Day if such funds were not returned on or before 12:00 noon (New York City time) on such date. Such interest, if any, shall accrue on the amount of such funds at the Debt Rate and shall be paid on the applicable date set forth in clause (A) or (B) of the immediately preceding sentence. The Indenture Trustee shall invest and reinvest funds received at the sole discretion of, for the account of, and at the risk of the Lessee, in any investment permitted by Section 9.11(b) of the Indenture selected by the Lessee that is due and payable on the Business Day immediately succeeding the date of such investment. To the extent that such earnings are not in excess of any interest due and payable by the Lessee to such Participant under this Section 2.04(b), any earnings on the investment of such funds (including interest) will be paid to such Participant toward the payment of such interest, and the Lessee will pay any shortfall. To the extent that such earnings are in excess of any interest due and payable by the Lessee to such Participant under this Section 2.04(b), such excess earnings will be paid to the Lessee. In the absence of any such direction by the Lessee, the Indenture Trustee shall invest and reinvest such funds in any available investments permitted by Section 9.11(b) of the Indenture that are due and payable on the Business Day immediately succeeding the date of such investment or reinvestment. The Lessee shall immediately reimburse the Indenture Trustee or the Owner Participant for any loss, cost or expense incurred as a result of the investment or transfer of funds by the Indenture Trustee in accordance with the terms of this Section 2.04(b). The duties of the Indenture Trustee with respect to the investment and payment of funds are limited to those specifically set forth herein. The Indenture Trustee shall incur no liability hereunder except for its gross negligence, willful misconduct, or its negligence relating to the holding or disposing (but not investing) of funds hereunder. The Indenture Trustee shall hold any such funds as escrow agent on behalf of such Participant. The Indenture Trustee shall hold such funds in trust for 4 9 such Participant and shall give such funds the degree of care it gives other similar property held in such capacity. The Indenture Trustee shall have no responsibility to determine the authenticity or validity of any written notice, instruction, opinion of counsel, request or other document delivered to it and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and purporting to have been signed by the proper party or parties. Upon making payment of funds received pursuant to this Section 2.04(b), the Indenture Trustee shall have no further liability under this Section 2.04(b) for any amount so paid. Notwithstanding the foregoing, Lessee shall not be obligated to make any payment under this Section 2.04(b) to the Owner Participant if the delay in the Closing Date results from the breach by the Owner Participant of its obligation to fund. ARTICLE III Closing Conditions SECTION 3.01. Conditions Precedent to Participations in Lessor's Cost. The obligation of the Owner Participant to participate in the payment of Lessor's Cost of the Equipment and the obligation of each Loan Participant to participate in the payment of such Lessor's Cost (each such Loan Participant and the Owner Participant being referred to, individually, as a "Participant" and, collectively, as the "Participants"), shall be subject to the fulfillment to the satisfaction of, or waiver by, such Participant prior to or on the Closing Date of the following conditions precedent (except that the obligation of any party shall not be subject to such party's own performance or compliance): (a) Notice; Commitments of Other Participants. Such Participant shall have received the notice required by the first sentence of Section 2.04(b). On or before the Closing Date, (i) the Participants shall have made available the full amount then required to be made available by them pursuant to Section 2.01, such sum required to be made available to equal the Lessor's Cost for the Equipment, and (ii) the Owner Participant shall have wire transferred to FSBU an amount equal to the aggregate Up-Front Fee and FSBU shall have wire transferred to each Loan Participant such Loan Participant's Up-Front Fee. (b) Loan Certificates. On or before the Closing Date, the Owner Trustee shall have duly executed and delivered to each Loan Participant one or more Loan Certificates, dated as of the Closing Date, in an aggregate principal amount equal to the amount of the Secured Loan made by such Loan Participant to the Owner Trustee, each of which shall be authenticated by the Indenture Trustee. 5 10 (c) Receipt. On the Closing Date, the Lessee shall have duly executed and delivered to the Owner Trustee an instrument acknowledging receipt of funds in the amount of Lessor's Cost of the Equipment. (d) Authorization, Execution and Delivery of Operative Documents. On the Closing Date, the following documents shall have been duly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect on the Closing Date without any event or condition having occurred or existing which constitutes, or with the giving of notice or lapse of time or both would constitute, a default thereunder or breach thereof or would give any party thereto the right to terminate any thereof or not to perform its obligations thereunder: (i) this Participation Agreement; (ii) the Headlease, dated the Closing Date, covering the Equipment to be transferred to the Lessor on the Closing Date (the chattel paper original of which shall go to the Indenture Trustee); (iii) the Lease, as supplemented by a Lease Supplement dated the Closing Date, such Lease Supplement (the chattel paper original of which shall go to the Indenture Trustee) covering all Items and specifying the Lessor's Cost for each Item and each Production Unit which Lessor's Cost shall be equal to the in-place fair market value of such Production Unit as set forth in the Appraisal; (iv) the Indenture, dated the Closing Date, covering (x) all Items in each Production Unit covered by the Headlease, and (y) the terms of the Loan Certificates related to such Production Units; (v) the Lease Security Agreement; and (vi) the Trust Agreement. (e) Appraisal. On or before the Closing Date, the Owner Participant shall have received the Appraisal for the Production Units being delivered on the Closing Date, and the Loan Participants shall have received the Loan Participants' Appraisal. (f) Insurance. On or before the Closing Date, the Participants, the Owner Trustee and the Indenture Trustee shall have received certificates of authorized representatives of the underwriters of such policies which evidence that the Lessee has in effect all insurance 6 11 which is required under the terms of the Lease, and an Officer's Certificate to the effect that all such insurance is in full force and effect and complies with the terms of the Lease. (g) Filings and Recordings. On or before the Closing Date, all filings, recordings and other actions reasonably requested by any Participant shall have been duly made or taken, including, without limitation: (i) Receipt of a landlord's waiver substantially in the form of Exhibit A-1 with respect to each Plant Site, or portion thereof, which is on real property leased to Raychem, duly filed in all appropriate locations; (ii) Filing of a financing statement (Form UCC-1) substantially in the form of Exhibit A-2 with the California Secretary of State to protect the Indenture Trustee's security interest in the Equipment; (iii) Filing of a precautionary financing statement (Form UCC-1) substantially in the form of Exhibit A-3 with the California Secretary of State to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (iv) Filing of a fixture filing substantially in the form of Exhibit A-2 with San Mateo County, California, to protect the Indenture Trustee's security interest in the Equipment; (v) Filing of a precautionary fixture filing substantially in the form of Exhibit A-3 with San Mateo County, California to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (vi) Filing of a financing statement (Form UCC-1) substantially in the form of Exhibit A-4 with the Secretary of State of the State of Massachusetts to protect the Indenture Trustee's security interest in the Owner Participant Trust Estate; (vii) Receipt of a search request (Form UCC-3) from the California Secretary of State listing active filings against Lessee as "debtor," with copies of such filings; (viii) Receipt of a search request from San Mateo County, California, showing fixture filings against Lessee with copies of such filings; 7 12 (ix) Filing of a fixture filing substantially in the form of Exhibit A-5 with Wake County, North Carolina to protect the Indenture Trustee's security interest in the Equipment; (x) Filing of a precautionary fixture filing substantially in the form of Exhibit A-6 with Wake County, North Carolina to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (xi) Receipt of a search request (Form UCC-3) from the North Carolina Secretary of State listing active filings against Lessee as "debtor," with copies of such filings (with the Indenture Trustee named therein as Assignee); (xii) Receipt of a search request from Wake County, North Carolina showing fixture filings against Lessee with copies of such filings; (xiii) Filing of a financing statement (Form UCC-1) substantially in the form of Exhibit A-5 with the North Carolina Secretary of State to protect the Indenture Trustee's security interest in the Equipment; and (xiv) Filing of a precautionary financing statement (Form UCC-1) substantially in the form of Exhibit A-6 with the North Carolina Secretary of State to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (h) Lessee Certificates. On the Closing Date, each Participant, the Owner Trustee and the Indenture Trustee shall have received (i) an Officer's Certificate of the Lessee confirming (A) that the representations and warranties of the Lessee contained in the Operative Documents are true and correct on and as of the Closing Date as though made on and as of the Closing Date, (B) that no event or condition has occurred and is continuing, or would result from the consummation of the transactions contemplated by the Operative Documents, that constitutes a Lease Default or an Indenture Default, (C) that each Operative Document to which the Lessee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Lessee enforceable against the Lessee in accordance with its terms, (D) that no Event of Loss (or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Loss) with respect to any Equipment to be transferred to the Lessor has occurred and is in existence on the Closing Date and (E) such 8 13 other matters as the Participants shall reasonably request; and (ii) such evidence as to the due authority of the Lessee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Participants shall reasonably request. (i) Legal Opinions. (A) On the Closing Date, each Participant, the Owner Trustee and the Indenture Trustee shall have received the opinions of: (i) Lessee's Counsel, substantially in the form of Exhibit B-1; (ii) Indenture Trustee's Counsel, substantially in the form of Exhibit B-2; (iii) Owner Trustee's Counsel, substantially in the form of Exhibit B-3; (iv) Owner Participant's in-house counsel, substantially in the form of Exhibit B-4; (v) Owner Participant's Special Counsel, substantially in the form of Exhibit B-5; (vi) Lessee's North Carolina counsel, substantially in the form of Exhibit B-6; and (B) On the Closing Date, Owner Participant shall have received the opinion of Owner Participant's Tax Counsel in form and substance satisfactory to Owner Participant. (C) On the Closing Date, the Loan Participants shall have received the opinion of Loan Participants' Counsel in form and substance satisfactory to such Loan Participants. (j) Closing Date. The Closing Date shall occur on or before May 30, 1996. (k) No Event of Loss. On the Closing Date, no Event of Loss (or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Loss) with respect to any Equipment to be transferred to the Lessor on the Closing Date shall have occurred. 9 14 (l) Representations and Warranties of the Lessee. The representations and warranties of the Lessee set forth in Section 4.01 shall be true and correct on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (m) Taxes. All Taxes, if any, due and payable on or prior to the Closing Date in connection with the execution, delivery, recording and filing of the Operative Documents and in connection with the consummation of any transaction contemplated by the Operative Documents shall have been paid in full. (n) Governmental Action. All Governmental Action required or, in the reasonable opinion of such Participant, advisable for the consummation of the transactions contemplated by the other Operative Documents shall have been obtained and shall be in full force and effect and each Participant shall have received copies of evidence of such Governmental Action, if any. (o) Litigation. Except as disclosed in any Disclosure Document, no action, proceeding or investigation shall have been instituted or threatened nor shall any Governmental Action before any Governmental Authority have been instituted or threatened, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority, in each case at the time of the Closing Date, to set aside, restrain, enjoin or prevent the consummation of the transactions contemplated by the Operative Documents or which could have a Material Adverse Effect on the Lessee. (p) Illegality. No change shall have occurred on or prior to the Closing Date in Applicable Laws that, in the opinion of such Participant or its counsel, would make it illegal for such Participant to participate in any of the transactions contemplated by the Operative Documents, and the Loan Certificates to be acquired by each Loan Participant on the Closing Date shall be a legal investment for such Loan Participant under the laws of each jurisdiction to which it may be subject, and each Loan Participant shall have received such certificates or other evidence as it may reasonably request demonstrating the legality of such purchase under such laws. (q) Certificates. Each Participant shall have received (i) certified copies of the Organic Documents of the Lessee, the Owner Trustee and the Indenture Trustee; and (ii) good standing certificates of the Lessee certified by the Secretary of State for the States of Delaware and of California. (r) Reserved (s) Aggregate Lessor's Cost. The aggregate Lessor's Cost of the Equipment shall not exceed $45,750,000. 10 15 (t) Material Adverse Change. No event shall have occurred which shall have caused a Material Adverse Effect on the financial condition of the Lessee from such condition on the date of filing of the Lessee's most recent report on Form 10-Q or Form 10-K furnished to the Participants prior to the Closing Date. (u) Lessee Authority. The Participants shall have received a certified copy of the resolution of the Board of Directors approving the Transactions and a certified incumbency certificate showing the authority of the individuals signing for Lessee. (v) Tax Changes. There shall have been no event which would have been a Tax Assumption Change pursuant to Section 10.04 but for the absence of an effective date on or prior to the Closing Date. (w) Trustee Certificates. The Participants shall have received (i) an Officer's Certificate of the Owner Trustee and of the Indenture Trustee confirming that (A) the representations and warranties of the Owner Trustee and of the Indenture Trustee contained in the Operative Documents are true and correct on and as of the Closing Date, and (B) each Operative Document to which the Owner Trustee and the Indenture Trustee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Trustee and the Indenture Trustee, respectively; and (ii) such evidence as to the due authority of the Owner Trustee and the Indenture Trustee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Participants shall reasonably request. (x) Tax Ruling. The Lessee shall have received a ruling from the California State Board of Equalization to the effect that no sales or use tax is due on payments pursuant to the Lease or the Headlease and have provided a copy of such ruling to the Owner Participant and to Loan Participants' Counsel. (y) Other Matters. Each Participant, the Owner Trustee and the Indenture Trustee shall have received copies of such other documents as they may have reasonably requested in connection with the transactions contemplated hereby (which, in the case of the Loan Participants, shall include the Owner Participant Certificates referred to in Section 3.02(b) with respect to the Closing Date. SECTION 3.02. Conditions Precedent to the Obligations of the Lessee on the Closing Date. The obligations of the Lessee to take the actions contemplated hereby on the Closing Date shall be subject to the fulfillment to the satisfaction of, or waiver by the Lessee prior to or on the Closing Date of, the following conditions precedent (except that the obligations of the Lessee shall not be subject to the performance or compliance of the Lessee): 11 16 (a) Authorization, Execution and Delivery of Operative Documents. The documents listed in Section 3.01(d) to be delivered on the Closing Date shall have been duly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect on the Closing Date, and the Lessee shall have received an executed counterpart of each such document of which an executed counterpart shall have been delivered to the Participants and a copy of each such document of which a copy shall have been delivered to the Participants. (b) Owner Participant Certificates. The Lessee shall have received (i) an Officer's Certificate of the Owner Participant confirming that (A) the representations and warranties of the Owner Participant contained in the Operative Documents are true and correct on and as of the Closing Date as though made on and as of the Closing Date, and (B) each Operative Document to which the Owner Participant is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Participant, enforceable against the Owner Participant in accordance with its terms; and (ii) such evidence as to the due authority of the Owner Participant to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Lessee shall reasonably request. (c) Owner Trustee Certificates. The Lessee shall have received (i) an Officer's Certificate of the Owner Trustee confirming that (A) the representations and warranties of the Owner Trustee contained in the Operative Documents are true and correct on and as of the Closing Date, and (B) each Operative Document to which the Owner Trustee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Trustee; and (ii) such evidence as to the due authority of the Owner Trustee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Lessee shall reasonably request. (d) Legal Opinions. The Lessee shall have received opinions addressed to it of the counsel specified in clauses (ii), (iii), (iv), and (v) of Section 3.01(i)(A). (e) Payment of Lessor's Cost. The Participants shall have paid to Lessee an amount equal to Lessor's Cost of the Equipment. (f) Closing Date. The Closing Date shall occur on or before the date specified in Section 3.01(j). (g) Appraisal. On or before the Closing Date, the Lessee shall have received a copy of the Appraisal for the Equipment. (h) Illegality. No change shall have occurred after the Business Day immediately prior to the date of execution by the Lessee of the Participation Agreement in 12 17 Applicable Laws that, in the opinion of the Lessee or its counsel, would make it illegal for the Lessee to participate in any of the transactions contemplated by the Operative Documents. (i) Filings and Recordings. All filings, recordings and other actions reasonably requested by the Lessee shall have been duly made or taken. (j) Tax Assumption Change. No notice of a Tax Assumption Change shall have been given by the Owner Participant to the Lessee pursuant to Section 10.04 if the present value of the Basic Rent (such present value to be computed in accordance with the methodology used by the Lessee in evaluating its participation in the transactions contemplated by this Participation Agreement and based on the full Interim Term and Basic Term) would, as adjusted as set forth in such notice, increase by more than 50 basis points (0.50%). If the Lessee declines to close because of this condition, the Lessee shall, notwithstanding Section 9.01 hereof, pay all Transaction Expenses. (k) Reserved (l) Withholding Taxes. The Participants shall have provided such forms and certificates as are necessary to establish that they may receive payments under the Operative Documents without withholding of Tax under Applicable Law. ARTICLE IV Representations and Warranties SECTION 4.01. Representations and Warranties of the Lessee. The Lessee represents and warrants as follows: (a) Corporate Organization. The Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power, authority and legal right to own or hold under lease its properties and to enter into and perform its obligations under the Operative Documents to which it is a party and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the failure to be so qualified would have a Material Adverse Effect on the Lessee. (b) Due Authorization, Non-Contravention, etc. The execution, delivery and performance of the Operative Documents to which the Lessee is a party have been duly authorized by all necessary corporate action, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of any Organic Document or Contractual Obligation of the Lessee or any Applicable Law. 13 18 (c) Governmental Action. No Governmental Action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution or delivery by the Lessee of the Operative Documents to which it is a party and no Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the due performance by the Lessee of its obligations under the Operative Documents to which it is a party except for Governmental Actions, notices or filings as have been duly obtained or made and are in full force and effect. There is no proceeding pending or, to the best knowledge of the Lessee, threatened which seeks, or may reasonably be expected, to rescind, terminate, modify or suspend any such Governmental Action. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940. (d) Validity. The Operative Documents to which the Lessee is a party have been duly authorized, executed and delivered by the Lessee and each constitutes the legal, valid and binding obligation of the Lessee, enforceable in accordance with their respective terms. (e) Litigation. Except as disclosed in any Disclosure Document, there is no pending or, to the best knowledge of the Lessee, threatened litigation, action, arbitration or proceeding affecting the Lessee or any of the Equipment or any of its properties, assets or revenues which is reasonably likely to have a Material Adverse Effect on the Lessee. (f) Compliance with Applicable Laws. The Lessee is in compliance with all Applicable Laws and Governmental Actions the failure to comply with which would be reasonably likely to have a Material Adverse Effect on the Lessee. (g) Financial Statements and Condition. The financial statements of the Lessee contained in the most recent Form 10-K and Form 10-Q provided to the Participants are complete and accurate in all material respects. Except as disclosed in its Disclosure Documents, there has been no material adverse change in the Lessee's business, assets, operations or condition (financial or otherwise) since the date of its most recent audited financial statements prior to the Closing Date. (h) Environmental Matters. The Lessee: (i) has not violated any Environmental Law or released any Hazardous Substance; (ii) is not aware of any events, conditions or circumstances involving Hazardous Substances; and, 14 19 (iii) is not aware of any claim or investigation, pending or threatened, based on or related to any Environmental Law, that could reasonably form the basis for a claim by any party which would, if adversely determined: (x) have a material adverse effect on the value or operating condition of any Production Unit; (y) result in the attachment of a lien to any Item or otherwise have a material adverse effect on the Owner Trustee's or Indenture Trustee's rights with respect to any Item; or (z) have a Material Adverse Effect on the Lessee. (i) Title. On the Closing Date, all Uniform Commercial Code financing statements and other documents (other than any Operative Documents), if any, or memoranda in respect thereof, necessary or advisable to establish and protect the Owner Trustee's right, leasehold title and interest in and to the Equipment to be transferred to it and to perfect (on a first priority basis, subject to Permitted Liens) for the benefit of the Indenture Trustee and the Loan Participants the security interest in the Indenture Estate will have been duly executed by the Lessee and the Owner Trustee and filed or recorded or delivered to the Indenture Trustee's Counsel for filing or recording. Upon delivery of any Equipment by the Lessee pursuant to the Headlease, the Owner Trustee will thereupon have leasehold title to such Equipment under the Headlease free and clear of all Liens other than Permitted Liens (and the Lessee agrees to defend such rights against any and all Persons whomsoever). Lessee has, immediately prior to entering into the Transactions, good and marketable title to the Equipment and has, except as disclosed on Exhibit 4.01(i), good and marketable title to the land comprising or underlying each Plant Site. (j) Equipment. On the Closing Date, the Equipment will be in good operating condition and repair (except for Equipment being repaired or upgraded in the ordinary course of business), will be adequate for the uses for which it is intended and will comply in all material respects with Applicable Law. No Item of such Equipment will be real property or a fixture. (k) No Public Offering. Neither the Lessee nor any Person acting on its behalf has directly or indirectly offered or sold the Loan Certificates or the beneficial interest in the Owner Participant Trust Estate or any interest in the Equipment or the Lease, or any securities similar thereto, or has otherwise approached or negotiated with any Person with respect thereto, so as to require the registration of any "security" offered or sold in connection 15 20 with the transactions contemplated hereby under Section 5 of the Securities Act of 1933, as amended. (l) No Prohibited Transaction. None of (I) the execution and delivery of the Operative Documents and the consummation of the transactions contemplated thereunder, nor (II) the making of the Secured Loans evidenced by the Loan Certificates and the issuance of the Loan Certificates, nor (III) the acquisition by the Owner Participant of the beneficial interest in the Trust Estate, will involve any non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code (the representation in this sentence being made in reliance upon and subject to the accuracy of the representations contained in or made by the Participants in Sections 4.02(f) and 4.04(b)). (m) Chief Executive Office. The chief executive office (as such term is used in Article 9 of the UCC) of the Lessee is located at 300 Constitution Drive, Menlo Park, California 94025. (n) Location of Equipment. On the Closing Date, each Item will be at a Plant Site of Lessee in San Mateo County, California or Wake County, North Carolina. (o) Taxes. All Taxes, if any, due and payable on or prior to the Closing Date in connection with the execution, delivery, recording, and filing of the Operative Documents and in connection with the consummation of the transactions contemplated by the Operative Documents have been paid in full. The Lessee has paid California sales tax reimbursement (or California use tax) on the Equipment located in California. (p) Appraisal. All written information with respect to the Equipment supplied by Lessee to, and expressly relied on by, the Appraiser in connection with the Appraisal was accurate at the time given and will remain accurate on the Closing Date. The Lessee and the Participants agree that the written information referred to in the foregoing sentence includes only the written information described in Exhibit 8.02(h), and that the Lessee is not otherwise responsible for the Appraisal or its conclusions. (q) Location of Items. As of the Closing Date each Item of Equipment is in the location described in the financing statements filed pursuant to Section 3.01(g). SECTION 4.02. Representations and Warranties of the Owner Participant. The Owner Participant represents and warrants with respect to itself, as follows: (a) Organization. It is a corporation, duly organized and validly existing under the laws of the State of Oregon, and has the power and authority to enter into and perform its obligations under the Operative Documents to which it is a party. 16 21 (b) Due Authorization, Non-Contravention, etc. The execution, delivery and performance of the Operative Documents to which it is a party have been duly authorized by all necessary corporate action, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of any of its Organic Documents or Contractual Obligations or any Applicable Law. (c) Validity. The Operative Documents to which it is a party have been duly executed and delivered by, and each constitutes the legal, valid and binding obligation of, the Owner Participant, enforceable in accordance with its terms. (d) Securities Acts; Brokers. Neither the Owner Participant nor any Person acting on its behalf has directly or indirectly offered or sold the Loan Certificates or any interest in the Equipment or the Lease, or any securities similar thereto, or has otherwise approached or negotiated with any Person with respect thereto, so as to require the registration of any security offered or sold in connection with the transactions contemplated hereby under Section 5 of the Securities Act of 1933, as amended. It is acquiring its interest in the Equipment for its own account for investment and not with a view to, or for sale in connection with, any distribution; provided, that the disposition of its properties shall at all times be and remain within its control. Except for Trinity Advisors Incorporated, it has not retained or employed any broker or finder to act on its behalf in connection with the transactions contemplated by the Operative Documents and has not authorized any broker or finder retained or employed by any other Person so to act. (e) Lessor Liens. The Equipment is free of Lessor Liens Attributable To Owner Participant. (f) ERISA. No part of the funds to be used by it to acquire any interest in the Equipment constitutes assets of any Benefit Plan. (g) Net Worth. The general partner Owner Participant has a Tangible Net Worth or combined capital and surplus of at least $50,000,000. SECTION 4.03. Representations and Warranties of the Indenture Trustee. The Indenture Trustee in its individual capacity represents and warrants to each of the other parties hereto that: (a) Corporate Organization. It is a national banking association duly organized and validly existing in good standing under the laws of the United States of America and has all requisite power and authority to execute, deliver and perform its obligations under this Agreement and the Indenture. 17 22 (b) Due Authorization. This Agreement and the other Operative Documents to which it is party have been executed and delivered by one of its officers who is duly authorized to execute and deliver such Operative Documents on its behalf. (c) Non-Contravention. Neither the execution and delivery by the Indenture Trustee of this Agreement or the other Operative Documents to which it is party, nor the authentication by it of the Loan Certificates, nor the consummation by it of the transactions contemplated hereby or thereby nor the compliance by it with any of the terms or provisions thereof will contravene any Utah or Federal applicable law governing the banking or trust powers of the Indenture Trustee or any judgment or order applicable to or binding on it, or contravene or result in any breach of, or constitute any default under, its Organic Documents or Contractual Obligations to which it is a party or by which any of its properties may be bound. (d) Approval. Neither the execution and delivery by the Indenture Trustee of this Agreement and the other Operative Documents to which it is or is to be a party, nor the performance by it of any of the transactions contemplated hereby or thereby, require the consent or approval of, the giving of notice to, the registration with, or the taking of any other action in respect of, any Utah or Federal Governmental Authority or agency governing the banking or trust powers of the Indenture Trustee. SECTION 4.04. Representations and Warranties of Loan Participants. Each Loan Participant, as to itself only, represents and warrants as follows: (a) Loan Certificates for Investment Only. It is acquiring the Loan Certificates in the ordinary course of its banking business. (b) ERISA. No part of the source of funds to be used by it to purchase the Loan Certificates constitutes assets of any Benefit Plan. (c) Resale. The Loan Certificate to be issued to it pursuant to the Indenture is being acquired by it with no present intent to make any resale or distribution thereof which would require registration under the securities Act of 1933 and it will not offer or sell any Loan Certificate in a manner which would violate or require registration under the Securities Act of 1933, as amended. SECTION 4.05. Representations and Warranties of the Owner Trustee. The Owner Trustee in its individual capacity represents and warrants to each of the other parties hereto that: (a) Organization. It is a national banking association duly organized and validly existing in good standing under the laws of the United States of America and has all 18 23 requisite corporate power and authority to execute, deliver and perform its obligations under the Trust Agreement and (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) has all requisite corporate power and authority as Owner Trustee to execute and deliver the other Operative Documents to which it is or is to be a party. (b) Due Authorization. It, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, has taken all corporate action necessary to authorize the execution and delivery by it of the Operative Documents to which it is a party, and each Operative Document executed by it in its individual capacity and (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) each Operative Document executed by it in its capacity as Owner Trustee has been executed and delivered by one of its officers who is duly authorized to execute and deliver such Operative Document on its behalf in either such capacity. (c) Non-Contravention. Neither the execution and delivery by it, either in its individual capacity or (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, of any of the Operative Documents to which it is a party, nor the consummation by it of the transactions contemplated thereby nor compliance by it with any of the terms or provisions thereof will contravene any judgment or order binding on it, or contravene or result in any breach of its Organic Documents or any Connecticut or Federal law governing its banking or trust powers. (d) Approval. Neither the execution and delivery by it, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, of each of the Operative Documents to which it is a party, requires the consent or approval of or the giving of notice to, the registration with, or the taking of any other action in respect of, any Connecticut or Federal Governmental Authority governing the banking or trust powers of the Owner Trustee. (e) Location. The chief place of business (as such term is used in Article 9 of the Uniform Commercial Code) of the Owner Trustee is in Boston, Massachusetts (and it hereby agrees to provide notice to the Lessee, the Indenture Trustee and the Participants of any change in the location of its chief place of business within thirty days of such change). (f) Title. On the Closing Date the Owner Trustee will have whatever interest in the Owner Participant Trust Estate and whatever rights to and interests in the Lease, the Lease Supplements and the Headlease as were granted or conveyed to it, free and clear of any Lessor Liens Attributable To Owner Trustee in its individual capacity. 19 24 ARTICLE V Covenants SECTION 5.01. No Lessor Liens. Each of the Owner Participant and the Owner Trustee (in its individual capacity) agrees, as to itself only, that it shall not directly or indirectly create, incur or suffer to exist any Lien on, or disposition of its interest in, any Item or any portion thereof that results from either (x) claims against such Person not related to the Transactions or (y) an affirmative act of such Person to create such a Lien or disposition that is neither consented to by the Lessee and the Indenture Trustee nor taken in connection with any Lease Event of Default nor, in the case of the Owner Trustee, expressly directed by the Owner Participant pursuant to the terms of the Trust Agreement (all such Liens being referred to herein as "Lessor Liens" and all such Liens which result from acts of a Person or claims against a Person being deemed "Attributable To" such Person). Each of the Owner Participant and the Owner Trustee (in its individual capacity) agrees that it will, at its own cost and expense, with respect to any Lessor Lien Attributable To it: (i) promptly take such action as may be necessary duly to discharge such Lessor Lien, (ii) make restitution to and hold harmless each other Indemnified Person from and against any costs or expenses (including legal fees and expenses) incurred as a result of the imposition or enforcement of any such Lessor Lien, and (iii) make restitution to each Certificateholder of any reduction in the amount payable out of the Indenture Estate to such Certificateholder under any Loan Certificate. SECTION 5.02. Further Assurances, etc.. (a) Lessee. The Lessee will, at its expense, cause to be promptly and duly taken, executed, acknowledged or delivered all such further acts, conveyances, documents and assurances as the Indenture Trustee or any Participant may, from time to time, reasonably request in order more effectively to carry out the intent of any of the Operative Documents and the Transactions. Without limiting the generality of the foregoing, the Lessee shall furnish to the Indenture Trustee such continuation statements, duly and properly completed, as shall be necessary to preserve and maintain the perfection of the Uniform Commercial Code financing statements originally filed pursuant to Section 3.01(g). (b) Indenture Trustee. Upon the request of the Lessee, and provided that no Lease Event of Default exists and is continuing, the Indenture Trustee shall, if it is able to do so based on information in its possession or provided to it by Lessee, certify to any party proposing to provide financing to Lessee that the Items listed on the Lease Supplements constitute the only tangible personal property of Lessee included in the Indenture Estate. The Indenture Trustee shall, within five Business Days of receipt thereof, execute and return to the Lessee for filing, or itself file at Lessee's expense, any financing statements or other documentation required pursuant to the Operative Documents to perfect the interests of the 20 25 Lessor and the Indenture Trustee, including pursuant to Sections 9.01, 9.05 and 18.01 of the Lease. (c) Owner Trustee. Upon the request of the Lessee, and provided that no Lease Event of Default exists and is continuing, the Owner Trustee shall, if it is able to do so based on information in its possession or provided to it by Lessee, certify to any party proposing to provide financing to Lessee that the Items listed on the Lease Supplements constitute the only tangible personal property of Lessee included in the Owner Participant Trust Estate or covered by the Headlease and the Lease. The Owner Trustee shall, within five Business Days of receipt thereof, execute and return to the Lessee for filing, or itself file at Lessee's expense, any financing statements or other documentation required pursuant to the Operative Documents to perfect the interests of the Lessor and the Indenture Trustee, including pursuant to Sections 9.01, 9.05 and 18.01 of the Lease. (d) All Participants. Following the completion of the tagging required by Section 12.02 of the Lease, all Participants agree, at Lessee's request and expense, (i) to substitute for the Schedules appended to the Lease, Headlease, and Indenture (or supplements thereto) revised Schedules showing the tag number assigned to each Item involved in the Transactions, and (ii) to amend the financing statements filed on or prior to the Closing such that the amended financing statements reference each Item subject to a security interest in favor of the Owner Trustee or the Indenture Trustee by tag number. SECTION 5.03. Lessee To Defend Rights of Owner Trustee. The Lessee covenants to the Owner Trustee that it will, at all times, at its own cost and expense, warrant and defend the rights of the Owner Trustee to the Equipment against any Liens (other than Permitted Liens), claims and demands of or against the Lessee and all other Persons claiming through the Lessee. SECTION 5.04. Reports. The Lessee will furnish or cause to be furnished to the Indenture Trustee and each Participant: (a) within 105 days after the close of each fiscal year of the Lessee, a certificate of the Lessee, signed by an officer of the Lessee, to the effect that the signer has reviewed, or caused to be reviewed by persons under his or her supervision, this Agreement and the Lease and has made, or caused to be made under his or her supervision, a review of the transactions and condition of the Lessee during the preceding fiscal year, and that such review has not disclosed the existence at the date of such certificate, nor does the signer have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes a Lease Event of Default or, if any such condition or event exists, specifying the nature and period of existence thereof and what action the Lessee has taken, is taking or proposes to take with respect thereto; and (b) from time to time such other information as the Indenture Trustee or any Participant may reasonably request, subject to appropriate provisions regarding confidentiality. 21 26 SECTION 5.05. Merger, Consolidation, etc., of Lessee. The Lessee shall not consolidate or merge with or into any Person or sell, transfer, convey or lease all or substantially all its properties or assets as an entirety to any Person, unless: (a) the successor entity formed by such consolidation or into which it is merged or that acquires such assets shall be organized under the laws of the United States of America, a state thereof or the District of Columbia, shall be authorized under all Applicable Laws to operate the Equipment and perform under the Operative Documents to the same extent as Lessee, and, if the successor entity is not the Lessee, the successor entity shall expressly assume, by an agreement executed and delivered to the Owner Trustee, in form reasonably satisfactory to the Indenture Trustee and the Owner Participant, the due and punctual performance of each covenant and condition of the Operative Documents to be performed or observed by the Lessee; (b) such successor entity shall, after giving effect to such transaction, have a Tangible Net Worth of not less than the greater of (i) the Tangible Net Worth of the Lessee as shown on the financial statements of Lessee contained in its most recent Form 10-K or Form 10-Q provided to the Participants prior to the Closing Date, or (ii) 75% of the Tangible Net Worth of Lessee immediately prior to such consolidation, merger, sale, transfer, conveyance or lease; (c) there shall be no Lease Event of Default after giving effect to such merger; (d) all filings shall have been made that are necessary or desirable to preserve the interests of the Participants in the Equipment; and (e) the Lessee shall have delivered to the Owner Trustee, the Indenture Trustee and each Participant an Officer's Certificate and, with respect to clause (a) above, an opinion of counsel satisfactory to the Owner Trustee, the Indenture Trustee and each Participant, stating that such consolidation, merger, sale, conveyance, transfer or lease, and the assumption agreement to the extent required by clause (a) above, comply with this Section 5.05, that all conditions precedent relating to such action have been complied with and that the assumption agreement is valid, binding and enforceable. Upon any such consolidation, merger, sale, conveyance, transfer or lease in accordance with this Section 5.05, the successor entity formed by such consolidation or into which the Lessee shall be merged or to which such sale, conveyance, transfer or lease shall be made shall succeed to, and be substituted for, and may exercise every right and power and shall be subject to each and every obligation of, the Lessee under the Operative Documents to which it is a party with the same effect as if such successor corporation had been named as the Lessee therein and in the event of any such sale, conveyance, transfer or lease, the transferor Lessee shall be discharged from all liability under the Operative Documents. 22 27 SECTION 5.06. Financial Statements. (a) Lessee. The Lessee shall provide to each Participant copies of its annual audited consolidated financial statements within 105 days of its fiscal year end, and unaudited quarterly financials within 60 days of the end of its first three fiscal quarters. Delivery to a Participant of the Lessee's Form 10-K (along with the Lessee's Annual Report) or Form 10-Q shall satisfy such annual or quarterly requirement as to such Participant. (b) Owner Participant. On an annual basis, Deutsche Bank AG may provide a written request to the Owner Participant to furnish Deutsche Bank AG (on behalf of itself and Bayerische Vereinsbank AG) copies of Owner Participant's unaudited financial statements and, to the extent available, the audited financial statements of the closest (in the chain of ownership) direct or indirect parent or partner of the Owner Participant which is regularly audited. The Owner Participant shall not unreasonably withhold compliance with any such request; provided, however, the failure of the Owner Participant to provide any such financial statements shall not constitute an Indenture Default or Indenture Event of Default. Deutsche Bank AG and Bayerische Vereinsbank AG will hold confidential all such financial statements as if such financial statements were covered by Section 14.03 hereof (for which purposes, however, disclosure would be with the consent of the Owner Participant (not the Lessee or the Lessor). SECTION 5.07. Trust Agreement. The Owner Trustee and the Owner Participant agree that (unless a Lease Event of Default shall have occurred and be continuing) until expiration or earlier termination of the Lease, they will not terminate the Trust Agreement without the prior written consent of the Lessee. The Owner Trustee and the Owner Participant further agree that, until the discharge of the Indenture, they will not, except as provided in Section 4.10 of the Indenture, amend or terminate the Trust Agreement without the prior written consent of the Indenture Trustee. SECTION 5.08. Advertising; Trademarks. Each Participant agrees that it will not advertise or publish the fact that it has furnished financing to, or otherwise entered into the transactions contemplated hereby with, the Lessee without first obtaining the written consent of the Lessee. Notwithstanding any other provision of any Operative Document, no Participant will have any right to use any patent, proprietary technology or trade secret of Lessee or any trademark or trade name of, or otherwise refer to, the Lessee or Lessee's Agent in any promotion or publication without first obtaining the written consent of such Person. For the avoidance of doubt, any software or license rights furnished to the Lessee by the manufacturer of an Item in connection with the acquisition or upgrade of such Item by the Lessee and necessary to operate such Item in the manner in which it was designed, as conveyed to the Lessor by Section 1.04 of the Headlease, do not constitute patents, proprietary technology or trade secrets of the Lessee subject to this Section 5.08. 23 28 SECTION 5.09. Involuntary Proceeding. Each Participant and the Indenture Trustee agrees that it will not commence or join in any proceeding under the Federal Bankruptcy Code to commence a case under Section 303 of the Federal Bankruptcy Code against the Owner Participant Trust Estate. Nothing contained herein shall be deemed to preclude any Participant or the Indenture Trustee from filing any claim against the Owner Participant Trust Estate in any such proceeding commenced against the Owner Participant Trust Estate. SECTION 5.10. ERISA. Loan Participants. Each Loan Participant covenants and agrees that it will not sell, exchange or transfer any Loan Certificate unless the proposed purchaser or transferee of such Loan Certificate has represented to such Loan Participant, the Owner Participant, and the Lessor as to each source of funds to be used by it to purchase such Loan Certificate to the same effect as Section 4.04(b). SECTION 5.11. Withholding Taxes. (a) Indemnity by Loan Participants. Each Loan Participant agrees to indemnify (on an After-Tax Basis) and hold harmless the Indenture Trustee, the Lessee, the Owner Trustee and the Owner Participant against any United States withholding taxes and related interest and penalties which the Indenture Trustee fails to withhold on payments to such Loan Participant solely as a result of the invalidity of any certificate or form provided by such Loan Participant to the Indenture Trustee hereunder or pursuant to Section 9.12 of the Indenture. Any amount payable hereunder shall be paid within 30 days after receipt by a Loan Participant of a written demand thereof. (b) Agreement of Indenture Trustee. The Indenture Trustee agrees that it shall (i) act as withholding agent and, in connection therewith, whenever any present or future Taxes are required to be withheld with respect to any amounts paid by the Indenture Trustee in respect of the Loan Certificates, it shall withhold such amounts and timely pay the same to the appropriate Governmental Authority in the name of and on behalf of the Loan Participants, (ii) file any necessary withholding tax returns or statements when due, and (iii) deliver to each Loan Participant appropriate documentation showing the payment of such amounts, together with such additional documentary evidence as such Loan Participants may reasonably request from time to time. The Indenture Trustee agrees that it shall file any other information reports as it may be required to file under United States law. If the Indenture Trustee is required to withhold in accordance with the first sentence of this Section 5.11(b) but fails, with respect to any Loan Participant, to withhold and pay over any such Taxes to the appropriate Governmental Authority, and a claim is made for such Taxes by such Governmental Authority, the Indenture Trustee shall make a written demand for payment from 24 29 the Lessee with respect to such Taxes as are subject to indemnification under Article VII of the Participation Agreement, and, upon receipt of an adequate indemnity from the Lessee, shall, with respect to Taxes that are not subject to indemnification under such Article VII take all reasonable steps permitted by law (other than filing of a lawsuit) to recover such Taxes from such Loan Participant, including withholding the amount of such Taxes from subsequent distributions, if any, to such Loan Participant. To the extent the Indenture Trustee receives any amount from the Lessee for indemnification of such Taxes with respect to a particular Loan Participant which are not indemnifiable by the Lessee pursuant to Article VII and the Indenture Trustee thereafter recovers from such Loan Participant (including by withholding from subsequent distributions to such Loan Participant) the Indenture Trustee shall reimburse the Lessee therefor. SECTION 5.12. Payment of Lessor Paid Amounts. The Owner Participant agrees, solely for the benefit of the Lessee, to satisfy the Lessor's obligation under Section 3.03 of the Lease to make certain payments on the Loan Certificates by paying to the Indenture Trustee on behalf of the Owner Trustee such amounts in the manner provided by Section 3.04 of the Lease. SECTION 5.13. Auxiliary Payments. If an Auxiliary Payment is payable under Section 5 or Section 6 of any Loan Certificate, the Owner Trustee shall, upon receipt of satisfactory indemnification from the Lessee and at the direction of the Lessee, elect under Section 5(f) or Section 6(f), as applicable, of the Loan Certificate to require the transfer of such Loan Certificate. All costs and expenses incurred by the Owner Trustee in connection with any such election, repayment or transfer, including any payment equal to the difference between the price payable to the Certificateholder pursuant to Section 5(f) or Section 6(f) of the Loan Certificate, and the amount to be paid by the proposed transferee, shall be included in Supplemental Rent. SECTION 5.14. Covenants Relating to Period While Loan Certificates are Outstanding. The following covenants are for the benefit of the Loan Participants and Certificateholders, and shall be of no force and effect if all Loan Certificates have been redeemed or retired or if a Majority in Interest of Certificateholders shall have waived the application of this Section 5.14. (a) Substitutions. In addition to the requirement of Section 9.05(a) of the Lease, if Lessee on a consolidated basis, reports on the financial statements referred to in Section 5.06(a) hereof net operating losses (excluding any "restructuring charges" identified as such) in two consecutive quarters (such losses, the "Reporting Trigger"), and for so long as Lessee continues to report such quarterly net operating losses, the Lessee will concurrently with or in advance of any substitution of Items perform the steps required by Sections 9.05 (a)(ii), (iii) and (iv) of the Lease. 25 30 (b) Appraisal. In addition to the requirements of Section 9.05(d) of the Lease, (i) if the sum of the Lessor's Cost of the replaced Items (measured according to and with the exclusions of Section 9.05(d)) exceeds five million dollars since the later of the Closing Date or the last appraisal, the Lessee shall obtain and supply to the Participants the appraisal specified in Section 9.05(d); and (ii) if Equipment with a cumulative Lessor's Cost in excess of 25% (determined without regard to the conditions described in clauses (i) through (iv) of Section 9.05(d)) of aggregate Lessor's Cost is substituted, Lessee shall obtain, and shall supply to the Participants, an appraisal in respect of such substituted Equipment of a scope and to the effect required by Section 9.05(d) of the Lease, but which will include an on-site inspection by the appraiser. (c) Subleasing. If the Reporting Trigger occurs, and for so long as Lessee continues to report quarterly net operating losses on such Forms 10-K and 10Q, the consent of a Majority in Interest of Certificateholders will be required for any sublease other than to an Affiliate of the Lessee that is consolidated on the Lessee's balance sheet in the financial statements referred to in Section 5.06(a) hereof. SECTION 5.15. Determinations. On each "LIBOR Determination Date" Deutsche Bank AG shall determine LIBOR (as defined in the Loan Certificates) and shall notify the Owner Trustee, the other Loan Participants, the Indenture Trustee and the Lessee thereof in writing. Upon being notified of LIBOR, the Indenture Trustee shall determine (i) the Debt Rate, (ii) the total amount of principal and interest payable under the Loan Certificates on the Interest Payment Date for such Interest Period and (iii) the total amount of Rent payable under the Lease on the corresponding Rent Payment Date, and shall notify the Owner Trustee, the Lessee and the Loan Participants thereof in writing. ARTICLE VI General Indemnity SECTION 6.01. General Indemnity. The Lessee does hereby assume liability for, and (whether or not any of the transactions contemplated hereby shall be consummated) shall indemnify, protect, save and hold harmless and keep whole each Indemnified Person, on an After-Tax Basis, from and against, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, judgments, costs, expenses and disbursements (including legal fees and expenses and costs of investigation) of whatever kind and nature that may be imposed on, incurred by or asserted against any Indemnified Person relating to or arising out of: 26 31 (A) the Operative Documents or the transactions contemplated by the Operative Documents (including, without limitation, the performance or enforcement of all obligations of the Lessee under the Operative Documents and payments made pursuant thereto or other transactions contemplated thereby and any claims or penalty arising out of a violation of applicable law with respect thereto (including ERISA and securities laws)), (B) the manufacture, financing, construction, purchase, acceptance, possession, rejection, control, ownership, delivery, nondelivery, use, operation, leasing, subleasing, condition, maintenance, repair, sale, abandonment, redelivery or other disposition of, or the imposition of any Lien (or incurrence of any liability to refund or pay over any amount as a result of any Lien) on, the Equipment or any interest therein, including any liabilities imposed by or under Environmental Laws (including all investigations, inspections and reinspections, clean-up costs and expenses, except to the extent such costs and expenses result from investigations or clean-ups initiated or undertaken by an Indemnified Person without demand or compulsion by a Governmental Authority or other third party), (C) any claim or penalty related to the Equipment arising out of violations of Applicable Law, or in tort (strict or otherwise) or arising from the active or passive negligence of an Indemnified Person, latent or other defects, whether or not discoverable by any Person, loss of or damage to any property or the environment, death of or injury to any person, (D) any claim for patent, trademark or copyright infringement relating to the Equipment or its use, and (E) all costs and expenses incurred by any Indemnified Person in connection with any Lease Event of Default, any Event of Loss, any redemption, refunding, prepayment or transfer of the Loan Certificates made in accordance with the Operative Documents, or any transfer of all or any part of the right, title and interest of the Owner Trustee or the Owner Participant in the Equipment or in, to and under any of the Operative Documents; provided, however that the Lessee shall not be required pursuant to this Section 6.01 to assume, or to provide indemnity for: (a) with respect to any Indemnified Person, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement to the extent resulting from such Indemnified Person's own gross negligence or wilful misconduct (other than gross negligence or wilful misconduct imputed to such 27 32 Indemnified Person by reason of its interest in the Equipment) or solely from such Indemnified Person's breach of any of its representations or warranties or covenants contained in any Operative Document; (b) with respect to the Owner Trustee or the Owner Participant, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement in connection with (i) a voluntary sale, lease or other disposition by either such Person of its rights in the Equipment or any part thereof or any right to or interest in the Operative Documents, other than a sale, lease or disposition contemplated by Articles VII, IX, XIV, XVI, and XVII of the Lease or by the Indenture, or (ii) an involuntary transfer in connection with any bankruptcy or other proceeding for the relief of debtors with respect to the Owner Participant or any Affiliate; for purposes of this Section, any increase in Taxes imposed on a transferee under clauses (i) or (ii) (other than a transferee in a transfer resulting from a Lease Event of Default) shall be treated as a loss in connection with such transfer; (c) with respect to any Indemnified Person, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement arising out of acts or events involving any Equipment and occurring after redelivery of such Equipment in accordance with the Lease (other than a redelivery pursuant to Article XIV thereof) and payment of all Rent then due and payable; or (d) with respect to any Indemnified Person, any Taxes, whether or not otherwise indemnified for, excluding from this clause (d) taxes or other penalties that may be imposed on the Owner Participant under Section 4975 of the Code or Parts 4 or 5 of Subpart B of Title I of ERISA as a result of the execution and delivery by the Owner Participant of this Agreement or any other Operative Document and the consummation of the transactions contemplated thereby on the Closing Date or the making or holding of its equity investment or in taking any other action requested by Lessee. The indemnities set forth in this Section 6.01 shall not constitute a guarantee, representation or warranty to any Indemnified Person of or as to the value or useful life of any Equipment, any guarantee, representation or warranty that any debt incurred by the Owner Participant to finance its Lessor's Cost will be paid or any guarantee, representation or warranty that any debt evidenced by the Loan Certificates will be paid or any other form of recourse against Lessee for the payment of any such debt. SECTION 6.02. Subrogation. Upon payment in full of any assumed liability or indemnity pursuant to Section 6.01, so long as no Lease Event of Default or Material Lease Default has occurred and is continuing, the Lessee shall, to the extent of such payment be 28 33 subrogated to any rights of the Indemnified Person in respect of the matter against which such indemnity was given. SECTION 6.03. Claims. (a) Claims Procedure. In case any action, suit or proceeding shall be brought against any Indemnified Person for which such Indemnified Person is entitled to indemnification, such Indemnified Person shall notify the Lessee of the commencement thereof (but the failure to do so shall not relieve the Lessee of its obligation to indemnify such Indemnified Person except to the extent that the Lessee or its insurer is materially prejudiced as a result of such failure). Subject to the rights of insurers under policies of insurance maintained by or for the benefit of Lessee, the Lessee shall have the right to investigate, and, if the Lessee states that, based on the facts and circumstances as then known, it does not intend to take the position that it would not be obligated to so indemnify (with Lessee reserving its right to take a contrary position based on factual circumstances as subsequently learned by the Lessee, which position Lessee will promptly disclose to such Indemnified Person), the right at its sole discretion to defend or compromise (using its reasonable best efforts), any claim for which indemnification is sought under this Article VI, and, at the Lessee's expense, the Indemnified Person shall cooperate with all reasonable requests of the Lessee in connection therewith; provided, however, that the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if (i) such action, suit or proceeding involves the potential imposition of criminal liability on such Indemnified Person or a risk (other than a de minimis risk) of the sale, forfeiture or loss of the Equipment; (ii) a Material Lease Default shall have occurred and be continuing, or (iii) such claim is joined with one or more claims for which Lessee is not obligated to indemnify hereunder and such other claims are not severable from the indemnifiable claim; provided, further, in the event of an action, suit or proceeding contemplated by the preceding provisos, the Lessee may nevertheless participate at its own expense in such action, suit or proceeding. Where the Lessee or its insurers undertake the defense of an Indemnified Person with respect to a claim, no additional (beyond those accrued prior to Lessee's assumption of the defense) legal fees or expenses of such Indemnified Person in connection with the defense of such claim shall be indemnified hereunder unless such fees or expenses were incurred at the request of the Lessee or such insurers. The Lessee shall pay the reasonable out-of-pocket costs, disbursements and expenses (including reasonable legal fees and expenses) in connection with any such action, suit or proceeding (i) which is indemnified by the Lessee under Section 6.01, and which is properly conducted by an Indemnified Person pursuant to the terms of this Section 6.03. Notwithstanding the foregoing, where the Lessee is obligated hereunder to pay the expenses of an Indemnified Person or Indemnified Persons, the Lessee shall nonetheless not be liable for the fees and expenses of more than one counsel for each of (A) the Owner Participant (and its respective successors and assigns), (B) the Owner Trustee (and its respective successors and permitted assigns, agents and servants) and (C) the Indenture Trustee (and its respective successors and permitted assigns, agents and servants). Notwithstanding anything in this Section 6.03 to the contrary, in any action, suit or proceeding 29 34 to which any Indemnified Person is a party, the Lessee shall not enter into any settlement or other compromise with respect to any claim indemnified under Article VI without the prior written consent of the Indemnified Person (which consent will not be unreasonably withheld), unless the Lessee acknowledges in a writing satisfactory to such Indemnified Person such Indemnified Person's right to full indemnification under this Section 6.03 with respect to such claim. (b) Insured Claims. In the case of any Claim indemnified by the Lessee hereunder which is covered by a policy of insurance maintained by or for the benefit of the Lessee, each Indemnified Person agrees to cooperate with the insurers in the exercise of their rights to investigate, defend or compromise such Claim as may be required to retain the benefits of such insurance with respect to such Claim. SECTION 6.04. Tax Savings. If any Indemnified Person shall actually realize any net income tax saving from any amount with respect to which the Lessee has paid such Indemnified Person pursuant to this Article VI, such Indemnified Person shall pay (except to the extent previously taken into account in determining the amount of any payment made by the Lessee pursuant to Section 6.01 or to an Indemnified Person pursuant to this Section) to the Lessee the amount of such saving, and at the time realized shall also pay the amount of any actual net income tax saving to such Indemnified Person resulting from any payment pursuant to this Section; provided, however, that any such amount shall in no event be payable before such time as the Lessee shall have made all indemnity payments then due under the Operative Documents to such Indemnified Person or at a time when a Lease Event of Default shall have occurred and be continuing; provided further, however, that no such payments shall cumulatively exceed the amount of the related indemnity payments, including any amount paid in connection therewith as an indemnity for or on an indemnity payment, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. The Lessee shall indemnify each Indemnified Person on an After-Tax Basis from and against the loss or disallowance of any such net income tax saving. All the determinations under this paragraph shall be made in a manner consistent with the procedures for the determination of "Gross-Up Taxes" as set forth in the definition of After-Tax Basis in Appendix A hereto. 30 35 ARTICLE VII General Tax Indemnity SECTION 7.01. General Tax Indemnity. 7.01.1 General Tax Indemnity. Except as provided in Section 7.01.2, the Lessee agrees to pay, and to indemnify, protect, save and hold each Indemnified Person harmless on an After-Tax Basis from and against, any and all Taxes imposed on or with respect to the Operative Documents, the Transaction, any Item or any part thereof, or the documentation, financing, purchase, acceptance, possession, control, delivery, use, operation, leasing, subleasing, condition, maintenance, repair, sale, abandonment, redelivery or other disposition thereof. 7.01.2 Excluded Taxes. The indemnity provided in Section 7.01.1 shall not extend to any of the following Taxes (the "Excluded Taxes"): (i) Taxes (whether or not imposed by way of withholding) imposed on, based upon or measured by gross or net income (including any minimum Taxes and any Taxes on or measured by items of tax preference), gross or net receipts (in each case other than Taxes in the nature of sales, use, license, property, ad valorem, value-added or rental taxes), capital or net worth, and Taxes that are franchise Taxes or Taxes on doing business; provided, however, that any such Taxes imposed upon or payable by (A) the Indenture Trustee, Owner Trustee or Owner Participant which are withholding taxes on payments made to the Loan Participants in accordance with the terms and conditions of the Loan Certificates, or (B) the Indenture Trustee, Owner Trustee or Loan Participant by reason of an Owner Participant's status as a non-United States person, or pursuant to Section 5.11 hereof, shall not be Excluded Taxes by reason of this subparagraph (i); (ii) any Tax to the extent such Tax is imposed as a result of activities of the Indemnified Person (or an Indemnified Person related thereto) in a taxing jurisdiction that are unrelated to the transactions contemplated by the Operative Documents; (iii) any Tax that results from the Indemnified Person (or an Indemnified Person related thereto) engaging, with respect to any Item or any part thereof, in transactions other than those contemplated by the Operative Documents; 31 36 (iv) any Tax that is a value-added Tax which is in the nature of or in lieu of or in substitution for an income tax; (v) Taxes resulting from the gross negligence or wilful misconduct of the Indemnified Person (or an Indemnified Person related thereto); (vi) Taxes resulting from any voluntary transfer (which, for the avoidance of doubt, does not include a transfer pursuant to the exercise by Lessee of an election or option under Articles VII, IX, or XVII of the Lease) by the Indemnified Person of any interest in any Item or any part thereof or any interest arising under the Operative Documents or any Loan Certificate (in each case, unless a Lease Event of Default shall have occurred and be continuing), or from any involuntary transfer by the Indemnified Person of any of the foregoing interests in connection with any bankruptcy or other proceeding for the relief of debtors with respect to the Owner Participant or any Affiliate; for purposes of this Section, any increase in Taxes imposed on a transferee (other than a transferee in a transfer resulting from a Lease Event of Default) over those that the Lessee is able to demonstrate are those that would have been imposed on the transferor shall be considered Excluded Taxes; (vii) any foreign Taxes imposed with respect to any Item unless such Taxes shall result from the location of such Item or the presence of or payment by the Lessee or any user of an Item in the foreign jurisdiction imposing such Taxes; (viii) any penalties or additions to tax (including interest that is in the nature of a penalty) resulting in whole or in part from a failure of the Indemnified Person to file a return that is timely and proper, unless such failure relates to a matter attributable to the Transaction and such failure was due to a failure of the Lessee timely to (A) supply information required to be supplied by it that was not in the possession of the Indemnified Person, (B) notify the Indemnified Person of such filing requirement, or (C) otherwise fulfill its obligations under this Article VII; (ix) any Tax based on, or measured by, the value of the interest of any Participant in any of the Owner Participant Trust Estate, the Indenture Estate or the Loan Certificates which Tax is imposed by any state or local taxing authority in which such Participant is subject to taxation as the result of transactions unrelated to the transactions contemplated by the Operative Documents; 32 37 (x) any Tax imposed on the Owner Trustee or the Indenture Trustee with respect to, or measured by, any trustee fees for services rendered in its capacity as trustee under the Trust Agreement or the Indenture; (xi) any Tax that is being contested in accordance with the provisions of Section 7.02 to the extent provided therein during the pendency of such contest; and (xii) any Tax attributable to any Item that is imposed with respect to any period after the earlier of (A) the expiration or early termination of the Term with respect to such Item if the Lessee shall have discharged its obligations with respect to such Item and (B) the return of possession of such Item to the Lessor in accordance with the Lease; provided, however, that no Lease Event of Default shall have occurred and be continuing, and provided, further, that the exception set forth in this subparagraph (xii) shall not apply to Taxes relating to events occurring or matters arising prior to such expiration, termination or return. 7.01.3 Credits for Foreign Taxes. If the Lessee makes any payment under Section 7.01 with respect to Taxes payable by an Indemnified Person to any foreign government and such Tax may be claimed as a credit on the United States Federal income tax return of such Indemnified Person, such Indemnified Person shall pay the Lessee an amount (certified to the Lessee by the chief financial officer or similar Responsible Officer of the Indemnified Person) equal to the sum of (i) the amount of such credit that is actually utilized (determined, in the case of years in which limitations apply to the total foreign tax credits available to an Indemnified Person, in accordance with principles set forth in the proviso to the following sentence) and (ii) the actual reduction in Taxes realized by such Indemnified Person as a result of any payment by an Indemnified Person to the Lessee pursuant to this sentence; provided, however, that the aggregate amount payable to the Lessee pursuant to this sentence with respect to any Tax shall not exceed the aggregate amounts previously paid by the Lessee under this Section 7.01 with respect to such Tax, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. To the extent that such Indemnified Person shall lose the benefit of such credit as a result of a loss or credit carryback, an audit adjustment or disallowance, or any similar cause, then such lost benefit shall be treated as a Tax for which the Lessee is obligated to make a payment under this Section 7.01, without regard to the exclusions set forth above in Section 7.01.2; provided, however, that the determination of the extent to which the benefit of such credit is lost shall be made, in the case of Loan Certificate Withholding, on the basis specified in Section 6(e) of the Loan Certificate, and otherwise on the assumption that (x) such credit is utilized prior to foreign tax credits arising out of any lease transaction in which there is a provision that foreign tax credits arising out of such transaction are deemed to be utilized last, (y) such credit is utilized on a pro rata basis with all other foreign tax credits arising out of any lease transaction 33 38 (except any transaction in which there is an express provision that foreign tax credits arising out of such transaction are deemed utilized on a more favorable basis), and (z) such credit is utilized after all foreign tax credits not described in clauses (x) and (y) of this proviso. If an Indemnified Person claims any credit consistent with this paragraph, the Lessee shall furnish such Indemnified Person with any receipts for the related Taxes that were previously received by the Lessee. 7.01.4 Refunds and Other Credits. If any Indemnified Person shall obtain a refund or credit of all or any part of any Taxes paid, reimbursed or advanced by the Lessee, (other than a credit described in Section 7.01.3), such Indemnified Person shall promptly pay to the Lessee the amount of such refund or credit plus the amount of any tax saving actually resulting from any payment pursuant to this sentence; provided, however, that no such payment shall exceed the amount of all prior payments by the Lessee to such Indemnified Person pursuant to this Article VII related to the Taxes that gave rise to such refund or credit. If, in addition to such refund or credit, such Indemnified Person shall receive an amount representing interest on such refund or credit, the Lessee shall promptly be paid that portion of such interest that shall be attributable to Taxes paid, reimbursed or advanced by the Lessee prior to the receipt of such refund or credit. If an Indemnified Person shall realize any actual tax saving (other than a credit described in Section 7.01.3) from any amount with respect to which the Lessee has indemnified such Indemnified Person pursuant to this Article VII, such Indemnified Person shall pay to the Lessee the amount of such tax saving, together with the amount of any actual tax saving resulting from any payment pursuant to this sentence; provided, however, that no such payments shall exceed the amount of all prior payments by the Lessee to such Indemnified Person pursuant to this Article VII related to the Taxes that gave rise to such tax saving, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. Notwithstanding the foregoing, no Indemnified Person shall be required to make any payment to the Lessee until such time as the Lessee shall have made all payments then due under the Operative Documents to such Indemnified Person. The Lessee shall indemnify each Indemnified Person on an After-Tax Basis from and against the loss or disallowance of an amount equal to any refund, credit or tax saving described in this Section which the Indemnified Person has actually paid to Lessee, without regard to the exclusions set forth in Section 7.01.2. 7.01.5 Consolidated Reporting. In the case of any Tax that at any time is required to be reported on a consolidated or combined basis by an Indemnified Person or a Affiliate thereof, the rules governing such consolidated or combined returns shall be taken into account in determining and computing the amount of any indemnity or any payment by or to the Lessee required to be made under this Article VII. 34 39 SECTION 7.02. Contests 7.02.1 Notice of Claims. If any Indemnified Person receives written notice that any claim or assessment for any Tax indemnifiable by the Lessee under this Article VII (an "Article VII Claim") is being or will be made against such Indemnified Person, such Indemnified Person shall, within 15 days, notify the Lessee; provided, that failure to notify the Lessee shall not impair such Indemnified Person's right to indemnification under this Article VII, unless the Lessee's ability to contest such Article VII Claim shall have been effectively precluded by such failure. 7.02.2 Conduct of Contest. If: (A) the Lessee in writing requests an Indemnified Person to contest an Article VII Claim and acknowledges its liability under this Article VII to indemnify for the Tax which is the subject of the Article VII Claim, unless the final determination of such claim clearly articulates a basis for the claim for which Lessee is not liable hereunder; (B) the Lessee agrees to pay on demand the Indemnified Person, on presentation of properly certified and supported invoices, for all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred by the Indemnified Person in connection with contesting such Article VII Claim; (C) the Lessee furnishes the Indemnified Person with a written opinion of Heller, Ehrman, White & McAuliffe (or other independent counsel selected by the Lessee and reasonably satisfactory to the Indemnified Person) to the effect that a reasonable basis exists to contest such Article VII Claim; and (D) a Lease Event of Default described in Section 13(a), (b), (c) or (f) of the Lease has not occurred or is not continuing, then the Indemnified Person shall take such action to contest such Article VII Claim as the Lessee shall reasonably request, or, if the Lessee is permitted by law to contest such Article VII Claim in its own name, such Indemnified Person shall take all reasonable action to cooperate with the Lessee's contest of such Article VII Claim. Without limiting the generality of the foregoing, such contest may include appropriate administrative or judicial appeals, and may include using reasonable efforts to obtain a refund of a Tax that has been paid as a result of the Article VII Claim. Except in the case of a contest carried on by the Lessee in its own name, any contest conducted pursuant to this Section 7.02 shall be controlled by the Indemnified Person (who shall consult in good faith with the Lessee regarding the contest, including the preparation of written submissions). Notwithstanding the foregoing, the Indemnified Person need not contest an Article VII Claim, or may discontinue any such 35 40 contest proceedings, if there is a material risk that any such contest or proceedings will result in the imposition of a Lien upon, or a material risk of the sale, forfeiture or other loss of, any Item (except if the Lessee shall have adequately bonded such Lien or otherwise made provision to protect the interests of such Indemnified Person in a manner reasonably satisfactory to such Indemnified Person). In addition, the Indemnified Person need not contest an Article VII Claim to the United States Supreme Court. 7.02.3 Failure to Contest. An Indemnified Person may refuse to contest an Article VII Claim. If an Indemnified Person fails or refuses to contest, or to permit the Lessee to contest, an Article VII Claim when (i) all of the conditions (A) through (D) of Section 7.02.2 have been satisfied, and (ii) there is no material risk that the contest will result in the imposition of a Lien upon, or a material risk of the sale, forfeiture or other loss of, any Item (or if the Lessee has adequately bonded such Lien or otherwise made provision to protect the interests of such Indemnified Person in a manner reasonably satisfactory to such Indemnified Person), such Indemnified Person shall be deemed to waive payment by the Lessee of any amount that might otherwise be payable by the Lessee under this Article VII in respect of such Article VII Claim. Such Indemnified Person shall promptly pay to the Lessee any amounts theretofore paid by the Lessee with respect to such Article VII Claim, other than reasonable expenses of such contest. SECTION 7.03 Returns. In case any report, statement or return shall be required to be made with respect to any Taxes indemnifiable by the Lessee under this Article VII, the Lessee shall, (i) to the extent required or permitted by law, file such return, statement or report in its own name, and (ii) in the case of any such return, statement or report required to be made in the name of an Indemnified Person, advise such Indemnified Person of such fact and either (A) prepare or cause to be prepared such return, statement or report for filing by such Indemnified Person or (B) where any such return, statement or report must reflect items in addition to Taxes indemnified by the Lessee under this Article VII, provide such Indemnified Person with information sufficient to permit such return, statement or report to be properly made with respect to any such Taxes. If an Indemnified Person prepares the return, statement or report filed (or changes a return, statement or report prepared by the Lessee prior to filing), and the Indemnified Person takes the position in such return, statement or report that any Tax indemnifiable by the Lessee under this Article VII is payable, such return, statement or report shall be deemed a written notice of an Article VII claim for purposes of Section 7.02. Neither the Lessee nor any Indemnified Person shall file a sales or use tax return reporting payments of Rent under the Lease or the payment from the Headlessee under the Headlease as being subject to sales or use tax, except in the event of a Change in Law, unless following a written determination of such Person's tax counsel that there is no reasonable basis for taking such position. 36 41 SECTION 7.04. Payments. 7.04.1 Due Dates for Payments. Subject to Section 7.02, all amounts payable by the Lessee pursuant to this Article VII shall be payable, to the extent not theretofore paid, on written demand therefor by the Indemnified Person (but not more than 10 days before the due date for the payment of the Taxes to which such demand relates). Any amounts payable to the Lessee under this Article VII with respect to a reduction, refund or adjustment in Taxes or a credit shall be paid within 20 days after the filing of the tax return upon which such reduction, refund, adjustment or credit could be claimed by the appropriate Indemnified Person (or could have been claimed by such Person if it had sufficient income). 7.04.2 No Payment Obligation During Lease Event of Default. No amount shall be required to be paid to the Lessee under this Article VII while a Lease Event of Default has occurred and is continuing. SECTION 7.05. Verification. Within 15 days after the Lessee receives any computation from an Indemnified Person pursuant to this Article VII, the Lessee may request that an accountant mutually acceptable to the Lessee and such Indemnified Person shall review such computation. The Indemnified Person shall cooperate with such accountant and supply it with all documentation and records necessary for the accountant to conduct such review; provided that such accountant shall agree in writing satisfactory to the Indemnified Person to maintain the confidentiality of such information. The determination of the accountant shall be final and binding upon the Lessee and the Indemnified Person. The fees and disbursements of such accountant will be paid by the Lessee; provided, however, that such fees and disbursements will be paid by the Indemnified Person if the verification results in an adjustment in the Lessee's favor of five percent or more of the indemnity payment or payments computed by the Indemnified Person. Neither the Indemnified Person nor the Lessee shall be required to disclose its income or franchise tax returns to any Person, other than the accountant retained pursuant to this paragraph. SECTION 7.06. Withholding on Rent.. All payments of Rent shall be made free and clear of, and without reduction for, U.S. or other withholding taxes on such Rent so long as the Lessor is a U.S. person and the Owner Participant is a U.S. corporation or is a U.S. partnership composed entirely of U.S. corporations. 37 42 ARTICLE VIII Special Tax Indemnity SECTION 8.01. Certain Tax Assumptions. The Operative Documents are being entered into on the following United States Federal income tax assumptions ("Tax Assumptions"): (a) The entity created by the Trust Agreement will be treated as a grantor trust or as an agent of the Owner Participant for Federal income tax purposes and the Owner Participant, as owner of or as the principal of the entire trust, will be entitled and required to take into account in computing its taxable income all items of income, gain, loss, deduction and credit with respect to the Equipment. (b) The Lease will constitute a true lease for income tax purposes, the Owner Participant will be treated as the owner and lessor of each Item, and the Lessee will be treated as lessee of each Item. (c) The Owner Participant will be entitled, (i) (x) with respect to the Lessor's Cost of 100% of each Production Unit, other than Polyswitch, as to which such percentage is 94.18%, to cost recovery deductions under Section 168 of the Code, as in effect on the date hereof, in the amounts applicable with respect to "five-year property", computed using a five-year recovery period, the 200% declining-balance method (switching to straight-line) and the half-year convention, resulting in deductions in an amount equal to 20.0% of the Lessor's Cost of each Item in the taxable year of the Owner Participant that includes the Closing Date and 32.0%, 19.2%, 11.52%, 11.52% and 5.76% of the Lessor's Cost of such Item in each of the Owner Participant's five succeeding taxable years, respectively, and (y) with respect to the remaining percentages of Lessor's Cost of each Production Unit, to depreciation deductions under Section 167 of the Code and the asset depreciation range of Section 1.167(a)-11 of the Regulations, as in effect on the date hereof, in amounts applicable with respect to asset class 36.0 (within the meaning of Rev. Proc. 87-56, 1987-2 C.B. 674, as modified and clarified by Rev. Proc. 88-22, 1988-1 C.B. 785), computed using a five-year recovery period, the 150% declining-balance method (switching to straight-line) and the half-year method, assuming zero salvage, resulting in deductions in an amount equal to 15.0% of the Lessor's cost attributable to such Equipment in the taxable year of the Owner Participant that includes the Closing Date and 25.5%, 17.85%, 38 43 16.66%, 16.66%, and 8.33%, in each of the Owner Participant's five succeeding taxable years, respectively (the "Depreciation Deductions"); (ii) to current deductions with respect to interest paid on the Loan Certificates (the "Interest Deductions"); and (iii) to amortization deductions in respect of Transaction Expenses on a straight-line basis over a period consisting of the Interim Term and the scheduled Basic Term (the "Amortization Deductions"). (d) No portion of the Depreciation Deductions will be recaptured prior to the expiration of the Term. (e) The marginal rate of United States Federal income tax for corporations is 35%, the marginal state income tax rate applicable to Owner Participant is 6%, and the permanent marginal rate of income tax applicable to the Owner Participant is 38.90% for each taxable year of the Owner Participant. (f) During fiscal years of the Owner Participant in which the Transaction generates a net loss for Federal income tax purposes, the Owner Participant will be entitled to treat all income and deductions with respect to the Equipment as derived from sources within the United States. (g) The taxable year of the Owner Participant is and will be the calendar year. (h) The Owner Participant will report its income and deductions using the accrual method of accounting for income tax purposes. (i) Prior to the end of the Term, the Owner Participant will not be required to include in its taxable income in connection with the Transactions any amount other than: (i) Basic Rent and Renewal Rent accrued in the amounts and over the periods provided for in the Lease (or, if earlier, on the Rent Payment Date with respect to any such Rent payable on such date), (ii) payments received under Article VI or VII hereof or this Article VIII, 39 44 (iii) any payment by Lessee of an amount specifically designated as interest in connection with a late payment, (iv) any income that is offset by a related current deduction of an expense of the same character for tax purposes not otherwise described in this Section 8.01, (v) any payment of Stipulated Loss Value, Termination Value or any amount determined by reference to Stipulated Loss Value or Termination Value on the date payable in accordance with the terms of the Operative Documents, (vi) any amount paid under the Operative Documents, the calculation of which is specifically determined under the Operative Documents to include an amount designed to hold the Owner Participant harmless against the income tax consequences of the receipt or accrual thereof, (vii) any amount paid pursuant to Article XVII of the Lease, and (viii) insurance proceeds from policies carried by the Owner Participant or any Affiliate thereof, but not required to be maintained by Lessee under the Lease. Notwithstanding anything to the contrary contained herein, the Lessee makes no representation, warranty or covenant with respect to the matters set forth in this Section 8.01 except as specifically set forth in Section 8.02. SECTION 8.02. Tax Representations. Solely for the purpose of this Article VIII, the Lessee represents, warrants and covenants that: (a) Neither the Lessee nor any Lessee Person (as hereinafter defined) will file any federal or state income or franchise tax report or form identifying itself as owner of the Equipment or any portion thereof (except for additions, modifications or alterations that are the property of the Lessee). (b) 100% of each Production Unit, other than Polyswitch, as to which such percentage is 94.18%, by value qualified for treatment as "5-year property" within the meaning of Section 168(e)(1) of the Code as in effect on the date hereof in the hands of the Lessee immediately prior to the Closing Date, and the remaining percentage each of such Production Unit by value qualified for treatment as property in asset class 36.0 (assuming a proper election were made under Treasury Regulations Section 1.167(a)- 40 45 11) in the hands of the Lessee immediately prior to the Closing Date, and neither the Lessee nor any Lessee Person will do anything during the period from the Closing Date through December 31, 2003, (or such longer period as the Owner Participant is claiming depreciation deductions as a result of a Loss of Deductions, as defined in Section 8.03(a)) to cause such proportions of the Equipment to fail to qualify for treatment as "5-year property" within the meaning of such Section 168(e)(1) or as property eligible for inclusion in asset class 36.0. (c) Each Item of Equipment will have been "placed in service" for Federal income tax purposes on or before the Closing Date. (d) As of the Closing Date, no Item of Equipment will require any improvement, modification or addition (other than ancillary items of equipment of a kind customarily selected and furnished by purchasers and lessees of similar equipment) in order to be rendered complete for its intended use by the Lessee or any Affiliate thereof or other user of the Equipment. (e) No Item of Equipment will be used outside the United States during the first seven years of the Term. (f) Under Section 168(g) of the Code as in effect on the date hereof, no Item of Equipment will constitute (i) "tax-exempt use property" by reason of the status of a Lessee Person during the first seven years of the Term or (ii) "tax-exempt bond financed property" by reason of activities of any Lessee Person. (g) Neither any Lessee Person nor any member of the "Lessee Group" (as such term is used in Rev. Proc. 75-21, 1975-1 C.B. 715, as modified by Rev. Proc. 79-48, 1979-2 C.B. 529) will directly or indirectly acquire any interest in the Loan Certificates, or enter into any arrangement for payment of the Loan Certificates with any Person other than as contemplated by the Operative Documents. (h) All written information with respect to the Equipment supplied by Lessee to, and expressly relied on by, the Appraiser in connection with the Appraisal was accurate at the time given and will remain accurate on the Closing Date. The Lessee and the Owner Participant agree that the written information referred to in the foregoing sentence includes only the written information described in Exhibit 8.02(h), and that the Lessee is not otherwise responsible for the Appraisal or its conclusions. (i) No Lessee Person will construct or install on any Item any component, improvement, alteration or addition that would cause such Item to become "limited use property" within the meaning of Rev. Proc. 79-48, 1979-2 C.B. 529. 41 46 The only obligation of the Lessee resulting from the breach or inaccuracy of any of the foregoing representations, warranties and covenants shall be as provided in this Article VIII. SECTION 8.03. Definition of Loss. If any of the following events (hereinafter referred to individually as a "Loss") shall occur, then the Lessee shall pay to the Owner Participant as an indemnity the amounts set forth in Section 8.04 hereof: (a) For United States Federal income tax purposes, the Owner Participant shall for any taxable year lose, shall not claim (as the result of a written determination of Owner Participant's Tax counsel, or other independent tax counsel selected by the Owner Participant involved and reasonably satisfactory to the Lessee, that there is not "substantial authority" within the meaning of Section 6662(d)(2)(B)(I) of the Code for making such claim, which determination was delivered, and furnished to the Lessee, prior to such failure to claim and which determination was delivered after consultation by such independent tax counsel with Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably acceptable to the Owner Participant), shall suffer a disallowance of, or shall be required to recapture, all or any portion of the Depreciation Deductions, the Interest Deductions or the Amortization Deductions (a "Loss of Deductions") as a result of: (i) any act or omission of the Lessee, any Affiliate thereof or any Person (other than the Owner Participant or any Affiliate thereof) who acquires possession of, or the right to use, any Item during the Term (a "Lessee Person"), excluding, however, the execution of the Operative Documents and further excluding any act or omission required or expressly permitted by the terms of the Operative Documents (but not excluding (x) the alteration or modification of any Item and (y) a substitution or trade-in of an Item pursuant to Section 9.01 or 9.05 of the Lease in exchange for a replacement Item, or (ii) the inaccuracy or breach of any representation, warranty or covenant set forth in Section 8.02 or Sections 4.01(d) and 4.01(i) of the Participation Agreement. (b) For United States Federal income tax purposes, the Owner Participant shall for any taxable year lose, shall not claim (as the result of a written determination of Owner Participant's Tax Counsel, or other independent tax counsel selected by the Owner Participant involved and reasonably satisfactory to the Lessee, that there is not "substantial authority" within the meaning of Section 6662(d)(2)(B)(I) of the Code for making such claim, which determination was delivered, and furnished to the Lessee, prior to such failure to claim and which determination was delivered after consultation by such independent tax counsel with Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably acceptable to the Owner Participant), or shall suffer a disallowance of all or 42 47 any portion of the credit for foreign taxes otherwise allowable under Sections 901, 902 or 960 of the Code (a "Foreign Tax Credit Loss") as a result of: (i) the use of any Item outside of the United States by the Lessee, any Affiliate thereof or any Person (other than the Owner Participant or any Affiliate thereof) who acquires possession of, or the right to use, any Item during the Term (a "Lessee Person"), (ii) the inaccuracy or breach of any representation, warranty or covenant set forth in Section 8.02 or Sections 4.01(d) and 4.01(i) of the Participation Agreement, or (iii) a Refunding pursuant to Article XII of the Lease (but not the right to cause a Refunding). (c) The Owner Participant shall be required to include in its income for Federal income tax purposes any amount other than the amounts described in Sections 8.01(i)(i)-(viii) as a result of: (i) the payment by the Lessee of any amount of Basic Rent or Renewal Rent prior to the due date thereof specified in the Lease, (ii) the acquisition of Loan Certificates by any Lessee Person except pursuant to Article XIII, (iii) provided that such inclusion shall be with respect to a period prior to the expiration or termination of the Lease with respect to such Item, the alteration, modification, enhancement or repair to, or maintenance of, any Item, (iv) the receipt and retention by any Lessee Person of any warranty or insurance payment related to any Item or the accrual of any such amount that is to be retained by a Lessee Person, (v) the actual date of an Event of Loss being deemed by the Internal Revenue Service to have occurred earlier than the date assumed in calculating the Federal income tax consequences reflected in the applicable Stipulated Loss Value, (vi) the breach or inaccuracy of any representation contained in Section 8.02 hereof, (vii) the making or accrual of any payment, including an Auxiliary Payment, (in each case, other than a payment pursuant to Section 3.03 of the Lease or 43 48 Article VI, VII or VIII hereof or any payment of principal, interest, breakage costs or similar debt payments) by the Lessee to the Indenture Trustee or a Certificateholder, or (viii) a substitution or trade-in of an Item of Equipment pursuant to Section 9.01 or 9.05 of the Lease, or (ix) the Refunding of the Loan Certificates pursuant to Article XIII (but not the right of the Lessee to cause a Refunding) (any of the foregoing an "Inclusion"). For purposes of this Section 8.03, the existence of the terms and provisions of the Operative Documents and their execution and delivery shall not be deemed to be an act or omission of the Lessee or any Lessee Person. SECTION 8.04. Indemnity (a) Indemnity Obligation. If the Owner Participant shall incur a Loss, as defined in Section 8.03, the Lessee shall make the indemnity payments set forth below: (i) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to a Loss of Deductions, the Lessee shall pay on an After-Tax Basis to the Owner Participant an amount equal to the income taxes payable or deemed payable by the Owner Participant (calculated pursuant to Section 8.04(e)) as a result of such Loss and any interest, penalties and additions to tax properly attributable to such Loss (net of any deductions currently available for such interest, penalties or additions), other than any interest, penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to file a return that is timely and proper, (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss). (ii) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to an Inclusion, the Lessee shall pay to the Owner Participant an amount which on an After-Tax Basis shall be equal to the sum of (1) the product of (A) the amount of the Inclusion which is the subject of such Loss times (B) the composite rate consisting of the highest marginal statutory Federal income tax rate generally applicable to corporations and the state rate actually payable by Owner Participant with respect to such Inclusion, taking 44 49 into account any allowable deduction of state tax from Federal taxable income (the "Marginal Rate") during the relevant period, plus (2) an amount equal to (A) the amount of any interest, penalties and additions to tax properly attributable to such Loss, other than any interest, penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant, or any Affiliate of either of the foregoing, to file a return that is timely and proper (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss), minus (B) the amount of any actual decrease in the Owner Participant's taxes caused by any allowable deduction in respect of such interest, penalties or additions to tax. (iii) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to a Foreign Tax Credit Loss, then, except to the extent that any Rent adjustment under Article XII reflects such Foreign Tax Credit Loss, the Lessee shall pay to the Owner Participant an amount equal, on the After-Tax Basis, to the amount of such Foreign tax Credit Loss calculated pursuant to Section 8.04(e), and any interest, penalties, or additions to tax properly attributable to such Loss (net of any deductions currently available for such interest, penalties or additions), other than any interest penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to file a return that is timely and proper (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss). (b) Method of Payment. The Lessee will make payments pursuant to this Section pursuant to (x), below, unless (i) it is not permitted to do so or (ii) it elects to make payments under (y) or (z), below: (x) The Lessee shall pay the Owner Participant, on an After-Tax Basis, from time-to-time at such time as the Owner Participant is required to pay the additional tax due by reason of the Loss of Deductions or Inclusion. (y) If the Lessee has elected not to pay, or cannot choose to pay, an indemnity pursuant to either clause (x) above or clause (z) below, Lessee shall provide the Owner Participant of notice of such fact prior to the date Lessee's obligation commences under Section 8.04(b), above, and shall pay to the Owner Participant as an indemnity a lump-sum amount which, on an After-Tax Basis, shall be sufficient to preserve the Owner Participant's Economics as if such 45 50 Loss had not occurred. The computation of such lump-sum amount shall be made by the Owner Participant utilizing the methodology and assumptions, including Tax Assumptions, utilized by the Owner Participant in determining Basic Rent, Stipulated Loss Value and Termination Value, except as such assumptions shall be varied to take into account such Loss and any prior Loss in a manner consistent with this Section. (z) So long as no Material Lease Default or Lease Event of Default has occurred and is continuing, the Lessee may elect to make indemnity payments in the form of adjustments in the amount of Basic Rent payable by the Lessee pursuant to the Lease, commencing on the next Rent Payment Date after the date the payment obligation commences under Section 8.04(b) continuing on each Rent Payment Date occurring thereafter during the Basic Term, in amounts sufficient to preserve the Owner Participant's Economics as if such Loss had not occurred. The computation thereof shall be made utilizing the methodology and assumptions, utilized by the Owner Participant in determining Basic Rent, Stipulated Loss Value and Termination Value, except as such assumptions shall be varied to take into account such loss and any prior loss in a manner consistent with this Section. (c) Commencement of Payment. (i) The amount payable by the Lessee to the Owner Participant pursuant to this Section 8.04 and Section 8.06 shall, subject to Lessee's elections under Subsection (b) above, commence to be paid upon the occurrence of the latest of (A) 30 days after receipt of a written demand therefor from the Owner Participant, accompanied by a written statement describing in reasonable detail the computation of the amount so payable, (B) except with respect to a Loss resulting from a failure to claim based upon a determination of independent tax counsel described in Section 8.03, if any such indemnity payment relates to a Loss that is contested pursuant to Section 8.06, the date of a final determination with respect to such Loss, and (C) the date the Owner Participant shall be required to pay the additional income taxes resulting from such Loss (or would have been required to pay such additional income taxes resulting from such Loss if it had had sufficient taxable income); provided, however, that if the Lessee shall elect to pay such sum prior to the latest of the dates referred to in this sentence, the Lessee shall not be required to pay the Owner Participant the amount of any interest that shall be attributable to the period after such payment by the Lessee; 46 51 (ii) The date required for payment pursuant to the preceding sentence shall be delayed until 15 days after completion of any verification pursuant to subsection (d) of this Section 8.04; provided that, unless the outcome of the verification requires the Owner Participant to bear the costs thereof (as hereinafter provided), the Lessee shall pay interest at the Debt Rate on the amount determined to be payable pursuant to such verification for the period from the date such amount would have been due in the absence of such verification to the date of the Lessee's payment. (d) Verification. When requesting payment by the Lessee pursuant to this Article VIII, the Owner Participant shall provide the Lessee with a certificate setting forth the amount payable by the Lessee and the computation of such amount. If the Lessee shall disagree with such amount, such amount shall be reviewed and determined by an accounting firm mutually acceptable to the Lessee and the Owner Participant; provided, however, that the sole responsibility of such firm shall be to verify the computation of any payment pursuant to this Article VIII (setting forth fully the assumptions on which such verification is based) and that matters of interpretation of the Operative Documents are not within the scope of such responsibility. The costs of such verification shall be borne by the Lessee, unless such verification results in a correction to such amount in the Lessee's favor of five percent or more of the amount as determined by the Owner Participant, in which case such costs shall be borne by the Owner Participant. No person other than such accounting firm shall be permitted access to the books, records or tax returns of the Owner Participant or any Affiliate thereof. The determination of such accounting firm shall be final and binding upon the Lessee and the Owner Participant. (e) Determination. Whenever it may be necessary for purposes of this Article VIII to determine the amount of any tax resulting from a Loss of Deductions or the amount of tax savings resulting from such Loss of Deductions, such determination shall be made on the assumption that the income taxes of the Owner Participant are payable at the Assumed Tax Rate. When determining the amount of Foreign Tax Credit Loss suffered by the Owner Participant, or the amount of any tax savings resulting from such Foreign Tax Credit Loss, such determination shall be made on the basis of the assumption that the income taxes of the Owner Participant are payable at the Assumed Tax Rate. In the case of any Loss, all computations shall assume that, in computing its Federal income tax liability, the Owner Participant can currently fully utilize the tax benefits that are the subject of any Loss or that result from a Loss. For purposes of determining the amount of tax savings from any payment by the Owner Participant to the Lessee with respect to any Loss other than an Inclusion, it shall be assumed that Taxes are payable by the Owner Participant at the Assumed Tax Rate. For purposes of the amount of a Loss resulting from an Inclusion or other amounts payable on an After-Tax Basis, or the amount of tax savings resulting from such amounts or from any 47 52 payment by the Owner Participant to the Lessee with respect to such amounts, it shall be assumed that Taxes are payable by the Owner Participant at the Marginal Rate. (f) Exceptions. Notwithstanding the foregoing, the Lessee shall not have any liability to the Owner Participant for indemnification under this Article VIII for any Loss (y) except with respect to a Loss described in clause (v) of Section 8.03(c) hereof, if such Loss results from an event with respect to an Item whereby the Lessee is required to pay, and shall have paid in full, Stipulated Loss Value or Termination Value for such Item or any amount determined by reference thereto or (z) if such Loss would not have occurred but for one or more of the following events: (i) a voluntary transfer or disposition by the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing of any interest in any Item or any part thereof or any interest arising under the Operative Documents or any interest in the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing or any involuntary transfer resulting from the bankruptcy or insolvency of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing or from foreclosure proceedings except a transfer or disposition while an Event of Default under the Lease shall have occurred and be continuing, (ii) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to claim a tax benefit or to exclude income described in Section 8.01(i) in a timely and proper manner, unless such failure shall be due to the failure of the Lessee timely to provide the Owner Participant with information timely requested by the Owner Participant and reasonably necessary to make such claim or unless such failure shall be based upon the written determination of independent tax counsel described in Section 8.03(a), (iii) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to take timely action in contesting a claim made by the Internal Revenue Service if such person shall be required to take such action pursuant to Section 8.06, and if such failure has a material adverse effect on Lessee's ability to conduct such contest, (iv) the status of the Owner Participant or any Affiliate thereof for income tax purposes, including without limitation the Owner Participant's or such other person's being or becoming an entity subject to the provisions set forth in Section 465 of the Code, a charitable organization, an agency or instrumentality of the United States, a State or political subdivision thereof or an international organization, 48 53 (v) the applicability of Section 168(d)(3), 168(f)(1), 168(g)(7), 55, 56, 57(a), 291, 501, 593, 851, 856, 1361, or 1381 of the Code to the Owner Participant or any Affiliate thereof, (vi) a change in the Owner Participant's taxable year, (vii) the inaccuracy or incompleteness of any conclusion of the Appraisal referred to in Section 3.01(e) or the inability of the Owner Participant to include in its basis for the Equipment all or any part of Lessor's Cost, in each such case unless such inaccuracy or incompleteness results from the inaccuracy of the representation set forth in Section 8.02(h), (viii) the existence of the trust created by the Trust Agreements, (ix) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to have sufficient income to benefit from the tax benefits described in Section 8.01, (x) the enactment of or any amendment, modification, deletion or change having been made in or to, the Code as in effect on the date hereof (or any other Federal tax statute), or the promulgation of temporary, proposed or final Treasury Regulations, or administrative interpretations of the Code or the Treasury Regulations in each case on or after the Closing Date; provided, however, that the exception set forth in this clause (x) shall not apply to a Loss relating to a Refunding or to the modification, substitution or trade-in of an Item of Equipment pursuant to Section 9.01 or 9.05 of the Lease if such Refunding, modification, substitution or trade-in occurs after an enactment, amendment, modification, deletion, change or promulgation relating to the Code, temporary or final Treasury Regulations, or a published ruling of the Internal Revenue Service, (xi) the failure of the Transaction to constitute a "true lease" for tax purposes or any determination that the Owner Participant is not the owner of the Equipment with respect to which it has participated in Lessor's Cost, the Loan Certificates are not true debt, the Owner Participant is not holding the Equipment for use in its trade or business or for the production of income or the Owner Participant did not enter into the transaction for profit, in each case unless such failure or determination results from the breach or inaccuracy of any of the Lessee's representations, warranties 49 54 and covenants set forth in Section 8.02 or referenced in Section 8.03(a)(ii), (xii) a breach or inaccuracy of any representation, warranty, covenant or agreement of the Owner Trustee or the Owner Participant contained in the Operative Documents including, without limitation, any failure of the Owner Participant to make (or cause the Owner Trustee to make) payments in respect of the Loan Certificates sufficient to relieve the Lessee of its obligations to pay any Advance Amount pursuant to Section 3.03 of the Lease, (xiii) the application of the provisions of Section 467 of the Code, other than as a result of a Refunding, or (xiv) the failure of the debt created by the Loan Certificates to constitute "qualified nonrecourse indebtedness" within the meaning of Section 1.861-10T(b) of the Treasury Regulations, except as the result of a Refunding. SECTION 8.05. Tax Savings. If the Owner Participant, as the result of a Loss or the event giving rise to a Loss for which the Owner Participant has been indemnified by the Lessee under this Article VIII, realizes with respect to any year income tax savings (including from the utilization of foreign tax credits) that would not have been realized but for such Loss or event (or would have realized income tax savings if the Owner Participant had had sufficient taxable income in such year), the Owner Participant shall pay to the Lessee an amount equal to the sum of such actual or assumed income tax savings (calculated in accordance with the provisions of Section 8.04.(e)), plus the amount of any income tax savings realized as the result of any payment made pursuant to this sentence such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. Any payment due to the Lessee pursuant to this Section 8.05 shall be paid promptly (and, in any event, within 30 days) after the filing of the tax return upon which such income tax savings could be claimed (or could have been claimed by the Owner Participant if it had had sufficient taxable income); provided, however, that (a) such aggregate sum shall in no event exceed the amounts paid by the Lessee to the Owner Participant with respect to such Loss, (b) such sum shall not be payable before such time as the Lessee shall have made all payments or indemnities then due pursuant to the Operative Documents, and (c) no Lease Event of Default shall have occurred and be continuing. Any subsequent disallowance of any such actual or assumed income tax savings shall be treated as a Loss for which an indemnity is required hereunder. SECTION 8.06. Contests. 50 55 8.06.1 Notification. Within 15 days after receipt of a written notification from the United States Federal taxing authorities of a claim, or upon receipt of a determination of independent tax counsel described in Section 8.03, with respect to which an amount may be payable by the Lessee in accordance with this Article VIII (an "Article VIII Claim"), the Owner Participant or the Owner Trustee shall promptly notify the Lessee of such Article VIII Claim and shall, upon request, provide such other information (not including copies of tax returns) as is available to the Owner Participant and is reasonably required by the Lessee to determine whether to request the Owner Participant to contest the Loss that is the subject of such Article VIII Claim as provided in this Section 8.06. The failure to so notify the Lessee within 15 days of such Article VIII Claim shall not affect Lessee's obligations hereunder except to the extent such failure materially adversely affects the contest of such Article VIII Claim. The Owner Participant shall, except with respect to a Loss resulting from a failure to claim based upon a determination of independent tax counsel described in Section 8.03, resist payment of any tax relating to such Loss for a period of 45 days following such notice to the Lessee or, if shorter, two days less than the period specified (including available extensions) for payment in such notification. 8.06.2 Obligation to Contest. If (A) the Lessee shall request in writing the Owner Participant to contest such Article VIII Claim within the period specified in the preceding sentence, (B) Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably satisfactory to the Owner Participant, shall furnish an opinion to the effect that there is a reasonable basis to contest such Article VIII Claim, (C) the Lessee shall agree to pay the Owner Participant, on presentation of properly certified and supported invoices, all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred by the Owner Trustee or the Owner Participant in conducting the contest of such Article VIII Claim (D) a Lease Event of Default shall not have occurred and be continuing, unless the Lessee shall have provided to the Owner Participant reasonably satisfactory security for any payment that might reasonably become due from the Lessee with respect to such Article VIII Claim or such contest, (E) the amount potentially payable by Lessee with respect to such Article VIII Claim shall be $50,000 or more, and (F) the Lessee shall have acknowledged to the Owner Participant that it will be liable under this Agreement with respect to such claim, unless the final determination of such claim clearly articulates a basis for the claim for which Lessee is not liable hereunder, then the Owner Trustee, the Owner Participant and any Affiliate of either of the foregoing will contest such Claim (including the appeal of any determination, it being understood, however, that under no circumstances will the Owner Participant be required to undertake any appeal to the United States Supreme Court). 8.06.3 Control of Contest. The Owner Participant will control, and conduct with Owner Participant's Tax Counsel, or other nationally-recognized counsel of its choice (which other counsel shall not be adverse to the Lessee in any matter other than any potential or actual adversity with respect to an Article 51 56 VIII Claim), any contest of an Article VIII Claim undertaken pursuant to this Section 8.06, and the Owner Participant, at its sole option, may choose to pursue or to forgo any and all administrative appeals, proceedings, hearings and conferences with the relevant taxing authorities with respect to such Article VIII Claim (unless and to the extent pursuit of any such proceedings shall be required to secure judicial remedies), but will, if the conditions set forth in the preceding paragraph are satisfied, contest such Claim in a court or courts of competent jurisdiction selected by the Owner Participant in its sole discretion. The Owner Participant shall cooperate with the Lessee in good faith in order to contest any Article VIII Claim and shall, if requested, consult in good faith with the Lessee regarding the conduct of such contest (including the preparation of written submissions). 8.06.4 Advances. If the proceeding to contest any Article VIII Claim selected by the Owner Participant requires the payment of any proposed United States Federal income tax deficiency or interest, penalties or additions to tax relating to such tax deficiency, and if the Lessee has not previously paid the indemnity provided under Section 8.04 with respect to such Article VIII Claim, the Lessee will advance to the Owner Participant on an interest-free basis sufficient funds to pay the deficiency attributable to such Article VIII Claim plus interest, penalties and additions to tax with respect thereto (to the extent such amount is indemnified against pursuant to Section 8.03 or 8.04). If the Owner Participant shall be required to include any amount in gross income with respect to such advance for United States Federal income tax purposes, such inclusion in income shall be treated as a Loss described in Section 8.03(c); provided, however, that the exception set forth in clause (x) of Section 8.04(f) hereof shall not apply to any such Loss. 8.06.5 Settlements. None of the Owner Trustee, Owner Participant and any Affiliate of either of the foregoing will, without the prior written consent of the Lessee, enter into a settlement or other compromise with respect to any Article VIII Claim that any such person would otherwise be required to contest pursuant to this Section 8.06, unless the Owner Participant waives its right to be indemnified with respect to the related Loss under this Article VIII. If the Lessee requests that the Owner Participant accept a settlement of an Article VIII Claim offered by the Internal Revenue Service which settlement offer does not also require the settlement of any issue unrelated to such Article VIII Claim, the Owner Participant shall, within 30 days of such request, either accept such settlement offer or agree with the Lessee that the Lessee's liability pursuant to Section 8.04 shall be based upon such settlement offer; no additional liability of the Lessee shall accrue after 30 days following the date of such request by the Lessee provided that within 60 days following the date of such request the Lessee shall have paid or commenced to pay the amounts that would be payable under this Article VIII with respect to such Article VIII Claim if such settlement offer constituted a final determination. 8.06.6 Offsets and Refunds. If the extent of the Loss relating to an Article VIII Claim shall be established by the final judgment or decree of a court or 52 57 administrative agency having jurisdiction thereof, then the Owner Participant will pay, within 30 days, to the Lessee any refund or offset received (including any refund or offset that would have been received but for a counterclaim not indemnified by the Lessee hereunder) by the Owner Participant with respect to such Article VIII Claim (except to the extent that such offset is applied to a tax liability for which the Owner Participant would be entitled to be indemnified under this Article VIII), plus, to the extent that any interest-free advance shall have been treated as a Loss, the amount of any tax saving resulting from any payment pursuant to this sentence (calculated in a manner consistent with Section 8.05), together with any interest (other than interest for the period after any taxes arising from such Loss or any circumstances resulting in such Loss were paid by the Owner Participant until such taxes were paid or reimbursed by the Lessee) paid thereon by the Internal Revenue Service fairly attributable to such portion of such refund or any interest that would have been received if no other matters had been involved in such proceeding, provided that the aggregate amount payable to the Lessee (other than amounts payable with respect to such expenses and interest) pursuant to this sentence with respect to any Loss shall not exceed the aggregate amount previously paid by the Lessee under this Article VIII with respect to such Loss, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. SECTION 8.07. Combined Returns. In the case of any tax that at any time is reported on a consolidated or combined basis by the Owner Participant or Affiliate thereof, the term "Owner Participant" shall, for purposes of this Article VIII, include such Affiliate and the rules governing such consolidated or combined returns shall be taken into account in determining and computing the amount of any indemnity or any payment by or to the Lessee required to be made under this Article VIII. SECTION 8.08. Certain Adjustments. In the event any payments shall be due to the Owner Participant under this Article VIII, the schedules of Stipulated Loss Values and Termination Values shall be appropriately adjusted in accordance with Article X. 53 58 ARTICLE IX Expenses SECTION 9.01. Transaction Expenses Payable by the Owner Participant. If the transactions contemplated by this Agreement to occur on the Closing Date are consummated, the Owner Participant will pay Transaction Expenses up to an amount equal to 1.47% of Lessor's Cost, and the Lessee shall pay the balance thereof, which Transaction Expenses shall be subject to the reasonable approval of the Lessee and the Owner Participant prior to payment thereof. The Owner Participant will pay such approved Transaction Expenses at Closing to the extent bills or invoices are presented to the Lessee and the Owner Participant not later than two Business Days prior thereto, and on the Adjustment Date to the extent bills or invoices with respect to such expenses are submitted within no more than 80 days after the Closing Date and in any event by no later than ten Business Days prior to the Adjustment Date. The failure to present bills or invoices by such dates shall not prevent such expenses from constituting Transaction Expenses or Article VI from applying to such expenses. SECTION 9.02. Agreed Transaction Expenses. The Owner Participant and the Lessee agree that Transaction Expenses shall not include any fees and expenses for Owner Participant's counsel other than the fees and expenses of Owner Participant's Special Counsel but not in excess of the amount specified in a letter from the Owner Participant to Lessee dated the Closing Date, and shall not include any fees and expenses for Loan Participants' Counsel, in excess of the amount specified in a letter from Loan Participants' Counsel to Lessee dated the Closing Date. SECTION 9.03. Amendments, Waivers, etc.. The Lessee will pay all costs and expenses incurred in connection with the entering into or the giving or withholding of any future amendments, supplements, waivers or consents with respect to the Operative Documents, whether or not the same shall become effective. SECTION 9.04. Fees of Trustees. The Lessee will pay all continuing fees and expenses of the Owner Trustee and the Indenture Trustee in connection with the transactions contemplated by the Operative Documents, other than the fees of such Trustees which constitute Transaction Expenses. 54 59 ARTICLE X Recomputation of Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values SECTION 10.01. Making of Adjustments. (a) If: (i) the Closing Date shall be other than the date specified in the notice given by the Lessee pursuant to Section 2.04(b)); (ii) the dates on which interest is payable shall be other than those specified in the notice given by the Lessee pursuant to Section 2.04(b) or the interest payable on the Loan Certificates for the Interim Term shall be less than the Assumed Debt Rate; (iii) the Transaction Expenses shall be other than 1.47% of Lessor's Cost; or (iv) any Tax Assumption Change described in a written notice from the Owner Participant to the Lessee or from the Lessee to the Owner Participant pursuant to Section 10.04 shall occur on or prior to the Closing Date; or (v) a Refunding pursuant to Article XII shall occur; then, unless such changes or differences shall have previously been reflected in schedules prepared by the Owner Participant and accepted by the Lessee and the other Participants, Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values, and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates shall be adjusted from time to time by such amounts as shall be appropriate so as to preserve each Owner Participant's Economics and, consistent therewith, to minimize the net present value to the Lessee (computed using the Debt Rate) of the Basic Rent, based on the Interim Term and the full Basic Term; (b) Adjustments required by clause (v) shall be made at the expense of the Lessee, when required by Article XII. All required adjustments under clause (i), (ii), (iii), or (iv) shall be made as soon as practicable, but in no event later than the Adjustment Date. The Lessee agrees, at its expense and at the request of any other party hereto, promptly to execute and deliver an amendment to the relevant Lease Supplement confirming any such adjustment. (c) Any adjustment of Basic Rent and amortization schedules of the Loan Certificates pursuant to this Article X shall be such as shall enable the Lessee to comply with Section 3.01(c) of the Lease. No adjustment shall (i) change the Weighted Average Life to Maturity of the Loan Certificates by more than six months, or to more than 7.25 years, (ii) extend the final maturity of any Loan Certificate beyond 10.752 years, (iii) with respect to a 55 60 Refunding, be effected on any day other than a Rent Payment Date (with at least five Business Days notice to each Certificateholder) unless Lessee agrees to, and does, pay associated LIBOR breakage, or (iv) increase the amount of Loan Certificates. SECTION 10.02. Stipulated Loss Values; Termination Values; EBO Prices. At the time any adjustment of Basic Rent percentages shall be required under this Article X, the Stipulated Loss Values, Termination Values, EBO Prices, and EBO Dates specified in the relevant Lease Supplements shall be adjusted by the Owner Participant in accordance with Section 10.01, effective as of the first Rent Payment Date thereafter; provided, however, that such percentages shall not be reduced below those percentages that will result in any of: (i) the Stipulated Loss Value as of any Rent Payment Date until expiration of the last Basic Term of any Production Unit leased under the Lease, (ii) the Termination Value as of any Rent Payment Date until expiration of the last Basic Term of any Production Unit leased under the Lease, or (iii) the EBO Price as of any EBO Date for any Production Unit (together, in the case of clauses (i), (ii) and (iii), in each case with any Accrued Rent that would be payable on such Rent Payment Date or EBO Date plus the amount of any Supplemental Rent payable (or that would be payable if not funded by a payment from the Lessor) pursuant to Section 3.03 of the Lease) not being at least equal to the aggregate principal amount of, and interest on, the Loan Certificates outstanding under the Indenture and issued in respect of such Production Unit on the Rent Payment Date to which such payments relate or, in the case of clause (iii), the principal and interest on the Loan Certificates that will become due and payable on the EBO Date to which such payments relate. SECTION 10.03. Computation of Adjustments. Upon the occurrence of an event requiring an adjustment pursuant to this Article X, the Owner Participant shall make the necessary computations. In making any such computations, the Owner Participant (i) shall utilize the same methods and assumptions originally used to calculate the payments of Basic Rent, EBO Prices, EBO Date, Stipulated Loss Values and Termination Values (other than those assumptions changed as a result of the event described in clause (i), (ii), (iii), or (iv) of Section 10.01(a) necessitating such computations; it being agreed that such computation shall reflect solely any changes of assumptions or facts resulting directly from any such event necessitating such recalculation). If the Lessee shall disagree with any such amounts, they shall be reviewed and determined by an independent accounting firm chosen by the Lessee and reasonably acceptable to the Owner Participant. In connection with any such review, the Owner Participant and the Lessee shall make available to such accounting firm on a confidential basis their pricing runs and its related assumptions including the Lessee's original 56 61 tax assumptions (other than any Owner Participant's tax return). The costs of such verification shall be borne by the Lessee, except that such costs shall be borne by the Owner Participant if such verification results in an increase in the amount of the present value (discounted semi-annually at an interest rate per annum equal to the Debt Rate in effect on the Closing Date) of the Basic Rent Payments during the Interim Term and the full Basic Term (using the discount rate referred to above) from the amounts proposed by the Owner Participant of more than 10 basis points. SECTION 10.04. Tax Assumption Changes. Prior to Closing on the Closing Date, (i) the Owner Participant may deliver written notice to the Lessee (x) specifying an amendment to the Code, Treasury Regulations (including proposed regulations which are also proposed to be effective on or prior to the Closing Date, whether or not such Regulations are issued under Section 467 of the Code), revenue rulings or administrative interpretations promulgated, issued, enacted or proposed after March 15, 1996, and on or prior to the Closing Date (any such promulgation, issuance, enactment or proposal, together with the proposal referred to in the final sentence of this Section 10.04, a "Tax Assumption Change") which amendment would have the effect of worsening the Owner Participant's Economics and (y) setting forth the adjustments to the Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values required in the case of such Tax Assumption Change or that would be required if such proposed Tax Assumption Change were enacted, promulgated or issued, computed as provided in Section 10.01, and (ii) the Lessee may give written notice to the Owner Participant specifying a Tax Assumption Change, which Tax Assumption Change would have the effect of bettering the Owner Participant's Economics. SECTION 10.05 Post-Closing Adjustment for Pre-Closing Tax Assumption Changes. (a) Prior to noon, Pacific Time on the day following the Closing Date the Owner Participant or the Lessee may deliver written notice of a Tax Assumption Change with respect to a promulgation, issuance, enactment or proposal after the second Business Day preceding the Closing Date and on or prior to the Closing Date. If such notice is delivered by the Lessee, then the adjustments contemplated by Section 10.01 shall be computed, and Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates shall be adjusted to reflect such Tax Assumption Change. If such notice is delivered by the Owner Participant, then it shall state whether the present value of Basic Rent, computed pursuant to the provisions of Section 3.02(j), might increase by an amount greater than the amount specified in such Section. If the notice delivered by the Owner Participant states that the present value of Basic Rent may not increase by an amount greater than the amount specified in 3.02(j), or if the Lessee elects to continue the transaction notwithstanding such potential increase by an amount greater than the amount specified in such Section, then the adjustments contemplated by Section 10.01 shall be computed and Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates, shall be adjusted to reflect such Tax Assumption Change. If the present 57 62 value of Basic Rent, computed pursuant to the provisions of Section 3.02(j), might increase by an amount greater than the amount specified in such Section, then the Lessee may elect to terminate the Transactions, as provided in Section 10.05(b). (b) If the Lessee elects to terminate the Transactions pursuant to Section 10.05(a), then (i) all of the Operative documents shall be rescinded, (ii) the Lessee shall refund the amounts received by it, (iii) the Lessee shall pay such Transaction Expenses as are applicable (specifically excluding fees of any advisor to any Participant and fees (but not excluding out-of-pocket costs) of the Owner Trustee and Indenture Trustee otherwise due on the Closing Date), (iv) the Lessee shall pay to the Owner Participant the amounts specified in Section 2.04(b), calculated through the date Lessee makes such payment (v) the Lessee shall pay to each Loan Participant interest at the Debt Rate plus LIBOR breakage and other costs incurred by such Loan Participant (but not the Up-Front Fee of such Loan Participant), and (vi) any amounts received on the Closing Date by any party to the Operative Documents in excess of the amounts to be paid to such party pursuant to this Section shall be returned to the party entitled thereto, including, without limitation, each Loan Participant agrees to promptly refund to the Owner Participant the portion of the Up-Front Fee received by it. ARTICLE XI Transfer of Owner Participant's Interest SECTION 11.01. Transfers. (a) The Owner Participant shall not assign, convey or otherwise transfer all or any part of its right, title and interest in and to the Owner Participant Trust Estate except as provided in this Section 11.01. (b) The Owner Participant may assign, convey or otherwise transfer all, but not a part only, of its right, title and interest in the Owner Participant Trust Estate to (i) a direct or indirect parent of the Owner Participant or a Subsidiary of such parent or (ii) a bank, financial institution, insurance company or similar institution or (iii) a partnership composed of Persons described in (i) and/or (ii); provided that the transfer must meet the following conditions: (A) the Owner Participant must transfer its interest as a whole to a single transferee, (B) any transferee must have a Tangible Net Worth or combined capital and surplus of at least $50,000,000 or have its obligations guaranteed pursuant to a guaranty agreement in form and substance satisfactory to the Lessee and the Indenture Trustee by a parent company or an Affiliate of such transferee with such a Tangible Net Worth, 58 63 (C) any transferee must not be a Competitor of the Lessee, and (D) any transferee must not be in litigation with the Lessee or any Subsidiary of the Lessee (E) any transferee must agree that (i) the amount of Lessee's tax indemnity payments, if any, payable to such transferee under Article VIII shall not exceed those amounts that would have been payable to Owner Participant and Lessor had such transfer not occurred (using the tax parameters of the Owner Participant on the date of transfer rather than the parameters existing at the time of the Loss), and (ii) the amount of Lessee's tax indemnity payments, if any, payable to such transferee with respect to any Article VII claim that (x) has been or, (y) in the reasonable judgment of the Lessee is likely to be asserted and is specified in a written notice delivered to the Lessor prior to the proposed transfer, shall not exceed the amounts that would have been payable to Owner Participant and Lessor had such transfer not occurred; (F) any transferee shall become bound to the Operative Documents pursuant to agreements (and subject to legal opinions) in form and substance reasonably satisfactory to the Lessee, the Owner Trustee and the Indenture Trustee; (G) such transfer occurs after the last payment of interest, payable to the Loan Participants for the Interim Term is due; and (H) any transferee must be a corporation formed under the laws of a state of the United States or a partnership formed under such laws composed entirely of corporations formed under such laws; provided, further, that no such transfer shall relieve the Owner Participant of its obligation to make any payments required by Section 5.12 to be made by the Owner Participant on the Loan Certificates outstanding under the Indenture. (c) Any assignment, conveyance or transfer pursuant to this Section 11.01 shall be made pursuant to an Owner Participant transfer agreement. Upon any such assignment, conveyance or transfer (including any subsequent assignment, conveyance or transfer), (x) the transferee shall be deemed an "Owner Participant" for all purposes hereof, and shall be 59 64 deemed to have made all payments in respect of the right, title and interest so transferred, and shall have a ratable interest therein, and each reference in any Operative Document to or encompassing the Owner Participant shall thereafter be deemed to include a reference to such transferee and (y) the transferor shall have no further obligations or liability with respect thereto from and after the date of such transfer. If the Owner Participant (or any successor) intends to transfer its interest in the Owner Participant Trust Estate, it shall give 45 days' prior written notice of the proposed transfer to the other Participants, the Owner Trustee, the Indenture Trustee and the Lessee, specifying the name and address of such transferee, and demonstrating compliance with the requirements of paragraph (b) of this Section. The Owner Participant shall respond promptly to any further requests for information from the Lessee or any Certificateholder regarding the proposed transferee. Promptly after the Lessee and the Indenture Trustee have approved the proposed transferee (but not less than 15 days prior to the proposed transfer), the Lessor shall provide the form of documentation to be used in the proposed transfer for the Lessee's and the Indenture Trustee's and Owner Trustee's review and approval. The transfer may take place three Business Days after the Lessee has approved such proposed documentation. Any purported transfer in violation of this Section 11.01 shall be void and of no effect whatsoever. ARTICLE XII Refunding SECTION 12.01. Refunding. (a) So long as no Lease Default shall be in existence and subject to satisfaction of the terms and conditions set forth in this Article XII and in Section 3.07 of the Indenture, the Lessee shall have the right, on no more than two occasions, to request the Owner Trustee to effect, and the Owner Participant, the Owner Trustee and the Indenture Trustee will cooperate to effect, an optional prepayment in whole, but not in part, of the Loan Certificates pursuant to Section 3.07 of the Indenture as part of a refunding or refinancing, on the terms of this Article XII (each such refunding or refinancing, a "Refunding"). In connection with a refunding or refinancing, (i) there shall be no material change in the Operative Documents except (x) to the extent provided in clause (iii), (y) for the deletion of Section 5.14 of this Agreement, and (z) for the inclusion, if any, of additional covenants the Lessee which are acceptable to the Lessee and, specifically, there shall be no change in the Operative Documents or resulting for such Refunding, taken as a whole, which increase the risk to, or have an adverse impact on the Owner Participant or the Owner Trustee, in such Person's reasonable judgment, including the provisions of the Indenture providing the Owner Trustee with rights in the event of an Indenture Default or an Indenture Event of Default; 60 65 (ii) the Lessee, the Owner Participant, the Owner Trustee, the Indenture Trustee, the loan participants admitted in the Refunding, and any other appropriate parties will enter into an agreement, in form and substance satisfactory to such Persons, providing for (w) the issuance and sale by the Owner Trustee on the date specified in such agreement (for the purposes of this Article XII, the "Refunding Date") of debt securities in an aggregate principal amount (in the lawful currency of the United States) equal to the aggregate outstanding principal amount of the Loan Certificates (the "Refunding Loan Certificates"), (x) the application of the gross proceeds of such sale to the prepayment in full of all of the principal amounts outstanding under such Loan Certificates and falling due as a result of such Refunding on the Refunding Date, (y) payments by the Lessee as Supplemental Rent (on an After-Tax Basis to the Owner Participant) to the Person or Persons entitled thereto of all other amounts, in respect of accrued interest and Auxiliary Payments, if any, payable on such Refunding Date and not otherwise paid from the proceeds of such sale and (z) such other provisions as are reasonably acceptable to the Owner Participant, the Owner Trustee, the Indenture Trustee and the Lessee; (iii) the Lessee and the Owner Trustee will amend the Lease such that (x) Basic Rent payable in respect of the period from and after the Refunding Date shall be recalculated to preserve Owner Participant's Economics; provided that the net present value of the Basic Rent shall be minimized to the extent consistent therewith, and amounts payable in respect of Stipulated Loss Value, Termination Value and EBO Price from and after the Refunding Date shall be appropriately recalculated to preserve the Net Economic Return which the Owner Participant would have realized had such Refunding not occurred (it being agreed that any recalculations pursuant to this clause (iii)(x) shall be performed in accordance with the requirements of Article X) and (y) any amounts payable on the Loan Certificates in addition to principal and interest are expressly made payable by the Lessee as Supplemental Rent and the percentages in Schedule X to the relevant Loan Certificates shall be adjusted as appropriate to take into account such Refunding; (iv) the Owner Trustee will enter into an Indenture Supplement to provide for the securing thereunder of the Refunding Loan Certificates issued by the Owner Trustee pursuant to this Article XII in like manner as the Series of Loan Certificates refunded; (v) the Lessee shall pay to the Indenture Trustee, or to the Person entitled thereto, as Supplemental Rent (on an After-Tax Basis to the Owner Participant), an amount equal to the Auxiliary Payments, if any, payable in respect of the Loan Certificates being paid on the Refunding Date; 61 66 (vi) the Lessee, the Owner Participant, the Owner Trustee and the Indenture Trustee shall have received (1) such opinions of counsel as they may reasonably request concerning compliance with Applicable Law relating to the sale of securities and (2) such other opinions of counsel and such certificates and other documents, each in form and substance satisfactory to them, as they may reasonably request in connection with the terms and conditions of this Article XII; (vii) all necessary authorizations, approvals and consents in connection with such Refunding shall have been obtained; (viii) as a result of the Refunding, the Owner Participant's investment shall not increase or decrease; and (ix) the final stated maturity of the Refunding Loan Certificates shall not extend beyond the final stated maturity of the Loan Certificates being refunded; (x) the Weighted Average Life to Maturity of the Loan Certificates shall not change by more than six months; and (xi) there will be no adverse effect on either Owner Participant's tax and accounting treatment of the Lease under FASB Statement Number 13; and (xii) each Certificateholder being refunded shall have received at least five Business Days advance notice of each Refunding and received, in immediately available funds, the aggregate principal amount of, and accrued interest on, and Auxiliary Payments on the Loan Certificates held by it; provided, however, that (x) no Refunding of the Loan Certificates will be permitted if, within 30 days after receipt of a request pursuant to the first sentence of Section 12.02 from the Lessee to effect a Refunding pursuant to this Section 12.01 and of all relevant information regarding the terms and conditions of such Refunding necessary to render the opinion referred to below, the Owner Participant reasonably determines (which determination shall be supported by a written opinion of independent tax counsel selected by the Owner Participant) that there will be a risk of adverse tax consequences to the Owner Participant, other than any true lease considerations arising from the existence of the Refunding or the Lessee's right to refund or refinance as opposed to the particular terms of the Refunding, and gives notice of such determination in reasonable detail to the Lessee, unless the Lessee shall have agreed to indemnify the Owner Participant against such adverse consequences in a manner satisfactory to the Owner Participant and the Owner Participant shall not have determined in its 62 67 reasonable judgment that there is no reasonable basis to report the tax consequences of the Refunding for Federal income tax purposes in a manner consistent with such indemnity; (y) the Lessee shall pay to or reimburse the Owner Participant, the Owner Trustee and the Indenture Trustee, on an After-Tax Basis, for all reasonable costs and expenses (including reasonable attorneys' fees and expenses) paid or incurred by them, in either case, in connection with such Refunding or such proposed Refunding; and (z) no Refunding may occur prior to the second anniversary of the Closing Date. (b) In the event that any proposed Refunding pursuant to Section 12.01(a) shall not be consummated for any reason whatsoever, the Lessee will pay to the Owner Participant, each Loan Participant, the Owner Trustee and the Indenture Trustee, as the case may be (on an After-Tax Basis), its respective fees, costs and expenses (including, without limitation, legal fees and expenses) and any amounts required to be paid to the Certificateholders as a result of such proposed Refunding not being consummated, except that the Lessee shall not be required to pay the fees, costs and expenses of any such Person if such failure shall result from the breach by such Person of any of its obligations under this Section 12.01. SECTION 12.02. Notice. The Lessee shall give the other parties hereto at least 45 days' prior written notice of any desired refinancing or refunding pursuant to this Article XII, which notice shall set forth to the extent practicable the proposed terms and conditions of such refunding or refinancing, including the desired date therefor. The Lessee will promptly provide to the Owner Participant, the Owner Trustee and the Indenture Trustee for their approval in accordance with the provisions of this Participation Agreement the terms and conditions proposed to be final of any such Refunding not less than five Business Days prior to the execution and delivery of the documents contemplated hereunder in connection therewith, other than interest rate setting, which shall occur three Business Days prior to the Refunding. ARTICLE XIII Reserved 63 68 ARTICLE XIV Miscellaneous SECTION 14.01. Documentary Conventions. This Agreement shall be governed by the Documentary Conventions. SECTION 14.02. No Recourse to Owner Participant. It is expressly agreed and understood by the parties hereto and, by its acceptance of Loan Certificates, any Certificateholder, that, except as expressly provided in Sections 4.02, 5.01, or 14.03 of this Agreement, no recourse may be had to the Owner Participant with respect to, and the Owner Participant shall have no obligation or liability with respect to, the obligations and liabilities of the Owner Trustee or the Owner Participant Trust Estate (including, without limitation, the obligations and the liabilities of the Owner Trustee under the Indenture with respect to the Loan Certificates). Nothing in Section 3.03(c) of the Indenture shall prevent the Indenture Trustee or any Certificateholder, as the case may be, from enforcing any such listed obligations of the Owner Participant. SECTION 14.03. Confidentiality. (a) The Operative Documents and the Appraisal are confidential documents among the parties, thereto and each party (the "Relevant Party") agrees to keep the same permanently confidential and not disclose the Operative Documents or the Appraisal to any third party and not to use the confidential information for any purpose than under the Operative Documents without the prior written consent of the Lessee and the Lessor; provided that nothing herein shall be deemed to prevent any such disclosure by the Relevant Party (i) to its auditors or attorneys, (ii) to any other Persons requiring access to such information in connection with the normal business operations of such Relevant Party (including portfolio review and analysis), except that such person shall have a "need to know" such information and shall be advised by the Relevant Party that such documents and information are subject to this confidentiality agreement, and such Relevant Party shall be responsible for such Person acting in compliance herewith, (iii) to (or as required by) any regulatory authorities (including bank examiners, the National Association of Insurance Commissioners, or any similar bodies), (iv) in connection with the enforcement or attempted enforcement of any of the Operative Documents, (v) to any Person expressing an interest in acquiring, directly or indirectly, the Relevant Party's interest in the Operative Documents (and who agrees to be bound by the provisions of this Section 14.03, with such Relevant Party responsible for such Person acting in compliance herewith) or (vi) as required by any subpoena or civil investigative demand or any Applicable Law or Governmental Authority, in each case (but, with respect to cases (i), (iii), (iv) and (vi), only to the extent appropriate given the parties to whom disclosure is made) subject to appropriate protective orders or confidentiality agreements to carry out the intent of this Section 14.03 to protect confidential information to the fullest extent possible. 64 69 (b) If the Owner Participant or any Affiliate of the Owner Participant acquires or is acquired by, merges, or otherwise consolidates with, any Competitor of the Lessee, and the Lessee does not elect to Purchase the Equipment pursuant to Section 17.03 of the Lease, the Owner Participant agrees that it will keep all information pertaining to the Lessee, the Equipment (including the maintenance and operation of the Equipment and any licenses, rights, software or other intellectual property associated with the Equipment) and the Operative Documents confidential from the division, business unit, or Affiliate that is the Competitor; provided that nothing herein shall prevent any disclosure by the Owner Participant (i) to its auditors or attorneys (if such auditors and attorneys agree not to divulge the information to the Competitor), (ii) to (or as required by) any regulatory authority (including the National Association of Insurance Commissioners or any similar body), (iii) in connection with the enforcement or attempted enforcement of any Operative Document, or (iv) as required by subpoena or civil investigative demand or any Applicable Law or Governmental Authority, in each case (but only to the extent appropriate given the parties to whom disclosure is made) subject to the appropriate protective orders or confidentiality agreements to carry out the intent of this Section 14.03 to the fullest extent possible. SECTION 14.04. Owner Trustee Not Acting in Individual Capacity. Each party hereto acknowledges that Fleet National Bank is entering into this Agreement solely as the Owner Trustee under the Trust Agreement and not, except as expressly provided herein, in its individual capacity, and in no case whatsoever shall it (or any entity acting as successor Owner Trustee under the Trust Agreement) be personally liable for any loss in respect of any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, except that the Owner Trustee shall be liable, in its individual capacity, (a) for its own wilful misconduct or gross negligence; (b) in the case of the inaccuracy of any of its representations or warranties or the failure to perform any covenant of the Owner Trustee in its individual capacity contained in or referred to in Section 4.05 of this Agreement or in Section 4.01 of the Lease; and (c) for the failure to use the degree of care and skill set forth in Section 6.01 of the Trust Agreement in the receipt and disbursement of moneys actually received by it in accordance with the provisions hereof. If a successor Owner Trustee is appointed in accordance with the terms of the Trust Agreement, such successor Owner Trustee shall, without any further act, succeed to all the rights, duties, immunities and obligations of the Owner Trustee hereunder and the predecessor Owner Trustee shall be released from all further duties and obligations hereunder. In the case of any appointment of a successor to the Owner Trustee pursuant to the Trust Agreement or any merger, consolidation or transfer of substantially all the corporate trust business of the Owner Trustee pursuant to the Trust Agreement, the successor Owner Trustee shall give prompt written notice thereof to the Indenture Trustee and the holders of the Loan Certificates, unless the Owner Trustee is the survivor of any such merger or consolidation. [balance of page intentionally left blank] 65 70 IN WITNESS WHEREOF, the parties hereto have each caused this Participation Agreement to be executed as of the date first above written. RAYCHEM CORPORATION By: /s/ Lars Larsen -------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer FLEET NATIONAL BANK not in its individual capacity (except as expressly set forth herein) but solely as Owner Trustee, By: /s/ K Larimore -------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION not in its individual capacity (except as expressly set forth herein) but solely as Indenture Trustee, By: /s/ Nancy M Dahl -------------------------------------- Name: Nancy M Dahl Title: Assistant Vice President 66 71 U.S. BANCORP LEASING & FINANCIAL as Owner Participant By: /s/ C C Langer -------------------------------------- Name: C. C. Langer Title: President BANK BRUSSELS LAMBERT, NEW YORK BRANCH as Loan Participant By: /s/ D Vangaever , Joyce Thunnissen -------------------------------------- Name: Dominick H. J. Vangaever , Joyce Thunnissen Title:Vice President, Credit Department, Vice President BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY as Loan Participant By: /s/ Christine Taylor -------------------------------------- Name: Christine Taylor Title: V.P. and Manager By: /s/ Mark Sadok -------------------------------------- Name: Mark Sadok Title: Vice President 67 72 DEUTSCHE BANK AG, LOS ANGELES BRANCH AND/OR CAYMAN ISLANDS BRANCH as Loan Participant By: /s/ Johnathon Scott Jessup -------------------------------------- Name: J. Scott Jessup Title: Vice President By: /s/ Ross Howard -------------------------------------- Name: Ross A. Howeard Title: Vice President KREDIETBANK NV as Loan Participant By: /s/ R Snauffer -------------------------------------- Name: Robert Snauffer Title: Vice President By: /s/ Tod Angus -------------------------------------- Name: Tod R. Angus Title: Vice President 68 73 SOCIETE GENERALE FINANCIAL CORP. as Loan Participant By: /s/ O. C. -------------------------------------- Name: O. Carmarie Title: V. P. By: -------------------------------------- Name: Title: 69 EX-10.T 3 PARTICIPATION AGREEMENT BETWEEN RAYCHEM & METLIFE 1 Exhibit 10(t) PARTICIPATION AGREEMENT dated as of April 11, 1996 among RAYCHEM CORPORATION, as Lessee, METLIFE CAPITAL, LIMITED PARTNERSHIP as Owner Participant, FLEET NATIONAL BANK as Owner Trustee, DEUTSCHE BANK AG as Agent, BANK BRUSSELS LAMBERT, NEW YORK BRANCH BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY DEUTSCHE BANK AG, KREDIETBANK NV, AND SOCIETE GENERALE FINANCIAL CORP. as Loan Participants, and FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION as Indenture Trustee -------------------- Manufacturing Equipment 2 TABLE OF CONTENTS
PAGE ARTICLE I Definitions and Rules of Usage................................................................ 1 ARTICLE II Closing....................................................................................... 1 SECTION 2.01. Agreements To Participate............................................................... 1 SECTION 2.02. Additional Loan Participants............................................................ 2 SECTION 2.03. Payments on Closing Date................................................................ 2 SECTION 2.04. Time and Place of Closing; Notice....................................................... 2 ARTICLE III Closing Conditions............................................................................ 4 SECTION 3.01. Conditions Precedent to Participations in Lessor's Cost................................. 4 SECTION 3.02. Conditions Precedent to the Obligations of the Lessee on the Closing Date.......................................................................... 10 ARTICLE IV Representations and Warranties....................................................... 11 SECTION 4.01. Representations and Warranties of the Lessee............................................ 11 SECTION 4.02. Representations and Warranties of the Owner Participant................................. 15 SECTION 4.03. Representations and Warranties of the Indenture Trustee................................. 15 SECTION 4.04. Representations and Warranties of Loan Participants..................................... 16 SECTION 4.05. Representations and Warranties of the Owner Trustee..................................... 17 ARTICLE V Covenants..................................................................................... 18 SECTION 5.01. No Lessor Liens......................................................................... 18 SECTION 5.02. Further Assurances, etc................................................................. 18 SECTION 5.03. Lessee To Defend Rights of Owner Trustee................................................ 19 SECTION 5.04. Reports................................................................................. 19 SECTION 5.05. Merger, Consolidation, etc., of Lessee.................................................. 20 SECTION 5.06. Financial Statements.................................................................... 21 SECTION 5.07. Trust Agreement......................................................................... 21 SECTION 5.08. Advertising; Trademarks................................................................. 21 SECTION 5.09. Involuntary Proceeding.................................................................. 22 SECTION 5.10. ERISA................................................................................... 22 SECTION 5.11. Withholding Taxes....................................................................... 22 SECTION 5.12. Payment of Lessor Paid Amounts.......................................................... 23 SECTION 5.13. Auxiliary Payments...................................................................... 23 SECTION 5.14. Covenants .............................................................................. 23 SECTION 5.15. Determinations.......................................................................... 24 ARTICLE VI General Indemnity.................................................................... 24 SECTION 6.01. General Indemnity....................................................................... 24 SECTION 6.02. Subrogation............................................................................. 26
i 3 TABLE OF CONTENTS (CONTINUED)
PAGE SECTION 6.03. Claims.................................................................................. 27 SECTION 6.04. Tax Savings............................................................................. 28 ARTICLE VII General Tax Indemnity................................................................ 28 SECTION 7.01. General Tax Indemnity................................................................... 28 7.01.1 General Tax Indemnity................................................................. 28 7.01.2 Excluded Taxes........................................................................ 29 7.01.3 Credits for Foreign Taxes............................................................. 31 7.01.4 Refunds and Other Credits............................................................. 31 7.01.5 Consolidated Reporting................................................................ 32 SECTION 7.02. Contests................................................................................ 32 7.02.1 Notice of Claims...................................................................... 32 7.02.2 Conduct of Contest.................................................................... 32 7.02.3 Failure to Contest.................................................................... 33 SECTION 7.03 Returns.................................................................................. 34 SECTION 7.04. Payments................................................................................ 34 7.04.1 Due Dates for Payments................................................................ 34 7.04.2 No Payment Obligation During Lease Event of Default................................... 34 SECTION 7.05. Verification............................................................................ 34 SECTION 7.06. Withholding on Rent..................................................................... 35 ARTICLE VIII Special Tax Indemnity................................................................ 35 SECTION 8.01. Certain Tax Assumptions................................................................. 35 SECTION 8.02. Tax Representations..................................................................... 37 SECTION 8.03. Definition of Loss...................................................................... 39 SECTION 8.04. Indemnity............................................................................... 41 SECTION 8.05. Tax Savings............................................................................. 47 SECTION 8.06. Contests................................................................................ 47 8.06.1 Notification.......................................................................... 48 8.06.2 Obligation to Contest................................................................. 48 8.06.3 Control of Contest.................................................................... 48 8.06.4 Advances.............................................................................. 49 8.06.5 Settlements........................................................................... 49 8.06.6 Offsets and Refunds................................................................... 49 SECTION 8.07. Combined Returns........................................................................ 50 SECTION 8.08. Certain Adjustments..................................................................... 50 ARTICLE IX Expenses............................................................................. 51 SECTION 9.01. Transaction Expenses Payable by the Owner Participant................................... 51 SECTION 9.02. Agreed Transaction Expenses............................................................. 51 SECTION 9.03. Amendments, Waivers, etc................................................................ 51
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PAGE SECTION 9.04. Fees of Trustees........................................................................ 51 ARTICLE X Recomputation of Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values............................... 52 SECTION 10.01. Making of Adjustments.................................................................. 52 SECTION 10.02. Stipulated Loss Values; Termination Values; EBO Prices................................. 53 SECTION 10.03. Computation of Adjustments............................................................. 53 SECTION 10.04. Tax Assumption Changes................................................................. 54 SECTION 10.05 Post-Closing Adjustment for Pre-Closing Tax................................. 54 ARTICLE XI Transfer of Owner Participant's Interest............................................. 55 SECTION 11.01. Transfers.............................................................................. 55 ARTICLE XII Refunding............................................................................ 57 SECTION 12.01. Refunding.............................................................................. 57 SECTION 12.02. Notice................................................................................. 60 ARTICLE XIII Reserved............................................................................. 60 ARTICLE XIV Miscellaneous........................................................................ 60 SECTION 14.01. Documentary Conventions................................................................ 60 SECTION 14.02. No Recourse to Owner Participant....................................................... 60 SECTION 14.03. Confidentiality........................................................................ 61 SECTION 14.04. Owner Trustee Not Acting in Individual Capacity........................................ 62 SCHEDULE I ADDRESSES SCHEDULE II Name of Loan Participants and Amounts EXHIBIT A-1 to the Participation Agreement EXHIBIT A-2 to the Participation Agreement EXHIBIT A-3 to the Participation Agreement EXHIBIT A-4 to the Participation Agreement EXHIBIT A-5 to the Participation Agreement EXHIBIT B-1 to the Participation Agreement
iii 5 TABLE OF CONTENTS (CONTINUED)
PAGE EXHIBIT B-2 to the Participation Agreement EXHIBIT B-3 to the Participation Agreement EXHIBIT B-4 to the Participation Agreement EXHIBIT B-5 to the Participation Agreement EXHIBIT B-6 to the Participation Agreement EXHIBIT 4.01(i) to the Participation Agreement Exhibit 8.02(h) to the Participation Agreement Appendix A to the Participation Agreement
iv 6 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT ("Agreement") is entered into as of April 11, 1996 among RAYCHEM CORPORATION, a Delaware corporation, as Lessee; METLIFE CAPITAL, LIMITED PARTNERSHIP, a Delaware limited partnership, as Owner Participant, BANK BRUSSELS LAMBERT, NEW YORK BRANCH, a Belgian bank, BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY, a German bank, DEUTSCHE BANK AG, LOS ANGELES BRANCH AND/OR CAYMAN ISLANDS BRANCH, a German bank, KREDIETBANK NV, a Belgian bank, and SOCIETE GENERALE FINANCIAL CORP., a Delaware corporation, as Loan Participants, FLEET NATIONAL BANK a national banking association, not in its individual capacity, except as expressly stated herein, but solely in its capacity as Owner Trustee, and FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, a national banking association, not in its individual capacity except as expressly stated herein, but solely as Indenture Trustee. The parties hereto agree as follows: ARTICLE I Definitions and Rules of Usage Unless the context otherwise requires, terms used herein shall have the meanings assigned to them in Appendix A, which also contains rules of usage. ARTICLE II Closing SECTION 2.01. Agreements To Participate. In reliance on the agreements, representations and warranties herein contained or made pursuant hereto, and subject to the terms and conditions hereinafter set forth: (a) Loan Participants. The Loan Participants will participate in the payment of Lessor's Cost of the Items delivered on the Closing Date by making one or more Secured Loans to the Owner Trustee on the Closing Date in the principal amount or amounts specified in Schedule II hereto (as such may be supplemented in accordance with Section 2.02). Each Secured Loan shall be evidenced as provided in the Indenture by one or more Loan Certificates, as specified in Schedule II hereto, in the aggregate principal amount of such Secured Loan. 1 7 (b) Owner Participant. The Owner Participant will participate in the payment of Lessor's Cost on the Closing Date by making an equity investment on the Closing Date with respect to the Equipment to be delivered to the Lessor on the Closing Date in an amount, with respect to the Owner Participant, equal to the result of subtracting from the Lessor's Cost of the Production Unit or Units to be allocated to the Owner Participant under the Trust Agreement the amount of Secured Loans specified in Schedule II hereto with respect to such Production Unit; provided, that the aggregate equity investment (excluding fees and expenses) of the Owner Participant shall not exceed $14,392,266.02. (c) Headlease Payment. The Owner Trustee will acquire rights to the Equipment under the Headlease on the Closing Date by executing the Headlease and paying Lessor's Cost of the Items delivered on the Closing Date pursuant to the Headlease. SECTION 2.02. Additional Loan Participants. The Lessee, on behalf of the Owner Trustee, may designate one or more institutional investors unrelated to the Lessee or any Affiliate of the Lessee that shall have agreed to become additional Loan Participants hereunder in connection with a Refunding. Following compliance by the Lessee with Article XII, each such institutional investor shall become a party to this Agreement, with all rights and obligations specified for a Loan Participant herein, by delivering to each of the other Participants, the Owner Trustee, the Indenture Trustee and the Lessee counterparts of this Agreement executed in the space provided for such purpose at the foot hereof, or an instrument or instruments agreeing to be bound by this Agreement and making the representations and warranties set forth in Section 4.04, with an addendum to Schedules I and II hereto showing the principal amount of Loan Certificates with respect to the Refunding Date to be purchased by such institutional investor, such Loan Participant's percentage of the aggregate principal amount of Loan Certificates to be purchased on the Refunding Date, the interest rate to be borne by each such Loan Certificate and each Loan Participant's name and address for payments and for notices. Upon such delivery, and upon approval by the Lessee and the Owner Participant of such dollar amounts and such percentages, each such institutional investor shall thereafter constitute a Loan Participant for all purposes of this Agreement and the other Operative Documents. SECTION 2.03. Payments on Closing Date. Subject to the terms and conditions of this Agreement, by noon, Eastern time on the Closing Date the Loan Participants and the Owner Participant will each make available the amount required to be made available by them pursuant to Section 2.01 through wire transfer in Federal or other funds immediately available on the Closing Date to the account of FSBU specified in Schedule I, and FSBU will pay the amount required to be paid by it pursuant to Section 2.01 through wire transfer in Federal or other funds to the account of the Lessee specified in Schedule I. SECTION 2.04. Time and Place of Closing; Notice. (a) The closing of the transactions contemplated by this Participation Agreement shall take place at the offices of 2 8 Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California at 9:00 a.m. on the Closing Date. (b) Change in Closing Date. If the Closing Date is later than the estimated closing date noticed by the Lessee, then the Lessee agrees to pay the Owner Participant any expense which such Participant may sustain or incur as a consequence of the delay in the Closing Date. Such payment shall not exceed an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the equity investment, to be made by the Owner Participant hereunder at then current Debt Rate over (ii) (x) if at least one Business Day's notice is not given by the Lessee of the delay in the Closing Date, but the Owner Participant has not transferred funds to the Indenture Trustee, the amount of interest (as reasonably determined by the Owner Participant) which would have accrued to the Owner Participant on such amount or (y) if the Owner Participant actually transmits the required funds to the Indenture Trustee on the estimated Closing Date, the Lessee shall pay to Owner Participant interest on such Participant's funds for the period (if any) from and including such Closing Date to but excluding the earlier of (A) the date on which the transactions to occur on such Closing Date are concluded and (B) the date such funds are returned to such Participant (which shall in no event occur later than two Business Days following such scheduled Closing Date) or in each case the following Business Day if such funds were not returned on or before 12:00 noon (New York City time) on such date. Such interest, if any, shall accrue on the amount of such funds at the Debt Rate and shall be paid on the applicable date set forth in clause (i) or (ii) of the immediately preceding sentence. The Indenture Trustee shall invest and reinvest funds received at the sole discretion of, for the account of, and at the risk of the Lessee, in any investment permitted by Section 9.11(b) of the Indenture selected by the Lessee that is due and payable on the Business Day immediately succeeding the date of such investment. To the extent that such earnings are not in excess of any interest due and payable by the Lessee to such Participant under this Section 2.04(b), any earnings on the investment of such funds (including interest) will be paid to such Participant toward the payment of such interest, and the Lessee will pay any shortfall. To the extent that such earnings are in excess of any interest due and payable by the Lessee to such Participant under this Section 2.04(b), such excess earnings will be paid to the Lessee. In the absence of any such direction by the Lessee, the Indenture Trustee shall invest and reinvest such funds in any available investments permitted by Section 9.11(b) of the Indenture that are due and payable on the Business Day immediately succeeding the date of such investment or reinvestment. The Lessee shall immediately reimburse the Indenture Trustee or the Owner Participant for any loss, cost or expense incurred as a result of the investment or transfer of funds by the Indenture Trustee in accordance with the terms of this Section 2.04(b). The duties of the Indenture Trustee with respect to the investment and payment of funds are limited to those specifically set forth herein. The Indenture Trustee shall incur no liability hereunder except for its gross negligence, willful misconduct, or its negligence relating to the holding or disposing (but not investing) of funds hereunder. The Indenture Trustee shall hold any such funds as escrow agent on behalf of such Participant. The Indenture Trustee shall hold such funds in trust for such Participant and shall give such funds the degree of care it gives other similar property 3 9 held in such capacity. The Indenture Trustee shall have no responsibility to determine the authenticity or validity of any written notice, instruction, opinion of counsel, request or other document delivered to it and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and purporting to have been signed by the proper party or parties. Upon making payment of funds received pursuant to this Section 2.04(b), the Indenture Trustee shall have no further liability under this Section 2.04(b) for any amount so paid. Notwithstanding the foregoing, Lessee shall not be obligated to make any payment under this Section 2.04(b) to the Owner Participant if the delay in the Closing Date results from the breach by the Owner Participant of its obligation to fund. ARTICLE III Closing Conditions SECTION 3.01. Conditions Precedent to Participations in Lessor's Cost. The obligation of the Owner Participant to participate in the payment of Lessor's Cost of the Equipment and the obligation of each Loan Participant to participate in the payment of such Lessor's Cost (each such Loan Participant and the Owner Participant being referred to, individually, as a "Participant" and, collectively, as the "Participants"), shall be subject to the fulfillment to the satisfaction of, or waiver by, such Participant prior to or on the Closing Date of the following conditions precedent (except that the obligation of any party shall not be subject to such party's own performance or compliance): (a) Notice; Commitments of Other Participants. Such Participant shall have received the notice required by the first sentence of Section 2.04(b). On or before the Closing Date, (i) the Participants shall have made available the full amount then required to be made available by them pursuant to Section 2.01, such sum required to be made available to equal the Lessor's Cost for the Equipment, and (ii) the Owner Participant shall have wire transferred to FSBU an amount equal to the aggregate Up-Front Fee and FSBU shall have wire transferred to each Loan Participant such Loan Participant's Up-Front Fee. (b) Loan Certificates. On or before the Closing Date, the Owner Trustee shall have duly executed and delivered to each Loan Participant one or more Loan Certificates, dated as of the Closing Date, in an aggregate principal amount equal to the amount of the Secured Loan made by such Loan Participant to the Owner Trustee, each of which shall be authenticated by the Indenture Trustee. (c) Receipt. On the Closing Date, the Lessee shall have duly executed and delivered to the Owner Trustee an instrument acknowledging receipt of funds in the amount of Lessor's Cost of the Equipment. 4 10 (d) Authorization, Execution and Delivery of Operative Documents. On the Closing Date, the following documents shall have been duly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect on the Closing Date without any event or condition having occurred or existing which constitutes, or with the giving of notice or lapse of time or both would constitute, a default thereunder or breach thereof or would give any party thereto the right to terminate any thereof or not to perform its obligations thereunder: (i) this Participation Agreement; (ii) the Headlease, dated the Closing Date, covering the Equipment to be transferred to the Lessor on the Closing Date (the chattel paper original of which shall go to the Indenture Trustee); (iii) the Lease, as supplemented by a Lease Supplement dated the Closing Date, such Lease Supplement (the chattel paper original of which shall go to the Indenture Trustee) covering all Items and specifying the Lessor's Cost for each Item and each Production Unit which Lessor's Cost shall be equal to the in-place fair market value of such Production Unit as set forth in the Appraisal; (iv) the Indenture, dated the Closing Date, covering (x) all Items in each Production Unit covered by the Headlease, and (y) the terms of the Loan Certificates related to such Production Units; (v) the Lease Security Agreement; and (vi) the Trust Agreement. (e) Appraisal. On or before the Closing Date, the Owner Participant shall have received the Appraisal for the Production Units being delivered on the Closing Date, and the Loan Participants shall have received the Loan Participants' Appraisal. (f) Insurance. On or before the Closing Date, the Participants, the Owner Trustee and the Indenture Trustee shall have received certificates of authorized representatives of the underwriters of such policies which evidence that the Lessee has in effect all insurance which is required under the terms of the Lease, and an Officer's Certificate to the effect that all such insurance is in full force and effect and complies with the terms of the Lease. 5 11 (g) Filings and Recordings. On or before the Closing Date, all filings, recordings and other actions reasonably requested by any Participant shall have been duly made or taken, including, without limitation: (i) Receipt of a landlord's waiver substantially in the form of Exhibit A-1 with respect to each Plant Site, or portion thereof, which is on real property leased to Raychem, duly filed in all appropriate locations; (ii) Filing of a financing statement (Form UCC-1) substantially in the form of Exhibit A-2 with the California Secretary of State to protect the Indenture Trustee's security interest in the Equipment; (iii) Filing of a precautionary financing statement (Form UCC-1) substantially in the form of Exhibit A-3 with the California Secretary of State to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (iv) Filing of a fixture filing substantially in the form of Exhibit A-2 with San Mateo County, California, to protect the Indenture Trustee's security interest in the Equipment; (v) Filing of a precautionary fixture filing substantially in the form of Exhibit A-3 with San Mateo County, California to protect the Owner Trustee's interest in the Equipment (with the Indenture Trustee named therein as Assignee); (vi) Filing of a financing statement (Form UCC-1) substantially in the form of Exhibit A-4 with the Secretary of State of the State of Massachusetts to protect the Indenture Trustee's security interest in the Owner Participant Trust Estate; (vii) Receipt of a search request (Form UCC-3) from the California Secretary of State listing active filings against Lessee as "debtor," with copies of such filings; and (viii) Receipt of a search request from San Mateo County, California, showing fixture filings against Lessee with copies of such filings. 6 12 (h) Lessee Certificates. On the Closing Date, each Participant, the Owner Trustee and the Indenture Trustee shall have received (i) an Officer's Certificate of the Lessee confirming (A) that the representations and warranties of the Lessee contained in the Operative Documents are true and correct on and as of the Closing Date as though made on and as of the Closing Date, (B) that no event or condition has occurred and is continuing, or would result from the consummation of the transactions contemplated by the Operative Documents, that constitutes a Lease Default or an Indenture Default, (C) that each Operative Document to which the Lessee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Lessee enforceable against the Lessee in accordance with its terms, (D) that no Event of Loss (or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Loss) with respect to any Equipment to be transferred to the Lessor has occurred and is in existence on the Closing Date and (E) such other matters as the Participants shall reasonably request; and (ii) such evidence as to the due authority of the Lessee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Participants shall reasonably request. (i) Legal Opinions. (A) On the Closing Date, each Participant, the Owner Trustee and the Indenture Trustee shall have received the opinions of: (i) Lessee's Counsel, substantially in the form of Exhibit B-1; (ii) Indenture Trustee's Counsel, substantially in the form of Exhibit B-2; (iii) Owner Trustee's Counsel, substantially in the form of Exhibit B-3; (iv) Owner Participant's in-house counsel, substantially in the form of Exhibit B-4; and (v) Owner Participant's Special Counsel, substantially in the form of Exhibit B-5; and (B) On the Closing Date, Owner Participant shall have received the opinion of Owner Participant's Tax Counsel in form and substance satisfactory to Owner Participant. (C) On the Closing Date, the Loan Participants shall have received the opinion of Loan Participants' Counsel in form and substance satisfactory to such Loan Participants. 7 13 (j) Closing Date. The Closing Date shall occur on or before May 30, 1996. (k) No Event of Loss. On the Closing Date, no Event of Loss (or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Loss) with respect to any Equipment to be transferred to the Lessor on the Closing Date shall have occurred. (l) Representations and Warranties of the Lessee. The representations and warranties of the Lessee set forth in Section 4.01 shall be true and correct on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (m) Taxes. All Taxes, if any, due and payable on or prior to the Closing Date in connection with the execution, delivery, recording and filing of the Operative Documents and in connection with the consummation of any transaction contemplated by the Operative Documents shall have been paid in full. (n) Governmental Action. All Governmental Action required or, in the reasonable opinion of such Participant, advisable for the consummation of the transactions contemplated by the other Operative Documents shall have been obtained and shall be in full force and effect and each Participant shall have received copies of evidence of such Governmental Action, if any. (o) Litigation. Except as disclosed in any Disclosure Document, no action, proceeding or investigation shall have been instituted or threatened nor shall any Governmental Action before any Governmental Authority have been instituted or threatened, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority, in each case at the time of the Closing Date, to set aside, restrain, enjoin or prevent the consummation of the transactions contemplated by the Operative Documents or which could have a Material Adverse Effect on the Lessee. (p) Illegality. No change shall have occurred on or prior to the Closing Date in Applicable Laws that, in the opinion of such Participant or its counsel, would make it illegal for such Participant to participate in any of the transactions contemplated by the Operative Documents, and the Loan Certificates to be acquired by each Loan Participant on the Closing Date shall be a legal investment for such Loan Participant under the laws of each jurisdiction to which it may be subject, and each Loan Participant shall have received such certificates or other evidence as it may reasonably request demonstrating the legality of such purchase under such laws. (q) Certificates. Each Participant shall have received (i) certified copies of the Organic Documents of the Lessee, the Owner Trustee and the Indenture Trustee; and (ii) 8 14 good standing certificates of the Lessee certified by the Secretary of State for the States of Delaware and of California. (r) Reserved (s) Aggregate Lessor's Cost. The aggregate Lessor's Cost of the Equipment shall not exceed $67,430,000. (t) Material Adverse Change. No event shall have occurred which shall have caused a Material Adverse Effect on the financial condition of the Lessee from such condition on the date of filing of the Lessee's most recent report on Form 10-Q or Form 10-K furnished to the Participants prior to the Closing Date. (u) Lessee Authority. The Participants shall have received a certified copy of the resolution of the Board of Directors approving the Transactions and a certified incumbency certificate showing the authority of the individuals signing for Lessee. (v) Tax Changes. There shall have been no event which would have been a Tax Assumption Change pursuant to Section 10.04 but for the absence of an effective date on or prior to the Closing Date. (w) Trustee Certificates. The Participants shall have received (i) an Officer's Certificate of the Owner Trustee and of the Indenture Trustee confirming that (A) the representations and warranties of the Owner Trustee and of the Indenture Trustee contained in the Operative Documents are true and correct on and as of the Closing Date, and (B) each Operative Document to which the Owner Trustee and the Indenture Trustee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Trustee and the Indenture Trustee, respectively; and (ii) such evidence as to the due authority of the Owner Trustee and the Indenture Trustee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Participants shall reasonably request. (x) Tax Ruling. The Lessee shall have received a ruling from the California State Board of Equalization to the effect that no sales or use tax is due on payments pursuant to the Lease or the Headlease and have provided a copy of such ruling to the Owner Participant and to Loan Participants' Counsel. (y) Other Matters. Each Participant, the Owner Trustee and the Indenture Trustee shall have received copies of such other documents as they may have reasonably requested in connection with the transactions contemplated hereby (which, in the case of the Loan Participants, shall include the Owner Participant Certificates referred to in Section 3.02(b) with respect to the Closing Date. 9 15 SECTION 3.02. Conditions Precedent to the Obligations of the Lessee on the Closing Date. The obligations of the Lessee to take the actions contemplated hereby on the Closing Date shall be subject to the fulfillment to the satisfaction of, or waiver by the Lessee prior to or on the Closing Date of, the following conditions precedent (except that the obligations of the Lessee shall not be subject to the performance or compliance of the Lessee): (a) Authorization, Execution and Delivery of Operative Documents. The documents listed in Section 3.01(d) to be delivered on the Closing Date shall have been duly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect on the Closing Date, and the Lessee shall have received an executed counterpart of each such document of which an executed counterpart shall have been delivered to the Participants and a copy of each such document of which a copy shall have been delivered to the Participants. (b) Owner Participant Certificates. The Lessee shall have received (i) an Officer's Certificate of the Owner Participant confirming that (A) the representations and warranties of the Owner Participant contained in the Operative Documents are true and correct on and as of the Closing Date as though made on and as of the Closing Date, and (B) each Operative Document to which the Owner Participant is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Participant, enforceable against the Owner Participant in accordance with its terms; and (ii) such evidence as to the due authority of the Owner Participant to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Lessee shall reasonably request. (c) Owner Trustee Certificates. The Lessee shall have received (i) an Officer's Certificate of the Owner Trustee confirming that (A) the representations and warranties of the Owner Trustee contained in the Operative Documents are true and correct on and as of the Closing Date, and (B) each Operative Document to which the Owner Trustee is a party is in full force and effect with respect to it and is the legal, valid and binding obligation of the Owner Trustee; and (ii) such evidence as to the due authority of the Owner Trustee to execute, deliver and perform each Operative Document executed by it or contemplated by the terms hereof to be executed by it as the Lessee shall reasonably request. (d) Legal Opinions. The Lessee shall have received opinions addressed to it of the counsel specified in clauses (ii), (iii), (iv), and (v) of Section 3.01(i)(A). (e) Payment of Lessor's Cost. The Participants shall have paid to Lessee an amount equal to Lessor's Cost of the Equipment. (f) Closing Date. The Closing Date shall occur on or before the date specified in Section 3.01(j). 10 16 (g) Appraisal. On or before the Closing Date, the Lessee shall have received a copy of the Appraisal for the Equipment. (h) Illegality. No change shall have occurred after the Business Day immediately prior to the date of execution by the Lessee of the Participation Agreement in Applicable Laws that, in the opinion of the Lessee or its counsel, would make it illegal for the Lessee to participate in any of the transactions contemplated by the Operative Documents. (i) Filings and Recordings. All filings, recordings and other actions reasonably requested by the Lessee shall have been duly made or taken. (j) Tax Assumption Change. No notice of a Tax Assumption Change shall have been given by the Owner Participant to the Lessee pursuant to Section 10.04 if the present value of the Basic Rent (such present value to be computed in accordance with the methodology used by the Lessee in evaluating its participation in the transactions contemplated by this Participation Agreement and based on the full Interim Term and Basic Term) would, as adjusted as set forth in such notice, increase by more than 50 basis points (0.50%). If the Lessee declines to close because of this condition, the Lessee shall, notwithstanding Section 9.01 hereof, pay all Transaction Expenses. (k) Reserved (l) Withholding Taxes. The Participants shall have provided such forms and certificates as are necessary to establish that they may receive payments under the Operative Documents without withholding of Tax under Applicable Law. ARTICLE IV Representations and Warranties SECTION 4.01. Representations and Warranties of the Lessee Representations and Warranties of the Lessee. The Lessee represents and warrants as follows: (a) Corporate Organization. The Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power, authority and legal right to own or hold under lease its properties and to enter into and perform its obligations under the Operative Documents to which it is a party and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the failure to be so qualified would have a Material Adverse Effect on the Lessee. 11 17 (b) Due Authorization, Non-Contravention, etc. The execution, delivery and performance of the Operative Documents to which the Lessee is a party have been duly authorized by all necessary corporate action, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of any Organic Document or Contractual Obligation of the Lessee or any Applicable Law. (c) Governmental Action. No Governmental Action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution or delivery by the Lessee of the Operative Documents to which it is a party and no Governmental Action by, and no notice to or filing with, any Governmental Authority is required for the due performance by the Lessee of its obligations under the Operative Documents to which it is a party except for Governmental Actions, notices or filings as have been duly obtained or made and are in full force and effect. There is no proceeding pending or, to the best knowledge of the Lessee, threatened which seeks, or may reasonably be expected, to rescind, terminate, modify or suspend any such Governmental Action. The Lessee is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940. (d) Validity. The Operative Documents to which the Lessee is a party have been duly authorized, executed and delivered by the Lessee and each constitutes the legal, valid and binding obligation of the Lessee, enforceable in accordance with their respective terms. (e) Litigation. Except as disclosed in any Disclosure Document, there is no pending or, to the best knowledge of the Lessee, threatened litigation, action, arbitration or proceeding affecting the Lessee or any of the Equipment or any of its properties, assets or revenues which is reasonably likely to have a Material Adverse Effect on the Lessee. (f) Compliance with Applicable Laws. The Lessee is in compliance with all Applicable Laws and Governmental Actions the failure to comply with which would be reasonably likely to have a Material Adverse Effect on the Lessee. (g) Financial Statements and Condition. The financial statements of the Lessee contained in the most recent Form 10-K and Form 10-Q provided to the Participants are complete and accurate in all material respects. Except as disclosed in its Disclosure Documents, there has been no material adverse change in the Lessee's business, assets, operations or condition (financial or otherwise) since the date of its most recent audited financial statements prior to the Closing Date. 12 18 (h) Environmental Matters. The Lessee: (i) has not violated any Environmental Law or released any Hazardous Substance; (ii) is not aware of any events, conditions or circumstances involving Hazardous Substances; and, (iii) is not aware of any claim or investigation, pending or threatened, based on or related to any Environmental Law, that could reasonably form the basis for a claim by any party which would, if adversely determined: (x) have a material adverse effect on the value or operating condition of any Production Unit; (y) result in the attachment of a lien to any Item or otherwise have a material adverse effect on the Owner Trustee's or Indenture Trustee's rights with respect to any Item; or (z) have a Material Adverse Effect on the Lessee. (i) Title. On the Closing Date, all Uniform Commercial Code financing statements and other documents (other than any Operative Documents), if any, or memoranda in respect thereof, necessary or advisable to establish and protect the Owner Trustee's right, leasehold title and interest in and to the Equipment to be transferred to it and to perfect (on a first priority basis, subject to Permitted Liens) for the benefit of the Indenture Trustee and the Loan Participants the security interest in the Indenture Estate will have been duly executed by the Lessee and the Owner Trustee and filed or recorded or delivered to the Indenture Trustee's Counsel for filing or recording. Upon delivery of any Equipment by the Lessee pursuant to the Headlease, the Owner Trustee will thereupon have leasehold title to such Equipment under the Headlease free and clear of all Liens other than Permitted Liens (and the Lessee agrees to defend such rights against any and all Persons whomsoever). Lessee has, immediately prior to entering into the Transactions, good and marketable title to the Equipment and has, except as disclosed on Exhibit 4.01(i), good and marketable title to the land comprising or underlying each Plant Site. (j) Equipment. On the Closing Date, the Equipment will be in good operating condition and repair (except for Equipment being repaired or upgraded in the ordinary course of business), will be adequate for the uses for which it is intended and will comply in all material respects with Applicable Law. No Item of such Equipment will be real property or a fixture. 13 19 (k) No Public Offering. Neither the Lessee nor any Person acting on its behalf has directly or indirectly offered or sold the Loan Certificates or the beneficial interest in the Owner Participant Trust Estate or any interest in the Equipment or the Lease, or any securities similar thereto, or has otherwise approached or negotiated with any Person with respect thereto, so as to require the registration of any "security" offered or sold in connection with the transactions contemplated hereby under Section 5 of the Securities Act of 1933, as amended. (l) No Prohibited Transaction. None of (I) the execution and delivery of the Operative Documents and the consummation of the transactions contemplated thereunder, nor (II) the making of the Secured Loans evidenced by the Loan Certificates and the issuance of the Loan Certificates, nor (III) the acquisition by the Owner Participant of the beneficial interest in the Trust Estate, will involve any non-exempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code (the representation in this sentence being made in reliance upon and subject to the accuracy of the representations contained in or made by the Participants in Sections 4.02(f) and 4.04(b)). (m) Chief Executive Office. The chief executive office (as such term is used in Article 9 of the UCC) of the Lessee is located at 300 Constitution Drive, Menlo Park, California 94025. (n) Location of Equipment. On the Closing Date, each Item will be at a Plant Site of Lessee in San Mateo County, California. (o) Taxes. All Taxes, if any, due and payable on or prior to the Closing Date in connection with the execution, delivery, recording, and filing of the Operative Documents and in connection with the consummation of the transactions contemplated by the Operative Documents have been paid in full. The Lessee has paid California sales tax reimbursement (or California use tax) on the Equipment located in California. (p) Appraisal. All written information with respect to the Equipment supplied by Lessee to, and expressly relied on by, the Appraiser in connection with the Appraisal was accurate at the time given and will remain accurate on the Closing Date. The Lessee and the Participants agree that the written information referred to in the foregoing sentence includes only the written information described in Exhibit 8.02(h), and that the Lessee is not otherwise responsible for the Appraisal or its conclusions. (q) Location of Items. As of the Closing Date each Item of Equipment is in the location described in the financing statements filed pursuant to Section 3.01(g). 14 20 SECTION 4.02. Representations and Warranties of the Owner Participant. The Owner Participant represents and warrants with respect to itself, as follows: (a) Organization. It is a limited partnership, duly organized and validly existing under the laws of the State of Delaware, and has the power and authority to enter into and perform its obligations under the Operative Documents to which it is a party. (b) Due Authorization, Non-Contravention, etc. The execution, delivery and performance of the Operative Documents to which it is a party have been duly authorized by all necessary corporate action, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of any of its Organic Documents or Contractual Obligations or any Applicable Law. (c) Validity. The Operative Documents to which it is a party have been duly executed and delivered by, and each constitutes the legal, valid and binding obligation of, the Owner Participant, enforceable in accordance with its terms. (d) Securities Acts; Brokers. Neither the Owner Participant nor any Person acting on its behalf has directly or indirectly offered or sold the Loan Certificates or any interest in the Equipment or the Lease, or any securities similar thereto, or has otherwise approached or negotiated with any Person with respect thereto, so as to require the registration of any security offered or sold in connection with the transactions contemplated hereby under Section 5 of the Securities Act of 1933, as amended. It is acquiring its interest in the Equipment for its own account for investment and not with a view to, or for sale in connection with, any distribution; provided, that the disposition of its properties shall at all times be and remain within its control. Except for Trinity Advisors Incorporated, it has not retained or employed any broker or finder to act on its behalf in connection with the transactions contemplated by the Operative Documents and has not authorized any broker or finder retained or employed by any other Person so to act. (e) Lessor Liens. The Equipment is free of Lessor Liens Attributable To Owner Participant. (f) ERISA. No part of the funds to be used by it to acquire any interest in the Equipment constitutes assets of any Benefit Plan. (g) Net Worth. The Owner Participant has a Tangible Net Worth or combined capital and surplus of at least $50,000,000. SECTION 4.03. Representations and Warranties of the Indenture Trustee. The Indenture Trustee in its individual capacity represents and warrants to each of the other parties hereto that: 15 21 (a) Corporate Organization. It is a national banking association duly organized and validly existing in good standing under the laws of the United States of America and has all requisite power and authority to execute, deliver and perform its obligations under this Agreement and the Indenture. (b) Due Authorization. This Agreement and the other Operative Documents to which it is party have been executed and delivered by one of its officers who is duly authorized to execute and deliver such Operative Documents on its behalf. (c) Non-Contravention. Neither the execution and delivery by the Indenture Trustee of this Agreement or the other Operative Documents to which it is party, nor the authentication by it of the Loan Certificates, nor the consummation by it of the transactions contemplated hereby or thereby nor the compliance by it with any of the terms or provisions thereof will contravene any Utah or Federal applicable law governing the banking or trust powers of the Indenture Trustee or any judgment or order applicable to or binding on it, or contravene or result in any breach of, or constitute any default under, its Organic Documents or Contractual Obligations to which it is a party or by which any of its properties may be bound. (d) Approval. Neither the execution and delivery by the Indenture Trustee of this Agreement and the other Operative Documents to which it is or is to be a party, nor the performance by it of any of the transactions contemplated hereby or thereby, require the consent or approval of, the giving of notice to, the registration with, or the taking of any other action in respect of, any Utah or Federal Governmental Authority or agency governing the banking or trust powers of the Indenture Trustee. SECTION 4.04. Representations and Warranties of Loan Participants. Each Loan Participant, as to itself only, represents and warrants as follows: (a) Loan Certificates for Investment Only. It is acquiring the Loan Certificates in the ordinary course of its banking business. (b) ERISA. No part of the source of funds to be used by it to purchase the Loan Certificates constitutes assets of any Benefit Plan. (c) Resale. The Loan Certificate to be issued to it pursuant to the Indenture is being acquired by it with no present intent to make any resale or distribution thereof which would require registration under the securities Act of 1933 and it will not offer or sell any Loan Certificate in a manner which would violate or require registration under the Securities Act of 1933, as amended. 16 22 SECTION 4.05. Representations and Warranties of the Owner Trustee. The Owner Trustee in its individual capacity represents and warrants to each of the other parties hereto that: (a) Organization. It is a national banking association duly organized and validly existing in good standing under the laws of the United States of America and has all requisite corporate power and authority to execute, deliver and perform its obligations under the Trust Agreement and (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) has all requisite corporate power and authority as Owner Trustee to execute and deliver the other Operative Documents to which it is or is to be a party. (b) Due Authorization. It, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, has taken all corporate action necessary to authorize the execution and delivery by it of the Operative Documents to which it is a party, and each Operative Document executed by it in its individual capacity and (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) each Operative Document executed by it in its capacity as Owner Trustee has been executed and delivered by one of its officers who is duly authorized to execute and deliver such Operative Document on its behalf in either such capacity. (c) Non-Contravention. Neither the execution and delivery by it, either in its individual capacity or (assuming due authorization execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, of any of the Operative Documents to which it is a party, nor the consummation by it of the transactions contemplated thereby nor compliance by it with any of the terms or provisions thereof will contravene any judgment or order binding on it, or contravene or result in any breach of its Organic Documents or any Connecticut or Federal law governing its banking or trust powers. (d) Approval. Neither the execution and delivery by it, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Owner Participant) as Owner Trustee, as the case may be, of each of the Operative Documents to which it is a party, requires the consent or approval of or the giving of notice to, the registration with, or the taking of any other action in respect of, any Connecticut or Federal Governmental Authority governing the banking or trust powers of the Owner Trustee. (e) Location. The chief place of business (as such term is used in Article 9 of the Uniform Commercial Code) of the Owner Trustee is in Boston, Massachusetts (and it hereby agrees to provide notice to the Lessee, the Indenture Trustee and the Participants of any change in the location of its chief place of business within thirty days of such change). 17 23 (f) Title. On the Closing Date the Owner Trustee will have whatever interest in the Owner Participant Trust Estate and whatever rights to and interests in the Lease, the Lease Supplements and the Headlease as were granted or conveyed to it, free and clear of any Lessor Liens Attributable To Owner Trustee in its individual capacity. ARTICLE V Covenants SECTION 5.01. No Lessor Liens. Each of the Owner Participant and the Owner Trustee (in its individual capacity) agrees, as to itself only, that it shall not directly or indirectly create, incur or suffer to exist any Lien on, or disposition of its interest in, any Item or any portion thereof that results from either (x) claims against such Person not related to the Transactions or (y) an affirmative act of such Person to create such a Lien or disposition that is neither consented to by the Lessee and the Indenture Trustee nor taken in connection with any Lease Event of Default nor, in the case of the Owner Trustee, expressly directed by the Owner Participant pursuant to the terms of the Trust Agreement (all such Liens being referred to herein as "Lessor Liens" and all such Liens which result from acts of a Person or claims against a Person being deemed "Attributable To" such Person). Each of the Owner Participant and the Owner Trustee (in its individual capacity) agrees that it will, at its own cost and expense, with respect to any Lessor Lien Attributable To it: (i) promptly take such action as may be necessary duly to discharge such Lessor Lien, (ii) make restitution to and hold harmless each other Indemnified Person from and against any costs or expenses (including legal fees and expenses) incurred as a result of the imposition or enforcement of any such Lessor Lien, and (iii) make restitution to each Certificateholder of any reduction in the amount payable out of the Indenture Estate to such Certificateholder under any Loan Certificate. SECTION 5.02. Further Assurances, etc. (a) Lessee. The Lessee will, at its expense, cause to be promptly and duly taken, executed, acknowledged or delivered all such further acts, conveyances, documents and assurances as the Indenture Trustee or any Participant may, from time to time, reasonably request in order more effectively to carry out the intent of any of the Operative Documents and the Transactions. Without limiting the generality of the foregoing, the Lessee shall furnish to the Indenture Trustee such continuation statements, duly and properly completed, as shall be necessary to preserve and maintain the perfection of the Uniform Commercial Code financing statements originally filed pursuant to Section 3.01(g). (b) Indenture Trustee. Upon the request of the Lessee, and provided that no Lease Event of Default exists and is continuing, the Indenture Trustee shall, if it is able to do so based on information in its possession or provided to it by Lessee, certify to any party proposing to provide financing to Lessee that the Items listed on the Lease Supplements 18 24 constitute the only tangible personal property of Lessee included in the Indenture Estate. The Indenture Trustee shall, within five Business Days of receipt thereof, execute and return to the Lessee for filing, or itself file at Lessee's expense, any financing statements or other documentation required pursuant to the Operative Documents to perfect the interests of the Lessor and the Indenture Trustee, including pursuant to Sections 9.01, 9.05 and 18.01 of the Lease. (c) Owner Trustee. Upon the request of the Lessee, and provided that no Lease Event of Default exists and is continuing, the Owner Trustee shall, if it is able to do so based on information in its possession or provided to it by Lessee, certify to any party proposing to provide financing to Lessee that the Items listed on the Lease Supplements constitute the only tangible personal property of Lessee included in the Owner Participant Trust Estate or covered by the Headlease and the Lease. The Owner Trustee shall, within five Business Days of receipt thereof, execute and return to the Lessee for filing, or itself file at Lessee's expense, any financing statements or other documentation required pursuant to the Operative Documents to perfect the interests of the Lessor and the Indenture Trustee, including pursuant to Sections 9.01, 9.05 and 18.01 of the Lease. (d) All Participants. Following the completion of the tagging required by Section 12.02 of the Lease, all Participants agree, at Lessee's request and expense, (i) to substitute for the Schedules appended to the Lease, Headlease, and Indenture (or supplements thereto) revised Schedules showing the tag number assigned to each Item involved in the Transactions, and (ii) to amend the financing statements filed on or prior to the Closing such that the amended financing statements reference each Item subject to a security interest in favor of the Owner Trustee or the Indenture Trustee by tag number. SECTION 5.03. Lessee To Defend Rights of Owner Trustee. The Lessee covenants to the Owner Trustee that it will, at all times, at its own cost and expense, warrant and defend the rights of the Owner Trustee to the Equipment against any Liens (other than Permitted Liens), claims and demands of or against the Lessee and all other Persons claiming through the Lessee. SECTION 5.04. Reports. The Lessee will furnish or cause to be furnished to the Indenture Trustee and each Participant: (a) within 105 days after the close of each fiscal year of the Lessee, a certificate of the Lessee, signed by an officer of the Lessee, to the effect that the signer has reviewed, or caused to be reviewed by persons under his or her supervision, this Agreement and the Lease and has made, or caused to be made under his or her supervision, a review of the transactions and condition of the Lessee during the preceding fiscal year, and that such review has not disclosed the existence at the date of such certificate, nor does the signer have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes a Lease Event of Default or, if any such condition or event exists, specifying the nature and period of existence thereof and what action the Lessee has taken, is taking or proposes to take with respect thereto; and (b) from time to time such other 19 25 information as the Indenture Trustee or any Participant may reasonably request, subject to appropriate provisions regarding confidentiality. SECTION 5.05. Merger, Consolidation, etc., of Lessee. The Lessee shall not consolidate or merge with or into any Person or sell, transfer, convey or lease all or substantially all its properties or assets as an entirety to any Person, unless: (a) the successor entity formed by such consolidation or into which it is merged or that acquires such assets shall be organized under the laws of the United States of America, a state thereof or the District of Columbia, shall be authorized under all Applicable Laws to operate the Equipment and perform under the Operative Documents to the same extent as Lessee, and, if the successor entity is not the Lessee, the successor entity shall expressly assume, by an agreement executed and delivered to the Owner Trustee, in form reasonably satisfactory to the Indenture Trustee and the Owner Participant, the due and punctual performance of each covenant and condition of the Operative Documents to be performed or observed by the Lessee; (b) such successor entity shall, after giving effect to such transaction, have a Tangible Net Worth of not less than the greater of (i) the Tangible Net Worth of the Lessee as shown on the financial statements of Lessee contained in its most recent Form 10-K or Form 10-Q provided to the Participants prior to the Closing Date, or (ii) 75% of the Tangible Net Worth of Lessee immediately prior to such consolidation, merger, sale, transfer, conveyance or lease; (c) there shall be no Lease Event of Default after giving effect to such merger; (d) all filings shall have been made that are necessary or desirable to preserve the interests of the Participants in the Equipment; and (e) the Lessee shall have delivered to the Owner Trustee, the Indenture Trustee and each Participant an Officer's Certificate and, with respect to clause (a) above, an opinion of counsel satisfactory to the Owner Trustee, the Indenture Trustee and each Participant, stating that such consolidation, merger, sale, conveyance, transfer or lease, and the assumption agreement to the extent required by clause (a) above, comply with this Section 5.05, that all conditions precedent relating to such action have been complied with and that the assumption agreement is valid, binding and enforceable. Upon any such consolidation, merger, sale, conveyance, transfer or lease in accordance with this Section 5.05, the successor entity formed by such consolidation or into which the Lessee shall be merged or to which such sale, conveyance, transfer or lease shall be made shall succeed to, and be substituted for, and may exercise every right and power and shall be subject to each and every obligation of, the Lessee under the Operative Documents to which it is a party with the same effect as if such successor corporation had been named as the Lessee 20 26 therein and in the event of any such sale, conveyance, transfer or lease, the transferor Lessee shall be discharged from all liability under the Operative Documents. SECTION 5.06. Financial Statements. (a) Lessee. The Lessee shall provide to each Participant copies of its annual audited consolidated financial statements within 105 days of its fiscal year end, and unaudited quarterly financials within 60 days of the end of its first three fiscal quarters. Delivery to a Participant of the Lessee's Form 10-K (along with the Lessee's Annual Report) or Form 10-Q shall satisfy such annual or quarterly requirement as to such Participant. (b) Owner Participant. On an annual basis, Deutsche Bank AG may provide a written request to the Owner Participant to furnish Deutsche Bank AG (on behalf of itself and Bayerische Vereinsbank AG) copies of Owner Participant's unaudited financial statements and, to the extent available, the audited financial statements of the closest (in the chain of ownership) direct or indirect parent or partner of the Owner Participant which is regularly audited. The Owner Participant shall not unreasonably withhold compliance with any such request; provided, however, the failure of the Owner Participant to provide any such financial statements shall not constitute an Indenture Default or Indenture Event of Default. Deutsche Bank AG and Bayerische Vereinsbank AG will hold confidential all such financial statements as if such financial statements were covered by Section 14.03 hereof (for which purposes, however, disclosure would be with the consent of the Owner Participant (not the Lessee or the Lessor). SECTION 5.07. Trust Agreement. The Owner Trustee and the Owner Participant agree that (unless a Lease Event of Default shall have occurred and be continuing) until expiration or earlier termination of the Lease, they will not terminate the Trust Agreement without the prior written consent of the Lessee. The Owner Trustee and the Owner Participant further agree that, until the discharge of the Indenture, they will not, except as provided in Section 4.10 of the Indenture, amend or terminate the Trust Agreement without the prior written consent of the Indenture Trustee. SECTION 5.08. Advertising; Trademarks. Each Participant agrees that it will not advertise or publish the fact that it has furnished financing to, or otherwise entered into the transactions contemplated hereby with, the Lessee without first obtaining the written consent of the Lessee. Notwithstanding any other provision of any Operative Document, no Participant will have any right to use any patent, proprietary technology or trade secret of Lessee or any trademark or trade name of, or otherwise refer to, the Lessee or Lessee's Agent in any promotion or publication without first obtaining the written consent of such Person. For the avoidance of doubt, any software or license rights furnished to the Lessee by the manufacturer of an Item in connection with the acquisition or upgrade of such Item by the Lessee and necessary to operate such Item in the manner in which it was designed, as conveyed to the 21 27 Lessor by Section 1.04 of the Headlease, do not constitute patents, proprietary technology or trade secrets of the Lessee subject to this Section 5.08. SECTION 5.09. Involuntary Proceeding. Each Participant and the Indenture Trustee agrees that it will not commence or join in any proceeding under the Federal Bankruptcy Code to commence a case under Section 303 of the Federal Bankruptcy Code against the Owner Participant Trust Estate. Nothing contained herein shall be deemed to preclude any Participant or the Indenture Trustee from filing any claim against the Owner Participant Trust Estate in any such proceeding commenced against the Owner Participant Trust Estate. SECTION 5.10. ERISA. Loan Participants. Each Loan Participant covenants and agrees that it will not sell, exchange or transfer any Loan Certificate unless the proposed purchaser or transferee of such Loan Certificate has represented to such Loan Participant, the Owner Participant, and the Lessor as to each source of funds to be used by it to purchase such Loan Certificate to the same effect as Section 4.04(b). SECTION 5.11. Withholding Taxes. (a) Indemnity by Loan Participants. Each Loan Participant agrees to indemnify (on an After-Tax Basis) and hold harmless the Indenture Trustee, the Lessee, the Owner Trustee and the Owner Participant against any United States withholding taxes and related interest and penalties which the Indenture Trustee fails to withhold on payments to such Loan Participant solely as a result of the invalidity of any certificate or form provided by such Loan Participant to the Indenture Trustee hereunder or pursuant to Section 9.12 of the Indenture. Any amount payable hereunder shall be paid within 30 days after receipt by a Loan Participant of a written demand thereof. (b) Agreement of Indenture Trustee. The Indenture Trustee agrees that it shall (i) act as withholding agent and, in connection therewith, whenever any present or future Taxes are required to be withheld with respect to any amounts paid by the Indenture Trustee in respect of the Loan Certificates, it shall withhold such amounts and timely pay the same to the appropriate Governmental Authority in the name of and on behalf of the Loan Participants, (ii) file any necessary withholding tax returns or statements when due, and (iii) deliver to each Loan Participant appropriate documentation showing the payment of such amounts, together with such additional documentary evidence as such Loan Participants may reasonably request from time to time. The Indenture Trustee agrees that it shall file any other information reports as it may be required to file under United States law. If the Indenture Trustee is required to withhold in accordance with the first sentence of this Section 5.11(b) but fails, with respect to any Loan Participant, to withhold and pay over any such Taxes to the appropriate Governmental Authority, and a claim is made for such Taxes by such 22 28 Governmental Authority, the Indenture Trustee shall make a written demand for payment from the Lessee with respect to such Taxes as are subject to indemnification under Article VII of the Participation Agreement, and, upon receipt of an adequate indemnity from the Lessee, shall, with respect to Taxes that are not subject to indemnification under such Article VII take all reasonable steps permitted by law (other than filing of a lawsuit) to recover such Taxes from such Loan Participant, including withholding the amount of such Taxes from subsequent distributions, if any, to such Loan Participant. To the extent the Indenture Trustee receives any amount from the Lessee for indemnification of such Taxes with respect to a particular Loan Participant which are not indemnifiable by the Lessee pursuant to Article VII and the Indenture Trustee thereafter recovers from such Loan Participant (including by withholding from subsequent distributions to such Loan Participant) the Indenture Trustee shall reimburse the Lessee therefor. SECTION 5.12. Payment of Lessor Paid Amounts. The Owner Participant agrees, solely for the benefit of the Lessee, to satisfy the Lessor's obligation under Section 3.03 of the Lease to make certain payments on the Loan Certificates by paying to the Indenture Trustee on behalf of the Owner Trustee such amounts in the manner provided by Section 3.04 of the Lease. SECTION 5.13. Auxiliary Payments. If an Auxiliary Payment is payable under Section 5 or Section 6 of any Loan Certificate, the Owner Trustee shall, upon receipt of satisfactory indemnification from the Lessee and at the direction of the Lessee, elect under Section 5(f) or Section 6(f), as applicable, of the Loan Certificate to require the transfer of such Loan Certificate. All costs and expenses incurred by the Owner Trustee in connection with any such election, repayment or transfer, including any payment equal to the difference between the price payable to the Certificateholder pursuant to Section 5(f) or Section 6(f) of the Loan Certificate, and the amount to be paid by the proposed transferee, shall be included in Supplemental Rent. SECTION 5.14. Covenants Relating to Period While Loan Certificates are Outstanding. The following covenants are for the benefit of the Loan Participants and Certificateholders, and shall be of no force and effect if all Loan Certificates have been redeemed or retired or if a Majority in Interest of Certificateholders shall have waived the application of this Section 5.14. (a) Substitutions. In addition to the requirement of Section 9.05(a) of the Lease, if Lessee on a consolidated basis, reports on the financial statements referred to in Section 5.06(a) hereof net operating losses (excluding any "restructuring charges" identified as such) in two consecutive quarters (such losses, the "Reporting Trigger"), and for so long as Lessee continues to report such quarterly net operating losses, the Lessee will concurrently with or in advance of any substitution of Items perform the steps required by Sections 9.05 (a)(ii), (iii) and (iv) of the Lease. 23 29 (b) Appraisal. In addition to the requirements of Section 9.05(d) of the Lease, (i) if the sum of the Lessor's Cost of the replaced Items (measured according to and with the exclusions of Section 9.05(d)) exceeds five million dollars since the later of the Closing Date or the last appraisal, the Lessee shall obtain and supply to the Participants the appraisal specified in Section 9.05(d); and (ii) if Equipment with a cumulative Lessor's Cost in excess of 25% (determined without regard to the conditions described in clauses (i) through (iv) of Section 9.05(d)) of aggregate Lessor's Cost is substituted, Lessee shall obtain, and shall supply to the Participants, an appraisal in respect of such substituted Equipment of a scope and to the effect required by Section 9.05(d) of the Lease, but which will include an on-site inspection by the appraiser. (c) Subleasing. If the Reporting Trigger occurs, and for so long as Lessee continues to report quarterly net operating losses on such Forms 10-K and 10Q, the consent of a Majority in Interest of Certificateholders will be required for any sublease other than to an Affiliate of the Lessee that is consolidated on the Lessee's balance sheet in the financial statements referred to in Section 5.06(a) hereof. SECTION 5.15. Determinations. On each "LIBOR Determination Date" Deutsche Bank AG shall determine LIBOR (as defined in the Loan Certificates) and shall notify the Owner Trustee, the other Loan Participants, the Indenture Trustee and the Lessee thereof in writing. Upon being notified of LIBOR, the Indenture Trustee shall determine the Debt Rate, (ii) the total amount of principal and interest payable under the Loan Certificates on the Interest Payment Date for such Interest Period and (iii) the total amount of Rent payable under the Lease on the corresponding Rent Payment Date, and shall notify the Owner Trustee, the Lessee and the Loan Participants thereof in writing. ARTICLE VI General Indemnity SECTION 6.01. General Indemnity. The Lessee does hereby assume liability for, and (whether or not any of the transactions contemplated hereby shall be consummated) shall indemnify, protect, save and hold harmless and keep whole each Indemnified Person, on an After-Tax Basis, from and against, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, judgments, costs, expenses and disbursements (including legal fees and expenses and costs of investigation) of whatever kind and nature that may be imposed on, incurred by or asserted against any Indemnified Person relating to or arising out of: 24 30 (A) the Operative Documents or the transactions contemplated by the Operative Documents (including, without limitation, the performance or enforcement of all obligations of the Lessee under the Operative Documents and payments made pursuant thereto or other transactions contemplated thereby and any claims or penalty arising out of a violation of applicable law with respect thereto (including ERISA and securities laws)), (B) the manufacture, financing, construction, purchase, acceptance, possession, rejection, control, ownership, delivery, nondelivery, use, operation, leasing, subleasing, condition, maintenance, repair, sale, abandonment, redelivery or other disposition of, or the imposition of any Lien (or incurrence of any liability to refund or pay over any amount as a result of any Lien) on, the Equipment or any interest therein, including any liabilities imposed by or under Environmental Laws (including all investigations, inspections and reinspections, clean-up costs and expenses, except to the extent such costs and expenses result from investigations or clean-ups initiated or undertaken by an Indemnified Person without demand or compulsion by a Governmental Authority or other third party), (C) any claim or penalty related to the Equipment arising out of violations of Applicable Law, or in tort (strict or otherwise) or arising from the active or passive negligence of an Indemnified Person, latent or other defects, whether or not discoverable by any Person, loss of or damage to any property or the environment, death of or injury to any person, (D) any claim for patent, trademark or copyright infringement relating to the Equipment or its use, and (E) all costs and expenses incurred by any Indemnified Person in connection with any Lease Event of Default, any Event of Loss, any redemption, refunding, prepayment or transfer of the Loan Certificates made in accordance with the Operative Documents, or any transfer of all or any part of the right, title and interest of the Owner Trustee or the Owner Participant in the Equipment or in, to and under any of the Operative Documents; provided, however that the Lessee shall not be required pursuant to this Section 6.01 to assume, or to provide indemnity for: (a) with respect to any Indemnified Person, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement to the extent resulting from such Indemnified Person's own gross negligence or wilful misconduct (other than gross negligence or wilful misconduct imputed to such Indemnified Person by reason of its interest in the Equipment) or solely from such 25 31 Indemnified Person's breach of any of its representations or warranties or covenants contained in any Operative Document; (b) with respect to the Owner Trustee or the Owner Participant, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement in connection with (i) a voluntary sale, lease or other disposition by either such Person of its rights in the Equipment or any part thereof or any right to or interest in the Operative Documents, other than a sale, lease or disposition contemplated by Articles VII, IX, XIV, XVI, and XVII of the Lease or by the Indenture, or (ii) an involuntary transfer in connection with any bankruptcy or other proceeding for the relief of debtors with respect to the Owner Participant or any Affiliate; for purposes of this Section, any increase in Taxes imposed on a transferee under clauses (i) or (ii) (other than a transferee in a transfer resulting from a Lease Event of Default) shall be treated as a loss in connection with such transfer; (c) with respect to any Indemnified Person, any liability, obligation, loss, damage, penalty, claim, action, suit, judgment, cost, expense or disbursement arising out of acts or events involving any Equipment and occurring after redelivery of such Equipment in accordance with the Lease (other than a redelivery pursuant to Article XIV thereof) and payment of all Rent then due and payable; or (d) with respect to any Indemnified Person, any Taxes, whether or not otherwise indemnified for, excluding from this clause (d) taxes or other penalties that may be imposed on the Owner Participant under Section 4975 of the Code or Parts 4 or 5 of Subpart B of Title I of ERISA as a result of the execution and delivery by the Owner Participant of this Agreement or any other Operative Document and the consummation of the transactions contemplated thereby on the Closing Date or the making or holding of its equity investment or in taking any other action requested by Lessee. The indemnities set forth in this Section 6.01 shall not constitute a guarantee, representation or warranty to any Indemnified Person of or as to the value or useful life of any Equipment, any guarantee, representation or warranty that any debt incurred by the Owner Participant to finance its Lessor's Cost will be paid or any guarantee, representation or warranty that any debt evidenced by the Loan Certificates will be paid or any other form of recourse against Lessee for the payment of any such debt. SECTION 6.02. Subrogation. Upon payment in full of any assumed liability or indemnity pursuant to Section 6.01, so long as no Lease Event of Default or Material Lease Default has occurred and is continuing, the Lessee shall, to the extent of such payment be subrogated to any rights of the Indemnified Person in respect of the matter against which such indemnity was given. 26 32 SECTION 6.03. Claims. (a) Claims Procedure. In case any action, suit or proceeding shall be brought against any Indemnified Person for which such Indemnified Person is entitled to indemnification, such Indemnified Person shall notify the Lessee of the commencement thereof (but the failure to do so shall not relieve the Lessee of its obligation to indemnify such Indemnified Person except to the extent that the Lessee or its insurer is materially prejudiced as a result of such failure). Subject to the rights of insurers under policies of insurance maintained by or for the benefit of Lessee, the Lessee shall have the right to investigate, and, if the Lessee states that, based on the facts and circumstances as then known, it does not intend to take the position that it would not be obligated to so indemnify (with Lessee reserving its right to take a contrary position based on factual circumstances as subsequently learned by the Lessee, which position Lessee will promptly disclose to such Indemnified Person), the right at its sole discretion to defend or compromise (using its reasonable best efforts), any claim for which indemnification is sought under this Article VI, and, at the Lessee's expense, the Indemnified Person shall cooperate with all reasonable requests of the Lessee in connection therewith; provided, however, that the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if (i) such action, suit or proceeding involves the potential imposition of criminal liability on such Indemnified Person or a risk (other than a de minimis risk) of the sale, forfeiture or loss of the Equipment; (ii) a Material Lease Default shall have occurred and be continuing, or (iii) such claim is joined with one or more claims for which Lessee is not obligated to indemnify hereunder and such other claims are not severable from the indemnifiable claim; provided, further, in the event of an action, suit or proceeding contemplated by the preceding provisos, the Lessee may nevertheless participate at its own expense in such action, suit or proceeding. Where the Lessee or its insurers undertake the defense of an Indemnified Person with respect to a claim, no additional (beyond those accrued prior to Lessee's assumption of the defense) legal fees or expenses of such Indemnified Person in connection with the defense of such claim shall be indemnified hereunder unless such fees or expenses were incurred at the request of the Lessee or such insurers. The Lessee shall pay the reasonable out-of-pocket costs, disbursements and expenses (including reasonable legal fees and expenses) in connection with any such action, suit or proceeding (i) which is indemnified by the Lessee under Section 6.01, and which is properly conducted by an Indemnified Person pursuant to the terms of this Section 6.03. Notwithstanding the foregoing, where the Lessee is obligated hereunder to pay the expenses of an Indemnified Person or Indemnified Persons, the Lessee shall nonetheless not be liable for the fees and expenses of more than one counsel for each of (A) the Owner Participant (and its respective successors and assigns), (B) the Owner Trustee (and its respective successors and permitted assigns, agents and servants) and (C) the Indenture Trustee (and its respective successors and permitted assigns, agents and servants). Notwithstanding anything in this Section 6.03 to the contrary, in any action, suit or proceeding to which any Indemnified Person is a party, the Lessee shall not enter into any settlement or other compromise with respect to any claim indemnified under Article VI without the prior written consent of the Indemnified Person (which consent will not be unreasonably withheld), unless the Lessee acknowledges in a writing satisfactory to such Indemnified Person such 27 33 Indemnified Person's right to full indemnification under this Section 6.03 with respect to such claim. (b) Insured Claims. In the case of any Claim indemnified by the Lessee hereunder which is covered by a policy of insurance maintained by or for the benefit of the Lessee, each Indemnified Person agrees to cooperate with the insurers in the exercise of their rights to investigate, defend or compromise such Claim as may be required to retain the benefits of such insurance with respect to such Claim. SECTION 6.04. Tax Savings. If any Indemnified Person shall actually realize any net income tax saving from any amount with respect to which the Lessee has paid such Indemnified Person pursuant to this Article VI, such Indemnified Person shall pay (except to the extent previously taken into account in determining the amount of any payment made by the Lessee pursuant to Section 6.01 or to an Indemnified Person pursuant to this Section) to the Lessee the amount of such saving, and at the time realized shall also pay the amount of any actual net income tax saving to such Indemnified Person resulting from any payment pursuant to this Section; provided, however, that any such amount shall in no event be payable before such time as the Lessee shall have made all indemnity payments then due under the Operative Documents to such Indemnified Person or at a time when a Lease Event of Default shall have occurred and be continuing; provided further, however, that no such payments shall cumulatively exceed the amount of the related indemnity payments, including any amount paid in connection therewith as an indemnity for or on an indemnity payment, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. The Lessee shall indemnify each Indemnified Person on an After-Tax Basis from and against the loss or disallowance of any such net income tax saving. All the determinations under this paragraph shall be made in a manner consistent with the procedures for the determination of "Gross-Up Taxes" as set forth in the definition of After-Tax Basis in Appendix A hereto. ARTICLE VII General Tax Indemnity SECTION 7.01. General Tax Indemnity. 7.01.1 General Tax Indemnity. Except as provided in Section 7.01.2, the Lessee agrees to pay, and to indemnify, protect, save and hold each Indemnified Person harmless on an After-Tax Basis from and against, any and all Taxes imposed on or with respect to the Operative Documents, the Transaction, any Item or any part thereof, or the documentation, financing, purchase, acceptance, possession, control, delivery, use, operation, leasing, subleasing, condition, maintenance, repair, sale, abandonment, redelivery or other disposition thereof. 28 34 7.01.2 Excluded Taxes. The indemnity provided in Section 7.01.1 shall not extend to any of the following Taxes (the "Excluded Taxes"): (i) Taxes (whether or not imposed by way of withholding) imposed on, based upon or measured by gross or net income (including any minimum Taxes and any Taxes on or measured by items of tax preference), gross or net receipts (in each case other than Taxes in the nature of sales, use, license, property, ad valorem, value-added or rental taxes), capital or net worth, and Taxes that are franchise Taxes or Taxes on doing business; provided, however, that any such Taxes imposed upon or payable by (A) the Indenture Trustee, Owner Trustee or Owner Participant which are withholding taxes on payments made to the Loan Participants in accordance with the terms and conditions of the Loan Certificates, or (B) the Indenture Trustee, Owner Trustee or Loan Participant by reason of an Owner Participant's status as a non-United States person, or pursuant to Section 5.11 hereof, shall not be Excluded Taxes by reason of this subparagraph (i); (ii) any Tax to the extent such Tax is imposed as a result of activities of the Indemnified Person (or an Indemnified Person related thereto) in a taxing jurisdiction that are unrelated to the transactions contemplated by the Operative Documents; (iii) any Tax that results from the Indemnified Person (or an Indemnified Person related thereto) engaging, with respect to any Item or any part thereof, in transactions other than those contemplated by the Operative Documents; (iv) any Tax that is a value-added Tax which is in the nature of or in lieu of or in substitution for an income tax; (v) Taxes resulting from the gross negligence or wilful misconduct of the Indemnified Person (or an Indemnified Person related thereto); (vi) Taxes resulting from any voluntary transfer (which, for the avoidance of doubt, does not include a transfer pursuant to the exercise by Lessee of an election or option under Articles VII, IX, or XVII of the Lease) by the Indemnified Person of any interest in any Item or any part thereof or any interest arising under the Operative Documents or any Loan Certificate (in each case, unless a Lease Event of Default shall have occurred and be continuing), or from any involuntary transfer by the Indemnified Person of any of the foregoing interests in connection with 29 35 any bankruptcy or other proceeding for the relief of debtors with respect to the Owner Participant or any Affiliate; for purposes of this Section, any increase in Taxes imposed on a transferee (other than a transferee in a transfer resulting from a Lease Event of Default) over those that the Lessee is able to demonstrate are those that would have been imposed on the transferor shall be considered Excluded Taxes; (vii) any foreign Taxes imposed with respect to any Item unless such Taxes shall result from the location of such Item or the presence of or payment by the Lessee or any user of an Item in the foreign jurisdiction imposing such Taxes; (viii) any penalties or additions to tax (including interest that is in the nature of a penalty) resulting in whole or in part from a failure of the Indemnified Person to file a return that is timely and proper, unless such failure relates to a matter attributable to the Transaction and such failure was due to a failure of the Lessee timely to (A) supply information required to be supplied by it that was not in the possession of the Indemnified Person, (B) notify the Indemnified Person of such filing requirement, or (C) otherwise fulfill its obligations under this Article VII; (ix) any Tax based on, or measured by, the value of the interest of any Participant in any of the Owner Participant Trust Estate, the Indenture Estate or the Loan Certificates which Tax is imposed by any state or local taxing authority in which such Participant is subject to taxation as the result of transactions unrelated to the transactions contemplated by the Operative Documents; (x) any Tax imposed on the Owner Trustee or the Indenture Trustee with respect to, or measured by, any trustee fees for services rendered in its capacity as trustee under the Trust Agreement or the Indenture; (xi) any Tax that is being contested in accordance with the provisions of Section 7.02 to the extent provided therein during the pendency of such contest; and (xii) any Tax attributable to any Item that is imposed with respect to any period after the earlier of (A) the expiration or early termination of the Term with respect to such Item if the Lessee shall have discharged its obligations with respect to such Item and (B) the return of possession of such Item to the Lessor in accordance with the Lease; provided, however, that no Lease Event of Default shall have occurred and be continuing, and provided, further, that the exception set forth in this 30 36 subparagraph (xii) shall not apply to Taxes relating to events occurring or matters arising prior to such expiration, termination or return. 7.01.3 Credits for Foreign Taxes. If the Lessee makes any payment under Section 7.01 with respect to Taxes payable by an Indemnified Person to any foreign government and such Tax may be claimed as a credit on the United States Federal income tax return of such Indemnified Person, such Indemnified Person shall pay the Lessee an amount (certified to the Lessee by the chief financial officer or similar Responsible Officer of the Indemnified Person) equal to the sum of (i) the amount of such credit that is actually utilized (determined, in the case of years in which limitations apply to the total foreign tax credits available to an Indemnified Person, in accordance with principles set forth in the proviso to the following sentence) and (ii) the actual reduction in Taxes realized by such Indemnified Person as a result of any payment by an Indemnified Person to the Lessee pursuant to this sentence; provided, however, that the aggregate amount payable to the Lessee pursuant to this sentence with respect to any Tax shall not exceed the aggregate amounts previously paid by the Lessee under this Section 7.01 with respect to such Tax, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. To the extent that such Indemnified Person shall lose the benefit of such credit as a result of a loss or credit carryback, an audit adjustment or disallowance, or any similar cause, then such lost benefit shall be treated as a Tax for which the Lessee is obligated to make a payment under this Section 7.01, without regard to the exclusions set forth above in Section 7.01.2; provided, however, that the determination of the extent to which the benefit of such credit is lost shall be made, in the case of Loan Certificate Withholding, on the basis specified in Section 6(e) of the Loan Certificate, and otherwise on the assumption that (x) such credit is utilized prior to foreign tax credits arising out of any lease transaction in which there is a provision that foreign tax credits arising out of such transaction are deemed to be utilized last, (y) such credit is utilized on a pro rata basis with all other foreign tax credits arising out of any lease transaction (except any transaction in which there is an express provision that foreign tax credits arising out of such transaction are deemed utilized on a more favorable basis), and (z) such credit is utilized after all foreign tax credits not described in clauses (x) and (y) of this proviso. If an Indemnified Person claims any credit consistent with this paragraph, the Lessee shall furnish such Indemnified Person with any receipts for the related Taxes that were previously received by the Lessee. 7.01.4 Refunds and Other Credits. If any Indemnified Person shall obtain a refund or credit of all or any part of any Taxes paid, reimbursed or advanced by the Lessee, (other than a credit described in Section 7.01.3), such Indemnified Person shall promptly pay to the Lessee the amount of such refund or credit plus the amount of any tax saving actually resulting from any payment pursuant to this sentence; provided, however, that no such payment shall exceed the amount of all prior payments by the Lessee to such Indemnified Person pursuant to this Article VII related to the Taxes that gave rise to such refund or credit. If, in addition to such refund or credit, such Indemnified Person shall receive an amount representing interest on such refund or credit, the Lessee shall promptly be paid that portion of 31 37 such interest that shall be attributable to Taxes paid, reimbursed or advanced by the Lessee prior to the receipt of such refund or credit. If an Indemnified Person shall realize any actual tax saving (other than a credit described in Section 7.01.3) from any amount with respect to which the Lessee has indemnified such Indemnified Person pursuant to this Article VII, such Indemnified Person shall pay to the Lessee the amount of such tax saving, together with the amount of any actual tax saving resulting from any payment pursuant to this sentence; provided, however, that no such payments shall exceed the amount of all prior payments by the Lessee to such Indemnified Person pursuant to this Article VII related to the Taxes that gave rise to such tax saving, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. Notwithstanding the foregoing, no Indemnified Person shall be required to make any payment to the Lessee until such time as the Lessee shall have made all payments then due under the Operative Documents to such Indemnified Person. The Lessee shall indemnify each Indemnified Person on an After-Tax Basis from and against the loss or disallowance of an amount equal to any refund, credit or tax saving described in this Section which the Indemnified Person has actually paid to Lessee, without regard to the exclusions set forth in Section 7.01.2. 7.01.5 Consolidated Reporting. In the case of any Tax that at any time is required to be reported on a consolidated or combined basis by an Indemnified Person or a Affiliate thereof, the rules governing such consolidated or combined returns shall be taken into account in determining and computing the amount of any indemnity or any payment by or to the Lessee required to be made under this Article VII. SECTION 7.02. Contests. 7.02.1 Notice of Claims. If any Indemnified Person receives written notice that any claim or assessment for any Tax indemnifiable by the Lessee under this Article VII (an "Article VII Claim") is being or will be made against such Indemnified Person, such Indemnified Person shall, within 15 days, notify the Lessee; provided, that failure to notify the Lessee shall not impair such Indemnified Person's right to indemnification under this Article VII, unless the Lessee's ability to contest such Article VII Claim shall have been effectively precluded by such failure. 7.02.2 Conduct of Contest. If: (A) the Lessee in writing requests an Indemnified Person to contest an Article VII Claim and acknowledges its liability under this Article VII to indemnify for the Tax which is the subject of the Article VII Claim, unless the final determination of such claim clearly articulates a basis for the claim for which Lessee is not liable hereunder; (B) the Lessee agrees to pay on demand the Indemnified Person, on presentation of properly certified and supported invoices, for all costs and expenses, including, 32 38 without limitation, reasonable attorneys' fees and expenses, incurred by the Indemnified Person in connection with contesting such Article VII Claim; (C) the Lessee furnishes the Indemnified Person with a written opinion of Heller, Ehrman, White & McAuliffe (or other independent counsel selected by the Lessee and reasonably satisfactory to the Indemnified Person) to the effect that a reasonable basis exists to contest such Article VII Claim; and (D) a Lease Event of Default described in Section 13(a), (b), (c) or (f) of the Lease has not occurred or is not continuing, then the Indemnified Person shall take such action to contest such Article VII Claim as the Lessee shall reasonably request, or, if the Lessee is permitted by law to contest such Article VII Claim in its own name, such Indemnified Person shall take all reasonable action to cooperate with the Lessee's contest of such Article VII Claim. Without limiting the generality of the foregoing, such contest may include appropriate administrative or judicial appeals, and may include using reasonable efforts to obtain a refund of a Tax that has been paid as a result of the Article VII Claim. Except in the case of a contest carried on by the Lessee in its own name, any contest conducted pursuant to this Section 7.02 shall be controlled by the Indemnified Person (who shall consult in good faith with the Lessee regarding the contest, including the preparation of written submissions). Notwithstanding the foregoing, the Indemnified Person need not contest an Article VII Claim, or may discontinue any such contest proceedings, if there is a material risk that any such contest or proceedings will result in the imposition of a Lien upon, or a material risk of the sale, forfeiture or other loss of, any Item (except if the Lessee shall have adequately bonded such Lien or otherwise made provision to protect the interests of such Indemnified Person in a manner reasonably satisfactory to such Indemnified Person). In addition, the Indemnified Person need not contest an Article VII Claim to the United States Supreme Court. 7.02.3 Failure to Contest. An Indemnified Person may refuse to contest an Article VII Claim. If an Indemnified Person fails or refuses to contest, or to permit the Lessee to contest, an Article VII Claim when (i) all of the conditions (A) through (D) of Section 7.02.2 have been satisfied, and (ii) there is no material risk that the contest will result in the imposition of a Lien upon, or a material risk of the sale, forfeiture or other loss of, any Item (or if the Lessee has adequately bonded such Lien or otherwise made provision to protect the interests of such Indemnified Person in a manner reasonably satisfactory to such Indemnified Person), such Indemnified Person shall be deemed to waive payment by the Lessee of any amount that might otherwise be payable by the Lessee under this Article VII in respect of such Article VII Claim. Such Indemnified Person shall promptly pay to the Lessee any amounts theretofore paid by the Lessee with respect to such Article VII Claim, other than reasonable expenses of such contest. 33 39 SECTION 7.03 Returns. In case any report, statement or return shall be required to be made with respect to any Taxes indemnifiable by the Lessee under this Article VII, the Lessee shall, (i) to the extent required or permitted by law, file such return, statement or report in its own name, and (ii) in the case of any such return, statement or report required to be made in the name of an Indemnified Person, advise such Indemnified Person of such fact and either (A) prepare or cause to be prepared such return, statement or report for filing by such Indemnified Person or (B) where any such return, statement or report must reflect items in addition to Taxes indemnified by the Lessee under this Article VII, provide such Indemnified Person with information sufficient to permit such return, statement or report to be properly made with respect to any such Taxes. If an Indemnified Person prepares the return, statement or report filed (or changes a return, statement or report prepared by the Lessee prior to filing), and the Indemnified Person takes the position in such return, statement or report that any Tax indemnifiable by the Lessee under this Article VII is payable, such return, statement or report shall be deemed a written notice of an Article VII claim for purposes of Section 7.02. Neither the Lessee nor any Indemnified Person shall file a sales or use tax return reporting payments of Rent under the Lease or the payment from the Headlessee under the Headlease as being subject to sales or use tax, except in the event of a Change in Law, unless following a written determination of such Person's tax counsel that there is no reasonable basis for taking such position. SECTION 7.04. Payments. 7.04.1 Due Dates for Payments. Subject to Section 7.02, all amounts payable by the Lessee pursuant to this Article VII shall be payable, to the extent not theretofore paid, on written demand therefor by the Indemnified Person (but not more than 10 days before the due date for the payment of the Taxes to which such demand relates). Any amounts payable to the Lessee under this Article VII with respect to a reduction, refund or adjustment in Taxes or a credit shall be paid within 20 days after the filing of the tax return upon which such reduction, refund, adjustment or credit could be claimed by the appropriate Indemnified Person (or could have been claimed by such Person if it had sufficient income). 7.04.2 No Payment Obligation During Lease Event of Default. No amount shall be required to be paid to the Lessee under this Article VII while a Lease Event of Default has occurred and is continuing. SECTION 7.05. Verification. Within 15 days after the Lessee receives any computation from an Indemnified Person pursuant to this Article VII, the Lessee may request that an accountant mutually acceptable to the Lessee and such Indemnified Person shall review such computation. The Indemnified Person shall cooperate with such accountant and supply it with all documentation and records necessary for the accountant to conduct such review; provided that such accountant shall agree in writing satisfactory to the Indemnified Person to maintain the confidentiality of such information. The determination of the accountant shall be final and binding upon the Lessee and the Indemnified Person. The fees and disbursements of 34 40 such accountant will be paid by the Lessee; provided, however, that such fees and disbursements will be paid by the Indemnified Person if the verification results in an adjustment in the Lessee's favor of five percent or more of the indemnity payment or payments computed by the Indemnified Person. Neither the Indemnified Person nor the Lessee shall be required to disclose its income or franchise tax returns to any Person, other than the accountant retained pursuant to this paragraph. SECTION 7.06. Withholding on Rent. All payments of Rent shall be made free and clear of, and without reduction for, U.S. or other withholding taxes on such Rent so long as the Lessor is a U.S. person and the Owner Participant is a U.S. corporation or is a U.S. partnership composed entirely of U.S. corporations. ARTICLE VIII Special Tax Indemnity SECTION 8.01. Certain Tax Assumptions. The Operative Documents are being entered into on the following United States Federal income tax assumptions ("Tax Assumptions"): (a) The entity created by the Trust Agreement will be treated as a grantor trust or as an agent of the Owner Participant for Federal income tax purposes and the Owner Participant, as owner of or as the principal of the entire trust, will be entitled and required to take into account in computing its taxable income all items of income, gain, loss, deduction and credit with respect to the Equipment. (b) The Lease will constitute a true lease for income tax purposes, the Owner Participant will be treated as the owner and lessor of each Item, and the Lessee will be treated as lessee of each Item. (c) The Owner Participant will be entitled, (i) (x) with respect to the Lessor's Cost of 100% of each Production Unit, other than Thermofit, as to which such percentage is 98.08%, Chemelex, as to which such percentage is 99.77%, and Wire and Cable, as to which said percentage is 95.41%, to cost recovery deductions under Section 168 of the Code, as in effect on the date hereof, in the amounts applicable with respect to "five-year property", computed using a five-year recovery period, the 200% declining-balance method (switching to straight-line) and the half-year convention, resulting in deductions in an amount equal to 20.0% of the Lessor's Cost of each Item in the taxable year of the Owner Participant that includes the 35 41 Closing Date and 32.0%, 19.2%, 11.52%, 11.52% and 5.76% of the Lessor's Cost of such Item in each of the Owner Participant's five succeeding taxable years, respectively, and (y) with respect to the remaining percentages of Lessor's Cost of each Production Unit, to depreciation deductions under Section 167 of the Code and the asset depreciation range of Section 1.167(a)-11 of the Regulations, as in effect on the date hereof, in amounts applicable with respect to asset class 36.0 (within the meaning of Rev. Proc. 87-56, 1987-2 C.B. 674, as modified and clarified by Rev. Proc. 88-22, 1988-1 C.B. 785), computed using a five-year recovery period, the 150% declining-balance method (switching to straight-line) and the half-year method, assuming zero salvage, resulting in deductions in an amount equal to 15.0% of the Lessor's cost attributable to such Equipment in the taxable year of the Owner Participant that includes the Closing Date and 25.5%, 17.85%, 16.66%, 16.66%, and 8.33%, in each of the Owner Participant's five succeeding taxable years, respectively (the "Depreciation Deductions"); (ii) to current deductions with respect to interest paid on the Loan Certificates (the "Interest Deductions"); and (iii) to amortization deductions in respect of Transaction Expenses on a straight-line basis over a period consisting of the Interim Term and the scheduled Basic Term (the "Amortization Deductions"). (d) No portion of the Depreciation Deductions will be recaptured prior to the expiration of the Term. (e) The marginal rate of United States Federal income tax for corporations is 35%, and the permanent marginal rate of income tax applicable to the Owner Participant is 35% for each taxable year of the Owner Participant. (f) During fiscal years of the Owner Participant in which the Transaction generates a net loss for Federal income tax purposes, the Owner Participant will be entitled to treat all income and deductions with respect to the Equipment as derived from sources within the United States. (g) The taxable year of the Owner Participant is and will be the calendar year. (h) The Owner Participant will report its income and deductions using the accrual method of accounting for income tax purposes. 36 42 (i) Prior to the end of the Term, the Owner Participant will not be required to include in its taxable income in connection with the Transactions any amount other than: (i) Basic Rent and Renewal Rent accrued in the amounts and over the periods provided for in the Lease (or, if earlier, on the Rent Payment Date with respect to any such Rent payable on such date), (ii) payments received under Article VI or VII hereof or this Article VIII, (iii) any payment by Lessee of an amount specifically designated as interest in connection with a late payment, (iv) any income that is offset by a related current deduction of an expense of the same character for tax purposes not otherwise described in this Section 8.01, (v) any payment of Stipulated Loss Value, Termination Value or any amount determined by reference to Stipulated Loss Value or Termination Value on the date payable in accordance with the terms of the Operative Documents, (vi) any amount paid under the Operative Documents, the calculation of which is specifically determined under the Operative Documents to include an amount designed to hold the Owner Participant harmless against the income tax consequences of the receipt or accrual thereof, (vii) any amount paid pursuant to Article XVII of the Lease, and (viii) insurance proceeds from policies carried by the Owner Participant or any Affiliate thereof, but not required to be maintained by Lessee under the Lease. Notwithstanding anything to the contrary contained herein, the Lessee makes no representation, warranty or covenant with respect to the matters set forth in this Section 8.01 except as specifically set forth in Section 8.02. SECTION 8.02. Tax Representations. Solely for the purpose of this Article VIII, the Lessee represents, warrants and covenants that: 37 43 (a) Neither the Lessee nor any Lessee Person (as hereinafter defined) will file any federal or state income or franchise tax report or form identifying itself as owner of the Equipment or any portion thereof (except for additions, modifications or alterations that are the property of the Lessee). (b) 100% of each Production Unit, other than Thermofit, as to which such percentage is 98.08%, Chemelex, as to which such percentage is 99.77%, and Wire and Cable, as to which said percentage is 95.41%, by value qualified for treatment as "5-year property" within the meaning of Section 168(e)(1) of the Code as in effect on the date hereof in the hands of the Lessee immediately prior to the Closing Date, and the remaining percentage each of such Production Unit by value qualified for treatment as property in asset class 36.0 (assuming a proper election were made under Treasury Regulations Section 1.167(a)-11) in the hands of the Lessee immediately prior to the Closing Date, and neither the Lessee nor any Lessee Person will do anything during the period from the Closing Date through December 31, 2003, (or such longer period as the Owner Participant is claiming depreciation deductions as a result of a Loss of Deductions, as defined in Section 8.03(a)) to cause such proportions of the Equipment to fail to qualify for treatment as "5-year property" within the meaning of such Section 168(e)(1) or as property eligible for inclusion in asset class 36.0. (c) Each Item of Equipment will have been "placed in service" for Federal income tax purposes on or before the Closing Date. (d) As of the Closing Date, no Item of Equipment will require any improvement, modification or addition (other than ancillary items of equipment of a kind customarily selected and furnished by purchasers and lessees of similar equipment) in order to be rendered complete for its intended use by the Lessee or any Affiliate thereof or other user of the Equipment. (e) No Item of Equipment will be used outside the United States during the first seven years of the Term. (f) Under Section 168(g) of the Code as in effect on the date hereof, no Item of Equipment will constitute (i) "tax-exempt use property" by reason of the status of a Lessee Person during the first seven years of the Term or (ii) "tax-exempt bond financed property" by reason of activities of any Lessee Person. (g) Neither any Lessee Person nor any member of the "Lessee Group" (as such term is used in Rev. Proc. 75-21, 1975-1 C.B. 715, as modified by Rev. Proc. 79-48, 1979-2 C.B. 529) will directly or indirectly acquire any interest in the Loan Certificates, or enter into any arrangement for payment of the Loan Certificates with any Person other than as contemplated by the Operative Documents. 38 44 (h) All written information with respect to the Equipment supplied by Lessee to, and expressly relied on by, the Appraiser in connection with the Appraisal was accurate at the time given and will remain accurate on the Closing Date. The Lessee and the Owner Participant agree that the written information referred to in the foregoing sentence includes only the written information described in Exhibit 8.02(h), and that the Lessee is not otherwise responsible for the Appraisal or its conclusions. (i) No Lessee Person will construct or install on any Item any component, improvement, alteration or addition that would cause such Item to become "limited use property" within the meaning of Rev. Proc. 79-48, 1979-2 C.B. 529. The only obligation of the Lessee resulting from the breach or inaccuracy of any of the foregoing representations, warranties and covenants shall be as provided in this Article VIII. SECTION 8.03. Definition of Loss. If any of the following events (hereinafter referred to individually as a "Loss") shall occur, then the Lessee shall pay to the Owner Participant as an indemnity the amounts set forth in Section 8.04 hereof: (a) For United States Federal income tax purposes, the Owner Participant shall for any taxable year lose, shall not claim (as the result of a written determination of Owner Participant's Tax counsel, or other independent tax counsel selected by the Owner Participant involved and reasonably satisfactory to the Lessee, that there is not "substantial authority" within the meaning of Section 6662(d)(2)(B)(I) of the Code for making such claim, which determination was delivered, and furnished to the Lessee, prior to such failure to claim and which determination was delivered after consultation by such independent tax counsel with Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably acceptable to the Owner Participant), shall suffer a disallowance of, or shall be required to recapture, all or any portion of the Depreciation Deductions, the Interest Deductions or the Amortization Deductions (a "Loss of Deductions") as a result of: (i) any act or omission of the Lessee, any Affiliate thereof or any Person (other than the Owner Participant or any Affiliate thereof) who acquires possession of, or the right to use, any Item during the Term (a "Lessee Person"), excluding, however, the execution of the Operative Documents and further excluding any act or omission required or expressly permitted by the terms of the Operative Documents (but not excluding (x) the alteration or modification of any Item and (y) a substitution or trade-in of an Item pursuant to Section 9.01 or 9.05 of the Lease in exchange for a replacement Item, or (ii) the inaccuracy or breach of any representation, warranty or covenant set forth in Section 8.02 or Sections 4.01(d) and 4.01(i) of the Participation Agreement. 39 45 (b) For United States Federal income tax purposes, the Owner Participant shall for any taxable year lose, shall not claim (as the result of a written determination of Owner Participant's Tax Counsel, or other independent tax counsel selected by the Owner Participant involved and reasonably satisfactory to the Lessee, that there is not "substantial authority" within the meaning of Section 6662(d)(2)(B)(I) of the Code for making such claim, which determination was delivered, and furnished to the Lessee, prior to such failure to claim and which determination was delivered after consultation by such independent tax counsel with Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably acceptable to the Owner Participant), or shall suffer a disallowance of all or any portion of the credit for foreign taxes otherwise allowable under Sections 901, 902 or 960 of the Code (a "Foreign Tax Credit Loss") as a result of: (i) the use of any Item outside of the United States by the Lessee, any Affiliate thereof or any Person (other than the Owner Participant or any Affiliate thereof) who acquires possession of, or the right to use, any Item during the Term (a "Lessee Person"), (ii) the inaccuracy or breach of any representation, warranty or covenant set forth in Section 8.02 or Sections 4.01(d) and 4.01(i) of the Participation Agreement, or (iii) a Refunding pursuant to Article XII of the Lease (but not the right to cause a Refunding). (c) The Owner Participant shall be required to include in its income for Federal income tax purposes any amount other than the amounts described in Sections 8.01(i)(i)-(viii) as a result of: (i) the payment by the Lessee of any amount of Basic Rent or Renewal Rent prior to the due date thereof specified in the Lease, (ii) the acquisition of Loan Certificates by any Lessee Person except pursuant to Article XIII, (iii) provided that such inclusion shall be with respect to a period prior to the expiration or termination of the Lease with respect to such Item, the alteration, modification, enhancement or repair to, or maintenance of, any Item, (iv) the receipt and retention by any Lessee Person of any warranty or insurance payment related to any Item or the accrual of any such amount that is to be retained by a Lessee Person, (v) the actual date of an Event of Loss being deemed by the Internal Revenue Service to have occurred earlier than the date assumed in calculating the 40 46 Federal income tax consequences reflected in the applicable Stipulated Loss Value, (vi) the breach or inaccuracy of any representation contained in Section 8.02 hereof, (vii) the making or accrual of any payment, including an Auxiliary Payment, (in each case, other than a payment pursuant to Section 3.03 of the Lease or Article VI, VII or VIII hereof or any payment of principal, interest, breakage costs or similar debt payments) by the Lessee to the Indenture Trustee or a Certificateholder, or (viii) a substitution or trade-in of an Item of Equipment pursuant to Section 9.01 or 9.05 of the Lease, or (ix) the Refunding of the Loan Certificates pursuant to Article XIII (but not the right of the Lessee to cause a Refunding) (any of the foregoing an "Inclusion"). For purposes of this Section 8.03, the existence of the terms and provisions of the Operative Documents and their execution and delivery shall not be deemed to be an act or omission of the Lessee or any Lessee Person. SECTION 8.04. Indemnity. (a) Indemnity Obligation. If the Owner Participant shall incur a Loss, as defined in Section 8.03, the Lessee shall make the indemnity payments set forth below: (i) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to a Loss of Deductions, the Lessee shall pay on an After-Tax Basis to the Owner Participant an amount equal to the income taxes payable or deemed payable by the Owner Participant (calculated pursuant to Section 8.04(e)) as a result of such Loss and any interest, penalties and additions to tax properly attributable to such Loss (net of any deductions currently available for such interest, penalties or additions), other than any interest, penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to file a return that is timely and proper, (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss). 41 47 (ii) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to an Inclusion, the Lessee shall pay to the Owner Participant an amount which on an After-Tax Basis shall be equal to the sum of (1) the product of (A) the amount of the Inclusion which is the subject of such Loss times (B) the composite rate consisting of the highest marginal statutory Federal income tax rate generally applicable to corporations and the state rate actually payable by Owner Participant with respect to such Inclusion, taking into account any allowable deduction of state tax from Federal taxable income (the "Marginal Rate") during the relevant period, plus (2) an amount equal to (A) the amount of any interest, penalties and additions to tax properly attributable to such Loss, other than any interest, penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant, or any Affiliate of either of the foregoing, to file a return that is timely and proper (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss), minus (B) the amount of any actual decrease in the Owner Participant's taxes caused by any allowable deduction in respect of such interest, penalties or additions to tax. (iii) In the case of a Loss incurred for any taxable year by the Owner Participant with respect to a Foreign Tax Credit Loss, then, except to the extent that any Rent adjustment under Article XII reflects such Foreign Tax Credit Loss, the Lessee shall pay to the Owner Participant an amount equal, on the After-Tax Basis, to the amount of such Foreign tax Credit Loss calculated pursuant to Section 8.04(e), and any interest, penalties, or additions to tax properly attributable to such Loss (net of any deductions currently available for such interest, penalties or additions), other than any interest penalties or additions to tax that result in whole or in part from a failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to file a return that is timely and proper (which failure was not attributable to the breach by Lessee of any of its covenants or representations in any Operative Document or the failure of the Lessee to timely notify the Owner Participant of an underlying event with respect to the Equipment or its use causing the Loss). (b) Method of Payment. The Lessee will make payments pursuant to this Section pursuant to (x), below, unless (i) it is not permitted to do so or (ii) it elects to make payments under (y) or (z), below: (x) The Lessee shall pay the Owner Participant, on an After-Tax Basis, from time-to-time at such time as the Owner Participant is required to pay the additional tax due by reason of the Loss of Deductions or Inclusion. 42 48 (y) If the Lessee has elected not to pay, or cannot choose to pay, an indemnity pursuant to either clause (x) above or clause (z) below, Lessee shall provide the Owner Participant of notice of such fact prior to the date Lessee's obligation commences under Section 8.04(b), above, and shall pay to the Owner Participant as an indemnity a lump-sum amount which, on an After-Tax Basis, shall be sufficient to preserve the Owner Participant's Economics as if such Loss had not occurred. The computation of such lump-sum amount shall be made by the Owner Participant utilizing the methodology and assumptions, including Tax Assumptions, utilized by the Owner Participant in determining Basic Rent, Stipulated Loss Value and Termination Value, except as such assumptions shall be varied to take into account such Loss and any prior Loss in a manner consistent with this Section. (z) So long as no Material Lease Default or Lease Event of Default has occurred and is continuing, the Lessee may elect to make indemnity payments in the form of adjustments in the amount of Basic Rent payable by the Lessee pursuant to the Lease, commencing on the next Rent Payment Date after the date the payment obligation commences under Section 8.04(b) continuing on each Rent Payment Date occurring thereafter during the Basic Term, in amounts sufficient to preserve the Owner Participant's Economics as if such Loss had not occurred. The computation thereof shall be made utilizing the methodology and assumptions, utilized by the Owner Participant in determining Basic Rent, Stipulated Loss Value and Termination Value, except as such assumptions shall be varied to take into account such loss and any prior loss in a manner consistent with this Section. (c) Commencement of Payment. (i) The amount payable by the Lessee to the Owner Participant pursuant to this Section 8.04 and Section 8.06 shall, subject to Lessee's elections under Subsection (b) above, commence to be paid upon the occurrence of the latest of (A) 30 days after receipt of a written demand therefor from the Owner Participant, accompanied by a written statement describing in reasonable detail the computation of the amount so payable, (B) except with respect to a Loss resulting from a failure to claim based upon a determination of independent tax counsel described in Section 8.03, if any such indemnity payment relates to a Loss that is contested pursuant to Section 8.06, the date of a final determination with respect to such Loss, and (C) the date the Owner Participant shall be required to pay the additional income taxes resulting from such Loss (or would have been required to pay such additional income taxes resulting from such Loss if it had had sufficient taxable income); provided, however, that if the Lessee shall elect to pay such sum prior to the latest 43 49 of the dates referred to in this sentence, the Lessee shall not be required to pay the Owner Participant the amount of any interest that shall be attributable to the period after such payment by the Lessee; (ii) The date required for payment pursuant to the preceding sentence shall be delayed until 15 days after completion of any verification pursuant to subsection (d) of this Section 8.04; provided that, unless the outcome of the verification requires the Owner Participant to bear the costs thereof (as hereinafter provided), the Lessee shall pay interest at the Debt Rate on the amount determined to be payable pursuant to such verification for the period from the date such amount would have been due in the absence of such verification to the date of the Lessee's payment. (d) Verification. When requesting payment by the Lessee pursuant to this Article VIII, the Owner Participant shall provide the Lessee with a certificate setting forth the amount payable by the Lessee and the computation of such amount. If the Lessee shall disagree with such amount, such amount shall be reviewed and determined by an accounting firm mutually acceptable to the Lessee and the Owner Participant; provided, however, that the sole responsibility of such firm shall be to verify the computation of any payment pursuant to this Article VIII (setting forth fully the assumptions on which such verification is based) and that matters of interpretation of the Operative Documents are not within the scope of such responsibility. The costs of such verification shall be borne by the Lessee, unless such verification results in a correction to such amount in the Lessee's favor of five percent or more of the amount as determined by the Owner Participant, in which case such costs shall be borne by the Owner Participant. No person other than such accounting firm shall be permitted access to the books, records or tax returns of the Owner Participant or any Affiliate thereof. The determination of such accounting firm shall be final and binding upon the Lessee and the Owner Participant. (e) Determination. Whenever it may be necessary for purposes of this Article VIII to determine the amount of any tax resulting from a Loss of Deductions or the amount of tax savings resulting from such Loss of Deductions, such determination shall be made on the assumption that the income taxes of the Owner Participant are payable at the Assumed Tax Rate. When determining the amount of Foreign Tax Credit Loss suffered by the Owner Participant, or the amount of any tax savings resulting from such Foreign Tax Credit Loss, such determination shall be made on the basis of the assumption that the income taxes of the Owner Participant are payable at the Assumed Tax Rate. In the case of any Loss, all computations shall assume that, in computing its Federal income tax liability, the Owner Participant can currently fully utilize the tax benefits that are the subject of any Loss or that result from a Loss. For purposes of determining the amount of tax savings from any payment by the Owner Participant to the Lessee with respect to any Loss other than an Inclusion, it shall be assumed that Taxes are payable by the Owner Participant at the Assumed Tax Rate. 44 50 For purposes of the amount of a Loss resulting from an Inclusion or other amounts payable on an After-Tax Basis, or the amount of tax savings resulting from such amounts or from any payment by the Owner Participant to the Lessee with respect to such amounts, it shall be assumed that Taxes are payable by the Owner Participant at the Marginal Rate. (f) Exceptions. Notwithstanding the foregoing, the Lessee shall not have any liability to the Owner Participant for indemnification under this Article VIII for any Loss (y) except with respect to a Loss described in clause (v) of Section 8.03(c) hereof, if such Loss results from an event with respect to an Item whereby the Lessee is required to pay, and shall have paid in full, Stipulated Loss Value or Termination Value for such Item or any amount determined by reference thereto or (z) if such Loss would not have occurred but for one or more of the following events: (i) a voluntary transfer or disposition by the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing of any interest in any Item or any part thereof or any interest arising under the Operative Documents or any interest in the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing or any involuntary transfer resulting from the bankruptcy or insolvency of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing or from foreclosure proceedings except a transfer or disposition while an Event of Default under the Lease shall have occurred and be continuing, (ii) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to claim a tax benefit or to exclude income described in Section 8.01(i) in a timely and proper manner, unless such failure shall be due to the failure of the Lessee timely to provide the Owner Participant with information timely requested by the Owner Participant and reasonably necessary to make such claim or unless such failure shall be based upon the written determination of independent tax counsel described in Section 8.03(a), (iii) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to take timely action in contesting a claim made by the Internal Revenue Service if such person shall be required to take such action pursuant to Section 8.06, and if such failure has a material adverse effect on Lessee's ability to conduct such contest, (iv) the status of the Owner Participant or any Affiliate thereof for income tax purposes, including without limitation the Owner Participant's or such other person's being or becoming an entity subject to the provisions set forth in Section 465 of the Code, a charitable organization, an agency or 45 51 instrumentality of the United States, a State or political subdivision thereof or an international organization, (v) the applicability of Section 168(d)(3), 168(f)(1), 168(g)(7), 55, 56, 57(a), 291, 501, 593, 851, 856, 1361, or 1381 of the Code to the Owner Participant or any Affiliate thereof, (vi) a change in the Owner Participant's taxable year, (vii) the inaccuracy or incompleteness of any conclusion of the Appraisal referred to in Section 3.01(e) or the inability of the Owner Participant to include in its basis for the Equipment all or any part of Lessor's Cost, in each such case unless such inaccuracy or incompleteness results from the inaccuracy of the representation set forth in Section 8.02(h), (viii) the existence of the trust created by the Trust Agreements, (ix) the failure of the Owner Trustee, the Owner Participant or any Affiliate of either of the foregoing to have sufficient income to benefit from the tax benefits described in Section 8.01, (x) the enactment of or any amendment, modification, deletion or change having been made in or to, the Code as in effect on the date hereof (or any other Federal tax statute), or the promulgation of temporary, proposed or final Treasury Regulations, or administrative interpretations of the Code or the Treasury Regulations in each case on or after the Closing Date; provided, however, that the exception set forth in this clause (x) shall not apply to a Loss relating to a Refunding or to the modification, substitution or trade-in of an Item of Equipment pursuant to Section 9.01 or 9.05 of the Lease if such Refunding, modification, substitution or trade-in occurs after an enactment, amendment, modification, deletion, change or promulgation relating to the Code, temporary or final Treasury Regulations, or a published ruling of the Internal Revenue Service, (xi) the failure of the Transaction to constitute a "true lease" for tax purposes or any determination that the Owner Participant is not the owner of the Equipment with respect to which it has participated in Lessor's Cost, the Loan Certificates are not true debt, the Owner Participant is not holding the Equipment for use in its trade or business or for the production of income or the Owner Participant did not enter into the transaction for profit, in each case unless such failure or determination results from the breach or inaccuracy of any of the Lessee's representations, warranties 46 52 and covenants set forth in Section 8.02 or referenced in Section 8.03(a)(ii), (xii) a breach or inaccuracy of any representation, warranty, covenant or agreement of the Owner Trustee or the Owner Participant contained in the Operative Documents including, without limitation, any failure of the Owner Participant to make (or cause the Owner Trustee to make) payments in respect of the Loan Certificates sufficient to relieve the Lessee of its obligations to pay any Advance Amount pursuant to Section 3.03 of the Lease, (xiii) the application of the provisions of Section 467 of the Code, other than as a result of a Refunding, or (xiv) the failure of the debt created by the Loan Certificates to constitute "qualified nonrecourse indebtedness" within the meaning of Section 1.861-10T(b) of the Treasury Regulations, except as the result of a Refunding. SECTION 8.05. Tax Savings. If the Owner Participant, as the result of a Loss or the event giving rise to a Loss for which the Owner Participant has been indemnified by the Lessee under this Article VIII, realizes with respect to any year income tax savings (including from the utilization of foreign tax credits) that would not have been realized but for such Loss or event (or would have realized income tax savings if the Owner Participant had had sufficient taxable income in such year), the Owner Participant shall pay to the Lessee an amount equal to the sum of such actual or assumed income tax savings (calculated in accordance with the provisions of Section 8.04.(e)), plus the amount of any income tax savings realized as the result of any payment made pursuant to this sentence such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. Any payment due to the Lessee pursuant to this Section 8.05 shall be paid promptly (and, in any event, within 30 days) after the filing of the tax return upon which such income tax savings could be claimed (or could have been claimed by the Owner Participant if it had had sufficient taxable income); provided, however, that (a) such aggregate sum shall in no event exceed the amounts paid by the Lessee to the Owner Participant with respect to such Loss, (b) such sum shall not be payable before such time as the Lessee shall have made all payments or indemnities then due pursuant to the Operative Documents, and (c) no Lease Event of Default shall have occurred and be continuing. Any subsequent disallowance of any such actual or assumed income tax savings shall be treated as a Loss for which an indemnity is required hereunder. SECTION 8.06. Contests. 47 53 8.06.1 Notification. Within 15 days after receipt of a written notification from the United States Federal taxing authorities of a claim, or upon receipt of a determination of independent tax counsel described in Section 8.03, with respect to which an amount may be payable by the Lessee in accordance with this Article VIII (an "Article VIII Claim"), the Owner Participant or the Owner Trustee shall promptly notify the Lessee of such Article VIII Claim and shall, upon request, provide such other information (not including copies of tax returns) as is available to the Owner Participant and is reasonably required by the Lessee to determine whether to request the Owner Participant to contest the Loss that is the subject of such Article VIII Claim as provided in this Section 8.06. The failure to so notify the Lessee within 15 days of such Article VIII Claim shall not affect Lessee's obligations hereunder except to the extent such failure materially adversely affects the contest of such Article VIII Claim. The Owner Participant shall, except with respect to a Loss resulting from a failure to claim based upon a determination of independent tax counsel described in Section 8.03, resist payment of any tax relating to such Loss for a period of 45 days following such notice to the Lessee or, if shorter, two days less than the period specified (including available extensions) for payment in such notification. 8.06.2 Obligation to Contest. If (A) the Lessee shall request in writing the Owner Participant to contest such Article VIII Claim within the period specified in the preceding sentence, (B) Heller, Ehrman, White & McAuliffe, or other independent tax counsel selected by the Lessee and reasonably satisfactory to the Owner Participant, shall furnish an opinion to the effect that there is a reasonable basis to contest such Article VIII Claim, (C) the Lessee shall agree to pay the Owner Participant, on presentation of properly certified and supported invoices, all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred by the Owner Trustee or the Owner Participant in conducting the contest of such Article VIII Claim (D) a Lease Event of Default shall not have occurred and be continuing, unless the Lessee shall have provided to the Owner Participant reasonably satisfactory security for any payment that might reasonably become due from the Lessee with respect to such Article VIII Claim or such contest, (E) the amount potentially payable by Lessee with respect to such Article VIII Claim shall be $50,000 or more, and (F) the Lessee shall have acknowledged to the Owner Participant that it will be liable under this Agreement with respect to such claim, unless the final determination of such claim clearly articulates a basis for the claim for which Lessee is not liable hereunder, then the Owner Trustee, the Owner Participant and any Affiliate of either of the foregoing will contest such Claim (including the appeal of any determination, it being understood, however, that under no circumstances will the Owner Participant be required to undertake any appeal to the United States Supreme Court). 8.06.3 Control of Contest. The Owner Participant will control, and conduct with Owner Participant's Tax Counsel, or other nationally-recognized counsel of its choice (which other counsel shall not be adverse to the Lessee in any matter other than any potential or actual adversity with respect to an Article VIII Claim), any contest of an Article VIII Claim undertaken pursuant to this Section 8.06, and the Owner Participant, at its sole 48 54 option, may choose to pursue or to forgo any and all administrative appeals, proceedings, hearings and conferences with the relevant taxing authorities with respect to such Article VIII Claim (unless and to the extent pursuit of any such proceedings shall be required to secure judicial remedies), but will, if the conditions set forth in the preceding paragraph are satisfied, contest such Claim in a court or courts of competent jurisdiction selected by the Owner Participant in its sole discretion. The Owner Participant shall cooperate with the Lessee in good faith in order to contest any Article VIII Claim and shall, if requested, consult in good faith with the Lessee regarding the conduct of such contest (including the preparation of written submissions). 8.06.4 Advances. If the proceeding to contest any Article VIII Claim selected by the Owner Participant requires the payment of any proposed United States Federal income tax deficiency or interest, penalties or additions to tax relating to such tax deficiency, and if the Lessee has not previously paid the indemnity provided under Section 8.04 with respect to such Article VIII Claim, the Lessee will advance to the Owner Participant on an interest-free basis sufficient funds to pay the deficiency attributable to such Article VIII Claim plus interest, penalties and additions to tax with respect thereto (to the extent such amount is indemnified against pursuant to Section 8.03 or 8.04). If the Owner Participant shall be required to include any amount in gross income with respect to such advance for United States Federal income tax purposes, such inclusion in income shall be treated as a Loss described in Section 8.03(c); provided, however, that the exception set forth in clause (x) of Section 8.04(f) hereof shall not apply to any such Loss. 8.06.5 Settlements. None of the Owner Trustee, Owner Participant and any Affiliate of either of the foregoing will, without the prior written consent of the Lessee, enter into a settlement or other compromise with respect to any Article VIII Claim that any such person would otherwise be required to contest pursuant to this Section 8.06, unless the Owner Participant waives its right to be indemnified with respect to the related Loss under this Article VIII. If the Lessee requests that the Owner Participant accept a settlement of an Article VIII Claim offered by the Internal Revenue Service which settlement offer does not also require the settlement of any issue unrelated to such Article VIII Claim, the Owner Participant shall, within 30 days of such request, either accept such settlement offer or agree with the Lessee that the Lessee's liability pursuant to Section 8.04 shall be based upon such settlement offer; no additional liability of the Lessee shall accrue after 30 days following the date of such request by the Lessee provided that within 60 days following the date of such request the Lessee shall have paid or commenced to pay the amounts that would be payable under this Article VIII with respect to such Article VIII Claim if such settlement offer constituted a final determination. 8.06.6 Offsets and Refunds. If the extent of the Loss relating to an Article VIII Claim shall be established by the final judgment or decree of a court or administrative agency having jurisdiction thereof, then the Owner Participant will pay, within 30 days, to the Lessee any refund or offset received (including any refund or offset that would 49 55 have been received but for a counterclaim not indemnified by the Lessee hereunder) by the Owner Participant with respect to such Article VIII Claim (except to the extent that such offset is applied to a tax liability for which the Owner Participant would be entitled to be indemnified under this Article VIII), plus, to the extent that any interest-free advance shall have been treated as a Loss, the amount of any tax saving resulting from any payment pursuant to this sentence (calculated in a manner consistent with Section 8.05), together with any interest (other than interest for the period after any taxes arising from such Loss or any circumstances resulting in such Loss were paid by the Owner Participant until such taxes were paid or reimbursed by the Lessee) paid thereon by the Internal Revenue Service fairly attributable to such portion of such refund or any interest that would have been received if no other matters had been involved in such proceeding, provided that the aggregate amount payable to the Lessee (other than amounts payable with respect to such expenses and interest) pursuant to this sentence with respect to any Loss shall not exceed the aggregate amount previously paid by the Lessee under this Article VIII with respect to such Loss, such that the Indemnified Person shall neither be disadvantaged nor unjustly enriched by such indemnity and such repayments. SECTION 8.07. Combined Returns. In the case of any tax that at any time is reported on a consolidated or combined basis by the Owner Participant or Affiliate thereof, the term "Owner Participant" shall, for purposes of this Article VIII, include such Affiliate and the rules governing such consolidated or combined returns shall be taken into account in determining and computing the amount of any indemnity or any payment by or to the Lessee required to be made under this Article VIII. SECTION 8.08. Certain Adjustments. In the event any payments shall be due to the Owner Participant under this Article VIII, the schedules of Stipulated Loss Values and Termination Values shall be appropriately adjusted in accordance with Article X. 50 56 ARTICLE IX Expenses SECTION 9.01. Transaction Expenses Payable by the Owner Participant. If the transactions contemplated by this Agreement to occur on the Closing Date are consummated, the Owner Participant will pay Transaction Expenses up to an amount equal to 1.47% of Lessor's Cost, and the Lessee shall pay the balance thereof, which Transaction Expenses shall be subject to the reasonable approval of the Lessee and the Owner Participant prior to payment thereof. The Owner Participant will pay such approved Transaction Expenses at Closing to the extent bills or invoices are presented to the Lessee and the Owner Participant not later than two Business Days prior thereto, and on the Adjustment Date to the extent bills or invoices with respect to such expenses are submitted within no more than 80 days after the Closing Date and in any event by no later than ten Business Days prior to the Adjustment Date. The failure to present bills or invoices by such dates shall not prevent such expenses from constituting Transaction Expenses or Article VI from applying to such expenses. SECTION 9.02. Agreed Transaction Expenses. The Owner Participant and the Lessee agree that Transaction Expenses shall not include any fees and expenses for Owner Participant's counsel other than the fees and expenses of Owner Participant's Special Counsel but not in excess of the amount specified in a letter from the Owner Participant to Lessee dated the Closing Date, and shall not include any fees and expenses for Loan Participants' Counsel, in excess of the amount specified in a letter from Loan Participants' Counsel to Lessee dated the Closing Date. SECTION 9.03. Amendments, Waivers, etc. The Lessee will pay all costs and expenses incurred in connection with the entering into or the giving or withholding of any future amendments, supplements, waivers or consents with respect to the Operative Documents, whether or not the same shall become effective. SECTION 9.04. Fees of Trustees. The Lessee will pay all continuing fees and expenses of the Owner Trustee and the Indenture Trustee in connection with the transactions contemplated by the Operative Documents, other than the fees of such Trustees which constitute Transaction Expenses. 51 57 ARTICLE X Recomputation of Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values SECTION 10.01. Making of Adjustments. (a) If: (i) the Closing Date shall be other than the date specified in the notice given by the Lessee pursuant to Section 2.04(b)); (ii) the dates on which interest is payable shall be other than those specified in the notice given by the Lessee pursuant to Section 2.04(b) or the interest payable on the Loan Certificates for the Interim Term shall be less than the Assumed Debt Rate; (iii) the Transaction Expenses shall be other than 1.47% of Lessor's Cost; or (iv) any Tax Assumption Change described in a written notice from the Owner Participant to the Lessee or from the Lessee to the Owner Participant pursuant to Section 10.04 shall occur on or prior to the Closing Date; or (v) a Refunding pursuant to Article XII shall occur; then, unless such changes or differences shall have previously been reflected in schedules prepared by the Owner Participant and accepted by the Lessee and the other Participants, Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values, and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates shall be adjusted from time to time by such amounts as shall be appropriate so as to preserve each Owner Participant's Economics and, consistent therewith, to minimize the net present value to the Lessee (computed using the Debt Rate) of the Basic Rent, based on the Interim Term and the full Basic Term; (b) Adjustments required by clause (v) shall be made at the expense of the Lessee, when required by Article XII. All required adjustments under clause (i), (ii), (iii), or (iv) shall be made as soon as practicable, but in no event later than the Adjustment Date. The Lessee agrees, at its expense and at the request of any other party hereto, promptly to execute and deliver an amendment to the relevant Lease Supplement confirming any such adjustment. (c) Any adjustment of Basic Rent and amortization schedules of the Loan Certificates pursuant to this Article X shall be such as shall enable the Lessee to comply with Section 3.01(c) of the Lease. No adjustment shall (i) change the Weighted Average Life to Maturity of the Loan Certificates by more than six months, or to more than 7.25 years, (ii) extend the final maturity of any Loan Certificate beyond 10.752 years, (iii) with respect to a Refunding, be effected on any day other than a Rent Payment Date (with at least five Business 52 58 Days notice to each Certificateholder) unless Lessee agrees to, and does, pay associated LIBOR breakage, or (iv) increase the amount of Loan Certificates. SECTION 10.02. Stipulated Loss Values; Termination Values; EBO Prices. At the time any adjustment of Basic Rent percentages shall be required under this Article X, the Stipulated Loss Values, Termination Values, EBO Prices, and EBO Dates specified in the relevant Lease Supplements shall be adjusted by the Owner Participant in accordance with Section 10.01, effective as of the first Rent Payment Date thereafter; provided, however, that such percentages shall not be reduced below those percentages that will result in any of: (i) the Stipulated Loss Value as of any Rent Payment Date until expiration of the last Basic Term of any Production Unit leased under the Lease, (ii) the Termination Value as of any Rent Payment Date until expiration of the last Basic Term of any Production Unit leased under the Lease, or (iii) the EBO Price as of any EBO Date for any Production Unit (together, in the case of clauses (i), (ii) and (iii), in each case with any Accrued Rent that would be payable on such Rent Payment Date or EBO Date plus the amount of any Supplemental Rent payable (or that would be payable if not funded by a payment from the Lessor) pursuant to Section 3.03 of the Lease) not being at least equal to the aggregate principal amount of, and interest on, the Loan Certificates outstanding under the Indenture and issued in respect of such Production Unit on the Rent Payment Date to which such payments relate or, in the case of clause (iii), the principal and interest on the Loan Certificates that will become due and payable on the EBO Date to which such payments relate. SECTION 10.03. Computation of Adjustments. Upon the occurrence of an event requiring an adjustment pursuant to this Article X, the Owner Participant shall make the necessary computations. In making any such computations, the Owner Participant (i) shall utilize the same methods and assumptions originally used to calculate the payments of Basic Rent, EBO Prices, EBO Date, Stipulated Loss Values and Termination Values (other than those assumptions changed as a result of the event described in clause (i), (ii), (iii), or (iv) of Section 10.01(a) necessitating such computations; it being agreed that such computation shall reflect solely any changes of assumptions or facts resulting directly from any such event necessitating such recalculation). If the Lessee shall disagree with any such amounts, they shall be reviewed and determined by an independent accounting firm chosen by the Lessee and reasonably acceptable to the Owner Participant. In connection with any such review, the Owner Participant and the Lessee shall make available to such accounting firm on a confidential basis their pricing runs and its related assumptions including the Lessee's original tax assumptions (other than any Owner Participant's tax return). The costs of such verification shall be borne by the Lessee, except that such costs shall be borne by the Owner Participant if 53 59 such verification results in an increase in the amount of the present value (discounted semi-annually at an interest rate per annum equal to the Debt Rate in effect on the Closing Date) of the Basic Rent Payments during the Interim Term and the full Basic Term (using the discount rate referred to above) from the amounts proposed by the Owner Participant of more than 10 basis points. SECTION 10.04. Tax Assumption Changes. Prior to Closing on the Closing Date, (i) the Owner Participant may deliver written notice to the Lessee (x) specifying an amendment to the Code, Treasury Regulations (including proposed regulations which are also proposed to be effective on or prior to the Closing Date, whether or not such Regulations are issued under Section 467 of the Code), revenue rulings or administrative interpretations promulgated, issued, enacted or proposed after March 15, 1996, and on or prior to the Closing Date (any such promulgation, issuance, enactment or proposal, together with the proposal referred to in the final sentence of this Section 10.04, a "Tax Assumption Change") which amendment would have the effect of worsening the Owner Participant's Economics and (y) setting forth the adjustments to the Basic Rent, EBO Prices, Stipulated Loss Values and Termination Values required in the case of such Tax Assumption Change or that would be required if such proposed Tax Assumption Change were enacted, promulgated or issued, computed as provided in Section 10.01, and (ii) the Lessee may give written notice to the Owner Participant specifying a Tax Assumption Change, which Tax Assumption Change would have the effect of bettering the Owner Participant's Economics. SECTION 10.05 Post-Closing Adjustment for Pre-Closing Tax Assumption Changes. (a) Prior to noon, Pacific Time on the day following the Closing Date the Owner Participant or the Lessee may deliver written notice of a Tax Assumption Change with respect to a promulgation, issuance, enactment or proposal after the second Business Day preceding the Closing Date and on or prior to the Closing Date. If such notice is delivered by the Lessee, then the adjustments contemplated by Section 10.01 shall be computed, and Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates shall be adjusted to reflect such Tax Assumption Change. If such notice is delivered by the Owner Participant, then it shall state whether the present value of Basic Rent, computed pursuant to the provisions of Section 3.02(j), might increase by an amount greater than the amount specified in such Section. If the notice delivered by the Owner Participant states that the present value of Basic Rent may not increase by an amount greater than the amount specified in 3.02(j), or if the Lessee elects to continue the transaction notwithstanding such potential increase by an amount greater than the amount specified in such Section, then the adjustments contemplated by Section 10.01 shall be computed and Basic Rent, EBO Price, EBO Date, Stipulated Loss Values and Termination Values and, subject to Section 10.01(c), the amortization schedules of the Loan Certificates, shall be adjusted to reflect such Tax Assumption Change. If the present value of Basic Rent, computed pursuant to the provisions of Section 3.02(j), might increase by an amount greater than the amount specified in such Section, then the Lessee may elect to terminate the Transactions, as provided in Section 10.05(b). 54 60 (b) If the Lessee elects to terminate the Transactions pursuant to Section 10.05(a), then (i) all of the Operative documents shall be rescinded, (ii) the Lessee shall refund the amounts received by it, (iii) the Lessee shall pay such Transaction Expenses as are applicable (specifically excluding fees of any advisor to any Participant and fees (but not excluding out-of-pocket costs) of the Owner Trustee and Indenture Trustee otherwise due on the Closing Date), (iv) the Lessee shall pay to the Owner Participant the amounts specified in Section 2.04(b), calculated through the date Lessee makes such payment (v) the Lessee shall pay to each Loan Participant interest at the Debt Rate plus LIBOR breakage and other costs incurred by such Loan Participant (but not the Up-Front Fee of such Loan Participant), and (vi) any amounts received on the Closing Date by any party to the Operative Documents in excess of the amounts to be paid to such party pursuant to this Section shall be returned to the party entitled thereto, including, without limitation, each Loan Participant agrees to promptly refund to the Owner Participant the portion of the Up-Front Fee received by it. ARTICLE XI Transfer of Owner Participant's Interest SECTION 11.01. Transfers. (a) The Owner Participant shall not assign, convey or otherwise transfer all or any part of its right, title and interest in and to the Owner Participant Trust Estate except as provided in this Section 11.01. (b) The Owner Participant may assign, convey or otherwise transfer all, but not a part only, of its right, title and interest in the Owner Participant Trust Estate to (i) a direct or indirect parent of the Owner Participant or a Subsidiary of such parent or (ii) a bank, financial institution, insurance company or similar institution or (iii) a partnership composed of Persons described in (i) and/or (ii); provided that the transfer must meet the following conditions: (A) the Owner Participant must transfer its interest as a whole to a single transferee, (B) any transferee must have a Tangible Net Worth or combined capital and surplus of at least $75,000,000 or have its obligations guaranteed pursuant to a guaranty agreement in form and substance satisfactory to the Lessee and the Indenture Trustee by a parent company or an Affiliate of such transferee with such a Tangible Net Worth, (C) any transferee must not be a Competitor of the Lessee, and (D) any transferee must not be in litigation with the Lessee or any Subsidiary of the Lessee 55 61 (E) any transferee must agree that (i) the amount of Lessee's tax indemnity payments, if any, payable to such transferee under Article VIII shall not exceed those amounts that would have been payable to Owner Participant and Lessor had such transfer not occurred (using the tax parameters of the Owner Participant on the date of transfer rather than the parameters existing at the time of the Loss), and (ii) the amount of Lessee's tax indemnity payments, if any, payable to such transferee with respect to any Article VII claim that (x) has been or, (y) in the reasonable judgment of the Lessee is likely to be asserted and is specified in a written notice delivered to the Lessor prior to the proposed transfer, shall not exceed the amounts that would have been payable to Owner Participant and Lessor had such transfer not occurred; (F) any transferee shall become bound to the Operative Documents pursuant to agreements (and subject to legal opinions) in form and substance reasonably satisfactory to the Lessee, the Owner Trustee and the Indenture Trustee; (G) such transfer occurs after the last payment of interest, payable to the Loan Participants for the Interim Term is due; and (H) any transferee must be a corporation formed under the laws of a state of the United States or a partnership formed under such laws composed entirely of corporations formed under such laws; provided, further, that no such transfer shall relieve the Owner Participant of its obligation to make any payments required by Section 5.12 to be made by the Owner Participant on the Loan Certificates outstanding under the Indenture. (c) Any assignment, conveyance or transfer pursuant to this Section 11.01 shall be made pursuant to an Owner Participant transfer agreement. Upon any such assignment, conveyance or transfer (including any subsequent assignment, conveyance or transfer), (x) the transferee shall be deemed an "Owner Participant" for all purposes hereof, and shall be deemed to have made all payments in respect of the right, title and interest so transferred, and shall have a ratable interest therein, and each reference in any Operative Document to or encompassing the Owner Participant shall thereafter be deemed to include a reference to such transferee and (y) the transferor shall have no further obligations or liability with respect thereto from and after the date of such transfer. If the Owner Participant (or any successor) 56 62 intends to transfer its interest in the Owner Participant Trust Estate, it shall give 45 days' prior written notice of the proposed transfer to the other Participants, the Owner Trustee, the Indenture Trustee and the Lessee, specifying the name and address of such transferee, and demonstrating compliance with the requirements of paragraph (b) of this Section. The Owner Participant shall respond promptly to any further requests for information from the Lessee or any Certificateholder regarding the proposed transferee. Promptly after the Lessee and the Indenture Trustee have approved the proposed transferee (but not less than 15 days prior to the proposed transfer), the Lessor shall provide the form of documentation to be used in the proposed transfer for the Lessee's and the Indenture Trustee's and Owner Trustee's review and approval. The transfer may take place three Business Days after the Lessee has approved such proposed documentation. Any purported transfer in violation of this Section 11.01 shall be void and of no effect whatsoever. ARTICLE XII Refunding SECTION 12.01. Refunding. (a) So long as no Lease Default shall be in existence and subject to satisfaction of the terms and conditions set forth in this Article XII and in Section 3.07 of the Indenture, the Lessee shall have the right, on no more than two occasions, to request the Owner Trustee to effect, and the Owner Participant, the Owner Trustee and the Indenture Trustee will cooperate to effect, an optional prepayment in whole, but not in part, of the Loan Certificates pursuant to Section 3.07 of the Indenture as part of a refunding or refinancing, on the terms of this Article XII (each such refunding or refinancing, a "Refunding"). In connection with a refunding or refinancing, (i) there shall be no material change in the Operative Documents except (x) to the extent provided in clause (iii), (y) for the deletion of Section 5.14 of this Agreement, and (z) for the inclusion, if any, of additional covenants the Lessee which are acceptable to the Lessee and, specifically, there shall be no change in the Operative Documents or resulting for such Refunding, taken as a whole, which increase the risk to, or have an adverse impact on the Owner Participant or the Owner Trustee, in such Person's reasonable judgment, including the provisions of the Indenture providing the Owner Trustee with rights in the event of an Indenture Default or an Indenture Event of Default; (ii) the Lessee, the Owner Participant, the Owner Trustee, the Indenture Trustee, the loan participants admitted in the Refunding, and any other appropriate parties will enter into an agreement, in form and substance satisfactory to such Persons, providing for (w) the issuance and sale by the Owner Trustee on the date specified in such agreement (for the purposes of this Article XII, the "Refunding Date") of debt securities in an aggregate principal amount (in the lawful currency of the United States) 57 63 equal to the aggregate outstanding principal amount of the Loan Certificates (the "Refunding Loan Certificates"), (x) the application of the gross proceeds of such sale to the prepayment in full of all of the principal amounts outstanding under such Loan Certificates and falling due as a result of such Refunding on the Refunding Date, (y) payments by the Lessee as Supplemental Rent (on an After-Tax Basis to the Owner Participant) to the Person or Persons entitled thereto of all other amounts, in respect of accrued interest and Auxiliary Payments, if any, payable on such Refunding Date and not otherwise paid from the proceeds of such sale and (z) such other provisions as are reasonably acceptable to the Owner Participant, the Owner Trustee, the Indenture Trustee and the Lessee; (iii) the Lessee and the Owner Trustee will amend the Lease such that (x) Basic Rent payable in respect of the period from and after the Refunding Date shall be recalculated to preserve Owner Participant's Economics; provided that the net present value of the Basic Rent shall be minimized to the extent consistent therewith, and amounts payable in respect of Stipulated Loss Value, Termination Value and EBO Price from and after the Refunding Date shall be appropriately recalculated to preserve the Net Economic Return which the Owner Participant would have realized had such Refunding not occurred (it being agreed that any recalculations pursuant to this clause (iii)(x) shall be performed in accordance with the requirements of Article X) and (y) any amounts payable on the Loan Certificates in addition to principal and interest are expressly made payable by the Lessee as Supplemental Rent and the percentages in Schedule X to the relevant Loan Certificates shall be adjusted as appropriate to take into account such Refunding; (iv) the Owner Trustee will enter into an Indenture Supplement to provide for the securing thereunder of the Refunding Loan Certificates issued by the Owner Trustee pursuant to this Article XII in like manner as the Series of Loan Certificates refunded; (v) the Lessee shall pay to the Indenture Trustee, or to the Person entitled thereto, as Supplemental Rent (on an After-Tax Basis to the Owner Participant), an amount equal to the Auxiliary Payments, if any, payable in respect of the Loan Certificates being paid on the Refunding Date; (vi) the Lessee, the Owner Participant, the Owner Trustee and the Indenture Trustee shall have received (1) such opinions of counsel as they may reasonably request concerning compliance with Applicable Law relating to the sale of securities and (2) such other opinions of counsel and such certificates and other documents, each in form and substance satisfactory to them, as they may reasonably request in connection with the terms and conditions of this Article XII; 58 64 (vii) all necessary authorizations, approvals and consents in connection with such Refunding shall have been obtained; (viii) as a result of the Refunding, the Owner Participant's investment shall not increase or decrease; and (ix) the final stated maturity of the Refunding Loan Certificates shall not extend beyond the final stated maturity of the Loan Certificates being refunded; (x) the Weighted Average Life to Maturity of the Loan Certificates shall not change by more than six months; and (xi) there will be no adverse effect on either Owner Participant's tax and accounting treatment of the Lease under FASB Statement Number 13; and (xii) each Certificateholder being refunded shall have received at least five Business Days advance notice of each Refunding and received, in immediately available funds, the aggregate principal amount of, and accrued interest on, and Auxiliary Payments on the Loan Certificates held by it; provided, however, that (x) no Refunding of the Loan Certificates will be permitted if, within 30 days after receipt of a request pursuant to the first sentence of Section 12.02 from the Lessee to effect a Refunding pursuant to this Section 12.01 and of all relevant information regarding the terms and conditions of such Refunding necessary to render the opinion referred to below, the Owner Participant reasonably determines (which determination shall be supported by a written opinion of independent tax counsel selected by the Owner Participant) that there will be a risk of adverse tax consequences to the Owner Participant, other than any true lease considerations arising from the existence of the Refunding or the Lessee's right to refund or refinance as opposed to the particular terms of the Refunding, and gives notice of such determination in reasonable detail to the Lessee, unless the Lessee shall have agreed to indemnify the Owner Participant against such adverse consequences in a manner satisfactory to the Owner Participant and the Owner Participant shall not have determined in its reasonable judgment that there is no reasonable basis to report the tax consequences of the Refunding for Federal income tax purposes in a manner consistent with such indemnity; (y) the Lessee shall pay to or reimburse the Owner Participant, the Owner Trustee and the Indenture Trustee, on an After-Tax Basis, for all reasonable costs and expenses (including reasonable attorneys' fees and expenses) paid or incurred by them, in either case, in connection with such Refunding or such proposed Refunding; and 59 65 (z) no Refunding may occur prior to the second anniversary of the Closing Date. (b) In the event that any proposed Refunding pursuant to Section 12.01(a) shall not be consummated for any reason whatsoever, the Lessee will pay to the Owner Participant, each Loan Participant, the Owner Trustee and the Indenture Trustee, as the case may be (on an After-Tax Basis), its respective fees, costs and expenses (including, without limitation, legal fees and expenses) and any amounts required to be paid to the Certificateholders as a result of such proposed Refunding not being consummated, except that the Lessee shall not be required to pay the fees, costs and expenses of any such Person if such failure shall result from the breach by such Person of any of its obligations under this Section 12.01. SECTION 12.02. Notice. The Lessee shall give the other parties hereto at least 45 days' prior written notice of any desired refinancing or refunding pursuant to this Article XII, which notice shall set forth to the extent practicable the proposed terms and conditions of such refunding or refinancing, including the desired date therefor. The Lessee will promptly provide to the Owner Participant, the Owner Trustee and the Indenture Trustee for their approval in accordance with the provisions of this Participation Agreement the terms and conditions proposed to be final of any such Refunding not less than five Business Days prior to the execution and delivery of the documents contemplated hereunder in connection therewith, other than interest rate setting, which shall occur three Business Days prior to the Refunding. ARTICLE XIII Reserved ARTICLE XIV Miscellaneous SECTION 14.01. Documentary Conventions. This Agreement shall be governed by the Documentary Conventions. SECTION 14.02. No Recourse to Owner Participant. It is expressly agreed and understood by the parties hereto and, by its acceptance of Loan Certificates, any Certificateholder, that, except as expressly provided in Sections 4.02, 5.01, or 14.03 of this Agreement, no recourse may be had to the Owner Participant with respect to, and the Owner Participant shall have no obligation or liability with respect to, the obligations and liabilities of the Owner Trustee or the Owner Participant Trust Estate (including, without limitation, the 60 66 obligations and the liabilities of the Owner Trustee under the Indenture with respect to the Loan Certificates). Nothing in Section 3.03(c) of the Indenture shall prevent the Indenture Trustee or any Certificateholder, as the case may be, from enforcing any such listed obligations of the Owner Participant. SECTION 14.03. Confidentiality. (a) The Operative Documents and the Appraisal are confidential documents among the parties, thereto and each party (the "Relevant Party") agrees to keep the same permanently confidential and not disclose the Operative Documents or the Appraisal to any third party and not to use the confidential information for any purpose than under the Operative Documents without the prior written consent of the Lessee and the Lessor; provided that nothing herein shall be deemed to prevent any such disclosure by the Relevant Party (i) to its auditors or attorneys, (ii) to any other Persons requiring access to such information in connection with the normal business operations of such Relevant Party (including portfolio review and analysis), except that such person shall have a "need to know" such information and shall be advised by the Relevant Party that such documents and information are subject to this confidentiality agreement, and such Relevant Party shall be responsible for such Person acting in compliance herewith, (iii) to (or as required by) any regulatory authorities (including bank examiners, the National Association of Insurance Commissioners, or any similar bodies), (iv) in connection with the enforcement or attempted enforcement of any of the Operative Documents, (v) to any Person expressing an interest in acquiring, directly or indirectly, the Relevant Party's interest in the Operative Documents (and who agrees to be bound by the provisions of this Section 14.03, with such Relevant Party responsible for such Person acting in compliance herewith) or (vi) as required by any subpoena or civil investigative demand or any Applicable Law or Governmental Authority, in each case (but, with respect to cases (i), (iii), (iv) and (vi), only to the extent appropriate given the parties to whom disclosure is made) subject to appropriate protective orders or confidentiality agreements to carry out the intent of this Section 14.03 to protect confidential information to the fullest extent possible. (b) If the Owner Participant or any Affiliate of the Owner Participant acquires or is acquired by, merges, or otherwise consolidates with, any Competitor of the Lessee, and the Lessee does not elect to Purchase the Equipment pursuant to Section 17.03 of the Lease, the Owner Participant agrees that it will keep all information pertaining to the Lessee, the Equipment (including the maintenance and operation of the Equipment and any licenses, rights, software or other intellectual property associated with the Equipment) and the Operative Documents confidential from the division, business unit, or Affiliate that is the Competitor; provided that nothing herein shall prevent any disclosure by the Owner Participant (i) to its auditors or attorneys (if such auditors and attorneys agree not to divulge the information to the Competitor), (ii) to (or as required by) any regulatory authority (including the National Association of Insurance Commissioners or any similar body), (iii) in connection with the enforcement or attempted enforcement of any Operative Document, or (iv) as required by subpoena or civil investigative demand or any Applicable Law or Governmental Authority, in each case (but only to the extent appropriate given the parties to whom disclosure is made) 61 67 subject to the appropriate protective orders or confidentiality agreements to carry out the intent of this Section 14.03 to the fullest extent possible. SECTION 14.04. Owner Trustee Not Acting in Individual Capacity. Each party hereto acknowledges that Fleet National Bank is entering into this Agreement solely as the Owner Trustee under the Trust Agreement and not, except as expressly provided herein, in its individual capacity, and in no case whatsoever shall it (or any entity acting as successor Owner Trustee under the Trust Agreement) be personally liable for any loss in respect of any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, except that the Owner Trustee shall be liable, in its individual capacity, (a) for its own wilful misconduct or gross negligence; (b) in the case of the inaccuracy of any of its representations or warranties or the failure to perform any covenant of the Owner Trustee in its individual capacity contained in or referred to in Section 4.05 of this Agreement or in Section 4.01 of the Lease; and (c) for the failure to use the degree of care and skill set forth in Section 6.01 of the Trust Agreement in the receipt and disbursement of moneys actually received by it in accordance with the provisions hereof. If a successor Owner Trustee is appointed in accordance with the terms of the Trust Agreement, such successor Owner Trustee shall, without any further act, succeed to all the rights, duties, immunities and obligations of the Owner Trustee hereunder and the predecessor Owner Trustee shall be released from all further duties and obligations hereunder. In the case of any appointment of a successor to the Owner Trustee pursuant to the Trust Agreement or any merger, consolidation or transfer of substantially all the corporate trust business of the Owner Trustee pursuant to the Trust Agreement, the successor Owner Trustee shall give prompt written notice thereof to the Indenture Trustee and the holders of the Loan Certificates, unless the Owner Trustee is the survivor of any such merger or consolidation. [balance of page intentionally left blank] 62 68 IN WITNESS WHEREOF, the parties hereto have each caused this Participation Agreement to be executed as of the date first above written. RAYCHEM CORPORATION by /s/ Lars Larsen ------------------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer FLEET NATIONAL BANK not in its individual capacity (except as expressly set forth herein) but solely as Owner Trustee, by /s/ K Larimore ------------------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION not in its individual capacity (except as expressly set forth herein) but solely as Indenture Trustee, by /s/ Nancy M Dahl ------------------------------------------------- Name: Nancy M. Dahl Title: Assistant Vice President 63 69 METLIFE CAPITAL, LIMITED PARTNERSHIP by METLIFE CAPITAL CORPORATION its general partner, as Owner Participant by /s/ Timothy L Johnson ------------------------------------------------- Name: Timothy L. Johnson Title: Executive Vice President BANK BRUSSELS LAMBERT, NEW YORK BRANCH as Loan Participant by /s/ D Vangaever , /s/ Joyce Thunnissen ------------------------------------------------- Name: Dominick H.J.Vangaever , Joyce Thunnissen Title: Vice President Credit Department , Vice President BAYERISCHE VEREINSBANK AG, LOS ANGELES AGENCY as Loan Participant by /s/ Christine Taylor ------------------------------------------------- Name: Christine Taylor Title: V.P. and Manager by /s/ Mark Sadok ------------------------------------------------- Name: Mark Sadok Title: Vice President 64 70 DEUTSCHE BANK AG, LOS ANGELES BRANCH AND/OR CAYMAN ISLANDS BRANCH as Loan Participant by /s/ Johnathon Scott Jessup ------------------------------------------------- Name: J. Scott Jessup Title: Vice President by /s/ Ross Howard ------------------------------------------------- Name: Ross A. Howard Title: Vice President KREDIETBANK NV as Loan Participant by /s/ R Snauffer ------------------------------------------------- Name: Robert Snauffer Title: Vice President by /s/ Tod Angus ------------------------------------------------- Name: Tod R. Angus Title: Vice President 65 71 SOCIETE GENERALE FINANCIAL CORP. as Loan Participant by /s/ O C. ------------------------------------------------- Name: O. Carmarie Title: V.P. by ------------------------------------------------- Name: Title: 66 EX-10.U 4 HEADLEASE AGREEMENT A 1 Exhibit 10(U) HEADLEASE AGREEMENT A THIS HEADLEASE AGREEMENT A ("Headlease") dated as of April 11, 1996 between Raychem Corporation, a corporation organized under the laws of the State of Delaware, as headlessor ("Headlessor"), and Fleet National Bank, not in its individual capacity but solely as Owner Trustee, as headlessee ("Headlessee"). WITNESSETH: ARTICLE I Agreement To Lease; Delivery And Acceptance SECTION 1.01. Agreement to Lease. Headlessor and Headlessee agree to subject the Equipment and the rights described in Section 1.04(a) to this Headlease for the rent and upon and subject to the terms and conditions herein set forth, for the Headlease term specified in the Headlease Supplement, commencing on the date on which the Headlease Supplement is executed and delivered (the "Headlease Commencement Date"). The Equipment as of the Closing Date is listed in the Headlease Supplement attached hereto. SECTION 1.02. Delivery and Acceptance; Quiet Enjoyment. (a) Upon execution and delivery of the Headlease Supplement by Headlessor and Headlessee, the Equipment described therein shall be deemed to have been delivered and accepted by Headlessee for all purposes of this Headlease and thereupon shall be subject to all the terms and conditions of this Headlease. Headlessee's execution and delivery of the Headlease Supplement shall be conclusive proof that the Equipment listed therein has been subjected to this Headlease subject to the terms hereof. Notwithstanding the foregoing, Headlessee shall have no obligation hereunder unless the Lease between Headlessee, as sublessor, and Headlessor, as sublessee has been executed and delivered by Headlessor and the Equipment has been accepted by Headlessor as sublessee under the Lease. (b) During the term of this Headlease neither Headlessor nor its agents, employees, creditors or assigns will disturb Headlessee's quiet, peaceful and uninterrupted possession of the Equipment. SECTION 1.03. Severable Modifications. The Headlessee may subject to this Headlease any Severable Modification to any Item or Items in the Production Units described in Annex A to the Headlease Supplement, which Severable Modification the Lessee elects not to remove pursuant to Section 8.02 of the Lease, by making an additional prepayment of rent to the Headlessor prior to the surrender of such Severable Modification and the Item or Items to which it is attached pursuant to Section 8.02 of the Lease, such additional prepayment to be equal to the Fair Market Value of such Severable Modification, as determined under the Lease. 2 SECTION 1.04. License. (a) The Headlessor grants to the Headlessee, for the term of the Headlease, a license to use all software and other rights licensed to the Headlessor by the manufacturer of each Item upon Headlessor's acquisition or upgrade of such Item, to the extent necessary to operate such Item in the manner in which it was designed. (b) Except as stated in Section 1.04(a), this Headlease is a lease of the Equipment only and does not grant to Headlessee a license to use patents, trade secrets, proprietary technology, or trademarks and tradenames of Headlessor. ARTICLE II Rent, Return; No Other Obligations On the Headlease Commencement Date, Headlessee shall pay Headlessor for the leasehold title created in the Equipment hereunder an amount equal to the prepaid rent specified in the Headlease Supplement, payable in immediately available funds on such date. Except in connection with a breach of Section 1.02(b) hereof, rent shall not be refundable under any circumstances. Unless this Headlease is terminated pursuant to Section 6.1 hereof and in the event the Equipment is not sold pursuant to the Lease, Headlessee shall make the Equipment available on the Headlease Termination Date (as such term is defined in the Headlease Supplement) in an as-is, where-is condition, for Headlessor to take possession and/or control thereof. Headlessor shall be responsible for all costs and expenses relating to the taking of possession and/or control of the Equipment on such date, including, without limitation, costs of preparing the Equipment for transportation and costs of transporting the Equipment to locations chosen by Headlessor. Except as expressly set forth in this Headlease, Headlessee shall have no further rental or any other obligations, monetary or otherwise, hereunder with respect to the Equipment, including, without limitation, any maintenance, use or operational obligation, or any obligation to insure, it being further understood that during the Term of the Lease all such obligations remain those of Headlessor, as "Lessee" under the Lease. ARTICLE III Taxes Headlessor and Headlessee each hereby represents and warrants that it is treating this Headlease as a sale for federal income tax purposes. Headlessor covenants that neither Headlessor, nor any affiliate of Headlessor, will at any time during the term of this Headlease claim to be the owner of the Equipment for foreign, federal or state income tax purposes. Headlessor further acknowledges that contemporaneously herewith, Headlessee is entering into the Lease and in connection herewith and therewith, Headlessee intends to take -2- 3 tax benefits with respect to the Equipment, as described in Section 8.01 of the Participation Agreement. ARTICLE IV Performance Of Headlessee Headlessee shall not be obligated to take any action or execute any instrument pursuant to any provision hereof until it shall have been requested to do so by Headlessor, or shall have received the instrument to be executed, and at Headlessee's option, shall have received assurance satisfactory to Headlessee that Headlessee shall be reimbursed for its reasonable expenses incurred or to be incurred in connection with taking such action or executing such instrument; provided that Headlessee shall be under no obligation to take any action or execute any instrument otherwise than in accordance with this Headlease or the Lease. ARTICLE V Subleasing And Assignment SECTION 5.01. Covenant of Headlessee. Headlessee will subject the Equipment to the Lease during the Term thereof. SECTION 5.02. Covenant of Headlessor. EXCEPT AS EXPRESSLY PROVIDED IN THIS HEADLEASE OR THE LEASE, HEADLESSOR SHALL NOT SELL, ASSIGN, TRANSFER OR CONVEY THIS HEADLEASE OR ALL OR ANY ITEM OF EQUIPMENT OR ITS RIGHTS, TITLE OR INTEREST HEREIN OR THEREIN, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN CONSENT OF HEADLESSEE. Anything in the foregoing to the contrary notwithstanding, upon 30 days' prior written notice to Headlessee, Headlessor may assign in whole its right, title and interest in this Headlease to a third party in connection with a consolidation, merger, conveyance or lease of substantially all of its assets to the extent such consolidation, merger, conveyance or lease does not constitute a default under the Lease. Except as may be otherwise expressly agreed in writing, no assignment, transfer, consolidation, merger or conveyance shall in any way relieve Headlessor from any of its obligations under this Headlease. SECTION 5.03. Rights of Headlessee. (a) Prior to the expiration or earlier termination of the Term of the Lease, (i) Headlessee may assign all (but not less than all) of its rights in, to, and under the Lease, and/or (ii) the Owner Participant may assign all (but not less than all) of its interest in the trust estate created under the Trust Agreement, in each case only in accordance with the provisions of the Lease, the Participation Agreement, and the Indenture. -3- 4 (b) At and after the expiration or earlier termination of the Term with respect to any Item or Production Unit (including pursuant to Article XIV of the Lease), and assuming Headlessor has not exercised any option to purchase Headlessee's rights and interests in the Equipment as provided in the Lease: (i) Headlessee may, in its sole discretion and without the consent of Headlessor or any other Person, either lease the Equipment to any Person(s) for the remaining term of this Headlease and/or Headlessee and/or the beneficiary of the trust created under the Trust Agreement may sell, assign, mortgage, hypothecate or otherwise convey its economic interest in this Headlease and the Equipment (or its beneficial interest in the trust estate created under the Trust Agreement, as the case may be), in whole or in part, to any Person(s), (ii) Headlessor shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Item, or title thereto or any interest therein, except Liens within clauses (vi), (viii) and (ix) of the definition of Permitted Liens, and will, at its own expense, take such action as may be necessary to discharge on a timely basis any Lien other than Liens within clauses (viii) (if adequately bonded as provided therein) and (ix) of the definition of Permitted Liens, (iii) Headlessor agrees to defend Headlessee's leasehold title to the Equipment, and (iv) Headlessor agrees to indemnify Headlessee and each Indemnified Person related thereto against any claims arising by reason of Headlessor's ownership of legal title to the Equipment or by reason of a breach by Headlessor of its covenants contained herein or in any other Operative Document. ARTICLE VI Termination SECTION 6.01. Exercise of Purchase Option Under Lease. In the event Headlessor should exercise its rights to purchase Headlessee's rights and interests in the Equipment as provided in the Lease, upon the transfer to Headlessor of Headlessee's rights and interests with respect to the Equipment this Headlease shall terminate with respect to the Equipment, and the obligations of Headlessor and Headlessee hereunder with respect to the Equipment shall cease. The Headlessor shall pay all costs incurred by Headlessee in effecting any such transfer of its rights to the Headlessor. SECTION 6.02. Termination. This Headlease shall terminate: (a) with respect to any Item or Production Unit acquired or disposed of pursuant to the terms of Section 7.03(b)(ii), 7.05, 7.07 or 17.04 of the Lease, or following foreclosure under the Lease Security Agreement (b) with respect to any Item or Production Unit for which the Headlessor has elected to terminate the Lease under Section 7.01 thereof and which the Headlessee has elected to retain under Section 7.02 of the Lease, upon any failure of the Headlessee to pay to the Indenture Trustee the amount specified under such Section -4- 5 7.02, and the payment by the Headlessor to the Indenture Trustee of the amounts specified in Section 7.02(i) of the Lease; (c) with respect to any Item or Production Unit that has suffered an Event of Loss, and for which the Headlessor has either furnished replacement equipment in accordance with Section 9.01(b)(i) of the Lease or paid the amount specified in Section 9.01(b)(ii) of the Lease; and (d) with respect to any Item which the Headlessor has elected to substitute under Section 9.05 of the Lease, upon the compliance by the Headlessor of the conditions set forth in such Section 9.05. ARTICLE VII Miscellaneous SECTION 7.01. Definitions and Rules of Usage. Capitalized terms not defined herein have the meanings set forth in the Definitions and Rule of Usage attached hereto as Exhibit A. This agreement shall be governed by the Documentary Conventions. SECTION 7.02. Further Assurances and Corrective Instruments. Headlessee and Headlessor will execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, from time to time, such supplements hereto and such further instruments as may reasonable be required to effectuate the transactions contemplated hereby. SECTION 7.03. Substitutions, Replacement Items; Accessions. Any Nonseverable Modification, any repair, replacement or substitution of any Item made pursuant to the Lease (including, without limitation, those described in Sections 6.02(c) or (d), above), and any replacement Item subjected to the Lease, shall immediately, and without further act or instrument, become subject to this Headlease. Following any such event Headlessee and Headlessor agree, upon written request from the other, to amend the Headlease Supplement to reflect such changes. SECTION 7.04. Trustee's Covenants. The parties hereto agree that all of the statements, representations, covenants and agreement made by Headlessee herein are made by Headlessee in its capacity as Owner Trustee under the Trust Agreement and not in its individual capacity, and are not made or intended as a personal representation, warranty, covenant or agreement but are made and intended only for the purpose of binding the Trust Estate. Therefore, anything contained herein or in such other agreements to the contrary notwithstanding, no recourse shall be had with respect hereto or such other agreements against Fleet National Bank or against its officers, directors, trustees or direct or indirect parent or controlling person or persons, except with respect to its own gross negligence or willful misconduct (or ordinary negligence with respect to the handling of money). -5- 6 SECTION 7.05. Indenture Trustee. In order to secure the indebtedness evidenced by the Loan Certificates, the Headlessee provides in the Indenture, among other things, for the assignment (to the extent provided therein) to the Indenture Trustee of certain rights and interests, including to this Headlease and for the creation of a Lien and security interest in favor of the Indenture Trustee for the benefit of the holders of the Loan Certificates in and to the Indenture Estate as described in the Granting Clauses of the Indenture. The Headlessor hereby (a) consents to such assignment pursuant to the terms of the Indenture, (b) agrees to give a copy of all notices hereunder directly to the Indenture Trustee, and (c) agrees that the Indenture Trustee may perform any covenant of Headlessee hereunder in the place of Headlessee. Any payment by the Headlessee to the Indenture Trustee of any amount payable hereunder shall constitute payment of such amount for all purposes of this Headlease. [balance of page intentionally left blank] -6- 7 IN WITNESS WHEREOF, Headlessor and Headlessee have caused this Headlease to be executed in their respective corporate names as of the day and year first above written. Raychem Corporation By: /s/ Lars Larsen -------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer Fleet National Bank, not in its individual capacity, but solely as Owner Trustee By: /s/ K Larimore -------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President Counterpart No. 13 of 15 Serially Numbered Manually Executed Counterparts. To the extent, if any, that this document constitutes Chattel Paper under the Uniform Commercial Code, no security interest may be created through the transfer and possession of any counterpart other than Counterpart No. 1.(1) - ----------------------------- (1) This language in original counterpart only. -7- EX-10.V 5 HEADLEASE AGREEMENT B 1 Exhibit 10(V) HEADLEASE AGREEMENT B THIS HEADLEASE AGREEMENT B ("Headlease") dated as of April 11, 1996 between Raychem Corporation, a corporation organized under the laws of the State of Delaware, as headlessor ("Headlessor"), and Fleet National Bank, not in its individual capacity but solely as Owner Trustee, as headlessee ("Headlessee"). WITNESSETH: ARTICLE I Agreement To Lease; Delivery And Acceptance SECTION 1.01. Agreement to Lease. Headlessor and Headlessee agree to subject the Equipment and the rights described in Section 1.04(a) to this Headlease for the rent and upon and subject to the terms and conditions herein set forth, for the Headlease term specified in the Headlease Supplement, commencing on the date on which the Headlease Supplement is executed and delivered (the "Headlease Commencement Date"). The Equipment as of the Closing Date is listed in the Headlease Supplement attached hereto. SECTION 1.02. Delivery and Acceptance; Quiet Enjoyment. (a) Upon execution and delivery of the Headlease Supplement by Headlessor and Headlessee, the Equipment described therein shall be deemed to have been delivered and accepted by Headlessee for all purposes of this Headlease and thereupon shall be subject to all the terms and conditions of this Headlease. Headlessee's execution and delivery of the Headlease Supplement shall be conclusive proof that the Equipment listed therein has been subjected to this Headlease subject to the terms hereof. Notwithstanding the foregoing, Headlessee shall have no obligation hereunder unless the Lease between Headlessee, as sublessor, and Headlessor, as sublessee has been executed and delivered by Headlessor and the Equipment has been accepted by Headlessor as sublessee under the Lease. (b) During the term of this Headlease neither Headlessor nor its agents, employees, creditors or assigns will disturb Headlessee's quiet, peaceful and uninterrupted possession of the Equipment. SECTION 1.03. Severable Modifications. The Headlessee may subject to this Headlease any Severable Modification to any Item or Items in the Production Units described in Annex A to the Headlease Supplement, which Severable Modification the Lessee elects not to remove pursuant to Section 8.02 of the Lease, by making an additional prepayment of rent to the Headlessor prior to the surrender of such Severable Modification and the Item or Items to which it is attached pursuant to Section 8.02 of the Lease, such additional prepayment to be equal to the Fair Market Value of such Severable Modification, as determined under the Lease. 2 SECTION 1.04. License. (a) The Headlessor grants to the Headlessee, for the term of the Headlease, a license to use all software and other rights licensed to the Headlessor by the manufacturer of each Item upon Headlessor's acquisition or upgrade of such Item, to the extent necessary to operate such Item in the manner in which it was designed. (b) Except as stated in Section 1.04(a), this Headlease is a lease of the Equipment only and does not grant to Headlessee a license to use patents, trade secrets, proprietary technology, or trademarks and tradenames of Headlessor. ARTICLE II Rent, Return; No Other Obligations On the Headlease Commencement Date, Headlessee shall pay Headlessor for the leasehold title created in the Equipment hereunder an amount equal to the prepaid rent specified in the Headlease Supplement, payable in immediately available funds on such date. Except in connection with a breach of Section 1.02(b) hereof, rent shall not be refundable under any circumstances. Unless this Headlease is terminated pursuant to Section 6.1 hereof and in the event the Equipment is not sold pursuant to the Lease, Headlessee shall make the Equipment available on the Headlease Termination Date (as such term is defined in the Headlease Supplement) in an as-is, where-is condition, for Headlessor to take possession and/or control thereof. Headlessor shall be responsible for all costs and expenses relating to the taking of possession and/or control of the Equipment on such date, including, without limitation, costs of preparing the Equipment for transportation and costs of transporting the Equipment to locations chosen by Headlessor. Except as expressly set forth in this Headlease, Headlessee shall have no further rental or any other obligations, monetary or otherwise, hereunder with respect to the Equipment, including, without limitation, any maintenance, use or operational obligation, or any obligation to insure, it being further understood that during the Term of the Lease all such obligations remain those of Headlessor, as "Lessee" under the Lease. ARTICLE III Taxes Headlessor and Headlessee each hereby represents and warrants that it is treating this Headlease as a sale for federal income tax purposes. Headlessor covenants that neither Headlessor, nor any affiliate of Headlessor, will at any time during the term of this Headlease claim to be the owner of the Equipment for foreign, federal or state income tax purposes. Headlessor further acknowledges that contemporaneously herewith, Headlessee is entering into the Lease and in connection herewith and therewith, Headlessee intends to take -2- 3 tax benefits with respect to the Equipment, as described in Section 8.01 of the Participation Agreement. ARTICLE IV Performance Of Headlessee Headlessee shall not be obligated to take any action or execute any instrument pursuant to any provision hereof until it shall have been requested to do so by Headlessor, or shall have received the instrument to be executed, and at Headlessee's option, shall have received assurance satisfactory to Headlessee that Headlessee shall be reimbursed for its reasonable expenses incurred or to be incurred in connection with taking such action or executing such instrument; provided that Headlessee shall be under no obligation to take any action or execute any instrument otherwise than in accordance with this Headlease or the Lease. ARTICLE V Subleasing And Assignment SECTION 5.01. Covenant of Headlessee. Headlessee will subject the Equipment to the Lease during the Term thereof. SECTION 5.02. Covenant of Headlessor. EXCEPT AS EXPRESSLY PROVIDED IN THIS HEADLEASE OR THE LEASE, HEADLESSOR SHALL NOT SELL, ASSIGN, TRANSFER OR CONVEY THIS HEADLEASE OR ALL OR ANY ITEM OF EQUIPMENT OR ITS RIGHTS, TITLE OR INTEREST HEREIN OR THEREIN, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN CONSENT OF HEADLESSEE. Anything in the foregoing to the contrary notwithstanding, upon 30 days' prior written notice to Headlessee, Headlessor may assign in whole its right, title and interest in this Headlease to a third party in connection with a consolidation, merger, conveyance or lease of substantially all of its assets to the extent such consolidation, merger, conveyance or lease does not constitute a default under the Lease. Except as may be otherwise expressly agreed in writing, no assignment, transfer, consolidation, merger or conveyance shall in any way relieve Headlessor from any of its obligations under this Headlease. SECTION 5.03. Rights of Headlessee. (a) Prior to the expiration or earlier termination of the Term of the Lease, (i) Headlessee may assign all (but not less than all) of its rights in, to, and under the Lease, and/or (ii) the Owner Participant may assign all (but not less than all) of its interest in the trust estate created under the Trust Agreement, in each case only in accordance with the provisions of the Lease, the Participation Agreement, and the Indenture. -3- 4 (b) At and after the expiration or earlier termination of the Term with respect to any Item or Production Unit (including pursuant to Article XIV of the Lease), and assuming Headlessor has not exercised any option to purchase Headlessee's rights and interests in the Equipment as provided in the Lease: (i) Headlessee may, in its sole discretion and without the consent of Headlessor or any other Person, either lease the Equipment to any Person(s) for the remaining term of this Headlease and/or Headlessee and/or the beneficiary of the trust created under the Trust Agreement may sell, assign, mortgage, hypothecate or otherwise convey its economic interest in this Headlease and the Equipment (or its beneficial interest in the trust estate created under the Trust Agreement, as the case may be), in whole or in part, to any Person(s), (ii) Headlessor shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Item, or title thereto or any interest therein, except Liens within clauses (vi), (viii) and (ix) of the definition of Permitted Liens, and will, at its own expense, take such action as may be necessary to discharge on a timely basis any Lien other than Liens within clauses (viii) (if adequately bonded as provided therein) and (ix) of the definition of Permitted Liens, (iii) Headlessor agrees to defend Headlessee's leasehold title to the Equipment, and (iv) Headlessor agrees to indemnify Headlessee and each Indemnified Person related thereto against any claims arising by reason of Headlessor's ownership of legal title to the Equipment or by reason of a breach by Headlessor of its covenants contained herein or in any other Operative Document. ARTICLE VI Termination SECTION 6.01. Exercise of Purchase Option Under Lease. In the event Headlessor should exercise its rights to purchase Headlessee's rights and interests in the Equipment as provided in the Lease, upon the transfer to Headlessor of Headlessee's rights and interests with respect to the Equipment this Headlease shall terminate with respect to the Equipment, and the obligations of Headlessor and Headlessee hereunder with respect to the Equipment shall cease. The Headlessor shall pay all costs incurred by Headlessee in effecting any such transfer of its rights to the Headlessor. SECTION 6.02. Termination. This Headlease shall terminate: (a) with respect to any Item or Production Unit acquired or disposed of pursuant to the terms of Section 7.03(b)(ii), 7.05, 7.07 or 17.04 of the Lease, or following foreclosure under the Lease Security Agreement (b) with respect to any Item or Production Unit for which the Headlessor has elected to terminate the Lease under Section 7.01 thereof and which the Headlessee has elected to retain under Section 7.02 of the Lease, upon any failure of the Headlessee to pay to the Indenture Trustee the amount specified under such Section -4- 5 7.02, and the payment by the Headlessor to the Indenture Trustee of the amounts specified in Section 7.02(i) of the Lease; (c) with respect to any Item or Production Unit that has suffered an Event of Loss, and for which the Headlessor has either furnished replacement equipment in accordance with Section 9.01(b)(i) of the Lease or paid the amount specified in Section 9.01(b)(ii) of the Lease; and (d) with respect to any Item which the Headlessor has elected to substitute under Section 9.05 of the Lease, upon the compliance by the Headlessor of the conditions set forth in such Section 9.05. ARTICLE VII Miscellaneous SECTION 7.01. Definitions and Rules of Usage. Capitalized terms not defined herein have the meanings set forth in the Definitions and Rule of Usage attached hereto as Exhibit A. This agreement shall be governed by the Documentary Conventions. SECTION 7.02. Further Assurances and Corrective Instruments. Headlessee and Headlessor will execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, from time to time, such supplements hereto and such further instruments as may reasonable be required to effectuate the transactions contemplated hereby. SECTION 7.03. Substitutions, Replacement Items; Accessions. Any Nonseverable Modification, any repair, replacement or substitution of any Item made pursuant to the Lease (including, without limitation, those described in Sections 6.02(c) or (d), above), and any replacement Item subjected to the Lease, shall immediately, and without further act or instrument, become subject to this Headlease. Following any such event Headlessee and Headlessor agree, upon written request from the other, to amend the Headlease Supplement to reflect such changes. SECTION 7.04. Trustee's Covenants. The parties hereto agree that all of the statements, representations, covenants and agreement made by Headlessee herein are made by Headlessee in its capacity as Owner Trustee under the Trust Agreement and not in its individual capacity, and are not made or intended as a personal representation, warranty, covenant or agreement but are made and intended only for the purpose of binding the Trust Estate. Therefore, anything contained herein or in such other agreements to the contrary notwithstanding, no recourse shall be had with respect hereto or such other agreements against Fleet National Bank or against its officers, directors, trustees or direct or indirect parent or controlling person or persons, except with respect to its own gross negligence or willful misconduct (or ordinary negligence with respect to the handling of money). -5- 6 SECTION 7.05. Indenture Trustee. In order to secure the indebtedness evidenced by the Loan Certificates, the Headlessee provides in the Indenture, among other things, for the assignment (to the extent provided therein) to the Indenture Trustee of certain rights and interests, including to this Headlease and for the creation of a Lien and security interest in favor of the Indenture Trustee for the benefit of the holders of the Loan Certificates in and to the Indenture Estate as described in the Granting Clauses of the Indenture. The Headlessor hereby (a) consents to such assignment pursuant to the terms of the Indenture, (b) agrees to give a copy of all notices hereunder directly to the Indenture Trustee, and (c) agrees that the Indenture Trustee may perform any covenant of Headlessee hereunder in the place of Headlessee. Any payment by the Headlessee to the Indenture Trustee of any amount payable hereunder shall constitute payment of such amount for all purposes of this Headlease. [balance of page intentionally left blank] -6- 7 IN WITNESS WHEREOF, Headlessor and Headlessee have caused this Headlease to be executed in their respective corporate names as of the day and year first above written. Raychem Corporation By: /s/ Lars Larsen -------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer Fleet National Bank, not in its individual capacity, but solely as Owner Trustee By: /s/ K Larimore -------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President Counterpart No. 13 of 15 Serially Numbered Manually Executed Counterparts. To the extent, if any, that this document constitutes Chattel Paper under the Uniform Commercial Code, no security interest may be created through the transfer and possession of any counterpart other than Counterpart No. 1.(1) - ----------------------------- (1) This language in original counterpart only. -7- EX-10.W 6 LEASE AGREEMENT BETWEEN RAYCHEM & FLEET NATIONAL 1 Exhibit 10(W) - -------------------------------------------------------------------------------- LEASE AGREEMENT A Dated as of April 11, 1996 between FLEET NATIONAL BANK as Owner Trustee and Lessor, and Raychem Corporation as Lessee. ------------------------ Manufacturing Equipment - -------------------------------------------------------------------------------- NOTE: THIS LEASE AGREEMENT HAS BEEN ASSIGNED TO AND IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF FIRST SECURITY BANK OF UTAH AS INDENTURE TRUSTEE, UNDER AND TO THE EXTENT SET FORTH IN THE INDENTURE AND SECURITY AGREEMENT A DATED AS OF APRIL 11, 1996, BETWEEN LESSOR AND FIRST SECURITY BANK OF UTAH AS INDENTURE TRUSTEE, AS SUCH INDENTURE AND SECURITY AGREEMENT A MAY BE AMENDED, MODIFIED OR SUPPLEMENTED FROM TIME TO TIME IN ACCORDANCE WITH THE PROVISIONS THEREOF. THIS LEASE AGREEMENT A HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. NO SECURITY INTEREST IN THE LESSOR'S RIGHT, TITLE AND INTEREST IN AND TO THIS LEASE MAY BE PERFECTED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL COUNTERPART OF THIS LEASE AGREEMENT A CONTAINING THE RECEIPT THEREFOR EXECUTED BY FIRST SECURITY BANK OF UTAH ON THE SIGNATURE PAGE THEREOF. 2 TABLE OF CONTENTS
PAGE ARTICLE I Definitions and Usage............................................... -1- ARTICLE II Lease of Equipment................................................. -1- ARTICLE III Rent.............................................................. -1- SECTION 3.01. Basic Rent with Respect to Basic Term...................... -1- SECTION 3.02. Supplemental Rent.......................................... -2- SECTION 3.03. Interim Term............................................... -2- SECTION 3.04. Method of Payment.......................................... -3- SECTION 3.05. Late Payment............................................... -4- SECTION 3.06. Net Lease; No Set-off, Counterclaims, etc.................. -4- ARTICLE IV Disclaimer of Warranties........................................... -7- ARTICLE V Liens; Quiet Enjoyment.............................................. -8- SECTION 5.01. Liens...................................................... -8- SECTION 5.02. Quiet Enjoyment............................................ -8- SECTION 5.03. Personal Property.......................................... -8- SECTION 5.04. Notice of Landlord Notices................................. -8- ARTICLE VI Operation; Maintenance............................................. -9- SECTION 6.01. Operation.................................................. -9- SECTION 6.02. Maintenance................................................ -9- SECTION 6.03. Replacement of Parts....................................... -10- SECTION 6.04. Relocation................................................. -11- SECTION 6.05. Modification............................................... -11- SECTION 6.06. Annual Listing of Production Units......................... -12- ARTICLE VII Obsolescence or Surplus Termination............................... -13- SECTION 7.01. Declaration of Obsolescence. ............................. -13- SECTION 7.02. Lessor Election to Retain Equipment........................ -13- SECTION 7.03. Qualifying Bids............................................ -14- SECTION 7.04. Rescission by Lessee....................................... -15- SECTION 7.05. Sale....................................................... -15- SECTION 7.06. Payment by Lessee; Notice; Termination of Lease............ -16- SECTION 7.07. Termination of Items....................................... -17-
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE VIII Return of Equipment; Storage..................................... -18- SECTION 8.01. Return of Production Units................................. -18- SECTION 8.02. Severable Modifications.................................... -18- SECTION 8.03. Re-Lease of Equipment by Lessor............................ -18- ARTICLE IX Event of Loss; Damage; Application of Payments; Substitution of Items............................. -19- SECTION 9.01. Event of Loss.............................................. -19- SECTION 9.02. Application of Payments Upon an Event of Loss.............. -21- SECTION 9.03. Seizure, Requisition, Application of Payments Not Relating to an Event of Loss......................................... -22- SECTION 9.04. Applications During Lease Event of Default or Material Lease Default............................................... -22- SECTION 9.05. Substitution of Items...................................... -23- SECTION 9.06. Application of Article VI.................................. -27- ARTICLE X Environmental Matters............................................... -27- ARTICLE XI Sublease and Assignment............................................ -28- SECTION 11.01 Sublease................................................... -28- SECTION 11.02 Assignment................................................. -29- ARTICLE XII Inspection and Marking............................................ -30- SECTION 12.01. Inspection................................................ -30- SECTION 12.02. Tagging................................................... -30- ARTICLE XIII Lease Events of Default.......................................... -31- ARTICLE XIV Remedies.......................................................... -33- SECTION 14.01. Effect of Lease Event of Default.......................... -33- SECTION 14.02. Determinations of Fair Market Value....................... -37- SECTION 14.03. No Relief from Termination................................ -37- SECTION 14.04. Remedies Cumulative....................................... -38- SECTION 14.05. Waiver of Lessee.......................................... -38- ARTICLE XV Right To Cure...................................................... -38-
-ii- 4 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE XVI Renewal Options................................................... -39- SECTION 16.01. Renewal Options........................................... -39- SECTION 16.02. Notice of Renewal......................................... -40- SECTION 16.03. Continuation of Lease Supplement.......................... -40- ARTICLE XVII Purchase Options................................................. -41- SECTION 17.01 Early Buyout Option....................................... -41- SECTION 17.02. End of Term Purchase Option; Notice....................... -42- SECTION 17.03. Owner Participant Becomes Competitor...................... -43- SECTION 17.04. Purchase.................................................. -43- ARTICLE XVIII Further Assurances.............................................. -44- SECTION 18.01. Further Action by Lessee.................................. -44- ARTICLE XIX Indenture Estate as Security for Lessor's Obligations to Loan Participants......... -45- ARTICLE XX Insurance.......................................................... -46- SECTION 20.01. Obligation to Insure...................................... -46- SECTION 20.03. Adjustment of Claims; Payment............................. -48- ARTICLE XXI Owner Trustee; Owner Participant.................................. -50- SECTION 21.01. Successor Trustee; Co-trustee............................. -50- SECTION 21.02. Liabilities of Owner Participant.......................... -50- ARTICLE XXII Miscellaneous.................................................... -51- SECTION 22.01. Documentary Conventions................................... -51- SECTION 22.02. Revision of Lease Supplement.............................. -51-
-iii- 5 LEASE AGREEMENT A dated as of April 11, 1996, between Fleet National Bank, not in its individual capacity but solely as Owner Trustee, as Lessor, and Raychem Corporation, a Delaware corporation, as Lessee. ARTICLE I Definitions and Usage Unless the context otherwise requires, terms used herein shall have the meanings assigned to them in Appendix A, which also contains rules as to usage. ARTICLE II Lease of Equipment Immediately upon execution and delivery of all the Operative Documents on the Closing Date, without necessity of any further act or evidence by either party hereto, each Item contained in each Production Unit listed on the Lease Supplement shall be deemed examined and accepted by the Lessee for all purposes and shall be deemed delivered and leased by the Lessor to the Lessee for the Interim Term and the Basic Term and, if the Lessee so elects pursuant to Article XVI, the Renewal Term applicable to such Item. ARTICLE III Rent SECTION 3.01. Basic Rent with Respect to Basic Term. (a) The Lessee shall pay to the Lessor an installment of Basic Rent on each Rent Payment Date during the Basic Term, subject to adjustment under Section 3.01(b) of this Lease and Article X of the Participation Agreement (which Article is incorporated by reference herein as if fully set forth herein), equal to the amount of Basic Rent specified for such Rent Payment Date in Schedule II to the Lease Supplement. (b) So long as any Loan Certificates shall be outstanding during the Basic Term and bear interest at a floating rate, each installment of Basic Rent shall be increased or decreased, as the case may be, by the Rent Differential. For purposes hereof, "Rent Differential" shall mean, with respect to the Basic Rent payable under the -1- 6 Lease Supplement as of any Rent Payment Date during the Basic Term, the difference between (i) the aggregate amount of interest due and payable on the Loan Certificates on the date on which the related payment of Basic Rent is payable and (ii) the aggregate amount of interest that would have been due and payable on such Loan Certificates on such Rent Payment Date if such Loan Certificates had borne interest at the Assumed Debt Rate. If, as of any Rent Payment Date, the amount determined under clause (i) of the immediately preceding sentence shall be greater than the amount determined under clause (ii) of such sentence, the amount of Basic Rent due on such Rent Payment Date shall be increased by the Rent Differential and, if the amount determined in accordance with such clause (ii) shall exceed the amount determined in accordance with such clause (i), the amount of Basic Rent due on such Rent Payment Date shall be decreased by the Rent Differential. (c) Anything contained in this Lease or the Participation Agreement to the contrary notwithstanding, the aggregate amount of Basic Rent payable (or that would be payable if not funded by a payment from the Lessor pursuant to Section 3.03) on any Rent Payment Date with respect to all Items shall in no event be less than the regularly scheduled payments of principal and interest in respect of the Loan Certificates due and payable on such Rent Payment Date. (d) The Lease Supplement will indicate whether and to what extent any installment of Basic Rent is payable in advance or in arrears. (e) The Lessee shall pay, as Supplemental Rent, any Auxiliary Payment due on all Loan Certificates on the date on which such amount is due, as provided in such Loan Certificates. SECTION 3.02. Supplemental Rent. The Lessee shall pay to the Lessor, or to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document, any and all Supplemental Rent promptly as the same shall become due and payable, including any interest payable at the Overdue Rate as provided in Section 3.05. SECTION 3.03. Interim Term. (a) Interim Rent. The Lessee shall pay for the Items subject to the Lease Supplement, as Interim Rent on the Basic Term Commencement Date, an amount equal to the excess, if any, of the interest payable on the Loan Certificates on such date over the amount of interest that would have been payable if such Loan Certificates had borne interest at the Assumed Debt Rate. -2- 7 (b) Lessor Paid Amounts; Lessee Right to Pay on Failure of Lessor. The Lessor shall make any payments of interest required to be made on the Loan Certificates on the Basic Term Commencement Date to the extent not required to be made by the Lessee under Section 3.03(a). In the event that the Lessor shall not have paid to the Indenture Trustee the amount of interest it is required to pay on the Loan Certificates under the preceding sentence, the Lessee shall make a payment to the Indenture Trustee equal to such amount plus interest on such amount at the Overdue Rate if not paid on the date the same is due (all of such payments being the "Advance Amount"), on the Lessor's behalf. (c) Right of Offset. If the Lessee pays any Advance Amount pursuant to the second sentence of Section 3.03(b), the Lessee shall be entitled to offsets (without duplication) for any outstanding Advance Amount (plus interest at the Advance Amount Rate on the outstanding portion of any Advance Amount from the date of the advance to the date on which the advance is fully offset) against any payments of Rent due from the Lessee to the Lessor or the Owner Participant (including, without limitation, Basic Rent, Stipulated Loss Value and Termination Value and all other amounts payable to the Lessor or the Owner Participant in connection with any termination of this Lease, but excluding Excepted Payments payable to the Indenture Trustee). Notwithstanding the preceding sentence, (i) in the case of any payment due from the Lessee that is distributable under the terms of the Indenture, the Lessee's right of offset shall be limited to an amount equal to the amount (if any) that would be distributable to the Owner Participant thereunder; (ii) no such offset or aggregate combined effect of separate offsets shall reduce the amount of any installment of Basic Rent, the Initial Portion of the EBO Price, Stipulated Loss Value or Termination Value as of any date payable under this Lease to an amount that would be in contravention of Section 3.01(c) or the definition of Stipulated Loss Value or Termination Value; and (iii) in the case of exercise of remedies by the Indenture Trustee against the Lessor by virtue of an Indenture Event of Default that is not (and is not the result of) a Lease Event of Default, the Lessee's right of offset set forth in this Section 3.03 shall continue against (x) the excess of the Basic Rent over the amount of scheduled principal, if any, and interest which is or would have been due under the Loan Certificates (had the Indenture Trustee not exercised remedies against the Lessor) and (y) other Rent due and payable directly to the Owner Participant. SECTION 3.04. Method of Payment. All Rent payable to the Lessor at any time prior to termination of the Indenture shall be paid by the Lessee to the Indenture Trustee at the Indenture Trustee Office or such other place in the United States as the Indenture Trustee shall specify to the Lessee on at least five Business Days' notice; all Rent payable to the Lessor after receipt by the Lessee of notice from the Indenture Trustee stating that the Indenture has been terminated following full satisfaction of the Loan Certificates thereunder shall be paid to the Lessor at its office -3- 8 set forth in Schedule I to the Participation Agreement, or at such other place in the United States as the Lessor shall specify to the Lessee on at least five Business Days' notice; provided, however, that, in the case of Excepted Payments, payment shall be made to whomever shall be entitled thereto. Each payment of Rent shall be made by the Lessee in funds with immediate value prior to 10:00 a.m., Pacific time to the designated account, on the date when such payment shall be due. SECTION 3.05. Late Payment. In the event any Rent shall not be paid on its due date to the Lessor, the Indenture Trustee or any Participant, the Lessee shall pay to the Lessor, the Indenture Trustee or such Participant, on demand, as Supplemental Rent, interest (to the extent permitted by Applicable Law) on such overdue amount from the due date thereof to the date of payment thereof at the Overdue Rate. SECTION 3.06. Net Lease; No Set-off, Counterclaims, etc. THIS LEASE IS A NET LEASE (AND EXPENSES ASSOCIATED WITH THE MAINTENANCE, OPERATION, AND INSURANCE OF THE EQUIPMENT SHALL BE FOR THE ACCOUNT OF THE LESSEE, WHETHER OR NOT SO STATED HEREIN), AND, NOTWITHSTANDING ANY PROVISION OF THIS LEASE OR OF ANY OTHER OPERATIVE DOCUMENT TO THE CONTRARY, THE LESSEE'S OBLIGATION TO MAKE ALL PAYMENTS OF RENT AS AND WHEN THE SAME SHALL BECOME DUE AND PAYABLE IN ACCORDANCE WITH THE TERMS OF THIS LEASE AND ANY OTHER OPERATIVE DOCUMENT SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT BE SUBJECT TO ANY ABATEMENT OR DIMINUTION BY SET-OFF (EXCEPT FOR OFFSETS REFERRED TO, AND ONLY TO THE EXTENT PROVIDED, IN SECTION 3.03), DEDUCTION, COUNTERCLAIM, RECOUPMENT, AGREEMENT, DEFENSE, SUSPENSION, DEFERMENT, INTERRUPTION OR OTHERWISE, AND, UNTIL SUCH TIME AS ALL RENT REQUIRED TO BE PAID UNDER THIS LEASE OR ANY OTHER OPERATIVE DOCUMENT SHALL HAVE BEEN PAID, THE LESSEE SHALL NOT HAVE ANY RIGHT TO TERMINATE THIS LEASE OR TO BE RELEASED, RELIEVED OR DISCHARGED FROM ITS OBLIGATION TO MAKE, AND SHALL NOT SUSPEND OR DISCONTINUE, ANY PAYMENT OF RENT FOR ANY REASON WHATSOEVER (EXCEPT AS MAY BE EXPRESSLY PROVIDED HEREIN), including, without limitation: (a) any default, misrepresentation, negligence, misconduct or other action or inaction of any kind by the Lessor, the Indenture Trustee, any Participant, the Lessee, or any other Person, whether under or in connection with this Lease, any other Operative Document or any other agreement relating to this Lease or in connection with any unrelated transaction; -4- 9 (b) the insolvency, bankruptcy, reorganization or cessation of existence, or discharge or forgiveness of indebtedness of, any entity or Person referred to in clause (a) above or any other Person; (c) the invalidity, unenforceability or impossibility of performance of this Lease or any other agreement referred to in clause (a) above for any reason; (d) any defect in the title, condition, design, operation or fitness for use of, or any Lien or other restriction of any kind upon, all or any part of any Item, any loss or destruction of, or damage to, any Item or any interruption in or cessation of the ownership, possession, operation or use of any thereof for any reason whatsoever; (e) any restriction, prevention or curtailment of or interference with any Item or the use thereof or any part thereof for any reason whatsoever, including, without limitation, by any Governmental Authority; (f) any Applicable Law now or hereafter in force; (g) any failure to obtain any required governmental consent for a transfer of rights or title to the Lessor, the Lessee or any other Person; (h) any amendment or other change of, or any assignment of any rights under, any Operative Document, or any waiver or other action or inaction under or in respect of any Operative Document, or any exercise or nonexercise of any right or remedy under or in respect of any Operative Document, including, without limitation, the exercise of any foreclosure or other remedy under the Indenture or this Lease or the sale of any Item or any portion thereof or interest therein; or (i) any other cause or circumstance foreseen or unforeseen, whether similar or dissimilar to any of the foregoing. The Lessee hereby waives and hereby agrees to waive at any future time at the request of the Lessor, to the extent now or then permitted by Applicable Law, any and all rights that the Lessee may have or that at any time hereafter may be conferred upon it, by statute, regulation or otherwise, to terminate, cancel, quit or surrender this Lease, except in accordance with the express terms hereof. If for any reason whatsoever this Lease shall be terminated (other than in accordance with the terms hereof) in whole or in part by operation of law or otherwise, the Lessee nonetheless agrees, to the extent permitted by Applicable Law, to pay to the Lessor (or, in the case of Supplemental -5- 10 Rent, to whomsoever shall be entitled thereto as provided herein or in the applicable Operative Document) an amount equal to each Rent payment at the time and in the manner such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. Each payment of Rent shall be final and the Lessee agrees not to seek to recover all or any part of any such payment (except for amounts that the Lessor, the Indenture Trustee or a Participant, as the case may be, in good faith agrees have been paid in error) from the Lessor, the Indenture Trustee or any Participant for any reason under any circumstance whatsoever; provided, however, that nothing contained in this Section 3.06 shall prevent the Lessee from bringing an action for damages suffered by the Lessee as a result of the breach by any Person of any obligation of such Person in any Operative Document or for equitable relief to obtain compliance with any such obligation. -6- 11 ARTICLE IV Disclaimer of Warranties SECTION 4.01. Disclaimer of Warranties. AS BETWEEN THE LESSOR AND THE LESSEE, DELIVERY OF EACH ITEM PURSUANT TO ARTICLE II SHALL BE CONCLUSIVE PROOF OF ACCEPTANCE BY THE LESSEE OF SUCH ITEM AS BEING IN COMPLIANCE WITH ALL REQUIREMENTS OF THIS LEASE, AND THE LESSOR LEASES AND THE LESSEE TAKES EACH ITEM AND EACH COMPONENT PART THEREOF "AS IS", AND THE LESSEE ACKNOWLEDGES THAT NEITHER THE LESSOR NOR ANY PARTICIPANT NOR THE INDENTURE TRUSTEE HAS MADE, NOR SHALL BE DEEMED TO HAVE MADE, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, VALUE, COMPLIANCE WITH SPECIFICATIONS, CONDITION, MERCHANTABILITY, DESIGN, QUALITY, DURABILITY, OPERATION OR FITNESS FOR USE OR PURPOSE OF SUCH ITEM OR ANY COMPONENT PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY ITEM OR ANY COMPONENT PART THEREOF OR OTHERWISE, IT BEING AGREED THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE, AS BETWEEN THE LESSOR AND THE LESSEE, BY THE LESSEE IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY ITEM OR ANY COMPONENT PART THEREOF, OF ANY NATURE WHETHER PATENT OR LATENT, AND THAT NEITHER THE LESSOR NOR ANY PARTICIPANT NOR THE INDENTURE TRUSTEE SHALL HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO, except that the Lessor, in its individual capacity, hereby represents, warrants and covenants that on the Closing Date the Items shall be free of Lessor Liens Attributable To it in its individual capacity. The provisions of this Article IV have been negotiated, and the foregoing provisions are intended to be a complete exclusion and negation of any other warranties by the Lessor, any Participant or the Indenture Trustee, express or implied, with respect to any Item or any component part thereof, whether arising pursuant to the Uniform Commercial Code or any other law now or hereafter in effect or otherwise. Nothing contained in this Article IV shall in any way diminish or otherwise affect any right the Lessee may have with respect to any Item against any third Person. Neither the Lessor nor any Participant nor the Indenture Trustee shall at any time be required to inspect any Item or any component part thereof, nor shall any inspection by the Lessor, any Participant or the Indenture Trustee be deemed to affect or modify the provisions of this Article IV. -7- 12 ARTICLE V Liens; Quiet Enjoyment SECTION 5.01. Liens. The Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Item, or title thereto or any interest therein, except Permitted Liens. The Lessee will promptly, at its own expense, take such action as may be necessary duly to discharge any Lien other than Permitted Liens. The Lessee's obligations under this Section 5.01 with respect to any Lien on any Item resulting from a claim arising prior to the termination of this Lease (other than pursuant to Article XVII) with respect to such Item shall survive such termination. SECTION 5.02. Quiet Enjoyment. Notwithstanding any other provision of this Lease, so long as no Lease Event of Default shall have occurred and be continuing, as between the Lessee and the Lessor, the Lessee shall have the exclusive rights to possession and control of all the Items in all Production Units and neither the Lessor nor any Person acting or claiming through the Lessor will take any action that shall interfere with the peaceful and quiet enjoyment of the use or nonuse of any Item by the Lessee, and the Lessee shall have the right to use or not use such Item in its sole discretion. The foregoing is not intended to limit the inspection rights and the rights in connection with a return of the Items granted by the Lessee hereunder. SECTION 5.03. Personal Property. The Lessee and the Lessor agree for the purposes of the Transaction that the Items, the Production Units, and every part thereof are and shall be considered as and shall remain personal and not real property or fixtures to all Persons and for all purposes. The Lessee and the Lessor agree that the Equipment, every Production Unit, every Item, and every part thereof are severed and shall be and shall remain severed from any real property and are readily movable, and, even if physically attached to such property, it is the intention of the Lessee and the Lessor that the Equipment, every Production Unit, every Item and every part thereof (i) shall retain the character of personal property, (ii) shall be removable, (iii) shall be treated as personal property with respect to the rights of all Persons whomsoever, (iv) shall not become part of any real property, and (v) by virtue of its nature as personal property, shall not be affected in any way by any instrument dealing with any real property. SECTION 5.04. Notice of Landlord Notices. The Lessee shall immediately notify the Lessor if it receives any notice of default under any lease of any premises on which any Item is located. -8- 13 ARTICLE VI Operation; Maintenance SECTION 6.01. Operation. The Lessee shall not use any Item or authorize any third party to use any Item in either case: (i) in breach of any Applicable Law (other than an Applicable Law as to which noncompliance would not adversely affect the business, operations or properties of the Lessee and so long as such noncompliance shall not involve any material risk of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement), or (ii) in violation of any authorization relating to such Item or to the Lessee issued by any Governmental Authority having jurisdiction over such Item (other than any provision thereof as to which noncompliance would not adversely affect the business, operations or properties of the Lessee and so long as such noncompliance shall not involve any material danger of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement), unless, in either case, the validity thereof is being contested in good faith and by appropriate proceedings (but only so long as such proceedings do not involve any material risk of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor, or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement and do not extend beyond the end of the Basic Term or, if any Lease Default has occurred and is continuing at the time at which such proceedings are initiated, the earlier termination of the Lease). SECTION 6.02. Maintenance. The Lessee at its own expense shall at all times during the Term applicable to each Item maintain each Production Unit and every Item contained therein so as to keep such Production Unit and such Items (i) in as good condition as when originally delivered under the Headlease, consistent with ordinary wear and tear, but in all events in good operating order for its age, (ii) in compliance with manufacturers' warranties, insurance requirements, prevailing industry standards, and otherwise in a prudent manner, and (iii) in all events, in accordance with practices followed from time to time by the Lessee in the operation and maintenance of -9- 14 similar kinds of properties owned or leased by it. Each Production Unit and every Item shall be, moreover, maintained and preserved by the Lessee in compliance with any requirement of Applicable Law, and the Lessee will (at its expense) provide all maintenance and service and make all repairs necessary for such purpose. The Lessor shall not be obliged in any way to maintain, alter, repair, rebuild or replace any Item. In case of any damage to, loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, any Item, that does not constitute an Event of Loss with respect to the Production Unit containing such Item, whether or not any insurance proceeds on account of such damage, loss, condemnation, confiscation, theft, seizure or requisition shall be sufficient for the purpose, the Lessee shall at its own expense promptly commence and complete the repair or replacement of such Item (and, in the case of a total loss or nonmaterial damage other than normal wear and tear, complete such repair or replacement before the end of the Term applicable to such Item or any earlier termination) such that the Item is returned as nearly as possible to its condition and character immediately prior to such damage, loss, condemnation, confiscation, theft, seizure or requisition (assuming such Item was then in the condition required to be maintained by the terms of this Lease), with such alterations and additions as may be made at the Lessee's election pursuant to and subject to the conditions of Section 6.05; provided, however, for the avoidance of doubt, that the Lessee may, in lieu of repairing any Item subject to this Lease which becomes damaged or in need of repairs, substitute for such Item another item of equipment in compliance with Section 9.05, or, if the conditions of Section 7.07 are met, terminate this Lease with respect to such Item pursuant to that Section. SECTION 6.03. Replacement of Parts. If any parts that were originally incorporated or installed in or attached to any Item at the time of delivery thereof hereunder, or any parts thereafter incorporated or installed in or attached to such Item in replacement of or substitution for such original parts, shall become worn out, lost, stolen, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, the Lessee, at its own expense, shall promptly replace such parts, or cause the same to be replaced, by replacement parts which are free of all Liens other than Permitted Liens and of such quality and in such manner that such Item shall be in as good an operating condition as, and have a value, remaining useful life and utility at least equal to the value, remaining useful life and utility of, such Item prior to such replacement of parts (assuming such Item was, at the time of such replacement of parts, in the condition and state of repair required by the terms hereof). All parts at any time removed from an Item shall remain subject to the Headlease and this Lease, no matter where located, until such time as such parts shall be replaced by parts which have been incorporated or installed in or attached to such Item and which meet the requirements for replacement parts specified above; provided, however, that parts that have been removed from Items and that have no value other than scrap value shall be released from this Lease and all other Operative Documents immediately upon their removal -10- 15 from the Item, and may be disposed of by the Lessee (at its expense) prior to the installation of the replacement part. Immediately upon a replacement part becoming incorporated or installed in or attached to such Item as above provided, without further act, (i) the replaced part shall cease being subject to the Headlease, this Lease, and all other Operative Documents, shall be free and clear of all rights of the Lessor, and shall no longer be part of an Item hereunder, and (ii) such replacement part shall become subject to the Headlease, this Lease, and all Operative Documents, including the Lien of the Indenture and the Lease Security Agreement, and shall be deemed part of such Item for all purposes to the same extent as the parts originally incorporated or installed in or attached to such Item. The Lessee may transfer parts or components from one Item to another within the same Production Unit in a manner consistent with its normal operating practices so long as such transfer does not change the identity of the Items involved or reduce the value or remaining useful life of such Production Unit. SECTION 6.04. Relocation. (a) Within the United States. If no Lease Event of Default and no Lease Default pursuant to paragraph (a) or (b) of Article XIII shall have occurred and be continuing, the Lessee may, subject to Section 12.02(b), without the consent of the Lessor, relocate any Item during the Term to any facility operated by the Lessee or any Affiliate thereof in the United States of America; provided, however, that (i) if the relocation of the Item is to a place outside the county in which the Item was originally located, the Lessee shall, concurrently with the relocation, ensure that any filings necessary to protect the interests of the Lessor and the Indenture Trustee in the Item are timely made or corrected, (ii) if the Item is relocated to real property that is not owned by the Lessee, the Lessee shall obtain a waiver (substantially in the form of Exhibit 6.04) from the landlord of the real property of any rights with respect to the Item, and (iii) the Lessee shall, concurrently with the relocation, inform the Lessor, the Owner Participant and the Indenture Trustee in writing of any relocation. Notwithstanding the previous sentence, the Lessee may move any Item to another location within the same county to a facility owned by the Lessee or with respect to which a landlord waiver in the form of Exhibit 6.04 attached has been obtained at any time, with notice to the Lessor no later than February 15 of each year of all such relocations occurring in the immediately preceding calendar year. (b) Outside the United States. The Lessee may relocate any Item to a place outside the United States of America (or to an area excluded from insurance coverage) only with the prior written consent of the Lessor and a majority in interest of the Loan Participants, in each case not to be unreasonably withheld. SECTION 6.05. Modification. (a) Subject to its contest rights under Section 6.01, the Lessee shall, at its expense, make any Modification to any Item -11- 16 required by Applicable Law. The Lessee, at its expense, from time to time may make any Modification to any Item that the Lessee may deem desirable in the conduct of its business; provided, however, that the Lessee shall not have the right to make any such Modification that materially impairs such Item from being operated for the purposes for which it was built or diminishes the value, utility or remaining useful life of such Item. (b) Immediately upon each Modification having been made: (i) in the case of any Nonseverable Modification, the Modification shall, effective on the date such Modification shall have been incorporated into such Item, become subject to the Headlease, this Lease, and all other Operative Documents, including the Liens of the Indenture and the Lease Security Agreement; and (ii) in the case of each Severable Modification, the Modification shall not become subject to the Headlease, this Lease, or any other Operative Document; provided, that Severable Modifications that remain at the end of the Term applicable to an Item modified (or remain as of any earlier termination of this Lease with respect to such Item) shall be subject to the provisions of Section 8.02. Modifications that, pursuant to this Section 6.05(b), become subject to this Lease, shall, without further act, become subject to the Headlease and to all other Operative Documents, including the Lien of the Indenture and the Lease Security Agreement, and shall be deemed part of the applicable Item for all purposes. Modifications that do not become subject to this Lease pursuant to this Section 6.05(b) shall not be deemed a part of the applicable Item and shall not be subject to this Lease, the Headlease, the Lien of the Indenture or the Lease Security Agreement. (c) Subject to compliance with Applicable Law and so long as no Material Lease Default shall have occurred and be continuing, the Lessee may remove, at its expense, any Severable Modification which has not become subject to this Lease pursuant to Section 6.05(b), provided, that, unless the Lessee shall have given notice of its election to Purchase such Item pursuant to Article XVII, the Lessee, at its expense and prior to the end of the Term, shall repair any damage to such Item caused by such removal such that the Item is returned to the condition required hereunder. SECTION 6.06. Annual Listing of Production Units. The Lessee shall provide to the Lessor, not later than February 15 of each year, a listing of (i) all Production Units subject to this Lease as of December 31 of the immediately preceding calendar year, (ii) the Items contained in each Production Unit on such December 31, and (iii) the Lessor's Cost of each such Item. -12- 17 ARTICLE VII Obsolescence or Surplus Termination SECTION 7.01. Declaration of Obsolescence. At any time on or after the earlier of (a) September 30, 1999, and (b) the approval by the Board of Directors of the Lessee of the sale to a person other than an Affiliate of the Lessee of any United States business unit of the Lessee containing a Production Unit or Production Units, the Lessee may, upon 90 days' prior written notice to the Lessor, declare any Production Unit or Production Units (or, in the case of clause (b), above, the Production Unit or Production Units to be sold) obsolete, operationally uneconomic, or surplus to its needs and, if no Event of Loss shall have occurred with respect to the Production Unit or Production Units, the Lessee shall be entitled to terminate this Lease with respect to such Production Unit or Production Units on: (x) in the case of a termination described in clause (a), any Termination Value Date occurring on or after such declaration, and (y) in the case of a termination described in clause (b), any day after the 90th day after the giving of the notice specified by the Lessee in such notice (in either case, the "Termination Date"). SECTION 7.02. Lessor Election to Retain Equipment. In the case of a termination described in clause (a) of Section 7.01 (and which is not also described in clause (b) of such Section), at any time within 30 days after notice from the Lessee of its election to terminate this Lease with respect to any Production Unit or Production Units, the Lessor may give the Lessee notice of its irrevocable election to retain any such Production Unit or Production Units under the Headlease. If the Lessor shall have elected to retain any Production Unit in accordance with the preceding sentence, on the Termination Date for such Production Unit (x) the Lessee shall pay to the Lessor any Accrued Rent due with respect to all Items then included in such Production Unit as of such Termination Date and other unpaid Supplemental Rent (including the Auxiliary Payments, if any) due on or prior to such Termination Date, but will not be required to pay Termination Value, and (y) the Lessor shall pay to the Indenture Trustee funds of the type required by the Indenture in an amount sufficient to pay in full the portion of the Applicable Principal Amount of the Loan Certificates that is Allocatable To the Items in such Production Unit together with accrued interest thereon, to such Termination Date, plus all other sums due and payable on such Termination Date to the Loan Participants by the Lessor under the Indenture, the Participation Agreement or such Loan Certificates. If the Lessor, the Indenture Trustee, or any Participant incurs any costs as a result of the prepayment of the Loan Certificates as provided in the preceding sentence, the Lessee shall pay such costs as Supplemental Rent. Subject to the receipt by the Indenture Trustee of the payment -13- 18 from the Lessor, on such Termination Date the Lessee shall deliver such Production Unit to the Lessor pursuant to the requirements of Article VIII, and, subject to the receipt by the Indenture Trustee of any associated Supplemental Rent from the Lessee, such Production Unit shall cease to be leased hereunder. If the Lessor shall fail to make the full amount of such payment to the Indenture Trustee, (i) the Lessee may make such payment, in which event, subject to the receipt by the Indenture Trustee of any associated Supplemental Rent, all liability of the Lessee to pay Rent for the Items in such Production Unit (including any Basic Rent due on such Termination Date) shall cease, the Term with respect to such Items shall cease, the Headlease with respect to such Items shall cease, and the Lessor must remove any Lessor Liens on the Items in such Production Unit and release such Items from the Lien of the Lease Security Agreement, and (ii) the Lessor shall thereafter no longer be entitled to exercise its election to retain any Production Unit; provided that if the Lessee does not make the payment contemplated by clause (i), this Lease shall continue in full force and effect, and the provisions of Sections 7.03, 7.04 and 7.05 shall apply as if the Lessor had not elected to retain the Production Unit. SECTION 7.03. Qualifying Bids. (a) Solicitation of Bids. In the case of a termination described in clause (a) of Section 7.01 (and which is not also described in clause (b) of such Section), during the period from the giving of such notice of termination for the relevant Production Unit or Production Units until ten days prior to the Termination Date and so long as the Lessor shall not have exercised its option pursuant to Section 7.02 to retain such Production Unit(s), the Lessee, as agent for the Lessor and at the Lessee's expense, shall use its best efforts to obtain the highest possible bids from Persons other than the Lessee or its Affiliates to purchase the Items in such Production Unit(s) (including Lessor's interest therein) on the Termination Date, and the Lessee shall, during such period, from time to time at the request of the Lessor, inform the Lessor of the results of its efforts and shall notify the Lessor in writing, at least ten days prior to the Termination Date, of the amount of each such bid that has theretofore been submitted and the name and address of the party submitting such bid. Each such bid shall be a bona fide bid for payment in full in cash (such a bid is referred to herein as a "Qualifying Bid"). The Lessor shall have the right, directly or through agents or brokers, to solicit bids, but shall be under no duty to solicit bids or to inquire into the efforts of the Lessee to obtain bids. (b) Election if No Bids Received. If neither the Lessor nor the Lessee shall have received any Qualifying Bid as to any one or more of such Production Units on or before the tenth day before the Termination Date, the Lessee may elect either (i) to continue this Lease as to such Production Units or (ii) to terminate this Lease on such Termination Date as to any such Production Units and pay -14- 19 the Lessor the amount specified in Section 7.06 with respect to such Production Units in exchange for a transfer from the Lessor to the Lessee of all of the Lessor's rights to such Production Unit under the Headlease and the release by Lessor of the Items included in such Production Unit from the Lien of the Lease Security Agreement. SECTION 7.04. Rescission by Lessee. The Lessee may at any time prior to the date on which the Indenture Trustee has given notice of prepayment to the Loan Participants pursuant to Section 3.11 of the Indenture, and provided that the Lessor has not exercised its election to retain such Production Units, rescind its notice of termination as to any Production Unit or Production Units. The total number of such rescissions and elections to continue to Lease during the Basic Term for all Production Units shall not exceed two. The Lessee shall reimburse the Lessor, the Owner Participant, the Indenture Trustee and all Loan Participants for all reasonable expenses (including attorney's fees and expenses of the Owner Participant) incurred in connection with any such rescission of a notice of termination. SECTION 7.05. Sale. (a) Sale Pursuant to Qualifying Bid. If (i) the Lessor or the Lessee shall have received a Qualifying Bid on or prior to the tenth day before the Termination Date, and (ii) the Indenture Trustee (or, after the termination of the Indenture, the Lessor (or the Lessee)) shall have received from the bidder (which may be or include the Lessor or any Affiliate thereof) that shall have submitted the highest Qualifying Bid for such Production Unit or Production Units immediately available funds of the amount specified in such bid, the Lessor shall on the Termination Date, subject to the receipt of the amounts payable pursuant to Section 7.06 hereof, release all of its rights under the Headlease to the Production Unit or Production Units and shall remove, at the Lessor's expense, any Lessor Liens on the Items in the Production Unit or Production Units to which such bid relates; and the Lessee shall transfer all of its right, title, and interest of the Items comprising such Production Unit or Production Units to such bidder. Any funds received by the Lessee for the Equipment shall be immediately paid over to the Indenture Trustee (or, after the termination of the Indenture, the Lessor). The Lessee and Lessor shall execute and deliver such documents evidencing such transfer and take such further action as the purchaser shall reasonably request. All out-of-pocket costs and expenses (including attorney's fees and expenses of the Owner Participant and any transfer taxes incurred in connection with the sale) incurred in connection with any release from the Headlease, transfer of, or attempt to find a Qualifying Bid for, any Production Unit pursuant to this Article VII shall be paid by the Lessee. (b) Sale of Business Unit. In the case of a sale of a business unit by Lessee as described in clause (b) of Section 7.01, the Lessor shall on the Termination -15- 20 Date, release all of its rights under the Headlease to all Production Units in the business unit to be sold, and shall remove, at the Lessor's expense, any Lessor Liens on the Items in such Production Units, and the Lessee shall consummate the sale of such Production Units to the purchaser of the business unit. The Lessee shall pay over to the Indenture Trustee (or, after the termination of the Indenture, the Lessor), all funds received on the sale of the business unit, up to an amount equal to the aggregate Fair Market Sales Value (determined by agreement or, if the Lessor and the Lessee are unable to agree, by the Appraisal Procedure) for all Production Units sold. In addition, the Lessee shall pay on such Termination Date the amount specified in Section 7.06, computed as if the net proceeds received on the sale of the Production Units were equal to the Fair Market Sales Value thereof. All out-of-pocket costs and expenses (including attorney's fees and expenses of the Owner Participant) incurred in connection with any release from the Headlease or transfer of any Production Unit pursuant to this Article VII shall be paid by the Lessee. SECTION 7.06. Payment by Lessee; Notice; Termination of Lease. In the case of any termination described in Section 7.01, unless the Lessor has elected to retain the Production Unit(s) being terminated pursuant to Section 7.02, and subject to a difference in computation provided in Section 7.05(b), on the Termination Date, the Lessee shall pay to the Lessor the sum of: (a) any Accrued Rent due with respect to the Items in each Production Unit terminated as of such Termination Date; plus (b) the excess, if any, of (i) the Termination Value for the Items in each such Production Unit as of such Termination Date (or, if the Termination Date is not also a Termination Value Date, the Termination Value for such Items for the Termination Value Date immediately preceding the Termination Date, plus interest on such Termination Value from such Termination Value Date to the Termination Date at the then-current "Debt Rate" (as defined in the Loan Certificates)), over (ii) the net proceeds actually realized on any sale thereof and paid over to the Indenture Trustee or the Lessor, as the case may be, pursuant to Section 7.05; plus (c) any Auxiliary Payments payable on such Termination Date on the portion of the Loan Certificates Allocatable To the Items in the Production Unit or Production Units being terminated (including LIBOR breakage, if any); plus (d) any other Rent with respect to the Items in each such Production Unit due and unpaid as of such Termination Date (including any amounts for costs and expenses payable by the Lessee as required in Section 7.05, but, if the -16- 21 Termination Date is also a Rent Payment Date, not including the advance portion of any installment of Basic Rent due on such Rent Payment Date). Upon payment by the Lessee of all such amounts as to any Production Unit, the obligation of the Lessee to pay Basic Rent with respect to the Items in such Production Unit shall terminate, such Items shall no longer be subject to this Lease and the Term with respect to such Items shall end. SECTION 7.07. Termination of Items. No later than February 15 of each year, the Lessee may give notice to the Lessor terminating this Lease as to any Item (or Items) that, during the previous calendar year, was damaged beyond repair, lost, stolen, reported missing, sold to a person other than an Affiliate of the Lessee, or disposed of as scrap; provided, that the Lessee may not, without the prior written consent of the Lessor, terminate this Lease pursuant to this Section 7.07 (i) as to any Item the Lessor's Cost of which exceeds $100,000, or (ii) in any calendar year, as to Items the aggregate Lessor's Cost of which (determined without regard to Items contained in Production Units terminated under Section 7.01) exceeds $250,000. Concurrently with giving the notice of termination, the Lessee shall: (a) provide to the Lessor a list of all Items terminated during such calendar year pursuant to this Section 7.07; (b) provide to the Lessor an Officer's Certificate stating that the termination of the Items on the list described in clause (a) does not adversely affect the value, utility or remaining useful life of the remaining Items in the Production Unit(s) that contained the terminated Items; and (c) pay to the Lessor the Termination Value for each Item terminated pursuant to this Section 7.07 as of the Termination Value Date immediately preceding the date of the notice, plus interest thereon from such Termination Value Date to the date of payment at the then-current "Debt Rate" (as defined in the Loan Certificates). The Lessee shall reimburse the Lessor, the Participants, and the Indenture Trustee for expenses (including Auxiliary Payments, if any) incurred in connection with any termination under this Section 7.07. Immediately upon compliance by the Lessee with the requirements of this Section, the terminated Items shall cease to be subject to this Lease, the Lease Supplement, and the Headlease; the Lessor shall remove any Lessor Liens on the terminated Items; and the terminated Items shall be released from the Liens of the Indenture and the Lease Security Agreement. -17- 22 ARTICLE VIII Return of Equipment; Storage SECTION 8.01. Return of Production Units. Upon the expiration of the Term, or upon any earlier termination of this Lease with respect to a Production Unit, if there is not a simultaneous termination of the Headlease with respect to that Production Unit, in either case if such Production Unit is not Purchased by Lessee pursuant to Article XVII, the Lessee (at its expense) shall surrender such Production Unit and all Items contained therein to Lessor in good condition and good operating order, in both cases consistent with ordinary wear and tear, and free and clear of all Liens other than Lessor Liens. If requested by the Lessor not less than 90 days prior to the expiration of the Term (or, in the event of an early termination pursuant to (i) Article VII, not later than 60 days after the Termination Date, or (ii) Section 14.01, forthwith following the exercise by the Lessor of its remedy under Section 14.01(b)(i)), the Lessee shall, at its own expense and risk, dismantle and crate each Item contained in each Production Unit being returned in accordance with generally accepted methods and procedures for deinstallation, and deliver such Production Unit to the Lessor at the nearest railhead. At the time of such return, the Items contained in each Production Unit being returned shall be free and clear of all Liens other than Lessor Liens and, subject to the provisions of the Lease Security Agreement in the event of a termination pursuant to Section 14.01, the Lien of the Headlease, and, except as may have otherwise been expressly agreed to in writing by the Lessor, free and clear of any right of any Person to use or access such Item other than the Lessor. SECTION 8.02. Severable Modifications. If the Lessee has made any Severable Modification to any Item to be surrendered to the Lessor pursuant to Section 8.01, and the Severable Modification has not previously been removed by the Lessee, the Lessee shall, not later than 60 days before such surrender, inform the Lessor in writing if the Lessee intends to leave the Severable Modification in place, whereupon the Lessor may elect to subject such Severable Modification to the Headlease in accordance with and upon payment of the amount specified in Section 1.03 thereof. If the Lessor has not given the Lessee written notice of its election under the preceding sentence at least 30 days prior to the date for the surrender of the Item (or has notified Lessee that it has elected not to subject the Severable Modification to the Headlease), the Lessee may (i) remove the Severable Modification prior to such surrender, or (ii) leave the Severable Modification in place, in which case it will become subject to the Headlease without further action on the part of, or further cost to, the Lessor. SECTION 8.03. Re-Lease of Equipment by Lessor. The Lessee agrees that during the last six months of the Term with respect to the Items in any Production Unit, it will cooperate in all reasonable respects with efforts of the Lessor to re-lease -18- 23 such Items, including by cooperating, at the expense of the Lessor, in the obtaining of all orders, licenses, consents, authorizations, approvals or exemptions under or by any Governmental Authority which may be necessary in connection with any potential lease or transfer of such Items; provided, however, that such cooperation shall be subject to the Lessee's reasonable operational, confidentiality and security requirements. SECTION 8.04. Storage. The Lessor shall be entitled to store any returned Item on Lessee's property at the Lessor's risk and expense (including reasonable charges for occupancy of space) for a period of up to 90 days after termination of the Term applicable to such Item, or in the case of a termination of this Lease under Article XIV, for a period of up to one year. ARTICLE IX Event of Loss; Damage; Application of Payments; Substitution of Items. SECTION 9.01. Event of Loss. (a) Notice of Event of Loss. Upon the occurrence of an Event of Loss, the Lessee shall, within 60 days of such occurrence, give the Lessor, the Indenture Trustee and the Owner Participant written notice thereof. In the notice, the Lessee shall (i) specifically identify the Production Unit that suffered the Event of Loss, and (ii) specify which of the alternatives set forth in Section 9.01(b) it will pursue. (b) Lessee Alternatives. Upon an Event of Loss, the Lessee shall pursue one of the alternatives, (i) or (ii), set forth in this Section 9.01(b). (i) If the Lessee elects this alternative (i), it shall either: (A) within 180 days of the occurrence of the Event of Loss, substitute Replacement Equipment (as defined in the succeeding sentence) for the Production Unit that suffered the Event of Loss, or (B) within 180 days of the Event of Loss, provide to the Indenture Trustee (or, after the termination of the Indenture, the Lessor) cash collateral equal to the Stipulated Loss Value of the Items in the affected Production Unit or a letter of credit for the amount of the Stipulated Loss Value of the Items in the affected Production Unit issued by a bank and in a form reasonably -19- 24 acceptable to the Lessor and the Indenture Trustee, and within 18 months of the Event of Loss, substitute Replacement Equipment for the Production Unit which suffered the Event of Loss. "Replacement Equipment" shall mean equipment which is compatible with the Equipment in the Production Unit that suffered the Event of Loss and with respect to which the Lessee has obtained an appraisal (in form and substance, and from an appraiser, reasonably satisfactory to the Lessor) confirming that such Replacement Equipment has a value, utility, and remaining useful life at least equal to the affected Production Unit and is in as good operating condition as the Production Unit replaced (assuming that such Production Unit had been maintained in accordance with this Lease). Notwithstanding the preceding sentence, the Lessee may replace a Production Unit that has suffered an Event of Loss with equipment that is not compatible with the Equipment in such Production Unit with the Lessor's consent, such consent not to be unreasonably withheld: any such equipment shall be "Replacement Equipment" for all purposes of this Lease. The Replacement Equipment shall be free and clear of all Liens other than Permitted Liens. The Lessee shall provide the Lessor with such documentation evidencing the substitution and the Lessee's title to the Replacement Equipment as the Lessor shall reasonably request, including: (i) supplements to the Head Lease, this Lease, the Lease Security Agreement, and the Indenture, subjecting the Replacement Equipment to such instrument; (ii) evidence of the perfected Lien on Lessor's interest in the Replacement Equipment and of the absence of Liens other than Permitted Liens on the Replacement Equipment; and (iii) UCC financing statements, duly executed, delivered and filed, of the type, in respect of such Replacement Equipment, referred to in Section 3.01(g) of the Participation Agreement, and shall provide opinions of counsel reasonably satisfactory to the Lessor regarding the legality, authorization and enforceability of such documentation, and the perfection of the interests thereon. Once the substitution has been made (or the collateral has been provided) and the other conditions specified in the preceding paragraph have been satisfied, the Lessor shall release all of its rights under the Headlease to, and shall remove all Lessor Liens upon the Items in the affected Production Unit and release such Items from the Lien of the Lease Security Agreement, and the Lessee shall be subrogated to all claims of the Lessor, if any, against third parties to the extent the same relate to physical damage to or loss of such Production Unit. For all purposes hereof, the Replacement Equipment shall, after such substitution, be part of the property leased hereunder, be "Equipment," be deemed to be the Production Unit replaced, be subject to the Lease Supplement, the Headlease and the Lease Security Agreement and -20- 25 Lessor's interest therein, and be subject to the Lien of the Indenture. After a substitution, each item of Replacement Equipment listed separately in a manifest provided to the Lessor by the Lessee shall be an "Item" hereunder. Under this alternative (i), no reduction shall be made in the Basic Rent. (ii) If the Lessee elects this alternative (ii), it shall, on the first Stipulated Loss Value Date falling at least 120 days after the occurrence of the Event of Loss, pay to the Lessor the sum of (A) the Stipulated Loss Value for Items in the Production Unit that suffered the Event of Loss determined for such Stipulated Loss Value Date, (B) if the Stipulated Loss Value Date is also a Rent Payment Date, any Accrued Rent with respect to such Items as of such Rent Payment Date, and (C) any Supplemental Rent with respect to such Items due and payable on or before such Stipulated Loss Value Date, including Auxiliary Payments, if any, due on the portion of the Loan Certificates Allocatable To such Items, on such Stipulated Loss Value Date as a result of the Event of Loss. Once the payment described in the preceding sentence has been made, the Lessor shall release all rights to the Items in the affected Production Unit under the Headlease and the Lease Security Agreement and shall remove all Lessor Liens against such Items, the Lessee shall have no further obligation to make payments of Rent with respect to the Items in the affected Production Unit, and the Term with respect to such Items shall end. SECTION 9.02. Application of Payments Upon an Event of Loss. Except as provided in the next sentence of this Section 9.02 or in Section 9.04, any payments received at any time by the Lessor or by the Lessee with respect to any Equipment (including insurance proceeds or warranty payments but excluding proceeds from insurance policies carried by the Lessor or the Owner Participant) from any Governmental Authority or other Person as a result of the occurrence of an Event of Loss with respect to such Equipment shall be applied as follows: (a) any such payment received at any time by the Lessee shall be promptly paid to the Lessor for application pursuant to the following provisions of this Section 9.02, except that the Lessee may retain any amounts which the Lessor shall at the time be obligated to pay to the Lessee under such provisions or pursuant to Article XX; (b) so much of such payments as shall not exceed all amounts required to be paid by the Lessee pursuant to Section 9.01(b)(ii) shall be applied in reduction of the Lessee's obligation to pay such amounts if not already paid by the Lessee, or, if already paid by the Lessee, shall be applied to reimburse the Lessee for its payment of such amounts; and -21- 26 (c) the balance, if any, of such payments remaining thereafter, if they are from insurance carried by the Lessee, shall be paid to the Lessee or, if they are from any other Person or source, shall be divided between the Lessor and the Lessee as their interests may appear. Notwithstanding the foregoing, subject to the provisions of Section 9.04, any such payments received with respect to any Equipment that has been replaced by the Lessee, or with respect to which the Lessee has provided collateral, pursuant to Section 9.01(b)(i) shall be retained by or paid to the Lessee. SECTION 9.03. Seizure, Requisition, Application of Payments Not Relating to an Event of Loss. In the event of a loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, or damage to, any Production Unit, any Item or any part thereof not resulting in an Event of Loss, the Lessee shall promptly notify the Lessor and the Indenture Trustee thereof and all obligations of the Lessee under this Lease with respect to such Production Unit shall continue to the same extent as if such event had not occurred. Subject to the provisions of Section 9.04 and Article XX, payments received at any time by the Lessor or the Lessee from any insurer under insurance carried by the Lessee but not Lessor or the Owner Participant, any Governmental Authority or other Person with respect to any loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, or damage to, any Item or Items not constituting an Event of Loss to the Production Unit containing such Item or Items shall be paid to or retained by the Lessee. Nothing contained in this Section 9.03 shall affect the Lessee's right to substitute replacement equipment for any Item pursuant to Section 9.05, or to terminate any Item pursuant to Section 7.07. SECTION 9.04. Applications During Lease Event of Default or Material Lease Default. Any amount that shall be payable to the Lessee pursuant to this Lease arising out of any insurance, warranty, governmental award or otherwise shall not be paid to the Lessee or, if it shall have been previously paid to Lessee, shall not be retained by the Lessee but shall be paid to the Lessor, if at the time of such payment any Lease Event of Default or Material Lease Default shall have occurred and be continuing. In such event, all such amounts shall be paid to and held by the Lessor in trust as security for the obligations of the Lessee to make payments under any other Operative Document or to pay Rent hereunder or, at the Lessor's option, applied by the Lessor toward payment of any of such obligations of the Lessee at the time due hereunder or under such other Operative Document. At such time as there shall not be continuing any Lease Event of Default or Material Lease Default, all such amounts at the time held by the Lessor in excess of the amount, if any, that the Lessor shall have elected to apply as above provided shall be paid to the Lessee. -22- 27 SECTION 9.05. Substitution of Items. (a) So long as no Material Lease Default has occurred and is continuing, the Lessee may substitute for an Item (including a substitution in the nature of a trade-in) another item of equipment in accordance with the terms of this Article IX and Section 9.13 of the Indenture. If the Lessee shall elect to substitute pursuant to the preceding sentence, the Lessee shall, at its sole cost and expense: (i) transfer to the Lessor under the Headlease, without cost to the Lessor, an item of equipment, to be located in the same or a different Production Unit, which substituted item meets the following conditions: (A) it is compatible with the Production Unit in which it is to be located: (B) it is free and clear of all Liens other than Permitted Liens; and (C) it has a value, utility and remaining useful life at least equal to the Item to be replaced and is in as good condition and good operating order as such Item, assuming that such Item had been maintained in accordance with this Lease; (ii) on each February 15 and August 15, provide to the Lessor, the Indenture Trustee and each Participant, an Officer's Certificate giving notice of each substitution made in the six months ending, in the case of the February 15, on the immediately preceding December 31 and, in the case of the August 15 notice, on the immediately preceding June 30, stating that each substituted item satisfies the conditions in subclauses (A), (B) and (C) of clause (i), and stating which substitutions satisfy the conditions in clauses (i) through (iv) of Section 9.05(d); (iii) no later than the date on which the Officer's Certificate is provided, deliver to the Lessor and the Indenture Trustee for execution, supplements to the Headlease and the Lease Security Agreement, amendments to the Lease Supplement and Indenture, signed by an authorized representative of the Lessee, subjecting such substituted equipment to the terms thereof and hereof; (iv) no later than the date on which the Officer's Certificate is provided, deliver to the Indenture Trustee and/or the Lessor for signature duly completed and signed (by the Lessee) financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment and provide to the -23- 28 Lessor evidence of the absence of Liens other than Permitted Liens on the substituted equipment, together with a favorable opinion of counsel (which may be Lessee's internal counsel) regarding the legality, authorization and enforceability of such documentation and the perfection of such interests and Liens; and (v) no later than five Business Days after the date on which the Lessee receives back the financing statements or other documentation described in clause (iv) signed by the Indenture Trustee and/or the Lessor (as the case may be), file such financing statements or other documentation. (b) Notwithstanding anything to the contrary in paragraph (a) of this Section 9.05, the Lessee may not make any single substitution (or related series of substitutions) of replacement equipment for an Item (or a group of related Items) having a Lessor's Cost in excess of five million dollars unless it satisfies the following conditions: (i) the Lessee shall give the Lessor at least 30 days' prior written notice of the substitution; (ii) concurrently with making the substitution, the Lessee shall provide to the Lessor, the Indenture Trustee and each Participant, an Officer's Certificate giving notice of the substitution, stating that the substituted item satisfies the conditions in subclauses (A), (B) and (C) of clause (i) of paragraph (a), and stating whether the substitution satisfies the conditions in clauses (i) through (iv) of Section 9.05(d); (iii) concurrently with making the substitution, the Lessee shall deliver documentation reasonably satisfactory to the Lessor subjecting the replacement item to the Headlease, the Lease Supplement, the Lien of the Indenture and the Lease Security Agreement, and evidencing the absence of prior Liens on the replacement item; and (iv) concurrently with making the substitution, the Lessee shall file any financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment, and shall deliver opinions of counsel reasonably satisfactory to the Lessor regarding the legality, authorization and enforceability of such documentation and the perfection of such interests and Liens. (c) Anything to the contrary in paragraphs (a) or (b) notwithstanding, if, in the period since the last time the Lessee gave notice of substitutions made pursuant -24- 29 to this Section 9.05, the Lessee has substituted replacement equipment for Items having an aggregate Lessor's Cost in excess of ten million dollars, the Lessee shall immediately: (i) provide to the Lessor, the Indenture Trustee and each Participant an Officer's Certificate giving notice of all substitutions made since the last notice, stating that the substituted items satisfy the conditions in subclauses (A), (B) and (C) of clause (i) of paragraph (a), and stating which substitutions satisfy the conditions in clauses (i) through (iv) of Section 9.05(d); (ii) deliver documentation signed by the Lessee in a form reasonably satisfactory to the Lessor subjecting the replacement items to the Headlease, the Lease Supplement, the Lien of the Indenture and the Lease Security Agreement, and evidencing the absence of prior Liens on the replacement items; and (iii) deliver to the Indenture Trustee and/or the Lessor for signature duly completed and signed (by the Lessee) financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment. The Lessee shall file the financing statements or other documentation described in clause (iii) within five Business Days of receiving such financing statements or other documentation signed by the Indenture Trustee and/or the Lessor (as the case may be). (d) The Lessee shall have no obligation to have any independent appraisal made of any equipment subjected to this Lease as a result of a substitution under this Section 9.05, except that the Lessee shall, at its own cost and expense, have an independent appraisal performed if, in the period since the later of the Closing Date and the date on which the last appraisal was performed, the Lessee has replaced Items pursuant to this Section 9.05 with an aggregate Lessor's Cost in excess of ten million dollars. For purposes of the preceding sentence, items of equipment subjected to this Lease shall not be taken into account if all of the following conditions are satisfied with respect to such item: (i) the item performs substantially the same manufacturing function as the Item that was replaced; (ii) the Item that was replaced was either disposed of as scrap or sold to a person other than an Affiliate of the Lessee in an arm's length transaction; -25- 30 (iii) the substituted item was purchased within six months before the date on which it was subjected to this Lease from a person other than an Affiliate of the Lessee in an arm's length transaction; and (iv) the price at which the Lessee purchased the substituted item (exclusive of any amounts paid for Severable Modifications that do not become subject to this Lease) exceeds the amount received by the Lessee on the disposition of the replaced Item. Any appraisal performed under this Section 9.05(d) shall confirm that each item of replacement equipment that has become subject to this Lease since the last appraisal has a value, utility and remaining useful life at least equal to the Item that was replaced by such replacement item; provided, that the appraisal will not address items that (A) became subject to this Lease as the result of substitutions pursuant to this Section 9.05 and (B) at the time of such substitutions, met the conditions set forth the preceding sentence. The appraisal may be based on a review of the Lessee's documentation rather than an inspection of the replacement equipment; provided, that, if the Lessee has, in the period since the later of the Closing Date and the date on which the last appraisal based on an on-site inspection was performed, the Lessee has replaced Items pursuant to this Section 9.05 with an aggregate Lessor's Cost in excess of 25 percent of the total Lessor's Cost for all Items subject to this Lease as of the Closing Date, the appraisal must be based on an on-site inspection. (e) Upon transfer of the substitute equipment and compliance with the requirements of clause (i) of the first sentence of paragraph (a) (and, in the case of a substitution described in paragraph (b) of this Section 9.05, compliance with the conditions set forth in such sentence): (i) the replaced Item shall be released from the Liens of the Indenture and the Lease Security Agreement (pursuant to the terms thereof), and shall be released from the Headlease; (ii) the Lessee will be subrogated to all claims of the Lessor, if any, against third parties to the extent the same relate to physical damage to or loss of such Item; and (iii) the Lessee shall have no further obligation to pay Rent with respect to the substituted Item (but shall have an equivalent obligation to pay Rent with respect the Item substituted therefor). For all purposes hereof, the item of equipment so substituted shall, after such transfer, (i) be part of the property leased hereunder, be subject to the Lease Supplement, the Headlease and all other Operative Documents, and be subject to the Lien of the Indenture and the Lease Security Agreement, (ii) be deemed to be the "Item" that was replaced and to have the same Lessor's Cost and Applicable Percentage as the Item replaced, and (iii) be deemed to be included in the Production Unit in which such replacement item is located. No such substitution shall result in any change in Basic Rent. -26- 31 SECTION 9.06. Application of Article VI. Article VI shall not apply to any Item after an Event of Loss has occurred with respect to the Production Unit containing such Item. ARTICLE X Environmental Matters The Lessee shall not: (a) violate any Environmental Law; (b) release any Hazardous Substance; or (c) use or permit the use of any Hazardous Substance, if any such action could reasonably be expected to form the basis of an Environmental Claim which would: (i) have a material adverse effect on the value or the operating condition of any Production Unit; (ii) result in the attachment of a Lien to any Item or otherwise have a material adverse effect on the Lessor's rights to or interest in any Item under the Headlease; (iii) be asserted against the Lessor or any Participant; or (iv) have a Material Adverse Effect on the Lessee. -27- 32 ARTICLE XI Sublease and Assignment SECTION 11.01 Sublease. The Lessee shall have and retain throughout the Term for any Item control over the operation and use of such Item, and may, so long as no Lease Event of Default shall have occurred and be continuing, without the consent of the Lessor, sublease, license, transfer control of, or permit any other Person to use, any Item or Items during the Term, subject to the following terms and conditions: (i) the Lessee shall remain primarily liable to the Lessor for the performance of all the terms of this Lease and the other Operative Documents to the same extent as if such sublease or arrangement had not occurred; (ii) such sublease or arrangement shall be in compliance with Applicable Law; (iii) such sublease or arrangement as to any Item shall not extend beyond the Basic Term for such Item, or, if a Renewal Term is then in effect for such Item, beyond such Renewal Term; (iv) any rights created thereby in an Item shall be fully and expressly subject and subordinate to this Lease; (v) no such sublease or arrangement shall permit any further subleasing of the Equipment; (vi) the Lessee shall make all filings necessary to protect the interests of the Lessor and the Indenture Trustee in the Equipment concurrently with entering into the sublease or arrangement; and (vii) the Lessee shall grant to the Lessor a security interest in any sublease or arrangement with a term in excess of one year. Notwithstanding the foregoing, the Lessee may not, without the consent of the Lessor, such consent not to be unreasonably withheld, enter into a sublease that: (A) provides that any Equipment subject to such sublease is to be used outside the United States; (B) is to a lessee incorporated or organized outside the United States; or (C) covers Items of Equipment with, in the aggregate, a Lessor's Cost in excess of ten million dollars and has a term in excess of one year. -28- 33 SECTION 11.02 Assignment. The Lessee may, at its own expense, assign all of its rights and obligations under this Lease and the other Operative Documents, without the consent of the Lessor, if such assignment meets the following conditions: (i) the assignment is to an Affiliate of the Lessee; (ii) the Lessee guarantees the obligations of such Affiliate under the Lease, which guarantee is in a form reasonably satisfactory to the Lessor; (iii) the Lessee pays all of the reasonable expenses incurred by the Participants and the other parties to the Operative Documents as a result of such assignment; and (iv) all filings necessary to preserve the Lessor's and the Indenture Trustee's interests in the Equipment are made. Notwithstanding the foregoing, the Lessee may, without the consent of the Lessor, assign its leasehold interest in this Lease to any corporation into or with which it shall be merged or consolidated or to whom it shall transfer substantially all of its property so long as the merger, consolidation or transfer is in accordance with the provisions of Section 5.05 of the Participation Agreement and the assignee assumes the obligations of the Lessee under this Lease and the other Operative Documents. -29- 34 ARTICLE XII Inspection and Marking SECTION 12.01. Inspection. (a) The Lessor, Indenture Trustee and the Owner Participant (or their representatives) each may, at its own expense upon reasonable prior notice and at reasonable times inspect the Items and the books and records of the Lessee relating to the maintenance, operation and performance of the Items; provided, that, except as provided in Section 12.02 or during the continuance of a Lease Default or a Lease Event of Default, such inspections shall not occur more frequently than once a year as to any Plant Site. The Lessee shall bear the cost of any inspection carried out during the continuance of any Lease Default or Lease Event of Default. All inspections will be conducted so as not to interfere with Lessee's business or the operation or maintenance of the Equipment. Any Person conducting an inspection shall agree to be bound by the terms of a confidentiality agreement of the type generally required by the Lessee. The Lessor shall also have the right to obtain information necessary to determine the Fair Market Sales Value and the Fair Market Rental Value of each Production Unit as and when required to be determined under this Lease. Neither the Lessor, the Indenture Trustee nor any Participant shall have any duty to make any inspection or inquiry or shall incur any liability or obligation by reason of not making any such inspection or inquiry, nor shall any such inspection or inquiry, reduce the Lessee's liability under the Operative Documents. (b) Notwithstanding anything in paragraph (a) of this Section 12.01, no Person shall have any right to receive any information that constitutes proprietary know-how of the Lessee in connection with any inspection pursuant to Section 12.01(a). SECTION 12.02. Tagging. (a) The Lessee shall, no later than December 31, 1996, affix to and maintain on each Item that is subject to this Lease as of the Closing Date a permanent label, plate or tag, in a form reasonably satisfactory to the Lessor, which identifies such Item by a unique number and does not interfere with such Item's operation. At such time as the Lessee shall have completed the tagging of each Item pursuant to the preceding sentence, the Lessee shall provide to the Lessor and to the Indenture Trustee an Officer's Certificate to that effect, and the Lessor and the Lessee shall amend the Lease Supplement to include the tag number for each Item. (b) Notwithstanding anything in this Lease or any Operative Document to the contrary, until such time as the Lessee has provided the Officer's Certificate described in paragraph (a) of this Section 12.02 and amended the financing statements filed in accordance with Section 3.01(g) of the Participation Agreement to include the tag number for each Item (and provided evidence of such amendment to the Lessor),(i) -30- 35 the Lessee shall not move any Item to any building that is not identified on a financing statement filed with respect to the Equipment in accordance with Section 3.01(g) of the Participation Agreement, and (ii) the provision in Section 12.01 of this Lease that inspections not be performed more frequently than once a year shall not apply. (c) The Lessee shall, within 45 days of the replacement or substitution of any Item pursuant to Articles VI or IX of this Lease, affix on each such item that becomes an Item subject to this Lease a permanent label, plate or tag, in a form reasonably satisfactory to the Lessor, which identifies such Item by a unique number and does not interfere with such Item's operation. ARTICLE XIII Lease Events of Default The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority): (a) the Lessee shall fail to make any payment of Interim Rent, Basic Rent, Rent Differential, Stipulated Loss Value or Termination Value (or any Auxiliary Payment constituting LIBOR breakage that is payable together with Stipulated Loss Value, Termination Value) when due, and any such failure shall continue unremedied for a period of five days; or (b) the Lessee shall fail to make any payment called for in this Lease or any other Operative Document other than those described in clause (a) when such payment is due, and any such failure shall continue until the later of (i) 30 days after receipt of a written notice from the Lessor demanding such payment, or (ii) 5 days after the resolution of any bona fide dispute over whether such payment is owing; or (c) the Lessee shall breach any covenant made by it in this Lease or any of the Operative Documents (other than a covenant in Section 8.02 of the Participation Agreement), and such breach shall not have been cured for a period of 30 days after the earlier to occur of (i) the Lessee's receipt of written notice of such breach from the Lessor and (ii) actual knowledge of any material breach by a Responsible Officer of the Lessee; provided, that the 30-day period shall be extended until the earlier of (1) the expiration of 120 days from the earlier of the Lessee's receipt of such notice and such actual knowledge and (2) -31- 36 the last day of the Term, if such extension is reasonably necessary to remedy any such failure that can be remedied within such period but cannot, with reasonable diligence, be remedied within such 30-day period, so long as the Lessee is making diligent efforts to remedy such breach; or (d) the Lessee shall have made any misrepresentation in any Operative Document (other than in Section 8.02 of the Participation Agreement) or in any certificate delivered thereunder, if such misrepresentation shall be material at the time of discovery and if such misrepresentation and any consequences of reliance thereon shall be curable and such misrepresentation and consequences shall not have been cured within 30 days after the earlier to occur of (i) the Lessee's receipt of written notice specifying the misrepresentation from the Lessor and (ii) actual knowledge of such misrepresentation by a Responsible Officer of the Lessee; provided, that the 30-day period will be extended until the earlier of (1) the expiration of 120 days from the earlier of the Lessee's receipt of such notice and such actual knowledge and (2) the last day of the Term, if such extension is reasonably necessary to cure any such misrepresentation and consequences that can be cured within such period but cannot, with reasonable diligence, be cured within such 30-day period, so long as the Lessee is making diligent efforts to cure such misrepresentation; or (e) the Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief or shall dissolve with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (f) an involuntary case or other proceeding shall be commenced against the Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 consecutive days; -32- 37 (g) the Lessee fails to maintain insurance in accordance with the provisions of Section 20.01; (h) after the occurrence of an Event of Loss, the Lessee fails to either complete a substitution of a Production Unit, provide sufficient collateral, or pay Stipulated Loss Value within the time periods set forth for such actions in Section 9.01(b); or (i) the Lessee (or any successor under the Headlease) fails to comply with any of the following provisions of the Headlease: Section 1.02(b); Section 1.04(a); Article III; and Section 5.02; or if the Lessee (or any successor under the Headlease) interferes with the Lessor's rights under Section 5.03 of the Headlease. ARTICLE XIV Remedies SECTION 14.01. Effect of Lease Event of DefaultEffect of Lease Event of Default. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, the Lessor may, at its option, by notice to the Lessee, declare this Lease to be in default (except that, upon the occurrence of a Lease Event of Default described in clause (e) or (f) of Article XIII, this Lease shall be deemed declared in default immediately without any further act or notice by the Lessor). At any time thereafter, the Lessor may do one or more of the following with respect to each Item as the Lessor in its sole discretion shall elect, to the full extent permitted by Applicable Law: (a) The Lessor may, by notice to the Lessee, terminate this Lease. (b) The Lessor may (i) demand that the Lessee, and the Lessee shall upon written demand of the Lessor, at the Lessee's expense, return the Items to the Lessor in the manner and condition required by Article VIII as if the Items were being returned at the end of the Term, and the Lessor shall not be liable for the reimbursement of the Lessee for any costs and expenses incurred by the Lessee in connection therewith or (ii) at the Lessee's expense enter upon the site where the Items are located and take immediate possession of any or all of the Items or any part thereof (to the exclusion of the Lessee) and remove the Items from the site without liability accruing to the Lessor for or by reason of such entry or taking of possession or removing. -33- 38 (c) The Lessor, by notice to the Lessee specifying a payment date not earlier than ten days or more than 30 days from the date of such notice, may require the Lessee to pay to the Lessor and the Lessee hereby agrees that it will pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain, and not as a penalty, and in lieu of any further payments of Basic Rent and Renewal Rent hereunder, an amount (reduced by any amounts previously paid by the Lessee pursuant to subparagraph (e) below) equal to the sum of: (i)(A) if the Stipulated Loss Value Date next preceding the date for payment specified in the notice is also a Rent Payment Date, all unpaid Accrued Rent payable with respect all Items as of such Rent Payment Date (or, if the date specified in the notice is a Rent Payment Date, as of such Rent Payment Date), or (B) if the Stipulated Loss Value Date next preceding the date for payment specified in the notice is not a Rent Payment Date, that portion of Accrued Rent for all Items representing unpaid Basic Rent or Renewal Rent due on any Rent Payment Date occurring before such Stipulated Loss Value Date; plus (ii) an amount equal to the Stipulated Loss Value for all Items calculated as of the Stipulated Loss Value Date next preceding the date for payment specified in the notice; plus (iii) interest, if any, at the Overdue Rate on the amount of such Basic Rent and Stipulated Loss Value from the Stipulated Loss Value Date as of which Stipulated Loss Value is computed until the date of actual payment; plus (iv) all Supplemental Rent payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto. Upon such payment of liquidated damages, the Lessor shall transfer to Lessee (without any representation, recourse or warranty whatsoever other than the absence of Lessor Liens) Lessor's entire interest in the Items by terminating this Lease and the Headlease and releasing Lessor's security interest in the Items under the Lease Security Agreement. The Lessor and Lessee shall (at the Lessee's expense) execute and deliver such documents evidencing such transfer, termination and release and take such further action as either party shall reasonably request to implement such transfer. (d) The Lessor or its agent may sell its interest in any Item pursuant to this subparagraph (d) and, if prior thereto the Lessor shall not have exercised its rights under subparagraph (f) below (unless the Lessor has not been paid thereunder and has rescinded such exercise), the Lessor may demand that the Lessee pay the Lessor, and the Lessee shall pay to the Lessor, as liquidated damages for the loss of a bargain and not as a penalty, in lieu of all Basic Rent -34- 39 and Renewal Rent with respect to such Item due after the date on which such sale shall occur, an amount equal to the sum of: (i) all unpaid Accrued Rent payable or that would have been payable with respect to such Item as of such Stipulated Loss Value Date (or, if the sale shall occur on a Rent Payment Date, as of such Rent Payment Date); plus (ii) all Supplemental Rent for such Item payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto; plus (iii) interest on the amounts described in clauses (i), (ii) and (iv) at the Overdue Rate from the Stipulated Loss Value Date as of which Stipulated Loss Value shall have been computed until the date of actual payment; plus (iv) the excess, if any, of (A) the Stipulated Loss Value of such Item as of the Stipulated Loss Value Date next preceding the date on which such sale shall occur (or, if the sale shall occur on a Stipulated Loss Value Date, as of such Stipulated Loss Value Date), over (B) the net proceeds of such sale. If the Lessor sells its interest in all of the Items pursuant this paragraph (d), this Lease and the Headlease shall terminate upon such sale. The Lessee's obligation to pay liquidated damages pursuant to this subparagraph (d) shall survive any total or partial termination of this Lease. (e) The Lessor may hold, use, operate, lease (whether for a period greater or less than the balance of what would have been the Basic Term or any Renewal Term, as the case may be) to others any Item, all on such terms and conditions and at such place or places as the Lessor may determine. The Lessee's obligation to pay Basic Rent and Renewal Rent for any period after the Lessee shall have been deprived of control of such Item pursuant to this subparagraph (e) shall be reduced by the net proceeds, if any, received by the -35- 40 Lessor from leasing such Item to, or otherwise permitting its use by, any Person other than the Lessee for all or any portion of such period. (f) The Lessor may, with respect to any or all of the Items, at any time prior to the time that the Lessor's interest in such Item or Items shall have been transferred to the Lessee pursuant to subparagraph (c) above or that the Lessor's interest in such Item or Items is sold by the Lessor pursuant to subparagraph (d) above, demand that the Lessee pay to the Lessor in respect of such Item or Items, and the Lessee shall pay to the Lessor on the first Business Day occurring at least ten days after, in the case of subclause (x) or (y) of clause (iv) below, the determination of the Fair Market Sales Value or Fair Market Rental Value, as the case may be, or, in the case of subclause (z) of clause (iv) below, the later of the date of such demand and the date of determination of the amount due thereunder, as liquidated damages for loss of a bargain and not as a penalty (in lieu of all payments of Basic Rent becoming due after the payment date), an amount equal to the sum of: (i) all unpaid Accrued Rent due on or before the Stipulated Loss Value Date for such Item or Items; plus (ii) all Supplemental Rent with respect to such Item or Items payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto; plus (iii) interest on the amounts described in clause (i), (ii) and (iv) at the Overdue Rate from the scheduled payment date to the date of actual payment; plus (iv) whichever of the following amounts as the Lessor, in its sole discretion, shall specify in such notice: (x) an amount equal to the excess, if any, of the Stipulated Loss Value for such Item or Items, computed as of the Stipulated Loss Value Date next preceding the date on which such payment is due, over the Fair Market Rental Value of such Item or Items for the remainder of the Basic Term or the Renewal Term, as the case may be, after discounting such Fair Market Rental Value semi-annually (effective on the Rent Payment Dates) to present worth as of the scheduled payment date at the Assumed Debt Rate; (y) an amount equal to the excess, if any, of the sum of Stipulated Loss -36- 41 Value for such Item or Items as of such Stipulated Loss Value Date over the Fair Market Sales Value of such Item or Items; or (z) an amount equal to the excess of (A) the present value as of the Rent Payment Date specified in such notice of all installments of Basic Rent until the end of the Basic Term (or Renewal Rent until the end of Renewal Term, if such demand for payment is made during a Renewal Term), discounting semi-annually at the Assumed Debt Rate, over (B) the present value as of such Rent Payment Date of the Fair Market Rental Value of the Items until the end of the Basic Term (or Renewal Term), discounted semi-annually at the Assumed Debt Rate. Upon such payment of liquidated damages, the Lease shall terminate with respect to such Item or Items and the Lessor and Lessee shall execute and deliver such documents evidencing such termination as either shall reasonably request. (g) The Lessor may exercise any other right or remedy which may be available to it under Applicable Laws or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof or to rescind this Lease. SECTION 14.02. Determinations of Fair Market Value. All determinations of Fair Market Sales Value and Fair Market Rental Value (each, a "Value") pursuant to this Article XIV shall be made by an independent appraiser selected by the Lessor at the Lessee's expense and the Lessor shall select the appraiser from a list supplied by the American Arbitration Association (or its successor) of independent appraisers qualified to determine such Value. The American Arbitration Association shall be asked to commission the appraiser so chosen to determine such Value and without revealing (and the Lessor and the Lessee shall not reveal) which party chose and/or is paying the fees and expenses of such appraiser. The appraiser so appointed shall be instructed to determine such Value within 30 days after being appointed and the determination of such appraiser shall be binding upon the parties. Anything in this Lease or any Operative Document to the contrary notwithstanding, (i) if any Item has not been returned by the Lessee to the Lessor pursuant to the terms hereof, or if such Item cannot be repossessed by the Lessor, the Fair Market Sales Value and the Fair Market Rental Value of such Item for purposes of this Article XIV shall be deemed to be zero, and (ii) if any Item has been sold in a commercially reasonable sale pursuant to this Article XIV, the Fair Market Sales Value of such Item shall be deemed to be the net proceeds received for such Item in such sale. SECTION 14.03. No Relief from Termination. No termination of this Lease, in whole or in part, or exercise of any remedy under this Article XIV shall, -37- 42 except as specifically provided herein, relieve the Lessee of any of its liabilities and obligations hereunder, all of which shall survive such termination, repossession or exercise of remedy. At any sale of the Lessor's interest in any Item or any part thereof pursuant to this Article XIV, the Lessor, the Indenture Trustee and any Participant may bid for and purchase such property. SECTION 14.04. Remedies Cumulative. To the full extent permitted by Applicable Law and except as expressly provided herein, each and every right, power and remedy herein specifically given to the Lessor in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically given herein or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of the Lessee or to be an acquiescence therein. No express or implied waiver by the Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Event of Default. SECTION 14.05. Waiver of Lessee. To the full extent permitted by Applicable Law, the Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may limit or modify any of the rights or remedies of the Lessor under this Article XIV. ARTICLE XV Right To Cure If the Lessee shall fail to make any payment of Rent to be made by it hereunder or shall fail to perform or comply with any of its other agreements contained herein or in any other Operative Document or in any other agreement entered into in connection therewith, the Lessor may (but shall not have any duty to do so) itself make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the reasonable expenses of the Lessor (including attorney's fees and expenses) incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by the Lessee upon demand. -38- 43 ARTICLE XVI Renewal Options SECTION 16.01. Renewal Options. The Lessee shall be entitled to renew this Lease as to any Production Unit for a period or periods (such period or periods being referred to herein as the "Renewal Term") and for rental amounts determined as follows. (For purposes of this Lease, the installments of rent to be paid during any Renewal shall be referred to as "Renewal Rent".) If the Lessee elects to renew this Lease as to any Production Unit, the Lessee must renew this Lease as to all Production Units for the same period; provided, that the renewal as to some Production Units may be Fixed Rate Renewals while the renewal as to other Production Units may be Fair Market Renewals. (a) Fixed Rate Renewals. Unless a Lease Event of Default or Material Lease Default shall have occurred and be continuing at the time of the notice or renewal, the Lessee shall be entitled to renew this Lease as to any Production Unit for one or more periods, commencing on the last day of the Basic Term for such Production Unit, which meet the following conditions (each a "Fixed Rate Renewal Period"): (i) each period must be at least one year; (ii) the aggregate of all periods, when added to the Interim and Basic Terms, must not exceed 80 percent of the economic useful life of the Production Unit, as appraised as of the beginning of such period; (iii) at the end of the each period, the residual value of the Production Unit, as estimated as of the beginning of such period (disregarding inflation or deflation since the Closing Date), must equal at least 20 percent of the Lessor's Cost of such Production Unit; and (iv) the aggregate of all such periods may not exceed five years. The rental to be paid for any Production Unit during the Fixed Rate Renewal Period shall be equal to the Fair Market Rental Value of such Production Unit; provided that such rent shall not exceed a fixed rate equal to 50 percent of the average Basic Rent installments set forth for the Items then contained in such Production Unit in the Lease Supplement. -39- 44 (b) Fair Market Renewals. Unless a Lease Event of Default or Material Lease Default shall have occurred and be continuing at the time of the notice or renewal, following the end of the last Fixed Rate Renewal Period for any Production Unit for which the Lessee has exercised its right to renew under paragraph (a) of this Section 16.01, or following the expiration of the Basic Term for any Production Unit for which there is no Fixed Rate Renewal Period, the Lessee shall be entitled to renew this Lease for such Production Unit for one or more periods (each a "Fair Market Renewal Period") which meet the following conditions: (i) each period must be at least one year; (ii) the aggregate of all such periods may not exceed five years; and (iii) the last period may not extend beyond the end of the term of the Headlease with respect to such Production Unit. The rental to be paid during any Fair Market Renewal Period shall be equal to the Fair Market Rental Value of such Production Unit determined for such period as of the beginning of such period. SECTION 16.02. Notice of Renewal. The Lessee may exercise its renewal option by giving the Lessor irrevocable notice, not less than 180 days prior to the end of the Basic Term (or, in the case of a further renewal at the end of any Renewal Term, not less than 180 days prior to the end of such Period). The notice shall specify the proposed duration of any Fixed Rate Renewal Period (or, in the case of a Fair Market Renewal Period, the duration elected by the Lessee), and the proposed Renewal Rent for each Production Unit as of each Rent Payment Date during such Renewal Term. The Lessor shall, within 30 days of its receipt of such notice, advise the Lessee as to whether it agrees with the Lessee's proposals. If the Lessor does not agree, and if the Lessee and the Lessor are unable to reach agreement, the duration of any Fixed Rate Renewal Period and the Renewal Rent shall be determined by the Appraisal Procedure. SECTION 16.03. Continuation of Lease Supplement. At the end of the Basic Term or the end of any Renewal Term, if the Lessee shall have elected to renew this Lease and if this Lease shall not have been previously terminated with respect to such Production Unit, the Lease Supplement shall continue in force and effect, and shall be deemed to have the following terms: (i) Renewal Rent shall be payable in arrears in semi-annual installments beginning on the day that is six months after the last day of the Basic Term (or, if there was a previous Renewal Term, the last day of the immediately -40- 45 preceding Renewal Term), with a final installment due on the last day of the Renewal Term; (ii) the installments of Renewal Rent shall be equal in amount, except that if the final such installment shall be for a period shorter than six months, the Renewal Rent in respect thereof shall be equal to a proportionate share of the Renewal Rent for a full six-month period; (iii) the Stipulated Loss Value Dates and the Termination Value Dates shall be the first day of each month, beginning with the first day of the Renewal Term; (iv) the Stipulated Loss Value for each Item as of each Stipulated Loss Value Date shall equal 20 percent of the Lessor's Cost of such Item; (v) the Termination Value for each Item as of the first Termination Value Date of the first Renewal Term shall equal the Termination Value for such Item as of the end of the Basic Term; (vi) the Termination Values for each Item as of any Termination Value Date in any Renewal Term after the Termination Value Date described in clause (v) shall be equal to the sum of (A) the amount determined by amortizing, on a straight line basis over five years, the excess of the Termination Value for such Item described in clause (v) over ten percent of the Lessor's Cost of such Item, and (B) ten percent of the Lessor's Cost of such Item. All other terms of this Lease and the other Operative Documents shall continue in effect during each Renewal Term in accordance with the provisions hereof and thereof. ARTICLE XVII Purchase Options SECTION 17.01 Early Buyout Option. (a) Option to Purchase. The Lessee shall have the right, upon not less than 60 days' irrevocable written notice to the Lessor, to Purchase all but not less than all of the Lessor's rights in the Equipment on the EBO Date for the EBO Price set forth in the Lease Supplement. As a condition to such Purchase, the Lessee shall be obligated to pay, in addition to the EBO Price, (i) Accrued Rent as of the EBO Date, -41- 46 and (ii) any other Supplemental Rent due and payable on or prior to the EBO Date, including Auxiliary Payments, if any, due on the Loan Certificates. (b) Deferred Purchase Price Option. In the case of any Purchase of Equipment pursuant to paragraph (a), the Lessee may, at its option, either (i) pay the entire EBO Price on the EBO Date or (ii) so long as no Material Lease Default has occurred and is continuing, pay the Initial Portion of the EBO Price on the EBO Date and pay the balance on the dates and in the amounts set forth in the Lease Supplement. The Lessee shall elect its payment option in the notice given pursuant to paragraph (a). In the event that the Lessee elects the payment option specified in clause (ii) above, then, on the date the Initial Portion of the EBO Price is paid, (w) this Lease shall be deemed terminated as a true lease and this agreement shall continue as a lease intended for security, mutatis mutandis, to secure for the Lessor the obligation of the Lessee to make the remaining installment payments, (x) Articles VII, VIII, IX (other than Section 9.05), XVI and XVII shall be of no further force and effect, (y) Basic Rent shall cease to accrue, and (z) the Lessor will, at the Lessee's expense, convey all of its rights, title and interest in and to the Equipment to the Lessee without recourse or warranty except as to the absence of Lessor Liens, subject, however, to the security interest of the Lessor then being retained hereunder. (c) Reconveyance. Upon payment by the Lessee of the last installment of EBO Price, the Headlease shall terminate in accordance with the terms thereof and the Lessor shall execute and deliver to the Lessee a release of the security interest retained. All reasonable costs and expenses of the Lessor or the Owner Participant incurred in connection with the Lessee's election under this Section 17.01(b) shall be paid by the Lessee. (d) Defaults. If the Lessee fails to pay the EBO Price (or, if the Lessee elects the payment option in clause (ii) of paragraph (b), the Initial Portion of the EBO Price) on the EBO Date, this Lease shall continue with respect to the Equipment as if the Lessee had not exercised the purchase option under this Article XVII, and the Lessee's failure to pay the EBO Price (or the Initial Portion of the EBO Price) shall not give rise to a Lease Event of Default under Article XIII hereof. The Lessee shall pay any costs or expenses, including LIBOR breakage, if any, incurred by the Lessor or any Participant as a result of the failure to pay the EBO Price after giving the notice described in Section 17.01(a). SECTION 17.02. End of Term Purchase Option; Notice. Unless a Lease Event of Default shall have occurred and be continuing, the Lessee shall have the option, upon irrevocable written notice given not less than 180 days prior to the end of the Basic Term (or Renewal Term, if any) applicable to any Production Unit, to -42- 47 Purchase all but not less than all of the Lessor's rights in the Equipment in such Production Unit at a price equal to the Fair Market Sales Value thereof at the end of the Basic Term or such Renewal Term. The Lessee's notice shall specify the proposed Fair Market Sales Value for the Production Unit. The Lessor shall, within 30 days of receipt of the Lessee's notice, inform the Lessee as to whether it agrees with the proposed Fair Market Sales Value. If the Lessor does not agree, and if the Lessee and the Lessor are unable to agree, the Fair Market Sales Value shall be determined in accordance with the Appraisal Procedure. SECTION 17.03. Owner Participant Becomes Competitor. In the event that the Owner Participant or any Affiliate of the Owner Participant acquires or is acquired by, merges, or otherwise consolidates with, any Competitor, the Lessee may, upon not less than 30 days' notice, Purchase all but not less than all of the Equipment on the Termination Value Date specified by the Lessee in such notice (but not later than 6 months after the date of the notice), for a price equal to the Termination Value of all of the Equipment on such Termination Value Date. In addition to such price, the Lessee shall pay (i) all other Rent due and unpaid as of such Termination Value Date (including any Auxiliary Payments but, if such Termination Value Date is also a Rent Payment Date, not including the advance portion of any installment of Basic Rent due on such Rent Payment Date), and (ii) all costs incurred by the Lessor to effect the transfer of its rights to the Equipment to the Lessee. Upon the Lessee's notice of intent to Purchase hereunder, and pending such Purchase (so long as no Lease Event of Default shall be continuing), the inspection rights of the Lessor provided in Section 12.01 shall be suspended. SECTION 17.04. Purchase. If the Lessee shall have elected to Purchase the Lessor's interest in the Items in the Production Units under Section 17.01, 17.02, or 17.03 and if the Lessee shall have paid all Rent then due and payable hereunder (including payment of the EBO Price, the Fair Market Sales Value, or the price specified in Section 17.03 whichever is applicable), the Lessor shall transfer (without any representation, recourse or warranty whatsoever except as to the absence of Lessor Liens) all of its rights under the Headlease to the Equipment in such Production Unit to the Lessee and shall execute and deliver such documents evidencing such transfer and take such further action as the Lessee shall reasonably request. -43- 48 ARTICLE XVIII Further Assurances SECTION 18.01. Further Action by Lessee. The Lessee, at its expense, shall promptly and duly execute and deliver to each of the Participants, the Lessor and the Indenture Trustee such documents and assurances and take such further action as the Lessor (and, for so long as the Indenture shall be in effect, the Indenture Trustee) may from time to time reasonably request in order to carry out the intent of this Lease and the other Operative Documents and to establish and protect the rights and remedies created or intended to be created in favor of the Lessor and the Indenture Trustee hereunder and thereunder, to establish, perfect and maintain the rights of the Lessor in and to the Items and, for the benefit of the Indenture Trustee, the Lien and security interest in the Indenture Estate provided for in the Indenture. Without limiting the preceding sentence, the Lessee shall record or file counterparts or appropriate memoranda of this Lease, the Lease Security Agreement, the Headlease and the Indenture, or such financing statements or other documents with respect to this Lease, the Lease Security Agreement, the Headlease and the Indenture, and the Lessor agrees to execute and deliver promptly such of the foregoing financing statements or other documents as may require execution by the Lessor. The Lessee agrees to cause the timely execution, delivery and filing of continuation statements as to the financing statements theretofore filed so as to preserve the security interest in the Indenture Estate referred to in the next preceding sentence. -44- 49 ARTICLE XIX Indenture Estate as Security for Lessor's Obligations to Loan Participants SECTION 19.01. In order to secure the indebtedness evidenced by the Loan Certificates, the Lessor provides in the Indenture, among other things, for the assignment (to the extent provided therein) by the Lessor to the Indenture Trustee of its right and interest to this Lease and for the creation of a Lien and security interest in favor of the Indenture Trustee for the benefit of the holders of the Loan Certificates in and to the Indenture Estate as described in the Granting Clauses of the Indenture. The Lessee hereby (a) consents to such assignment pursuant to the terms of the Indenture and acknowledges that all rights of the Lessor hereunder shall be exercised only by the Indenture Trustee pursuant to such assignment, subject, however, to Section 16.04 of the Indenture, (b) agrees to pay directly to the Indenture Trustee (or, after receipt of notice from the Indenture Trustee stating that the Indenture has been satisfied and discharged, to the Lessor) all amounts of Rent (other than Excepted Payments) due to the Lessor hereunder or under any other Operative Document that shall be required to be paid to the Indenture Trustee pursuant to the Indenture or any other Operative Document, (c) agrees that the right of the Indenture Trustee to such payments hereunder shall be absolute and unconditional and shall not be affected by any circumstances whatsoever, and (d) agrees that all notices and communications to the Lessor shall be copied to the Indenture Trustee. Any payment by the Lessee to the Indenture Trustee of any amount payable hereunder shall constitute payment of such amount for all purposes of this Lease. The Lessee further agrees that, so long as the Indenture remains in effect, if the Lessor fails to perform any of its covenants or obligations under this Lease (other than its obligations relating to the confidentiality under Sections 12.01 and 17.03(b)), the Indenture Trustee may, but is not required to, perform such covenant or obligation, with the same force and effect as if the covenant or obligation had been performed by the Lessor. -45- 50 ARTICLE XX Insurance SECTION 20.01. Obligation to Insure. The Lessee shall maintain, with insurers of recognized reputation and responsibility, (i) property insurance in customary form with respect to loss of or damage to the Equipment (but not including insurance against earthquake damage for any Equipment (x) located in California or (y) located outside California if such insurance is not available on commercially reasonable terms and such Equipment has been installed, and the buildings in which it is located have been reinforced, in a manner comparable to the installation and reinforcement of Equipment in Lessee's facilities in California), in an amount not less than the Stipulated Loss Value of the Equipment, and (ii) public liability insurance in customary form of not less than $50 million per occurrence and in the aggregate. Notwithstanding the foregoing, the property and liability insurance maintained by the Lessee with respect to the Equipment shall be in amounts and cover risks no less favorable than the insurance maintained by the Lessee with respect to similar equipment owned or leased by the Lessee in the United States; provided that the liability insurance may provide for different levels of coverage for products made by different Production Units. The insurance policies carried in accordance with the terms of this Lease shall: (a) name the Owner Trustee (in both its individual and trust capacities), the Owner Participant, Indenture Trustee and each Certificateholder, from time to time, of the Loan Certificates ("Additional Insureds") as additional insureds, as their respective interests may appear, but, in the case of liability insurance, only with respect to claims relating to the Equipment leased hereunder or to the transactions contemplated by the Operative Documents, (b) provide that, so long as the Indenture is in effect, the proceeds, if any, except as provided below, shall be payable to Indenture Trustee under a standard lender's loss payable endorsement reasonably satisfactory to Indenture Trustee and thereafter to the Lessor as loss payees, as their respective interests may appear, in the case of property insurance, but only to the extent that such proceeds result from a claim relating to the Equipment leased hereunder or to the transactions contemplated by the Operative Documents, (c) be primary with respect to, and without right of contribution from, other insurance policies held by the Additional Insureds with respect to the Equipment; (d) waive any right of subrogation of the insurers to any right against the Additional Insureds for damages arising out of their interests in the -46- 51 Equipment or the transactions contemplated by the Operative Documents, and waive any right of the insurers to any set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of the Lessor for damages arising out of their interests in the Equipment or the transactions contemplated by the Operative Documents or of the Lessee; (e) provide that there is no recourse against any Additional Insureds for the payment of premiums, commissions, direct calls, assessments or advances; and provide that if such insurance is cancelled or terminated or if there is any decrease in the dollar amount of coverage purchased below the amount required by this Section 20.01, deletion of one or more of the material covered risks, material increase in the deductible amount (in excess of the deductible amounts otherwise permitted by this Section 20.01), or deletion of one or more of the Additional Insureds as an additional insured or loss payee for any reason whatsoever, or any change in any policy endorsement which are inconsistent with the requirements of this Article XX, the insurers will notify the Additional Insureds and the Lessee at least 30 days prior to the effective date of such change in coverage (except that, if the change in coverage is the result of a non-payment of premiums, the insurers will notify the Additional Insureds at least 10 days before the effective date of such change); (f) include a cross-liability or severability of interest provision providing that inasmuch as the policies are written to cover more than one insured, all terms and conditions, insuring agreements and endorsements, with the exception of limits of liability, shall operate in the same manner as if there were a separate policy covering each insured for public liability insurance; and (g) without waiving the insurers' rights to cancel the policies (subject to paragraph (e), above), insure each additional insured party and loss payee (subject to the terms and conditions of the policy) regardless of any breach of violation of any warranty, declaration or condition contained in such policies by any other insured party or loss payee. Notwithstanding the foregoing, the Lessee may self-insure (through deductibles or otherwise) against damage to the Equipment and third-party public liability in an amount per occurrence not greater than the higher of (1) two percent of the Tangible Net Worth of the Lessee and all subsidiaries consolidated with the Lessee under generally accepted accounting principles, and (2) $1 million. SECTION 20.02. Certification of Insurance. Upon any renewal of the insurance required hereunder, the Lessee shall furnish to the Lessor, the Indenture Trustee and each Loan Participant, (i) certificates from authorized representatives of -47- 52 the underwriters of the insurance policies maintained by the Lessee, containing details as to such insurance policies, and (ii) Officer's Certificates stating that the property and liability insurance coverage required to be maintained pursuant to this Article XX is in full force and effect. The Lessee shall deliver to the Lessor, Indenture Trustee and each Loan Participant promptly following request by any of them, copies of all applicable policies of insurance carried pursuant to this Article XX. SECTION 20.03. Adjustment of Claims; Payment. Unless a Lease Event of Default shall have occurred and be continuing, the Lessee shall have the exclusive right to negotiate and adjust all claims against insurers for damage to or loss of the Equipment, or for third-party public liability with respect to the Equipment. Subject to Section 9.04 hereof, insurance proceeds of $7.5 million or less per occurrence shall be paid to the Lessee, or, if received by the Lessee may be retained by the Lessee. If the property insurance proceeds in respect of any Item or Items for any occurrence are in excess of $7.5 million, the excess of such proceeds over $7.5 million shall be paid to the Indenture Trustee (or, after the Indenture has terminated, the Lessor) and, (A) if the Lessee has elected to repair or replace such Item or Items the Indenture Trustee (or the Lessor, as the case may be) shall promptly pay such proceeds to the Lessee upon a written application signed by the Lessee to reimburse the Lessee for the costs of repairing, restoring or replacing the damaged Items, (B) if such proceeds were paid as a consequence of an Event of Loss and the Lessee has elected to comply with alternative (ii) of Section 9.01(b) hereof, the Indenture Trustee (or the Lessor, as the case may be) shall hold such proceeds in accordance with Section 9.11 of the Indenture pending application as provided in said alternative (ii), or (C) if such proceeds were paid as a consequence of an Event of Loss and the Lessee has elected to comply with alternative (i) of Section 9.01(b) hereof, the Indenture Trustee (or the Lessor, as the case may be) shall hold such proceeds in accordance with Section 9.11 of the Indenture, such proceeds shall be deemed to be cash collateral provided by the Lessee, and the Indenture Trustee shall pay such proceeds to the Lessee periodically upon application by the Lessee to reimburse the Lessee for the cost of Items replaced to date, with remainder being remitted to the Lessee upon the completion of the substitution of the affected Production Unit. Any amounts held by the Lessor or Indenture Trustee (which amounts shall be held by the Lessor or Indenture Trustee, as the case may be, as security for the obligation of -48- 53 the Lessee to make repairs or replacements, as the case may be) and any proceeds or payments (and net earnings thereon) remaining after such repairs or replacements have been made shall be paid to the Lessee. Any amounts which are held by the Lessor or the Indenture Trustee, as the case may be, pending payment to the Lessee shall, until paid to the Lessee as provided herein or, as long as the Indenture is in effect, until applied as provided in the Indenture, be invested by the Lessor or the Indenture Trustee, as the case may be, in accordance with the provisions of Section 9.11 of the Indenture. Any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) shall be applied or reinvested in the same manner as the principal invested. Anything to the contrary in this Section 20.03 notwithstanding, if a Lease Event of Default or a Material Lease Default shall have occurred and for so long as such Lease Event of Default or a Material Lease Default shall be continuing, all property insurance proceeds relating to the Equipment shall be paid to and held by the Indenture Trustee (or the Lessor, as the case may be) as security for the obligations of the Lessee hereunder. SECTION 20.04 Insurance Obtained by Additional Insureds; Lessee Reimbursement for Cost. (a) If the Lessee is in default of its obligation to maintain the insurance coverages specified in this Article XX, each of the Additional Insureds may, at its option, but shall not be required to, provide such insurance (but without duplication of any such insurance obtained by any other Additional Insured pursuant to this Article XX or by the Lessee). In such event, the Lessee shall, upon demand from time to time, reimburse such Additional Insured for the cost to such Additional Insured of insurance in the amount which the Lessee shall have failed to maintain and which such Additional Insured shall have obtained in accordance herewith, together with interest thereon at the Overdue Rate, from the date of payment of such cost by the Additional Insured to but excluding the date of receipt of such reimbursement; provided, however, that the Lessee shall have no obligation to reimburse any Additional Insured for the cost of any insurance provided under the preceding sentence unless (i) if the Lessee's default in maintaining insurance is a failure of the policy to conform to the requirements in clauses (a) through (g) of Section 20.01, the Additional Insured gives the Lessee at least 15 days' notice of the default and its intention to acquire insurance, and (ii) the Additional Insured obtains the insurance from a party unrelated to it. (b) Nothing in this Article XX shall prohibit the Lessor, the Owner Participant, the Indenture Trustee or any Certificateholder from obtaining insurance for its own account and any proceeds payable thereunder shall be as provided in the insurance policy relating thereto; provided, that no such insurance may be obtained that would limit or otherwise adversely affect the coverage of any insurance to be obtained or maintained by the Lessee pursuant to this Article XX, it being understood that all -49- 54 salvage rights to the Items in the event of an Event of Loss affecting the Production Unit containing such Items shall remain with the Lessee or its insurers at all times. ARTICLE XXI Owner Trustee; Owner Participant SECTION 21.01. Successor Trustee; Co-trustee. In the case of the appointment of any successor trustee pursuant to the terms of the Trust Agreement, such successor trustee shall succeed to all the rights, duties, powers, and obligations of the Lessor hereunder and under the other Operative Documents and shall be deemed to be the Lessor and the legal owner of the Equipment for all purposes hereof and each reference herein and in the Operative Documents to the "Lessor" shall mean any such successor trustee. The Lessor or any successor trustee from time to time serving as the Lessor hereunder may from time to time appoint one or more co-trustees or separate trustees pursuant to the terms of the Trust Agreement to exercise or hold any of or all the rights, powers and title of the Lessor hereunder. No such appointment of any successor trustee, co-trustee or separate trustee shall require any consent or approval by the Lessee or shall in any way alter the terms of this Lease or the obligations of the Lessee or the Lessor hereunder. The appointment of one successor trustee, co-trustee or separate trustee shall not exhaust the right to appoint further successor trustees, co-trustees and separate trustees pursuant to the Trust Agreement, but such right may be exercised repeatedly so long as this Lease may be in effect. SECTION 21.02. Liabilities of Owner Participant. The Owner Participant shall not have any obligation or duty to the Lessee with respect to the transactions contemplated hereby except as specifically provided in the Operative Documents. Without limiting the generality of the foregoing, under no circumstances whatsoever shall the Owner Participant as such be liable to the Lessee for any action or inaction on the part of the Lessor in connection with the Operative Documents, the beneficial ownership of the Equipment, the administration of the Trust Estate or otherwise, whether or not such action or inaction shall be caused by the wilful misconduct or gross negligence of the Lessor unless the Owner Participant shall have specifically directed the Lessor to take such action and such direction shall constitute wilful misconduct or gross negligence by the Owner Participant other than in reliance on the wilful misconduct or gross negligence of the Lessor. SECTION 21.03. Owner Trustee Not Acting in Individual Capacity. The Lessee acknowledges that Fleet National Bank is entering into this Lease solely as the Owner Trustee and not, except as expressly provided herein or with respect to Lessor Liens attributable to it, in its individual capacity, and in no case whatsoever -50- 55 shall it (or any entity acting as successor Owner Trustee under the Trust Agreement) be personally liable for any loss in respect of any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, except that the Owner Trustee shall be liable, in its individual capacity, (a) for its own wilful misconduct or gross negligence; (b) in the case of the inaccuracy of any of its representations or warranties or the failure to perform any covenant of the Owner Trustee in its individual capacity contained in or referred to in Section 4.05 of the Participation Agreement or in Section 4.01 hereof; and (c) for the failure to use the degree of care and skill set forth in Section 6.01 of the Trust Agreement in the receipt and disbursement of moneys actually received by it under the Operative Documents. ARTICLE XXII Miscellaneous SECTION 22.01. Documentary Conventions. This Agreement shall be governed by the Documentary Conventions. SECTION 22.02. Revision of Lease Supplement. If this Lease has terminated with respect to some but not all of the Items as a result of (i) the termination of a Production Unit or any Item in accordance with Article VII, or (ii) an Event of Loss to any Production Unit with respect to which the Lessee elected the alternative described in Section 9.01(b)(ii), then the Lease Supplement shall automatically be revised as follows: Each installment of Basic Rent and Renewal Rent (if any), the EBO Price, the Initial Portion of the EBO Price, the Termination Value as of any Termination Value Date, and the Stipulated Loss Value as of any Stipulated Loss Value Date shall each be reduced to the amount determined by multiplying (i) the percentage for each such amount set forth in the applicable schedule to the Lease Supplement opposite the relevant date by (ii) the aggregate Lessor's Cost for all Items remaining subject to this Lease and the Lease Supplement. The Lessor and the Lessee agree to amend the Lease Supplement to reflect the revisions as soon as necessary or practical. The revisions shall take effect immediately, whether or not the Lease Supplement has been amended. -51- 56 IN WITNESS WHEREOF, the parties hereto have each caused this Lease Agreement to be duly executed as of the date first above written. FLEET NATIONAL BANK not in its individual capacity but solely as Owner Trustee, Lessor, By: /s/ K Larimore ---------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President RAYCHEM CORPORATION, Lessee, By: /s/ Lars Larsen ---------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer Receipt of this original counterpart of the foregoing Lease Agreement is hereby acknowledged on this 11 day of April, 1996.(1) FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION Indenture Trustee, By: /s/ Nancy M Dahl ---------------------------------------- Name: Nancy M. Dahl Title: Assistant Vice President - ----------------------------- (1) This language is to be in the original counterpart only. -52- EX-10.X 7 LEASE AGREEMENT B BETWEEN RAYCHEM & FLEET NTL 1 EXHIBIT 10(X) LEASE AGREEMENT B Dated as of April 11, 1996 between FLEET NATIONAL BANK as Owner Trustee and Lessor, and Raychem Corporation as Lessee. ------------------------ Manufacturing Equipment NOTE: THIS LEASE AGREEMENT B HAS BEEN ASSIGNED TO AND IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF FIRST SECURITY BANK OF UTAH AS INDENTURE TRUSTEE, UNDER AND TO THE EXTENT SET FORTH IN THE INDENTURE AND SECURITY AGREEMENT B DATED AS OF APRIL 11, 1996, BETWEEN LESSOR AND FIRST SECURITY BANK OF UTAH AS INDENTURE TRUSTEE, AS SUCH INDENTURE AND SECURITY AGREEMENT B MAY BE AMENDED, MODIFIED OR SUPPLEMENTED FROM TIME TO TIME IN ACCORDANCE WITH THE PROVISIONS THEREOF. THIS LEASE AGREEMENT B HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. NO SECURITY INTEREST IN THE LESSOR'S RIGHT, TITLE AND INTEREST IN AND TO THIS LEASE MAY BE PERFECTED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL COUNTERPART OF THIS LEASE AGREEMENT B CONTAINING THE RECEIPT THEREFOR EXECUTED BY FIRST SECURITY BANK OF UTAH ON THE SIGNATURE PAGE THEREOF. 2 TABLE OF CONTENTS PAGE -ii- ARTICLE I Definitions and Usage........................................... -1- ARTICLE II Lease of Equipment............................................. -1- ARTICLE III Rent.......................................................... -1- SECTION 3.01. Basic Rent with Respect to Basic Term.............. -1- SECTION 3.02. Supplemental Rent.................................. -2- SECTION 3.03. Interim Term....................................... -2- SECTION 3.04. Method of Payment.................................. -3- SECTION 3.05. Late Payment....................................... -4- SECTION 3.06. Net Lease; No Set-off, Counterclaims, etc.......... -4- ARTICLE IV Disclaimer of Warranties....................................... -7- ARTICLE V Liens; Quiet Enjoyment.......................................... -8- SECTION 5.01. Liens.............................................. -8- SECTION 5.02. Quiet Enjoyment.................................... -8- SECTION 5.03. Personal Property.................................. -8- SECTION 5.04. Notice of Landlord Notices. ....................... -8- ARTICLE VI Operation; Maintenance......................................... -9- SECTION 6.01. Operation.......................................... -9- SECTION 6.02. Maintenance........................................ -9- SECTION 6.03. Replacement of Parts............................... -10- SECTION 6.04. Relocation........................................ -11- SECTION 6.05. Modification....................................... -11- SECTION 6.06. Annual Listing of Production Units................. -12- ARTICLE VII Obsolescence or Surplus Termination........................... -13- SECTION 7.01. Declaration of Obsolescence. ..................... -13- SECTION 7.02. Lessor Election to Retain Equipment................ -13- SECTION 7.03. Qualifying Bids.................................... -14- SECTION 7.04. Rescission by Lessee............................... -15- SECTION 7.05. Sale............................................... -15- SECTION 7.06. Payment by Lessee; Notice; Termination of Lease.... -16- SECTION 7.07. Termination of Items ............................. -17- -i- 3 TABLE OF CONTENTS (continued)
Page ---- ARTICLE VIII Return of Equipment; Storage........................................ -18- SECTION 8.01. Return of Production Units................................ -18- SECTION 8.02. Severable Modifications................................... -18- SECTION 8.03. Re-Lease of Equipment by Lessor........................... -18- ARTICLE IX Event of Loss; Damage; Application of Payments; Substitution of Items................... -19- SECTION 9.01. Event of Loss............................................. -19- SECTION 9.02. Application of Payments Upon an Event of Loss............. -21- SECTION 9.03. Seizure, Requisition, Application of Payments Not Relating to an Event of Loss.............................. -22- SECTION 9.04. Applications During Lease Event of Default or Material Lease Default....... ............................ -22- SECTION 9.05. Substitution of Items..................................... -23- SECTION 9.06. Application of Article VI................................. -27- ARTICLE X Environmental Matters........................................... -27- ARTICLE XI Sublease and Assignment............................................... -28- SECTION 11.01 Sublease.................................................. -28- SECTION 11.02 Assignment................................................ -29- ARTICLE XII Inspection and Marking............................................... -30- SECTION 12.01. Inspection............................................... -30- SECTION 12.02. Tagging.................................................. -30- ARTICLE XIII Lease Events of Default............................................. -31- ARTICLE XIV Remedies............................................................. -33- SECTION 14.01. Effect of Lease Event of Default........................ -33- SECTION 14.02. Determinations of Fair Market Value...................... -37- SECTION 14.03. No Relief from Termination............................... -37- SECTION 14.04. Remedies Cumulative...................................... -38- SECTION 14.05. Waiver of Lessee......................................... -38- ARTICLE XV Right To Cure......................................................... -38-
-ii- 4 TABLE OF CONTENTS (continued)
Page ---- ARTICLE XVI Renewal Options................................................... -39- SECTION 16.01. Renewal Options....................................... -39- SECTION 16.02. Notice of Renewal..................................... -40- SECTION 16.03. Continuation of Lease Supplement...................... -40- ARTICLE XVII Purchase Options................................................. -41- SECTION 17.01 Early Buyout Option.................................... -41- SECTION 17.02. End of Term Purchase Option; Notice................... -42- SECTION 17.03. Owner Participant Becomes Competitor.................. -43- SECTION 17.04. Purchase.............................................. -43- ARTICLE XVIII Further Assurances.............................................. -44- SECTION 18.01. Further Action by Lessee.............................. -44- ARTICLE XIX Indenture Estate as Security for Lessor's Obligations to Loan Participants..... -45- ARTICLE XX Insurance.......................................................... -46- SECTION 20.01. Obligation to Insure.................................. -46- SECTION 20.03. Adjustment of Claims; Payment......................... -48- ARTICLE XXI Owner Trustee; Owner Participant.................................. -50- SECTION 21.01. Successor Trustee; Co-trustee......................... -50- SECTION 21.02. Liabilities of Owner Participant...................... -50- ARTICLE XXII Miscellaneous.................................................... -51- SECTION 22.01. Documentary Conventions............................... -51- SECTION 22.02. Revision of Lease Supplement.......................... -51-
-iii- 5 LEASE AGREEMENT B dated as of April 11, 1996, between Fleet National Bank, not in its individual capacity but solely as Owner Trustee, as Lessor, and Raychem Corporation, a Delaware corporation, as Lessee. ARTICLE I Definitions and Usage Unless the context otherwise requires, terms used herein shall have the meanings assigned to them in Appendix A, which also contains rules as to usage. ARTICLE II Lease of Equipment Immediately upon execution and delivery of all the Operative Documents on the Closing Date, without necessity of any further act or evidence by either party hereto, each Item contained in each Production Unit listed on the Lease Supplement shall be deemed examined and accepted by the Lessee for all purposes and shall be deemed delivered and leased by the Lessor to the Lessee for the Interim Term and the Basic Term and, if the Lessee so elects pursuant to Article XVI, the Renewal Term applicable to such Item. ARTICLE III Rent SECTION 3.01. Basic Rent with Respect to Basic TermBasic Rent with Respect to Basic Term. (a) The Lessee shall pay to the Lessor an installment of Basic Rent on each Rent Payment Date during the Basic Term, subject to adjustment under Section 3.01(b) of this Lease and Article X of the Participation Agreement (which Article is incorporated by reference herein as if fully set forth herein), equal to the amount of Basic Rent specified for such Rent Payment Date in Schedule II to the Lease Supplement. (b) So long as any Loan Certificates shall be outstanding during the Basic Term and bear interest at a floating rate, each installment of Basic Rent shall be increased or decreased, as the case may be, by the Rent Differential. For purposes hereof, "Rent Differential" shall mean, with respect to the Basic Rent payable under the -1- 6 Lease Supplement as of any Rent Payment Date during the Basic Term, the difference between (i) the aggregate amount of interest due and payable on the Loan Certificates on the date on which the related payment of Basic Rent is payable and (ii) the aggregate amount of interest that would have been due and payable on such Loan Certificates on such Rent Payment Date if such Loan Certificates had borne interest at the Assumed Debt Rate. If, as of any Rent Payment Date, the amount determined under clause (i) of the immediately preceding sentence shall be greater than the amount determined under clause (ii) of such sentence, the amount of Basic Rent due on such Rent Payment Date shall be increased by the Rent Differential and, if the amount determined in accordance with such clause (ii) shall exceed the amount determined in accordance with such clause (i), the amount of Basic Rent due on such Rent Payment Date shall be decreased by the Rent Differential. (c) Anything contained in this Lease or the Participation Agreement to the contrary notwithstanding, the aggregate amount of Basic Rent payable (or that would be payable if not funded by a payment from the Lessor pursuant to Section 3.03) on any Rent Payment Date with respect to all Items shall in no event be less than the regularly scheduled payments of principal and interest in respect of the Loan Certificates due and payable on such Rent Payment Date. (d) The Lease Supplement will indicate whether and to what extent any installment of Basic Rent is payable in advance or in arrears. (e) The Lessee shall pay, as Supplemental Rent, any Auxiliary Payment due on all Loan Certificates on the date on which such amount is due, as provided in such Loan Certificates. SECTION 3.02. Supplemental Rent. The Lessee shall pay to the Lessor, or to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document, any and all Supplemental Rent promptly as the same shall become due and payable, including any interest payable at the Overdue Rate as provided in Section 3.05. SECTION 3.03. Interim Term. (a) Interim Rent. The Lessee shall pay for the Items subject to the Lease Supplement, as Interim Rent on the Basic Term Commencement Date, an amount equal to the excess, if any, of the interest payable on the Loan Certificates on such date over the amount of interest that would have been payable if such Loan Certificates had borne interest at the Assumed Debt Rate. -2- 7 (b) Lessor Paid Amounts; Lessee Right to Pay on Failure of Lessor. The Lessor shall make any payments of interest required to be made on the Loan Certificates on the Basic Term Commencement Date to the extent not required to be made by the Lessee under Section 3.03(a). In the event that the Lessor shall not have paid to the Indenture Trustee the amount of interest it is required to pay on the Loan Certificates under the preceding sentence, the Lessee shall make a payment to the Indenture Trustee equal to such amount plus interest on such amount at the Overdue Rate if not paid on the date the same is due (all of such payments being the "Advance Amount"), on the Lessor's behalf. (c) Right of Offset. If the Lessee pays any Advance Amount pursuant to the second sentence of Section 3.03(b), the Lessee shall be entitled to offsets (without duplication) for any outstanding Advance Amount (plus interest at the Advance Amount Rate on the outstanding portion of any Advance Amount from the date of the advance to the date on which the advance is fully offset) against any payments of Rent due from the Lessee to the Lessor or the Owner Participant (including, without limitation, Basic Rent, Stipulated Loss Value and Termination Value and all other amounts payable to the Lessor or the Owner Participant in connection with any termination of this Lease, but excluding Excepted Payments payable to the Indenture Trustee). Notwithstanding the preceding sentence, (i) in the case of any payment due from the Lessee that is distributable under the terms of the Indenture, the Lessee's right of offset shall be limited to an amount equal to the amount (if any) that would be distributable to the Owner Participant thereunder; (ii) no such offset or aggregate combined effect of separate offsets shall reduce the amount of any installment of Basic Rent, the Initial Portion of the EBO Price, Stipulated Loss Value or Termination Value as of any date payable under this Lease to an amount that would be in contravention of Section 3.01(c) or the definition of Stipulated Loss Value or Termination Value; and (iii) in the case of exercise of remedies by the Indenture Trustee against the Lessor by virtue of an Indenture Event of Default that is not (and is not the result of) a Lease Event of Default, the Lessee's right of offset set forth in this Section 3.03 shall continue against (x) the excess of the Basic Rent over the amount of scheduled principal, if any, and interest which is or would have been due under the Loan Certificates (had the Indenture Trustee not exercised remedies against the Lessor) and (y) other Rent due and payable directly to the Owner Participant. SECTION 3.04. Method of Payment. All Rent payable to the Lessor at any time prior to termination of the Indenture shall be paid by the Lessee to the Indenture Trustee at the Indenture Trustee Office or such other place in the United States as the Indenture Trustee shall specify to the Lessee on at least five Business Days' notice; all Rent payable to the Lessor after receipt by the Lessee of notice from the Indenture Trustee stating that the Indenture has been terminated following full satisfaction of the Loan Certificates thereunder shall be paid to the Lessor at its office -3- 8 set forth in Schedule I to the Participation Agreement, or at such other place in the United States as the Lessor shall specify to the Lessee on at least five Business Days' notice; provided, however, that, in the case of Excepted Payments, payment shall be made to whomever shall be entitled thereto. Each payment of Rent shall be made by the Lessee in funds with immediate value prior to 10:00 a.m., Pacific time to the designated account, on the date when such payment shall be due. SECTION 3.05. Late Payment. In the event any Rent shall not be paid on its due date to the Lessor, the Indenture Trustee or any Participant, the Lessee shall pay to the Lessor, the Indenture Trustee or such Participant, on demand, as Supplemental Rent, interest (to the extent permitted by Applicable Law) on such overdue amount from the due date thereof to the date of payment thereof at the Overdue Rate. SECTION 3.06. Net Lease; No Set-off, Counterclaims, etc. THIS LEASE IS A NET LEASE (AND EXPENSES ASSOCIATED WITH THE MAINTENANCE, OPERATION, AND INSURANCE OF THE EQUIPMENT SHALL BE FOR THE ACCOUNT OF THE LESSEE, WHETHER OR NOT SO STATED HEREIN), AND, NOTWITHSTANDING ANY PROVISION OF THIS LEASE OR OF ANY OTHER OPERATIVE DOCUMENT TO THE CONTRARY, THE LESSEE'S OBLIGATION TO MAKE ALL PAYMENTS OF RENT AS AND WHEN THE SAME SHALL BECOME DUE AND PAYABLE IN ACCORDANCE WITH THE TERMS OF THIS LEASE AND ANY OTHER OPERATIVE DOCUMENT SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT BE SUBJECT TO ANY ABATEMENT OR DIMINUTION BY SET-OFF (EXCEPT FOR OFFSETS REFERRED TO, AND ONLY TO THE EXTENT PROVIDED, IN SECTION 3.03), DEDUCTION, COUNTERCLAIM, RECOUPMENT, AGREEMENT, DEFENSE, SUSPENSION, DEFERMENT, INTERRUPTION OR OTHERWISE, AND, UNTIL SUCH TIME AS ALL RENT REQUIRED TO BE PAID UNDER THIS LEASE OR ANY OTHER OPERATIVE DOCUMENT SHALL HAVE BEEN PAID, THE LESSEE SHALL NOT HAVE ANY RIGHT TO TERMINATE THIS LEASE OR TO BE RELEASED, RELIEVED OR DISCHARGED FROM ITS OBLIGATION TO MAKE, AND SHALL NOT SUSPEND OR DISCONTINUE, ANY PAYMENT OF RENT FOR ANY REASON WHATSOEVER (EXCEPT AS MAY BE EXPRESSLY PROVIDED HEREIN), including, without limitation: (a) any default, misrepresentation, negligence, misconduct or other action or inaction of any kind by the Lessor, the Indenture Trustee, any Participant, the Lessee, or any other Person, whether under or in connection with this Lease, any other Operative Document or any other agreement relating to this Lease or in connection with any unrelated transaction; -4- 9 (b) the insolvency, bankruptcy, reorganization or cessation of existence, or discharge or forgiveness of indebtedness of, any entity or Person referred to in clause (a) above or any other Person; (c) the invalidity, unenforceability or impossibility of performance of this Lease or any other agreement referred to in clause (a) above for any reason; (d) any defect in the title, condition, design, operation or fitness for use of, or any Lien or other restriction of any kind upon, all or any part of any Item, any loss or destruction of, or damage to, any Item or any interruption in or cessation of the ownership, possession, operation or use of any thereof for any reason whatsoever; (e) any restriction, prevention or curtailment of or interference with any Item or the use thereof or any part thereof for any reason whatsoever, including, without limitation, by any Governmental Authority; (f) any Applicable Law now or hereafter in force; (g) any failure to obtain any required governmental consent for a transfer of rights or title to the Lessor, the Lessee or any other Person; (h) any amendment or other change of, or any assignment of any rights under, any Operative Document, or any waiver or other action or inaction under or in respect of any Operative Document, or any exercise or nonexercise of any right or remedy under or in respect of any Operative Document, including, without limitation, the exercise of any foreclosure or other remedy under the Indenture or this Lease or the sale of any Item or any portion thereof or interest therein; or (i) any other cause or circumstance foreseen or unforeseen, whether similar or dissimilar to any of the foregoing. The Lessee hereby waives and hereby agrees to waive at any future time at the request of the Lessor, to the extent now or then permitted by Applicable Law, any and all rights that the Lessee may have or that at any time hereafter may be conferred upon it, by statute, regulation or otherwise, to terminate, cancel, quit or surrender this Lease, except in accordance with the express terms hereof. If for any reason whatsoever this Lease shall be terminated (other than in accordance with the terms hereof) in whole or in part by operation of law or otherwise, the Lessee nonetheless agrees, to the extent permitted by Applicable Law, to pay to the Lessor (or, in the case of Supplemental -5- 10 Rent, to whomsoever shall be entitled thereto as provided herein or in the applicable Operative Document) an amount equal to each Rent payment at the time and in the manner such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. Each payment of Rent shall be final and the Lessee agrees not to seek to recover all or any part of any such payment (except for amounts that the Lessor, the Indenture Trustee or a Participant, as the case may be, in good faith agrees have been paid in error) from the Lessor, the Indenture Trustee or any Participant for any reason under any circumstance whatsoever; provided, however, that nothing contained in this Section 3.06 shall prevent the Lessee from bringing an action for damages suffered by the Lessee as a result of the breach by any Person of any obligation of such Person in any Operative Document or for equitable relief to obtain compliance with any such obligation. -6- 11 ARTICLE IV Disclaimer of Warranties SECTION 4.01. Disclaimer of Warranties. AS BETWEEN THE LESSOR AND THE LESSEE, DELIVERY OF EACH ITEM PURSUANT TO ARTICLE II SHALL BE CONCLUSIVE PROOF OF ACCEPTANCE BY THE LESSEE OF SUCH ITEM AS BEING IN COMPLIANCE WITH ALL REQUIREMENTS OF THIS LEASE, AND THE LESSOR LEASES AND THE LESSEE TAKES EACH ITEM AND EACH COMPONENT PART THEREOF "AS IS", AND THE LESSEE ACKNOWLEDGES THAT NEITHER THE LESSOR NOR ANY PARTICIPANT NOR THE INDENTURE TRUSTEE HAS MADE, NOR SHALL BE DEEMED TO HAVE MADE, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, VALUE, COMPLIANCE WITH SPECIFICATIONS, CONDITION, MERCHANTABILITY, DESIGN, QUALITY, DURABILITY, OPERATION OR FITNESS FOR USE OR PURPOSE OF SUCH ITEM OR ANY COMPONENT PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY ITEM OR ANY COMPONENT PART THEREOF OR OTHERWISE, IT BEING AGREED THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE, AS BETWEEN THE LESSOR AND THE LESSEE, BY THE LESSEE IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY ITEM OR ANY COMPONENT PART THEREOF, OF ANY NATURE WHETHER PATENT OR LATENT, AND THAT NEITHER THE LESSOR NOR ANY PARTICIPANT NOR THE INDENTURE TRUSTEE SHALL HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO, except that the Lessor, in its individual capacity, hereby represents, warrants and covenants that on the Closing Date the Items shall be free of Lessor Liens Attributable To it in its individual capacity. The provisions of this Article IV have been negotiated, and the foregoing provisions are intended to be a complete exclusion and negation of any other warranties by the Lessor, any Participant or the Indenture Trustee, express or implied, with respect to any Item or any component part thereof, whether arising pursuant to the Uniform Commercial Code or any other law now or hereafter in effect or otherwise. Nothing contained in this Article IV shall in any way diminish or otherwise affect any right the Lessee may have with respect to any Item against any third Person. Neither the Lessor nor any Participant nor the Indenture Trustee shall at any time be required to inspect any Item or any component part thereof, nor shall any inspection by the Lessor, any Participant or the Indenture Trustee be deemed to affect or modify the provisions of this Article IV. -7- 12 ARTICLE V Liens; Quiet Enjoyment SECTION 5.01. Liens. The Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Item, or title thereto or any interest therein, except Permitted Liens. The Lessee will promptly, at its own expense, take such action as may be necessary duly to discharge any Lien other than Permitted Liens. The Lessee's obligations under this Section 5.01 with respect to any Lien on any Item resulting from a claim arising prior to the termination of this Lease (other than pursuant to Article XVII) with respect to such Item shall survive such termination. SECTION 5.02. Quiet Enjoyment. Notwithstanding any other provision of this Lease, so long as no Lease Event of Default shall have occurred and be continuing, as between the Lessee and the Lessor, the Lessee shall have the exclusive rights to possession and control of all the Items in all Production Units and neither the Lessor nor any Person acting or claiming through the Lessor will take any action that shall interfere with the peaceful and quiet enjoyment of the use or nonuse of any Item by the Lessee, and the Lessee shall have the right to use or not use such Item in its sole discretion. The foregoing is not intended to limit the inspection rights and the rights in connection with a return of the Items granted by the Lessee hereunder. SECTION 5.03. Personal Property. The Lessee and the Lessor agree for the purposes of the Transaction that the Items, the Production Units, and every part thereof are and shall be considered as and shall remain personal and not real property or fixtures to all Persons and for all purposes. The Lessee and the Lessor agree that the Equipment, every Production Unit, every Item, and every part thereof are severed and shall be and shall remain severed from any real property and are readily movable, and, even if physically attached to such property, it is the intention of the Lessee and the Lessor that the Equipment, every Production Unit, every Item and every part thereof (i) shall retain the character of personal property, (ii) shall be removable, (iii) shall be treated as personal property with respect to the rights of all Persons whomsoever, (iv) shall not become part of any real property, and (v) by virtue of its nature as personal property, shall not be affected in any way by any instrument dealing with any real property. SECTION 5.04. Notice of Landlord Notices. The Lessee shall immediately notify the Lessor if it receives any notice of default under any lease of any premises on which any Item is located.Notice of Landlord Notices. The Lessee shall immediately notify the Lessor if it receives any notice of default under any lease of any premises on which any Item is located. -8- 13 ARTICLE VI Operation; Maintenance SECTION 6.01. Operation. The Lessee shall not use any Item or authorize any third party to use any Item in either case: (i) in breach of any Applicable Law (other than an Applicable Law as to which noncompliance would not adversely affect the business, operations or properties of the Lessee and so long as such noncompliance shall not involve any material risk of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement), or (ii) in violation of any authorization relating to such Item or to the Lessee issued by any Governmental Authority having jurisdiction over such Item (other than any provision thereof as to which noncompliance would not adversely affect the business, operations or properties of the Lessee and so long as such noncompliance shall not involve any material danger of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement), unless, in either case, the validity thereof is being contested in good faith and by appropriate proceedings (but only so long as such proceedings do not involve any material risk of the sale, forfeiture or loss of such Item, any risk of the imposition of any criminal liability on the Lessor, or any material risk of the imposition of any other liability not indemnified against by the Lessee pursuant to Section 6.01 of the Participation Agreement and do not extend beyond the end of the Basic Term or, if any Lease Default has occurred and is continuing at the time at which such proceedings are initiated, the earlier termination of the Lease). SECTION 6.02. Maintenance. The Lessee at its own expense shall at all times during the Term applicable to each Item maintain each Production Unit and every Item contained therein so as to keep such Production Unit and such Items (i) in as good condition as when originally delivered under the Headlease, consistent with ordinary wear and tear, but in all events in good operating order for its age, (ii) in compliance with manufacturers' warranties, insurance requirements, prevailing industry standards, and otherwise in a prudent manner, and (iii) in all events, in accordance with practices followed from time to time by the Lessee in the operation and maintenance of -9- 14 similar kinds of properties owned or leased by it. Each Production Unit and every Item shall be, moreover, maintained and preserved by the Lessee in compliance with any requirement of Applicable Law, and the Lessee will (at its expense) provide all maintenance and service and make all repairs necessary for such purpose. The Lessor shall not be obliged in any way to maintain, alter, repair, rebuild or replace any Item. In case of any damage to, loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, any Item, that does not constitute an Event of Loss with respect to the Production Unit containing such Item, whether or not any insurance proceeds on account of such damage, loss, condemnation, confiscation, theft, seizure or requisition shall be sufficient for the purpose, the Lessee shall at its own expense promptly commence and complete the repair or replacement of such Item (and, in the case of a total loss or nonmaterial damage other than normal wear and tear, complete such repair or replacement before the end of the Term applicable to such Item or any earlier termination) such that the Item is returned as nearly as possible to its condition and character immediately prior to such damage, loss, condemnation, confiscation, theft, seizure or requisition (assuming such Item was then in the condition required to be maintained by the terms of this Lease), with such alterations and additions as may be made at the Lessee's election pursuant to and subject to the conditions of Section 6.05; provided, however, for the avoidance of doubt, that the Lessee may, in lieu of repairing any Item subject to this Lease which becomes damaged or in need of repairs, substitute for such Item another item of equipment in compliance with Section 9.05, or, if the conditions of Section 7.07 are met, terminate this Lease with respect to such Item pursuant to that Section. SECTION 6.03. Replacement of Parts. If any parts that were originally incorporated or installed in or attached to any Item at the time of delivery thereof hereunder, or any parts thereafter incorporated or installed in or attached to such Item in replacement of or substitution for such original parts, shall become worn out, lost, stolen, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, the Lessee, at its own expense, shall promptly replace such parts, or cause the same to be replaced, by replacement parts which are free of all Liens other than Permitted Liens and of such quality and in such manner that such Item shall be in as good an operating condition as, and have a value, remaining useful life and utility at least equal to the value, remaining useful life and utility of, such Item prior to such replacement of parts (assuming such Item was, at the time of such replacement of parts, in the condition and state of repair required by the terms hereof). All parts at any time removed from an Item shall remain subject to the Headlease and this Lease, no matter where located, until such time as such parts shall be replaced by parts which have been incorporated or installed in or attached to such Item and which meet the requirements for replacement parts specified above; provided, however, that parts that have been removed from Items and that have no value other than scrap value shall be released from this Lease and all other Operative Documents immediately upon their removal -10- 15 from the Item, and may be disposed of by the Lessee (at its expense) prior to the installation of the replacement part. Immediately upon a replacement part becoming incorporated or installed in or attached to such Item as above provided, without further act, (i) the replaced part shall cease being subject to the Headlease, this Lease, and all other Operative Documents, shall be free and clear of all rights of the Lessor, and shall no longer be part of an Item hereunder, and (ii) such replacement part shall become subject to the Headlease, this Lease, and all Operative Documents, including the Lien of the Indenture and the Lease Security Agreement, and shall be deemed part of such Item for all purposes to the same extent as the parts originally incorporated or installed in or attached to such Item. The Lessee may transfer parts or components from one Item to another within the same Production Unit in a manner consistent with its normal operating practices so long as such transfer does not change the identity of the Items involved or reduce the value or remaining useful life of such Production Unit. SECTION 6.04. Relocation. (a) Within the United States. If no Lease Event of Default and no Lease Default pursuant to paragraph (a) or (b) of Article XIII shall have occurred and be continuing, the Lessee may, subject to Section 12.02(b), without the consent of the Lessor, relocate any Item during the Term to any facility operated by the Lessee or any Affiliate thereof in the United States of America; provided, however, that (i) if the relocation of the Item is to a place outside the county in which the Item was originally located, the Lessee shall, concurrently with the relocation, ensure that any filings necessary to protect the interests of the Lessor and the Indenture Trustee in the Item are timely made or corrected, (ii) if the Item is relocated to real property that is not owned by the Lessee, the Lessee shall obtain a waiver (substantially in the form of Exhibit 6.04) from the landlord of the real property of any rights with respect to the Item, and (iii) the Lessee shall, concurrently with the relocation, inform the Lessor, the Owner Participant and the Indenture Trustee in writing of any relocation. Notwithstanding the previous sentence, the Lessee may move any Item to another location within the same county to a facility owned by the Lessee or with respect to which a landlord waiver in the form of Exhibit 6.04 attached has been obtained at any time, with notice to the Lessor no later than February 15 of each year of all such relocations occurring in the immediately preceding calendar year. (b) Outside the United States. The Lessee may relocate any Item to a place outside the United States of America (or to an area excluded from insurance coverage) only with the prior written consent of the Lessor and a majority in interest of the Loan Participants, in each case not to be unreasonably withheld. SECTION 6.05. Modification. (a) Subject to its contest rights under Section 6.01, the Lessee shall, at its expense, make any Modification to any Item -11- 16 required by Applicable Law. The Lessee, at its expense, from time to time may make any Modification to any Item that the Lessee may deem desirable in the conduct of its business; provided, however, that the Lessee shall not have the right to make any such Modification that materially impairs such Item from being operated for the purposes for which it was built or diminishes the value, utility or remaining useful life of such Item. (b) Immediately upon each Modification having been made: (i) in the case of any Nonseverable Modification, the Modification shall, effective on the date such Modification shall have been incorporated into such Item, become subject to the Headlease, this Lease, and all other Operative Documents, including the Liens of the Indenture and the Lease Security Agreement; and (ii) in the case of each Severable Modification, the Modification shall not become subject to the Headlease, this Lease, or any other Operative Document; provided, that Severable Modifications that remain at the end of the Term applicable to an Item modified (or remain as of any earlier termination of this Lease with respect to such Item) shall be subject to the provisions of Section 8.02. Modifications that, pursuant to this Section 6.05(b), become subject to this Lease, shall, without further act, become subject to the Headlease and to all other Operative Documents, including the Lien of the Indenture and the Lease Security Agreement, and shall be deemed part of the applicable Item for all purposes. Modifications that do not become subject to this Lease pursuant to this Section 6.05(b) shall not be deemed a part of the applicable Item and shall not be subject to this Lease, the Headlease, the Lien of the Indenture or the Lease Security Agreement. (c) Subject to compliance with Applicable Law and so long as no Material Lease Default shall have occurred and be continuing, the Lessee may remove, at its expense, any Severable Modification which has not become subject to this Lease pursuant to Section 6.05(b), provided, that, unless the Lessee shall have given notice of its election to Purchase such Item pursuant to Article XVII, the Lessee, at its expense and prior to the end of the Term, shall repair any damage to such Item caused by such removal such that the Item is returned to the condition required hereunder. SECTION 6.06. Annual Listing of Production UnitsAnnual Listing of Production Units. The Lessee shall provide to the Lessor, not later than February 15 of each year, a listing of (i) all Production Units subject to this Lease as of December 31 of the immediately preceding calendar year, (ii) the Items contained in each Production Unit on such December 31, and (iii) the Lessor's Cost of each such Item. -12- 17 ARTICLE VII Obsolescence or Surplus Termination SECTION 7.01. Declaration of Obsolescence. At any time on or after the earlier of (a) September 30, 1999, and (b) the approval by the Board of Directors of the Lessee of the sale to a person other than an Affiliate of the Lessee of any United States business unit of the Lessee containing a Production Unit or Production Units, the Lessee may, upon 90 days' prior written notice to the Lessor, declare any Production Unit or Production Units (or, in the case of clause (b), above, the Production Unit or Production Units to be sold) obsolete, operationally uneconomic, or surplus to its needs and, if no Event of Loss shall have occurred with respect to the Production Unit or Production Units, the Lessee shall be entitled to terminate this Lease with respect to such Production Unit or Production Units on: (x) in the case of a termination described in clause (a), any Termination Value Date occurring on or after such declaration, and (y) in the case of a termination described in clause (b), any day after the 90th day after the giving of the notice specified by the Lessee in such notice (in either case, the "Termination Date"). SECTION 7.02. Lessor Election to Retain Equipment. In the case of a termination described in clause (a) of Section 7.01 (and which is not also described in clause (b) of such Section ), at any time within 30 days after notice from the Lessee of its election to terminate this Lease with respect to any Production Unit or Production Units, the Lessor may give the Lessee notice of its irrevocable election to retain any such Production Unit or Production Units under the Headlease. If the Lessor shall have elected to retain any Production Unit in accordance with the preceding sentence, on the Termination Date for such Production Unit (x) the Lessee shall pay to the Lessor any Accrued Rent due with respect to all Items then included in such Production Unit as of such Termination Date and other unpaid Supplemental Rent (including the Auxiliary Payments, if any) due on or prior to such Termination Date, but will not be required to pay Termination Value, and (y) the Lessor shall pay to the Indenture Trustee funds of the type required by the Indenture in an amount sufficient to pay in full the portion of the Applicable Principal Amount of the Loan Certificates that is Allocatable To the Items in such Production Unit together with accrued interest thereon, to such Termination Date, plus all other sums due and payable on such Termination Date to the Loan Participants by the Lessor under the Indenture, the Participation Agreement or such Loan Certificates. If the Lessor, the Indenture Trustee, or any Participant incurs any costs as a result of the prepayment of the Loan Certificates as provided in the preceding sentence, the Lessee shall pay such costs as Supplemental Rent. Subject to the receipt by the Indenture Trustee of the payment -13- 18 from the Lessor, on such Termination Date the Lessee shall deliver such Production Unit to the Lessor pursuant to the requirements of Article VIII, and, subject to the receipt by the Indenture Trustee of any associated Supplemental Rent from the Lessee, such Production Unit shall cease to be leased hereunder. If the Lessor shall fail to make the full amount of such payment to the Indenture Trustee, (i) the Lessee may make such payment, in which event, subject to the receipt by the Indenture Trustee of any associated Supplemental Rent, all liability of the Lessee to pay Rent for the Items in such Production Unit (including any Basic Rent due on such Termination Date) shall cease, the Term with respect to such Items shall cease, the Headlease with respect to such Items shall cease, and the Lessor must remove any Lessor Liens on the Items in such Production Unit and release such Items from the Lien of the Lease Security Agreement, and (ii) the Lessor shall thereafter no longer be entitled to exercise its election to retain any Production Unit; provided that if the Lessee does not make the payment contemplated by clause (i), this Lease shall continue in full force and effect, and the provisions of Sections 7.03, 7.04 and 7.05 shall apply as if the Lessor had not elected to retain the Production Unit. SECTION 7.03. Qualifying Bids. (a) Solicitation of Bids. In the case of a termination described in clause (a) of Section 7.01 (and which is not also described in clause (b) of such Section ), during the period from the giving of such notice of termination for the relevant Production Unit or Production Units until ten days prior to the Termination Date and so long as the Lessor shall not have exercised its option pursuant to Section 7.02 to retain such Production Unit(s), the Lessee, as agent for the Lessor and at the Lessee's expense, shall use its best efforts to obtain the highest possible bids from Persons other than the Lessee or its Affiliates to purchase the Items in such Production Unit(s) (including Lessor's interest therein) on the Termination Date, and the Lessee shall, during such period, from time to time at the request of the Lessor, inform the Lessor of the results of its efforts and shall notify the Lessor in writing, at least ten days prior to the Termination Date, of the amount of each such bid that has theretofore been submitted and the name and address of the party submitting such bid. Each such bid shall be a bona fide bid for payment in full in cash (such a bid is referred to herein as a "Qualifying Bid"). The Lessor shall have the right, directly or through agents or brokers, to solicit bids, but shall be under no duty to solicit bids or to inquire into the efforts of the Lessee to obtain bids. (b) Election if No Bids Received. If neither the Lessor nor the Lessee shall have received any Qualifying Bid as to any one or more of such Production Units on or before the tenth day before the Termination Date, the Lessee may elect either (i) to continue this Lease as to such Production Units or (ii) to terminate this Lease on such Termination Date as to any such Production Units and pay -14- 19 the Lessor the amount specified in Section 7.06 with respect to such Production Units in exchange for a transfer from the Lessor to the Lessee of all of the Lessor's rights to such Production Unit under the Headlease and the release by Lessor of the Items included in such Production Unit from the Lien of the Lease Security Agreement. SECTION 7.04. Rescission by Lessee. The Lessee may at any time prior to the date on which the Indenture Trustee has given notice of prepayment to the Loan Participants pursuant to Section 3.11 of the Indenture, and provided that the Lessor has not exercised its election to retain such Production Units, rescind its notice of termination as to any Production Unit or Production Units. The total number of such rescissions and elections to continue to Lease during the Basic Term for all Production Units shall not exceed two. The Lessee shall reimburse the Lessor, the Owner Participant, the Indenture Trustee and all Loan Participants for all reasonable expenses (including attorney's fees and expenses of the Owner Participant) incurred in connection with any such rescission of a notice of termination. SECTION 7.05. Sale. (a) Sale Pursuant to Qualifying Bid. If (i) the Lessor or the Lessee shall have received a Qualifying Bid on or prior to the tenth day before the Termination Date, and (ii) the Indenture Trustee (or, after the termination of the Indenture, the Lessor (or the Lessee)) shall have received from the bidder (which may be or include the Lessor or any Affiliate thereof) that shall have submitted the highest Qualifying Bid for such Production Unit or Production Units immediately available funds of the amount specified in such bid, the Lessor shall on the Termination Date, subject to the receipt of the amounts payable pursuant to Section 7.06 hereof, release all of its rights under the Headlease to the Production Unit or Production Units and shall remove, at the Lessor's expense, any Lessor Liens on the Items in the Production Unit or Production Units to which such bid relates; and the Lessee shall transfer all of its right, title, and interest of the Items comprising such Production Unit or Production Units to such bidder. Any funds received by the Lessee for the Equipment shall be immediately paid over to the Indenture Trustee (or, after the termination of the Indenture, the Lessor). The Lessee and Lessor shall execute and deliver such documents evidencing such transfer and take such further action as the purchaser shall reasonably request. All out-of-pocket costs and expenses (including attorney's fees and expenses of the Owner Participant and any transfer taxes incurred in connection with the sale) incurred in connection with any release from the Headlease, transfer of, or attempt to find a Qualifying Bid for, any Production Unit pursuant to this Article VII shall be paid by the Lessee. (b) Sale of Business Unit. In the case of a sale of a business unit by Lessee as described in clause (b) of Section 7.01, the Lessor shall on the Termination -15- 20 Date, release all of its rights under the Headlease to all Production Units in the business unit to be sold, and shall remove, at the Lessor's expense, any Lessor Liens on the Items in such Production Units, and the Lessee shall consummate the sale of such Production Units to the purchaser of the business unit. The Lessee shall pay over to the Indenture Trustee (or, after the termination of the Indenture, the Lessor), all funds received on the sale of the business unit, up to an amount equal to the aggregate Fair Market Sales Value (determined by agreement or, if the Lessor and the Lessee are unable to agree, by the Appraisal Procedure) for all Production Units sold. In addition, the Lessee shall pay on such Termination Date the amount specified in Section 7.06, computed as if the net proceeds received on the sale of the Production Units were equal to the Fair Market Sales Value thereof. All out-of-pocket costs and expenses (including attorney's fees and expenses of the Owner Participant) incurred in connection with any release from the Headlease or transfer of any Production Unit pursuant to this Article VII shall be paid by the Lessee. SECTION 7.06. Payment by Lessee; Notice; Termination of LeasePayment by Lessee; Notice; Termination of Lease. In the case of any termination described in Section 7.01, unless the Lessor has elected to retain the Production Unit(s) being terminated pursuant to Section 7.02, and subject to a difference in computation provided in Section 7.05(b), on the Termination Date, the Lessee shall pay to the Lessor the sum of: (a) any Accrued Rent due with respect to the Items in each Production Unit terminated as of such Termination Date; plus (b) the excess, if any, of (i) the Termination Value for the Items in each such Production Unit as of such Termination Date (or, if the Termination Date is not also a Termination Value Date, the Termination Value for such Items for the Termination Value Date immediately preceding the Termination Date, plus interest on such Termination Value from such Termination Value Date to the Termination Date at the then-current "Debt Rate" (as defined in the Loan Certificates)), over (ii) the net proceeds actually realized on any sale thereof and paid over to the Indenture Trustee or the Lessor, as the case may be, pursuant to Section 7.05; plus (c) any Auxiliary Payments payable on such Termination Date on the portion of the Loan Certificates Allocatable To the Items in the Production Unit or Production Units being terminated (including LIBOR breakage, if any); plus (d) any other Rent with respect to the Items in each such Production Unit due and unpaid as of such Termination Date (including any amounts for costs and expenses payable by the Lessee as required in Section 7.05, but, if the -16- 21 Termination Date is also a Rent Payment Date, not including the advance portion of any installment of Basic Rent due on such Rent Payment Date). Upon payment by the Lessee of all such amounts as to any Production Unit, the obligation of the Lessee to pay Basic Rent with respect to the Items in such Production Unit shall terminate, such Items shall no longer be subject to this Lease and the Term with respect to such Items shall end. SECTION 7.07. Termination of Items. No later than February 15 of each year, the Lessee may give notice to the Lessor terminating this Lease as to any Item (or Items) that, during the previous calendar year, was damaged beyond repair, lost, stolen, reported missing, sold to a person other than an Affiliate of the Lessee, or disposed of as scrap; provided, that the Lessee may not, without the prior written consent of the Lessor, terminate this Lease pursuant to this Section 7.07 (i) as to any Item the Lessor's Cost of which exceeds $100,000, or (ii) in any calendar year, as to Items the aggregate Lessor's Cost of which (determined without regard to Items contained in Production Units terminated under Section 7.01) exceeds $250,000. Concurrently with giving the notice of termination, the Lessee shall: (a) provide to the Lessor a list of all Items terminated during such calendar year pursuant to this Section 7.07; (b) provide to the Lessor an Officer's Certificate stating that the termination of the Items on the list described in clause (a) does not adversely affect the value, utility or remaining useful life of the remaining Items in the Production Unit(s) that contained the terminated Items; and (c) pay to the Lessor the Termination Value for each Item terminated pursuant to this Section 7.07 as of the Termination Value Date immediately preceding the date of the notice, plus interest thereon from such Termination Value Date to the date of payment at the then-current "Debt Rate" (as defined in the Loan Certificates). The Lessee shall reimburse the Lessor, the Participants, and the Indenture Trustee for expenses (including Auxiliary Payments, if any) incurred in connection with any termination under this Section 7.07. Immediately upon compliance by the Lessee with the requirements of this Section , the terminated Items shall cease to be subject to this Lease, the Lease Supplement, and the Headlease; the Lessor shall remove any Lessor Liens on the terminated Items; and the terminated Items shall be released from the Liens of the Indenture and the Lease Security Agreement. -17- 22 ARTICLE VIII Return of Equipment; Storage SECTION 8.01.Return of Production Units. Upon the expiration of the Term, or upon any earlier termination of this Lease with respect to a Production Unit, if there is not a simultaneous termination of the Headlease with respect to that Production Unit, in either case if such Production Unit is not Purchased by Lessee pursuant to Article XVII, the Lessee (at its expense) shall surrender such Production Unit and all Items contained therein to Lessor in good condition and good operating order, in both cases consistent with ordinary wear and tear, and free and clear of all Liens other than Lessor Liens. If requested by the Lessor not less than 90 days prior to the expiration of the Term (or, in the event of an early termination pursuant to (i) Article VII, not later than 60 days after the Termination Date, or (ii) Section 14.01, forthwith following the exercise by the Lessor of its remedy under Section 14.01(b)(i)), the Lessee shall, at its own expense and risk, dismantle and crate each Item contained in each Production Unit being returned in accordance with generally accepted methods and procedures for deinstallation, and deliver such Production Unit to the Lessor at the nearest railhead. At the time of such return, the Items contained in each Production Unit being returned shall be free and clear of all Liens other than Lessor Liens and, subject to the provisions of the Lease Security Agreement in the event of a termination pursuant to Section 14.01, the Lien of the Headlease, and, except as may have otherwise been expressly agreed to in writing by the Lessor, free and clear of any right of any Person to use or access such Item other than the Lessor. SECTION 8.02. Severable Modifications. If the Lessee has made any Severable Modification to any Item to be surrendered to the Lessor pursuant to Section 8.01, and the Severable Modification has not previously been removed by the Lessee, the Lessee shall, not later than 60 days before such surrender, inform the Lessor in writing if the Lessee intends to leave the Severable Modification in place, whereupon the Lessor may elect to subject such Severable Modification to the Headlease in accordance with and upon payment of the amount specified in Section 1.03 thereof. If the Lessor has not given the Lessee written notice of its election under the preceding sentence at least 30 days prior to the date for the surrender of the Item (or has notified Lessee that it has elected not to subject the Severable Modification to the Headlease), the Lessee may (i) remove the Severable Modification prior to such surrender, or (ii) leave the Severable Modification in place, in which case it will become subject to the Headlease without further action on the part of, or further cost to, the Lessor. SECTION 8.03. Re-Lease of Equipment by Lessor. The Lessee agrees that during the last six months of the Term with respect to the Items in any Production Unit, it will cooperate in all reasonable respects with efforts of the Lessor to re-lease -18- 23 such Items, including by cooperating, at the expense of the Lessor, in the obtaining of all orders, licenses, consents, authorizations, approvals or exemptions under or by any Governmental Authority which may be necessary in connection with any potential lease or transfer of such Items; provided, however, that such cooperation shall be subject to the Lessee's reasonable operational, confidentiality and security requirements. SECTION 8.04. Storage. The Lessor shall be entitled to store any returned Item on Lessee's property at the Lessor's risk and expense (including reasonable charges for occupancy of space) for a period of up to 90 days after termination of the Term applicable to such Item, or in the case of a termination of this Lease under Article XIV, for a period of up to one year. ARTICLE IX Event of Loss; Damage; Application of Payments; Substitution of Items. SECTION 9.01. Event of Loss. (a) Notice of Event of Loss. Upon the occurrence of an Event of Loss, the Lessee shall, within 60 days of such occurrence, give the Lessor, the Indenture Trustee and the Owner Participant written notice thereof. In the notice, the Lessee shall (i) specifically identify the Production Unit that suffered the Event of Loss, and (ii) specify which of the alternatives set forth in Section 9.01(b) it will pursue. (b) Lessee Alternatives. Upon an Event of Loss, the Lessee shall pursue one of the alternatives, (i) or (ii), set forth in this Section 9.01(b). (i) If the Lessee elects this alternative (i), it shall either: (A) within 180 days of the occurrence of the Event of Loss, substitute Replacement Equipment (as defined in the succeeding sentence) for the Production Unit that suffered the Event of Loss, or (B) within 180 days of the Event of Loss, provide to the Indenture Trustee (or, after the termination of the Indenture, the Lessor) cash collateral equal to the Stipulated Loss Value of the Items in the affected Production Unit or a letter of credit for the amount of the Stipulated Loss Value of the Items in the affected Production Unit issued by a bank and in a form reasonably -19- 24 acceptable to the Lessor and the Indenture Trustee, and within 18 months of the Event of Loss, substitute Replacement Equipment for the Production Unit which suffered the Event of Loss. "Replacement Equipment" shall mean equipment which is compatible with the Equipment in the Production Unit that suffered the Event of Loss and with respect to which the Lessee has obtained an appraisal (in form and substance, and from an appraiser, reasonably satisfactory to the Lessor) confirming that such Replacement Equipment has a value, utility, and remaining useful life at least equal to the affected Production Unit and is in as good operating condition as the Production Unit replaced (assuming that such Production Unit had been maintained in accordance with this Lease). Notwithstanding the preceding sentence, the Lessee may replace a Production Unit that has suffered an Event of Loss with equipment that is not compatible with the Equipment in such Production Unit with the Lessor's consent, such consent not to be unreasonably withheld: any such equipment shall be "Replacement Equipment" for all purposes of this Lease. The Replacement Equipment shall be free and clear of all Liens other than Permitted Liens. The Lessee shall provide the Lessor with such documentation evidencing the substitution and the Lessee's title to the Replacement Equipment as the Lessor shall reasonably request, including: (i) supplements to the Head Lease, this Lease, the Lease Security Agreement, and the Indenture, subjecting the Replacement Equipment to such instrument; (ii) evidence of the perfected Lien on Lessor's interest in the Replacement Equipment and of the absence of Liens other than Permitted Liens on the Replacement Equipment; and (iii) UCC financing statements, duly executed, delivered and filed, of the type, in respect of such Replacement Equipment, referred to in Section 3.01(g) of the Participation Agreement, and shall provide opinions of counsel reasonably satisfactory to the Lessor regarding the legality, authorization and enforceability of such documentation, and the perfection of the interests thereon. Once the substitution has been made (or the collateral has been provided) and the other conditions specified in the preceding paragraph have been satisfied, the Lessor shall release all of its rights under the Headlease to, and shall remove all Lessor Liens upon the Items in the affected Production Unit and release such Items from the Lien of the Lease Security Agreement, and the Lessee shall be subrogated to all claims of the Lessor, if any, against third parties to the extent the same relate to physical damage to or loss of such Production Unit. For all purposes hereof, the Replacement Equipment shall, after such substitution, be part of the property leased hereunder, be "Equipment," be deemed to be the Production Unit replaced, be subject to the Lease Supplement, the Headlease and the Lease Security Agreement and -20- 25 Lessor's interest therein, and be subject to the Lien of the Indenture. After a substitution, each item of Replacement Equipment listed separately in a manifest provided to the Lessor by the Lessee shall be an "Item" hereunder. Under this alternative (i), no reduction shall be made in the Basic Rent. (ii) If the Lessee elects this alternative (ii), it shall, on the first Stipulated Loss Value Date falling at least 120 days after the occurrence of the Event of Loss, pay to the Lessor the sum of (A) the Stipulated Loss Value for Items in the Production Unit that suffered the Event of Loss determined for such Stipulated Loss Value Date, (B) if the Stipulated Loss Value Date is also a Rent Payment Date, any Accrued Rent with respect to such Items as of such Rent Payment Date, and (C) any Supplemental Rent with respect to such Items due and payable on or before such Stipulated Loss Value Date, including Auxiliary Payments, if any, due on the portion of the Loan Certificates Allocatable To such Items, on such Stipulated Loss Value Date as a result of the Event of Loss. Once the payment described in the preceding sentence has been made, the Lessor shall release all rights to the Items in the affected Production Unit under the Headlease and the Lease Security Agreement and shall remove all Lessor Liens against such Items, the Lessee shall have no further obligation to make payments of Rent with respect to the Items in the affected Production Unit, and the Term with respect to such Items shall end. SECTION 9.02. Application of Payments Upon an Event of Loss. Except as provided in the next sentence of this Section 9.02 or in Section 9.04, any payments received at any time by the Lessor or by the Lessee with respect to any Equipment (including insurance proceeds or warranty payments but excluding proceeds from insurance policies carried by the Lessor or the Owner Participant) from any Governmental Authority or other Person as a result of the occurrence of an Event of Loss with respect to such Equipment shall be applied as follows: (a) any such payment received at any time by the Lessee shall be promptly paid to the Lessor for application pursuant to the following provisions of this Section 9.02, except that the Lessee may retain any amounts which the Lessor shall at the time be obligated to pay to the Lessee under such provisions or pursuant to Article XX; (b) so much of such payments as shall not exceed all amounts required to be paid by the Lessee pursuant to Section 9.01(b)(ii) shall be applied in reduction of the Lessee's obligation to pay such amounts if not already paid by the Lessee, or, if already paid by the Lessee, shall be applied to reimburse the Lessee for its payment of such amounts; and -21- 26 (c) the balance, if any, of such payments remaining thereafter, if they are from insurance carried by the Lessee, shall be paid to the Lessee or, if they are from any other Person or source, shall be divided between the Lessor and the Lessee as their interests may appear. Notwithstanding the foregoing, subject to the provisions of Section 9.04, any such payments received with respect to any Equipment that has been replaced by the Lessee, or with respect to which the Lessee has provided collateral, pursuant to Section 9.01(b)(i) shall be retained by or paid to the Lessee. SECTION 9.03. Seizure, Requisition, Application of Payments Not Relating to an Event of Loss . In the event of a loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, or damage to, any Production Unit, any Item or any part thereof not resulting in an Event of Loss, the Lessee shall promptly notify the Lessor and the Indenture Trustee thereof and all obligations of the Lessee under this Lease with respect to such Production Unit shall continue to the same extent as if such event had not occurred. Subject to the provisions of Section 9.04 and Article XX, payments received at any time by the Lessor or the Lessee from any insurer under insurance carried by the Lessee but not Lessor or the Owner Participant, any Governmental Authority or other Person with respect to any loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, or damage to, any Item or Items not constituting an Event of Loss to the Production Unit containing such Item or Items shall be paid to or retained by the Lessee. Nothing contained in this Section 9.03 shall affect the Lessee's right to substitute replacement equipment for any Item pursuant to Section 9.05, or to terminate any Item pursuant to Section 7.07. SECTION 9.04. Applications During Lease Event of Default or Material Lease Default. Any amount that shall be payable to the Lessee pursuant to this Lease arising out of any insurance, warranty, governmental award or otherwise shall not be paid to the Lessee or, if it shall have been previously paid to Lessee, shall not be retained by the Lessee but shall be paid to the Lessor, if at the time of such payment any Lease Event of Default or Material Lease Default shall have occurred and be continuing. In such event, all such amounts shall be paid to and held by the Lessor in trust as security for the obligations of the Lessee to make payments under any other Operative Document or to pay Rent hereunder or, at the Lessor's option, applied by the Lessor toward payment of any of such obligations of the Lessee at the time due hereunder or under such other Operative Document. At such time as there shall not be continuing any Lease Event of Default or Material Lease Default, all such amounts at the time held by the Lessor in excess of the amount, if any, that the Lessor shall have elected to apply as above provided shall be paid to the Lessee. -22- 27 SECTION 9.05. Substitution of Items. (a) So long as no Material Lease Default has occurred and is continuing, the Lessee may substitute for an Item (including a substitution in the nature of a trade-in) another item of equipment in accordance with the terms of this Article IX and Section 9.13 of the Indenture. If the Lessee shall elect to substitute pursuant to the preceding sentence, the Lessee shall, at its sole cost and expense: (i) transfer to the Lessor under the Headlease, without cost to the Lessor, an item of equipment, to be located in the same or a different Production Unit, which substituted item meets the following conditions: (A) it is compatible with the Production Unit in which it is to be located: (B) it is free and clear of all Liens other than Permitted Liens; and (C) it has a value, utility and remaining useful life at least equal to the Item to be replaced and is in as good condition and good operating order as such Item, assuming that such Item had been maintained in accordance with this Lease; (ii) on each February 15 and August 15, provide to the Lessor, the Indenture Trustee and each Participant, an Officer's Certificate giving notice of each substitution made in the six months ending, in the case of the February 15, on the immediately preceding December 31 and, in the case of the August 15 notice, on the immediately preceding June 30, stating that each substituted item satisfies the conditions in subclauses (A), (B) and (C) of clause (i), and stating which substitutions satisfy the conditions in clauses (i) through (iv) of Section 9.05(d); (iii) no later than the date on which the Officer's Certificate is provided, deliver to the Lessor and the Indenture Trustee for execution, supplements to the Headlease and the Lease Security Agreement, amendments to the Lease Supplement and Indenture, signed by an authorized representative of the Lessee, subjecting such substituted equipment to the terms thereof and hereof; (iv) no later than the date on which the Officer's Certificate is provided, deliver to the Indenture Trustee and/or the Lessor for signature duly completed and signed (by the Lessee) financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment and provide to the -23- 28 Lessor evidence of the absence of Liens other than Permitted Liens on the substituted equipment, together with a favorable opinion of counsel (which may be Lessee's internal counsel) regarding the legality, authorization and enforceability of such documentation and the perfection of such interests and Liens; and (v) no later than five Business Days after the date on which the Lessee receives back the financing statements or other documentation described in clause (iv) signed by the Indenture Trustee and/or the Lessor (as the case may be), file such financing statements or other documentation. (b) Notwithstanding anything to the contrary in paragraph (a) of this Section 9.05, the Lessee may not make any single substitution (or related series of substitutions) of replacement equipment for an Item (or a group of related Items) having a Lessor's Cost in excess of five million dollars unless it satisfies the following conditions: (i) the Lessee shall give the Lessor at least 30 days' prior written notice of the substitution; (ii) concurrently with making the substitution, the Lessee shall provide to the Lessor, the Indenture Trustee and each Participant, an Officer's Certificate giving notice of the substitution, stating that the substituted item satisfies the conditions in subclauses (A), (B) and (C) of clause (i) of paragraph (a), and stating whether the substitution satisfies the conditions in clauses (i) through (iv) of Section 9.05(d); (iii) concurrently with making the substitution, the Lessee shall deliver documentation reasonably satisfactory to the Lessor subjecting the replacement item to the Headlease, the Lease Supplement, the Lien of the Indenture and the Lease Security Agreement, and evidencing the absence of prior Liens on the replacement item; and (iv) concurrently with making the substitution, the Lessee shall file any financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment, and shall deliver opinions of counsel reasonably satisfactory to the Lessor regarding the legality, authorization and enforceability of such documentation and the perfection of such interests and Liens. (c) Anything to the contrary in paragraphs (a) or (b) notwithstanding, if, in the period since the last time the Lessee gave notice of substitutions made pursuant -24- 29 to this Section 9.05, the Lessee has substituted replacement equipment for Items having an aggregate Lessor's Cost in excess of 7.1 million dollars, the Lessee shall immediately: (i) provide to the Lessor, the Indenture Trustee and each Participant an Officer's Certificate giving notice of all substitutions made since the last notice, stating that the substituted items satisfy the conditions in subclauses (A), (B) and (C) of clause (i) of paragraph (a), and stating which substitutions satisfy the conditions in clauses (i) through (iv) of Section 9.05(d); (ii) deliver documentation signed by the Lessee in a form reasonably satisfactory to the Lessor subjecting the replacement items to the Headlease, the Lease Supplement, the Lien of the Indenture and the Lease Security Agreement, and evidencing the absence of prior Liens on the replacement items; and (iii) deliver to the Indenture Trustee and/or the Lessor for signature duly completed and signed (by the Lessee) financing statements or other documentation required to perfect any interest (leasehold or security) of the Lessor, the Indenture Trustee, or any Participant in the substituted equipment. The Lessee shall file the financing statements or other documentation described in clause (iii) within five Business Days of receiving such financing statements or other documentation signed by the Indenture Trustee and/or the Lessor (as the case may be). (d) The Lessee shall have no obligation to have any independent appraisal made of any equipment subjected to this Lease as a result of a substitution under this Section 9.05, except that the Lessee shall, at its own cost and expense, have an independent appraisal performed if, in the period since the later of the Closing Date and the date on which the last appraisal was performed, the Lessee has replaced Items pursuant to this Section 9.05 with an aggregate Lessor's Cost in excess of 7.1 million dollars. For purposes of the preceding sentence, items of equipment subjected to this Lease shall not be taken into account if all of the following conditions are satisfied with respect to such item: (i) the item performs substantially the same manufacturing function as the Item that was replaced; (ii) the Item that was replaced was either disposed of as scrap or sold to a person other than an Affiliate of the Lessee in an arm's length transaction; -25- 30 (iii) the substituted item was purchased within six months before the date on which it was subjected to this Lease from a person other than an Affiliate of the Lessee in an arm's length transaction; and (iv) the price at which the Lessee purchased the substituted item (exclusive of any amounts paid for Severable Modifications that do not become subject to this Lease) exceeds the amount received by the Lessee on the disposition of the replaced Item. Any appraisal performed under this Section 9.05(d) shall confirm that each item of replacement equipment that has become subject to this Lease since the last appraisal has a value, utility and remaining useful life at least equal to the Item that was replaced by such replacement item; provided, that the appraisal will not address items that (A) became subject to this Lease as the result of substitutions pursuant to this Section 9.05 and (B) at the time of such substitutions, met the conditions set forth the preceding sentence. The appraisal may be based on a review of the Lessee's documentation rather than an inspection of the replacement equipment; provided, that, if the Lessee has, in the period since the later of the Closing Date and the date on which the last appraisal based on an on-site inspection was performed, the Lessee has replaced Items pursuant to this Section 9.05 with an aggregate Lessor's Cost in excess of 25 percent of the total Lessor's Cost for all Items subject to this Lease as of the Closing Date, the appraisal must be based on an on-site inspection. (e) Upon transfer of the substitute equipment and compliance with the requirements of clause (i) of the first sentence of paragraph (a) (and, in the case of a substitution described in paragraph (b) of this Section 9.05, compliance with the conditions set forth in such sentence): (i) the replaced Item shall be released from the Liens of the Indenture and the Lease Security Agreement (pursuant to the terms thereof), and shall be released from the Headlease; (ii) the Lessee will be subrogated to all claims of the Lessor, if any, against third parties to the extent the same relate to physical damage to or loss of such Item; and (iii) the Lessee shall have no further obligation to pay Rent with respect to the substituted Item (but shall have an equivalent obligation to pay Rent with respect the Item substituted therefor). For all purposes hereof, the item of equipment so substituted shall, after such transfer, (i) be part of the property leased hereunder, be subject to the Lease Supplement, the Headlease and all other Operative Documents, and be subject to the Lien of the Indenture and the Lease Security Agreement, (ii) be deemed to be the "Item" that was replaced and to have the same Lessor's Cost and Applicable Percentage as the Item replaced, and (iii) be deemed to be included in the Production Unit in which such replacement item is located. No such substitution shall result in any change in Basic Rent. -26- 31 SECTION 9.06. Application of Article VI. Article VI shall not apply to any Item after an Event of Loss has occurred with respect to the Production Unit containing such Item. ARTICLE X Environmental Matters The Lessee shall not: (a) violate any Environmental Law; (b) release any Hazardous Substance; or (c) use or permit the use of any Hazardous Substance, if any such action could reasonably be expected to form the basis of an Environmental Claim which would: (i) have a material adverse effect on the value or the operating condition of any Production Unit; (ii) result in the attachment of a Lien to any Item or otherwise have a material adverse effect on the Lessor's rights to or interest in any Item under the Headlease; (iii) be asserted against the Lessor or any Participant; or (iv) have a Material Adverse Effect on the Lessee. -27- 32 ARTICLE XI Sublease and Assignment SECTION 11.01 Sublease. The Lessee shall have and retain throughout the Term for any Item control over the operation and use of such Item, and may, so long as no Lease Event of Default shall have occurred and be continuing, without the consent of the Lessor, sublease, license, transfer control of, or permit any other Person to use, any Item or Items during the Term, subject to the following terms and conditions: (i) the Lessee shall remain primarily liable to the Lessor for the performance of all the terms of this Lease and the other Operative Documents to the same extent as if such sublease or arrangement had not occurred; (ii) such sublease or arrangement shall be in compliance with Applicable Law; (iii) such sublease or arrangement as to any Item shall not extend beyond the Basic Term for such Item, or, if a Renewal Term is then in effect for such Item, beyond such Renewal Term; (iv) any rights created thereby in an Item shall be fully and expressly subject and subordinate to this Lease; (v) no such sublease or arrangement shall permit any further subleasing of the Equipment; (vi) the Lessee shall make all filings necessary to protect the interests of the Lessor and the Indenture Trustee in the Equipment concurrently with entering into the sublease or arrangement; and (vii) the Lessee shall grant to the Lessor a security interest in any sublease or arrangement with a term in excess of one year. Notwithstanding the foregoing, the Lessee may not, without the consent of the Lessor, such consent not to be unreasonably withheld, enter into a sublease that: (A) provides that any Equipment subject to such sublease is to be used outside the United States; (B) is to a lessee incorporated or organized outside the United States; or (C) covers Items of Equipment with, in the aggregate, a Lessor's Cost in excess of 7.1 million dollars and has a term in excess of one year. -28- 33 SECTION 11.02 Assignment. The Lessee may, at its own expense, assign all of its rights and obligations under this Lease and the other Operative Documents, without the consent of the Lessor, if such assignment meets the following conditions: (i) the assignment is to an Affiliate of the Lessee; (ii) the Lessee guarantees the obligations of such Affiliate under the Lease, which guarantee is in a form reasonably satisfactory to the Lessor; (iii) the Lessee pays all of the reasonable expenses incurred by the Participants and the other parties to the Operative Documents as a result of such assignment; and (iv) all filings necessary to preserve the Lessor's and the Indenture Trustee's interests in the Equipment are made. Notwithstanding the foregoing, the Lessee may, without the consent of the Lessor, assign its leasehold interest in this Lease to any corporation into or with which it shall be merged or consolidated or to whom it shall transfer substantially all of its property so long as the merger, consolidation or transfer is in accordance with the provisions of Section 5.05 of the Participation Agreement and the assignee assumes the obligations of the Lessee under this Lease and the other Operative Documents. -29- 34 ARTICLE XII Inspection and Marking SECTION 12.01. Inspection. (a) The Lessor, Indenture Trustee and the Owner Participant (or their representatives) each may, at its own expense upon reasonable prior notice and at reasonable times inspect the Items and the books and records of the Lessee relating to the maintenance, operation and performance of the Items; provided, that, except as provided in Section 12.02 or during the continuance of a Lease Default or a Lease Event of Default, such inspections shall not occur more frequently than once a year as to any Plant Site. The Lessee shall bear the cost of any inspection carried out during the continuance of any Lease Default or Lease Event of Default. All inspections will be conducted so as not to interfere with Lessee's business or the operation or maintenance of the Equipment. Any Person conducting an inspection shall agree to be bound by the terms of a confidentiality agreement of the type generally required by the Lessee. The Lessor shall also have the right to obtain information necessary to determine the Fair Market Sales Value and the Fair Market Rental Value of each Production Unit as and when required to be determined under this Lease. Neither the Lessor, the Indenture Trustee nor any Participant shall have any duty to make any inspection or inquiry or shall incur any liability or obligation by reason of not making any such inspection or inquiry, nor shall any such inspection or inquiry, reduce the Lessee's liability under the Operative Documents. (b) Notwithstanding anything in paragraph (a) of this Section 12.01, no Person shall have any right to receive any information that constitutes proprietary know-how of the Lessee in connection with any inspection pursuant to Section 12.01(a). SECTION 12.02. Tagging. (a) The Lessee shall, no later than December 31, 1996, affix to and maintain on each Item that is subject to this Lease as of the Closing Date a permanent label, plate or tag, in a form reasonably satisfactory to the Lessor, which identifies such Item by a unique number and does not interfere with such Item's operation. At such time as the Lessee shall have completed the tagging of each Item pursuant to the preceding sentence, the Lessee shall provide to the Lessor and to the Indenture Trustee an Officer's Certificate to that effect, and the Lessor and the Lessee shall amend the Lease Supplement to include the tag number for each Item. (b) Notwithstanding anything in this Lease or any Operative Document to the contrary, until such time as the Lessee has provided the Officer's Certificate described in paragraph (a) of this Section 12.02 and amended the financing statements filed in accordance with Section 3.01(g) of the Participation Agreement to include the tag number for each Item (and provided evidence of such amendment to the Lessor),(i) -30- 35 the Lessee shall not move any Item to any building that is not identified on a financing statement filed with respect to the Equipment in accordance with Section 3.01(g) of the Participation Agreement, and (ii) the provision in Section 12.01 of this Lease that inspections not be performed more frequently than once a year shall not apply. (c) The Lessee shall, within 45 days of the replacement or substitution of any Item pursuant to Articles VI or IX of this Lease, affix on each such item that becomes an Item subject to this Lease a permanent label, plate or tag, in a form reasonably satisfactory to the Lessor, which identifies such Item by a unique number and does not interfere with such Item's operation. ARTICLE XIII Lease Events of Default The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority): (a) the Lessee shall fail to make any payment of Interim Rent, Basic Rent, Rent Differential, Stipulated Loss Value or Termination Value (or any Auxiliary Payment constituting LIBOR breakage that is payable together with Stipulated Loss Value, Termination Value) when due, and any such failure shall continue unremedied for a period of five days; or (b) the Lessee shall fail to make any payment called for in this Lease or any other Operative Document other than those described in clause (a) when such payment is due, and any such failure shall continue until the later of (i) 30 days after receipt of a written notice from the Lessor demanding such payment, or (ii) 5 days after the resolution of any bona fide dispute over whether such payment is owing; or (c) the Lessee shall breach any covenant made by it in this Lease or any of the Operative Documents (other than a covenant in Section 8.02 of the Participation Agreement), and such breach shall not have been cured for a period of 30 days after the earlier to occur of (i) the Lessee's receipt of written notice of such breach from the Lessor and (ii) actual knowledge of any material breach by a Responsible Officer of the Lessee; provided, that the 30-day period shall be extended until the earlier of (1) the expiration of 120 days from the earlier of the Lessee's receipt of such notice and such actual knowledge and (2) -31- 36 the last day of the Term, if such extension is reasonably necessary to remedy any such failure that can be remedied within such period but cannot, with reasonable diligence, be remedied within such 30-day period, so long as the Lessee is making diligent efforts to remedy such breach; or (d) the Lessee shall have made any misrepresentation in any Operative Document (other than in Section 8.02 of the Participation Agreement) or in any certificate delivered thereunder, if such misrepresentation shall be material at the time of discovery and if such misrepresentation and any consequences of reliance thereon shall be curable and such misrepresentation and consequences shall not have been cured within 30 days after the earlier to occur of (i) the Lessee's receipt of written notice specifying the misrepresentation from the Lessor and (ii) actual knowledge of such misrepresentation by a Responsible Officer of the Lessee; provided, that the 30-day period will be extended until the earlier of (1) the expiration of 120 days from the earlier of the Lessee's receipt of such notice and such actual knowledge and (2) the last day of the Term, if such extension is reasonably necessary to cure any such misrepresentation and consequences that can be cured within such period but cannot, with reasonable diligence, be cured within such 30-day period, so long as the Lessee is making diligent efforts to cure such misrepresentation; or (e) the Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief or shall dissolve with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (f) an involuntary case or other proceeding shall be commenced against the Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 consecutive days; -32- 37 (g) the Lessee fails to maintain insurance in accordance with the provisions of Section 20.01; (h) after the occurrence of an Event of Loss, the Lessee fails to either complete a substitution of a Production Unit, provide sufficient collateral, or pay Stipulated Loss Value within the time periods set forth for such actions in Section 9.01(b); or (i) the Lessee (or any successor under the Headlease) fails to comply with any of the following provisions of the Headlease: Section 1.02(b); Section 1.04(a); Article III; and Section 5.02; or if the Lessee (or any successor under the Headlease) interferes with the Lessor's rights under Section 5.03 of the Headlease. ARTICLE XIV Remedies SECTION 14.01. Effect of Lease Event of Default. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, the Lessor may, at its option, by notice to the Lessee, declare this Lease to be in default (except that, upon the occurrence of a Lease Event of Default described in clause (e) or (f) of Article XIII, this Lease shall be deemed declared in default immediately without any further act or notice by the Lessor). At any time thereafter, the Lessor may do one or more of the following with respect to each Item as the Lessor in its sole discretion shall elect, to the full extent permitted by Applicable Law: (a) The Lessor may, by notice to the Lessee, terminate this Lease. (b) The Lessor may (i) demand that the Lessee, and the Lessee shall upon written demand of the Lessor, at the Lessee's expense, return the Items to the Lessor in the manner and condition required by Article VIII as if the Items were being returned at the end of the Term, and the Lessor shall not be liable for the reimbursement of the Lessee for any costs and expenses incurred by the Lessee in connection therewith or (ii) at the Lessee's expense enter upon the site where the Items are located and take immediate possession of any or all of the Items or any part thereof (to the exclusion of the Lessee) and remove the Items from the site without liability accruing to the Lessor for or by reason of such entry or taking of possession or removing. -33- 38 (c) The Lessor, by notice to the Lessee specifying a payment date not earlier than ten days or more than 30 days from the date of such notice, may require the Lessee to pay to the Lessor and the Lessee hereby agrees that it will pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain, and not as a penalty, and in lieu of any further payments of Basic Rent and Renewal Rent hereunder, an amount (reduced by any amounts previously paid by the Lessee pursuant to subparagraph (e) below) equal to the sum of: (i)(A) if the Stipulated Loss Value Date next preceding the date for payment specified in the notice is also a Rent Payment Date, all unpaid Accrued Rent payable with respect all Items as of such Rent Payment Date (or, if the date specified in the notice is a Rent Payment Date, as of such Rent Payment Date), or (B) if the Stipulated Loss Value Date next preceding the date for payment specified in the notice is not a Rent Payment Date, that portion of Accrued Rent for all Items representing unpaid Basic Rent or Renewal Rent due on any Rent Payment Date occurring before such Stipulated Loss Value Date; plus (ii) an amount equal to the Stipulated Loss Value for all Items calculated as of the Stipulated Loss Value Date next preceding the date for payment specified in the notice; plus (iii) interest, if any, at the Overdue Rate on the amount of such Basic Rent and Stipulated Loss Value from the Stipulated Loss Value Date as of which Stipulated Loss Value is computed until the date of actual payment; plus (iv) all Supplemental Rent payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto. Upon such payment of liquidated damages, the Lessor shall transfer to Lessee (without any representation, recourse or warranty whatsoever other than the absence of Lessor Liens) Lessor's entire interest in the Items by terminating this Lease and the Headlease and releasing Lessor's security interest in the Items under the Lease Security Agreement. The Lessor and Lessee shall (at the Lessee's expense) execute and deliver such documents evidencing such transfer, termination and release and take such further action as either party shall reasonably request to implement such transfer. (d) The Lessor or its agent may sell its interest in any Item pursuant to this subparagraph (d) and, if prior thereto the Lessor shall not have exercised its rights under subparagraph (f) below (unless the Lessor has not been paid thereunder and has rescinded such exercise), the Lessor may demand that the Lessee pay the Lessor, and the Lessee shall pay to the Lessor, as liquidated damages for the loss of a bargain and not as a penalty, in lieu of all Basic Rent -34- 39 and Renewal Rent with respect to such Item due after the date on which such sale shall occur, an amount equal to the sum of: (i) all unpaid Accrued Rent payable or that would have been payable with respect to such Item as of such Stipulated Loss Value Date (or, if the sale shall occur on a Rent Payment Date, as of such Rent Payment Date); plus (ii) all Supplemental Rent for such Item payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto; plus (iii) interest on the amounts described in clauses (i), (ii) and (iv) at the Overdue Rate from the Stipulated Loss Value Date as of which Stipulated Loss Value shall have been computed until the date of actual payment; plus (iv) the excess, if any, of (A) the Stipulated Loss Value of such Item as of the Stipulated Loss Value Date next preceding the date on which such sale shall occur (or, if the sale shall occur on a Stipulated Loss Value Date, as of such Stipulated Loss Value Date), over (B) the net proceeds of such sale. If the Lessor sells its interest in all of the Items pursuant this paragraph (d), this Lease and the Headlease shall terminate upon such sale. The Lessee's obligation to pay liquidated damages pursuant to this subparagraph (d) shall survive any total or partial termination of this Lease. (e) The Lessor may hold, use, operate, lease (whether for a period greater or less than the balance of what would have been the Basic Term or any Renewal Term, as the case may be) to others any Item, all on such terms and conditions and at such place or places as the Lessor may determine. The Lessee's obligation to pay Basic Rent and Renewal Rent for any period after the Lessee shall have been deprived of control of such Item pursuant to this subparagraph (e) shall be reduced by the net proceeds, if any, received by the -35- 40 Lessor from leasing such Item to, or otherwise permitting its use by, any Person other than the Lessee for all or any portion of such period. (f) The Lessor may, with respect to any or all of the Items, at any time prior to the time that the Lessor's interest in such Item or Items shall have been transferred to the Lessee pursuant to subparagraph (c) above or that the Lessor's interest in such Item or Items is sold by the Lessor pursuant to subparagraph (d) above, demand that the Lessee pay to the Lessor in respect of such Item or Items, and the Lessee shall pay to the Lessor on the first Business Day occurring at least ten days after, in the case of subclause (x) or (y) of clause (iv) below, the determination of the Fair Market Sales Value or Fair Market Rental Value, as the case may be, or, in the case of subclause (z) of clause (iv) below, the later of the date of such demand and the date of determination of the amount due thereunder, as liquidated damages for loss of a bargain and not as a penalty (in lieu of all payments of Basic Rent becoming due after the payment date), an amount equal to the sum of: (i) all unpaid Accrued Rent due on or before the Stipulated Loss Value Date for such Item or Items; plus (ii) all Supplemental Rent with respect to such Item or Items payable by the Lessee hereunder before, after or during the exercise of this remedy, including all Auxiliary Payments and all reasonable legal fees and expenses and other costs and expenses incurred by the Lessor, the Indenture Trustee or any Participant by reason of the occurrence of any Lease Event of Default or the exercise of the remedies of the Lessor with respect thereto; plus (iii) interest on the amounts described in clause (i), (ii) and (iv) at the Overdue Rate from the scheduled payment date to the date of actual payment; plus (iv) whichever of the following amounts as the Lessor, in its sole discretion, shall specify in such notice: (x) an amount equal to the excess, if any, of the Stipulated Loss Value for such Item or Items, computed as of the Stipulated Loss Value Date next preceding the date on which such payment is due, over the Fair Market Rental Value of such Item or Items for the remainder of the Basic Term or the Renewal Term, as the case may be, after discounting such Fair Market Rental Value semi-annually (effective on the Rent Payment Dates) to present worth as of the scheduled payment date at the Assumed Debt Rate; (y) an amount equal to the excess, if any, of the sum of Stipulated Loss -36- 41 Value for such Item or Items as of such Stipulated Loss Value Date over the Fair Market Sales Value of such Item or Items; or (z) an amount equal to the excess of (A) the present value as of the Rent Payment Date specified in such notice of all installments of Basic Rent until the end of the Basic Term (or Renewal Rent until the end of Renewal Term, if such demand for payment is made during a Renewal Term), discounting semi-annually at the Assumed Debt Rate, over (B) the present value as of such Rent Payment Date of the Fair Market Rental Value of the Items until the end of the Basic Term (or Renewal Term), discounted semi-annually at the Assumed Debt Rate. Upon such payment of liquidated damages, the Lease shall terminate with respect to such Item or Items and the Lessor and Lessee shall execute and deliver such documents evidencing such termination as either shall reasonably request. (g) The Lessor may exercise any other right or remedy which may be available to it under Applicable Laws or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof or to rescind this Lease. SECTION 14.02. Determinations of Fair Market Value. All determinations of Fair Market Sales Value and Fair Market Rental Value (each, a "Value") pursuant to this Article XIV shall be made by an independent appraiser selected by the Lessor at the Lessee's expense and the Lessor shall select the appraiser from a list supplied by the American Arbitration Association (or its successor) of independent appraisers qualified to determine such Value. The American Arbitration Association shall be asked to commission the appraiser so chosen to determine such Value and without revealing (and the Lessor and the Lessee shall not reveal) which party chose and/or is paying the fees and expenses of such appraiser. The appraiser so appointed shall be instructed to determine such Value within 30 days after being appointed and the determination of such appraiser shall be binding upon the parties. Anything in this Lease or any Operative Document to the contrary notwithstanding, (i) if any Item has not been returned by the Lessee to the Lessor pursuant to the terms hereof, or if such Item cannot be repossessed by the Lessor, the Fair Market Sales Value and the Fair Market Rental Value of such Item for purposes of this Article XIV shall be deemed to be zero, and (ii) if any Item has been sold in a commercially reasonable sale pursuant to this Article XIV, the Fair Market Sales Value of such Item shall be deemed to be the net proceeds received for such Item in such sale. SECTION 14.03. No Relief from Termination. No termination of this Lease, in whole or in part, or exercise of any remedy under this Article XIV shall, -37- 42 except as specifically provided herein, relieve the Lessee of any of its liabilities and obligations hereunder, all of which shall survive such termination, repossession or exercise of remedy. At any sale of the Lessor's interest in any Item or any part thereof pursuant to this Article XIV, the Lessor, the Indenture Trustee and any Participant may bid for and purchase such property. SECTION 14.04. Remedies Cumulative. To the full extent permitted by Applicable Law and except as expressly provided herein, each and every right, power and remedy herein specifically given to the Lessor in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically given herein or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of the Lessee or to be an acquiescence therein. No express or implied waiver by the Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Event of Default. SECTION 14.05. Waiver of Lessee. To the full extent permitted by Applicable Law, the Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may limit or modify any of the rights or remedies of the Lessor under this Article XIV. ARTICLE XV Right To Cure If the Lessee shall fail to make any payment of Rent to be made by it hereunder or shall fail to perform or comply with any of its other agreements contained herein or in any other Operative Document or in any other agreement entered into in connection therewith, the Lessor may (but shall not have any duty to do so) itself make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the reasonable expenses of the Lessor (including attorney's fees and expenses) incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by the Lessee upon demand. -38- 43 ARTICLE XVI Renewal Options SECTION 16.01. Renewal Options. The Lessee shall be entitled to renew this Lease as to any Production Unit for a period or periods (such period or periods being referred to herein as the "Renewal Term") and for rental amounts determined as follows. (For purposes of this Lease, the installments of rent to be paid during any Renewal shall be referred to as "Renewal Rent".) If the Lessee elects to renew this Lease as to any Production Unit, the Lessee must renew this Lease as to all Production Units for the same period; provided, that the renewal as to some Production Units may be Fixed Rate Renewals while the renewal as to other Production Units may be Fair Market Renewals. (a) Fixed Rate Renewals. Unless a Lease Event of Default or Material Lease Default shall have occurred and be continuing at the time of the notice or renewal, the Lessee shall be entitled to renew this Lease as to any Production Unit for one or more periods, commencing on the last day of the Basic Term for such Production Unit, which meet the following conditions (each a "Fixed Rate Renewal Period"): (i) each period must be at least one year; (ii) the aggregate of all periods, when added to the Interim and Basic Terms, must not exceed 80 percent of the economic useful life of the Production Unit, as appraised as of the beginning of such period; (iii) at the end of the each period, the residual value of the Production Unit, as estimated as of the beginning of such period (disregarding inflation or deflation since the Closing Date), must equal at least 20 percent of the Lessor's Cost of such Production Unit; and (iv) the aggregate of all such periods may not exceed five years. The rental to be paid for any Production Unit during the Fixed Rate Renewal Period shall be equal to the Fair Market Rental Value of such Production Unit; provided that such rent shall not exceed a fixed rate equal to 50 percent of the average Basic Rent installments set forth for the Items then contained in such Production Unit in the Lease Supplement. -39- 44 (b) Fair Market Renewals. Unless a Lease Event of Default or Material Lease Default shall have occurred and be continuing at the time of the notice or renewal, following the end of the last Fixed Rate Renewal Period for any Production Unit for which the Lessee has exercised its right to renew under paragraph (a) of this Section 16.01, or following the expiration of the Basic Term for any Production Unit for which there is no Fixed Rate Renewal Period, the Lessee shall be entitled to renew this Lease for such Production Unit for one or more periods (each a "Fair Market Renewal Period") which meet the following conditions: (i) each period must be at least one year; (ii) the aggregate of all such periods may not exceed five years; and (iii) the last period may not extend beyond the end of the term of the Headlease with respect to such Production Unit. The rental to be paid during any Fair Market Renewal Period shall be equal to the Fair Market Rental Value of such Production Unit determined for such period as of the beginning of such period. SECTION 16.02. Notice of Renewal. The Lessee may exercise its renewal option by giving the Lessor irrevocable notice, not less than 180 days prior to the end of the Basic Term (or, in the case of a further renewal at the end of any Renewal Term, not less than 180 days prior to the end of such Period). The notice shall specify the proposed duration of any Fixed Rate Renewal Period (or, in the case of a Fair Market Renewal Period, the duration elected by the Lessee), and the proposed Renewal Rent for each Production Unit as of each Rent Payment Date during such Renewal Term. The Lessor shall, within 30 days of its receipt of such notice, advise the Lessee as to whether it agrees with the Lessee's proposals. If the Lessor does not agree, and if the Lessee and the Lessor are unable to reach agreement, the duration of any Fixed Rate Renewal Period and the Renewal Rent shall be determined by the Appraisal Procedure. SECTION 16.03. Continuation of Lease Supplement. At the end of the Basic Term or the end of any Renewal Term, if the Lessee shall have elected to renew this Lease and if this Lease shall not have been previously terminated with respect to such Production Unit, the Lease Supplement shall continue in force and effect, and shall be deemed to have the following terms: (i) Renewal Rent shall be payable in arrears in semi-annual installments beginning on the day that is six months after the last day of the Basic Term (or, if there was a previous Renewal Term, the last day of the immediately -40- 45 preceding Renewal Term), with a final installment due on the last day of the Renewal Term; (ii) the installments of Renewal Rent shall be equal in amount, except that if the final such installment shall be for a period shorter than six months, the Renewal Rent in respect thereof shall be equal to a proportionate share of the Renewal Rent for a full six-month period; (iii) the Stipulated Loss Value Dates and the Termination Value Dates shall be the first day of each month, beginning with the first day of the Renewal Term; (iv) the Stipulated Loss Value for each Item as of each Stipulated Loss Value Date shall equal 20 percent of the Lessor's Cost of such Item; (v) the Termination Value for each Item as of the first Termination Value Date of the first Renewal Term shall equal the Termination Value for such Item as of the end of the Basic Term; (vi) the Termination Values for each Item as of any Termination Value Date in any Renewal Term after the Termination Value Date described in clause (v) shall be equal to the sum of (A) the amount determined by amortizing, on a straight line basis over five years, the excess of the Termination Value for such Item described in clause (v) over ten percent of the Lessor's Cost of such Item, and (B) ten percent of the Lessor's Cost of such Item. All other terms of this Lease and the other Operative Documents shall continue in effect during each Renewal Term in accordance with the provisions hereof and thereof. ARTICLE XVII Purchase Options SECTION 17.01 Early Buyout Option. (a) Option to Purchase. The Lessee shall have the right, upon not less than 60 days' irrevocable written notice to the Lessor, to Purchase all but not less than all of the Lessor's rights in the Equipment on the EBO Date for the EBO Price set forth in the Lease Supplement. As a condition to such Purchase, the Lessee shall be obligated to pay, in addition to the EBO Price, (i) Accrued Rent as of the EBO Date, -41- 46 and (ii) any other Supplemental Rent due and payable on or prior to the EBO Date, including Auxiliary Payments, if any, due on the Loan Certificates. (b) Deferred Purchase Price Option. In the case of any Purchase of Equipment pursuant to paragraph (a), the Lessee may, at its option, either (i) pay the entire EBO Price on the EBO Date or (ii) so long as no Material Lease Default has occurred and is continuing, pay the Initial Portion of the EBO Price on the EBO Date and pay the balance on the dates and in the amounts set forth in the Lease Supplement. The Lessee shall elect its payment option in the notice given pursuant to paragraph (a). In the event that the Lessee elects the payment option specified in clause (ii) above, then, on the date the Initial Portion of the EBO Price is paid, (w) this Lease shall be deemed terminated as a true lease and this agreement shall continue as a lease intended for security, mutatis mutandis, to secure for the Lessor the obligation of the Lessee to make the remaining installment payments, (x) Articles VII, VIII, IX (other than Section 9.05), XVI and XVII shall be of no further force and effect, (y) Basic Rent shall cease to accrue, and (z) the Lessor will, at the Lessee's expense, convey all of its rights, title and interest in and to the Equipment to the Lessee without recourse or warranty except as to the absence of Lessor Liens, subject, however, to the security interest of the Lessor then being retained hereunder. (c) Reconveyance. Upon payment by the Lessee of the last installment of EBO Price, the Headlease shall terminate in accordance with the terms thereof and the Lessor shall execute and deliver to the Lessee a release of the security interest retained. All reasonable costs and expenses of the Lessor or the Owner Participant incurred in connection with the Lessee's election under this Section 17.01(b) shall be paid by the Lessee. (d) Defaults. If the Lessee fails to pay the EBO Price (or, if the Lessee elects the payment option in clause (ii) of paragraph (b), the Initial Portion of the EBO Price) on the EBO Date, this Lease shall continue with respect to the Equipment as if the Lessee had not exercised the purchase option under this Article XVII, and the Lessee's failure to pay the EBO Price (or the Initial Portion of the EBO Price) shall not give rise to a Lease Event of Default under Article XIII hereof. The Lessee shall pay any costs or expenses, including LIBOR breakage, if any, incurred by the Lessor or any Participant as a result of the failure to pay the EBO Price after giving the notice described in Section 17.01(a). SECTION 17.02. End of Term Purchase Option; Notice. Unless a Lease Event of Default shall have occurred and be continuing, the Lessee shall have the option, upon irrevocable written notice given not less than 180 days prior to the end of the Basic Term (or Renewal Term, if any) applicable to any Production Unit, to -42- 47 Purchase all but not less than all of the Lessor's rights in the Equipment in such Production Unit at a price equal to the Fair Market Sales Value thereof at the end of the Basic Term or such Renewal Term. The Lessee's notice shall specify the proposed Fair Market Sales Value for the Production Unit. The Lessor shall, within 30 days of receipt of the Lessee's notice, inform the Lessee as to whether it agrees with the proposed Fair Market Sales Value. If the Lessor does not agree, and if the Lessee and the Lessor are unable to agree, the Fair Market Sales Value shall be determined in accordance with the Appraisal Procedure. SECTION 17.03. Owner Participant Becomes Competitor. In the event that the Owner Participant or any Affiliate of the Owner Participant acquires or is acquired by, merges, or otherwise consolidates with, any Competitor, the Lessee may, upon not less than 30 days' notice, Purchase all but not less than all of the Equipment on the Termination Value Date specified by the Lessee in such notice (but not later than 6 months after the date of the notice), for a price equal to the Termination Value of all of the Equipment on such Termination Value Date. In addition to such price, the Lessee shall pay (i) all other Rent due and unpaid as of such Termination Value Date (including any Auxiliary Payments but, if such Termination Value Date is also a Rent Payment Date, not including the advance portion of any installment of Basic Rent due on such Rent Payment Date), and (ii) all costs incurred by the Lessor to effect the transfer of its rights to the Equipment to the Lessee. Upon the Lessee's notice of intent to Purchase hereunder, and pending such Purchase (so long as no Lease Event of Default shall be continuing), the inspection rights of the Lessor provided in Section 12.01 shall be suspended. SECTION 17.04. Purchase. If the Lessee shall have elected to Purchase the Lessor's interest in the Items in the Production Units under Section 17.01, 17.02, or 17.03 and if the Lessee shall have paid all Rent then due and payable hereunder (including payment of the EBO Price, the Fair Market Sales Value, or the price specified in Section 17.03 whichever is applicable), the Lessor shall transfer (without any representation, recourse or warranty whatsoever except as to the absence of Lessor Liens) all of its rights under the Headlease to the Equipment in such Production Unit to the Lessee and shall execute and deliver such documents evidencing such transfer and take such further action as the Lessee shall reasonably request. -43- 48 ARTICLE XVIII Further Assurances SECTION 18.01. Further Action by Lessee. The Lessee, at its expense, shall promptly and duly execute and deliver to each of the Participants, the Lessor and the Indenture Trustee such documents and assurances and take such further action as the Lessor (and, for so long as the Indenture shall be in effect, the Indenture Trustee) may from time to time reasonably request in order to carry out the intent of this Lease and the other Operative Documents and to establish and protect the rights and remedies created or intended to be created in favor of the Lessor and the Indenture Trustee hereunder and thereunder, to establish, perfect and maintain the rights of the Lessor in and to the Items and, for the benefit of the Indenture Trustee, the Lien and security interest in the Indenture Estate provided for in the Indenture. Without limiting the preceding sentence, the Lessee shall record or file counterparts or appropriate memoranda of this Lease, the Lease Security Agreement, the Headlease and the Indenture, or such financing statements or other documents with respect to this Lease, the Lease Security Agreement, the Headlease and the Indenture, and the Lessor agrees to execute and deliver promptly such of the foregoing financing statements or other documents as may require execution by the Lessor. The Lessee agrees to cause the timely execution, delivery and filing of continuation statements as to the financing statements theretofore filed so as to preserve the security interest in the Indenture Estate referred to in the next preceding sentence. -44- 49 ARTICLE XIX Indenture Estate as Security for Lessor's Obligations to Loan Participants SECTION 19.01. In order to secure the indebtedness evidenced by the Loan Certificates, the Lessor provides in the Indenture, among other things, for the assignment (to the extent provided therein) by the Lessor to the Indenture Trustee of its right and interest to this Lease and for the creation of a Lien and security interest in favor of the Indenture Trustee for the benefit of the holders of the Loan Certificates in and to the Indenture Estate as described in the Granting Clauses of the Indenture. The Lessee hereby (a) consents to such assignment pursuant to the terms of the Indenture and acknowledges that all rights of the Lessor hereunder shall be exercised only by the Indenture Trustee pursuant to such assignment, subject, however, to Section 16.04 of the Indenture, (b) agrees to pay directly to the Indenture Trustee (or, after receipt of notice from the Indenture Trustee stating that the Indenture has been satisfied and discharged, to the Lessor) all amounts of Rent (other than Excepted Payments) due to the Lessor hereunder or under any other Operative Document that shall be required to be paid to the Indenture Trustee pursuant to the Indenture or any other Operative Document, (c) agrees that the right of the Indenture Trustee to such payments hereunder shall be absolute and unconditional and shall not be affected by any circumstances whatsoever, and (d) agrees that all notices and communications to the Lessor shall be copied to the Indenture Trustee. Any payment by the Lessee to the Indenture Trustee of any amount payable hereunder shall constitute payment of such amount for all purposes of this Lease. The Lessee further agrees that, so long as the Indenture remains in effect, if the Lessor fails to perform any of its covenants or obligations under this Lease (other than its obligations relating to the confidentiality under Sections 12.01 and 17.03(b)), the Indenture Trustee may, but is not required to, perform such covenant or obligation, with the same force and effect as if the covenant or obligation had been performed by the Lessor. -45- 50 ARTICLE XX Insurance SECTION 20.01. Obligation to Insure. The Lessee shall maintain, with insurers of recognized reputation and responsibility, (i) property insurance in customary form with respect to loss of or damage to the Equipment (but not including insurance against earthquake damage for any Equipment (x) located in California or (y) located outside California if such insurance is not available on commercially reasonable terms and such Equipment has been installed, and the buildings in which it is located have been reinforced, in a manner comparable to the installation and reinforcement of Equipment in Lessee's facilities in California), in an amount not less than the Stipulated Loss Value of the Equipment, and (ii) public liability insurance in customary form of not less than $50 million per occurrence and in the aggregate. Notwithstanding the foregoing, the property and liability insurance maintained by the Lessee with respect to the Equipment shall be in amounts and cover risks no less favorable than the insurance maintained by the Lessee with respect to similar equipment owned or leased by the Lessee in the United States; provided that the liability insurance may provide for different levels of coverage for products made by different Production Units. The insurance policies carried in accordance with the terms of this Lease shall: (a) name the Owner Trustee (in both its individual and trust capacities), the Owner Participant, Indenture Trustee and each Certificateholder, from time to time, of the Loan Certificates ("Additional Insureds") as additional insureds, as their respective interests may appear, but, in the case of liability insurance, only with respect to claims relating to the Equipment leased hereunder or to the transactions contemplated by the Operative Documents, (b) provide that, so long as the Indenture is in effect, the proceeds, if any, except as provided below, shall be payable to Indenture Trustee under a standard lender's loss payable endorsement reasonably satisfactory to Indenture Trustee and thereafter to the Lessor as loss payees, as their respective interests may appear, in the case of property insurance, but only to the extent that such proceeds result from a claim relating to the Equipment leased hereunder or to the transactions contemplated by the Operative Documents, (c) be primary with respect to, and without right of contribution from, other insurance policies held by the Additional Insureds with respect to the Equipment; (d) waive any right of subrogation of the insurers to any right against the Additional Insureds for damages arising out of their interests in the -46- 51 Equipment or the transactions contemplated by the Operative Documents, and waive any right of the insurers to any set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of the Lessor for damages arising out of their interests in the Equipment or the transactions contemplated by the Operative Documents or of the Lessee; (e) provide that there is no recourse against any Additional Insureds for the payment of premiums, commissions, direct calls, assessments or advances; and provide that if such insurance is cancelled or terminated or if there is any decrease in the dollar amount of coverage purchased below the amount required by this Section 20.01, deletion of one or more of the material covered risks, material increase in the deductible amount (in excess of the deductible amounts otherwise permitted by this Section 20.01), or deletion of one or more of the Additional Insureds as an additional insured or loss payee for any reason whatsoever, or any change in any policy endorsement which are inconsistent with the requirements of this Article XX, the insurers will notify the Additional Insureds and the Lessee at least 30 days prior to the effective date of such change in coverage (except that, if the change in coverage is the result of a non-payment of premiums, the insurers will notify the Additional Insureds at least 10 days before the effective date of such change); (f) include a cross-liability or severability of interest provision providing that inasmuch as the policies are written to cover more than one insured, all terms and conditions, insuring agreements and endorsements, with the exception of limits of liability, shall operate in the same manner as if there were a separate policy covering each insured for public liability insurance; and (g) without waiving the insurers' rights to cancel the policies (subject to paragraph (e), above), insure each additional insured party and loss payee (subject to the terms and conditions of the policy) regardless of any breach of violation of any warranty, declaration or condition contained in such policies by any other insured party or loss payee. Notwithstanding the foregoing, the Lessee may self-insure (through deductibles or otherwise) against damage to the Equipment and third-party public liability in an amount per occurrence not greater than the higher of (1) two percent of the Tangible Net Worth of the Lessee and all subsidiaries consolidated with the Lessee under generally accepted accounting principles, and (2) $1 million. SECTION 20.02. Certification of Insurance. Upon any renewal of the insurance required hereunder, the Lessee shall furnish to the Lessor, the Indenture Trustee and each Loan Participant, (i) certificates from authorized representatives of -47- 52 the underwriters of the insurance policies maintained by the Lessee, containing details as to such insurance policies, and (ii) Officer's Certificates stating that the property and liability insurance coverage required to be maintained pursuant to this Article XX is in full force and effect. The Lessee shall deliver to the Lessor, Indenture Trustee and each Loan Participant promptly following request by any of them, copies of all applicable policies of insurance carried pursuant to this Article XX. SECTION 20.03. Adjustment of Claims; Payment. Unless a Lease Event of Default shall have occurred and be continuing, the Lessee shall have the exclusive right to negotiate and adjust all claims against insurers for damage to or loss of the Equipment, or for third-party public liability with respect to the Equipment. Subject to Section 9.04 hereof, insurance proceeds of $7.5 million or less per occurrence shall be paid to the Lessee, or, if received by the Lessee may be retained by the Lessee. If the property insurance proceeds in respect of any Item or Items for any occurrence are in excess of $7.5 million, the excess of such proceeds over $7.5 million shall be paid to the Indenture Trustee (or, after the Indenture has terminated, the Lessor) and, (A) if the Lessee has elected to repair or replace such Item or Items the Indenture Trustee (or the Lessor, as the case may be) shall promptly pay such proceeds to the Lessee upon a written application signed by the Lessee to reimburse the Lessee for the costs of repairing, restoring or replacing the damaged Items, (B) if such proceeds were paid as a consequence of an Event of Loss and the Lessee has elected to comply with alternative (ii) of Section 9.01(b) hereof, the Indenture Trustee (or the Lessor, as the case may be) shall hold such proceeds in accordance with Section 9.11 of the Indenture pending application as provided in said alternative (ii), or (C) if such proceeds were paid as a consequence of an Event of Loss and the Lessee has elected to comply with alternative (i) of Section 9.01(b) hereof, the Indenture Trustee (or the Lessor, as the case may be) shall hold such proceeds in accordance with Section 9.11 of the Indenture, such proceeds shall be deemed to be cash collateral provided by the Lessee, and the Indenture Trustee shall pay such proceeds to the Lessee periodically upon application by the Lessee to reimburse the Lessee for the cost of Items replaced to date, with remainder being remitted to the Lessee upon the completion of the substitution of the affected Production Unit. Any amounts held by the Lessor or Indenture Trustee (which amounts shall be held by the Lessor or Indenture Trustee, as the case may be, as security for the obligation of -48- 53 the Lessee to make repairs or replacements, as the case may be) and any proceeds or payments (and net earnings thereon) remaining after such repairs or replacements have been made shall be paid to the Lessee. Any amounts which are held by the Lessor or the Indenture Trustee, as the case may be, pending payment to the Lessee shall, until paid to the Lessee as provided herein or, as long as the Indenture is in effect, until applied as provided in the Indenture, be invested by the Lessor or the Indenture Trustee, as the case may be, in accordance with the provisions of Section 9.11 of the Indenture. Any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) shall be applied or reinvested in the same manner as the principal invested. Anything to the contrary in this Section 20.03 notwithstanding, if a Lease Event of Default or a Material Lease Default shall have occurred and for so long as such Lease Event of Default or a Material Lease Default shall be continuing, all property insurance proceeds relating to the Equipment shall be paid to and held by the Indenture Trustee (or the Lessor, as the case may be) as security for the obligations of the Lessee hereunder. SECTION 20.04 Insurance Obtained by Additional Insureds; Lessee Reimbursement for Cost. (a) If the Lessee is in default of its obligation to maintain the insurance coverages specified in this Article XX, each of the Additional Insureds may, at its option, but shall not be required to, provide such insurance (but without duplication of any such insurance obtained by any other Additional Insured pursuant to this Article XX or by the Lessee). In such event, the Lessee shall, upon demand from time to time, reimburse such Additional Insured for the cost to such Additional Insured of insurance in the amount which the Lessee shall have failed to maintain and which such Additional Insured shall have obtained in accordance herewith, together with interest thereon at the Overdue Rate, from the date of payment of such cost by the Additional Insured to but excluding the date of receipt of such reimbursement; provided, however, that the Lessee shall have no obligation to reimburse any Additional Insured for the cost of any insurance provided under the preceding sentence unless (i) if the Lessee's default in maintaining insurance is a failure of the policy to conform to the requirements in clauses (a) through (g) of Section 20.01, the Additional Insured gives the Lessee at least 15 days' notice of the default and its intention to acquire insurance, and (ii) the Additional Insured obtains the insurance from a party unrelated to it. (b) Nothing in this Article XX shall prohibit the Lessor, the Owner Participant, the Indenture Trustee or any Certificateholder from obtaining insurance for its own account and any proceeds payable thereunder shall be as provided in the insurance policy relating thereto; provided, that no such insurance may be obtained that would limit or otherwise adversely affect the coverage of any insurance to be obtained or maintained by the Lessee pursuant to this Article XX, it being understood that all -49- 54 salvage rights to the Items in the event of an Event of Loss affecting the Production Unit containing such Items shall remain with the Lessee or its insurers at all times. ARTICLE XXI Owner Trustee; Owner Participant SECTION 21.01. Successor Trustee; Co-trustee. In the case of the appointment of any successor trustee pursuant to the terms of the Trust Agreement, such successor trustee shall succeed to all the rights, duties, powers, and obligations of the Lessor hereunder and under the other Operative Documents and shall be deemed to be the Lessor and the legal owner of the Equipment for all purposes hereof and each reference herein and in the Operative Documents to the "Lessor" shall mean any such successor trustee. The Lessor or any successor trustee from time to time serving as the Lessor hereunder may from time to time appoint one or more co-trustees or separate trustees pursuant to the terms of the Trust Agreement to exercise or hold any of or all the rights, powers and title of the Lessor hereunder. No such appointment of any successor trustee, co-trustee or separate trustee shall require any consent or approval by the Lessee or shall in any way alter the terms of this Lease or the obligations of the Lessee or the Lessor hereunder. The appointment of one successor trustee, co-trustee or separate trustee shall not exhaust the right to appoint further successor trustees, co-trustees and separate trustees pursuant to the Trust Agreement, but such right may be exercised repeatedly so long as this Lease may be in effect. SECTION 21.02. Liabilities of Owner Participant. The Owner Participant shall not have any obligation or duty to the Lessee with respect to the transactions contemplated hereby except as specifically provided in the Operative Documents. Without limiting the generality of the foregoing, under no circumstances whatsoever shall the Owner Participant as such be liable to the Lessee for any action or inaction on the part of the Lessor in connection with the Operative Documents, the beneficial ownership of the Equipment, the administration of the Trust Estate or otherwise, whether or not such action or inaction shall be caused by the wilful misconduct or gross negligence of the Lessor unless the Owner Participant shall have specifically directed the Lessor to take such action and such direction shall constitute wilful misconduct or gross negligence by the Owner Participant other than in reliance on the wilful misconduct or gross negligence of the Lessor. SECTION 21.03. Owner Trustee Not Acting in Individual Capacity. The Lessee acknowledges that Fleet National Bank is entering into this Lease solely as the Owner Trustee and not, except as expressly provided herein or with respect to Lessor Liens attributable to it, in its individual capacity, and in no case whatsoever -50- 55 shall it (or any entity acting as successor Owner Trustee under the Trust Agreement) be personally liable for any loss in respect of any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, except that the Owner Trustee shall be liable, in its individual capacity, (a) for its own wilful misconduct or gross negligence; (b) in the case of the inaccuracy of any of its representations or warranties or the failure to perform any covenant of the Owner Trustee in its individual capacity contained in or referred to in Section 4.05 of the Participation Agreement or in Section 4.01 hereof; and (c) for the failure to use the degree of care and skill set forth in Section 6.01 of the Trust Agreement in the receipt and disbursement of moneys actually received by it under the Operative Documents. ARTICLE XXII Miscellaneous SECTION 22.01. Documentary Conventions. This Agreement shall be governed by the Documentary Conventions. SECTION 22.02. Revision of Lease Supplement. If this Lease has terminated with respect to some but not all of the Items as a result of (i) the termination of a Production Unit or any Item in accordance with Article VII, or (ii) an Event of Loss to any Production Unit with respect to which the Lessee elected the alternative described in Section 9.01(b)(ii), then the Lease Supplement shall automatically be revised as follows: Each installment of Basic Rent and Renewal Rent (if any), the EBO Price, the Initial Portion of the EBO Price, the Termination Value as of any Termination Value Date, and the Stipulated Loss Value as of any Stipulated Loss Value Date shall each be reduced to the amount determined by multiplying (i) the percentage for each such amount set forth in the applicable schedule to the Lease Supplement opposite the relevant date by (ii) the aggregate Lessor's Cost for all Items remaining subject to this Lease and the Lease Supplement. The Lessor and the Lessee agree to amend the Lease Supplement to reflect the revisions as soon as necessary or practical. The revisions shall take effect immediately, whether or not the Lease Supplement has been amended. -51- 56 IN WITNESS WHEREOF, the parties hereto have each caused this Lease Agreement to be duly executed as of the date first above written. FLEET NATIONAL BANK not in its individual capacity but solely as Owner Trustee, Lessor, By: /s/ K Larimore -------------------------------------------- Name: Kathy A. Larimore Title: Assistant Vice President RAYCHEM CORPORATION, Lessee, By: /s/ Lars Larsen -------------------------------------------- Name: Lars Larsen Title: Vice President and Treasurer Receipt of this original counterpart of the foregoing Lease Agreement is hereby acknowledged on this 11 day of April, 1996.(1) FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION Indenture Trustee, By: /s/ Nancy M Dahl -------------------------------------------- Name: Nancy M. Dahl Title: Assistant Vice President (1) This language is to be in the original counterpart only. -52- EX-10.Y 8 AGREEMENT BETWEEN RAYCHEM & MICHAEL T. EVERETT 1 EXHIBIT 10(y) [RAYCHEM CORPORATION LETTERHEAD] July 22, 1996 Mr. Michael T. Everett (Address deleted) Re: Agreement and Release Dear Mike: This letter is to confirm our agreement with respect to the termination of your employment with Raychem Corporation. To ensure that there are no ambiguities, this letter first explains in detail the rights and obligations of both you and Raychem Corporation upon termination of your employment. If, in exchange for a release, you wish to accept additional benefits to which you would not otherwise be entitled, indicate your agreement by signing, dating, and returning this letter to me no later than August 9, 1996. We have agreed that your employment with Raychem Corporation will end as of the end of the business day on December 31, 1996, or, if you elect to terminate your employment voluntarily before such date, such earlier date (the "Termination Date"). Thereafter, you will no longer be an employee of Raychem. In your final paycheck on the Termination Date, you will be paid all earned and unpaid salary together with any accrued and unused vacation pay, less deductions authorized or required by law. In addition, to induce Raychem to enter into this Agreement, you agree to enter into the Professional Services Agreement attached as Exhibit 2. You agree that the consideration named in this Agreement is sufficient to compensate you for the release given herein, as well as for any consulting services you may provide to Raychem pursuant to the Professional Services Agreement. You will also receive a severance amount equal to (i) fifty-two (52) weeks of salary, and (ii) upon your written request, up to an additional 52 weeks of salary (or, if you are working during such second fifty-two week period and your salary plus bonus from your new employer is less than Three Hundred Ten Thousand Dollars ($310,000), the difference between those two figures). Your written request to receive the second fifty-two (52) weeks of salary must be received by one year from the Termination Date, and must include your confirmation that you are not working or, if you are, what your base salary or base compensation and expected bonus are. You agree to notify Raychem in writing within five (5) days after any changes in such information. This severance benefit, minus deductions authorized or required by law, will be paid in bi-weekly installments beginning after the later to occur of (a) the eighth day after Raychem receives a signed copy of this Agreement, or (b) the Termination Date. Information on health coverage and COBRA conversion rights will be mailed to your home address. Your present Raychem medical, dental and life insurance benefits will remain in effect, at standard employee rates, until the earliest to occur of (I) two years after the Termination Date, or (ii) until you secure other employment which provides 2 RAYCHEM Michael T. Everett July 22, 1996 medical and dental insurance, or (iii) until your death, whichever occurs first. You agree to notify Raychem within five (5) days after securing other employment. For purposes of determining your eligibility for any benefits under COBRA, the "qualifying event" shall be deemed to be one year from the Termination Date, or if severance benefits are payable with respect to the second year, two years from the Termination Date. As you are leaving the company before age 55 and are vested in the Raychem Pension Plan, you will be offered the option of receiving your accrued benefit as an annuity or a lump sum in the first month of the second calendar quarter following your termination. If your pension benefit amount as a lump sum is less than $3,500.00, then it will be distributed to you without the option to decline. At any time after reaching retirement age (age 65 or older, or age 55 with ten or more years of service), you are eligible to receive your pension benefit as a normal or early retirement benefit; at your option, the payment can be in the form of an annuity or a lump sum. Raychem will also furnish to you through one year from the Termination Date, according to established Raychem practices and policies: - Financial planning services. - Continuation of vesting of options to purchase Raychem stock to the extent that such options are unvested. - The career transition services of de Recat & Associates, a professional outplacement firm, selected by Raychem to support and enhance your job search efforts. The services of de Recat & Associates shall also be made available to your wife up to a maximum cost to Raychem of Ten Thousand Dollars ($10,000.00). - Continued use of the computer you are bringing with you from Hong Kong. In addition, in lieu of any entitlement to use or transfer of a company vehicle, Raychem will pay to you on the Termination Date a lump sum of Ten Thousand Dollars ($10,000.00). For a transition period beginning upon your return to the United States, you will be entitled to the use of two vehicles to be provided by Raychem, one for a period of thirty days and the second through the Termination Date. You will continue to be considered a designated insider for purposes of trading in Raychem stock for a period of three months beginning on the Termination Date. Thereafter you will no longer be considered a designated insider. You agree that you will return all company property to Richard Kashnow or designee by the Termination Date. This includes but is not limited to all samples, cases, brochures, papers, notes, and other documents, and all copies thereof, relating to Raychem, its business, and its customers that have been obtained by you during your employment, together with other Raychem or Raychem-customer or supplier property in -2- 3 RAYCHEM Michael T. Everett July 22, 1996 your possession. In addition, please note that your obligations under the Proprietary Information Agreement still remain in effect. We have enclosed a copy of that agreement as Exhibit I for your reference. In order to prevent what you agree would otherwise result in the inevitable disclosure of Proprietary Information which would thereby cause irreparable harm to Raychem, you agree that for you will not, during the term of the Professional Services Agreement including any renewal, directly or indirectly, anywhere in the United States, including any county of the state of California, or in any foreign country in which, during such period, business is conducted by Raychem or substantial customers of Raychem are located, enter into or engage in any activity, as a sole proprietor, shareholder, employee, partner or otherwise, in any way be concerned with the design, development, use, manufacture and/or sale of any product or product line which is directly competitive with any product or product line which is manufactured and/or sold by Raychem as of the Termination Date. Raychem and you acknowledge that the provisions of this paragraph may or may not be enforceable under the laws of certain states and/or certain countries. Raychem and you intend that this paragraph be enforced, to the extent enforceable, in all jurisdictions worldwide in which Raychem currently does business, and that lack of enforceability in any one jurisdiction shall not impair enforcement in any other jurisdiction. Also, in consideration of an additional severance payment equivalent to one week of salary, less deductions authorized or required by law, you, on behalf of your heirs, spouse and assigns, hereby completely release and forever discharge Raychem from any claims, known or unknown, foreseen or unforeseen, arising under the Age Discrimination in Employment Act of 1967. Such additional severance payment shall be made at the conclusion of the period to which any other severance payments payable under this Agreement relate. Raychem is prepared to offer you the consideration set forth herein above and beyond the wages and benefits to which you would otherwise be entitled in exchange for your agreement to release all claims, known or unknown, against Raychem Corporation, its affiliates, and its past, present, and future officers, directors, shareholders, agents, employees, attorneys, insurers, successors, and assigns (collectively referred to as "Raychem"). You are not eligible to receive the additional consideration outlined herein unless you elect to sign this Agreement. In consideration, you, on behalf of yourself, your heirs, spouse, and assigns, hereby completely release and forever discharge Raychem from any and all claims, of any and every kind, nature, and character, known or unknown, foreseen or unforeseen, based on any act or omission occurring prior to the Termination Date, including but not limited to any claims arising out of your offer of employment, your employment, or termination of your employment with Raychem or acts leading up to such termination, and all claims under federal and state discrimination laws, including but not limited to claims arising under the Age Discrimination in Employment Act of 1967 and the California Fair Employment and Housing Act. The only exceptions are any claims that you may have for unemployment compensation, any rights that you may have under the Raychem Pension Plan, any Workers' Compensation benefits to which you may be found entitled, any claims -3- 4 RAYCHEM Michael T. Everett July 22, 1996 for amounts deferred pursuant to the Raychem Executive Deferred Compensation Plan, and any claims for indemnification, including any related insurance coverage, to which you may be entitled in connection with your service as an officer of Raychem Corporation. This Agreement fully and finally extinguishes and discharges all claims (except for unemployment, Pension Plan, Workers' Compensation, deferred compensation and indemnification claims discussed above), whether known or not, as provided by California Civil Code Section 1542. Section 1542 states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You agree to waive that right and affirm your intention to release not only claims known but those unknown to you which arose out of your employment with Raychem or its termination, and you do hereby release all such known and unknown claims. You fully understand that, if in fact with respect to any matter covered by this Agreement is found hereafter to be other than or different from the facts now believed by you to be true, you expressly accept and assume that this Agreement will be and remain effective, notwithstanding such difference in the facts. You agree neither to file nor to encourage or knowingly permit another to file any claim, charge, action, or complaint concerning any matter referred to in this release. If you have previously filed any such claims (other than Workers' Compensation claims), you agree to take all reasonable steps to cause them to be withdrawn without delay. This letter constitutes the entire agreement between yourself and Raychem with respect to any matters referred to in this letter and supersedes any and all of the other agreements between yourself and Raychem, except for the Proprietary Information Agreement attached hereto as Exhibit I and the Professional Services Agreement attached hereto as Exhibit 2, which remain in full force and effect; provided that, benefits or entitlements due to you with respect to your foreign service for Raychem pursuant to the agreement between you and Raychem dated April 15,1993, including in particular tax preparation and equalization with respect to your period of foreign assignment, shall not be affected. No other consideration, agreements, representations, oral statements, understandings, or course of conduct that are not expressly set forth in this document should be implied or are binding. You are not relying upon any other agreement, representation, statement, omission, understanding, or course of conduct that is not expressly set forth in this document. You understand and agree that this Agreement will not be deemed or construed at any time or for any purposes as an admission of any liability or wrongdoing by either yourself or Raychem. You also agree that if any provision of this Agreement is deemed invalid, the remaining provisions will still be given full force and effect. The terms and conditions of this Agreement will be governed by the laws of California applicable to contracts made and performed within California. -4- 5 RAYCHEM Michael T. Everett July 22, 1996 Prior to execution of this Agreement, you should apprise yourself of sufficient relevant information to intelligently exercise your own judgment. You are advised to consult an attorney. You may take at least twenty-one (21) days from your receipt of this letter to consider whether or not you wish to accept benefits described herein in exchange for this Agreement. Please also note that even if you do sign this Agreement, you may change your mind and revoke this Agreement and forego the additional benefits, provided that you notify me in writing, within seven (7) days after the date of your signing. You also understand and agree that if any suit is brought to enforce the provisions of the agreement in this letter, the prevailing party will be entitled to its costs, expenses, and attorneys' fees as well as any and all other remedies. In order to obtain the additional consideration described in this Agreement, this Agreement signed by you must be returned to Raychem by August 9, 1996. Finally, you agree that you will not disclose to anyone (except for your spouse, accountant, financial planner and/or lawyer) or allow anyone else to disclose the existence of, reason for, or contents of this letter without Raychem's prior written consent, unless required to do so by law. Sincerely, /s/ Richard A. Kashnow Richard A. Kashnow Chairman, Chief Executive Officer and President EMPLOYEE'S ACCEPTANCE OF AGREEMENT, RELEASE AND BENEFITS I HAVE CAREFULLY READ, FULLY UNDERSTAND, AND VOLUNTARILY AGREE TO ALL THE TERMS OF THIS AGREEMENT AND RELEASE IN EXCHANGE FOR THE ADDITIONAL BENEFITS TO WHICH I WOULD NOT OTHERWISE BE ENTITLED. THIS RELEASE IS EXECUTED VOLUNTARILY AND WITH FULL KNOWLEDGE OF ITS SIGNIFICANCE. August 6, 1996 /s/ Michael T. Everett - --------------------------------------- --------------------------- Date Michael T. Everett -5- 6 EXHIBIT 1 RAYCHEM PROPRIETARY INFORMATION AGREEMENT In partial consideration of my employment by Raychem Corporation, I agree as follows: 1. Confidentiality Obligation. I will hold all Raychem Proprietary Information in confidence and will not disclose, use, copy, publish, summarize, or remove from Raychem's premises any Proprietary Information, except (i) as necessary to carry out my responsibilities as an employee, and (ii) after termination, as specifically authorized in writing by an officer of Raychem. "Proprietary Information" is all information related to Raychem's business, unless: (i) the information is publicly known through lawful means; (ii) the information was rightfully in my possession prior to employment at Raychem; or (iii) the information is rightfully disclosed to me by a third party without restriction. 2. Information of Others. I will also treat information of parties with which Raychem does business as confidential to the same degree as if it were Raychem information. 3. Raychem Property. All data, records, drawings, files, documents, samples, products, and other materials, including copies, relating to Raychem's business that I posses as a result of my employment, whether or not confidential, are the sole and exclusive property of Raychem. In the event of the termination of my employment, I will deliver to Raychem all Raychem data, records, drawings, files, documents, sample, products, and materials, including copies. 4. Inventions. All inventions, improvements, know-how, processes, and techniques which result form work performed by me on behalf of Raychem or from access to Raychem Proprietary Information or property ("Inventions") shall be the property of Raychem. I will disclose promptly and in writing to the individual designated by Raychem or to my immediate supervisor all Inventions which I have made or reduced to practice. I agree to assign to Raychem, without further consideration, my entire interest in all Inventions, and Raychem shall be the sole owner of all patents and proprietary rights. I will assist Raychem (at Raychem's expense) to obtain and enforce patents and other forms of trade secret protection of Inventions. 5. Excluded Inventions. Attached is a list of all inventions which have been made or reduced to practice by me prior to my employment which I desire to exclude from this Agreement. If no list is attached to this Agreement, there are 1 7 EXHIBIT 1 no inventions to be excluded at the time of my signing of this Agreement. This Agreement also does not apply to any invention that qualifies under Section 2870 of the California Labor Code which reads: "Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: a) relate at the time of conception or reduction to practice of the invention to the employer's business or actual or demonstrably anticipated research or development of the employer, or b) result from any work performed by the employee for the employer." 6. Patent Applications. In the event of the filing of any original United States patent application covering any Invention of which I am a named inventor, I will receive an inventor's fee of $100. In the event that an application is filed with joint inventors, each inventor will receive $100. 7. Attorneys' Fees. In the event of litigation related to this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees and other costs. Either party may seek an injunction to restrain any breach of this Agreement by the other. MICHAEL T. EVERETT 81334 - ----------------------- ----------------------- Employee's Name (Print) Employee's Number /s/ Michael T Everett Date: 6/15/88 - ----------------------- Employee's Signature 2 8 EXHIBIT 2 PROFESSIONAL SERVICES AGREEMENT THIS AGREEMENT is effective as of January 1,1997, by and between RAYCHEM CORPORATION, a corporation organized and existing under and by virtue of the laws of the State of Delaware, having a place of business at 300 Constitution Drive, Menlo Park, California 94025 (hereinafter "RAYCHEM"), and Michael T. Everett of San Mateo, California (hereinafter "CONSULTANT"). NOW, THEREFORE, for and in consideration of the mutual covenants and obligations assumed by the parties hereto, it is agreed as follows: 1. CONSULTANT, pursuant to the provisions of this Agreement, is retained to perform services as reasonably requested from time to time by RAYCHEM, at such place or places and at such times as shall be mutually agreeable. The services shall be carried out at the direction of Richard A. Kashnow or his disignee. 2. As full and complete compensation for CONSULTANT's services and also for the discharge of CONSULTANT's joint and several obligations hereunder, RAYCHEM shall pay CONSULTANT the consideration named in the Agreement and Release between the parties, to which this Agreement is attached as Exhibit 2 (Agreement and Release). A. RAYCHEM shall reimburse CONSULTANT for the expense of round trip tourist class transportation, hotels and meals, reasonably incurred by CONSULTANT in connection with any trip made by CONSULTANT at the request of RAYCHEM, that have been preapproved by Richard A. Kashnow or designee. B. RAYCHEM shall reimburse CONSULTANT for any other reasonable expenses actually incurred which are incidental to the services performed hereunder. Expenses exceeding One Hundred Dollars ($100.00) must be approved in advance by Richard A. Kashnow or designee. Payment of CONSULTANT's invoice shall be made by RAYCHEM within thirty (30) days of receipt thereof. 3. CONSULTANT's relationship to RAYCHEM shall be that of an independent contractor and nothing in this Agreement shall be construed to create an employer-employee relationship. Since CONSULTANT will not be an employee of RAYCHEM, it is understood that CONSULTANT will not be entitled to any benefits under RAYCHEM's retirement, group insurance or medical plans or any other employee benefits except as expressly provided in the Agreement and Release. In the performance of all services hereunder CONSULTANT shall comply with all applicable laws and regulations. 4. RAYCHEM agrees that during the term of this Agreement, or any extension or renewal thereof, CONSULTANT may be employed by other persons, firms, or corporations. However, CONSULTANT recognizes the vital importance to RAYCHEM of the confidential status of any RAYCHEM proprietary information and in particular all RAYCHEM proprietary information pertaining to RAYCHEM. In any event, and in no way limited by the foregoing, CONSULTANT agrees that while obligated to perform services to RAYCHEM pursuant to this Agreement, CONSULTANT shall not, without 9 Professional Services Agreement - Michael T. Everett January 2, 1997 the prior written consent of RAYCHEM, directly or indirectly, anywhere in the State of California, or in any other State of the United States or in any other country in which during such period business is conducted by RAYCHEM or substantial customers of RAYCHEM are located, enter into or engage in any activity which is in directly competitive with any product or product line manufactured and/or sold by RAYCHEM as of December 31,1996. CONSULTANT further agrees that CONSULTANT shall not, either during the term of this Agreement and any extension thereof, or during a term expiring two (2) years after termination of this Agreement and any extension thereof, serve as an expert witness for, or advisor to any third party in connection with any litigation involving RAYCHEM without the express prior written consent of RAYCHEM. 5. CONSULTANT understands that RAYCHEM does not desire to acquire from CONSULTANT any secret or confidential know-how or information of CONSULTANT or which CONSULTANT has acquired or shall hereafter acquire from any third party. Accordingly, CONSULTANT represents and warrants that CONSULTANT is free to divulge to RAYCHEM, without any obligation to, or violation of any right of CONSULTANT or of others, any and all information, practices or techniques which CONSULTANT will describe, demonstrate, divulge, or in any other manner make known to RAYCHEM during CONSULTANT's performance of services hereunder. CONSULTANT hereby undertakes to exonerate, indemnify and hold harmless RAYCHEM from and against any and all liability, loss, cost, expense, damage, claims or demands for actual or alleged violation of the rights of CONSULTANT or of the rights of others whose secret or confidential know-how or information CONSULTANT has divulged to RAYCHEM in any trade secret, know-how or other confidential information by reason of RAYCHEM's receipt or use of the services or information described above, or otherwise in connection therewith. 6. As used in this Agreement, the term "Invention" means any and all discoveries, improvements, trade secrets, processes, techniques, copyrightable material, computer programs, formula, design and know-how, of any kind or nature, whether or not patentable, and whether or not related to RAYCHEM's business, and which are invented, conceived, discovered, developed or reduced to practice by CONSULTANT and which in any way result from or arise out of CONSULTANTS services hereunder and/or CONSULTANT's exposure to RAYCHEM's proprietary information pursuant to paragraph 7 of this Agreement. CONSULTANT agrees that CONSULTANT will promptly and fully disclose to RAYCHEM all Inventions. CONSULTANT also agrees to and hereby does assign to RAYCHEM all right, title and interest in and to all Inventions and CONSULTANT represents and warrants that CONSULTANT has no contractual or other obligations to any third party which preclude or in any way encumber CONSULTANT's right to assign to RAYCHEM the full and exclusive right, title and interest in and to any and all Inventions. It is further understood and agreed that all Inventions will be and remain the property of RAYCHEM whether or not disclosed, assigned or patented. CONSULTANT shall, if RAYCHEM shall so request, assist RAYCHEM in every proper way (entirely at the expense of RAYCHEM) to obtain for the sole benefit of RAYCHEM patents on Inventions in any and all countries. RAYCHEM shall compensate -2- 10 Professional Services Agreement - Michael T. Everett January 2, 1997 CONSULTANT at a reasonable rate for time actually spent by CONSULTANT at RAYCHEM's request on such assistance. The decision to file (or not to file) and/or continue to prosecute a patent application or applications on any Inventions shall be in RAYCHEM's sole discretion. 7. The parties hereto acknowledge that during the course of CONSULTANT's service to RAYCHEM pursuant to this Agreement it may be necessary or desirable for RAYCHEM to disclose to CONSULTANT significant RAYCHEM proprietary information. Any information imparted to RAYCHEM in confidence by a third party shall be deemed for purposes of this Agreement to constitute RAYCHEM proprietary information. CONSULTANT fully understands that the maintenance of RAYCHEM's proprietary information in strict confidence and the confinement of its use to RAYCHEM is of vital importance to RAYCHEM. CONSULTANT therefore agrees that all information and knowledge divulged to CONSULTANT by RAYCHEM or which CONSULTANT acquires in connection with or as a result of CONSULTANT's services hereunder shall be regarded and treated by CONSULTANT as confidential. Without limiting the generality of the foregoing, CONSULTANT recognizes that, unless and until published, all features of the materials, apparatus, process and application methods heretofore or hereafter used or developed by RAYCHEM shall be regarded and treated by CONSULTANT as a trade secret of RAYCHEM. CONSULTANT shall not use, nor shall CONSULTANT disclose, any such information or knowledge to any person either during or after the term of this Agreement, except only to those employees of RAYCHEM as may be necessary in the regular course of CONSULTANT's duties hereunder, or except as otherwise authorized in writing by RAYCHEM, unless such information or knowledge are, or become, publicly known through no act or omission of CONSULTANT. 8. CONSULTANT recognizes that all records and copies of records, drawings, models, apparatus, samples and the like which in any way relate to RAYCHEM's technology, operations, investigations and business, and which are made or received by CONSULTANT during the term of, or otherwise pursuant to, this Agreement are and shall remain the exclusive property of RAYCHEM. CONSULTANT shall keep such records and/or copies thereof at all times in CONSULTANT's custody and subject to CONSULTANT's control, and shall surrender the same to RAYCHEM immediately upon the request of RAYCHEM. 9. CONSULTANT hereby undertakes to exonerate RAYCHEM, its officers, agents and employees from and against any and all liability, loss, cost, damage, claims, demands for expenses of every kind on account of any injuries (including death) to CONSULTANT or loss of or damage to CONSULTANT's property arising out of or resulting in any manner from or occurring in connection with CONSULTANT's performance of services hereunder, except only if caused solely by the negligence of RAYCHEM or its servants or employees. 10. CONSULTANT shall not assign this Agreement or any part thereof without RAYCHEM's prior written consent, and any such purported assignment shall be void. This Agreement shall be binding on CONSULTANT's heirs, executors, legal representatives and permitted assigns and shall inure to the benefit of RAYCHEM's subsidiaries, -3- 11 Professional Services Agreement - Michael T. Everett January 2, 1997 successors and assigns. If any provision, paragraph, subparagraph, or clause, or any part thereof of this Agreement shall be found invalid or unenforceable under any applicable law or regulation, such provision, paragraph, subparagraph, or clause, or part thereof, shall be deemed inoperative and shall not affect the remainder of the Agreement and the Agreement shall be construed as if such invalid portion had never been included. 11. This Agreement shall be effective as of the date first written above and shall terminate on December 31, 1997. This Agreement will be subject to a one year renewal at RAYCHEM's option, which renewal shall be automatic if, and extend for the period that, CONSULTANT continues to receive compensation from RAYCHEM pursuant to the Agreement and Release. Any act or omission by CONSULTANT constituting a material breach of this Agreement shall subject this Agreement to termination immediately by RAYCHEM for good cause and shall automatically suspend all RAYCHEM's obligations to perform hereunder so long as CONSULTANT is in breach hereof. This Agreement shall terminate automatically in the event of CONSULTANT's death or inability for any reason to perform the services contemplated herein. On termination of this Agreement, for any reason, RAYCHEM's obligation to pay any compensation, except for services or expenses already properly accrued or incurred, shall forthwith cease and terminate. Termination of this Agreement for any reason shall not affect CONSULTANT's obligations under Paragraphs 4 through 9, inclusive, hereof. CONSULTANT represents and warrants that CONSULTANT has or will promptly obtain an agreement containing provisions equivalent in all material respects to the provisions contained in Paragraphs 4 through 9, inclusive, hereof with all agents, employees or associates of CONSULTANT who will be in any way involved either with RAYCHEM proprietary information or otherwise in connection with the services being performed hereunder. The obligations undertaken by CONSULTANT pursuant to Paragraphs 4 through 9, inclusive, hereof shall extend to the subsidiaries and affiliates of RAYCHEM and to its predecessors and successors in interest. CONSULTANT shall have the right to terminate this Agreement in the event that RAYCHEM does not pay any invoice of CONSULTANT pursuant to terms of this Agreement. 12. Any notices or communications hereunder shall be effective only if in writing, addressed as follows: If to RAYCHEM: RAYCHEM CORPORATION Attn: Richard A. Kashnow 300 Constitution Drive Menlo Park, California 94025-1164 with a copy to: RAYCHEM CORPORATION Attn: Legal Department MS 120/8502 300 Constitution Drive Menlo Park, California 94025-1164 -4- 12 Professional Services Agreement - Michael T. Everett January 2, 1997 If to CONSULTANT: Michael T. Everett (Address deleted) 13. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. 14. This Agreement, together with the Agreement and Release, is the entire contract of the parties and supersedes any prior agreements between the parties. Any changes in or modifications of this Agreement shall be effective only if in writing and signed by the parties hereto. CONSULTANT represents that in entering into this Agreement, CONSULTANT has not relied on any previous oral or implied representations, inducements or understandings of any kind or nature whatsoever. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the day and year written on the first page hereof. RAYCHEM CORPORATION by: by: /s/ Richard A Kashnow ------------------------------------- Richard A. Kashnow Title: Chairman, Chief Executive Officer and President ------------------------------------ Date: ------------------------------------- CONSULTANT by: /s/ Michael T Everett ------------------------------------- Michael T. Everett Social Security No.: (Social security number deleted) ------------------------------------- Date August 6, 1996 ------------------------------------- Department/Account to charge: Approved as to legal form - ------------- Atty: FAMB -5- EX-13 9 PORTIONS OF THE 1996 ANNUAL REPORT 1 ============================================================================= FINANCIAL REVIEW - ----------------------------------------------------------------------------- RESULTS OF OPERATIONS - ----------------------------------------------------------------------------- OVERVIEW
- ----------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (in millions, except per share data) - ----------------------------------------------------------------- Revenues $1,672 $1,531 $1,462 - ----------------------------------------------------------------- Net income (loss) 148 (29) 2 - ----------------------------------------------------------------- Net income (loss) per common share $ 3.22 $ (0.67) $ 0.04 - -----------------------------------------------------------------
The company reported record revenues of $1.7 billion and record earnings of $148 million for 1996, with profits up significantly from 1995 and 1994. Revenues in 1994 included $58 million in revenues from Raynet Corporation and subsidiaries (Raynet). Raynet was consolidated prior to 1995 when it was a wholly owned Raychem subsidiary. On November 16, 1994, the company formed a joint venture, Ericsson Raynet, with LM Ericsson, a Swedish telecommunications company. Consequently, Raychem changed its Raynet accounting in 1995 from consolidation to the equity method. Raychem's equity in net losses of affiliated companies for 1995 includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raynet's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995 (in the notes to consolidated financial statements see "Raynet" for details on the transaction and loss allocations and see "Investments" for summarized financial information). Raynet's pretax loss for 1995 of $118 million included a $28 million loss on formation of the Ericsson Raynet joint venture, equity in net loss of $86 million, and $4 million of other Raynet items. Raychem's equity in Ericsson Raynet's net loss for 1996 was $30 million and represents Raychem's share of losses through December 31, 1995, in accordance with the previously agreed upon loss allocation formula. During the third quarter of 1996, Raychem and LM Ericsson amended their joint venture agreement resulting in a reorganization of Ericsson Raynet. Following the reorganization, effective January 1, 1996, Raychem's interest in the joint venture is accounted for using the cost basis of accounting, and Raychem no longer shares in the ongoing operating losses of the joint venture. The reorganization of Ericsson Raynet resulted in a $2 million charge in 1996 (see "Raynet" in the notes to consolidated financial statements for details on the reorganization). Several unusual transactions affected core business results during the last three years ("core business" refers to the company's business segments -- electronics, industrial, and telecommunications -- and corporate groups). Core business pretax income for 1996 included a $44 million provision for restructuring and divestitures, as well as other charges of $18 million for severance and other costs. In addition, pretax income included a $7 million gain from an insurance settlement arising from a previous shareholder lawsuit, and a gain of $3 million from the sale of the company's shape memory metals components business. Results for 1995 included a pretax charge of $24 million for restructuring and divestitures, a gain of $5 million from the sale of the company's minority interest in Menlo Care, Inc., and charges of $9 million for severance and other costs. Results for 1994 included charges of $6 million for plant consolidation and severance costs. Excluding these transactions and the effect of Raynet items, Raychem's "ongoing" pretax income was $230 million in 1996, compared to $146 million in 1995 and $143 million in 1994. [CHART OMITTED] 12 2 Raychem's results for the past three years are summarized as follows:
- ------------------------------------------------------------------------------------------------------------ YEARS ENDED JUNE 30 (in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Core business "Ongoing" pretax income $230 $146 $143 Provision for restructuring and divestitures (44) (24) - Insurance settlement 7 - - Gain on sale of assets 3 5 - Severance, plant consolidation, and other charges (18) (9) (6) - ------------------------------------------------------------------------------------------------------------ Core business pretax income 178 118 137 Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items (2) (32) - Equity in net loss of Ericsson Raynet (30) (86) - Raynet pretax loss - - (103) - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes, extraordinary item, and change in accounting principle 146 (0) 34 Provision (credit) for income taxes (2) 21 32 - ------------------------------------------------------------------------------------------------------------ Income (loss) before extraordinary item and change in accounting principle 148 (21) 2 Extraordinary item - (6) - Change in accounting principle - (2) - - ------------------------------------------------------------------------------------------------------------ Net income (loss) $148 $(29) $ 2 - ------------------------------------------------------------------------------------------------------------
Income taxes in 1996 were a net credit of $2 million, compared to a provision of $21 million in 1995 and $32 million in 1994. The credit for income taxes in 1996 arose due to the utilization of prior year U.S. tax deductions and a tax benefit due to the company's reassessment of the valuation of its deferred tax asset, which was based on the favorable impact on U.S. taxable income of the Ericsson Raynet reorganization, strengthening business in the United States, and the tax effect of a lease financing. The provision for income taxes results primarily from profitable non-U.S. operations. The provision for income taxes in 1995 was lower than in 1994 due to the recognition of tax benefits related to restructuring, severance, and other costs, and lower profits in certain non-U.S. subsidiaries. The results for 1995 include an extraordinary loss of $6 million, or $0.15 per share, for the early retirement of debt following payment by the company of its 9.55% privately placed senior notes. For details, see "Extraordinary Item -- Loss Related to Early Retirement of Debt" in the notes to consolidated financial statements. In addition, the company adopted, effective July 1, 1994, Financial Accounting Standards Board (FASB) Statement No. 112, "Employers' Accounting for Postemployment Benefits." This statement changed the method of accounting for certain postemployment benefits from a cash basis to an accrual basis. The cumulative effect of this accounting change was a charge of $1 million, or $0.03 per share. The following discussion of the results of operations is based on the core business. CORE BUSINESS OPERATIONS REVENUES AND GROSS PROFIT
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Revenues $1,672 $1,531 $1,404 - ------------------------------------------------------------- Constant currency growth 8% 4% 7% - ------------------------------------------------------------- Gross profit as a percent of revenues 51% 50% 50% - -------------------------------------------------------------
Core business revenues increased 9% in reported currencies in each of the past two years as compared to the prior year. Revenues would have increased 8% from 1995 to 1996, and 4% from 1994 to 1995, if foreign currency exchange rates had remained constant in those years. Gross profit as a percent of revenues for the company's core business was 51% in 1996, up from 50% in 1995 and 1994, due principally to the benefits of past restructuring actions. ELECTRONICS
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Revenues $671 $611 $522 - ------------------------------------------------------------- Constant currency growth 10% 13% 6% - -------------------------------------------------------------
13 3 Revenues in the electronics business segment were $671 million in 1996, up 10% in both reported and constant currency terms from 1995. Revenues in the Electronics Division (which consolidates the combined operations of the former Thermofit, Wire and Cable, and Devices/ICD business units) were up sharply and accounted for the majority of the segment's growth. The segment had good growth in all geographic regions, although Europe was slowed by lower PolySwitch sales. Despite a 25% unit volume growth, PolySwitch Division revenues were up only 2% as planned price reductions impacted revenue. The PolySwitch Division expects to reduce prices more modestly in 1997. Elo TouchSystems experienced strong growth in sales of its touchscreen products. Gross profit as a percent of revenues for the electronics business segment remained essentially unchanged. Revenues in 1995 were $611 million, up 17% from 1994, although growth on a constant currency basis was 13%. In 1995, decreases in worldwide defense sales were more than offset by increases of more than 30% in sales of PolySwitch devices and touchscreen products, and continued growth in sales to the automotive market by the Electronics Division. Elo TouchSystems experienced strong growth as a result of large contracts with major equipment manufacturers deploying new point-of-sale and public interactive systems. Prices generally declined in many of the segment's markets, with PolySwitch decreasing its prices substantially from those of the prior year while increasing its sales in all geographic regions. Gross profit as a percent of revenues remained essentially unchanged, despite the decrease in prices, reflecting primarily higher volumes and manufacturing efficiencies. INDUSTRIAL
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Revenues $542 $499 $452 - ------------------------------------------------------------- Constant currency growth 6% 5% 8% - -------------------------------------------------------------
Revenues in the industrial business segment for 1996 grew 9% in reported terms, with constant currency growth of 6%. The segment's growth was led by the Electrical Products Division, which had broad revenue growth in all geographic regions. The new Chemelex business unit, which now includes the former Ultratec Division, reported higher sales of heat-tracing products, while sales of corrosion protection products were essentially flat. Compared to 1995, Chemelex revenues in North America were down, which more than offset sales improvements by Electrical Products in the region. Prices were slightly lower in 1996 in many of the segment's markets. Gross profit as a percent of revenues improved slightly, primarily reflecting the benefits of current and prior year cost-reduction activities. Segment revenues for 1995 grew 11% from 1994, while constant currency growth for the segment was 5%. The segment's Electrical Products Division increased sales in North America, Europe, and Latin America. Revenues were also up for Chemelex, notably in North America. Revenues were down sharply in Ultratec, the segment's pipeline accessory division, which had benefited in 1994 from major pipeline projects. Prices remained generally unchanged in most of the segment's markets. Gross profit as a percent of revenues was also unchanged as improved revenues and profitability in the Electrical Products and Chemelex divisions offset the effects of revenue declines in Ultratec. TELECOMMUNICATIONS
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Revenues $459 $420 $430 - ------------------------------------------------------------- Constant currency growth 8% (5%) 6% - -------------------------------------------------------------
Revenues in the telecommunications business segment grew 9% in reported terms to $459 million in 1996, an 8% constant currency increase over a relatively weak 1995. Sales of Miniplex products in North America were up strongly from year-ago levels. The segment also had strong growth in Latin America, notably in Peru where the division won several large projects, while revenues actually declined in Europe. The segment continued to experience a shift in product mix away from its traditional copper closure business to lower-margin fiber, coaxial, and active electronics products. In addition, prices generally declined in many of the segment's markets in 1996. Despite the price and margin impacts, gross profit as a percent of revenues increased nearly two percentage points, reflecting the benefits of past restructuring actions. Revenues declined to $420 million in 1995, down 2% from 1994 as reported, and down 5% on a constant currency basis. Revenues were up in North America, but down in Europe and Asia and unchanged in Latin America. The discontinuance of unprofitable product lines and a general market shift away from the copper telephony network accounted for the revenue decline. While the segment introduced new products into other market segments of the outside plant network, sales of the new products, which carry lower margins, were not yet sufficient to offset the decline in sales of copper closures. Prices generally declined across the world in the copper segment as competitive pressures increased. Gross profit as a percent of revenues remained 14 4 unchanged because previous restructuring actions reduced the impact of lower sales levels and prices. The declining copper closure business and increasing competition has led the segment not only to reduce overall resources, but also to shift its resources to focus on the growing parts of the telecommunications business. PROVISION FOR RESTRUCTURING AND DIVESTITURES Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify operations and reduce costs. The charge impacted operating income of the company's business segments as follows: electronics -- $14 million; industrial -- $21 million; telecommunications -- $7 million; and corporate -- $2 million. The restructuring charge included $38 million for employee severance costs. Approximately 700 positions will be eliminated by the end of calendar 1996, some portion of which may be replaced elsewhere. The bulk of these actions affects Europe where the company's manufacturing and support operations in Belgium, France, and the United Kingdom have been reconfigured. In addition, a variety of other restructuring actions at both divisional and corporate levels took place throughout Raychem's worldwide organization. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. The segment's restructuring charge included $13 million for severance costs related to a net workforce reduction of 340 employees, resulting from the closure of telecommunications' manufacturing operations in Germany and the restructuring of its North American activities. The remaining charge of $11 million related to plant consolidations and the shutdown of unprofitable product lines. The charge, excluding $8 million of asset writedowns, was cash in nature and was primarily incurred in 1995 and funded through operating cash flow. The restructuring was substantially completed by June 30, 1995. The actions resulted in approximately $24 million of annualized savings, which were realized in 1996; approximately $10 million of savings were realized in 1995. Substantially all of the savings are cash related. See "Restructuring and Divestitures" in the notes to consolidated financial statements for further details on the restructuring reserves and the nature of the 1996 and 1995 provisions for restructuring and divestitures. RESEARCH AND DEVELOPMENT EXPENSE
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Research and development (R&D) expense $122 $119 $95 - ------------------------------------------------------------- R&D as a percent of revenues 7% 8% 7% - -------------------------------------------------------------
Raychem continues to substantially invest in product development. R&D expense for the core business totaled $122 million in 1996, up slightly from 1995. The increase of R&D expense as a percent of revenues in 1995 primarily reflects increased development spending. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
- ------------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------- Selling, general, and administrative (SG&A) expense $508 $496 $453 - ------------------------------------------------------------- SG&A expense as a percent of revenues 30% 32% 32% - -------------------------------------------------------------
For the core business, SG&A expense as a percent of revenues declined to 30% in 1996, down from 32% in 1995 and 1994. SG&A expense in 1996 also includes $12 million of severance and other costs incurred during the year. The reduction in SG&A costs as a percent of revenue is largely the result of restructuring and other actions taken in the current and prior year to reduce operating costs. Management is focused on further reducing SG&A costs as a percent of revenue. OTHER (INCOME) EXPENSE, NET Other (income) expense, net, consists primarily of net foreign exchange gains and losses, bank charges, gains and losses on the disposition of fixed assets and investments, and certain other nonoperating items. Other (income) expense, net, was net income of $3 million in 1996, and net expense of $4 million in 1995 and $8 million in 1994. The decrease from 1994 to 1995 was due principally to the $5 million gain from the sale of the company's minority interest in Menlo Care, Inc. The decrease from 1995 to 1996 was due principally to the $7 million insurance settlement, the $3 million gain from the sale of the shape memory metals components business, and lower foreign exchange losses. 15 5 NEW ACCOUNTING STANDARDS In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." For a description, see the notes to consolidated financial statements. This statement must be adopted by the first quarter of fiscal 1997. The company has determined that its adoption will have no impact on the company's results of operations or financial condition. In October 1994, the FASB issued Statement No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which the company adopted in the second quarter of 1995. For required disclosures, see "Financial Instruments" in the notes to consolidated financial statements. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- At June 30, 1996, the company had $224 million in cash and cash equivalents, $305 million in committed credit facilities (of which $6 million were utilized), and $180 million in various uncommitted credit facilities (of which $46 million were utilized). The combination of cash and cash equivalents, available lines of credit, and future cash flows from operations are expected to be sufficient to satisfy substantially all of the company's needs for working capital, normal capital expenditures, planned debt repayments, and anticipated dividends. The following table presents certain measures of liquidity and capital resources:
- -------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - -------------------------------------------------------- Debt net of cash $79 $175 $197 - -------------------------------------------------------- (Decrease) increase in debt net of cash $(96) $(22) $ 56 - -------------------------------------------------------- Debt net of cash as a percent of stockholders' equity 9% 23% 27% - -------------------------------------------------------- Days of sales outstanding 60 61 65(a) - -------------------------------------------------------- Days of inventory on hand 104 109 114(a) - --------------------------------------------------------
(a)Excludes Raynet The $96 million decrease in debt net of cash in 1996 resulted primarily from improved profitability and increased cash flow from operations as well as reduced funding requirements for Raynet losses. The $22 million decrease in debt net of cash in 1995 resulted primarily from reduced funding requirements for Raynet losses, cash proceeds from the Ericsson Raynet joint venture transaction, and proceeds from the sale of a minority interest in Menlo Care, Inc., partially offset by the company's repurchase of its Common Stock. Inventory as measured by the number of days of inventory on hand improved in 1995 and 1996, reflecting ongoing efforts by the company to reduce the number of locations holding inventory and the levels of inventory being held. The table below summarizes the company's cash flows from operating, investing, and financing activities:
- -------------------------------------------------------- YEARS ENDED JUNE 30 1996 1995 1994 (dollars in millions) - -------------------------------------------------------- Cash provided by (used in): Operating activities $224 $129 $26 Investing activities (101) (112) (99) Financing activities (11) 18 18 Effect of exchange rate changes on cash and cash equivalents (6) 5 (1) - -------------------------------------------------------- Increase (decrease) in cash and cash equivalents $106 $ 40 $(56) - --------------------------------------------------------
OPERATING ACTIVITIES The increase in cash flows from operations in 1996 resulted primarily from improved profitability, while the 1995 improvement largely reflects the change to the equity basis of accounting for Raynet losses. In 1996 the company recorded a $44 million provision for restructuring and divestitures. At June 30, 1996, approximately $26 million of accrued severance liability remains, which is expected to be substantially paid in cash in 1997. Also, in 1996 the company began to recognize deferred tax benefits, a portion of which are not expected to generate cash flow benefits until 1997 and beyond. INVESTING ACTIVITIES Cash used in investing activities is substantially unchanged. Capital expenditures as a percent of revenues were 5% in 1996, down slightly from 6% in 1995 and 7% in 1994. Investments in property, plant, and equipment totaled $79 million, $94 million, and $104 million in 1996, 1995, and 1994, respectively. Capital expenditures in 1996 decreased compared to the past two years, when the company had significant capital expenditures for manufacturing facilities in Japan, the People's Republic of China, and Mexico. Capital 16 6 expenditures in 1997 are expected to be about the level of 1996 and consistent with the company's annual depreciation and amortization expense. In November 1994, the company completed the transactions related to the formation of the Ericsson Raynet joint venture. In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to LM Ericsson in exchange for $40 million in cash. In January 1995, the company entered into a revolving credit agreement with the joint venture. Through June 30, 1995, the company made net advances to Ericsson Raynet of $62 million, of which $4 million was under the above credit agreement and the remaining $58 million was capitalized as an investment in the joint venture. In 1996, the company made advances to Ericsson Raynet of $23 million under this credit agreement, increasing the amount due to the company to $27 million. As a result of the reconfiguration of the Ericsson Raynet partnership, Raychem converted the amount due under the revolving credit agreement to capital. Raychem subsequently terminated the revolving credit agreement. BellSouth Enterprises Inc. (BSE) had financed a portion of the software development work at Raynet and held a royalty interest in the software-related revenues of Raynet. With the creation of the joint venture, this royalty payment was reconfigured. Raychem made two payments to BSE of $10 million each in November 1994 and 1995, and is required to make one additional payment of $10 million in November 1996. BSE will be entitled to receive a portion of any income allocation that Raychem is entitled to receive as a result of the reconfigured Ericsson Raynet partnership agreement (see "Raynet" in the notes to consolidated financial statements for further details). In the fourth quarter of fiscal 1995, the company sold its minority interest in Menlo Care, Inc. for cash and common stock of Johnson & Johnson. A portion of the stock received was sold during the quarter, with the balance sold in 1996. In the fourth quarter of 1996, the company sold its shape memory metals components business to Memry Corporation. The cash proceeds from these transactions amounted to $4 million in 1995 and $7 million in 1996. FINANCING ACTIVITIES In February 1991, the company entered into a $210 million privately placed debt agreement. In December 1992, the company entered into an interest rate swap agreement with a financial institution, which effectively converted $100 million of notional principal amount from a fixed to a floating interest rate. The effect of this interest rate swap was to reduce net interest expense in 1994 by $1 million. In December 1993, the company terminated the swap agreement. The termination resulted in a gain of $3 million, which was deferred, to be amortized over the remaining life of the hedged debt. On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes, resulting in an extraordinary loss, which included recognition of the remaining deferred gain on the termination of the interest rate swap. In September 1994, the company entered into syndicated loan agreements providing for a five-year partially amortizing term loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. Interest on the term loan and revolving credit facility are at variable spreads over LIBOR. Proceeds from the term loan were drawn on November 1, 1994, and used to retire the 9.55% privately placed senior notes and for general corporate purposes, while the revolving credit facility replaced existing committed credit facilities. The syndicated loan agreements include covenants that, among other things, specify a minimum net worth requirement, a maximum leverage limit, a minimum fixed charge coverage ratio, and limits on further advances to fund Raynet operations. On September 28, 1995, the company amended its syndicated loan agreements. The revolving credit facility was increased to $250 million and extended to a term of four years. Variable pricing terms for both the term loan and revolving credit facility were improved, and certain restrictive covenants were relaxed. In April 1996, the company entered into a lease financing secured by the majority of its manufacturing equipment in the United States. The company has the option of terminating the transaction for a fixed amount in 10 years. The arrangement is accounted for as 10-year partially amortizing secured debt with interest that varies periodically with LIBOR. Cash proceeds from the financing were approximately $113 million and were used in roughly equal portions to reduce long-term debt and for other corporate purposes. The arrangement lowers the company's long-term borrowing costs. A portion of the above financing proceeds was used to prepay $57 million of the outstanding term loan principal in May 1996. An additional $50 million of the term loan was prepaid in June 1996. At June 30, 1996, $118 million of the term loan principal remained unpaid and was classified as "Current maturities of long-term debt"; the company prepaid $50 million of this balance in July 1996 and prepaid the remainder of the term loan in August 1996. 17 7 Net interest expense was $10 million in 1996, compared to $13 million in 1995 and 1994. The decrease in 1996 resulted from higher interest income on larger cash balances and lower interest costs due to the effect of declining interest rates on variable rate debt. While debt was higher in 1995 versus 1994, net interest expense was unchanged due to lower interest costs resulting from the refinancing of the company's debt. In December 1994, the board of directors authorized the repurchase, at management's discretion, of up to 1.5 million shares of the company's stock during any one fiscal year. Shares repurchased under this authorization were used to offset the dilution caused by the company's employee stock plans. The company repurchased 1.5 million shares in 1996 at a cost of $95 million. In 1995, the company repurchased 700,000 shares at a cost of $26 million. In April 1996, the board of directors increased management's authorization to repurchase up to 2.0 million shares of the company's stock during any one fiscal year, effective July 1, 1996. In addition, management may elect to repurchase, in unusual circumstances, an additional 0.5 million shares in a fiscal year. Proceeds from the issuance of Common Stock to employees participating in the company's employee stock purchase plan and stock option plans amounted to $81 million in 1996, up substantially from $40 million in 1995. The increase was principally due to higher stock option exercises precipitated by increases in Raychem's share price during the year. The company's quarterly cash dividend has been paid consistently since the second quarter of 1978. In the third quarter of 1996, the quarterly dividend was increased 25% to $0.10 per share. During 1996, the company paid $16 million in dividends to its stockholders, and expects to continue to pay dividends in the foreseeable future. - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS AND RISK FACTORS - -------------------------------------------------------------------------------- Forward-looking statements made in this Financial Review and elsewhere in this annual report are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including those discussed below. The 1996 restructuring charges, excluding net asset writedowns of $4 million, are cash in nature and are expected to be substantially incurred over the next 12 months and funded through operating cash flow. The company expects that the restructuring charges will be recovered within 18 to 24 months through lower operating costs. When fully implemented, the annual run-rate savings is expected to be in the $35-$40 million range; substantially all of the savings are cash related. These restructuring actions reflect complex changes that will affect the company's worldwide operations. Timelines could be longer than anticipated and implementation difficulties or market factors could alter the estimated benefits. The company continues to work to improve operational efficiency in all areas of the company and to reduce SG&A costs. For example, the company is redesigning worldwide logistics operations and is examining manufacturing operations to achieve efficiencies through sharing of "back end" resources. Reviews continue and further actions may yet be identified that could result in additional charges in the future. The company's operating results and financial condition could be adversely affected by its ability to effectively manage the transition to the new organizational and operating structures and to the outsourcing of some activities. There can be no assurance that the company will be successful in achieving its goals or that it will be able to do so without unintended adverse consequences. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. Commitment to continued research and development and the acquisition of new or compatible technologies and businesses continue to be an important part of the company's strategy. In addition, the company may enter into arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. The success of the research and development efforts, acquisitions of new technologies and products, or arrangements with third parties is not always predictable and there is no assurance that the company will be successful in realizing its objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions. As a result of the Ericsson Raynet reorganization, effective January 1, 1996, Raychem no longer shares in the ongoing operating losses of the joint venture. While there is the potential for some future charges related to warranty claims, the company believes that Ericsson Raynet's existing warranty reserves are adequate. The income tax provision is determined by the level of profitability and the tax jurisdiction in which profits are generated. The geographic distribution and level of profitability is difficult to predict and may vary from forecasts which could result in changes in the estimated annual effective tax rate during the fiscal year. In addition, the company has a deferred tax asset valuation allowance that 18 8 is primarily attributable to U.S. federal and state deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient future U.S. taxable income to utilize deductions and credits prior to their expiration. Management believes sufficient uncertainty exists regarding the realization of these deferred tax assets that a valuation allowance is required. The amount of the valuation allowance will be reassessed in future periods and may be reduced further dependent on U.S. taxable income. Any such adjustment would also impact the income tax provision. The company has manufacturing facilities in many countries and is subject to environmental regulations. These regulations, and any changes in them, can affect the company's manufacturing processes as well as the cost, availability, and use of raw materials. Although compliance with such environmental regulations has not had a material effect on capital expenditures or operating results in the past, there is no assurance that any such regulations or changes in regulations will not have a material adverse effect on future capital expenditures or operating results. In the past, supplies of certain raw materials the company uses have become limited, and it is possible that this may occur again in the future. Should it occur, it could result in increased prices, rationing, and shortages. In response, the company tries to identify alternative materials and technologies for such raw materials or other sources of supply. Although the effect in the past has not been material, such situations could adversely affect financial results. From time to time, the company and/or its subsidiaries become involved in lawsuits arising from various types of commercial claims, including, but not limited to, product liability, unfair competition, breach of contract, and intellectual property matters. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. Litigation tends to be unpredictable and costly. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. Over half of the company's revenues result from sales outside the United States and the company also has several production facilities located outside the United States. The company's financial results can be adversely affected by changes in foreign currency rates, changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest overseas. These effects may be mitigated by the global nature of both the company's sales and production activities. The company has a substantial investment in intellectual properties -- consisting of patents, trademarks, copyrights, and trade secrets -- and relies significantly on the protection these intellectual property rights provide. Accordingly, the company aggressively protects these rights and may become involved in issues of infringement or theft by third parties from time to time and related counterclaims by such third parties. The company may also become involved as a defendant in intellectual property lawsuits. Litigation can be unpredictable and costly. While it is doubtful that an unfavorable resolution of any such dispute would have a material adverse effect on the company's financial condition, it is possible that an unfavorable outcome could be material. The company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against potential loss exposures. To the extent that losses occur, there could be an adverse effect on the company's financial results depending on the nature of the loss, and the level of insurance coverage maintained by the company. From time to time, the company may reevaluate and change the types and levels of insurance coverage that it purchases. A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. In the event of a major earthquake, the ultimate impact on the company, significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected. The company is predominantly not insured for losses and interruptions caused by earthquakes. Many of the company's products are sold in competition with other products or technologies. Actions of competitors could affect the company's operating results. For example, several companies have announced intentions to begin marketing in fiscal 1997 PPTC circuit protection devices similar to some of the PolySwitch Division's products. In addition, operating results are subject to fluctuations in demand and the seasonal activity of certain product lines. A shortfall in revenue could also result from a number of other factors, including but not necessarily limited to, overall economic conditions, lower than expected demand, or supply constraints. In addition, changes in geographic or product mix may impact gross profits. A substantial amount of the company's revenues are realized through orders and shipments booked within a quarter, and the backlog at the end of any quarter may not be predictive of the financial results for the next quarter. 19 9 The company periodically identifies financial targets for the company, for specific divisions of the company, and -- within divisions -- for heartland and growth platform businesses. These targets constitute goals, not projections or assured results. The ability to achieve such targets is subject to a variety of factors, including, but not necessarily limited to, those identified above. Because of the foregoing factors, in addition to other factors that affect the company's operating results and financial position, past financial performance or management's expectations should not be considered to be a reliable indicator of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, the company's stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on the company's stock price. In addition, failure of revenues or earnings in any quarter to meet the investment community's expectations, as well as broader market trends, could have an adverse impact on the company's stock price. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. 20 10 =============================================================================== REPORT OF MANAGEMENT Responsibility for the preparation, integrity, and objectivity of the financial information presented in this annual report rests with Raychem management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. Raychem maintains a system of internal accounting control designed to be cost-effective while providing reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded in the financial records. Internal control effectiveness is supported through written communication of policies and procedures, careful selection and training of personnel, quarterly financial reviews with divisions and major subsidiaries, and audits by a professional staff of internal auditors. The company's control environment is further enhanced through a formal Statement of Corporate Values which sets standards of professionalism and integrity for employees worldwide. Price Waterhouse LLP, independent accountants, are retained to examine Raychem's financial statements. Their accompanying report is based on an examination conducted in accordance with generally accepted auditing standards, including a review of financial controls and tests of accounting procedures and records as deemed necessary. The Audit Committee of the Board of Directors is composed solely of nonemployee directors, and is responsible for recommending to the Board the independent accounting firm to be retained for the coming year, subject to stockholder approval. The Audit Committee meets periodically and privately with the independent accountants, with our internal auditors, and with Raychem management, to review accounting, auditing, financial control, and financial reporting matters. /s/ Richard A. Kashnow /s/ Raymond J. Sims Richard A. Kashnow Raymond J. Sims President and Chief Senior Vice President and Executive Officer Chief Financial Officer =============================================================================== REPORT OF INDEPENDENT ACCOUNTANTS [PRICE WATERHOUSE LLP LOGO] TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF RAYCHEM CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Raychem Corporation and its subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the notes to consolidated financial statements, the company changed its method of accounting for postemployment benefits in 1995. /s/ PRICE WATERHOUSE LLP San Jose, California July 17, 1996 21 11 =============================================================================== CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------- JUNE 30 (in thousands except share data) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 224,115 $ 118,067 Accounts receivable, net of allowances for doubtful accounts of $10,033 and $10,348, respectively 308,341 304,819 Inventories: Raw materials 86,562 76,862 Work in process 50,965 53,632 Finished goods 91,796 103,206 ------------------------------------- Total inventories 229,323 233,700 Prepaid taxes 50,312 60,661 Other current assets 95,765 62,361 - ----------------------------------------------------------------------------------------------------------------- Total current assets 907,856 779,608 - ----------------------------------------------------------------------------------------------------------------- Property, plant, and equipment: Land 39,314 50,063 Buildings 364,494 374,577 Machinery and equipment 657,951 645,265 Leasehold improvements 42,887 48,034 ------------------------------------- Total property, plant, and equipment 1,104,646 1,117,939 Less accumulated depreciation and amortization 613,207 590,520 - ----------------------------------------------------------------------------------------------------------------- Net property, plant, and equipment 491,439 527,419 - ----------------------------------------------------------------------------------------------------------------- Other assets 151,321 147,718 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 1,550,616 $ 1,454,745 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 35,011 $ 28,632 Accounts payable 69,230 67,102 Compensation and benefits 86,735 85,690 Other accrued liabilities 112,437 97,789 Income taxes 27,721 22,943 Current maturities of long-term debt 119,618 1,042 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 450,752 303,198 - ----------------------------------------------------------------------------------------------------------------- Long-term debt 148,352 263,552 - ----------------------------------------------------------------------------------------------------------------- Deferred income taxes 23,722 35,002 - ----------------------------------------------------------------------------------------------------------------- Other long-term liabilities 80,422 98,215 - ----------------------------------------------------------------------------------------------------------------- Minority interests 6,162 5,120 - ----------------------------------------------------------------------------------------------------------------- Commitments and contingencies (See notes) - ----------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000; Issued: none -- -- Common Stock, $1.00 par value Authorized: 72,150,000 Issued: 44,890,881 and 43,897,275 shares, respectively 44,891 43,897 Additional contributed capital 408,866 380,127 Retained earnings 361,876 272,657 Currency translation 25,137 61,946 Treasury Stock, at cost (115,753 and 226,640 shares, respectively) (8,630) (8,330) Notes receivable from sale of stock (795) (639) Available-for-sale marketable securities -- unrealized gain 9,861 -- - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 841,206 749,658 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,550,616 $ 1,454,745 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 22 12 ============================================================================== CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands except share data) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Revenues $ 1,671,561 $ 1,530,573 $ 1,461,532 Cost of goods sold 815,352 758,566 779,820 Research and development expense 122,137 118,762 136,619 Selling, general, and administrative expense 508,206 495,537 491,563 Provision for restructuring and divestitures 43,571 23,900 -- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items 2,103 32,032 -- Equity in net losses of affiliated companies 27,280 84,758 109 Interest expense, net 9,631 13,046 12,762 Other (income) expense, net (2,849) 4,242 6,914 - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and change in accounting principle 146,130 (270) 33,745 Provision (credit) for income taxes (1,782) 21,178 32,066 - -------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item and change in accounting principle 147,912 (21,448) 1,679 Extraordinary item -- loss related to early retirement of debt, net of $0 income taxes -- (6,318) -- Cumulative effect of change in accounting principle, net of $0 income taxes -- (1,477) -- - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 147,912 $ (29,243) $ 1,679 - -------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share: Income (loss) before extraordinary item and change in accounting principle $ 3.22 $ (0.49) $ 0.04 Extraordinary item -- (0.15) -- Change in accounting principle -- (0.03) -- - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3.22 $ (0.67) $ 0.04 - -------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding 45,908,894 43,538,028 43,290,797 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 23 13 =============================================================================== CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 147,912 $ (29,243) $ 1,679 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for restructuring and divestitures, net of payments 26,992 7,620 (6,163) Loss on reorganization/formation of Ericsson Raynet joint venture 2,103 14,517 -- Equity in net losses of affiliated companies 27,280 84,758 109 Extraordinary loss related to early retirement of debt -- (1,043) -- Change in accounting principle -- 1,477 -- Depreciation and amortization 79,427 74,798 86,265 Deferred income tax (benefit) provision (45,353) 3,465 (4,723) Other 108 (1,558) (743) Changes in certain assets and liabilities, net of effects from restructuring and divestitures, joint venture reorganization/formation, extraordinary item, and change in accounting principle: Accounts receivable (18,375) (12,911) (61,340) Inventories (9,380) (1,107) (14,734) Accounts payable and accrued liabilities 7,761 (1,166) 25,317 Income taxes 12,537 (14,822) 17,329 Other assets and liabilities (6,564) 4,479 (17,212) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 224,448 129,264 25,784 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment in property, plant, and equipment (78,589) (94,041) (104,056) Disposition of property, plant, and equipment 3,973 6,342 4,494 Proceeds from sale of specified Raynet assets -- 40,000 -- Advances to affiliated companies (33,001) (63,427) -- Cost of acquisition, net of cash acquired -- (3,930) -- Proceeds from sale of investments/business 7,443 4,387 873 Purchase of investments (1,075) (1,000) -- - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (101,249) (111,669) (98,689) - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from (payment of) short-term debt 7,618 5,031 (11,503) Proceeds from long-term debt 119,277 225,498 17,405 Payments of long-term debt (108,802) (213,100) (8,242) Common Stock repurchased (95,184) (26,139) -- Common Stock issued under employee benefit plans 81,378 39,877 34,071 Proceeds from repayments of stockholder notes receivable 428 320 117 Cash dividends (16,038) (13,950) (13,624) - -------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (11,323) 17,537 18,224 - -------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (5,828) 4,845 (1,175) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 106,048 39,977 (55,856) Cash and cash equivalents at beginning of year 118,067 78,090 133,946 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 224,115 $ 118,067 $ 78,090 - -------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 20,312 $ 25,710 $ 19,197 Income taxes (net of refunds) 29,436 25,623 6,991 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 24 14 ================================================================================ CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NOTES ADDITIONAL RECEIVABLE COMMON CONTRIBUTED RETAINED CURRENCY TREASURY FROM SALE (in thousands except share data) STOCK CAPITAL EARNINGS TRANSLATION STOCK OF STOCK - ------------------------------------------------------------------------------------------------------------------ Balance June 30, 1993 $ 41,875 $ 321,512 $ 331,850 $(5,100) $ -- $ (633) - ------------------------------------------------------------------------------------------------------------------ Net income -- -- 1,679 -- -- -- Common Stock issued (1,131,013 shares) 1,131 33,148 -- -- -- (208) Cash dividends ($0.32 per share of Common Stock) -- -- (13,624) -- -- -- Currency translation -- -- -- 21,177 -- -- Repayments of notes receivable -- -- -- -- -- 117 - ------------------------------------------------------------------------------------------------------------------ Balance June 30, 1994 43,006 354,660 319,905 16,077 -- (724) - ------------------------------------------------------------------------------------------------------------------ Net loss -- -- (29,243) -- -- -- Common Stock issued (891,490 shares) 891 25,467 -- -- -- (235) Cash dividends ($0.32 per share of Common Stock) -- -- (13,950) -- -- -- Currency translation -- -- -- 45,869 -- -- Treasury Stock purchased (700,000 shares), net of issuances (473,360 shares) -- -- (4,055) -- (8,330) -- Repayments of notes receivable -- -- -- -- -- 320 - ------------------------------------------------------------------------------------------------------------------ Balance June 30, 1995 43,897 380,127 272,657 61,946 (8,330) (639) - ------------------------------------------------------------------------------------------------------------------ Net income -- -- 147,912 -- -- -- Common Stock issued (993,606 shares) 994 28,739 -- -- -- (586) Cash dividends ($0.36 per share of Common Stock) -- -- (16,038) -- -- -- Currency translation -- -- -- (36,809) -- -- Treasury Stock purchased (1,500,000 shares), net of issuances (1,610,887 shares) -- -- (42,655) -- (300) -- Repayments of notes receivable -- -- -- -- -- 430 Unrealized gain on available- for-sale marketable securities -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Balance June 30, 1996 $ 44,891 $ 408,866 $ 361,876 $ 25,137 $ (8,630) $ (795) - ------------------------------------------------------------------------------------------------------------------
AVAILABLE- FOR-SALE MARKETABLE SECURITIES -- UNREALIZED GAIN TOTAL - -------------------------------------------------------------- Balance June 30, 1993 $ -- $ 689,504 - -------------------------------------------------------------- Net income -- 1,679 Common Stock issued (1,131,013 shares) -- 34,071 Cash dividends ($0.32 per share of Common Stock) -- (13,624) Currency translation -- 21,177 Repayments of notes receivable -- 117 - -------------------------------------------------------------- Balance June 30, 1994 -- 732,924 - -------------------------------------------------------------- Net loss -- (29,243) Common Stock issued (891,490 shares) -- 26,123 Cash dividends ($0.32 per share of Common Stock) -- (13,950) Currency translation -- 45,869 Treasury Stock purchased (700,000 shares), net of issuances (473,360 shares) -- (12,385) Repayments of notes receivable -- 320 - -------------------------------------------------------------- Balance June 30, 1995 -- 749,658 - -------------------------------------------------------------- Net income -- 147,912 Common Stock issued (993,606 shares) -- 29,147 Cash dividends ($0.36 per share of Common Stock) -- (16,038) Currency translation -- (36,809) Treasury Stock purchased (1,500,000 shares), net of issuances (1,610,887 shares) -- (42,955) Repayments of notes receivable -- 430 Unrealized gain on available- for-sale marketable securities 9,861 9,861 - -------------------------------------------------------------- Balance June 30, 1996 $ 9,861 $ 841,206 - --------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 15 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries. Investments in entities owned 20% or more but less than majority owned and not otherwise controlled by the company are accounted for under the equity method. Due to the formation of the Ericsson Raynet joint venture in November 1994, the operations of Raynet Corporation and subsidiaries (Raynet), are included in the consolidated financial statements using the equity method of accounting for the period July 1, 1994, through December 31, 1995; Raynet's operations were consolidated in prior years. Following the reorganization of the joint venture, effective January 1, 1996, Raychem's interest is accounted for on the cost basis (see "Raynet" note). All significant intercompany accounts and transactions are eliminated. 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 disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FOREIGN CURRENCY TRANSLATION Assets and liabilities of operations outside the United States, except for operations in highly inflationary economies (principally in Latin America), are translated into U.S. dollars using the exchange rate in effect at each period end. Revenues and expenses are translated at the average exchange rate prevailing during the period. The effects of foreign currency translation adjustments arising from differences in exchange rates from period to period are deferred and included as a component of "Stockholders' equity." The effects of foreign currency transactions, and of remeasuring the financial position and results of operations into the functional currency, are included in "Other (income) expense, net." CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at the date of purchase are classified as cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out method and includes materials, direct and indirect labor, and manufacturing overhead. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are carried at cost. Effective July 1, 1990, the company adopted the straight-line method of depreciation for property, plant, and equipment placed in service on or after that date. Fixed assets placed in service prior to 1991 continue to be depreciated using principally accelerated methods. Property, plant, and equipment are depreciated over the estimated useful lives of the individual assets and, for leasehold improvements, over the terms of their respective leases, if shorter. The estimated useful lives of major classes of depreciable assets are as follows: - -------------------------------------------------------------------------------- Buildings and improvements 10 - 45 years Machinery and equipment 3 - 10 years Leasehold improvements Term of lease or life of asset
- -------------------------------------------------------------------------------- INTANGIBLE ASSETS Goodwill represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired and is amortized on a straight-line basis over periods not exceeding 20 years. Patents and trademarks are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter. The company reviews the carrying value of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 26 16 REVENUE RECOGNITION Revenue from product sales is recognized when the earnings process is complete. This generally occurs at the time product is shipped. Revenue on certain Raynet contracts was recognized upon installation and acceptance by the customer. Other revenues are principally from licensing and royalty arrangements. License and royalty revenues are recognized according to the terms of the specific agreements. ENVIRONMENTAL COSTS Environmental expenditures are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. INCOME TAXES Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded to reduce a deferred tax asset to that portion that is expected to more likely than not be realized. EARNINGS (LOSS) PER COMMON SHARE Primary earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding after giving effect to stock options considered to be dilutive common stock equivalents. Common shares outstanding includes issued shares less shares held in treasury. In the case that fully diluted earnings per common share is materially different from primary earnings per common share, fully diluted earnings per common share is calculated by dividing net income by the sum of the weighted average number of common shares outstanding, dilutive stock options, and shares issuable under the company's Employee Stock Purchase Plan at the end of the period. Common stock equivalents would be excluded from both the primary and fully diluted calculations if a net loss was incurred for the period as they would be anti-dilutive. TREASURY STOCK In December 1994, the board of directors authorized the repurchase, at management's discretion, of up to 1.5 million shares of the company's stock during any one fiscal year. Shares repurchased under this authorization were used to offset the dilution caused by the company's employee stock purchase and stock option plans. The company's repurchases of shares of Common Stock are recorded as "Treasury Stock" and result in a reduction of "Stockholders' equity." When treasury shares are reissued, the company uses a first-in, first-out method and the excess of repurchase cost over reissuance price is treated as a reduction of "Retained earnings." NEW ACCOUNTING STANDARD In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. The statement must be adopted by the first quarter of fiscal 1997. The company has determined that there is no impact of adoption on the company's results of operations or financial condition. FINANCIAL PRESENTATION Certain prior-year amounts have been reclassified to conform with the 1996 financial statement presentation. - -------------------------------------------------------------------------------- RAYNET - -------------------------------------------------------------------------------- FORMATION OF ERICSSON RAYNET JOINT VENTURE On November 16, 1994, the company and LM Ericsson (Ericsson), a Swedish telecommunications company, formed a joint venture for the development, manufacture, and marketing of fiber-optic communications systems for telephone access networks worldwide. The joint venture, called "Ericsson Raynet," took over the operations of the company's Raynet subsidiary. Ericsson Raynet is organized as a partnership under Delaware law; the company's Raynet subsidiary holds the company's interest in the joint venture. Ericsson is the managing general partner of the joint venture. 27 17 In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to Ericsson in exchange for $40 million in cash. Ericsson contributed the purchased assets to the joint venture, and Raynet contributed substantially all of its remaining assets and liabilities to the joint venture. Funding of the joint venture was initially provided by the partners, generally 51% by Ericsson and 49% by Raynet, subject to Ericsson's loss allocation limit described below. During the first five to eight years of operation, subject to various conditions, substantially all of the profits of the joint venture up to $156 million (plus incremental losses borne by Raynet on account of the loss cap) were to be allocated to Raynet; thereafter, profits of the joint venture were to be shared 51/49 by Ericsson and Raynet, respectively. Ericsson's share of the joint venture's losses were capped at $25 million for the fiscal year ended June 30, 1995. In addition, restructuring costs in 1995 were shared 51/49 by Ericsson and Raynet, respectively, without consideration of Ericsson's previously mentioned loss allocation cap. During the fiscal year ended June 30, 1996, up to $19.6 million of losses were allocated to Ericsson and Raynet in a 51/49 ratio; additional losses of up to $10 million were allocated 100% to Raynet; and additional losses were allocated to Ericsson and Raynet in a 51/49 ratio. BellSouth Enterprises Inc. (BSE) had financed a portion of the software development work at Raynet and held a royalty interest in the software related revenues of Raynet. The royalty was based on a variable rate subject to meeting certain annual royalty payment levels. Royalty expense under the agreement was $3 million in 1994. With the creation of the joint venture, this royalty payment was reconfigured. Raychem paid BSE $10 million in each of November 1994 and November 1995, and is required to make one additional payment of $10 million in November 1996. Raychem agreed to make other royalty payments to BSE contingent upon the revenues and earnings performance of the joint venture. At such time as the joint venture achieves profitability, these royalty payments could approximate 36% of Raychem's distributions from the joint venture. The company's loss resulting from these transactions, a pre-tax charge of $28 million, was included in the line item "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items" in 1995. For purposes of recording its loss, the company discounted its obligations to BSE to their present value as of November 16, 1994, using a 7.97% discount rate. AMENDMENT TO ERICSSON RAYNET JOINT VENTURE During the third quarter of fiscal 1996, Raychem and Ericsson amended their joint venture agreement. Effective January 1, 1996, Raychem no longer shares in ongoing operating losses of the joint venture (other than potential warranty claims if they are in excess of reserves which have been previously established). Through December 31, 2000, Raychem may receive a modest income allocation from the venture. BSE is entitled to receive a portion of any income or distributions that Raychem may receive. The reorganization of Ericsson Raynet resulted in a $2 million pre-tax charge that was included in the line item "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items" in 1996. See "Investments" note for summarized financial information of Ericsson Raynet. REVOLVING CREDIT AGREEMENT On January 2, 1995, the company entered into a revolving credit agreement with Ericsson Raynet. The company committed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995, or earlier if the revolving credit arrangement were terminated at the company's discretion. At June 30, 1995, Ericsson Raynet had borrowed $4 million from the company under the revolving credit agreement, which amount was included in "Other current assets." In 1996, the company made advances to Ericsson Raynet of $23 million under this credit agreement, increasing the amount due to the company to $27 million. As a result of the reconfiguration of the Ericsson Raynet partnership, Raychem converted the amount due under the revolving credit agreement to capital. Raychem subsequently terminated the revolving credit agreement. REPURCHASE OF MINORITY INTEREST On June 24, 1993, the company repurchased all of the convertible preferred stock in Raynet International Inc. (RNI), a subsidiary of Raynet Corporation, previously held by BSE for $30 million. The excess of Raychem's cost over the fair value of the preferred stock was recorded as goodwill and was being amortized over a five-year period. Goodwill amortization expense was $1 million in 1994. In 1995, the underlying assets of the business were sold and the remaining $4 million of unamortized goodwill was included in the "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items." 28 18 - -------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Currently, the company is not a party to any interest rate risk management transactions. The company does not hold any derivative financial instruments for trading purposes. The company has written policies which place all foreign currency forward and option transactions under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The company operates in more than 40 countries worldwide, with in excess of sixty percent of its revenues occurring outside the United States. The company attempts to limit its exposure to changing foreign currency exchange rates through both operational and financial market actions. The company manufactures its products in a number of locations around the world, and hence has a cost base that is well diversified over a number of European and Asian currencies as well as the U.S. dollar. This diverse base of local currency costs serves to counterbalance the income effect of potential changes in the value of the company's local currency denominated revenues. Also, the company denominates its third-party export sales in the currency of the selling Raychem entity, whenever possible. FORWARD FOREIGN EXCHANGE CONTRACTS Short-term exposures to changing foreign currency exchange rates are managed by financial market transactions, principally through the purchase of forward foreign exchange contracts (with maturities usually less than six months) to hedge the non-functional currency denominated receivables and payables and anticipated transactions of the company's operating units. All realized gains and losses are included in "Other (income) expense, net." The company is subject to credit risk exposure from nonperformance by the counterparties to these transactions, typically large international financial institutions. Net gains from forward foreign exchange contracts used to hedge receivables and payables and to cover anticipated transactions totaled $5 million and $4 million for the years ended June 30, 1996 and 1995, respectively. The company incurred total net foreign exchange transaction losses of $1 million, $4 million, and $5 million for 1996, 1995, and 1994, respectively. The net amount of foreign exchange exposure hedged was $163 million and $205 million at June 30, 1996 and 1995, respectively. The company hedges exposures that arise from trade and intercompany receivables and payables, and loans in non-functional currencies. The company has unhedged non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Exposures at June 30, 1996, included $8 million in net intercompany payables in non-functional currencies and $3 million of net monetary assets in foreign countries with the U.S. dollar as functional currency. The company periodically enters into forward foreign exchange contracts to hedge a portion of its equity in foreign subsidiaries. The gains and losses on these contracts are included in "Currency translation" as a component of "Stockholders' equity." There were no such hedges of foreign equity outstanding at June 30, 1996 and 1995. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the company to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. The company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the world, and the company's policy is designed to limit exposure to any one institution. The company's periodic evaluations of the relative credit standing of these financial institutions are considered in the company's investment strategy. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the company's customer base and their dispersion across many different industries and countries. Credit risk to certain countries is further limited through the use of irrevocable letters of credit and bank guarantees. As of June 30, 1996 and 1995, the company had no significant concentrations of credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the company's financial instruments, including cash and cash equivalents, accounts receivable, notes payable to banks, accounts payable, and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Consequently, such instruments are not included in the following table, which provides information regarding the estimated fair values of other financial instruments. The fair value of long-term debt is estimated using discounted cash flow analysis, based on the incremental borrowing rates currently available to the company for bank loans with similar terms and maturities. The estimated fair value of forward foreign exchange contracts is primarily based on quoted market prices of comparable contracts. 29 19
- --------------------------------------------------------------------------------------------------------------- 1996 1995 ------------------------- -------------------------- JUNE 30 CARRYING FAIR CARRYING FAIR ASSET (LIABILITY) (in thousands) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------- Long-term debt, including current maturities, and accrued interest of $1,056 and $2,812 in 1996 and 1995, respectively $(269,026) $(269,212) $(267,406) $(267,406) Forward foreign exchange contracts included in: Other current assets 594 594 805 805 Other accrued liabilities (494) (494) (307) (307) - ---------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- Of the total investments accounted for by the equity method, Ericsson Raynet, a joint venture for the development, manufacture, and marketing of fiber-optic communication systems for telephone access networks worldwide, which is 49%-owned by Raychem, was the most significant investment. During the third quarter of fiscal 1996, Raychem and LM Ericsson amended their joint venture agreement. Following the reorganization, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis (see related "Raynet" note). The remaining investments accounted for by the equity method aggregate to $7 million and $2 million at June 30, 1996 and 1995, respectively, and include various manufacturing companies owned between 20%-50%. Investments are included as a component of "other assets." No dividends were received from equity affiliates in 1996 or 1995. The investment balance and the company's equity in net losses of affiliated companies were immaterial prior to 1995. Summarized financial information of Ericsson Raynet and the other equity affiliates follows:
- -------------------------------------------------------------------------------------------------------------------------------- 1996 1995 ---------------------------------------- ---------------------------------------- TOTAL TOTAL ERICSSON OTHER EQUITY ERICSSON OTHER EQUITY (in thousands) RAYNET AFFILIATES AFFILIATES RAYNET AFFILIATES AFFILIATES - -------------------------------------------------------------------------------------------------------------------------------- Current assets $ (a) $30,814 $ 30,814 $ 62,864 (c) $19,354 $ 82,218 Non-current assets (a) 7,233 7,233 34,203 (c) 6,892 41,095 Current liabilities (a) 22,210 22,210 65,906 (c) 23,666 89,572 Non-current liabilities (a) 149 149 495 (c) 1,077 1,572 - -------------------------------------------------------------------------------------------------------------------------------- Revenues (a) 48,437 48,437 45,502 (d) 40,990 86,492 - -------------------------------------------------------------------------------------------------------------------------------- Gross profit (loss) (a) 18,401 18,401 (24,074)(d) 15,645 (8,429) - -------------------------------------------------------------------------------------------------------------------------------- Net (loss) income (a) 3,936 3,936 (116,638)(d) 4,698 (111,940) - -------------------------------------------------------------------------------------------------------------------------------- Raychem's equity in (loss) income (29,818)(b) 2,538 (27,280) (85,946)(e) 1,188 (84,758) - --------------------------------------------------------------------------------------------------------------------------------
(a) Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (b) Raychem's equity in loss represents its share of losses through December 31, 1995, which the company accounted for on the equity basis of accounting. Effective January 1, 1996, Raychem no longer shares in the ongoing operating losses of the joint venture (see "Raynet" note). (c) Balances as of June 30, 1995, are those of Ericsson Raynet. (d) Includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and the results of Ericsson Raynet from November 17, 1994, through June 30, 1995. (e) The joint venture agreement specifies varying profit and loss allocations to its partners as more fully described in the accompanying "Raynet" note. Raychem's equity in loss includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raychem's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995. MARKETABLE SECURITIES Marketable securities are classified as available-for-sale and carried at fair value as determined by quoted market prices. The aggregate fair value of the marketable securities held at June 30, 1996, was $12 million. Gross unrealized holding gains were $10 million and are included as a separate component of "Stockholders' equity." Marketable securities held in prior years were immaterial. 30 20 - -------------------------------------------------------------------------------- OTHER POSTRETIREMENT BENEFITS - -------------------------------------------------------------------------------- The company provides postretirement health care benefits to U.S. employees who qualify for the company's defined benefit pension plan and retire on or after age 55, until the employees reach age 65. Such benefits are limited to allowing retirees to continue their participation in the company's group medical plan. Eligible retirees pay monthly premiums, thus reducing the cost to the company. The cost of providing medical and dental benefits to early retirees was $0.4 million, comprised of a service cost of $0.2 million and interest cost of $0.2 million, in each of 1996, 1995 and 1994. The following table sets forth components of the accumulated postretirement benefit obligation:
- -------------------------------------------------------------------------------- JUNE 30 (in thousands) 1996 1995 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation attributable to: Retirees $ 803 $ 792 Fully eligible employees 689 689 Other active employees 1,614 1,740 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation 3,106 3,221 Unrecognized net gain 399 74 - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation $3,505 $3,295 - --------------------------------------------------------------------------------
The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.75% at June 30, 1996 and 1995. The assumed health care cost trend rate for 1996 is 8.5%, declining to an ultimate rate in 2001 of 6%. A one percentage point increase in the assumed health care cost trend rate for each future year increases annual net periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of June 30, 1996, by $0.1 million and $0.3 million, respectively. - -------------------------------------------------------------------------------- RETIREMENT BENEFITS - -------------------------------------------------------------------------------- The company has noncontributory defined benefit pension plans that cover substantially all U.S. employees and a number of its employees in foreign countries. The benefits for these plans are based primarily on years of service and employee compensation. The company funds these pension plans when legally or contractually required, or earlier. Plan assets for the U.S. and non-U.S. defined benefit pension plans generally consist of publicly traded securities, bonds, and cash investments. Amortization of prior service cost is calculated on a straight-line basis over the expected future years of service of the plans' active participants. On January 1, 1996, the U.S. plan was amended to update the years used to calculate past service benefits. The amendment generated an unrecognized prior service cost of $5.8 million. Effective January 1, 1995, the company adopted amendments to the International Pension Plan to expand benefit coverage to include more employees. This change resulted in an increase of $0.2 million in pension expense for 1995 and an increase of approximately $2.5 million in the projected benefit obligation. In 1995, the U.S. plan recognized a curtailment loss of $1.2 million related to a transfer of Raynet employees to the Ericsson pension plan. The assumptions used to measure the projected benefit obligation and to compute the expected long-term return on assets for the company's defined benefit pension plans are as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- U.S. plans: Discount rate 7.75% 7.75% 8.25% Average increase in compensation levels 4.75% 4.75% 5.25% Expected long-term return on assets 8.5% 8.5% 9% - -------------------------------------------------------------------------------- Non-U.S. plans: Discount rates 5.5 - 9.0% 5.5 - 9.3% 6 - 8.5% Average increase in compensation levels 4.0 - 6.9% 3 - 6.9% 4 - 6.9% Expected long-term return on assets 7.5 - 9.5% 7.5 - 10% 7.5 - 9.5% - --------------------------------------------------------------------------------
31 21 Net periodic pension cost includes the following components:
- ------------------------------------------------------------------------------------------------------------------------------------ U.S. PLANS NON-U.S. PLANS ---------------------------------- ---------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost -- benefits earned during the period $ 6,319 $ 6,105 $ 6,161 $ 9,151 $ 9,584 $ 7,477 Interest cost on projected benefit obligation 9,206 9,009 8,091 14,113 13,161 10,148 Actual (return) loss on plan assets (23,936) (16,342) 165 (24,706) (3,969) (14,055) Net amortization and deferral 18,367 9,820 (6,697) 12,805 (6,241) 5,607 - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic pension cost $ 9,956 $ 8,592 $ 7,720 $ 11,363 $ 12,535 $ 9,177 - ------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status of the plans:
- ------------------------------------------------------------------------------------------------ ASSETS EXCEED ACCUMULATED BENEFITS ------------------------------------------------------------ U.S. PLANS NON-U.S. PLANS -------------------------- -------------------------- JUNE 30 (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $(115,852) $(103,501) $ (64,461) $ (64,030) - ------------------------------------------------------------------------------------------------ Accumulated benefit obligation $(118,120) $(108,949) $ (65,434) $ (65,111) - ------------------------------------------------------------------------------------------------ Projected benefit obligation $(126,976) $(118,013) $(116,374) $(121,614) Plan assets at fair value 122,169 110,652 142,693 120,735 - ------------------------------------------------------------------------------------------------ Plan assets more (less) than projected benefit obligation (4,807) (7,361) 26,319 (879) Unrecognized net loss (gain) 10,312 17,170 (27,326) (1,167) Unrecognized net transition (asset) liability (127) (1,668) (6,967) (8,169) Unrecognized prior service cost 10,599 8,150 2,728 3,055 Adjustment required to recognize additional minimum liability -- -- -- -- - ------------------------------------------------------------------------------------------------ Prepaid (accrued) pension cost $ 15,977 $ 16,291 $ (5,246) $ (7,160) - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ ACCUMULATED BENEFITS EXCEED ASSETS ------------------------------------------------------------ U.S. PLANS NON-U.S. PLANS -------------------------- -------------------------- JUNE 30 (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $ (3,107) $ (3,978) $ (42,288) $ (43,820) - ------------------------------------------------------------------------------------------------------ Accumulated benefit obligation $ (3,107) $ (4,027) $ (44,038) $ (45,855) - ------------------------------------------------------------------------------------------------------ Projected benefit obligation $ (6,641) $ (7,702) $ (51,387) $ (54,377) Plan assets at fair value -- -- -- 744 - ------------------------------------------------------------------------------------------------------ Plan assets more (less) than projected benefit obligation (6,641) (7,702) (51,387) (53,633) Unrecognized net loss (gain) (504) 818 (5,931) (4,798) Unrecognized net transition (asset) liability 614 645 (444) (477) Unrecognized prior service cost 6,237 5,247 -- -- Adjustment required to recognize additional minimum liability (2,813) (3,033) -- -- - ------------------------------------------------------------------------------------------------------ Prepaid (accrued) pension cost $ (3,107) $ (4,025) $ (57,762) $ (58,908) - ------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- DEBT STRUCTURE - -------------------------------------------------------------------------------- Long-term debt consists of the following:
- ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30 (in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ 3.30% to 8.75% notes payable to banks and others requiring payments in varying amounts through 2008. $ 35,325 $ 39,094 Secured debt requiring varying semi-annual payments beginning January 1997 through December 2006. The interest rate fluctuates semi-annually and was 5.64% at June 30, 1996. 114,645 -- Syndicated term loan requiring varying quarterly payments beginning December 1996 through September 1998. The interest rate fluctuates periodically and was 5.86% at June 30, 1996. 118,000 225,000 Industrial Revenue Bond due in equal quarterly installments through 1996. The interest rate, which fluctuates according to the lender's prime rate, was 5.13% at June 30, 1995. -- 500 - ------------------------------------------------------------------------------------------------------------------------------------ Total long-term debt 267,970 264,594 Less current maturities 119,618 1,042 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term portion $148,352 $263,552 - ------------------------------------------------------------------------------------------------------------------------------------
32 22 In April 1996, the company entered into a lease financing covering the majority of its manufacturing equipment in the United States. The arrangement is accounted for as 10-year partially amortizing secured debt with interest that varies periodically with LIBOR. The proceeds of approximately $113 million were used in roughly equal portions to prepay a portion of the outstanding term loan and for other corporate purposes. The company entered into a $210 million private placement debt agreement in February 1991. In December 1992, the company entered into a three-year interest rate swap agreement which effectively converted $100 million of notional principal amount from a fixed rate to a floating rate. Under the agreement, which was to mature on December 8, 1995, the company made payments to a counterparty at variable rates based on LIBOR, reset every six months, and in return received payments based on a fixed rate of 5.715%. The LIBOR rate for the period from July 1, 1993 to December 8, 1993, was 3.4375%. The effect of the interest rate swap agreement was to reduce interest expense in 1994 by $1 million. On December 8, 1993, the company terminated this agreement which resulted in a deferred gain of $3 million to be amortized over the remaining life of the hedged debt. In 1994, $1 million of the gain was recognized as a reduction of interest expense. On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes resulting in an extraordinary loss, which included recognition of the remaining deferred gain on the termination of the interest rate swap (see note "Extraordinary Item -- Loss Related to Early Retirement of Debt"). On September 29, 1994, the company entered into syndicated loan agreements providing for a five-year partially amortizing loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. Interest on the term loan and revolving credit facility are at variable spreads over LIBOR. Proceeds from the term loan were drawn on November 1, 1994, and used to retire the 9.55% privately placed senior notes and for general corporate purposes, while the revolving credit facility replaced existing committed credit facilities. The syndicated loan agreements include covenants that, among other things, specify a minimum net worth requirement, a maximum leverage limit, a minimum fixed charge coverage ratio, and limits on further advances to fund Raynet operations. On September 28, 1995, the company amended its syndicated loan agreements. The revolving credit facility was increased to $250 million and extended to a term of four years. Variable pricing terms for both the term loan and revolving credit facility were improved, and certain restrictive covenants were relaxed. As noted, a portion of the secured debt proceeds was used to prepay $57 million of the outstanding term loan principal in May 1996. An additional $50 million of the term loan was prepaid in June 1996. On June 28, 1996, the company signed an irrevocable letter of intent to prepay $50 million of the syndicated loan on July 8, 1996. Additionally, the company intends to prepay the remaining balance in August 1996. As such, the entire balance of the syndicated loan is included as "Current maturities of long-term debt." Long-term debt maturing during the five years subsequent to June 30, 1996, is as follows: 1997 -- $120 million; 1998 -- $11 million; 1999 -- $20 million; 2000 -- $6 million; 2001 -- $6 million; and thereafter -- $105 million. Assets pledged as security for long-term debt totaled $96 million at June 30, 1996. In addition to short-term borrowings, lines of credit are used for letters of credit, bank guarantees, and other purposes. The company had no significant compensating balance requirements or capital lease obligations at June 30, 1996. Information regarding short-term debt is as follows:
- -------------------------------------------------------------------------------- JUNE 30 (dollars in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Total lines of credit $484,702 $419,864 $483,073 Available unused credit lines $433,197 $364,307 $437,856 - -------------------------------------------------------------------------------- Weighted average interest rate: Highly inflationary economies 20.3% 16.8% 15.1% Other countries 9.6% 7.0% 9.4% Worldwide average 9.8% 7.1% 9.5% - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- STOCK - -------------------------------------------------------------------------------- EMPLOYEE STOCK PURCHASE PLANS The company's employee stock purchase plans provide that eligible employees may contribute up to 15% of their base earnings toward the quarterly purchase of the company's Common Stock. The employees' purchase price is derived from a formula based on the fair market value of the Common Stock. No compensation expense is recorded in connection with the plans. Shares issued under the plans were 767,000 in 33 23 1996, 905,000 in 1995 and 901,000 in 1994. At June 30, 1996, a total of 4,210 of the 7,851 eligible employees were participants in the plans. On each of October 27, 1993, and November 9, 1994, the stockholders approved an amendment to the employee stock purchase plans to increase the aggregate number of shares issuable under the plans by 700,000. On November 1, 1995, the stockholders approved another amendment to the employee stock purchase plans to increase the aggregate number of shares issuable under the plans by 1,000,000. The total number of shares reserved for future issuance under the plans was 966,000 at June 30, 1996. STOCK OPTION AND INCENTIVE PLANS The company has various stock option and management incentive plans for selected employees, officers, directors, and consultants. The plans provide for awards in the form of stock options, restricted stock, and performance shares. As of June 30, 1996, only stock options and restricted stock had been awarded under the plans. Options to purchase Common Stock have been granted at no less than fair market value on the date of grant. On October 27, 1993, the stockholders approved an amendment to the 1990 Incentive Plan to increase by 1,700,000 shares the aggregate number of shares issuable under the plan. On November 9, 1994, the stockholders approved two amendments to the 1990 Incentive Plan to: (1) limit the number of shares with respect to which options may be granted to no more than 200,000 shares to any one participant in any one-year period; and (2) extend up to five years the period during which awards granted on or after August 12, 1994, may be exercised following retirement from the company. On November 1, 1995, the stockholders approved an amendment to the 1990 Incentive Plan to increase by 1,250,000 shares the aggregate number of shares issuable under the plan. During 1996, 37,500 shares of restricted stock were issued under the 1990 Incentive Plan resulting in compensation expense totaling $1.65 million as the restrictions lapsed during the year. No other restricted shares were issued or outstanding at June 30, 1996. At June 30, l996, 769 optionees held options for the purchase of Common Stock with expiration dates occurring between July 29, 1996 and June 30, 2006, with an average exercise price of $39 per share. The following table summarizes Raychem option activity during 1996, 1995, and 1994:
- ------------------------------------------------------------------------------------------------------- OPTION SHARES, JUNE 30 (in thousands except per share data) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 5,588 5,211 4,896 Granted 1,443 1,051 894 Exercised (1,909) (466) (232) Expired or canceled (307) (208) (347) - ------------------------------------------------------------------------------------------------------- Outstanding at end of year 4,815 5,588 5,211 - ------------------------------------------------------------------------------------------------------- Exercisable 2,295 3,256 2,676 - ------------------------------------------------------------------------------------------------------- Available for future grant 807 759 1,792 - ------------------------------------------------------------------------------------------------------- Option price per share: Exercised $17 - $47 $17 - $40 $21 - $41 Outstanding $17 - $76 $17 - $45 $17 - $45 - -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RESTRUCTURING AND DIVESTITURES - -------------------------------------------------------------------------------- Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. The core business incurred a pretax charge of $44 million in the third quarter of 1996 as the company moved to simplify and lower the costs of its operations. All of the charges, with the exception of net $4 million in asset writedowns, are cash in nature and are expected to be substantially incurred in fiscal 1997 and funded through operating cash flows. Approximately 700 positions will be eliminated by the end of calendar 1996, some portion of which may be replaced elsewhere. As a result of the restructuring, 289 employees have separated from the company as of June 30, 1996. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. All charges, excluding asset writedowns, were cash in nature, substantially incurred in 1995, and funded through operating cash flows. The following table sets forth components of the company's "Provision for restructuring and divestitures" for the years ended June 30, 1996 and 1995 (none in 1994): 34 24
- ------------------------------------------------------------------------------------------------------------------------ PROVISION FOR RESTRUCTURING AND DIVESTITURES EMPLOYEE ASSET YEAR ENDED JUNE 30 (in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------ 1996 Employee severance $ 37,907 $ -- $ -- $ -- $ 37,907 Assets to be sold -- 5,887 -- -- 5,887 Discontinued product inventory -- 250 -- -- 250 Vacated buildings -- -- 821 -- 821 Other -- -- -- 615 615 Adjustment to prior year reserves -- (2,470) -- 561 (1,909) - ------------------------------------------------------------------------------------------------------------------------ Total 1996 $ 37,907 $ 3,667 $ 821 $ 1,176 $ 43,571 - ------------------------------------------------------------------------------------------------------------------------ 1995 Employee severance $ 13,200 $ -- $ -- $ -- $ 13,200 Assets to be sold -- 5,680 -- 1,000 6,680 Discontinued product inventory -- 2,600 -- -- 2,600 Vacated buildings -- -- 620 -- 620 Other -- -- -- 800 800 - ------------------------------------------------------------------------------------------------------------------------ Total 1995 $ 13,200 $ 8,280 $ 620 $ 1,800 $ 23,900 - ------------------------------------------------------------------------------------------------------------------------
The following table sets forth the company's restructuring reserves as of June 30, 1994, 1995, and 1996:
- ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURING RESERVES EMPLOYEE ASSET (in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1993 $ 3,001 $ 1,482 $ 675 $ 3,178 $ 8,336 - ------------------------------------------------------------------------------------------------------------------------ Cash payments (1,663) -- (645) (2,726) (5,034) Non-cash items -- (630) -- -- (630) - ------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1994 1,338 852 30 452 2,672 - ------------------------------------------------------------------------------------------------------------------------ Provision for restructuring and divestitures 13,200 8,280 620 1,800 23,900 Adjustment to reserves 1,300 (1,300) -- -- -- Cash payments (13,676) -- (650) (1,237) (15,563) Non-cash items -- (7,832) -- -- (7,832) - ------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1995 2,162 -- -- 1,015 3,177 - ------------------------------------------------------------------------------------------------------------------------ Provision for restructuring and divestitures 37,907 3,667 821 1,176 43,571 Adjustment to reserves (9) -- 75 (66) -- Cash payments (15,442) -- (30) (1,425) (16,897) Non-cash items (885) (2,621) (39) -- (3,545) - ------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1996 $ 23,733 $ 1,046 $ 827 $ 700 $ 26,306 - ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- INTEREST - -------------------------------------------------------------------------------- Interest expense, net, consisted of the following components:
- ------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- Interest expense incurred $ 19,216 $ 20,434 $ 22,318 Interest expense capitalized (660) (724) (1,172) Interest income (8,925) (6,664) (8,384) - ------------------------------------------------------------------------------- Interest expense, net $ 9,631 $ 13,046 $ 12,762 - -------------------------------------------------------------------------------
35 25 - -------------------------------------------------------------------------------- SALE OF ASSETS - -------------------------------------------------------------------------------- In the fourth quarter of 1996, the company sold its shape memory metals components business to Memry Corporation resulting in a pretax gain of $3 million. In the fourth quarter of 1995, Johnson & Johnson acquired, in a tax-free reorganization, all of the outstanding common stock of Menlo Care, Inc., a company in which Raychem held a minority interest. This transaction resulted in a pretax gain of $5 million. These gains were included in "Other (income) expense, net." As proceeds from the Menlo Care transaction, the company received cash and shares of Johnson & Johnson common stock valued on the closing date at approximately $6 million. At June 30, 1995, the company held Johnson & Johnson stock valued at approximately $3 million, the fair value based on the quoted market price. These shares were subsequently sold in 1996, and resulted in a $1 million gain which was included in "Other (income) expense, net." 36 - -------------------------------------------------------------------------------- INCOME TAXES - -------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and change in accounting principle consisted of the following components:
- ------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- U.S. operations, including Puerto Rico $ 57,203 $ (89,868) $(102,200) Non-U.S. operations 88,927 89,598 135,945 - ------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and change in accounting principle $ 146,130 $ (270) $ 33,745 - -------------------------------------------------------------------------------------------------------
The provision for income taxes included:
- ------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------- Current tax: U.S. federal, including Puerto Rico $ 5,383 $ 547 $ 1,194 U.S. state and local 2,990 510 775 Non-U.S 35,198 16,656 34,820 - ------------------------------------------------------------------------------------- Total current tax 43,571 17,713 36,789 - ------------------------------------------------------------------------------------- Deferred (benefit) tax: U.S. federal, including Puerto Rico (45,032) (12) (2,419) Non-U.S (321) 3,477 (2,304) - ------------------------------------------------------------------------------------- Total deferred (benefit) tax (45,353) 3,465 (4,723) - ------------------------------------------------------------------------------------- Provision (credit) for income taxes $ (1,782) $ 21,178 $ 32,066 - -------------------------------------------------------------------------------------
The company has provided for U.S. federal income taxes and foreign withholding taxes on the portion of the undistributed earnings of non-U.S. subsidiaries expected to be remitted. Undistributed earnings intended to be reinvested indefinitely in foreign subsidiaries were approximately $366 million at June 30, 1996. If these earnings were distributed, foreign withholding taxes would be imposed; however, foreign tax credits would become available to substantially reduce any resulting U.S. income tax liability. Income from operations in certain countries is subject to reduced tax rates as a result of satisfying certain commitments regarding employment and capital investment. The exemption grants for these operations will expire at various dates through 2010. The income tax benefits related to the tax status of these operations are estimated to be $4 million for 1996, $3 million for 1995, and $5 million for 1994. The company's provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes, extraordinary item, and change in accounting principle as follows: 36 26
- ----------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Tax (benefit) determined by applying U.S. statutory rate to income (loss) before income taxes, extraordinary item, and change in accounting principle $ 51,146 $ (95) $ 11,811 Tax (benefit) of deferred deductions, net operating losses, foreign tax credits, minimum tax credits, and changes in valuation allowance, net (51,140) 32,994 33,951 Tax rate differences (6,809) (11,722) (12,498) State and local taxes, net of federal income tax benefits 1,635 338 497 Adjustment of prior years' taxes 1,056 230 210 Other items, net 2,330 (567) (1,905) - ----------------------------------------------------------------------------------------------------------- Provision (credit) for income taxes $ (1,782) $ 21,178 $ 32,066 - -----------------------------------------------------------------------------------------------------------
Future expirations of U.S. credit carryforwards, if not utilized, are as follows: 1997 -- $0.6 million; 1998 -- $1.2 million; 1999 -- $2.3 million; 2000 -- $2.0 million; 2001 -- $0.8 million; 2002 -- $0.3 million; 2003 -- $2.0 million; 2004 -- $6.8 million; 2005 -- $4.3 million; 2006 -- $4.2 million; 2007 -- $3.2 million; and $8.0 million with no expiration. U.S. federal tax return examinations have been completed for years through 1992. The company believes adequate provisions for income tax have been recorded for all years. Deferred tax liabilities (assets) were comprised of the following:
- --------------------------------------------------------------------------------------------------------- JUNE 30 (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Liabilities: Difference between book and tax bases of assets $ 34,445 $ 47,176 $ 37,306 Compensation and benefits accrual 1,602 1,221 1,074 Retirement benefits 6,161 7,299 6,405 Other 20,628 17,639 13,446 - --------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities 62,836 73,335 58,231 - --------------------------------------------------------------------------------------------------------- Assets: Difference between book and tax bases of assets (54,401) (49,010) (37,582) Compensation and benefits accrual (6,205) (5,170) (4,486) Retirement benefits (4,307) (6,425) (4,737) Asset reserves (10,558) (13,143) (16,662) Restructuring and divestitures accruals (10,802) (8,065) (5,119) Capitalization of research and experimental costs, net of amortization (157,381) (166,744) (167,576) Difference between book and tax bases of investments (14,477) (1,930) (2,523) Net operating loss carryforwards (7,660) (38,065) (12,124) General business credits (30,406) (27,049) (14,670) Minimum tax credit (5,332) (4,097) (3,277) Foreign tax credit (402) (31,488) (5,900) Other (12,419) (10,296) (9,055) - --------------------------------------------------------------------------------------------------------- Gross deferred tax assets (314,350) (361,482) (283,711) - --------------------------------------------------------------------------------------------------------- Deferred tax asset valuation allowance 213,271 292,822 229,787 - --------------------------------------------------------------------------------------------------------- Net deferred tax (assets) liabilities $ (38,243) $ 4,675 $ 4,307 - ---------------------------------------------------------------------------------------------------------
The deferred tax asset valuation allowance is primarily attributed to U.S. federal and state deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of these items that a valuation allowance is required. The decrease of approximately $80 million in the valuation allowance during 1996 was due in part to a reassessment of the company's ability to realize its net deferred tax asset in the future. Approximately $34 million of the valuation allowance at June 30, 1996, relates to the tax benefits of stock options which will be credited to additional paid-in capital when realized. 37 27 - -------------------------------------------------------------------------------- EXTRAORDINARY ITEM -- LOSS RELATED TO EARLY RETIREMENT OF DEBT - -------------------------------------------------------------------------------- On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes. Accordingly, the company recorded an extraordinary loss of $6 million related to the early retirement of debt. The extraordinary loss was comprised of a $7 million prepayment penalty and deferred debt issuance costs, net of a $1 million deferred gain resulting from the termination of a related interest rate swap agreement. There was no tax benefit recognized for the extraordinary item because it increased U.S. losses. - -------------------------------------------------------------------------------- WORLDWIDE OPERATIONS(a) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- UNITED REST OF CONSOLIDATED (in thousands) STATES EUROPE ASIA WORLD CONSOLIDATION TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers(b) 1996 $ 612,435 $684,661 $220,586 $153,879 $ -- $1,671,561 1995 539,518 653,221 198,845 138,989 -- 1,530,573 1994 562,199 587,196 179,060 133,077 -- 1,461,532 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues between geographic areas(c) 1996 243,120 130,581 11,677 1,485 (386,863) -- 1995 220,267 117,188 13,729 138 (351,322) -- 1994 199,331 141,493 8,427 142 (349,393) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 1996 855,555 815,242 232,263 155,364 (386,863) 1,671,561 1995 759,785 770,409 212,574 139,127 (351,322) 1,530,573 1994 761,530 728,689 187,487 133,219 (349,393) 1,461,532 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision 1996 91,964 115,825 9,627 8,450 -- 225,866 for restructuring and divestitures, and 1995 43,664 103,926 4,809 5,309 -- 157,708 loss on reorganization/formation of JV 1994 (80,764) 120,825 2,026 11,443 -- 53,530 and other Raynet items - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including 1996 79,836 83,961 9,138 7,257 -- 180,192 provision for restructuring and 1995 6,532 85,126 4,809 5,309 -- 101,776 divestitures, and loss on reorganization/ 1994 (80,764) 120,825 2,026 11,443 -- 53,530 formation of JV and other Raynet items - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1996 57,203 55,186 21,534 12,207 -- 146,130 extraordinary item, and change in 1995 (89,868) 60,983 18,583 10,032 -- (270) accounting principle 1994 (102,200) 108,345 15,686 11,914 -- 33,745 - ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1996 380,349 427,527 128,067 57,907 -- 993,850 1995 335,609 487,079 150,511 60,492 -- 1,033,691 1994 433,155 452,888 139,947 56,328 -- 1,082,318 - ----------------------------------------------------------------------------------------------------------------------------------- Corporate assets 1996 373,846 124,590 33,447 24,883 -- 556,766 1995 186,911 177,809 40,445 15,889 -- 421,054 1994 201,762 67,581 32,542 14,812 -- 316,697 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 1996 754,195 552,117 161,514 82,790 -- 1,550,616 1995 522,520 664,888 190,956 76,381 -- 1,454,745 1994 634,917 520,469 172,489 71,140 -- 1,399,015 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1996 and 1995 versus consolidated in 1994. (b) Revenues from unaffiliated customers in each geographic area reflect only shipments originating locally and exclude direct exports from other geographic areas. (c) Revenues between geographic areas are recorded on the basis of arms-length prices established by the company. 38 28 - -------------------------------------------------------------------------------- BUSINESS SEGMENTS - -------------------------------------------------------------------------------- The electronics business segment serves the aerospace, automotive, defense, mass transit, computer, communications, medical, and other industries. The industrial business segment serves industrial and commercial infrastructure customers, including electric, gas, and water utilities; industrial plants and pipelines; and commercial construction. The telecommunications business segment serves the telephone and cable television industries. The company's Raynet subsidiary delivered fiber-optic distribution systems for voice, video, and data to telecommunications network operators. Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1996 and 1995 versus consolidated in 1994.
- ----------------------------------------------------------------------------------------------------------------------------------- TELECOMMU- CONSOLIDATED (in thousands) ELECTRONICS INDUSTRIAL NICATIONS RAYNET CORPORATE TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Revenues(a) 1996 $670,595 $542,344 $458,622 $ -- $ -- $ 1,671,561 1995 611,036 499,344 420,193 -- -- 1,530,573 1994 521,890 451,814 430,044 57,784 -- 1,461,532 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision for 1996 125,788 116,443 91,202 -- (107,567) 225,866 restructuring and divestitures, and loss on 1995 98,768 86,519 62,809 -- (90,388) 157,708 reorganization/formation of JV and other 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530 Raynet items - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision 1996 112,225 95,618 84,550 -- (112,201) 180,192 for restructuring and divestitures, and loss 1995 98,768 86,519 38,909 -- (122,420) 101,776 on reorganization/formation of JV and 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530 other Raynet items - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1996 -- -- -- -- -- 146,130 extraordinary item, and change 1995 -- -- -- -- -- (270) in accounting principle 1994 -- -- -- -- -- 33,745 - ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1996 438,926 301,109 253,815 -- 556,766 1,550,616 1995 448,858 323,109 261,724 -- 421,054 1,454,745 1994 381,863 300,320 290,591 109,544 316,697 1,399,015 - ----------------------------------------------------------------------------------------------------------------------------------- Capital expenditures 1996 30,503 17,140 13,308 -- 17,638 78,589 1995 37,179 22,515 20,802 -- 13,545 94,041 1994 33,211 20,415 26,967 10,758 12,705 104,056 - ----------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 1996 32,326 16,643 16,236 -- 14,222 79,427 1995 27,020 16,456 19,873 -- 11,449 74,798 1994 24,672 16,715 17,795 14,806 12,277 86,265 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Revenues between segments are immaterial. 39 29 - -------------------------------------------------------------------------------- COMMITMENTS - -------------------------------------------------------------------------------- Total rental expense was $35 million in both 1996 and 1995, and $39 million in 1994. The company had commitments at June 30, 1996, to expend approximately $25 million for the construction or acquisition of additional property, plant, and equipment. Annual future minimum lease payments at June 30, 1996, under noncancelable operating leases, are as follows: 1997 -- $24 million; 1998 -- $19 million; 1999 -- $15 million; 2000 -- $10 million; 2001 -- $7 million; and thereafter -- $34 million. - -------------------------------------------------------------------------------- CONTINGENCIES - -------------------------------------------------------------------------------- The company has been named, among others, as a potentially responsible party in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of the sites, the company is alleged to be a de minimis generator of hazardous wastes, and the company believes that it has limited or no liability for cleanup costs at these sites. The company and its subsidiaries have also been named as a defendant, along with sixteen other corporate and governmental codefendants, in a private cost recovery for environmental cleanup expenses at the West Contra Costa County Landfill in Richmond, California. On August 4, 1995, the company's and other defendants' motion for judgment on the pleadings was granted by the District Court striking the plaintiff's claim that the company and the other defendants were jointly and severally liable for response costs at the site. As a result, the company's potential liability, if any, for response costs at the site would be based on the company's disposal of wastes at the site. The company believes its wastes constitute less than 2% of the total amount of wastes disposed of at the site. Additionally, the company and its subsidiaries are parties to lawsuits involving various types of commercial claims, including, but not limited to, product liability, unfair competition, breach of contract, and intellectual property matters. The principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company intends to defend itself vigorously in these matters. The company's experience to date is that losses, if any, from such claims have not had, nor are they expected to have, a material effect on the company's financial position or results of operations. The company maintains insurance to cover product liability and certain other claims in excess of deductibles. Effective March 31, 1996, the company increased its insurance deductible for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. In the second quarter of 1992, the company and its insurer reached settlement with the plaintiffs in a class action securities suit. The settlement totaled $19.5 million, which was funded $8.25 million by the company and $11.25 million by its insurer. In 1996, the company recovered $6.6 million from its insurer, which gain was included in "Other (income) expense, net." Legal proceedings tend to be unpredictable and costly. Based on currently available information, however, management believes that the resolution of pending claims and legal proceedings will not have a material adverse effect on the company's operating results or financial position. 40 30 ================================================================================ QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED (in thousands except share data) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 - ---------------------------------------------------------------------------------------------------------------------------------- FISCAL 1996:(a) Revenues $ 410,515 $ 411,051 $ 417,819 $ 432,176 Gross profit 215,601 214,390 210,242 215,976 Provision for restructuring and divestitures -- -- 43,571 -- Loss on reorganization of Ericsson Raynet joint venture -- -- 2,103 -- Equity in Ericsson Raynet net loss 11,124 18,694 -- -- Income before income taxes 45,440 35,311 10,946 54,433 Net income 32,430 25,102 41,708(b) 48,672 - ---------------------------------------------------------------------------------------------------------------------------------- Per share data: Net income per common share $ 0.72 $ 0.55 $ 0.89(b) $ 1.05 Cash dividends per common share 0.08 0.08 0.10 0.10 Price range of Common Stock(d) 36 1/2-47 43 3/8-59 3/4 52-69 3/4 63-80 1/2 - ---------------------------------------------------------------------------------------------------------------------------------- FISCAL 1995:(a) Revenues $ 368,145(c) $ 382,494 $ 368,784 $ 411,150 Gross profit 185,286(c) 197,846 184,718 204,157 Provision for restructuring and divestitures 23,900 -- -- -- Loss on formation of Ericsson Raynet joint venture and other Raynet items 31,723(c) (423) 931 (199) Equity in Ericsson Raynet net loss 24,676 13,532 11,466 36,272 (Loss) income before income taxes, extraordinary item, and change in accounting principle (45,638) 31,134 18,562 (4,328) (Loss) income before extraordinary item and change in accounting principle (48,328) 19,999 10,896 (4,015) Extraordinary item -- (loss) adjustment related to early retirement of debt, net of $0 income taxes (7,074) 756 -- -- Cumulative effect of change in accounting principle, net of $0 income taxes (1,477) -- -- -- Net (loss) income (56,879) 20,755 10,896 (4,015) - ---------------------------------------------------------------------------------------------------------------------------------- Per share data: (Loss) earnings per common share: (Loss) income before extraordinary item and change in accounting principle $ (1.12) $ 0.45 $ 0.25 $ (0.09) Extraordinary item (0.16) 0.02 -- -- Change in accounting principle (0.04) -- -- -- ----------------------------------------------------------------- Net (loss) income $ (1.32) $ 0.47 $ 0.25 $ (0.09) ================================================================= Cash dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 Price range of Common Stock(d) 35 1/8-41 7/8 32 3/8-42 3/8 34 1/4-41 3/8 32 1/2-41 1/4 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in fiscal 1995 and through December 31 in fiscal 1996. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (b) Includes a discrete tax benefit of $25 million related to the reassessment of the company's deferred tax asset valuation allowance. (c) Reflects restatement of Raynet Corporation and subsidiaries' results to the equity basis of accounting. (d) The price range of Common Stock is as reported on the New York Stock Exchange composite tape. Raychem Corporation Common Stock is listed on the New York Stock Exchange. The number of stockholders as of August 19, 1996, was 6,750. Dividends have been paid quarterly since the second quarter of fiscal 1978. The closing price of the company's Common Stock on the New York Stock Exchange composite tape on August 19, 1996, was $68 1/4 per share. 41 31 ================================================================================ TEN-YEAR SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated(a) - ---------------------------------------------------------------------------------------------------------------------------- INCOME DATA - ---------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,671,561 $ 1,530,573 $ 1,461,532 - ---------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures $ 43,571 $ 23,900 $ -- - ---------------------------------------------------------------------------------------------------------------------------- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ 2,103 $ 32,032 $ -- - ---------------------------------------------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet $ 29,818 $ 85,946 $ -- - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ 146,130 $ (270) $ 33,745 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 147,912 $ (29,243) $ 1,679 - ---------------------------------------------------------------------------------------------------------------------------- SHARE DATA - ---------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share $ 3.22 $ (0.67) $ 0.04 - ---------------------------------------------------------------------------------------------------------------------------- Cash dividends per common share $ 0.36 $ 0.32 $ 0.32 - ---------------------------------------------------------------------------------------------------------------------------- Cash dividends per Series B share $ -- $ -- $ -- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 45,908,894 43,538,028 43,290,797 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,550,616 $ 1,454,745 $ 1,399,015 - ---------------------------------------------------------------------------------------------------------------------------- Long-term debt $ 148,352 $ 263,552 $ 244,681 - ---------------------------------------------------------------------------------------------------------------------------- Total debt $ 302,981 $ 293,226 $ 275,548 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 841,206 $ 749,658 $ 732,924 - ---------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in debt net of cash $ (96,293) $ (22,299) $ 55,842 - ---------------------------------------------------------------------------------------------------------------------------- OTHER SIGNIFICANT MEASURES - ---------------------------------------------------------------------------------------------------------------------------- Gross profit as a percent of revenues 51.2% 50.4% 46.6% - ---------------------------------------------------------------------------------------------------------------------------- Research and development expense as a percent of revenues 7.3% 7.8% 9.3% - ---------------------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense as a percent of revenues 30.4% 32.4% 33.6% - ---------------------------------------------------------------------------------------------------------------------------- Net debt as a percent of stockholders' equity 9.4% 23.4% 26.9% - ---------------------------------------------------------------------------------------------------------------------------- Number of employees 8,697 9,496 10,769 - ---------------------------------------------------------------------------------------------------------------------------- Revenues per average number of employees $ 184 $ 151 $ 136 - ---------------------------------------------------------------------------------------------------------------------------- RAYNET CORPORATION(f) - ---------------------------------------------------------------------------------------------------------------------------- Revenues $ -- $ -- $ 57,784 - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ -- $ -- $ (102,993) - ----------------------------------------------------------------------------------------------------------------------------
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 and through December 31 in fiscal 1996 versus consolidated in prior years. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (b) Restated to reflect reclassification of royalty and licensing income from "Other expense, net" to "Revenues." (c) Reflects reclassification of litigation settlement to "Other expense, net." (d) Restated to reflect the three-for-one stock split effective on November 2, 1987. (e) Cash exceeded debt at June 30. (f) Raynet Corporation was incorporated in 1988. 42 32 ================================================================================
- ---------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated(a) - ---------------------------------------------------------------------------------------------------------------- INCOME DATA - ---------------------------------------------------------------------------------------------------------------- Revenues $ 1,385,730 $ 1,301,601(b) $ 1,250,772(b) - ---------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures $ -- $ 43,300 $ 3,697 - ---------------------------------------------------------------------------------------------------------------- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ -- $ -- $ -- - ---------------------------------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet $ -- $ -- $ -- - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ 39,584 $ 12,585(c) $ (3,109) - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ 9,625 $ (24,808) $ (23,429) - ---------------------------------------------------------------------------------------------------------------- SHARE DATA - ---------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share $ 0.23 $ (0.64) $ (0.63) - ---------------------------------------------------------------------------------------------------------------- Cash dividends per common share $ 0.32 $ 0.32 $ 0.32 - ---------------------------------------------------------------------------------------------------------------- Cash dividends per Series B share $ -- $ -- $ -- - ---------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 42,232,289 39,030,049 37,134,161 - ---------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA - ---------------------------------------------------------------------------------------------------------------- Total assets $ 1,332,270 $ 1,392,606 $ 1,234,860 - ---------------------------------------------------------------------------------------------------------------- Long-term debt $ 233,853 $ 229,768 $ 233,347 - ---------------------------------------------------------------------------------------------------------------- Total debt $ 275,562 $ 257,763 $ 265,340 - ---------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 689,504 $ 715,188 $ 651,973 - ---------------------------------------------------------------------------------------------------------------- (Decrease) increase in debt net of cash $ 32,715 $ (57,610) $ 90,589 - ---------------------------------------------------------------------------------------------------------------- OTHER SIGNIFICANT MEASURES - ---------------------------------------------------------------------------------------------------------------- Gross profit as a percent of revenues 48.7% 48.4% 48.6% - ---------------------------------------------------------------------------------------------------------------- Research and development expense as a percent of revenues 9.3% 10.8% 11.2% - ---------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense as a percent of revenues 34.6% 33.6% 35.8% - ---------------------------------------------------------------------------------------------------------------- Net debt as a percent of stockholders' equity 20.5% 15.2% 25.5% - ---------------------------------------------------------------------------------------------------------------- Number of employees 10,772 11,187 11,406 - ---------------------------------------------------------------------------------------------------------------- Revenues per average number of employees $ 126 $ 115 $ 111 - ---------------------------------------------------------------------------------------------------------------- RAYNET CORPORATION(f) - ---------------------------------------------------------------------------------------------------------------- Revenues $ 9,671 $ 16,594 $ 11,500 - ---------------------------------------------------------------------------------------------------------------- Net (loss) income $ (92,551) $ (89,334) $ (73,959) - ---------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1990 1989 1988 1987 - --------------------------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated(a) - --------------------------------------------------------------------------------------------------------------------------------- INCOME DATA - --------------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,114,713(b) $ 1,083,028 $ 1,094,733 $ 944,434 - --------------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures $ 90,000 $ -- $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------------- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ -- $ -- $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet $ -- $ -- $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ (86,261) $ 63,767 $ 169,304 $ 100,821 - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (111,398) $ 36,347 $ 125,285 $ 73,599 - --------------------------------------------------------------------------------------------------------------------------------- SHARE DATA - --------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share $ (3.12) $ 1.04 $ 3.69 $ 2.25(d) - --------------------------------------------------------------------------------------------------------------------------------- Cash dividends per common share $ 0.32 $ 0.30 $ 0.22 $ 0.15(d) - --------------------------------------------------------------------------------------------------------------------------------- Cash dividends per Series B share $ -- $ 0.01 $ 0.03 $ 0.02(d) - --------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 35,708,523 34,928,935 33,979,365 32,738,442(d) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,270,834 $ 1,172,783 $ 1,148,975 $ 926,920 - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt $ 31,087 $ 29,029 $ 35,458 $ 22,377 - ---------------------------------------------------------------------------------------------------------------------------------- Total debt $ 212,954 $ 130,294 $ 129,246 $ 132,409 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 690,467 $ 734,286 $ 722,155 $ 570,946 - ---------------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in debt net of cash $ 98,633 $ (19,132) $ (80,857) $ (57,859) - ---------------------------------------------------------------------------------------------------------------------------------- OTHER SIGNIFICANT MEASURES - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit as a percent of revenues 49.6% 52.8% 54.3% 52.2% - ---------------------------------------------------------------------------------------------------------------------------------- Research and development expense as a percent of revenues 11.0% 11.1% 7.7% 7.3% - ---------------------------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense as a percent of revenues 37.5% 36.7% 32.8% 33.2% - ---------------------------------------------------------------------------------------------------------------------------------- Net debt as a percent of stockholders' equity 11.0% (e) (e) 13.5% - ---------------------------------------------------------------------------------------------------------------------------------- Number of employees 11,065 11,451 10,909 9,899 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues per average number of employees $ 99 $ 97 $ 105 $ 95 - ---------------------------------------------------------------------------------------------------------------------------------- RAYNET CORPORATION(f) - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 7,625 $ 2,960 $ 25,160 $ -- - ---------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (64,484) $ (54,307) $ 2,562 $ -- - ----------------------------------------------------------------------------------------------------------------------------------
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 and through December 31 in fiscal 1996 versus consolidated in prior years. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (b) Restated to reflect reclassification of royalty and licensing income from "Other expense, net" to "Revenues." (c) Reflects reclassification of litigation settlement to "Other expense, net." (d) Restated to reflect the three-for-one stock split effective on November 2, 1987. (e) Cash exceeded debt at June 30. (f) Raynet Corporation was incorporated in 1988. 43 33 EXHIBIT 13 APPENDIX OMITTED GRAPHIC MATERIAL The following graphic material, included in the original paper format, has been excluded from the electronic filing of the 1996 Annual Report (Exhibit 13 to this filing). This graph appears in the section entitled "Financial Review" of the 1996 Annual Report. "ONGOING" PRETAX INCOME (excludes Raynet and non-recurring items) A bar chart (in millions) depicting: $143 in 1994; $146 in 1995; and $230 in 1996. EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME ORGANIZED UNDER THE LAWS OF - ---------------------------------------------------------------------------------------- Compagnie Francaise des Isolants (CFI) .................. France Elo TouchSystems, Inc. .................................. Tennessee K.K. Raychem ............................................ Japan Raychem AG .............................................. Switzerland Raychem Aktiebolag ...................................... Sweden Raychem A/S ............................................. Denmark Raychem A/S ............................................. Norway Raychem (Australia) Proprietary, Ltd. ................... Australia (New South Wales) Raychem Canada Limited .................................. Canada Raychem (Delaware) Ltd. ................................. Delaware Raychem Gesellschaft m.b.H. ............................. Austria Raychem GmbH ............................................ Germany Raychem Industries N.V. ................................. Belgium Raychem International Corporation ....................... California Raychem International ................................... Cayman Islands, B.W. I. Raychem International Manufacturing Corporation ......... California Raychem Korea Ltd ....................................... Korea Raychem Limited. ........................................ United Kingdom Raychem (Nederland) Besloten Vennootschap ............... The Netherlands Raychem N.V. ............................................ Belgium Raychem OY .............................................. Finland Raychem Produtos Irradiados Limitada .................... Brazil Raychem RPG Limited ..................................... India Raychem S.A. ............................................ France Raychem, S.A. ........................................... Spain Raychem S.A. Industrial y Comercial ..................... Argentina Raychem Saudi Arabia Limited ............................ Saudi Arabia Raychem Shanghai Cable Accessories Ltd. ................. People's Republic of China Raychem Singapore Pte. Limited .......................... Singapore Raychem S.p.A. .......................................... Italy Raychem Taiwan Limited .................................. Taiwan Raychem Technologies Ltd. ............................... Cyprus Raychem Tecnologias, S.A. de C.V. ....................... Mexico Raychem Ventures, Inc. .................................. California RTP Development Corporation ............................. Delaware SHG Strahlenchemie Holding GmbH ......................... Germany Sigmaform France S.A.R.L. ............................... France Sigmaform GmbH .......................................... Germany Sigmaform U.K. Limited .................................. United Kingdom
EX-23 11 CONSENT OF INDEPENDANT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-00353, No. 333-00355, No. 333-00925, No. 33-15116, No. 33-15117, No. 33-23856, No. 33-29215, No. 33-29216, No. 33-37579, No. 33-37580, No. 33-45986, No. 33-50737, No. 33-58437, No. 33-58869, No. 33-58871, and No. 33-59600 ) of Raychem Corporation of our report dated July 17, 1996, appearing on page 21 of the 1996 Annual Report to Stockholders, portions of which are incorporated as Exhibit 13 to this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule II, listed in Item 14(a)(2) of this Form 10-K. /s/ PRICE WATERHOUSE LLP San Jose, California September 19, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 U.S. DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 224,115 0 318,374 10,033 229,323 907,856 1,104,646 613,207 1,550,616 450,752 148,352 0 0 44,891 796,315 1,550,616 1,669,551 1,671,561 813,351 815,352 122,137 3,145 9,631 146,130 (1,782) 147,912 0 0 0 147,912 $3.22 0
EX-99.A 13 PARTICIPATING PARTIES IN THE 1984 EMPLOYEE STOCK 1 Exhibit 99(a) RAYCHEM CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 Participating subsidiaries in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Compagnie Francaise des Isolants (CFI) K.K. Raychem Raychem A.G. Raychem A/S (Denmark) Raychem (Australia) Proprietary, Ltd. Raychem Gesellschaft m.b.H. Raychem GmbH Raychem (H.K.) Limited Raychem International Corporation Raychem Korea Ltd. Raychem Limited Raychem (Nederland) Besloten Vennootschap Raychem New Zealand Limited Raychem N.V. Raychem OY Raychem S.A. Raychem, S.A. Raychem Saudi Arabia Limited Raychem Singapore Pte. Limited Raychem S.p.A. Raychem Taiwan Limited Remtek International Corporation Sigmaform France S.A.R.L. Sigmaform U.K. Limited Sigmaform GmbH Elo TouchSystems, Inc. EX-99.B 14 PATRICIPATING PARTIES IN THE AMEND 1985 SUPP EMPLY 1 Exhibit 99(b) RAYCHEM CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 Participating subsidiaries in the Amended and Restated 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Raychem Ltd. Raychem Aktie Bolag Raychem A/S (Norway) Raychem Canada Limited Raychem Industrial y Comercial Ltda Raychem International (Ireland) Raychem International Manufacturing Corp (Puerto Rico) Raychem Produtos Irradiados Limitada Raychem S.A. Industrial y Comercial Raychem Technologias, S.A. de C.V. Raychem de Venezuela, C.A. Raychem Technologies Ltd. SHG Strahlenchemie Holding GmbH -----END PRIVACY-ENHANCED MESSAGE-----