-----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, GOEH9oapiOrRHZx99G5Xs02Meu98WObsygQ5VRxEYvlHX4J3LRm9ysLD7OrQwO6d 20a3DwOPoUs3AKRLe7N8PQ== 0000891618-99-001286.txt : 19990505 0000891618-99-001286.hdr.sgml : 19990505 ACCESSION NUMBER: 0000891618-99-001286 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLESOFT INC CENTRAL INDEX KEY: 0000875570 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 680137069 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20710 FILM NUMBER: 99580131 BUSINESS ADDRESS: STREET 1: 4460 HACIENDA DR POST OFFICE BOX 8015 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5102253000 MAIL ADDRESS: STREET 1: 4440 ROSEWOOD DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588-3031 10-K405 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-20710 PEOPLESOFT, INC. (Exact name of registrant as specified in its charter) DELAWARE 68-0137069 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 4460 HACIENDA DRIVE, PLEASANTON, CA 94588 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 694-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PREFERRED SHARE PURCHASE RIGHTS (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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. [X] The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based upon the closing sale price of common stock on March 22, 1999 as reported on the Nasdaq National Market, was approximately $3 billion. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 22, 1999, Registrant had 238,078,138 outstanding shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of Stockholders to be held May 25, 1999 are incorporated by reference in Part III of this Form 10-K Report. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 References in this Report to the "Company" or "PeopleSoft" refer to PeopleSoft, Inc. which was incorporated in Delaware in 1987 and its subsidiaries. PeopleSoft, the PeopleSoft logo, PeopleTools, PS/nVision, PeopleCode, PeopleBooks, and Red Pepper are registered trademarks, and PSBN, PeopleTalk, and "We work in your world." are trademarks of PeopleSoft, Inc. All other company and product names may be trademarks of their respective owners. References to beta versions of software products refer to software products delivered to select customers for testing or evaluation prior to the general commercial release of such software products. 3 PART I ITEM 1. BUSINESS This Business section and other parts of this Form 10K contain forward-looking statements that involve risk and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." GENERAL PeopleSoft designs, develops, markets and supports a family of enterprise client/server and internet based application software products for use throughout large and medium sized organizations, including corporations worldwide, and higher education institutions, and federal, state, provincial and local government agencies primarily in North America. The Company designs its products for the client/server and internet models of computing and believes that its architecture is among the most flexible available for enterprise level applications software. The Company's strategy is to offer a comprehensive business portal entitled the PeopleSoft Business Network ("PSBN"). PSBN consists of an eBusiness Backbone integrated with upcoming eWorkplace self service communities and ePerformance Management Analytical Applications. The eBusiness Backbone consists of cross industry transaction processing applications such as HR management, financial applications, and procurement, including industry specific versions of these base applications, such as manufacturing, distribution, student administration, public sector, Federal, financial services, and others. The eWorkplace communities will consist of self service applications which integrate third party content with the eBusiness Backbone and Analytical Applications, allowing users a browser based service environment which is both productive and easy to use. The self service communities will include procurement, expenses, benefits, travel booking and processing, recruitment, and others, the first of which are planned for introduction in 1999. Analytical applications allow customers to perform analysis of data from the transaction processing applications, both those from PeopleSoft and other vendors, supporting management decision making. The Activity Based Management, Risk Weighted Capital, and Funds Transfer Pricing analytical applications began shipping in the first quarter of 1999, and others are planned for release in 1999 and 2000. The Company believes that its PSBN solutions will enable its customers to significantly improve the productivity of their employees and enhance the capability of management to analyze enterprise information in making essential business decisions. The Company's software products utilize the Microsoft Windows family of operating systems on the desktop as well as Internet browser-based products for its clients. The database server runs on a wide variety of popular relational database management system ("RDBMS"), operating system and hardware platform choices. There are also several popular options on the application server, making its software solutions among the most flexible, scaleable and portable in the application software industry. Application software products have been primarily developed using PeopleTools, the Company's integrated rapid application development toolset that is delivered to customers along with the application software products to facilitate customer modification and customization. PeopleSoft was incorporated in Delaware in August 1987 and initially shipped its first software product suite, a Human Resource Management System ("HRMS") in December 1988. In 1992, PeopleSoft introduced the first of a series of Financial Management and Accounting System software products, and in 1994, introduced the first of a series of Distribution and Materials Management products, rounding out a complete family of cross industry software products. Since that time, PeopleSoft has introduced several industry specific software product suites, including a suite of Manufacturing products for manufacturers, a suite of Public Sector Financial Management products, a suite of Public Sector HRMS products, a suite of Student Administration products for the higher education market, and a suite of HRMS products for the U.S. Federal Government marketplace, and has introduced additional Human Resource and Financial Management software products. In October 1996, the Company acquired Red Pepper Software Company ("Red Pepper"), a leader in the supply chain management systems market. PeopleSoft's strategy is to offer comprehensive enterprise application software solutions to a variety of industries with best of breed products 1 4 utilized in a wide variety of cross-industry solutions. In the first quarter of 1999, the Company released its first Analytical Applications products to support management decision making. SOFTWARE PRODUCT ARCHITECTURE PeopleSoft's software products are based on a scaleable, multi-tiered, client/server architecture, and emerging internet architectures. The Company believes that its architecture provides the system performance required for intensive record keeping and high volume on-line transaction processing ("OLTP") business applications, and facilitates faster, easier and less expensive implementations of the initial system as well as subsequent upgrades. PeopleSoft applications are designed for ease of use, are integrated with the Microsoft Windows family of products and are compatible with personal productivity applications such as word processors and spreadsheets. PeopleSoft applications also operate over the web using a browser-based client. PeopleSoft software products are designed specifically for use with RDBMSs, which offer power and functionality superior to flat files, hierarchical, or other non-relational databases that are generally used with legacy software applications. The Company's software products are also scaleable, permitting changes in network size, server platforms and other architectural components with minimal disruption. Further, PeopleSoft software products are portable across major RDBMS software and server hardware platforms. The Company believes that the intuitive design of its software products reduces end-user training requirements and allows end-users and decision makers increased access to critical data not always readily available to them with legacy systems. Architecture The Company's application software products support online transaction management in any of three different modes. In two-tier transaction processing, the presentation logic and interactive application logic are performed on a Windows client, while data intensive application logic and data management functions are carried out on the database server. In three-tier transaction processing, the presentation logic and selected interactive application logic operate on a Windows client, while the balance of interactive application logic and data intensive application logic operates on an application server and data management functions are carried out on a database server. The two-tier and three-tier options that use Windows on the desktop are collectively referred to as the Windows Client. In "three-tier for the Web" transaction processing, the presentation logic operates on a Java based client in a browser ("Web client"), while interactive application logic and data intensive application logic operates on an application server. With the availability of Release 7 and three-tier transaction processing, the Company's application software products now take advantage of messaging using remote procedure calls which facilitate real-time initiation of certain application logic routines on an application server or database server machine. Customers may implement Release 7 or 7.5 application software products using a single or any combination of the above processing options in a single local area or wide area network environment. The Company's future product development will focus heavily on internet centric computing, including an HTML client for a smaller footprint (thin client), applications messaging across the internet with XML, internet based APIs and messages, and web based reporting. PeopleTools Today's users are demanding system solutions that address specific business needs, facilitate the automation of workflow, are quickly adaptable to changing information requirements and provide for ease of access to information. PeopleSoft addresses these needs by providing PeopleTools, a set of integrated development and reporting tools including: (i) Development tools for use by business process or system analysts to rapidly design and deploy custom modifications; (ii) Administration tools for use by systems managers and support staff to improve the efficiency of implementing, operating and upgrading PeopleSoft's applications; (iii) Reporting and Analysis tools for use by application users to easily access, summarize and analyze information; (iv) PeopleSoft Workflow for use by business process or system analysts and application users to automate business processes in a paperless environment; and (v) PeopleSoft enterprise application integration tools for use in communicating between PeopleTools-built applications and externally-built applications. PeopleTools continues to be used by the Company to develop most of its application software 2 5 products, and is a runtime environment. Powerful features and functions which PeopleTools supports include effective date capabilities, extensive security at both a user and object level, and a tree editor for managing hierarchical relationships among data elements. PeopleTools is used to build and modify data tables, design and customize user interface windows, modify user pull-down menus, define security privileges of individual users and operator access to system objects, define and build workflow based processes, process online transactions, and facilitate data importation from other systems into PeopleSoft applications. PeopleTools simplifies system customization and implementation and can help reduce the time and cost of implementing the system. Upgrades to new releases are simplified with a tool, which provides an automated comparison of the customer's customized systems to base level systems, and helps define how to install new releases. In addition, PeopleTools provides customers with significant ongoing flexibility to modify their systems quickly and inexpensively, so that internal maintenance costs can be reduced significantly. Relational Database Management Systems By utilizing relational databases and designing the system from the ground up, the Company has been able to develop integrated software products with fully normalized data structures. A fully integrated system provides convenient access to shared data such as department tables, tax rates and organization charts, without requiring users to maintain this information redundantly. Collecting and capturing information once ensures that all data is consistent, readily available and easier to maintain. Through adherence to ANSI Structured Query Language ("SQL"), the industry standard data manipulation language for RDBMSs, and other relational database standards, the Company's software products are available in a range of environments. PeopleSoft's software products can be licensed for use with the following RDBMSs: IBM's DB2 (MVS/ESA using DDCS connectivity products from IBM, and separately on AIX and OS/400), Informix Corporation's ("Informix") INFORMIX-OnLine Dynamic Server (NT and multiple versions of Unix), Microsoft Corporation's ("Microsoft") SQL Server, Oracle Corporation's ("Oracle") Oracle 8 (NT and over 10 versions of Unix), and Sybase, Inc.'s ("Sybase") System 11 (on multiple versions of Unix). If the customer decides to switch to other PeopleSoft supported RDBMS or hardware platforms, user disruption is usually minimized because only the "back-end" database changes, while the "front-end" application remains the same. No assurance can be given concerning the successful development of PeopleSoft software products on additional platforms, the specific timing of the releases of any future software products, the performance characteristics of PeopleSoft applications on additional platforms or their acceptance in the marketplace. Not all software products or release versions of the Company's software products are currently available on all of the above platforms. Presently, releases or new software products are initially introduced on Oracle with a subsequent release supporting other RDBMS versions. As a result of the complexities inherent in the DB2 environment and the performance demanded by customers in the DB2 environment, the DB2 version requires more lengthy development and testing periods to achieve market acceptance. In addition, there may be future or existing RDBMS platforms which achieve popularity within the business application marketplace and which PeopleSoft may desire to offer its applications thereon. Such future or existing RDBMS products may or may not be architecturally compatible with PeopleSoft's software product design. No assurance can be given concerning the successful porting to new platforms, the specific timing of completion of any such ports or their acceptance in the marketplace. Graphical User Interface All PeopleSoft's current software products share a common graphical user interface ("GUI") based on Microsoft's Windows family of products, which provides a consistent "look and feel" to the Company's applications, including similar pull-down menus, error handling, system navigation and point-and-click mouse-driven functionality. PeopleSoft Release 7.5 operates either in a 32-bit architecture on Windows 95 and NT or on browsers certified to run the Company's Web client. The intuitive nature of GUI-based systems increases productivity and reduces user training requirements. The GUI's ease of use encourages non-technical users to utilize the information system capabilities more fully. In addition, the GUI allows users to integrate enterprise applications and data with other Microsoft Windows-based desktop applications while using the Windows Client. For example, customers can easily query the system and download data into either a word processing 3 6 document or a spreadsheet. By leveraging the public's widespread familiarity with personal computers ("PC"), previously difficult access to enterprise information is readily available to the casual employee user, resulting in potentially significant improvements in employee productivity. PeopleSoft's planned new business portal (PSBN) products to be introduced beginning in 1999 will be internet focused, with extensive use of a Web browser interface. Application Security Architecture The Company's application software products incorporate extensive security features designed to protect certain sensitive data managed by these applications from unauthorized retrieval or modification. The Company has developed a security architecture utilizing the capabilities of its own applications, the client operating system software, some of the security features contained in the RDBMS platforms on which the applications run, as well as certain third party security products. To date, the Company is not aware of any violations of its application security architecture within its installed base. Electronic Commerce PeopleSoft's Web client runs applications over the World Wide Web, the Internet, extranets and intranets. Electronic Data Interchange ("EDI") is supported by the EDI Manager feature to handle transactions based on EDI documents utilizing standard X-12 and EDIFACT formats. The transactions can be passed over the Internet or private extranets. The Message Agent application programming interface allows initiation of PeopleSoft transactions from sources such as electronic forms, electronic mail, touch screen information kiosks and Web browsers. PeopleSoft's planned PSBN internet focused products will also include electronic bill presentment, supply chain management eCommerce capability, and electronic storefront functionality. APPLICATION SOFTWARE PRODUCTS At December 31, 1998, PeopleSoft delivers commercially available application software products in product lines of Business Management, Supply Chain, Industry Solutions, and Product Architecture. Listed below are the commercially available software products within these product lines. Please note that products may be shared between product lines and therefore, may appear in more than one product line. For example, Purchasing is a product that is part of PeopleSoft Materials Management, as well as PeopleSoft Procurement. This allows our customers the flexibility to purchase the set of products that best address their business needs. Listed below are the commercially available software products for the following software product lines: BUSINESS MANAGEMENT APPLICATION SOFTWARE PRODUCTS
PEOPLESOFT HUMAN RESOURCES MANAGEMENT 7.5 PEOPLESOFT ACCOUNTING AND CONTROL 7.5 PEOPLESOFT TREASURY MANAGEMENT 7.5 - - ----------------------------------------- ------------------------------------- ---------------------------------- Human Resources General Ledger Cash Management Benefits Administration Receivables Payables FSA Administration Payables Expenses Payroll Asset Management Receivables Payroll Interface Projects Budgets Pension Administration Budgets Deal Management Time and Labor Expenses Risk Management Stock Administration Cash Management
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PEOPLESOFT PERFORMANCE MEASUREMENT 7.5 PEOPLESOFT PROJECT MANAGEMENT 7.5 - - -------------------------------------- --------------------------------- Enterprise Warehouse Projects Activity-Based Management Purchasing Funds Transfer Pricing Payables Risk Weighted Capital Expenses General Ledger Asset Management Time and Labor Inventory Billing Time and Labor Payroll Budgets SUPPLY CHAIN APPLICATION SOFTWARE PRODUCTS PEOPLESOFT SALES AND LOGISTICS 7.5 PEOPLESOFT MATERIALS MANAGEMENT/ PEOPLESOFT SUPPLY CHAIN PLANNING --------------------------------- PROCUREMENT 7.5 7.5 --------------------------------- --------------------------------- Remote Order Entry Purchasing Demand Planning Order Management Payables Enterprise Planning Product Configurator Inventory Order Promising Billing Expenses Receivables Asset Management Order Promising Inventory
PEOPLESOFT REVENUE MANAGEMENT 7.5 - - --------------------------------- Time and Labor Payroll Projects Billing Expenses Receivables Payables Purchasing INDUSTRY SOLUTIONS APPLICATION SOFTWARE PRODUCTS PEOPLESOFT HUMAN RESOURCES PEOPLESOFT HUMAN RESOURCES PEOPLESOFT FINANCIAL MANAGEMENT MANAGEMENT MANAGEMENT FOR EDUCATION AND GOVERNMENT 7 FOR EDUCATION AND GOVERNMENT 7.5 FOR U.S. FEDERAL GOVERNMENT 7 --------------------------------- - - --------------------------------- --------------------------------- Human Resources Human Resources General Ledger Benefits Administration Benefits Administration Receivables FSA Administration Payroll Payables Payroll Payroll Interface Purchasing Payroll Interface Time and Labor Budgets Time and Labor Inventory Asset Management Billing PEOPLESOFT PROFITABILITY PEOPLESOFT MERCHANDISE MANAGEMENT PEOPLESOFT CUSTOMER INFORMATION MANAGEMENT 7.5 SYSTEM FOR FINANCIAL SERVICES 7.5 --------------------------------- FOR UTILITIES 7.5 - - --------------------------------- --------------------------------- Enterprise Warehouse Merchandising CIS Plus from SPL WorldGroup Activity-Based Management Funds Transfer Pricing Risk Weighted Capital
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PEOPLESOFT PRODUCT DEVELOPMENT 7.5 PEOPLESOFT PRODUCTION MANAGEMENT 7.5 - - ---------------------------------- ------------------------------------ Engineering Bills and Routings Bills and Routings Production Planning Cost Management Production Management Inventory Cost Management Quality Inventory PEOPLESOFT STUDENT ADMINISTRATION PEOPLESOFT ADVANCEMENT 7.5 7.5 --------------------------------- - - --------------------------------- Recruiting and Admissions Advancement Student Financials Financial Aid Student Records Academic Advisement Campus Community PRODUCT ARCHITECTURE APPLICATION SOFTWARE PRODUCTS PEOPLETOOLS 7.5: PEOPLETOOLS 7.5: PEOPLETOOLS 7.5: DEVELOPMENT TOOLS ADMINISTRATION TOOLS REPORTING AND ANALYSIS TOOLS - - --------------------------------- --------------------------------- --------------------------------- Application Designer Data Mover PeopleSoft Query Application Engine Security Administrator PS/nVision PeopleCode Mass Change Structured Query Reports Import Manager Cube Manager Process Scheduler Tree Manager Configuration Manager Process Scheduler Object Security Transaction Set Editor PEOPLETOOLS 7.5: PEOPLETOOLS 7.5: WORKFLOW TOOLS INTEGRATION TOOLS - - --------------------------------- --------------------------------- Application Designer Message Agent API Workflow Processor EDI Manager Workflow Administrator Open Query API
STATEMENT OF FUTURE DIRECTION: This document contains statements of future direction concerning possible functionality for PeopleSoft's software products and technology. All functionality and software products will be available for license and shipment from PeopleSoft only if and when generally commercially available. PeopleSoft disclaims any express or implied commitment to deliver functionality or software unless or until actual shipment of the functionality or software occurs. The statements of possible future direction are for informational purposes only and PeopleSoft makes no express or implied commitments or representations concerning the timing and content of any future functionality or releases. In a comprehensive offering to help organizations improve both efficiency and effectiveness through business process automation and analysis, PeopleSoft 7.5 includes: (i) global applications and functionality, including global manufacturing and supply chain management, support for European Economic and Monetary Union (EMU) and international accounting practices, and additional global enhancements to support regional and multinational organizations worldwide; (ii) new applications for increased business process efficiency, including the Treasury application suite and new Expenses, Stock Administration, and Quality applications; (iii) strategic applications and functionality with OLAP capability, including the new Performance Measurement application suite, an enhanced Budgets application, and new total compensation functionality in the Human Resources application; (iv) enhancements throughout the entire enterprise application suite. In addition, PeopleSoft 7.5 marks the introduction of several new web client-based self-service applications, including employee expenses, employee time and reporting, and benefits processing; (v) all of the applications and functionality included in release 7.5 take advantage of the proven technology delivered with PeopleSoft 7 6 9 in September 1997, including a web client, a high-performance three-tier processing option, and OLAP integration; (vi) industry-specific solutions for manufacturing, retail, the federal government, higher education, public sector, healthcare, financial services, service industries, communications, transportation and utilities; and (vii) PeopleSoft Express, PeopleSoft's packaged guidance for rapid implementations and upgrades, is available with PeopleSoft 7.5. The Company's software products are generally licensed to end-user customers under non-exclusive, non-transferable, perpetual license agreements. In most cases, the Company licenses its software products solely for the customer's internal operations. License fees for the Company's software products are a function of the particular combination of PeopleSoft software products chosen and, the number of employees for HRMS software products, the number of enrolled students for Higher Education software products or revenues of the licensing entity for Financial, Supply Chain and Manufacturing software products and the number of named users for third party workstation based software tools. All RDBMS platforms are priced the same except for DB2 mainframe versions, which have a higher price. PEOPLESOFT BUSINESS MANAGEMENT APPLICATION PRODUCTS: HUMAN RESOURCES MANAGEMENT PeopleSoft Human Resources Management 7.5 is a family of fully integrated human resources management application software products available for a variety of industries. A brief summary of each software product follows: PeopleSoft Human Resources. The base human resources software product provides support for the human resource and certain base benefit functions, including workforce administration (employee biographical and job-related information), recruitment, position management, training and development, health and safety monitoring, skills inventory, career and succession. Additional features include globalization for managing operations and requirements specific to a country or region, tracking and administration of temporary global assignments, salary planning and budgets, competency management for identifying and analyzing job skills or competencies associated with individuals, jobs, teams and positions, and variable compensation to align the workforce with strategic business objectives, and the administration and tracking of various types of incentive compensation plans. This software product also includes the capability to set up online review by employees of their own selected human resource and benefits information. With this foundation as a building block, the following software products can be added to expand the range of system capabilities. PeopleSoft Benefits Administration. The benefits administration software product provides companies with the capability to automate certain of their more sophisticated benefits management processes, including flexible and non-flexible benefits programs that require complex eligibility checking, open enrollment processing, and other automatic enrollment processing capabilities. PeopleSoft FSA Administration. The flexible spending account administration (FSA) software product provides the capability for companies to manage employee flexible spending accounts for healthcare and dependent care benefits plans. PeopleSoft Payroll. The payroll software product provides a full in-house payroll administration and production facility. PeopleSoft Payroll Interface. The payroll interface software product provides a bridge between the PeopleSoft Human Resources Management application and third party payroll systems for those companies that use their own payroll system or a payroll service bureau. PeopleSoft Pension Administration. The pension administration software product provides the capability to automate pension administration functions for qualified, non-qualified, contributory, final pay, career average and cash balance defined benefit plans. PeopleSoft Time and Labor. The time and labor software product provides a single repository for workforce time and labor tracking and reporting, including exception-only and positive time tracking. 7 10 PeopleSoft Stock Administration. The stock administration product will enable organizations to efficiently administer stock options and employee stock purchase programs. In addition to the above software products, PeopleSoft has extended the functionality of PeopleSoft Human Resources Management through the integration of numerous third party software products, including a resume reader from Restrac, tax reporting and filing from Federal Liaison Services and interactive voice processing of benefit, time and personal payroll-related information from TALX Corporation. PEOPLESOFT BUSINESS MANAGEMENT APPLICATION PRODUCTS: ACCOUNTING AND CONTROL PeopleSoft Accounting and Control 7.5 is a family of fully integrated financial management system products available for a variety of industries. These modules support multiple currencies (including EMU). A brief summary of each software product follows: PeopleSoft General Ledger. The general ledger software product provides financial analysis, flexible management reporting, general ledger accounting and consolidations that enable the user to collect and report financial information based on the organization's unique requirements. Features include: unlimited charts of accounts (ChartFields) with alternate account codes available to support multinational statutory requirements, unlimited ledger versions (multibooks) allowing transaction level data capture in an unlimited number of currencies, gross and net debit and credit balances, currency precision to 15.3 digits, automatic generation of cross-currency exchange rates, customer-defined ledgers, graphical "tree" maintenance of ChartField elements, flexible calendars, dynamic budgeting, automated journal entry, multi-currency capabilities (including support for the European Monetary Unit (EMU)), automated allocations processing and inter-company journal entries. PeopleSoft Receivables. The receivables software product manages the receipt of customer payments, and is designed to improve the organization's ability to collect payments in a timely fashion. PeopleSoft Payables. The payables software product provides comprehensive accounts payable and cash management functions. PeopleSoft Asset Management. The asset management software product manages the acquisition, maintenance, transfer, depreciation and retirement of fixed assets and tax compliance. PeopleSoft Projects. The projects software product integrates operational and financial functions, allowing users to perform a variety of tasks, from managing complex capital projects to calculating revenue for billable projects. PeopleSoft Budgets. The budgeting software product integrates all aspects of the budgeting process, combining spreadsheets, workflow processing and PeopleSoft reporting and query tools into a centralized budgeting solution. In addition, the budget product offers full online analytical processing (OLAP) capability utilizing Arbor's Essbase software. PeopleSoft Expenses. The expenses software product integrates all aspects of the travel and entertainment reimbursement process providing tight control over expense management processing while enabling timely and efficient employee reimbursement. Features include: the flexibility to enable travelers to use their own PCs to enter expense reports outside of the network and then submit them for approval and processing later, direct input from credit card companies, or centralized input of employee receipts submitted by travelers. This software can be integrated with the General Ledger and Payables for reporting and disbursements and will contain workflow capabilities for review and approval. PeopleSoft Cash Management. PeopleSoft Cash Management helps global, multi-center treasury units to monitor and forecast cash needs, maintain bank relationship information, and perform bank reconciliation. PeopleSoft Cash Management at a glance: More Accurate Forecasting. Track and predict the amount and timing of cash flows -- including foreign currency exposures -- from operations through integration with enterprise financial applications, such as accounts payable and accounts receivable. 8 11 Strategic In-House Banking. Strategically provide short-term cash availability to business units, and better assess cash requirements for your organization. Integrated Bank Statement Processing. Centrally reconcile system data from internal and third party sources, then transfer the information to the appropriate applications, such as PeopleSoft Payables, Receivables, Treasury, and General Ledger. Bank Relationship Management. Successfully manage relationships with banks and counterparties, while tracking facilities and fees. Fully Integrated Enterprise Solution. Simplify the forecasting process, using the system to gather data from other PeopleSoft applications, such as PeopleSoft Receivables, Payables, and Budgets. PEOPLESOFT BUSINESS MANAGEMENT APPLICATION PRODUCTS: TREASURY MANAGEMENT PeopleSoft Treasury Management 7.5 is a family of fully integrated treasury management system products available for a variety of industries. A brief summary of each software product follows: PeopleSoft Cash Management. See description above. PeopleSoft Payables. See description above. PeopleSoft Expenses. See description above. PeopleSoft Receivables. See description above. PeopleSoft Budgets. See description above. PeopleSoft Deal Management. PeopleSoft Deal Management provides treasury departments with functionality to streamline deal capture, confirmations, settlement, accounting, and position management. PeopleSoft Deal Management at a glance: Quicker Deal Processing. Define financial instruments, save them as templates, and re-use them for similar types of deals. Simplify administration with electronic confirmation and matching. Innovative Instrument Creation. Create financial instruments using a building block approach. Handle an increasing variety of complex instruments using the same methods as Wall Street financial engineers. Enterprise-Wide Foreign Exchange. Quantify the foreign exchange exposures across different business units in the enterprise. Offset unwanted exposures by conducting fewer transactions at more favorable rates. Flexible Transaction Settlement. Settle all transactions on a gross or net basis by individual deal, financial instrument type, or counterparty for a particular date and currency. Automated Workflow. Use workflow to generate printed confirmation letters and have them faxed to your trade counterparty, or fully automate the process and use electronic confirmation matching. Efficient Transaction Tracking. Track the status of the transaction through the dealing process to determine if there are any backlogs or problems. Immediate Online Information Access. Use your own market data, or integrate real-time information using quote vendors such as Reuters and Bloomberg. Flexible Limits Establishment. Establish limits for counterparties, currencies, financial instrument types, trader, deal size, or numerous other criteria. Use workflow to provide online warning of limits being approached or breached. PeopleSoft Risk Management. PeopleSoft Risk Management supports the valuation and analysis of a treasury's portfolio of transactions and exposures. You can use a variety of reporting tools to provide position, treasury performance analysis, and value-at-risk reports. PeopleSoft Risk Management at a glance: Online Pricing and Analysis. Interface to third party and proprietary analytical tools for online pricing and analysis. Select same analytics used by bankers, to more accurately calculate your counterparty 9 12 exposures in terms of market value. And to conform to regulatory requirements such as those imposed by FASB. Treasury Performance Tracking. Analyze and report treasury performance. For example, track treasury performance relative to a policy-defined benchmark. Hedges Calculation. Calculate the effectiveness of hedges for a single transaction or across a given portfolio. Value at Risk Calculation. Quantify market exposures by calculating Value at Risk (VaR) through an interface to third party analytical tools. Analyze the risk of alternative strategies, restructure the firm's exposure profile, or comply with external regulatory reporting guidelines as imposed by the SEC. Up-to-Date Market Information. Update market information using feeds from external quote vendors. PEOPLESOFT BUSINESS MANAGEMENT APPLICATION PRODUCTS: PERFORMANCE MEASUREMENT PeopleSoft Performance Measurement 7.5 is a family of fully integrated performance measurement system products available for a variety of industries. Enterprise Warehouse, Activity-Based Management, Funds Transfer Pricing and Risk Weighted Capital became generally available during the first quarter of 1999. A brief summary of each software product follows: PeopleSoft Enterprise Warehouse. PeopleSoft Enterprise Warehouse, is a key component to our Performance Measurement solution. The financial, operational, and activity-based management data for performance measurement is stored within the Performance Measurement Warehouse. PeopleSoft Performance Measurement Warehouse brings together data from diverse operating systems. So you can access and analyze information at a variety of levels using online analytical processing (OLAP) tools. PeopleSoft Performance Measurement Warehouse is also designed to store large amounts of data and is optimized for fast response to any query. Performance Measurement Warehouse includes a variety of reporting and OLAP tools, providing an intuitive, navigational interface to your performance measurement data. PeopleSoft Activity-Based Management. The activity-based management software product helps organizations measure performance and support decision making throughout the enterprise with activity-based costing, economic value-added calculations, and the capability to determine profitability by customer, product and channel. PeopleSoft Funds Transfer Pricing. PeopleSoft Funds Transfer Pricing (FTP) helps financial institutions integrate systems for risk management, performance, measurement, and planning. The comparative value of profit contributions is difficult to measure across a wide range of offices operating in different financial environments. FTP is an accurate, credible, and fair tool for measuring and managing profitability across the enterprise. FTP includes the following: Accurate Evaluation of Business Units. Evaluate business units according to factors within their control, including credit quality, pricing, and product strategy. Evaluate institution components consistently and determine component impact on overall earnings. Centralized Risk Management. Transfer interest rate risk from business units to a centralized reporting unit, where risk management expertise resides. Accurate Evaluation of Profit Contributions. Measure profit contributions at the individual product, customer, and organizational levels. Profitable Lending Rates. Determine the funding cost for each asset in a financial institution. Then set profitable lending rates that take credit risk, operating cost, and accurate funding costs into account. Asset Generation Measurement. Measure the asset-generating efficiency of each business unit apart from its funds-generating efficiency. Employee Motivation. Motivate employees to perform according to the financial goals of the institution, with accurate financial reporting. 10 13 Enhanced Management Knowledge. Build management knowledge to improve pricing, tactical, and strategic decisions. PeopleSoft Risk Weighted Capital. PeopleSoft Risk Weighted Capital (RWC) measures the return on risk-adjusted capital. RWC helps institutions allocate appropriate levels of capital to business units on a basis that includes inherent risk. By measuring the performance of business units, products, customers, or transactions against perceived levels of risk, RWC provides a truer picture of profitability. RWC measures risk-adjusted capital derived from several types of risk, including: Credit, Interest Rate, Market, Deposit Run-off, Operational, Legal and Reputation Risk. The advantages of RWC include: - Provides a basis for calculating and reporting risk-adjusted performance - Highlights control and improvement opportunities - Optimally assigns time and resources - Helps reduce earnings volatility by highlighting diversification opportunities - Helps identify areas of equity protection in the event of catastrophic losses - Extends the depth to which capital is allocated to the business unit, product, or customer - Extends the breadth of risk categories covered in reaching specific capital allocation decisions PeopleSoft General Ledger. See description above. PeopleSoft Time and Labor. See description above. PeopleSoft Billing. The billing software product offers a flexible, modular approach for managing billing and adjustments, processing sales taxes, generating invoices, and creating account distributions. Organizations can create an enterprise-wide billing information repository, streamline the billing process, and customize billing requirements. The unique modular approach opens PeopleSoft Billing to allow the billing process to be driven by any number of PeopleSoft and non-PeopleSoft billing sources. Features include: integration with PeopleSoft General Ledger and Order Management, ChartField combination edits, support of Canadian sales and use taxes and automated RMA credit generation. PEOPLESOFT BUSINESS MANAGEMENT APPLICATION PRODUCTS: PROJECT MANAGEMENT PeopleSoft Project Management 7.5 is a family of fully integrated project management system products available for a variety of industries. A brief summary of each software product follows: PeopleSoft Projects. See description above. PeopleSoft Purchasing. The purchasing software product automates requisitioning, purchasing and receiving of raw materials, supplies, services, products and assets, streamlines purchasing functions through online requisitioning, automated sourcing, and application integration and enables buyers to manage vendor selection and ongoing contracts more efficiently and cost effectively. PeopleSoft Payables. See description above. PeopleSoft Expenses. See description above. PeopleSoft Asset Management. See description above. PeopleSoft Inventory. The inventory software product provides the ability to efficiently store and issue stock in response to changing demands, accurately track the movement of stock on a real-time basis, and automatically replenish stock as needed. PeopleSoft Time and Labor. See description above. PeopleSoft Payroll. See description above. PeopleSoft Budgets. See description above. 11 14 PEOPLESOFT SUPPLY CHAIN APPLICATION PRODUCTS: SALES AND LOGISTICS PeopleSoft Sales and Logistics 7.5 is a family of fully integrated distribution software products providing optimum order management and supply chain management. A brief summary of each software product follows: PeopleSoft Remote Order Entry. PeopleSoft Remote Order Entry gives field sales force the ability to enter configured sales orders and quotes on a standalone laptop version of our Product Configurator and Order Management applications. PeopleSoft Remote Order Entry at a glance: Open Ordering Environment. Support full quotation and order entry, as well as full pricing and discounting logic. Enterprise-Wide Synchronization. Ensure accuracy throughout the enterprise. Remote Order Entry operates with subsets of Order Management data -- customers, catalogs, and business units -- to efficiently transfer data. Sales Force Advantage. Enable the customer's sales force to take orders outside the office, thereby increasing productivity. PeopleSoft Order Management. The order management software product handles the complete range of order processing requirements. PeopleSoft Product Configurator. The configurator software product is a highly efficient solution to selling, producing, and tracking individually configured products in a make-to-order or assemble-to-order environment. PeopleSoft Billing. See description above. PeopleSoft Receivables. See description above. PeopleSoft Order Promising. This event-driven, real-time order promising application works in concert with other enterprise requirements planning (ERP) applications to evaluate production capability to meet customer demand. PeopleSoft Inventory. See description above. PEOPLESOFT SUPPLY CHAIN APPLICATION PRODUCTS: MATERIALS MANAGEMENT/PROCUREMENT PeopleSoft Materials Management/Procurement 7.5 is a family of fully integrated distribution software products providing optimum materials and supply chain management. From materials procurement through complex outbound logistics, PeopleSoft Materials Management/Procurement uses the latest technology for the supply chain to streamline business processes. When dealing with customers in the Products Industry (e.g. manufacturing, transportation, and utilities), PeopleSoft refers to this product line as PeopleSoft Materials Management. When dealing with customers in the Services Industry (e.g. financial services, healthcare, retail, service industries), PeopleSoft refers to this product line as PeopleSoft Procurement. Materials Management/Procurement software products that are currently commercially available are: Purchasing, Payables, Inventory, Expenses and Asset Management, each of which is described above. PEOPLESOFT SUPPLY CHAIN APPLICATION PRODUCTS: SUPPLY CHAIN PLANNING PeopleSoft Supply Chain Planning 7.5 is a family of intelligent planning and optimization solutions, powered by Red Pepper technology, for supply chain planning, sales order promising and plant level operations. Supply Chain optimization technology is embedded in certain PeopleSoft manufacturing and distribution software products and is also sold separately for integration into customer environments that incorporate enterprise resource planning (ERP), material requirement planning (MRP) and distribution requirement planning (DRP) products from other vendors. A brief summary of each software product follows: PeopleSoft Demand Planning. PeopleSoft Demand Planning combines advanced decision support techniques with multi-user collaboration to develop enterprise-feasible forecasts. 12 15 PeopleSoft Enterprise Planning. This intelligent supply chain optimization application creates a total view of the enterprise. Beyond just manufacturing planning, it includes true constraint-based replenishment planning, featuring sourcing rules, inventory stocking policies, transfer options, and plan requirements for each location in the supply chain. PeopleSoft Order Promising. See description above. PEOPLESOFT SUPPLY CHAIN APPLICATION PRODUCTS: REVENUE MANAGEMENT PeopleSoft Revenue Management 7.5 is a family of fully integrated distribution software products providing optimum materials and revenue management. A brief summary of each software product is listed above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: HUMAN RESOURCES MANAGEMENT FOR EDUCATION AND GOVERNMENT PeopleSoft Human Resources Management for Education and Government 7.5 is a family of fully integrated human resources management application software products available for education and government. This industry solution is based on our cross-industry Human Resources Management product line and contains additional capabilities required by education and public sector organizations, such as encumbrances/commitments, fund-based position management and budgeting, and contract pay programs. Human Resources Management for Education and Government software products that are currently commercially available include: Human Resources, Benefits Administration, FSA Administration, Payroll, Payroll Interface and Time and Labor. A brief summary of each software product is listed above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: HUMAN RESOURCES MANAGEMENT FOR U.S. FEDERAL GOVERNMENT PeopleSoft Human Resources Management for U.S. Federal Government 7 is a family of fully integrated human resources management application software products available for the U.S. federal government. This industry solution is based on our cross-industry Human Resources Management product line and contains additional capabilities required by U.S. federal government agencies, such as specific U.S. government terminology, encumbrances/commitments, fund-based position management and budgeting, and contract pay programs. Human Resources Management for U.S. Federal Government software products that are currently commercially available include: Human Resources, Benefits Administration, Payroll, Payroll Interface and Time and Labor. A brief summary of each software product is listed above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: FINANCIAL MANAGEMENT FOR EDUCATION AND GOVERNMENT PeopleSoft Financial Management for Education and Government 7 is a family of fully integrated financial management system products available for education and government. This industry solution is based on our cross-industry financial and distribution product lines and contains additional capabilities required by education and public sector organizations, such as public sector specific chart of accounts structures and encumbrances/commitments. Financial Management for Education and Government software products that are currently commercially available include: General Ledger, Receivables, Payables, Purchasing, Budgets, Inventory, Asset Management and Billing. A brief summary of each software product is listed above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: PROFITABILITY MANAGEMENT FOR FINANCIAL SERVICES PeopleSoft Profitability Management 7.5 delivers the kind of cost and profitability information that financial services companies need to remain competitive. Our solution provides access to timely and accurate data on cost, profit, and risk. It helps management throughout the organization make decisions that support overall strategy. PeopleSoft Profitability Management allows financial services organizations to: - Identify the right product lines to support with investment -- and the wrong ones - Manage the cost of and return on funds for operations 13 16 - Determine profitability for individual products, then rationalize accordingly - Determine true product cost and revenue, then price more competitively - Identify service costs of alternative channels of distribution Profitability Management for Financial Services software products which became generally available during the first quarter of 1999 include: Enterprise Warehouse, Activity-Based Management, Funds Transfer Pricing and Risk Weighted Capital. A brief summary of each software product is listed above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: MERCHANDISE MANAGEMENT The merchandising software product is a comprehensive retail merchandise software solution. With PeopleSoft, retailers can enable all users -- novice or experienced -- to quickly turn transaction data into reports that spur action. Merchandise Management enhances a retailer's ability to address problems and capitalize on opportunities across the enterprise. PeopleSoft's Merchandise Management provides additional benefits such as: - Streamline administrative practices and work more productively - Adapt merchandise management system to business changes and growth - Deploy user-friendly exception based reporting and data surfing tools enterprise-wide - Organize and consolidate critical information in a data warehouse for quick and easy enterprise-wide access - Consolidate the functionality of disparate information systems onto a single easy-to-use platform PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: CUSTOMER INFORMATION SYSTEM FOR UTILITIES PeopleSoft for Utilities features CIS PLUS(R) the leading customer management solution from SPL WorldGroup. CIS PLUS is a functionally rich system designed to meet customer needs quickly and effectively. Benefits include: - Understand customer purchasing trends and offer them the choices they want - Capture comprehensive customer information with flexible parameters - Customize market offering - Take advantage of emerging market opportunities - Capture customer financial data then integrate it into PeopleSoft financial management applications PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: PRODUCT DEVELOPMENT PeopleSoft Product Development 7.5 is a family of fully integrated software products designed for manufacturers. A brief summary of each software product follows: PeopleSoft Engineering. The engineering software product provides the ability to manage product introduction and change processes throughout the enterprise. PeopleSoft Bills and Routings. The bills and routings software product provides all the features and functionality required to dynamically maintain complex bills of material (BOM), resources, work centers and routings. PeopleSoft Cost Management. The Cost Management software product provides control and flexibility to manage costs throughout the supply chain. This software product focuses on determining, analyzing, and managing product costs and on accounting transactions that affect inventory balances. PeopleSoft Inventory. See description above. 14 17 PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: PRODUCTION MANAGEMENT PeopleSoft Production Management 7.5 is a family of fully integrated software products designed for manufacturers. A brief summary of each software product follows: PeopleSoft Bills and Routings. See description above. PeopleSoft Production Planning. This interactive factory planning system enables planners to optimize their manufacturing operations. PeopleSoft Production Management. The production management software product synchronizes planning and execution throughout the enterprise. PeopleSoft Cost Management. See description above. PeopleSoft Quality. The Quality software product provides a structured quality environment, combining online Statistical Process Control (SPC) data collection with the power of a relational database for unparalleled quality analysis and reporting. PeopleSoft Inventory. See description above. PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: STUDENT ADMINISTRATION PeopleSoft Student Administration 7.5 is a suite of software applications tailored to meet the specific needs of higher education institutions. A brief summary of each software product follows: PeopleSoft Recruiting and Admissions. The recruiting and admissions application captures all information relating to specific candidates, admitted students, recruiter management, event management, concurrent prospect and applications records, and automated admissions decisions. PeopleSoft Student Financials. The student financials application unifies all the rules a college or university has regarding fees and tuition, making possible innovative tuition calculation, cashiering, third party processing, collections and profitability tracking. PeopleSoft Financial Aid. The financial aid application integrates workflow to streamline applications processing, assignment of student budgets, needs analysis, fund disbursement, and compliance with federal regulations and grant applications. This application also allows automated Direct and FFELP Loan processing and automated aid packaging. PeopleSoft Student Records. The student records application expedites complex academic administrative tasks such as catalog and class schedule maintenance, enrollment requisite and conflict checking, multiple grading systems, multiple concurrent academic careers and academic programs, wait list management and tracking, and automated transfer credit evaluation. PeopleSoft Academic Advisement. The academic advisement application provides automated analysis of student progress toward completion of academic requirements. This application allows students and advisors to easily understand, navigate and track degree progress. PeopleSoft Campus Community. The campus community application captures and unifies prospect, applicant, student, alumni and employee records by allowing for a common database across the institution. This application streamlines internal communications management and provides complex global searches and tracking of all individuals and organizations associated with the college or university. 15 18 PEOPLESOFT INDUSTRY SOLUTIONS APPLICATION PRODUCTS: ADVANCEMENT PeopleSoft Advancement streamlines and automates key business functions related to philanthropic and non-profit management. Advancement combines with other products to provide the higher education community with a comprehensive institution-wide solution. PeopleSoft Advancement users can: - Maintain biographic constituent information - Track and manages all types of commitments - Maintain detailed prospect information - Put on events of various sizes and objectives - Strengthen fundraising efforts PEOPLESOFT APPLICATION DEVELOPMENT AND PRODUCTIVITY TOOLS -- PEOPLETOOLS The Company includes a restricted use license to PeopleTools with each PeopleSoft application software product licensed. PeopleTools 7.5 includes the following application development tools: Development Tools: Business process analysts use the following tools to design, prototype and deliver custom modifications and system extensions: Application Designer. Application Designer is an integrated development environment which allows users to view and edit a list of applications objects through an MDI interface. It also allows modified objects to be moved into production through PeopleSoft's upgrade process. The Application Designer integrates the following tools: Data Designer. Data Designer is used to build new table definitions, to add, drop or modify fields in existing tables and to facilitate field editing. In addition, Data Designer includes PeopleCode, a programming language similar to Visual Basic which is used for custom field-level calculations, edits, defaults and programming routines which minimizes complex coding inherent with standard computer languages. Panel Designer. Panel Designer is used to build or modify GUI-based query and data entry screens. Menu Designer. Menu Designer is used to build or modify application windows and pull-down menus in a graphical user interface environment. Business Process Designer. Business Process Designer comprises the tools used to design and build business processes, including workflow rules and routings. Application Upgrader. Application Upgrader facilitates customer upgrades to successive releases of the applications with retention of the function and feature modifications made by the customer. Object Security. Object Security allows read or modification access to individual objects and groups of objects, including tables, panels, menus or tree structures. Application Reviewer. Application Reviewer works as a debugger to help systems analysts perform problem identification and resolution prior to placing a modified system into production. Application Processor. Application Processor builds panels from stored application objects. An image of the objects in memory is written to local storage for reuse, but is automatically updated if changed on the server. EDI Manager. EDI Manager is used to define the data mappings for electronic data interchange. 16 19 Administration Tools: Information systems managers and support staff use the following tools to improve the efficiency of implementing and operating PeopleSoft's software applications: Application Installer. Application Installer automates the application installation process in various client/server network environments, facilitating easier navigation through the many hardware, database, and connectivity variables that affect PeopleSoft applications. Data Mover. Data Mover archives and retrieves archived data stored in PeopleSoft application databases. Operator Security. Operator Security controls the scope and level of data accessibility provided to individuals and classes of users. Mass Change. Mass Change is a SQL generator used to develop and perform custom applications. Through Mass Change, a developer can set up a series of insert, update or delete SQL statements that the end user can execute to perform business functions. Import Manager. Import Manager speeds the loading of data generated by other systems into the RDBMS server for access by the Company's application software products. Process Scheduler. Process Scheduler streamlines the execution of routine tasks and controls time-based events from distributed clients by running, on the client or server, batch processes or programs such as journal creation, payroll processing, voucher posting and other reports without requiring additional user interaction. Reporting and Analysis Tools: The following tools are used by application users to easily access, analyze and report information: PS/nVision. PS/nVision integrates PeopleSoft applications with Microsoft Excel in the production of financial statements, responsibility reports and other ad hoc financial reports and analyses. Tree Manager. Tree Manager builds hierarchical relationships between different data elements within a given table, such as among departments or accounts. PeopleSoft Query. PeopleSoft Query builds SQL queries which extract and summarize information from an application's database. Query Link. Query Link provides a PeopleSoft Query interface to Crystal Reports Pro, a versatile report designer and formatter from Crystal Services. Through Query Link, data can be quickly and easily formatted with a variety of fonts, borders and other special effects or imported into a spreadsheet such as Microsoft Excel for further analysis. Cube Manager. Cube Manager is used to map data between PeopleSoft databases and hyperdimensional cubes using online analytical processing ("OLAP"). Currently Cognos PowerPlay and Arbor Essbase are directly integrated through the PeopleTools Cube Manager. PeopleSoft Workflow Tools: PeopleSoft Workflow is a suite of tools that significantly extends the range of business tasks that can be automated. The following are PeopleSoft Workflow tools: Workflow Processor. Workflow Processor is a suite of online agents that run and control the workflow in business processes. Once business processes are defined, agents are created which perform the business process tasks. PeopleSoft Navigator. The Navigator is a graphical browser which provides application users with a graphical map of the business processes they participate in and enables them to navigate, or select, application panels by clicking on activities they need to perform. Database Agent. The Database Agent monitors the PeopleSoft database to identify items that need to enter workflow for processing. 17 20 Message Agent. The Message Agent processes messages sent to PeopleSoft by external systems such as IVR, E-mail such as Lotus Notes or Microsoft CC-Mail, Internet, intranet, extranet and kiosks. It provides an Application Program Interface ("API") that enables third party systems to integrate with PeopleSoft. Worklists. Worklists are ordered lists of work a person or department has to process. The list is sent to the correct person in priority order as defined using the Business Process Designer. Workflow Administrator. The Workflow Administrator provides capability to access, monitor, analyze and control workflow applications. SALES AND MARKETING The Company markets and licenses its software products in most major world markets primarily through a direct sales organization of 1,509 employees as of December 31, 1998. The direct sales organization is based in over 25 field sales offices located in major metropolitan areas throughout the United States. International sales activities are managed out of the Company's offices in Toronto, Vancouver, Ottawa, and Montreal, Canada; Amsterdam, the Netherlands; Paris, France; Reading, England; Munich, Germany; Brussels, Belgium; Milan, Italy; Zurich, Switzerland; Mexico City, Mexico; Sydney, Perth and Melbourne, Australia; Auckland, New Zealand; Buenos Aires, Argentina; Sao Paulo, Brazil; Tokyo, Japan; Madrid, Spain; Johannesburg, South Africa; Hong Kong and Singapore. Most of the Company's licenses for PeopleSoft software products to date have been in the U.S. and Canada, and a significant portion of international sales have been to overseas affiliates of a customer's U.S. based enterprise. To augment its direct sales channel, the Company has: (i) a teaming agreement with Andersen Consulting to address the PeopleSoft HRMS and PeopleSoft Financials requirements of state and local government agencies; (ii) agreements for consulting and system integration with Deloitte and Touche LLP, KPMG Peat Marwick LLP and PriceWaterhouseCoopers LLP, and (iii) agreements with other third party distributors and system integrators in various countries where it does not have a direct sales force. In support of its sales force, the Company conducts comprehensive marketing programs, which include telemarketing, direct mail, public relations, advertising, seminars, trade shows and ongoing customer communication programs. The sales cycle begins with the generation of a sales lead, or often the receipt of a request for proposal ("RFP") from a prospect, which is followed by qualification of the lead, an analysis of the customer's needs, response to an RFP (if solicited by the customer), one or more presentations to the customer, customer internal sign-off activities, and contract negotiation and finalization. While the sales cycle from customer to customer varies substantially, the sales cycle has historically required six to twelve months. Generally, customers obtain separate licenses for the underlying database management systems directly from the RDBMS vendors, however, the Company may also sublicense runtime versions of Oracle's, Sybase's or Informix's RDBMSs and certain connectivity software products to its customers, and in some cases, has made royalty prepayments under these agreements. In addition, the Company incorporates SQRIBE Technology Corporation's ("SQRIBE") SQR, ReportMate, Seagate's Crystal Report Writer, BEA's Tuxedo and Jolt Middleware, Cognos' Powerplay, Select Software's data modeling and process modeling tools, and Rational Software Corporation's SQA Robot with all of its software products. The Company has sublicensing arrangements with Microsoft, Oracle, Informix, SQRIBE, Seagate, BEA, Cognos, Select Software, Folio Corporation and Rational and accordingly, the Company must rely on the strength of such companies' trademarks, trade secrets, contractual arrangements, copyrights and patents for protection and continued usage of such intellectual property by the Company. Termination of the relationship with any of these companies could adversely affect the Company's software product offerings and ability to generate revenue software application license sales. A key aspect of the Company's sales and marketing strategy is to build and maintain strong working relationships with businesses the Company believes play an important role in the successful marketing of its software products. The Company's customers and potential customers often rely on third party system integrators to develop, deploy and manage client/server applications. These include: (i) RDBMS software vendors (such as Informix, Microsoft, Oracle and Sybase); (ii) hardware vendors (such as Compaq 18 21 Computer Corporation, Hewlett Packard Corporation, IBM, Sequent Computer Systems, Inc. and Sun Microsystems, Inc.) which offer both hardware platforms and, in the case of IBM, proprietary RDBMS products on which the Company's software products run; (iii) technology consulting firms and systems integrators (such as Andersen Consulting, IBM's ISSC, Deloitte and Touche LLP, PriceWaterhouseCoopers LLP, and KPMG Peat Marwick LLP) some of which are active in the selection and implementation of large information systems for the information-intensive organizations that comprise the Company's principal customer base; and (iv) benefits consulting firms (such as Towers Perrin, Wyatt Co. and William M. Mercer & Co.) that are active in the implementation of human resource management systems. The Company believes that its marketing and sales efforts are enhanced by the worldwide presence of these companies. PeopleSoft has conducted several joint marketing and sales programs with these vendors and other technology and software partners, including seminars, direct mail campaigns and trade show appearances. However, there can be no assurance that these companies, most of which have significantly greater financial and marketing resources than PeopleSoft, will not start, or in some cases increase, the marketing of business application software in competition with PeopleSoft, or will not otherwise discontinue their relationships with or support of PeopleSoft. If the Company or its partners are unable to adequately train a sufficient number of consulting personnel to support the implementation of the Company's software products, demand for these products could be adversely affected. In addition, PeopleSoft's software application architecture, including PeopleTools, may facilitate reduced implementation costs for customers compared to the competitive alternatives from Oracle and SAP. Therefore, systems integrators may actually generate lower integration fees when implementing PeopleSoft applications when compared to competitive offerings. Due to the foregoing factors, it is possible that in a future quarter or quarters, the Company's operating results could not meet the published expectations of certain public market financial analysts. In such an event, the price of the Company's common stock would very likely be materially adversely affected. Relationship with Shared Medical Systems, Inc. In August 1995, PeopleSoft and Shared Medical Systems, Inc. ("SMS") entered into a systems integrator agreement whereby PeopleSoft appointed SMS as a distributor of certain PeopleSoft HRMS and Financials software products. During the third quarter of 1998, the companies mutually terminated the distribution agreement. SMS had the right to sublicense selected PeopleSoft software products in competition with the Company's marketing efforts in the healthcare market. International Operations During the years ended December 31, 1996, 1997 and 1998, the Company's international revenues were approximately 16%, 15% and 16% of total revenues, respectively. International revenues from each geographic region were less than 10% of total revenues. The Company markets certain of its software products to a variety of industries through foreign subsidiaries located in Canada, the United Kingdom, the Netherlands, Germany, France, Spain, Switzerland, Italy, Belgium, South Africa, Mexico, Argentina, Brazil, Venezuela, Australia, Singapore, Japan, Malaysia, Hong Kong, and New Zealand. In addition, the Company also markets through distributors in the Asia/Pacific region. For the years ended December 31, 1996, 1997, and 1998, the Company's revenues in the Asia/Pacific region, which includes Far East countries and Australia and New Zealand, were less than 5% of total revenues. As of December 31, 1998, less than 5% of the Company's assets are in the Asia/Pacific region. SERVICES AND CUSTOMER SUPPORT The Company believes that a high level of customer service is required to be successful in the enterprise software marketplace due to the number of different hardware and software vendors involved in an implementation and the inherent complexity of the software. The Company also believes that the opportunity exists to differentiate itself from competitors on a service level due to the demanding service requirements of this market. The Company's customer service staff consisted of 3,601 employees as of December 31, 1998. 19 22 Service revenue consists primarily of software support (maintenance) fees, customer training fees, consulting fees, and other miscellaneous fees. Services revenues constituted 44%, 47% and 56% of the Company's total revenues during the years ended December 31, 1996, 1997 and 1998, respectively. Service revenue may fluctuate due to, but not limited to, changes in levels of consulting activity, the related satisfaction of significant agreement milestones, and satisfaction of the Company's revenue recognition criteria. In addition, seasonality impacts training and installation revenue, both of which tend to follow license fees by approximately one quarter. Services include the following categories: Software Maintenance and Support The Company provides 24-hour hot-line telephone support, staffed with a group of experienced professionals and supported by a computerized call tracking and problem reporting system. PeopleSoft has provided internet access to this hotline as an alternative to telephone bound service since August of 1995. The Company supports worldwide operations with hubs in North America, Europe and the Asia/Pacific region. This service provides subscribing customers with company news, direct access to other PeopleSoft subscribing customers, the ability to download and apply software product fixes and access to an online troubleshooting database. Typically, software product license fees include the first year of maintenance support. Thereafter, ongoing maintenance contracts are offered to customers, and are renewable on an annual basis. The maintenance agreement entitles the customer to software product enhancements or upgrades released during the term of the maintenance agreement, access to the PeopleSoft Advantage Customer Care Business Center, and 24-hour hot-line telephone support. Annual maintenance fees are generally based on 18% of the price of the software products under license by a customer. To date, well over 90% of all customers have renewed their maintenance contracts. Customer Education and Training The Company offers comprehensive education for key groups affected by the implementation of PeopleSoft technology (executives, the project team and application users) with the goal of ensuring each customer's success with the Company's software products. Training is also available for third party consultants. The Company's educational programs include instructor-led classes, computer-based training, and extensive end user training that also serves as an electronic performance support system. In 1999, PeopleSoft is launching four significant training initiatives: PeopleSoft Knowledge Broadcasts: This new subscription service provides interactive, instructor-led training via satallite broadcasts which are delivered to the users desktop. The format allows customers to train managers and members of their implementation teams without incurring travel costs or office downtime through the use of Interactive Distance Learning (IDL) technologies. The PeopleSoft Knowledge Center: This new Web-based learning and competency management environment provides Web-based training modules covering PeopleSoft products, related technology and even soft skills, allowing customers' end users to develop skills in all areas crucial to their performance in their jobs. PeopleSoft Performance Solutions: This consulting team provides services to help customers manage human performance. Their services include competency definition, gap analysis, competency management program development, training recommendations, and professional development program development. The PeopleSoft Pro Credential Program: This program provides job role based training recommendations and awards a certificate based on completion of a prescribed training program. This program, which is open to the public, is designed to help customers be confident that the individuals who they hire or contract to assist in an implementation have the requisite skills and training to make their implementation a success. Instructor-led training is provided in training facilities leased by the Company in several major metropolitan areas around the world and can also be delivered on the customer's site for a fee plus travel 20 23 expenses. The Company's fees for instructor-led, project team training are generally priced at $450 per training unit (representing approximately one student day of training). The Company offers price reductions for volume advanced purchases of training units. The Company's pricing for end user training varies based on the number of employees at the customer company and the number of training modules purchased. Consulting Services The Company offers a variety of consulting services to its customers including system product implementation assistance and planning, project planning and strategy, upgrade implementation, electronic commerce, workflow or OLAP deployment, and minor software product enhancements. The Company has several technology labs which currently concentrate on upgrading customers from one PeopleSoft release to the next. Additionally, the Company has a Year 2000 lab that specializes in rapid customer implementations and the development of tools, templates and methodologies to assist our customers and partners in similar efforts. The Company frequently works closely with third party consulting and systems integration firms such as Andersen Consulting, Deloitte and Touche LLP, KPMG Peat Marwick LLP and PriceWaterhouseCoopers LLP who provide the customer with a full range of reengineering, customization and project management services. These third party consulting firms have also licensed PeopleSoft applications to develop programs to support customers implementing the Company's software products. During the past year PeopleSoft significantly expanded its consulting services group to meet growing customer demands for such services. There can be no assurance that PeopleSoft will be successful in further expanding its consulting services group, or that revenues from consulting services will in fact increase, or be profitable. To help reduce the time-to-implement and improve a customer's opportunity to achieve a higher return on investment from licensing a PeopleSoft product, the Company has created the PeopleSoft Implementation Tool Kit (ITK). This tool kit is bundled with the product, and provides customers and partners with specific implementation guidance and facilities. The Implementation Took Kit has been successfully utilized in a beta setting during 1998. The Company believes that ITK will significantly reduce the time-to-implement and long-term cost of ownership for the licensed products, as well as facilitating the overall process of upgrading and extending applications throughout a customer's enterprise. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. Customer Care Business Center The Customer Care Business Center (CCBC) is a pool of customer service resources that are available via 1-800 number access. All PeopleSoft customers have access to the CCBC personnel. These service professionals are focused on resolving customer's business issues. The CCBC will also be responsible for all customer software orders, maintaining customer contracts and the maintenance of customer service systems such as Vantive. PeopleSoft Advisor This group develops and delivers PeopleSoft business information to the customer base via seminars, conference calls, knowledge broadcasts, etc., serving as a communication vehicle for all customers. COMPETITION The market for business application software has been intensely competitive for the past three years and is currently intensifying. The Company currently competes with a variety of software vendors including: (i) enterprise application software vendors; (ii) manufacturing application software vendors; (iii) enterprise resource optimization application software vendors; (iv) financial management systems and HRMS application software vendors; and (v) software tools vendors. In addition, the Company's new eWorkplace, analytical applications, and other internet focused products will compete with companies offering internet community and portal solutions as well as companies offering analysis and reporting products. Although PeopleSoft believes its success has been due in part to its early emphasis on the client/server architecture, virtually all of 21 24 the Company's competitors now offer software products based on a client/server architecture. The Company must now differentiate itself in the internet applications market through solutions that offer customers high productivity for user self service processes, analysis for strategic decision making, a highly integrated and easy to use enterprise business portal, and other factors unique to the internet application market. In addition, the Company must compete through: (i) enterprise software product breadth and individual product features; (ii) service reputation; (iii) product flexibility; (iv) ease of implementation; (v) international software product version availability and support; and (vi) price. Price competition has increased over the past year and this trend may continue in the future. In the enterprise application software market, PeopleSoft faces significant competition from SAP, Oracle J.D. Edwards, and to a lesser degree, Dun & Bradstreet Software (operating as two separate divisions of Geac Computer Systems, Inc.), Computer Associates International, Inc. and other companies such as System Software Associates who previously focused primarily on the AS/400 marketplace. In this market, the chief competitive factors include: (i) the breadth and completeness of the enterprise solution offered by each vendor; (ii) the extent of software product integration across the enterprise solution; (iii) the availability of localized software products and technical support in key markets outside the United States, and (iv) the strength of internet focused product offerings and vision. Both SAP and Oracle have substantially greater financial, technical, international and marketing resources, and a larger installed base than PeopleSoft. Furthermore, Oracle's RDBMS underlies a significant portion of PeopleSoft's installed applications. The Company entered the manufacturing software application markets in 1996. In these markets, the Company's existing competitors include those listed immediately above and others such as Baan Company N.V. ("Baan") QAD, Ross Systems and J.D. Edwards, and a large number of niche competitors already in the manufacturing markets. In addition, since it acquired Red Pepper Software in the fourth quarter of 1996, PeopleSoft has competed in the enterprise resource optimization software solutions market. PeopleSoft's current and potential competitors in this market include: (i) companies such as i2 Technologies, Manugistics, and Numetrix Software which have developed or are attempting to develop advanced planning and scheduling software products which complement or compete with MRP (material requirements planning) solutions; (ii) other companies that provide specialized planning and scheduling software for niche markets, including Chesapeake Systems, Waterloo Manufacturing Software, MAPICS, Inc., Marcam Solutions, Inc. and Cap Logistics; (iii) other enterprise application software vendors that may broaden their product offerings by internally developing (such as SAP's initiatives in this area), acquiring (such as Baan's acquisitions of Berclain Group, Inc. and Antalys, Inc.) or partnering with independent developers of advanced planning and scheduling software; (iv) internal development efforts by potential customers' corporate information technology departments; and (v) companies offering standardized or customized products on mainframe and/or mid-range computer systems. PeopleSoft also competes with (i) providers of HRMS software products including Cyborg Systems, Lawson Associates, Integral Systems, Inc., InPower, Inc. and Ceridian and (ii) providers of financial management systems software products including Computron Software, Inc., Flexiware International, Hyperion Software, Lawson Associates and other smaller companies. In addition, as the Year 2000 approaches, potential customers may consider outsourcing options, including data center outsourcing and service bureaus, as viable alternatives to purchasing PeopleSoft's software products. This may result in increased competition from outsource services including Computer Science Corporation ("CSC"), Electronic Data Systems Corporation ("EDS"), IBM, ADP, Ceridian, and other smaller companies. During the third quarter of 1998, PeopleSoft signed agreements with IT service 22 25 providers CIBER, Inc., CSC, Corio, KPMG Peat Marwick, reSOURCE PARTNER, and Usinternetworking to provide industry-specific outsourcing solutions encompassing software implementation and management services. Although PeopleSoft is pursuing an outsourcing partner program that it believes will address the needs of the marketplace, this program may not be successful. Intense competition could lead to increased price competition in the market, forcing the Company to reduce prices. As a result, PeopleSoft's gross margins may decline and it may lose market share, which, in turn, could have a material adverse effect on the Company's business, financial condition and results of operations. In recent quarters, PeopleSoft's competitors have increasingly priced their products aggressively. PeopleSoft may be unable to continue to compete successfully with its existing competitors or to compete successfully with new competitors. SOFTWARE PRODUCT DEVELOPMENT Since inception, the Company has made substantial investments in research and software product development. The Company believes that timely development of new software products, enhancements to existing software products and the acquisition of rights to sell or incorporate complimentary technologies and products into its software product offerings, is essential to maintain its competitive position in the market. The applications software market is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and rapidly evolving industry standards. The Company believes that software product development is most effectively and expeditiously accomplished by small teams comprised of relatively senior people who are focused on certain software product areas. Accordingly, the Company's development organization is comprised of small, focused development groups assigned to each of the software products within the primary software product areas: eWorkplace Communities, Enterprise Performance Measurement, various industry specific applications, PeopleSoft HRMS, PeopleSoft Financials, PeopleSoft Financials for the Public Sector, PeopleSoft Human Resources for the Federal Government, PeopleSoft Distribution, PeopleSoft Manufacturing, Supply Chain Planning, PeopleSoft Student Administration and PeopleTools. This development is typically undertaken in a single RDBMS environment on a workstation-based LAN. In addition, the Company utilizes a platforms group that is responsible for porting and testing the Company's software products on other RDBMS and hardware server environments. The Company's documentation group develops the user and system administration documentation for each software product. The Company utilizes a common technology and technical approach in the development of all application products. Significant application development is performed using PeopleTools. The Company's current focus in application development is to transform its product offerings into the PeopleSoft Business Network (PSBN), an Enterprise Information Portal approach to computing, as well as to increase the breadth and scope of its industry specific offerings. PSBN will consist of a business portal approach to computing including (i) internet focused enhancements to the base ERP (the eBackbone), including development of internet focused API's and internet messaging protocols, an HTML client, and eCommerce capabilities such as electronic bill presentment and electonric storefront capabilities; (ii) eWorkplace communities for internet based self service applications that link the eBackbone, analytical applications, and third party content; and (iii) analytical applications (Enterprise Performance Management) to support strategic decision making. In addition the Company will invest in expanded functionality across all of its software product offerings, including global product requirements and industry specific requirements. There can be no assurance that such development efforts will result in products, features or functionality or that software products, features or functionality that are developed will be accepted by the market. The Company's research and development staff consisted of 1,332 employees as of December 31, 1998. The Company's total research and development expenses were approximately $70.7 million, $129.6 million, and $209.7 million for the years ended December 31, 1996, 1997 and 1998, respectively. In addition, the Company capitalized software development costs of $3.7 million, $2.5 million and $5.6 million for the years ended December 31, 1996, 1997 and 1998, respectively. In October 1998, the Company capitalized $27.8 million in software related to the purchase of Intrepid Systems, Inc. ("Intrepid"). Capitalized software development and purchased software costs are amortized over the estimated useful life of the software product beginning with general availability for a period not to exceed five years. Total capitalized software 23 26 amortization, which is charged to cost of license fees, amounted to $1.6 million in 1996, $4.0 million in 1997 and $5.7 million in 1998. In addition, in November 1996 and October 1998, the Company recorded one-time charges of $22.5 million and $13.9 million for in-process research and development related to the purchases of PeopleSoft Manufacturing, Inc. ("PMI") and Intrepid, respectively. Throughout 1998, the Company had a significant amount of cash on hand. Management evaluated options on using the funds to acquire or develop new technology. During the fourth quarter of 1998 the Company formed a new company, Momentum Business Applications, Inc. ("Momentum Business Applications"), to select and develop certain software application products, and to commercialize such products, most likely through licensing to the Company. The Company contributed $250 million to Momentum Business Applications. Momentum Business Applications' software application development activities will take place under a development and license agreement with the Company. It is anticipated that substantially all of Momentum Business Applications' funds will be directed toward developing the following software application products: (i) electronic business ("e-business") applications; (ii) analytic applications; and (iii) software applications designed for specific industry segments. The goal of providing e-business applications, analytic applications and industry-specific software applications for a number of different industries involves an ambitious product development effort that requires market specific domain expertise significantly different from the Company's existing skill base. PeopleSoft entered into development arrangements in 1995 and 1997 for the purpose of developing the Student Administration software applications which were commercially released in December 1997. Under these agreements, PeopleSoft is the exclusive remarketer of the Student Administration software products, and pays a royalty to the third parties based on license fees received from end user licenses of these software products. All ownership rights and interests in the software will transfer to the Company, upon the later of five years from the commercial release of the applications or when $17 million in cumulative royalties have been paid to the third parties. INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, LICENSES AND PRODUCT LIABILITY The Company regards certain aspects of its internal operations, software and documentation as proprietary, and relies on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect its proprietary information. There can be no assurance that any issued patents will result from such applications or that, if issued, such patents will provide any meaningful competitive advantage. Existing copyright laws afford only limited protection. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent software product enhancements and the timeliness and quality of support services. There can be no assurance that these protections will be adequate or that PeopleSoft's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Many customers of PeopleSoft are beneficiaries of a source code escrow account arrangement to enable the customer to acquire a future limited right to use the Company's source code solely for their internal provision of maintenance services. This possible access to the Company's source code may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. In addition, the laws of certain countries in which the Company's software products are or may be licensed do not protect the Company's software products and intellectual property rights to the same extent as the laws of the United States. The Company does not believe its software products, third party software products the Company offers under sublicense agreements, Company trademarks or other Company proprietary rights infringe the property rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future software products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. The Company's license agreements with its customers contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be valid as a result of future federal, state or local laws or ordinances or 24 27 unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the license and support of its software for use in mission critical applications creates the risk of a claim being successfully pursued against the Company. Damage or injunctive relief resulting under such a successful claim could cause a materially adverse impact on the Company's business, operating results and financial condition. In addition, as PeopleSoft begins to compete in the manufacturing software application market, the mission critical nature of such software products may increase PeopleSoft's exposure to product liability claims against the Company. PERSONNEL As of December 31, 1998, the Company employed 7,032 people, including 1,509 in sales and marketing, 1,332 in product development, 3,601 in customer services, and 590 in administration. None of the Company's employees in the United States are represented by a labor union or are subject to a collective bargaining agreement. Certain of the international employees are covered by the customary employment contracts and agreements of the countries in which they are employed. The Company believes that relations with its employees are good. The executive officers of the Company as of December 31, 1998, are as follows:
NAME AGE POSITION ---- --- -------- David A. Duffield 57 Chairman of the Board, Chief Executive Officer, and President Albert W. Duffield 54 Senior Vice President of Worldwide Operations, and Director Margaret L. Taylor 46 Senior Vice President of New Products and Release Management Aneel Bhusri 32 Senior Vice President of Product Strategy, Business Development and Marketing, Vice Chairman and Director James J. Bozzini 32 Senior Vice President of Service Operations Alfred J. Castino 46 Senior Vice President of Finance and Administration, Chief Financial Officer, and Chief Accounting Officer
MR. DAVID A. DUFFIELD is a founder of the Company and has served as Chairman of the Board, Chief Executive Officer and President since the Company's incorporation in August 1987. Prior to that time, he was a founder and Chairman of the Board of Integral, a vendor of human resource and financial applications software, from April 1972 through April 1987. During a portion of that time, Mr. Duffield also served as Integral's Chief Executive Officer. Mr. Duffield is also the co-founder of Information Associates (now a subsidiary of Systems and Computer Technology), where he was employed between 1968 and 1972. From 1964 to 1968, Mr. Duffield worked at IBM as a marketing representative and systems engineer. He holds a B.Sc. in Electrical Engineering and an M.B.A. from Cornell University. MR. ALBERT W. DUFFIELD joined the Company in June 1990 as Vice President of Sales. Mr. Duffield was appointed Vice President of Operations in September 1991. In November 1993, he was appointed Senior Vice President of Sales and Marketing, and, effective January 1994, he was appointed Senior Vice President of Worldwide Operations. He was elected to the Board of Directors in April 1991. Prior to joining the Company, Mr. Duffield served as Chief Operating Officer of Data Design Associates, a division of Integral Systems, from June 1989 through June 1990. Prior to the acquisition of Data Design Associates by Integral Systems in September 1989, he served as its Senior Vice President of Sales and Marketing from October 1981 through June 1989. From 1970 to 1981, Mr. Duffield worked at IBM in various sales, sales management and staff management positions. He holds a B.Sc. in Hotel/Business Administration from Cornell University and an M.B.A. from Rutgers University. Mr. David Duffield and Mr. Albert Duffield are brothers. Mr. Albert Duffield retired from his position as Senior Vice President of Worldwide Operations in March 1999. He will continue to work in a strategic role for the Company. MS. MARGARET L. TAYLOR joined the Company in January 1989 as Vice President of Customer Services, and was appointed Vice President of Customer Services and International in February 1993. In November 1993, she was appointed Senior Vice President of Customer Services, and, effective January 1994, she was appointed Senior Vice President of Application Development and Customer Services. In the third 25 28 quarter of 1995, Ms. Taylor also assumed responsibility for PeopleTools development. In January 1998, she was appointed Senior Vice President of Corporate Operations. In January, 1999 she was appointed Senior Vice President of New Products and Release Management. Ms. Taylor is a Director of the Board of Directors of Momentum Business Applications, OnDisplay, NightFire Software, and KiraCom. Ms. Taylor holds a B.A. in Psychology and Communications from Lone Mountain College. MR. ANEEL BHUSRI joined PeopleSoft in August 1993 as Director of Strategic Planning. In April of 1995, he was appointed Vice President of Product Strategy. In November of 1995, Mr. Bhusri was appointed Senior Vice President of Product Strategy. In April 1997, he was appointed Senior Vice President of Product Strategy, Business Development and Marketing. Prior to joining PeopleSoft, Mr. Bhusri was an associate at Norwest Venture Capital from June 1992 to March 1993. Mr. Bhusri holds an M.B.A. from Stanford University and a B.Sc. in Electrical Engineering with a B.A. in Economics from Brown University. In March 1999, Mr. Bhusri was appointed Vice Chairman of the Company and added to its Board of Directors. MR. JAMES J. BOZZINI joined the Company in August 1991 as an account manager, and was appointed Director of European Operations in December 1992. In January 1994, he was appointed Director of International Services and in February 1994 assumed responsibility for the Professional Services group in North America, in addition to his international responsibilities. In January 1995, he was appointed Vice President of Professional Services, and in January 1997 he was appointed Vice President of Customer Service Operations and assumed responsibility for Education Services, Product Support, and Customer Service Strategy, in addition to Professional Services. In January 1998, Mr. Bozzini was appointed Senior Vice President of Service Operations. In January 1999, Mr. Bozzini was appointed Senior Vice President of Product Development and Customer Services. Mr. Bozzini is a Director of the Board of Directors of Personic Software, Inc. From August 1988 to July 1991, he held various positions at Andersen Consulting. Mr. Bozzini holds a B.S. in Business from California State University, Chico. MR. ALFRED J. CASTINO joined PeopleSoft in September 1997 as Vice President of Finance, Chief Accounting Officer, and Corporate Controller. In November 1998, he was appointed Senior Vice President of Finance and Administration with responsibility for Finance, Legal, MIS, Facilities, and Human Resources. In December 1998, he was promoted to Chief Financial Officer. From April 1996 to September 1997, Mr. Castino was Vice President and Corporate Controller at Chiron Corporation, a biotechnology company. From August 1988 to March 1996, he held finance positions at Sun Microsystems, including Finance Director of U.S. Operations, Director of Finance and Planning for European Operations, and Assistant Corporate Controller. His prior experience also includes seven years at Hewlett-Packard Company in various financial management positions. Mr. Castino is a Certified Public Accountant. He earned a B.A. in Economics from Holy Cross College and an M.B.A. from Stanford University. 26 29 ITEM 2. PROPERTIES FACILITIES As of December 31, 1998, the Company leased the majority of its facilities and its principal locations are in or near the following cities:
APPROXIMATE LEASE LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES -------- ----------- --------------- -------------------- Irvine, CA................ 17,513 November 2000 Sales, Marketing and Customer Service Encino, CA................ 26,000 June 2001 Development Pleasanton, CA............ 216,000 February 2002 Corporate HQ, Development and Technical Support Pleasanton, CA............ 35,000 January 1999 Corporate HQ, Development and Technical Support Pleasanton, CA............ 194,490 September 2003 Corporate HQ, Development and Technical Support Pleasanton, CA............ 66,000 July 2006 Sales, Marketing and Customer Service San Mateo, CA............. 29,000 July 2000 Development, Sales, Marketing and Customer Service Coral Gables, FL.......... 10,000 July 2002 Sales, Marketing and Customer Service Atlanta, GA............... 59,000 June 2000 Sales, Marketing and Customer Service Chicago, IL............... 53,000 December 2001 Sales, Marketing and Customer Service Boston, MA................ 21,000 November 1999 Sales, Marketing and Customer Service Bethesda, MD.............. 46,000 August 2000 Sales, Marketing and Customer Service Detroit, MI............... 14,000 June 2003 Sales, Marketing and Customer Service Minneapolis, MN........... 13,000 July 2002 Sales, Marketing and Customer Service Teaneck, NJ............... 47,000 May 2003 Sales, Marketing and Customer Service Philadelphia, PA.......... 13,000 September 2001 Sales, Marketing and Customer Service Dallas, TX................ 18,000 July 2000 Sales, Marketing and Customer Service Melbourne, Australia...... 10,000 January 1999 Sales, Marketing and Customer Service Sydney, Australia......... 21,000 September 1999 Sales, Marketing and Customer Service Montreal, Canada.......... 15,000 July 2002 Sales, Marketing and Customer Service Toronto, Canada........... 43,000 August 2003 Sales, Marketing and Customer Service Vancouver, Canada......... 16,000 April 2002 Sales, Marketing and Customer Service Reading, England.......... 15,000 May 2000 Sales, Marketing, Customer Service and Admin. Paris, France............. 27,000 March 2005 Sales, Marketing and Customer Service Munich, Germany........... 12,000 July 2001 Sales, Marketing and Customer Service Amsterdam, the 27,000 June 2000 Sales, Marketing, Customer Service and Netherlands............. Admin. Madrid, Spain............. 7,000 June 1999 Sales, Marketing and Customer Service Hong Kong................. 11,000 December 2000 Sales, Marketing and Customer Service Singapore................. 14,000 December 2000.. Sales, Marketing and Customer Service Tokyo, Japan.............. 15,000 June 1999 Sales, Marketing and Customer Service
The Company also leases smaller facilities (generally under execusuite arrangements) for sales, marketing and customer service activities in or near Phoenix, Arizona; Sacramento, California; Denver, Colorado; Orlando, Florida; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati and Columbus, Ohio; Pittsburgh, Pennsylvania; Austin and Houston Texas; Bellevue, Washington; Milwaukee, Wisconsin; and outside of the United States in Calgary, Ottawa and Edmonton, Canada; Mexico City and Monterey, Mexico; Buenos Aires, Argentina; Rio De Janeiro and Sao Paulo, Brazil; Adelaide, Brisbane, Canberra and Perth, Australia; Wellington and Auckland, New Zealand; Brussels, Belgium; Milan, Italy; Zurich, Switzerland; Kuala Lumpur, Malaysia; Johannesburg, South Africa; and Hong Kong. 27 30 During the third quarter of 1998, the Company entered into agreements to sell one of its Pleasanton, California office buildings and related land, and to simultaneously lease back a substantial portion of the office space contained therein. The initial lease term is for 5 years. The Company has options to terminate up to 50% of the space as early as 4 years and the remaining 50% at the end of the 5th year; or alternatively, the Company may extend the term of the lease in five year increments up to 20 years. Fees due upon termination after the initial lease period, if applicable, are not significant to the overall lease payments but are being expensed over the initial term of the agreement. The sales price of approximately $50.0 million resulted in a gain of approximately $24.4 million, which will be amortized over the lease period. The Company holds a right of first refusal to additional space within the site as other tenants' leases expire. Additionally, the Company purchased two parcels of land for $50.0 million during the third quarter of 1998. The Company has entered into an operating lease agreement for facilities that will be constructed on one of the parcels. The monthly lease amount will be determined at the end of construction when the final construction cost is known. The estimated construction cost for the facilities of $110.0 million includes interest costs during construction that are added to the lease balance rather than paid by the Company. The expected interest rate during construction is LIBOR plus 0.75% as measured on the date of each funding or rollover; this rate may change depending on certain financial ratios. At each funding or rollover date, the Company has its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount is requested. As of December 31, 1998, the Company had drawn a total of $6.1 million under the lease financing. The lease term is for 5 years with the option to purchase the building for $110.0 million at the end of the lease term. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to 85% of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. In December 1996, the Company entered into a five-year lease for a new office facility in Pleasanton, California. This lease is structured as an operating lease with rental payments due beginning upon the completion of the construction, which was during the fourth quarter of 1998. The cost for the construction of the facility totaled $70.0 million including interest during the construction period. The rental payments equal the amount of interest under the agreement. The interest rate charged on amounts funded is LIBOR plus 0.625% as measured on the date of each funding rollover. At each funding or rollover date, the Company had its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount was requested and approved. Each subsequent funding rollover date was the corresponding maturity of the chosen LIBOR term. The Company began accruing interest concurrent with the lessor's first drawdown of the construction commitment in January 1997. Throughout the construction period, the accrued interest amount, which was approximately $1.1 million and $4.5 million as of December 31, 1997 and the end of the construction phase, respectively, has been added to the construction cost. The Company has an option to renew the lease for an additional three years, subject to certain conditions, or purchase the building for $70.0 million. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to 85% of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. In 1998, the Company negotiated an amendment to this lease which extends the term of the lease until February 2003, with an option to renew for an additional three years. Additionally, the Company negotiated a fixed rate funding option under which the Company may elect that any or all of the amounts funded to date be charged a fixed interest rate. The Company has the option of setting the fixed rate expiration date for any date through the end of the lease term. ITEM 3. LEGAL PROCEEDINGS Securities Class Actions: Beginning on January 29, 1999, a series of class actions have been filed alleging that the Company and various of its officers and directors violated Section 10(b) of the Securities Exchange 28 31 Act of 1934 and Rule 10b-5 promulgated thereunder. As of this date, the Company is aware of sixteen such actions, all filed in the United States District Court for the Northern District of California, the first of which is entitled Gulio Suttovia v. David Duffield et al., No. C 99-0472 MJJ. It is likely that all of the subsequent actions will be consolidated with Suttovia. There are varying combinations of defendants named in these actions, but the universe of defendants named in one or more actions, all of whom are represented by Gibson, Dunn & Crutcher LLP is: PeopleSoft, Inc., David A. Duffield, Ronald E.F. Codd, Albert W. Duffield, Kenneth R. Morris, George J. Still, Jr., Margaret L. Taylor, Aneel Bhusri, Cyril Yansouni and Momentum Business Applications. The class periods alleged in the complaints vary slightly, but generally run from early February 1997, when the Company's 1996 financial results were released, until late January 1999, when its 1998 results were announced. The allegations of the complaints focus on three general areas. First, the complaints allege that the Company improperly accounted for the acquisition of PeopleMan, L.P., which was acquired by the Company in 1996. The complaints allege that, instead of writing off approximately $22 million of in-process research and development ("IPR&D") in 1996 as a one-time charge, the Company should have written off a lesser amount in 1996, capitalized the remainder and amortized such amount over its useful life, which would have increased reported earnings in 1996 but reduced reported operating earnings in later years. The allegations in this regard appear to be based on the Company's announcement, on January 28, 1999, that the Securities and Exchange Commission was reviewing the Company's accounting treatment for this transaction (as well as for the acquisition of Intrepid Systems. Inc. in 1998, which resulted in a $13.9 million charge for IPR&D in the fourth quarter), and that the Company may be required to restate its 1996 and 1997 financial statements with respect to the accounting for IPR&D on the PeopleMan transaction (and take a lesser charge than expected for the Intrepid acquisition in the fourth quarter of 1998). The Company has subsequently been advised by the SEC that it will not require restatement of the 1996 or 1997 financial statements with respect to the PeopleMan transaction and that it does not take exception to the accounting for IPR&D with respect to the Intrepid transaction. Second, certain of the complaints allege that the Company has improperly accounted for (or intends improperly to account for) the spin-off of its subsidiary, Momentum Business Applications, Inc. ("Momentum Business Applications"). In late 1998, the Company transferred $250 million to Momentum Business Applications pursuant to a contract under which Momentum Business Applications is to conduct research and development. The Company has a right of first refusal with respect to the products generated by such research and development and has an option to purchase the outstanding shares of Momentum Business Applications in the future. Momentum Business Applications has one employee, the former CFO of the Company, and contracts with the Company to provide personnel to conduct its operations and for administrative services. On December 31, 1998, the Company, pursuant to a Registration Statement filed with the SEC, distributed the shares of Momentum Business Applications to the holders of the Company's shares which resulted in a dividend of approximately $79 million being segregated in the Company's equity accounts in December 1998. Upon the election of independent directors of Momentum Business Applications, which occurred in the first quarter of 1999, Momentum Business Applications no longer meets the requirements for consolidation with the Company. This resulted in a one-time charge of approximately $177 million by the Company in the first quarter of 1999. The complaints allege that this structure is designed to artificially inflate future operating earnings by allegedly converting what would be ongoing research and development charges into a one-time write-off. This structure was disclosed in detail in the above-referenced Registration statement, and the SEC has not taken exception to the deconsolidation of the financial statements upon the election of independent Momentum Business Applications directors. Third, the complaints allege that the Company misled the investing public as to the Company's future prospects and failed to disclose facts that it knew would result in decreased demand for its products and/or decreased operating margins. The complaints allege further that various officers and directors intended to profit thereby by artificially inflating the price of the Company's stock so that they could sell significant amounts of their stock at inflated prices. The allegations appear to have been triggered by the Company's announcement, on January 28, 1999, that it expected revenue growth in 1999 to be in the range of 20 - 30% (whereas it had previously experienced 60 - 65% annual revenue growth) and that it expected operating 29 32 margins in 1999 to be in the range of 16 - 18% (whereas it had previously experienced operating margins of 18 - 20%). The Company also announced that it was reducing its workforce by approximately 6%. The Company believes these actions to be without merit and intends to vigorously defend them. However depending on the amount and timing, an unfavorable resolution of some or all these matters could materially affect the Company's future financial position or results of operations or cash flows in a particular period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol PSFT. The following table lists the high and low closing prices for the PeopleSoft Common Stock as reported on Nasdaq for the last two years. The stock prices have been adjusted to reflect 2-for-1 stock splits effected by PeopleSoft in December 1997.
HIGH LOW ------ ------ Fourth quarter of 1998...................................... $32.50 $16.81 Third quarter of 1998....................................... $50.88 $27.25 Second quarter of 1998...................................... $55.94 $41.94 First quarter of 1998....................................... $52.69 $31.44 Fourth quarter of 1997...................................... $39.50 $27.19 Third quarter of 1997....................................... $33.19 $26.00 Second quarter of 1997...................................... $28.44 $15.31 First quarter of 1997....................................... $28.38 $18.88
The trading price of the Company's common stock is subject to wide fluctuations in response to quarterly variations in contracting activity and operating results, announcements of technological innovations or new software products by the Company or its competitors, as well as other events or factors. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have particularly effected the market price of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. As of March 22, 1999, the approximate number of common stockholders of record was 3,486, representing approximately 160,000 shareholder accounts. The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's facility lease prohibits the payment of cash dividends without the other's consent. In December 1998, the Company declared a stock dividend of one share of Momentum Business Applications Class A Common Stock for every fifty shares of PeopleSoft stock held as of December 31, 1998. The Company's stockholders were not required to pay cash or other consideration for the Momentum Business Applications shares received. 4.7 million shares were distributed. No fractional shares were distributed. The distribution is taxable as a dividend to each holder in the amount of the fair market value of the Momentum Business Applications shares distributed to each shareholder. The average market value of the shares on January 16, 1999 (the first day of trading) was $16.75. Prior to the distribution, the Company contributed $250.0 million to Momentum Business Applications. Certain provisions of the Company's Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more 30 33 difficult, even if such events would be beneficial to the interests of the stockholders. In addition, the Company has 2,000,000 shares of authorized Preferred Stock. The Company may issue shares of such Preferred Stock in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. In addition, the staggered terms of the Company's Board of Directors could have the effect of delaying or deferring a change in control of the Company. Under a stockholder rights plan adopted in 1995, each share of the Company's common stock carries the right ("Right"), under certain circumstances, to purchase equity securities of the Company or an acquirer. Ten days after a tender offer or acquisition of 20% or more of the Company's common stock, each Right may be exercised for $190 ("Exercise Price") to purchase one one-thousandth of one share of the Company's Series A Participating Preferred Stock. Each one one-thousandth of each share of Series A Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition after such rights are triggered, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the Exercise Price. Each Right expires in February 2005, and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. Based on the number of shares of common stock outstanding at March 22, 1999, officers and directors of the Company and persons who may be deemed to be affiliates, as a group, beneficially owned approximately 22% of PeopleSoft's outstanding common stock. As a result, officers and directors and their affiliates may have influence over the election of the Board of Directors and any matters requiring approval by the stockholders of the Company. In addition, the Company has entered into agreements with its officers and directors indemnifying them against losses they may incur in legal proceedings resulting from their service to the Company. 31 34 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,(a) ------------------------------------------------------ 1994 1995 1996 1997 1998 -------- -------- -------- -------- ---------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA: Revenues: License fees............................. $ 68,580 $137,808 $252,799 $433,195 $ 576,467 Services................................. 44,503 94,331 197,253 382,456 737,206 -------- -------- -------- -------- ---------- Total revenues................... 113,083 232,139 450,052 815,651 1,313,673 Costs and expenses: Cost of license fees..................... 6,817 8,503 12,357 21,635 42,933 Cost of services......................... 26,740 56,789 118,906 229,178 424,234 Sales and marketing...................... 35,844 70,052 135,757 225,498 339,973 Product development...................... 15,318 38,625 70,653 129,553 209,677 General and administrative............... 8,167 16,182 27,162 43,611 61,447 In-process research and development and merger related costs.................. -- -- 29,393 -- 13,900 -------- -------- -------- -------- ---------- Total costs and expenses......... 92,886 190,151 394,228 649,475 1,092,164 -------- -------- -------- -------- ---------- Operating income........................... 20,197 41,988 55,824 166,176 221,509 Other income, interest expense and other... 2,192 4,149 5,888 9,862 20,067 -------- -------- -------- -------- ---------- Income before income taxes................. 22,389 46,137 61,712 176,038 241,576 Provision for income taxes................. 9,308 18,799 25,851 67,775 98,358 -------- -------- -------- -------- ---------- Net income................................. $ 13,081 $ 27,338 $ 35,861 $108,263 $ 143,218 ======== ======== ======== ======== ========== Basic income per share..................... $ 0.07 $ 0.13 $ 0.17 $ 0.49 $ 0.63 ======== ======== ======== ======== ========== Shares used in basic per share computation.............................. 194,156 203,689 211,248 219,302 228,479 ======== ======== ======== ======== ========== Diluted income per share................... $ 0.06 $ 0.12 $ 0.15 $ 0.44 $ 0.55 ======== ======== ======== ======== ========== Shares used in diluted per share computation.............................. 213,644 228,987 239,452 248,321 258,305 ======== ======== ======== ======== ========== BALANCE SHEET DATA: Working capital............................ $ 72,290 $ 89,437 $109,806 $245,014 $ 495,028 Total assets............................... $173,987 $322,241 $540,080 $898,336 $1,440,605 Long-term obligations...................... $ 958 -- -- -- 107,826 Stockholders' equity....................... $ 94,580 $161,094 $253,248 $417,304 $ 664,292
- - --------------- (a) Historical results of operations are not necessarily indicative of future results. Refer to the Results of Operations -- Risk Factors under Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the discussion of factors which may impact future results. Note: No cash dividends have been declared or paid in any period presented. 32 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of the Company's expectations regarding future trends affecting its business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following discussion sets forth certain factors the Company believes could cause actual results to differ materially from those contemplated by the forward-looking statements. Forward-looking statements include but are not limited to those identified with a footnote(1) symbol. The Company undertakes no obligation to update the information contained in this Item 7. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenues and the percentage of period over period growth represented by certain line items in the Company's consolidated statements of income:
YEARS ENDED DECEMBER 31, ---------------------------------------- PERCENTAGE OF DOLLAR INCREASE PERCENTAGE OF YEAR OVER YEAR TOTAL REVENUES ---------------- -------------------- 97/96 98/97 1996 1997 1998 ------ ------ ---- ---- ---- Revenues: License fees.......................................... 71% 33% 56% 53% 44% Services.............................................. 94 93 44 47 56 --- --- --- --- --- Total revenues................................ 81 61 100 100 100 Costs and expenses: Cost of license fees.................................. 75 98 3 3 3 Cost of services...................................... 93 85 26 28 32 Sales and marketing................................... 66 51 30 28 26 Product development................................... 83 62 16 16 16 General and administrative development................ 61 41 6 5 5 In-process research and development and merger related costs.............................................. N/A N/A 6 -- 1 --- --- --- --- --- Total costs and expenses...................... 65 68 87 80 83 --- --- --- --- --- Operating income........................................ 198 33 13 20 17 Other income, interest expense and other................ 67 103 1 1 2 --- --- --- --- --- Income before income taxes.................... 185 37 14 21 19 Provision for income taxes.............................. 162 45 6 8 8 --- --- --- --- --- Net income.............................................. 202% 32% 8% 13% 11% === === === === ===
REVENUES The Company licenses software under non-cancellable license agreements and provides services including training, installation, consulting and maintenance, consisting of product support services and periodic updates. License fee revenues are generally recognized when a non-cancellable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. For customer license agreements, which meet these recognition criteria, the portion of the fees related to software licenses will generally be recognized in the current period, while the portion of the fees related to services is recognized as the services are performed. When the Company enters into a license agreement with a customer requiring significant customization of the software products, the Company recognizes revenue related to the license agreement using contract accounting. The Company allocates a portion of contractual license fees to post-contract support activities covered under the contract including first year maintenance, installation assistance and limited training 33 36 services. Revenues from maintenance agreements are recognized ratably over the maintenance period, which in most instances is one year. Revenues from licensing fees increased by 71% from $252.8 million in 1996 to $433.2 million in 1997 and increased by 33% to $576.5 million in 1998. The increase in license fee revenues was primarily attributable to continued increased market acceptance of, and expanded breadth of, the Company's software product offerings and the increased capacity created by continued growth in the Company's sales, marketing and customer service organizations, and achievement of specific contract related milestones or other conditions which allowed the Company to recognize more deferred license revenue than in the prior year period. At December 31, 1998, the Company's deferred license revenue had declined by $3.4 million as compared to December 31, 1997. The reported deferred license revenue amounts do not include items which are both deferred and unbilled. The Company's practice is to net such deferred items against the related receivables balances. As of December 31, 1997 and 1998, $78.3 million and $29.2 million in unbilled receivables was netted against deferred license revenue, respectively. At December 31, 1998, both the net deferred license fees and the gross (before netting unbilled items) deferred license fees declined from the prior year. The decline in gross deferred license fees is due to the following factors: (i) considerable efforts made by the Company during the third and fourth quarters of 1998 on converting previously deferred revenue to recognizable revenue through the satisfaction or elimination of certain contingencies or additional obligations, the existence of which had previously caused such revenue to be deferred and (ii) a higher than normal percentage of the Company's third and fourth quarter contracting activity qualified for immediate recognition of revenue, reflecting the Company's increased efforts to move its business to standard software license terms and conditions. Revenues from services increased by 94% from $197.3 million in 1996 to $382.5 million in 1997 and increased by 93% to $737.2 million in 1998. The Company's customer license agreements provide for initial maintenance, training, and installation services for specified periods or amounts. Therefore increases in customer licensing agreements have resulted in increases in revenues from these services. Service revenues as a percentage of total revenues were 44%, 47%, and 56% for the years ended December 31, 1996, 1997, and 1998 respectively. The increase in the relative percentage of service revenues to total revenues in these periods was attributable to two primary factors: increases in the installed base of customers receiving ongoing maintenance, training and other support services from 1,500 customers as of December 31, 1996 to 2,200 customers as of December 31, 1997 to 2,900 customers as of December 31, 1998; and a $37.3 million, $64.9 million and $162.4 increase each year in consulting revenue for the years ended December 1996, 1997 and 1998, respectively, as a result of expanded demand for PeopleSoft's direct assistance during enterprise implementation projects. There can be no assurance that PeopleSoft will be successful in further expanding its consulting services group, or that revenues from consulting services will in fact increase, or be profitable. Per the terms of the development contract with Momentum Business Applications, the Company will perform development services on behalf of Momentum Business Applications. Momentum Business Applications will pay one hundred and ten percent (110%) of the Company's fully burdened costs relating to the research and development provided by the Company. The Company will begin recognizing revenue on this contract during the first quarter of 1999. Total revenues increased by 81% from $450.1 million in 1996 to $815.7 million in 1997 and increased by 61% to $1,313.7 million in 1998. During the years ended December 31, 1996, 1997, and 1998, the Company's international revenues were approximately 16%, 15% and 16% of total revenues, respectively. No single region had revenues which represented more than 10% of total revenue. The dollar increases in international revenues in 1997 and 1998 resulted from expanded international operations and the introduction of Release 6 and later Release 7.5, which incorporated additional global features and functionality. The Company expects international revenues to continue to grow in absolute dollars during 1999, and accordingly, continues to invest heavily in international infrastructure, global product functionality and translated versions of financial and other software products.(1) In the - - --------------- 1Forward-Looking Statement 34 37 event international expansion and/or product globalization efforts are not successful, the Company's business operating results and financial condition may be adversely affected. COSTS AND EXPENSES Cost of license fees consists principally of royalties, technology access fees for certain third party software products and amortization of capitalized software costs. Cost of license fees increased from $12.4 million in 1996 to $21.6 million in 1997, and $42.9 million in 1998, representing 3% of total revenues in each of those years and 5%, 5% and 7% of license fee revenues in those years, respectively. Royalty costs in 1998 included a one-time $2.5 million buy out of royalty fees related to providing certain technology embedded in Release 7.5 to its existing customer installed base. Also included in the 1998 cost of license fees amount is $1.4 million amortization of Intrepid purchased software. The Company expects to amortize approximately $5.6 million per year for five years for this software. However, in the event the related forecasted revenues are not realized, the related capitalized amounts may be expensed over a shorter period. In addition, cost of license fees has grown as a percentage of license revenues due to royalty agreements related to OLAP tools embedded within the Company's products and royalties owed on the Student Administration and Treasury products. The Company's system solutions are based on a combination of internally developed technology and application products, as well as bundled third party products and technology. Cost of license fees as a percentage of license fee revenues may fluctuate from period to period due principally to the mix of sales of royalty-bearing software products in each period and seasonal fluctuations in revenues contrasted with certain fixed expenses such as the amortization of capitalized software. Royalties associated with certain software products currently under development by joint business arrangements and charges associated with software products and technologies acquired from various third party vendors may cause the cost of license fees as a percentage of license fee revenues to increase in future periods. Cost of services consists principally of expenses related to consulting, account management field support, training, and product support. These costs increased from $118.9 million in 1996, to $229.2 million in 1997, and $424.2 million in 1998, representing 26%, 28%, and 32% of total revenues and 60%, 60% and 58% of service revenues in those years, respectively. These increases are due to the significant expansion of the Company's customer service resources across all categories, including consulting, telephone support, training, and account management staff. In particular, the Company has made a significant investment in its professional consulting services organization which has grown substantially over the past two years in response to customer demand. The Company anticipates cost of services will increase in dollar amount, and may increase as a percentage of total revenues, in future periods. Sales and marketing expenses increased from $135.8 million in 1996, to $225.5 million in 1997, and $340.0 million in 1998, representing 30%, 28%, and 26% of total revenues. The increase in sales and marketing expenses is largely attributable to the Company's continued expansion of its sales and marketing force, both domestic and international, from approximately 665 employees as of December 31, 1996 to 1,006 employees as of December 31, 1997 to 1,509 employees as of December 31, 1998. Additionally, the Company incurred increased commission expense associated with higher revenue. The commission expense for the years ended December 31, 1996, 1997 and 1998 was $19.4 million, $39.1 million and $57.5 million, respectively. Sales and marketing expenses as a percentage of total revenues have declined versus the prior years due to the relatively lower expense levels associated with both maintenance and other services, both of which are growing more quickly than license sales. However, such expenses may increase as a percentage of total revenues in future periods as the Company continues to increase its direct sales and marketing expenditures to address certain international and industry specific markets and establish dedicated sales forces for certain new product areas, particularly eWorkplace Communities and Enterprise Performance Management.(1) Software product development expenses increased from $70.7 million in 1996, to $129.6 million in 1997, and to $209.7 million in 1998, representing 16% of total revenues in each of those years. In addition, capitalization of internal software development costs was $3.7 million in 1996, $2.5 million in 1997, and - - --------------- 1Forward-Looking Statement 35 38 $5.6 million in 1998. In general, software product development expenditures consist of costs related to the Company's staff of software developers and outside consultants, and the associated infrastructure costs required to support software product development initiatives in the following areas: (i) expansion and enhancement of the Company's core software product offerings in the areas of eWorkplace Communities, Enterprise Performance Management, internet focused enhancements to the eBackbone such as eCommerce capabilities and HTML client, HRMS, Financial Management Systems, and Distribution/Materials Management Systems and Supply Chain Management software; (ii) the enhancement of the Company's platform development, certification, software product testing and overall release management capabilities; (iii) the continued enhancement of the Company's client/server and internet focused architecture including its software development tools and the integration of these tools with various third party purchased or licensed technologies; (iv) the localization and translation of certain versions of the Company's software products for specific foreign markets; and (v) the development of certain vertical market products and versions of its core products suitable to the unique needs of customers within certain industries. The Company intends to continue to invest significant resources in upcoming releases, and anticipates software product development expenditures will significantly increase in future periods due to continued incremental investment in all of the above areas, and overall development expenditures may increase as a percentage of revenues. General and administrative expenses increased from $27.2 million in 1996 to $43.6 million in 1997, and to $61.4 million in 1998, representing 6%, 5%, and 5% of total revenues, respectively. The dollar increase in general and administrative expenses resulted primarily from increases in staffing and related infrastructure to support the Company's growth. The 1998 expenses include one-time charges of $6.3 million related to a contractual dispute and associated termination of the Company's arrangement with a distributor. Excluding the one-time charges, the 1998 general and administrative expenses would be 4% of total revenues. Other income, consisting primarily of interest, increased from $5.9 million in 1996 to $9.9 million in 1997, and $20.1 million in 1998. The increase was due to higher cash and investment balances based upon improved cash collections and higher pre-tax return on investments due to a shift into higher yield taxable securities. In January 1998, the Company initiated a foreign currency transaction hedging program. The hedging transactions were effective in materially offsetting the related foreign currency transaction gains and losses for the year ended December 31, 1998. During the fourth quarter of 1998 the Company formed a new company, Momentum Business Applications, Inc. ("Momentum Business Applications"), to select and develop certain software application products, and to commercialize such products, most likely through licensing to the Company. The Company contributed $250.0 million to Momentum Business Applications and distributed all of the outstanding shares of Momentum Business Applications Class A Common Stock to the Company's shareholders. At December 31, 1998 the Company recorded a dividend for the stock distribution based on the fair value of Momentum Business Applications stock on the date of the distribution. Momentum Business Applications was consolidated with the Company's financial position, results of operations and cash flows as of December 31, 1998. The Company anticipates Momentum Business Applications will no longer meet the requirements for consolidation during the first quarter of 1999. As a result, the Company will incur a charge of approximately $177.0 million which represents the $250.0 million contribution less the $78.6 million dividend recorded as of December 31, 1998, investment banker fees of $2.9 million and other expenses related to the formation of Momentum Business Applications, and expenses incurred by Momentum Business Applications while consolidated with the Company. In the first quarter of 1999, the Company redeployed resources to new product development, global product support, and other strategic customer value added programs. Accordingly, PeopleSoft redeployed 100 employees to these new strategic areas and eliminated 430 staff from other redundant and unnecessary positions primarily in the administration, sales and service support, and marketing support areas. This action will allow the Company to hire more staff in support of its e-business, analytic applications and ERP development as well as customer support programs.(1) The reduction in staff represents approximately 6 percent - - --------------- 1Forward-Looking Statement 36 39 of the Company's total workforce with over 90 percent of the reductions in North America. The Company expects to incur a one-time restructuring charge in the first quarter of 1999 of between $4.0 million and $5.0 million for the separation arrangements. PEOPLESOFT MANUFACTURING, INC. ("PMI") In November 1996, the Company acquired the assets and assumed certain liabilities of PMI. The Company paid an aggregate purchase price of $30.1 million. The assets acquired consisted of a suite of software applications products that streamline, automate, and augment business processes for discrete manufacturing and supply chain management solution for manufacturers and distributors. The Company allocated the purchase price to the fair value of the net tangible assets and identified intangible assets acquired including in-process research and development. In performing this allocation, the Company considered, among other factors, intentions for future use of the acquired assets and analyses of historical financial performance and estimates of future performance of PMI products and the in process research and development ("IPR&D") projects present at the date of acquisition. PMI's IPR&D projects included the incorporation of certain critical planning and optimization functionality which had not reached technological feasibility at the date of acquisition. The Company allocated $22.5 million to the PMI IPR&D projects. With regard to the IPR&D projects, the Company considered, among other factors, the importance of each project to the overall development plan, and the projected incremental cash flows from the projects when completed and any associated risks. The incremental cash flows were discounted at an annual rate of 40% to determine the value of the IPR&D projects. The discount rate reflects the risks associated with the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, achieving anticipated levels of market acceptance and penetration, market growth rates, competitive risks, information technology investment trends in the manufacturing and distribution industry, and risks related to the impact of potential changes in future target markets. The Company has also recently recalculated the valuation of PMI's assets in accordance with recently revised valuation methodologies. Differences between the old and new methodologies include considering the stage of completion of the in-process research and development, and excluding cash flows from ancillary sources such as maintenance, training and consulting. The Company has concluded that the difference in value allocated to in-process research and development and the impact of amortization expense were not material to the Company's financial statements. The Company completed development of the acquired in-process technology into commercially viable products in 1997 at a post acquisition cost of $3.3 million. The cost and timing of completing the in-process technology was consistent with the assumptions used in the valuation model. Estimated revenue from the purchased in process projects peak in the year 2000 and decline through 2004 as other new products are expected to be introduced. Revenues to date have also been materially consistent with the revenue assumptions used in the valuation model. These projections were based on management's estimates of market size and growth, expected trends in technology and the expected timing of new product introductions. Should actual growth rates be materially lower in future periods, the Company would realize a lower return on its investment in PMI; however, based on the current level of licensing activity, the Company does not believe that there will be an impairment in the carrying value of acquisition costs related to PMI's products. INTREPID SYSTEMS, INC. ("INTREPID") In October 1998, the Company acquired the assets and assumed certain liabilities of Intrepid. The Company paid an aggregate purchase price of $51.5 million. The assets acquired included two products: Evolution and Decision Master. Evolution is a retail management system supporting on-line transaction processing ("OLTP") systems for merchandise management, store operations management and financial management for sales systems and retail stock ledgers. Decision Master is an on-line analytic processing ("OLAP") decision support system designed to provide better data and analysis tools which may be used to improve retail operations. 37 40 The Company allocated the purchase price to the fair value of the net tangible assets and identified intangible assets acquired including the in-process research and development projects: Evolution and Decision Master. In performing this allocation, the Company considered, among other factors, intentions for future use of the acquired assets and analyses of historical financial performance and estimates of future performance of Intrepid products and the IPR&D projects present at the date of acquisition. Evolution's IPR&D activities included the planning, designing and testing for re-writing certain functionality to improve performance, adding new functionality to better address competitive offerings, conforming the "look and feel" of the system with PeopleSoft's standards, and expanding the integration of Evolution with complementary PeopleSoft products. Decision Master's IPR&D activities included the planning, designing and testing for the re-writing of nearly the entire product to support or incorporate several new products and/or technologies particularly in the areas of extracting, translating and loading data, defining and creating the data warehouse and "meta" data layer, and accessing and analyzing the meta data. The Company allocated $4.3 million and $9.6 million to the Evolution and Decision Master IPR&D projects, respectively. With regard to the IPR&D projects, the Company considered, among other factors, the stage of completion of each project, the attainment of technological feasibility, the importance of each project to the overall development plan, alternative future uses of the technology and the projected incremental cash flows from the projects when completed and any associated risks. The incremental cash flows were discounted at an annual rate of 25% to determine the value of each IPR&D project. The discount rate reflects the risks associated with the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, achieving anticipated levels of market acceptance and penetration, market growth rates, competitive risks, information technology investment trends in the retail industry, and risks related to the impact of potential changes in future target markets. The Company anticipates that the IPR&D projects will take up to 18 months to complete and will require an additional $3.2 million and $1.4 million to complete for Evolution and Decision Master, respectively. Estimated revenue from the purchased in process projects peak in the year 2002 at $23 million with respect to the decision support system and 2003 at $11 million with respect to the merchandise management system, and, thereafter, decline through 2005 as other new products are expected to be introduced. Revenues and costs to date related to the completed in-process technology, have been materially consistent with the assumptions used in the valuation model. These projections were based on management's estimates of market size and growth, expected trends in technology and the expected timing of new product introductions. Should actual growth rates be materially lower in future periods, the Company would realize a lower return on its investment in Intrepid. The Company will periodically assess whether there has been an impairment in the carrying value of acquisition costs related to Intrepid's products based on the then current level of licensing activity and the Company's assessment of the overall market conditions in the retail industry. Should the Company determine that there is has been an impairment, there could be additional charges to operations related to reducing the carrying value of the impaired assets to their net realizable value. PROVISION FOR INCOME TAXES The Company's income tax provision increased from $25.9 million in 1996 to $67.8 million in 1997 and to $98.4 million in 1998. The effective tax rate was 40.7% in 1998, 38.5% in 1997 and 41.9% in 1996. The 1996 and 1998 tax rates were higher than the 1997 tax rate primarily due to certain non-deductible one-time merger related charges and unrecognized benefits of losses of certain foreign subsidiaries. The net deferred tax assets at December 31, 1998 were $61.2 million, net of a valuation allowance of $11.1 million, primarily related to net operating loss carryforwards incurred in certain foreign jurisdictions and other foreign tax benefits. The realization of these net deferred tax assets is based on historical tax positions and expectations about future taxable income. EARNINGS PER SHARE The Company's earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires calculation of both a basic earnings per share and a diluted earnings per share. The basic earnings per share excludes the dilutive effect of common stock 38 41 equivalents such as stock options and warrants, while the diluted earnings per share includes such dilutive effects. Diluted earnings per share increased from $0.15 in 1996 to $0.44 in 1997 to $0.55 in 1998. Earnings per share for 1998 increased as a result of the 32% increase in net income from $108.3 million for the year ended December 31, 1997 to $143.2 million for the year ended December 31, 1998, partially offset by a 4% increase in the number of shares used in the diluted per share computation from 248.3 million shares for the year ended December 31, 1997 to 258.3 million shares for the year ended December 31, 1998. The increase in weighted average shares outstanding was due to the exercise of stock options and the issuance of shares under the employee stock purchase plan. Shares outstanding during 1999 will be impacted by the following factors: (i) the ongoing issuance of common stock associated with stock option exercises and the employee stock purchase plan; (ii) the anticipated exercise during the first and fourth quarters of 1999 of warrants for up to approximately 4 million shares; (iii) any fluctuations in the Company's stock price, which could cause changes in the number of common stock equivalents included in the earnings per share computation; and, (iv) the issuance of common stock to complete acquisitions of TriMark Technologies, Inc and Distinction Software, both anticipated to close in 1999, and to affect other business combinations should the Company enter into such transactions. BUSINESS OUTLOOK In a press release dated January 28, 1999, the Company made forecasts regarding its expected revenue and operating margin for the calendar 1999 first quarter and year. Based on activity through March 30, 1999, the Company believes that it will not achieve those forecasts. While the quarter is not yet complete, the Company now expects that revenue for the first quarter of 1999 will be approximately between $275 million and $305 million which represents a 0 to 10% increase in revenue from the first quarter of 1998(1). Lower than expected revenue will also reduce operating profit margins to levels significantly lower than the forecast (excluding the effect of charges resulting from the distribution of shares of Momentum Business Applications, Inc. to the Company shareholders and the Company's previously announced reduction in workforce). In the first quarter of 1999, the Company's revenue growth, like that of the enterprise application software industry as a whole, has been adversely impacted by the slowdown in customer license sales, in part as a result of Year 2000 projects in process at many organizations, as well as those other factors described in Business Outlook and Factors That May Affect Future Results reported in our third quarter 10-Q. Due to the uncertainty associated with the current market conditions, the Company is suspending its practice of issuing forecasts for future quarters or years. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided cash of $384.5 million during 1998, compared to $230.1 million in 1997, and $130.9 million in 1996. In all periods, cash provided by operating activities was due to earnings plus non-cash items, increases in deferred revenue, accrued compensation and related expenses, and income taxes payable and the tax benefit of employee stock transactions, the sum of which were partially offset by increases in accounts receivable and other assets. Net accounts receivable increased from $163.7 million to $299.2 million and to $385.4 million as of December 31, 1996, 1997 and 1998, respectively, and deferred revenues increased from $183.3 million to $327.7 million and to $515.5 million over the same period. The increase in net accounts receivable resulted from the growth in customer licensing activity partially offset by increased cash collections. The Company's expanded installed base of customers and emphasis on selling prepaid maintenance and training contracts has resulted in a significant increase in deferred revenues related to ongoing maintenance and other services. Increases in payables and other assets were due to general growth in the Company's operations. - - --------------- (1) Forward-looking statement as defined in the Private Securities Litigation Reform Act of 1995. This forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks are detailed in the Company's filings with the Securities and Exchange Commission, including, but not limited to, the 1998 Annual Report to Shareholders (Form 10-K) and recent Form 10-Q filings. 39 42 The Company calculates accounts receivable days sales outstanding ("DSO") as the ratio of quarter-end accounts receivable to the sum of quarterly revenues and the net change in quarter-end deferred revenues, multiplied by 90. The Company believes this calculation is appropriate because license fees are typically billable regardless of whether revenue has been recognized or deferred. Under this method, accounts receivable days outstanding was 88 days as of December 31, 1998 which was equal to the DSO as of December 31, 1997. Since billing terms of the Company's agreements typically are spread out over a sequence of events (including contract execution through standard acceptance) or dates that generally span four to nine months, and contracting activity is concentrated at the end of each quarter, the Company anticipates that its DSO will continue to be substantial in future periods. During the years ended December 31, 1997 and 1998, the Company's principal use of cash for investing activities included investments and the purchase of property and equipment comprised of purchases of computer and networking equipment to accommodate employee and facility expansions and to support the Company's growing training capacity requirements. During 1998, the Company entered into agreements to sell one of its Pleasanton, California office buildings and related land, and lease back a substantial portion of the premises. Additionally, the Company purchased two parcels of land for $50.0 million during the third quarter of 1998. These transactions were structured as a like-kind exchange for tax purposes and, therefore did not impact immediate cash flow. The Company is committed to lease buildings costing approximately $110.0 million, which will be constructed on one of the sites. The construction is expected to be completed in the first quarter of 2000. The lease term is for five years with the option to purchase the buildings for $110.0 million at the end of the lease term. The Company also entered into a five year lease for a new facility in Pleasanton, California. The lessor has funded $70.0 million for the construction of this facility that was completed in the fourth quarter of 1998. The Company has an option to purchase the building at the end of the lease term for $70.0 million. In the event the Company exercises the options to purchase these buildings, the Company plans on utilizing cash flow from operations to fund the purchase(s), however there can be no assurance that the Company will maintain its levels of cash flows from operations. Financing activity for the years ended December 31, 1997 and 1998 related to the proceeds from the exercise of common stock options and issuance of stock under employee stock purchase plans. The Company believes granting stock options is essential in attracting and retaining key employees who are critical to the Company's success. In 1996, 1997 and 1998, the Company granted options aggregating 5.4%, 5.0% and 5.3%, respectively, of the common stock issued and outstanding at the beginning of each year. The Company anticipates that it will continue to grant a significant number of options each year. The actual number of options granted each year is based on a variety of factors including the Company's historical and anticipated employee count, the level of hiring activity, competitive factors associated with the labor market, and comparison of the Company's compensation philosophy and practice to other similar technology companies. There can be no assurance that employee stock activity will continue to generate substantial funds in the future. In November 1995, PeopleSoft issued common stock warrants with annual exercise dates through 1999. Upon the annual notice of exercise by the holders of the warrants, the Company, at its option, may settle such exercise by either issuing the full amount of shares and receiving cash proceeds, issuing a net amount of shares with no cash proceeds, or purchasing the warrants for an amount equal to the difference between the then fair market value of the common stock and the warrant exercise price. In November 1997, the Company issued 942,880 shares of common stock pursuant to the net exercise of warrants to purchase 1,600,000 shares of common stock at $13.75 per share. The Company has received notice that the holders intend on exercising their 1998 warrants consisting of 1,600,000 warrants with an exercise price of $13.75 per share and 1,600,000 warrants with an exercise price of $16.875 per share. By mutual consent of the Company and the warrant holder, the maturity date for the warrants has been extended to March 1999. The Company has elected the net exercise provision and thus will issue approximately 572,000 shares in the first quarter of 1999 related to these warrants. While the Company has not determined how the exercise of the remaining 1999 warrants will be satisfied, if exercised, they represent a significant source of potential liquidity and may provide the 40 43 Company with cash up to $58 million.(1) However, at the time of this filing, the exercise price for the 1999 warrants was above the fair market value of the stock. As of December 31, 1998, the Company had $495.0 million in working capital, including $480.1 million in cash and cash equivalents and $206.2 million in short-term investments, consisting principally of investments in interest-bearing demand deposit accounts with financial institutions, tax-advantaged money market funds and highly liquid debt and equity securities of corporations, municipalities and the U.S. Government. Since Momentum Business Applications was consolidated with the Company's financial position at December 31, 1998, the cash balance includes the $250.0 million in cash related to the contribution from the Company. The Company anticipates Momentum Business Applications will no longer meet the requirements for consolidation in the first quarter of 1999, therefore the cash balance will decrease significantly. However, the Company believes that the remaining cash and short term investment balances, proceeds from sale of stock under the employee purchase plan and stock option exercises, potential proceeds from issuance of stock for warrants, and potential cash flow from operations will be sufficient to meet its operating cash requirements at least through 1999.(1) BUSINESS COMBINATIONS In June 1998, the Company entered into a definitive agreement to acquire all outstanding equity interest of TriMark Technologies, Inc. ("TriMark"), a leading provider of software solutions for the life insurance industry. The Company and TriMark are taking initial steps toward the life insurance industry's first single-source, integrated enterprise solution. The Company will issue a maximum of $25.0 million in common stock and options for all of the outstanding equity interests of TriMark in a transaction that is expected to close prior to the end of the first half of 1999. The amount of consideration which TriMark shareholders will receive may vary depending on several factors. The accounting treatment of this acquisition will not be determined until the acquisition is concluded. Prior to closing the transaction, the Company and TriMark will operate independently within a development, marketing, sales and support relationship. In December 1998, the Company entered into a definitive agreement to acquire all outstanding equity interest of Distinction Software, Inc. ("Distinction"), a supply chain management software company, by issuing between $5 million and $10 million in common stock and options. The transaction is expected to close in the second half of 1999. The accounting treatment of this acquisition will not be determined until the acquisition is concluded. Prior to closing the transaction, the Company and Distinction will operate independently within a development, marketing, sales and support relationship. YEAR 2000 The Company has established a Year 2000 Program Management Office ("PMO") to ensure that it has adequately addressed exposures related to the Year 2000 and is Year 2000 Ready. "Year 2000 Ready" means that the performance or functionality of the Company's internal systems will not be significantly affected by the dates prior to, during, and after the Year 2000, to include leap year calculations and specific day-of-the-week calculations. Through an extensive risk analysis the Company has identified critical processes that will require Level One Year 2000 Readiness testing. Level One testing will involve full Year 2000 system and end-to-end testing. In cases where Level One testing is not feasible, Level Two Readiness testing at the vendor site will be employed. Additionally, all hardware and software associated with the Company's identified critical business processes will be subject to Level Three Readiness certification which consists of verification from the vendor indicating that the item is Year 2000 Ready. At present, the PMO is in the process of establishing dedicated test environments for Year 2000 Readiness testing. The building of the environment and testing is based on a comprehensive methodology, a collaborative effort between the Company and Compuware. Testing of critical processes commenced during the fourth quarter of 1998. Costs directly attributed to the Company's internal Year 2000 initiative are currently estimated at approximately $4.0 million. The amount spent to date is immaterial. This estimate is comprised primarily of - - --------------- 1Forward-Looking Statement 41 44 consulting fees and the cost of hardware and software required to complete Year 2000 testing within the enterprise. This cost estimate excludes internal resource costs for individuals outside of the PMO, however, these costs are not considered to be material. The Company, which was established in 1987, is a relatively new company that does not have the level of exposure to Year 2000 issues as many older companies. There are no legacy mainframe applications within the organization. The Company's commercial application software products generally offered for license by the Company are also used to develop internal business information systems within the enterprise. In addition, third party software, hardware, and telecommunication products are also used for the development of the Company's systems. As a matter of strategic direction, the Company attempts to utilize the most recent release versions/models of in-house and third party products. With respect to embedded systems consisting of facilities, utilities, and third-party interfaces on which the enterprise is dependent but does not have direct control, the Company is in the process of developing detailed contingency plans for its core support centers. The Company currently anticipates that the approach described above will enable it to achieve Year 2000 readiness with respect to its critical internal processes and therefore, the Company does not expect that Year 2000 issues will have a material adverse impact on the Company's financial condition.(1) However, because of the vast scope of potential Year 2000 issues, the Company cannot be certain to what extent the Company may be impacted. Although the Company feels confident that its internal critical processes will be Year 2000 Ready, the Company does recognize that it is vulnerable, as are most organizations, to the inability of significant suppliers, third-party external interface suppliers, and utility organizations to achieve Year 2000 Readiness. In light of these possibilities, the Company is in the process of developing detailed contingency plans for its core support centers to ensure the continuity of its operations. ITEM 7A. FINANCIAL RISK MANAGEMENT FOREIGN EXCHANGE PeopleSoft's revenue originating outside the United States was 15% and 16% of total revenues in 1997 and 1998, respectively. International revenues from each geographic region were less than 10% of total revenues. International sales are made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company's exposure to foreign exchange rate fluctuations arise in part from intercompany accounts in which cost of software, including certain development costs, incurred in the United States is charged to the Company's foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. The Company is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. In January 1998, the Company initiated a foreign exchange hedging program designed to mitigate the potential for future adverse impact on intercompany balances due to changes in foreign exchange rates. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have terms of three months or less. The Company currently settles all of its hedges on the last day of the second month of each quarter and concurrently opens new - - --------------- 1Forward-Looking Statement 42 45 contracts to cover the upcoming quarter. Gains and losses on the settled contracts are recognized as other income or expense in the current period, consistent with the period in which the gain or loss of the underlying transaction is recognized. The Company recorded net losses from these settled contracts and underlying foreign currency exposures of approximately $900,000 for the year ended December 31, 1998. The foreign exchange hedging program is managed in accordance with a corporate policy approved by the Company's Board of Directors. At December 31, 1998, hedge positions totaled $11.0 million equivalent. All hedge positions are carried at fair value, which approximates book value and all hedge positions had maturity dates within three months. For the years ended December 31, 1997 and 1998, the Company's revenues in the Asia/Pacific region, which includes Far East countries and Australia and New Zealand, were less than 5% of total revenues. As of December 31, 1998, less than 5% of the Company's assets are in the Asia/Pacific region. To date, the Company's operations in the region are generating losses and negative cash flows. As the Asia/Pacific currencies devalue, the translated loss reported on the consolidated financial statements decreases. In addition, such currency devaluations cause the Company's U.S. dollar cash funding requirements of these foreign subsidiaries to decrease. INTEREST RATES The Company invests its cash in a variety of financial instruments, consisting principally of investments in interest-bearing demand deposit accounts with financial institutions, tax-advantaged money market funds and highly liquid debt and equity securities of corporations, municipalities and the U.S. Government. These investments are denominated in U.S. Dollars. Cash balances in foreign currencies overseas are operating balances and are only invested in short term time deposits of the local operating bank. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent, short term, and long term investments are treated as "available- for-sale" under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company's investments are made in accordance with an investment policy approved by the Board of Directors. At December 31, 1998, the average maturity of the Company's investment securities was approximately four months. No investment securities had maturities exceeding two years. The following table presents certain information about the financial instruments held by the Company at December 31, 1998 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. For available-for-sale investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The Company believes its available-for-sale securities, comprised of highly liquid debt securities of corporations, municipalities, and the U.S. Government, are similar enough to aggregate. Because of the Company's effective tax rate, the Company finds it advantageous to invest largely in tax-advantaged securities. The average interest rates below reflect a weighted average rate for both taxable investments and tax-exempt investments. Below is a tabular 43 46 presentation of the maturity profile of the available-for-sale investment securities held by the Company at December 31, 1998: INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY WEIGHTED AVERAGE INTEREST RATE
FAIR VALUE 1999 2000 TOTAL 12/31/98 ------ ----- ------ ---------- (DOLLARS IN MILLIONS) Available-for-sale securities.......... $290.3 $31.6 $321.9 $322.5 Weighted average interest rate......... 4.0% 4.0%
The Company is not an issuer of any corporate debt nor does it have any bank borrowings outstanding. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company has identified certain forward-looking statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations with a footnote(1) symbol. The Company may also make oral forward-looking statements from time to time. Actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Form 10-K. The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties that may have a material adverse effect on the Company's business, financial condition or results of operations. This section should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 1996, 1997, and 1998 contained elsewhere in this Form 10-K. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS PeopleSoft's revenues and results of operations are difficult to predict and may fluctuate substantially from quarter to quarter. License fee revenues in any quarter depend substantially upon PeopleSoft's total contracting activity and its ability to recognize revenue in that quarter in accordance with its revenue recognition policies. PeopleSoft's contracting activity is difficult to forecast for a variety of reasons, including the following: - a significant portion of PeopleSoft's license agreements are completed within the last few weeks of each quarter; - PeopleSoft's sales cycle is relatively long and increasingly variable since PeopleSoft has broadened its marketing emphasis to include software product solutions for each customer's overall business, thus increasing the financial value of individual transactions and the complexity of the customer selection, negotiation and approval process; - the size of license transactions can vary significantly; - customers may postpone or cancel system replacement or new system evaluations due to changes in their strategic priorities, project objectives, budgetary constraints or company management; - customer evaluations and procurement processes vary significantly from company to company, and a customer's internal approval and expenditure authorization process can be difficult, even after selection of a vendor; and - the number, timing and significance of software product enhancements and new software product announcements by PeopleSoft and its competitors may affect purchase decisions; 44 47 In addition, each customer's evaluation of its need to achieve Year 2000 compliance may affect the purchase decision. PeopleSoft believes that, many customers and potential customers are heavily engaged in testing and correcting system Year 2000 problems, and therefore such customers may choose to defer system investments during 1999, negatively impacting the Company's revenues. In addition, prior year sales may have been increased due to customers' urgent need to address Year 2000 issues. Such Year 2000 related demand should be eliminated in 1999 due to the lead time required to implement new systems, negatively impacting the Company's revenues. In addition, the Company's sales cycles may lengthen in 1999 and future years due to lessened urgency of customers' system investment decisions. Because Year 2000 related impacts on customer purchasing decisions are unprecedented, PeopleSoft has a limited ability to forecast accurately the impact of the Year 2000 issue on its quarter-to-quarter revenues. In addition, changes in PeopleSoft's sales incentive plans have had and may continue to have an unpredictable impact on seasonal business patterns. Finally, changes in economic, political and market conditions may adversely impact PeopleSoft's business opportunities at any time. Several factors may require PeopleSoft to defer recognition of license fee revenue for a significant period of time after entering into a license agreement, including: - whether the license agreement relates entirely to then currently undeliverable software products; - whether enterprise transactions include both software products that are then currently deliverable and software products that are still under development or other undeliverable elements (If PeopleSoft enters into a license agreement to provide both software product categories, then, in order to recognize revenue on currently delivered products under the license agreement, it must be able to establish separate values for all elements under the license agreement, and the license agreement and supporting schedules must contain precise contractual provisions consistent with generally accepted accounting principles ("GAAP")); - whether the customer demands services that include significant modifications, customizations or complex interfaces; - whether the license agreement includes non-standard acceptance criteria that may preclude revenue recognition prior to customer acceptance; and - whether the license agreement includes fees with extended payment terms or fees that depend upon acceptance of services or other contingencies. Because of the factors listed above and other specific requirements under published GAAP standards for software revenue recognition, PeopleSoft must have very precise terms in its license agreements in order to recognize revenue when it initially delivers software. Although PeopleSoft has a standard form of license agreement that meets the criteria under GAAP for current revenue recognition on delivered elements, it must often negotiate and revise certain terms and conditions in large enterprise transactions. Negotiation of mutually acceptable terms and conditions can extend the sales cycle and, sometimes PeopleSoft does not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed. Variances or slowdowns in PeopleSoft's prior quarter contracting activity may impact its current and future service revenues since service revenues typically lag license fee revenues. PeopleSoft's ability to increase service revenue (such as fees derived from consulting, training and maintenance services) primarily depends on its ability to increase the number of its licensing agreements. Additionally, PeopleSoft may not be able to recruit, hire and train sufficient numbers of qualified consultants to perform these services. DEPENDENCE ON THIRD PARTY TECHNOLOGY PeopleSoft licenses numerous critical third-party software products that it incorporates into its own software products. The termination of any of PeopleSoft's licenses to this third-party software could have a material adverse effect on PeopleSoft's business, financial condition and results of operations. These adverse effects include, for example, its products becoming inoperable or their performance being materially reduced. 45 48 If any of the third-party software vendors change their product offerings, PeopleSoft may need to incur additional development costs to ensure continued performance of its products. In addition, if the cost of licensing any of these third-party software products materially increases, PeopleSoft's gross margin levels could materially decrease. PeopleSoft relies on existing partnerships with certain other software vendors who are also competitors. For example, PeopleSoft partners with Oracle when PeopleSoft customers select an Oracle database to run in conjunction with PeopleSoft's financial package. However, Oracle competes with PeopleSoft in the enterprise software area. If these partners/competitors change their business practices in the future, PeopleSoft may be compelled to find alternative vendors of complementary software, which may not be as popular or provide the same functionality as the software provided by PeopleSoft's existing partners/competitors. RISK ASSOCIATED WITH CREATION OF MOMENTUM BUSINESS APPLICATIONS PeopleSoft faces a number of risks as of a result of the creation of Momentum Business Applications and the distribution of the Momentum Business Applications Class A Common Stock to PeopleSoft stockholders. These include: - PeopleSoft has less control over important research and development projects. PeopleSoft and Momentum Business Applications must agree on project selection, budgets, timetables and specifications for each project and Momentum Business Applications will be responsible for overseeing the actual product development. - PeopleSoft contributed a substantial portion of its cash reserves to Momentum Business Applications. As a result, PeopleSoft's credit rating may be adversely affected and its ability to raise additional funds may be impaired. In addition, the Company has increased risk of having insufficient cash resources to address adverse conditions that may impact its business results. - PeopleSoft may lose the tax benefits associated with the research and development expenditures on the projects pursued by Momentum Business Applications. Though PeopleSoft may be able to recapture these benefits if it chooses to acquire Momentum Business Applications, it will likely face restrictions on the amount and timing of its utilization of these tax benefits. - If PeopleSoft chooses to acquire Momentum Business Applications, it will likely be required to record significant accounting charges relating to acquisition of in-process research and development and amortization of capitalized intangible assets. POSSIBLE ADVERSE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition", SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" in October 1997, March 1998, and December 1998, respectively. These standards address software revenue recognition matters primarily from a conceptual level and do not include specific implementation guidance. These standards supersede an earlier Statement of Position and, in part, are effective for transactions entered into for fiscal years beginning after December 15, 1997. Based on its reading and interpretation of SOPs 97-2 and 98-4, the Company believes that it's currently in compliance with these standards. However, the American Institute of Certified Public Accountants has not issued implementation guidelines for these standards and the accounting profession is discussing a wide range of potential interpretations. Once available, these implementation guidelines could lead to unanticipated changes in PeopleSoft's current revenue accounting practices that could have a material adverse effect on PeopleSoft's business, financial condition and results of operations. The Company has not fully assessed its ability to comply with SOP 98-9 using current contracting and business practices. However, the Company believes that SOP 98-9 may require significantly more revenue to be deferred for certain types of transactions. Although this new standard is not effective until the year 2000, the Company, in accordance with its historical practice of complying with new revenue recognition standards 46 49 as soon as issued, may choose to adopt the standard in 1999, requiring either changes in revenue recognition practices or changes in the Company's sales and contracting practices in order to comply. Such changes may have a significant adverse impact on revenues and margins in the quarter and year they are implemented. The implementation guidelines for these standards, when issued, may also require PeopleSoft to change significantly its business practices in order to continue to recognize a substantial portion of its license fee revenue when it delivers its software products. These changes may reduce demand, extend sales cycles, increase administrative costs and otherwise adversely affect PeopleSoft's business, financial condition and results of operations. In addition, PeopleSoft could become competitively disadvantaged relative to foreign-based competitors that are not currently subject to U.S. GAAP. PRICING PRACTICES The Company may choose in 1999 or a future year to make changes to its pricing practices, including additional discounts to customers, reduction of transactions that involve a perpetual use license to its software products, changes in maintenance pricing, or other changes which may negatively impact revenues in the quarter and year implemented, and for succeeding quarters and years. Such changes may have a material adverse impact on revenues, income, and the statement of financial condition, and such changes may cause the Company to revise its guidance on future operating results. HIGH DEGREE OF OPERATING LEVERAGE Like many of its competitors, PeopleSoft's business model is characterized by a very high degree of operating leverage. A substantial portion of PeopleSoft's operating costs and expenses consist of employee and facility related costs, which are relatively fixed over the short term. In addition, PeopleSoft's expense levels and hiring plans are based substantially on PeopleSoft's projections of future revenue. If PeopleSoft's actual revenues fall below expectations, its net income is likely to be disproportionately adversely affected. PeopleSoft may be unable to increase or even maintain its current level of profitability on a quarterly or annual basis in the future. FUTURE OPERATING RESULTS UNCERTAIN; SEASONALITY Segments of the software industry have in the past, and are expected in the future, to experience significant economic downturns characterized by decreased product demand, price erosion, technological shifts, work slowdowns and layoffs. PeopleSoft's operations may, in the future, fluctuate substantially from period to period because of these industry patterns, general economic conditions affecting the timing of orders from customers and other factors affecting capital spending. PeopleSoft has been, and expects to continue to be, affected by seasonal trends in the software industry. PeopleSoft's revenues historically have followed a pattern of being relatively weak in the first and second quarters and relatively strong in the third and fourth quarters. This seasonality has been caused by a variety of factors, including sales incentives, customer demand based on available capital budgets and release of new technologies. However, there is no assurance that results in the third and fourth quarters will be stronger than, or even equal to, results in the first half of the Company's fiscal year. COMPETITION The market for business application software has been intensely competitive for the past year and is currently intensifying. PeopleSoft competes with a variety of software vendors including: (i) enterprise application software vendors, including emerging new internet software application vendors; (ii) manufacturing application software vendors; (iii) enterprise resource optimization application software vendors; (iv) financial management systems and HRMS application software vendors; and (v) software tools vendors. Although PeopleSoft believes its success has been due in part to its early emphasis on the client/server architecture, virtually all of PeopleSoft's competitors now offer software products based on a client/server architecture. Consequently, PeopleSoft must differentiate itself through different or more subtle architectural and technological factors, including: (i) internet focused application development; (ii) enterprise 47 50 software product breadth and individual product features; (iii) service reputation; (iv) product flexibility; (v) ease of implementation; (vi) international software product version availability and support; and (vii) price. Price competition has significantly increased recently and this trend may continue in the future. In the enterprise application software market, PeopleSoft faces significant competition from SAP and Oracle and, to a lesser degree, J.D. Edwards, Dun & Bradstreet Software (now operating as two separate divisions of Geac Computer Systems, Inc.), Computer Associates International, Inc. and other companies such as System Software Associates who previously focused primarily on the AS/400 marketplace. In addition, the Company faces increasing competition from internet focused application vendors. In this market, the chief competitive factors include: (i) the breadth and completeness of the enterprise solution offered by each vendor, and the competitive advantages the solution offers to its customers; (ii) the extent of software product integration across the enterprise solution; and (iii) the availability of localized software products and technical support in key markets outside the United States. Both SAP and Oracle have certain competitive advantages over PeopleSoft in these areas primarily due to their significant worldwide presence and longer operating and product development history. Both SAP and Oracle have substantially greater financial, technical and marketing resources than PeopleSoft. In addition, SAP has a larger installed base that PeopleSoft. Furthermore, Oracle's RDBMS (relational database management system) underlies a significant portion PeopleSoft's installed applications. PeopleSoft entered the manufacturing software application markets in 1996. In these markets, PeopleSoft's existing competitors include those listed immediately above, and others such as Baan, QAD, Ross Systems and a large number of niche competitors already in the manufacturing market. In addition, since it acquired Red Pepper Software in the fourth quarter of 1996, PeopleSoft has competed in the emerging enterprise resource optimization software solutions market. PeopleSoft's current and potential competitors in this market include: - companies such as i2 Technologies, Manugistics and Numetrix Software, which have developed or are attempting to develop advanced planning and scheduling software products that complement or compete with MRP (material requirements planning) solutions; - other companies that provide specialized planning and scheduling software for niche markets, including Chesapeake Systems, Waterloo Manufacturing Software, MAPICS, Inc., and Marcam Solutions, Inc.; - other business application software vendors that may broaden their product offerings by internally developing (such as SAP's initiatives in this area), acquiring (such as Baan's acquisitions of Berclain Group, Inc. and Antalys, Inc.) or partnering with independent developers of advanced planning and scheduling software; - internal development efforts by potential customers' corporate information technology departments; and - companies offering standardized or customized products on mainframe and/or mid-range computer systems. PeopleSoft also competes with (i) providers of HRMS software products, including Cyborg Systems, Lawson Associates, Integral Systems, Inc., InPower, Inc. and Ceridian, and (ii) providers of financial management systems software products, including Computron Software, Inc., Flexiware International, Hyperion Software, Lawson Associates and other smaller companies. In addition, as the Year 2000 approaches, potential customers may consider outsourcing options, including data center outsourcing and service bureaus, as viable alternatives to purchasing PeopleSoft's software products. This may result in increased competition from outsource services such as Computer Science Corporation ("CSC"), Electronic Data Systems Corporation ("EDS"), IBM, ADP, Ceridian and other smaller companies. During the third quarter of 1998, PeopleSoft signed agreements with IT service providers CIBER, Inc., CSC, Corio, KPMG Peat Marwick, reSOURCE PARTNER, and USinternetworking to provide industry-specific outsourcing solutions encompassing software implementation and management 48 51 services. Although PeopleSoft is pursuing an outsourcing partner program that it believes will address the needs of the marketplace, this program may not be successful. Intense competition could lead to increased price competition in the market, forcing PeopleSoft to reduce prices. As a result, PeopleSoft's gross margins may decline and it may lose market share which, in turn, could have a material adverse effect on PeopleSoft's business, financial condition and results of operations. During 1998 certain competitors became more aggressive with their product pricing reductions, payment terms and/or issuance of contractual implementation terms or guarantees. PeopleSoft may be unable to continue to compete successfully with its existing competitors or to compete successfully with new competitors. RISKS ASSOCIATED WITH BUSINESS COMBINATIONS As part of its overall strategy, PeopleSoft plans to continue to acquire or invest in complementary companies, products, and technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that the Company may not be able to integrate the acquired technologies or products with its current products and technologies; the potential disruption of PeopleSoft's ongoing business; the inability to retain key technical and managerial personnel; the inability of management to maximize the financial and strategic position of PeopleSoft through the successful integration of acquired businesses; decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets; adverse impact on PeopleSoft's annual effective tax rate; dilution of existing equity holders; difficulty in maintaining controls, procedures, and policies; potential adverse impact on the Company's relationships with partner companies or third party providers of technology or products; and the impairment of relationships with employees and customers as a result of any integration of new personnel. In addition, due to the recent distribution of Momentum Business Applications to shareholders and to other factors that are used to judge the accounting treatment of any acquisition, the Company may not qualify for pooling of interests accounting for acquisitions of companies made in 1999, and thus may need to account for acquistions of other companies using the purchase method, in addition to using the purchase method for acquisitions of technologies or products. The purchase method of accounting for acquisitions may require large write-offs of any in process research and development costs related to companies acquired, as well as ongoing amortization costs for goodwill and other intangible assets valued in the acquisition of companies, products, or technologies. Such writeoffs and ongoing amortization charges may have a material adverse impact on operating margins and net income in the quarter of the acquisition and for several subsequent years. PeopleSoft may not be successful in overcoming these risks or any other problems encountered in connection with such transactions. RELIANCE ON PROPRIETARY SOFTWARE DEVELOPMENT TOOLS PeopleSoft's software products include a suite of proprietary software development tools, known as PeopleTools, which are fundamental to the effective use of PeopleSoft's software products. While no industry standard exists for software development tools, several companies have focused on providing software development tools and each of them is attempting to establish its software development tools as the accepted industry standard. In addition, Microsoft is attempting to establish several standards in the marketplace, including software development tools, middleware and OLAP tools. If a software product other than PeopleTools becomes the clearly established and widely accepted industry standard, PeopleSoft: (i) may be compelled to abandon or modify PeopleTools in favor of such an established standard; (ii) may be forced to redesign its software products to operate with such third party's software development tools; or (iii) may face the potential sales obstacle of marketing a proprietary software product against other vendors' software products that incorporate a standardized software development toolset. PeopleSoft may not be able to respond appropriately or sufficiently rapidly to the emergence of an industry standard. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS PeopleSoft has committed, and expects to continue to commit, substantial resources and funding to build its international service and support infrastructure. Operating costs in many countries, including many of those 49 52 in which PeopleSoft operates, are higher than in the United States. In order to increase international sales in 1998 and subsequent periods, PeopleSoft must: - continue to globalize its software product lines; - expand existing and establish additional foreign operations; - hire additional personnel; - identify suitable locations for sales, marketing, customer service and development; and - recruit international distributors and resellers in selected territories. If PeopleSoft's international expansion and/or product globalization efforts are not successful, its operating results will likely be negatively affected. Generally, PeopleSoft's foreign sales are denominated in its foreign subsidiaries' local currencies. If these foreign currency exchange rates change unexpectedly, PeopleSoft's could have significant gains or losses. In January 1998, PeopleSoft implemented a hedging program designed to mitigate the potential impact of exchange rate fluctuations. Under a foreign exchange management policy approved by the Company's Board of Directors, PeopleSoft may hedge existing transaction exposures, anticipated transactions and exposure resulting from the translation of foreign financial results into U.S. Dollars. PeopleSoft can hedge anticipated transactions and translation exposures only if they are highly certain, reasonably estimable and significant in amount. PeopleSoft began hedging of anticipated transactions and translation exposures in the first quarter of 1998 using forward contracts. PeopleSoft's inability to hedge potential significant exposures due to uncertainty or inability to estimate reasonably its foreign exchange exposure could materially adversely affect its operating results. RELIANCE ON THIRD PARTIES FOR SALES AND MARKETING A key aspect of PeopleSoft's sales and marketing strategy is to build and maintain strong working relationships with businesses that PeopleSoft believes play an important role in the successful marketing of its software products. PeopleSoft's customers and potential customers often rely on third-party system integrators to develop, deploy and manage client/server applications. These third-party system integrators include: (i) RDBMS software vendors; (ii) hardware vendors which offer both hardware platforms and, in the case of IBM, proprietary RDBMS products on which PeopleSoft's software products run; (iii) technology consulting firms and systems integrators, some of which are active in the selection and implementation of large information systems for the information-intensive organizations that make up PeopleSoft's principal customer base; and (iv) benefits consulting firms that are active in the implementation of HRMS. PeopleSoft believes that its marketing and sales efforts are enhanced by the worldwide presence of these companies. However, these companies, most of which have significantly greater financial and marketing resources than PeopleSoft, may start, or in some cases increase, the marketing of business application software in competition with PeopleSoft, or may otherwise discontinue their relationships with or support of PeopleSoft. If PeopleSoft or its partners are unable to recruit and adequately train a sufficient number of consulting personnel to support the implementation of PeopleSoft's software products, demand for these software products could be materially adversely affected. In addition, integrators who generate consulting fees from customers by providing implementation services may be less likely to recommend PeopleSoft's software application architecture, including PeopleTools, if these products facilitate less implementation effort than competitors' similar product offerings. COMPLEXITY OF SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT The market for PeopleSoft's software products is characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. PeopleSoft's future success will depend in part upon its ability to; (i) continue to enhance and expand its core applications; (ii) continue to provide enterprise solutions; (iii) enter new markets; and (iv) develop and introduce new products that keep pace with technological developments, including developments related to the internet, satisfy increasingly sophisticated customer requirements and achieve market acceptance. 50 53 PeopleSoft may not be able to enhance existing products or develop and introduce new products in a timely manner. PeopleSoft's software products can be licensed for use with a variety of popular industry standard RDBMSs. There may be future or existing RDBMS platforms that achieve popularity within the business application marketplace and on which PeopleSoft may desire to offer its applications. These future or existing RDBMS products may or may not be architecturally compatible with PeopleSoft's software product design. PeopleSoft may not be able to develop software products on additional platforms with the specifications and within the time frame necessary for market success. Beginning with Release 6, PeopleSoft integrated certain features of BEA's Tuxedo product into its applications. Over the next several releases, PeopleSoft will continue to integrate Tuxedo features to allow applications to run on a distributed basis using a multi-tiered client/server architecture. PeopleSoft also will bundle Cognos' Powerplay product and Arbor's Essbase product to incorporate desktop OLAP capabilities, and will bundle products from Informatica and Information Advantage into its Enterprise Performance Management products. These third party products may be critical to the competitiveness of PeopleSoft's software products in the future. Integration of these and other products is complex and PeopleSoft's efforts may not be successful or may not result in significant software product enhancements. Despite testing by PeopleSoft and by third-parties, software programs as complex as those offered by PeopleSoft are likely to contain a number of undetected errors or "bugs" when they are first introduced or as new releases are subsequently released. This may result in reduced acceptance of PeopleSoft's software products in the marketplace. The effort and expense of developing, testing and maintaining software product lines will increase with the increasing number of possible combinations of: (i) vendor hardware platforms; (ii) operating systems and updated versions; (iii) PeopleSoft application software products and updated versions; and (iv) RDBMS platforms and updated versions. Developing consistent software product performance characteristics across all of these combinations could place a significant strain on PeopleSoft's development resources and software product release schedules. RELIANCE ON CLIENT INTERFACES Currently, PeopleSoft supports client platforms using browsers certified to run its Java-based Web client, or Microsoft's Windows family of software products, including Windows 3.1 (PeopleSoft releases prior to Release 6 only), Windows NT and Windows 95. If Microsoft fundamentally changes the architecture of its software product so that users of PeopleSoft's software applications experience significant performance degradation or become incompatible with future versions of Microsoft's Windows Operating System, it could have a material adverse effect on PeopleSoft's business, financial condition and results of operations. The use of a Web client as a primary user interface is emerging as an alternative to the traditional desktop access through Microsoft Windows based personal computers. This client access via the Internet or intranet involves numerous risks inherent in using the Internet, including security, availability and reliability. PeopleSoft may wish to offer its applications on future or existing client platforms that achieve popularity within the business application marketplace. These future or existing client platforms may or may not be architecturally compatible with PeopleSoft's software product design. PeopleSoft may not be able to support new client interfaces and achieve market acceptance of new client interfaces which it does support. RELIANCE ON JOINT BUSINESS ARRANGEMENTS PeopleSoft has in the past entered into, and may in the future enter into, various development or joint business arrangements to develop new software products or extensions to its existing software products. Under these arrangements, PeopleSoft has in the past and expects in the future to be the exclusive remarketer of the developed software products and pays a royalty to the business partner based on end user license fees for the developed products. Under these joint business arrangements, PeopleSoft may distribute or jointly sell with its business partner an integrated software product. While PeopleSoft intends to develop business applications that are integrated with its software products, these software products may not in fact be integrated or the market may not accept an integrated enterprise solution. Also, these arrangements may require additional 51 54 investments from third parties or business partners to complete development or to enhance the software product. These investments may not be available on terms mutually acceptable to PeopleSoft and its business partner or the existing or other potential third-party funding source(s). If PeopleSoft acquires title to the software products or technology from its business partner, it may account for this acquisition using the purchase method, which is likely to result in either or both of the following accounting treatments: (i) a charge to earnings for in-process research and development which PeopleSoft would record in its statement of income in the period it completed the acquisition; or (ii) allocation of a substantial portion of the purchase price to acquired technology or other intangible assets, creating significant intangible assets. These intangible assets would be amortized in future periods as a cost of operations. If either of these scenarios occur, PeopleSoft's results of operations in one or more future periods could be materially adversely affected. POTENTIAL SECURITY BREACHES PeopleSoft's application software products incorporate extensive security features designed to prevent unauthorized retrieval or modification of sensitive data. PeopleSoft has developed a security architecture using: (i) the capabilities of its own applications; (ii) the client operating system software; (iii) some of the security features contained in the RDBMS platforms on which the applications run; and (iv) certain third party security products. To date, PeopleSoft is not aware of any violations of its application security architecture within its installed base. Although these security features are subject to constant review and enhancement, they may not be successfully implemented or may not be effective within a particular customer's operating environment. If a breach of security or a suspected breach of security occurs, the accompanying publicity or any subsequent claims against PeopleSoft could adversely impact the demand for PeopleSoft's software products and/or could cause a decline in the market price of PeopleSoft's stock and/or could adversely impact PeopleSoft's financial results due to lost or delayed closing of software licensing opportunities. LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; POTENTIAL INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS PeopleSoft considers certain aspects of its internal operations, software and documentation to be proprietary, and relies on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect this information. Outstanding applications may not result in issued patents and, even if issued, the patents may not provide any meaningful competitive advantage. Existing copyright laws afford only limited protection. PeopleSoft believes that the rapid pace of technological change in the computer software industry has made patent, trade secret and copyright protection less significant than factors such as: (i) the knowledge, ability and experience of PeopleSoft's employees; (ii) frequent software product enhancements; and (iii) the timeliness and quality of support services. Patent, trade secret and copyright protections may be inadequate, and PeopleSoft's competitors may independently develop technologies that are substantially equivalent or superior to PeopleSoft's technology. Through an escrow arrangement, PeopleSoft has granted many of its customers a future right to use PeopleSoft's source code solely for internal maintenance services. This possible access to PeopleSoft's source code may increase the likelihood of misappropriation or other misuse of PeopleSoft's intellectual property. Finally, the laws of some countries in which PeopleSoft's software products are or may be licensed do not protect PeopleSoft's software products and intellectual property rights to the same extent as the laws of the United States. PeopleSoft does not believe that its software products, software products acquired from previous acquisitions, third party software products PeopleSoft offers under sublicense agreements, PeopleSoft trademarks or other PeopleSoft proprietary rights infringe the property rights of any third parties. However, third parties may assert infringement claims against PeopleSoft with respect to its products. Any such assertion could require PeopleSoft to enter into royalty arrangements or could result in costly litigation. POTENTIAL PRODUCT LIABILITY CLAIMS PeopleSoft's license agreements contain provisions designed to limit its exposure to potential product liability claims. However, these provisions could be invalidated by unfavorable judicial decisions or by federal, state or local laws or ordinances. Although PeopleSoft has not experienced any product liability claims to date, 52 55 use of its software in mission critical applications creates the risk that a third party may pursue a claim against PeopleSoft. If a product liability claim against PeopleSoft were successful, the resulting damages or injunctive relief could have a material adverse effect on PeopleSoft's business, financial condition and results of operations. In addition, as PeopleSoft begins to compete in the manufacturing software application market, the mission critical nature of these products may increase PeopleSoft's exposure to product liability claims. RISKS ASSOCIATED WITH MANAGING GROWTH PeopleSoft has experienced an extended period of: (i) significant revenue growth; (ii) customer base growth; (iii) expansion of its software product lines and supported platforms; (iv) significant expansion in its number of employees; (v) increased pressure on the viability and scope of its operating and financial systems; and (vi) expansion in the geographic scope of its operations. This growth has resulted in new and increased responsibilities for management personnel and has placed a significant strain upon PeopleSoft's management, operating and financial controls and resources, including its services and development organizations. To accommodate recent growth, compete effectively and manage potential future growth, PeopleSoft must continue to implement and improve the speed and quality of its information decision support systems, management decisions, reporting systems, procedures and controls. PeopleSoft's personnel, procedures, systems and controls may not be adequate to support its future operations. DEPENDENCE ON KEY PERSONNEL PeopleSoft believes that its future prospects will depend in large part upon its ability to attract, train and retain highly-skilled technical, managerial, sales and marketing personnel. PeopleSoft continues to hire a significant number of additional sales, services and technical personnel. However, competition for personnel in the software industry is intense, and, at times, PeopleSoft has had difficulty locating candidates with appropriate qualifications within various desired geographic locations, or with certain industry-specific domain expertise. If PeopleSoft's competitors increase their use of non-compete agreements, the pool of available technical personnel may further narrow in certain jurisdictions, even if the non-compete agreements are ultimately unenforceable. The failure to attract, train, retain and manage productive sales and sales support personnel would have a material adverse effect on PeopleSoft's business, financial condition and results of operations. If PeopleSoft loses the services of one or more of its key employees, its business, operating results, financial condition or business prospects could be materially adversely affected. In the past, PeopleSoft has lost few employees, especially those in critical positions. PeopleSoft has several programs in place to retain key personnel, including granting of stock options that vest annually over four or five years. A number of key employees have vested stock options with exercise prices lower than PeopleSoft's current stock price. These potential gains provide these employees the economic freedom to explore personal objectives both within and outside PeopleSoft, which may result in the loss of key employees during the coming years. It is widely recognized that the software industry in which PeopleSoft competes is at or beyond a condition of full employment. PeopleSoft may not be able to attract, train and retain the personnel it requires to develop, market, sell and support new or existing software or to continue to grow. Also, to penetrate successfully key vertical markets, PeopleSoft must attract, train and retain personnel with industry-specific domain expertise. Since the fourth quarter of 1998, PeopleSoft has experienced turnover of several senior executives. PeopleSoft has hired or promoted qualified candidates to fill these positions. However, since the employees are new to the positions, there is no assurance that the newly hired or promoted employees will smoothly transition into these leadership roles or be able to successfully lead the Company as it continues to grow. YEAR 2000 COMPLIANCE PeopleSoft's internal business information systems are comprised primarily of the same commercial application software products it generally offers for license to end user customers. These applications have been tested for Year 2000 compliance and are certified by the Information Technology Association of 53 56 America ("ITAA") as Year 2000 compliant. Therefore, PeopleSoft does not expect any Year 2000 compliance issues to arise related to its primary internal business information systems. PeopleSoft is not aware of any material operational issues or costs associated with preparing internal systems for the Year 2000. However, PeopleSoft uses other third party vendor network equipment, telecommunication products, and software products that may or may not be Year 2000 compliant. PeopleSoft currently is taking steps to address the impact, if any, of the Year 2000 issue surrounding these third party products. The failure of any critical technology components to operate properly in the Year 2000 could have a material adverse effect on PeopleSoft's business, financial condition and results of operations, and PeopleSoft may be required to incur unanticipated expenses to remedy any problems. RISKS ASSOCIATED WITH THE EUROPEAN MONETARY UNION ("EMU") The Company's internal business information systems are primarily comprised of the same commercial application software products generally offered for license by the Company to end user customers. The Company's latest software release (Release 7.5) contains EMU functionality that allows for dual currency reporting and information management. The Company is not aware of any material operational issues or costs associated with preparing internal systems for the EMU. However, the Company utilizes third party vendor network equipment and software products that may or may not be EMU compliant. Although the Company is currently taking steps to address the impact, if any, of EMU compliance for such third party products, failure of any critical technology components to operate properly post-EMU may adversely affect business operations or require the Company to incur unanticipated expenses to remedy any problems. Furthermore, the Company's foreign exchange exposures to legacy sovereign currencies of the participating countries in the EMU will become foreign exchange exposures to the Euro upon its introduction. To the extent hedging transactions are entered for exposures after January 1, 1999, they will be denominated in Euros as applicable. Although the Company is not aware of any material adverse financial risk consequences of the change from legacy sovereign currencies to the Euro, conversion may result in problems, which may have an adverse impact on the Company's business since the Company may be required to incur unanticipated expenses to remedy these problems. RISKS ASSOCIATED WITH FACILITY EXPANSION PeopleSoft's continued growth has led to a significant increase in its number of employees. Commercial building vacancy rates have dropped significantly in many of the markets where PeopleSoft has significant operations. As a consequence, PeopleSoft expects to experience increasing difficulty in obtaining additional space within which to expand its operations. PeopleSoft's failure to either obtain space, or to obtain it on reasonably attractive commercial terms, may inhibit its ability to grow, or may otherwise adversely affect its operations and financial results. Additionally, PeopleSoft may commit to real estate projects in order to expand its operations to accommodate expected growth. These real estate projects typically have a lead time of over one year from the commitment date to occupancy. PeopleSoft's anticipated growth projections may not be realized, and therefore, PeopleSoft may be subject to increased fixed costs that cannot be recovered from operations, resulting in material reductions to net income and cash flows. VOLATILITY OF STOCK PRICE; RISK OF LITIGATION The trading price of PeopleSoft Common Stock has in past and may in the future be subject to wide fluctuations in response to factors such as: (i) revenue or results of operations in any quarter failing to meet the expectations (published or otherwise) of the investment community; (ii) announcements of technological innovations by PeopleSoft or its competitors; (iii) new products or the acquisition of significant customers by PeopleSoft or its competitors; (iv) developments with respect to patents, copyrights or other proprietary rights of PeopleSoft or its competitors; (v) changes in recommendations or financial estimates by securities analysts; (vi) conditions and trends in the software industry generally; (vii) adoption of new accounting standards affecting the software industry; (viii) general market conditions and other factors. Further, the stock market 54 57 has experienced in recent months and may continue in the future to experience extreme price and volume fluctuations that particularly affect the market prices of equity securities of high technology companies that often are not related to or are disproportionate to the operating performance of such companies. These broad market fluctuations, as well as general economic, political and market conditions, have and may continue to have a material adverse effect on the trading price of PeopleSoft Common Stock. Fluctuations in the price of PeopleSoft's Common Stock may expose PeopleSoft to the risk of securities class action lawsuits. As a result of the significant declines in the price of PeopleSoft's Common Stock during the second half of fiscal 1998 and the first quarter of fiscal 1999, several such lawsuits were filed against PeopleSoft. Though PeopleSoft believes that these lawsuits are without merit, defending against them could result in substantial costs and a diversion of management's attention and resources. In addition, any settlement or adverse determination of these lawsuits could subject PeopleSoft to significant liabilities. There can be no assurance that there will not be additional lawsuits in the future or that current or future lawsuits will not have a material adverse effect on the Company's business, financial condition and results of operations. See Item 3 Legal Proceedings. POSSIBLE ADVERSE EFFECTS OF RECENT SECURITIES ISSUANCES If holders of warrants and/or options to purchase PeopleSoft Common Stock exercise any significant number of these securities and resell the underlying shares, the market price of PeopleSoft Common Stock could be materially adversely affected. At December 31, 1998, warrants to purchase 6,400,000 shares of PeopleSoft Common Stock were outstanding. As of December 31, 1998, these warrants had exercise prices below the current market price of PeopleSoft Common Stock. In addition, at December 31, 1998, there were outstanding exercisable options to purchase 10,006,204 shares of PeopleSoft Common Stock issued under employee stock plans. As of such date, options to purchase 1,364,836 shares of PeopleSoft Common Stock had exercise prices below the current market price of PeopleSoft Common Stock. INVESTMENTS AND LIQUIDITY PeopleSoft's short-term and long-term investments consisting principally of investments in interest-bearing demand deposit accounts with financial institutions, tax-advantaged money market funds and highly liquid debt and equity securities of corporations, municipalities and the U.S. Government. Although these investments have favorable credit ratings, it is possible that the issuers will default on their obligations, and PeopleSoft may lose principal and accrued interest. In times of growth, PeopleSoft's operating and investing activities may use more cash than they provide, thus requiring PeopleSoft to obtain additional sources of financing. In addition, PeopleSoft may need additional sources of financing for capital expenditures and material acquisitions of complementary businesses, products or technologies. PeopleSoft may be unable to obtain additional sources of financing on favorable terms, if at all. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included in Part IV Item 14(a)(1) and (2). ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Report because the registrant will file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. 55 58 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's officers required by this Item is included in the section in Part I hereof entitled "Personnel." The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Election of Directors -- Nominees." Information concerning the Company's officers, directors and 10% shareholders compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained in the Company's Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Transactions with Management." PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements. The following consolidated financial statements of PeopleSoft, Inc. are filed as part of this report:
PAGE ---- Report of Ernst and Young LLP, Independent Auditors......... F-1 Covered by Report of Ernst and Young LLP, Independent Auditors: Consolidated Balance Sheets at December 31, 1997 and 1998................................................... F-2 Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998....................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998........... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998....................... F-5 Notes to Consolidated Financial Statements.................. F-6 Not Covered by Report of Independent Auditors: Supplemental Quarterly Financial Information.............. F-24
2.Consolidated Financial Statements Schedules. None. All schedules have been omitted as they are either not required or not applicable, or the required information is included in the consolidated financial statements or the notes thereto. 3. Exhibits. 2.1(7) Agreement and Plan of Reorganization between PeopleSoft, Inc. and Red Pepper Company dated as of September 4, 1996.
56 59 2.2(16) Agreement and Plan of Merger dated September 30, 1998 between the Registrant and Intrepid Systems, Inc. 3.1(11) Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of Delaware on May 25, 1996. 3.2(11) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on June 17, 1996. 3.3(14) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on July 3, 1997. 3.4(14) Certificate of Designation as filed with the Secretary of State of the State of Delaware on March 24, 1998. 3.5 Bylaws of Registrant as amended to date. 4.2(12) First Amended and Restated Preferred Shares Rights Agreement dated December 16, 1997. 10.1(5)(11) Amended and Restated 1989 Stock Plan and forms of option agreements thereunder. 10.2(11) 1992 Employee Stock Purchase Plan as amended to date, and form of subscription agreement thereunder. 10.3(1) 1992 Directors' Stock Option Plan and forms of option agreements thereunder. 10.4(2)(5) Executive Bonus Plan. 10.5(3) Amendment and Restatement of PeopleSoft, Inc. 401(K) Plan, dated December 13, 1995, Amendment No. 1 dated December 30, 1994, and Amendment No. 2, dated August 25, 1995. 10.6(1) Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers. 10.7(3) Loan Agreement between the Registrant and West America Bank, N.A. dated October 31, 1995. 10.8(1) Office Lease for 1331 North California Boulevard dated July 23, 1990 between the Registrant and 1333 North California Boulevard, a California limited partnership, as amended by the First Amendment to Lease dated April 24, 1991 and the Second Amendment to Lease dated June 17, 1992 and related Lease Guarantees dated July 26, 1990 and June 14, 1991 between 1333 North California Boulevard and David A. Duffield. 10.9(1) Lease dated July 24, 1992 between the Registrant and Glen Pointe Associates. 10.12(1)(6) Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc., as amended by Amendment No. 1 dated September 30, 1992. 10.18(2) Lease dated June 23, 1993 between the Registrant and Westbrook Corporate Center. 10.19(2) Lease dated January 17, 1994 between the Registrant and R-H Associates Bldg. III Corp. 10.20(2) Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.21(3) Contract of Sale and Escrow Instructions between the Company and Rosewood Owner of California (B) LLC, a California limited liability company, dated October 4, 1995. 10.22(4) Warrant Agreement between the Registrant and The First National Bank of Boston, as Warrant Agent, dated October 30, 1995. 10.23(4) Warrant Purchase Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995.
57 60 10.24(4) Registration Rights Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.25(8) Amendment No. 2 dated September 28, 1994, Amendment No. 3 dated September 21, 1995 and Amendment No. 4 dated December 28, 1995 to the Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc. (Confidential treatment requested for Amendment No. 2 and No. 4 only). 10.26(8) Amended Software Development Agreement dated December 22, 1995 between the Registrant and Solutions for Education Administrators, Inc. 10.27(8) Exclusive Marketing and Distribution Agreement dated December 22, 1995 between the Registrant and SIS Development LLC ("SIS"). 10.28(13) Amendment No. 1 dated September 19, 1994, Amendment No. 2 dated May 15, 1995 and Amendment No. 3 dated June 19, 1995 to the Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.29(8) Systems Integrator Agreement dated August 25, 1995 between the Registrant and Shared Medical Systems Corporation. 10.32(13) Lease dated December 4, 1996 between the Registrant and Lease Plan North America, Inc. 10.33(13) Purchase Agreement dated October 22, 1996 between the Registrant and Norwest Equity Partners IV, L.P. 10.34(10) Red Pepper Software Company 1993 Stock Option Plan, and forms of stock option agreement thereunder. 10.35(15) Agreement of Purchase and Sale dated July 22, 1998 between the Registrant and William Willson & Associates. 10.36(15) Lease dated September 14, 1998 between the Registrant and Hacienda Plaza Associates, LLC. 10.37 Development and License Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc. 10.38 Marketing and Distribution Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc. 10.39 Distribution Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc. 10.40 First amendment to Participation Agreement and Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust dated February 20, 1998 between the Registrant and Lease Plan North America, Inc. 10.41 Second Amendment to Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease and Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust dated September 28, 1998 between the Registrant and Lease Plan North America, Inc. 10.42 Participation Agreement dated September 28, 1998 between the Registrant and Wilmington Trust Company, ABN AMRO Leasing, Inc., ABN AMRO Bank N.V., and Financial Institutions listed in Schedule I of the Participation Agreement. 10.43 Master Lease dated September 28, 1998 between the Registrant and Wilmington Trust Company. 10.44 Appendix 1 to the Participation Agreement and Master Lease dated September 28, 1998. 21.1 Subsidiaries.
58 61 23.1 Consent of Ernst and Young LLP, Independent Auditors. 24.1 Power of Attorney (see page 61). 27.1 Financial Data Schedule.
- - --------------- (1) Incorporated by reference to the exhibit having the same number filed with the Registrant's Registration Statement on Form S-1 (No. 33-53000) filed October 7, 1992, Amendment No. 1 thereto filed October 26, 1992, Amendment No. 2 thereto filed November 10, 1992 and Amendment No. 3 thereto filed November 18, 1992, which Registration Statement became effective November 18, 1992 and the Registrant's Registration Statement on Form S-1 (No. 33-62356) filed on May 7, 1993, which Registration Statement became effective May 24, 1993. (2) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (3) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K filed with the Securities and Exchange Commission on December 15,1995. (4) Exhibits 10.22, 10.23, and 10.24 are incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, filed with the Company's Registration Statement on Form S-3 (No. 33-80755) filed with the Securities and Exchange Commission on December 22, 1995. (5) This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c). (6) Confidential treatment previously granted. (7) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-4 filed with the Securities and Exchange Commission on October 4, 1996. (8) Incorporated by reference to the exhibit having the same filed numbers with the Company's Annual Report on Form 10K for the year ended December 31, 1995. (9) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-A filed with the Securities and Exchange Commission on February 15, 1995. (10) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-8 filed with the Securities and Exchange Commission on October 24, 1996. (11) Incorporated by reference to the exhibit filed with the Company's Form S-8 (No.333-08575) filed with the Securities and Exchange Commission on July 22, 1996. (12) Incorporated by reference to Exhibit 1 filed with the Company's Form 8-A/A filed with the Securities and Exchange Commission on March 25, 1998. (13) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1996. (14) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1997. (15) Incorporated by reference to the exhibit having the same filed number with the Company's Quarterly Report on Form 10Q for the quarter ended September 30, 1998. (16) Incorporated by reference to the exhibit 10.37 filed with the Company's Quarterly Report on Form 10Q for the quarter ended September 30, 1998. 59 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLESOFT, INC. By: /s/ ALFRED J. CASTINO ------------------------------------ Alfred J. Castino Senior Vice President of Finance and Administration, and Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 29, 1999 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, David A. Duffield and Alfred J. Castino, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report (Form 10-K) 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 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/ DAVID A. DUFFIELD President, Chief Executive March 29, 1999 - - ----------------------------------------------------- Officer and Director (Principal David A. Duffield Executive Officer) /s/ ALFRED J. CASTINO Senior Vice President of March 29, 1999 - - ----------------------------------------------------- Finance and Administration and Alfred J. Castino Chief Financial Officer (Principal Financial and Accounting Officer) /s/ DR. EDGAR F. CODD Director March 29, 1999 - - ----------------------------------------------------- Dr. Edgar F. Codd /s/ ALBERT W. DUFFIELD Director March 29, 1999 - - ----------------------------------------------------- Albert W. Duffield /s/ A. GEORGE BATTLE Director March 29, 1999 - - ----------------------------------------------------- A. George Battle /s/ GEORGE J. STILL, JR. Director March 29, 1999 - - ----------------------------------------------------- George J. Still, Jr. /s/ CYRIL J. YANSOUNI Director March 29, 1999 - - ----------------------------------------------------- Cyril J. Yansouni /s/ ANEEL BHUSRI Director March 29, 1999 - - ----------------------------------------------------- Aneel Bhusri
60 63 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders PeopleSoft, Inc. We have audited the accompanying consolidated balance sheets of PeopleSoft, Inc. at December 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PeopleSoft, Inc. at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Walnut Creek, California January 26, 1999 F-1 64 PEOPLESOFT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ---------------------- 1997 1998 -------- ---------- Current assets: Cash and cash equivalents................................. $215,784 $ 480,086 Short-term investments.................................... 176,678 206,242 Accounts receivable, less allowance for doubtful accounts of $19,493 in 1997 and $40,001 in 1998................. 299,243 385,413 Deferred income taxes..................................... 25,320 53,346 Other current assets...................................... 9,021 38,428 -------- ---------- Total current assets.............................. 726,046 1,163,515 Property and equipment, at cost: Computer equipment and software........................... 107,503 181,093 Furniture and fixtures.................................... 35,106 46,329 Leasehold improvements.................................... 27,261 41,277 Building.................................................. 18,310 -- Land...................................................... 7,487 46,066 -------- ---------- 195,667 314,765 Less accumulated depreciation and amortization............ (78,492) (128,509) -------- ---------- 117,175 186,256 Investments................................................. 26,783 31,616 Deferred income taxes....................................... 7,371 7,814 Capitalized software, less accumulated amortization......... 9,706 37,393 Other assets................................................ 11,255 14,011 -------- ---------- $898,336 $1,440,605 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 19,882 $ 31,145 Accrued liabilities....................................... 43,626 79,330 Accrued compensation and related expenses................. 67,486 109,284 Income taxes payable...................................... 22,370 22,587 Deferred revenue.......................................... 327,668 426,141 -------- ---------- Total current liabilities......................... 481,032 668,487 Long term deferred revenue.................................. -- 89,393 Other long term liabilities................................. -- 18,433 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued and outstanding................ -- -- Common stock, $.01 par value, 320,000,000 shares authorized; shares issued and outstanding: 1997 -- 223,729,000 and 1998 -- 233,881,000............ 2,237 2,339 Additional paid-in capital................................ 219,005 324,332 Cumulative translation adjustment......................... (1,292) (2,951) Dividend declared of Momentum Business Applications shares................................................. -- 78,622 Retained earnings......................................... 197,354 261,950 -------- ---------- Total stockholders' equity........................ 417,304 664,292 -------- ---------- $898,336 $1,440,605 ======== ==========
See accompanying notes. F-2 65 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- ---------- Revenues: License fees.............................................. $252,799 $433,195 $ 576,467 Services.................................................. 197,253 382,456 737,206 -------- -------- ---------- Total revenues.................................... 450,052 815,651 1,313,673 Costs and expenses: Cost of license fees...................................... 12,357 21,635 42,933 Cost of services.......................................... 118,906 229,178 424,234 Sales and marketing....................................... 135,757 225,498 339,973 Product development....................................... 70,653 129,553 209,677 General and administrative................................ 27,162 43,611 61,447 In-process research and development and merger related costs.................................................. 29,393 -- 13,900 -------- -------- ---------- Total costs and expenses.......................... 394,228 649,475 1,092,164 -------- -------- ---------- Operating income............................................ 55,824 166,176 221,509 Interest income............................................. 4,864 9,141 18,631 Other income, net........................................... 1,024 721 1,436 -------- -------- ---------- Income before income taxes.................................. 61,712 176,038 241,576 Provision for income taxes.................................. 25,851 67,775 98,358 -------- -------- ---------- Net income.................................................. $ 35,861 $108,263 $ 143,218 ======== ======== ========== Basic income per share...................................... $ 0.17 $ 0.49 $ 0.63 ======== ======== ========== Shares used in basic per share computation.................. 211,248 219,302 228,479 ======== ======== ========== Diluted income per share.................................... $ 0.15 $ 0.44 $ 0.55 ======== ======== ========== Shares used in diluted per share computation................ 239,452 248,321 258,305 ======== ======== ==========
See accompanying notes. F-3 66 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL ---------------- PAID-IN TRANSLATION DIVIDEND RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT DECLARED EARNINGS EQUITY ------- ------ ---------- ----------- -------- -------- ------------- Balances at December 31, 1995......... 206,983 $2,070 $105,579 $ (264) -- $ 53,709 $161,094 Exercise of common stock options and issuances under stock purchase plan............................. 7,580 76 15,015 -- -- -- 15,091 Acquisition of PMI.................. 716 7 22,039 -- -- -- 22,046 Tax benefits from employee stock transactions..................... -- -- 18,981 -- -- -- 18,981 Translation adjustment.............. -- -- -- 175 -- -- 175 Net income.......................... -- -- -- -- -- 35,861 35,861 ------- ------ -------- ------- ------- -------- -------- Balances at December 31, 1996......... 215,279 2,153 161,614 (89) -- 89,570 253,248 Exercise of common stock options and issuances under stock purchase plan............................. 6,906 69 33,263 -- -- -- 33,332 Acquisitions........................ 601 6 80 -- -- (479) (393) Exercise of warrants................ 943 9 (9) -- -- -- -- Tax benefits from employee stock transactions..................... -- -- 24,057 -- -- -- 24,057 Translation adjustment.............. -- -- -- (1,203) -- -- (1,203) Net income.......................... -- -- -- -- -- 108,263 108,263 ------- ------ -------- ------- ------- -------- -------- Balances at December 31, 1997......... 223,729 2,237 219,005 (1,292) -- 197,354 417,304 Exercise of common stock options and issuances under stock purchase plan............................. 10,152 102 64,068 -- -- -- 64,170 Tax benefits from employee stock transactions..................... -- -- 41,259 -- -- -- 41,259 Translation adjustment.............. -- -- -- (1,659) -- -- (1,659) Dividend declared of Momentum Business Applications shares..... -- -- -- -- 78,622 (78,622) -- Net income.......................... -- -- -- -- -- 143,218 143,218 ------- ------ -------- ------- ------- -------- -------- Balances at December 31, 1998......... 233,881 $2,339 $324,332 $(2,951) $78,622 $261,950 $664,292 ======= ====== ======== ======= ======= ======== ========
See accompanying notes. F-4 67 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- --------- --------- OPERATING ACTIVITIES Net income.................................................. $ 35,861 $ 108,263 $ 143,218 Adjustments to reconcile net income to net cash provided (used) by operating activities, net of acquired companies: Depreciation and amortization............................. 26,691 38,873 58,157 Provision for doubtful accounts, net of write-offs and recoveries............................................. 2,597 12,070 16,794 Provision for deferred income taxes....................... (25,428) (6,932) (28,026) In-process research and development and merger related costs.................................................. 26,509 -- 13,900 Changes in operating assets and liabilities: Accounts receivable.................................... (99,726) (214,493) (342,828) Cash received from sales of accounts receivable........ 33,886 66,856 239,792 Other current assets................................... (1,093) (1,318) (20,533) Other noncurrent assets................................ (7,245) (7,256) 1,814 Accounts payable and accrued liabilities............... 15,214 16,380 31,089 Accrued compensation and related expenses.............. 12,545 29,805 40,911 Deferred revenue....................................... 85,129 144,416 188,807 Income taxes payable................................... 6,992 19,388 181 Tax benefits from employee stock transactions.......... 18,981 24,057 41,259 -------- --------- --------- Net cash provided by operating activities................... 130,913 230,109 384,535 INVESTING ACTIVITIES Purchase of available-for-sale investments.................. (18,127) (222,572) (210,461) Sale of available-for-sale investments...................... 21,434 71,644 176,064 Purchase of property and equipment.......................... (57,086) (55,388) (99,686) Additions to capitalized software, net...................... (2,568) (2,495) (5,555) Acquisitions, net of cash acquired.......................... 391 (393) (43,106) -------- --------- --------- Net cash used in investing activities....................... (55,956) (209,204) (182,744) FINANCING ACTIVITIES Net proceeds from exercise of common stock options and issuances under stock purchase plan....................... 15,091 33,332 64,170 -------- --------- --------- Net cash provided by financing activities................... 15,091 33,332 64,170 Effect of foreign exchange rate changes on cash............. 175 (1,203) (1,659) -------- --------- --------- Net increase in cash and cash equivalents................... 90,223 53,034 264,302 Cash and cash equivalents at beginning of period............ 72,527 162,750 215,784 -------- --------- --------- Cash and cash equivalents at end of period.................. $162,750 $ 215,784 $ 480,086 ======== ========= =========
See accompanying notes. F-5 68 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES The Company PeopleSoft, Inc. (the "Company") designs, develops, markets, licenses and supports a family of client/server enterprise application software products, including manufacturing, distribution, financial, and human resource management systems. The Company also provides services such as maintenance, training, installation, consulting and product support services. Customers consist primarily of large and medium sized organizations including corporations, higher education institutions, non-profit entities and federal, state and local government agencies. The Company's business is predominately based in the United States. It does not have a concentration of credit or operating risk in any one industry or any one geographic region within or outside of the United States. Basis of Presentation The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and Momentum Business Applications, Inc. ("Momentum Business Applications"). All significant intercompany transactions have been eliminated. During 1998, PeopleSoft formed Momentum Business Applications, a research and development company designed to develop e-business, analytic applications and industry-specific software products. All of the outstanding shares of Momentum Business Applications Class A Common Stock were transferred to a custodian on December 31, 1998 and distributed as a dividend to holders of PeopleSoft Common Stock during January 1999. Prior to the distribution, PeopleSoft contributed $250.0 million to Momentum Business Applications. PeopleSoft has consolidated Momentum Business Applications into its financial statements for the fourth quarter of 1998. However, PeopleSoft plans to exclude Momentum Business Applications from its financial statements by the end of the first quarter of 1999 following the election of independent directors by the Momentum Business Applications Class A Common stockholders at a special stockholders' meeting. The declared dividend of $78.6 million in the accompanying financial statements represents the fair value of the Momentum Business Applications Class A Common Stock distributed based on the average market value on the day trading commenced. At the time that Momentum Business Applications is no longer consolidated in the Company's financial statements, the Company will incur a charge of approximately $177.0 million which represents the $250.0 million contribution less the amount of the dividend, investment banker fees of $2.9 million and other expenses related to the formation of Momentum Business Applications, and expenses incurred by Momentum Business Applications while consolidated with the Company. Certain prior period amounts have been reclassified to conform to the current period presentation. 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 at the date of the financial statements and the reported amounts of revenue and expenses during the period. Despite management's best effort to establish good faith estimates and assumptions, actual results may differ from these estimates. Cash and Cash Equivalents, Short Term Investments and Long Term Investments Cash equivalents are highly liquid investments with insignificant interest rate risk and remaining maturities of three months or less at the date of purchase and are stated at amounts which approximate fair value, based on quoted market prices. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts with financial institutions, tax-advantaged money market funds and highly liquid F-6 69 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) debt and preferred equity securities of corporations, municipalities and the U.S. Government. All other cash is held in bank demand deposits. The Company accounts for its cash equivalents and investments under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt and preferred equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 1997 and 1998 the Company has classified all of its debt and preferred equity securities as available-for-sale and has recorded these securities at amounts which approximate fair value. The components of the Company's debt and preferred equity securities are as follows (in thousands):
1997 1998 -------- -------- State and local municipalities debt.................... $216,951 $238,925 U.S. Government debt................................... 6,771 -- Corporate debt......................................... 2,223 19,158 Auction rate preferred stock........................... 54,130 63,828 -------- -------- $280,085 $321,911 ======== ======== Recorded as: Cash equivalents....................................... $ 76,624 $ 84,053 Investments due in one year or less.................... 176,678 206,242 Investments due in one year to 18 months............... 26,783 31,616 -------- -------- $280,085 $321,911 ======== ========
Unrealized gains and losses at December 31, 1997 and 1998 and realized gains and losses for the years then ended were not material. The cost of securities sold is based on the specific identification method. Accounts Receivable Accounts receivable are comprised of billed receivables arising from recognized and deferred revenues and unbilled receivables, which include accrued license fees for payments not yet due and accrued services. The Company does not require collateral for its receivables. Reserves are maintained for potential losses. For the years ended December 31, 1996, 1997, and 1998 actual loss experience has been within management's estimates. Future credit losses may differ from the Company's estimates and could have a material impact on the Company's future results of operations. The principal components of accounts receivable were as follows at December 31, (in thousands):
1997 1998 -------- -------- Billed receivables..................................... $200,081 $306,995 Unbilled receivables................................... 118,655 118,419 -------- -------- 318,736 425,414 Allowance for doubtful accounts........................ (19,493) (40,001) -------- -------- $299,243 $385,413 ======== ========
Depreciation and Amortization Depreciation and amortization are computed using the straight-line method over estimated useful lives of two to three years for computer equipment, five years for telephones and office equipment, seven years for furniture and fixtures, and 30 years for buildings. Leasehold improvements are depreciated over the shorter of the lease term or the useful life of the asset. Intangible assets are amortized over a three to five year life. F-7 70 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Capitalized Software The Company capitalizes software purchased from third parties if the related software product under development has reached technological feasibility or if there are alternative future uses for the purchased software provided that capitalized amounts will be realized over a period not exceeding five years. In addition, the Company capitalizes costs of materials, consultants, interest, and payroll and payroll-related costs for employees incurred in developing internal-use computer software once technological feasibility is attained. Technological feasibility is attained when software products reach Beta release. Costs incurred prior to the establishment of technological feasibility are charged to product development expense. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in software and hardware technologies. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized (using the straight-line method) on a product by product basis over the estimated life which is generally three years. All research and development expenditures are charged to research and development expense in the period incurred. Capitalized software costs and accumulated amortization at December 31, 1996, 1997 and 1998 and related software amortization expense (included in cost of license fees) for the years then ended were as follows (in thousands):
1996 1997 1998 ------- -------- -------- Capitalized software: Internal development costs................ $10,737 $ 13,232 $ 18,786 Obtained through business combination..... 6,532 6,532 34,332 Purchased from third parties.............. 300 300 300 ------- -------- -------- 17,569 20,064 53,418 Accumulated amortization.................... (6,396) (10,358) (16,025) ------- -------- -------- $11,173 $ 9,706 $ 37,393 ======= ======== ======== Amortization expense........................ $ 1,585 $ 3,962 $ 5,667 ======= ======== ========
As part of the acquisition of PeopleSoft Manufacturing, Inc. ("PMI"), in 1996, the Company allocated $6.5 million to developed software costs, which is being amortized over the useful life of five years. In October 1998, the Company acquired Intrepid Systems Inc. ("Intrepid") for $51.5 million (see Note 8). The Company allocated $27.8 million of the Intrepid acquisition price to developed software and is amortizing the software over the useful life of five years. F-8 71 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred Revenue Deferred revenue is comprised of deferrals for license fees, maintenance, training and other services. Long term deferred revenue represents amounts received for maintenance and support services to be provided beginning in periods on or after January 1, 2000. The principal components of deferred revenue at December 31, 1997 and 1998 were as follows (in thousands):
1997 1998 -------- -------- License fees........................................... $ 71,168 $ 67,765 Maintenance............................................ 184,171 310,049 Training............................................... 46,201 76,696 Other services......................................... 26,128 61,024 -------- -------- 327,668 515,534 Less: Long term deferred revenue....................... -- 89,393 -------- -------- $327,668 $426,141 ======== ========
Revenue Recognition The Company licenses software under non-cancellable license agreements and provides services including training, installation, consulting and maintenance, consisting of product support services and periodic updates. License fee revenues are generally recognized when a non-cancellable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. For customer license agreements, which meet these recognition criteria, the portion of the fees related to software licenses will generally be recognized in the current period, while the portion of the fees related to services is recognized as the services are performed. When the Company enters into a license agreement with a customer requiring significant customization of the software products, the Company recognizes revenue related to the license agreement using contract accounting. The Company allocates a portion of contractual license fees to post-contract support activities covered under the contract including first year maintenance, installation assistance and limited training services. Revenues from maintenance agreements are recognized ratably over the maintenance period, which in most instances is one year. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). This statement provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. Foreign Currency Translation The Company has determined that the functional currency of each foreign operation is the local currency. The effects of translation rate changes related to assets and liabilities located outside the United States are included as a component of stockholders' equity. Foreign currency transaction gains and losses are included in Other income, net on the Consolidated Statements of Income. Through 1998, such gains and losses have not been significant. In January 1998, the Company initiated a foreign exchange hedging program designed to mitigate the potential for future adverse impact on intercompany balances due to changes in foreign exchange rates. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have terms of three months or less. The Company currently F-9 72 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) settles all of its hedge contracts on the last day of the second month of each quarter and concurrently opens new contracts to cover the upcoming quarter. Gains and losses on the settled contracts are recognized as other income or expense in the current period, consistent with the period in which the gain or loss of the underlying transaction is recognized. The Company recorded net losses from these settled contracts and underlying foreign currency exposures of approximately $900,000 for the year ended December 31, 1998. At December 31, 1998, hedge positions totaled $11.0 million. At December 31, 1998, the Company had three forward foreign exchange contracts denominated in Dutch Guilders, Singapore dollars and New Zealand dollars. Each of these contracts had a maturity date in March 1999. The instruments held at the end of the year had book values that approximated market values at December 31, 1998. The foreign exchange hedging program is managed in accordance with a corporate policy approved by the Company's Board of Directors. In addition to hedging existing transaction exposures, the Company's foreign exchange management policy allows for the hedging of anticipated transactions, and exposure resulting from the translation of foreign subsidiary financial results into U.S. Dollars. Such hedges can only be undertaken to the extent that the exposures are highly certain, reasonably estimable, and significant in amount. No such hedges have occurred through December 31, 1998. These hedges will only be undertaken should the Company deem them necessary to protect the U.S. Dollar value of the underlying exposure. The Company expects that hedges of such anticipated transactions and translation exposures will be done in the future using forward and option contracts. Transfer of Financial Assets The Company transfers the accounts receivable under certain software license and service agreements with customers to financing institutions, on a non-recourse basis. The Company records such transfers as sales of the related accounts receivable when it is considered to have surrendered control of such receivables under the provisions of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Company does not maintain any servicing obligations under these arrangements. Per Share Data Share amounts for all periods presented reflect restatement for the two-for-one stock splits in November 1996 and December 1997. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), requiring public companies to exclude the dilutive effect of stock options in calculating basic earnings per share as of December 31, 1997. As a result, the Company changed the method used to compute earnings per share and restated earnings per share for all prior periods. Basic income per share as required under SFAS 128 is computed using the weighted average number of common shares outstanding during the period. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options and warrants (using the F-10 73 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) treasury stock method). The following table sets forth the computation of basic and diluted income per share for the years ended December 31, (in thousands except per share amounts):
1996 1997 1998 -------- -------- -------- Numerator: Net income............................... $ 35,861 $108,263 $143,218 ======== ======== ======== Denominator: Denominator for basic income per share -- weighted average shares............... 211,248 219,302 228,479 Employee stock options................... 27,386 25,967 26,421 Warrants................................. 818 3,052 3,405 -------- -------- -------- Denominator for diluted income per share -- adjusted weighted average shares and assumed exercises.......... 239,452 248,321 258,305 ======== ======== ======== Basic income per share..................... $ 0.17 $ 0.49 $ 0.63 ======== ======== ======== Diluted income per share................... $ 0.15 $ 0.44 $ 0.55 ======== ======== ========
Stock-based Compensation In October 1995, the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued and effective for the year ending December 31, 1996. As permitted by SFAS 123, the Company has continued to account for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and has made the pro forma disclosures required by SFAS 123 for each of the three years in the period ending December 31, 1998 in Note 3. Newly Issued Accounting Standards Statement of Position ("SOP") 97-2, "Software Revenue Recognition", SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Tranasactions", were issued in October 1997, March 1998, and December 1998, respectively and address software revenue recognition matters primarily from a conceptual level and do not include specific implementation guidance. These standards supersede SOP 91-1 and, in part, are effective for transactions entered into for fiscal years beginning after December 15, 1997. Based on it's reading and interpretation of SOPs 97-2 and 98-4, the Company believes it is currently in compliance with the standards. Complying with SOP 98-9 or additional detailed implementation guidance, once issued, could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could adversely impact the Company's ability to recognize revenue consistent with its current practice. Although this new standard is not effective until the year 2000, the Company, in accordance with its historical practice of complying with new revenue recognition standards as soon as issued, may choose to adopt the standard in 1999, requiring either changes in revenue recognition practices or changes in the Company's sales and contracting practices in order to comply. PeopleSoft has not fully assessed its ability to comply with SOP 98-9 using current contracting and business practices. However, PeopleSoft believes that SOP 98-9 may require significantly more revenue to be deferred for certain types of transactions. The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" as of January 1, 1998. SFAS 130 requires disclosure of the components of total non-stockholder changes in equity as comprehensive income. The Company's only items that meet the definition for adjustment to arrive at comprehensive income are changes in cumulative translation adjustment and unrealized gains and losses on investments. Changes in cumulative translation adjustment are immaterial F-11 74 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for the periods presented and are presented elsewhere in the financial statement. The unrealized gains and losses on investments were insignificant at December 31, 1996, 1997 and 1998. Therefore, the Company's net income materially approximates comprehensive income for all periods presented. The Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. Statement 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The statement is effective for years beginning after June 15, 1999. The Company will apply the new rules prospectively to transactions beginning in the first quarter of 1999. Based on current circumstances, the Company believes the application of the new rules will not have a material impact on the consolidated financial statements. 2. COMMITMENTS AND CONTINGENCIES The Company leases office facilities under operating leases which generally require the Company to pay operating costs, including property taxes, insurance and maintenance. The Company also leases certain computer equipment under operating leases. Computer leases require the return of the equipment or payment of residual values. Such residual values, which approximate fair values, are not material to the consolidated financial statements. In December 1996, the Company entered into a five-year lease for a new office facility in Pleasanton, California. This lease is structured as an operating lease with rental payments due beginning upon the completion of the construction, which occurred during the fourth quarter of 1998. The rental payments related to this lease have been included in the future minimum operating lease payments schedule below. The cost for the construction of the facility totals $70.0 million including interest during the construction period. The rental payments equal the amount of interest under the agreement. The interest rate charged on amounts funded prior to the commencement of the lease payments was LIBOR plus 0.625% as measured on the date of each funding rollover. At each funding or rollover date, the Company had its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount was requested and approved. Each subsequent funding rollover date was the corresponding maturity of the chosen LIBOR term. The Company began accruing interest concurrent with the lessor's first drawdown of the construction commitment in January 1997. Throughout the construction period, the accrued interest amount, which was approximately $1.1 million and $4.5 million as of December 31, 1997 and the end of the construction phase, respectively, has been added to the construction cost. The Company has an option to renew the lease for an additional three years, subject to certain conditions, or purchase the building for $70.0 million. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to 85% of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. In 1998, the Company negotiated an amendment to this lease which extends the term of the lease until February 2003, with an option to renew for an additional three years. Additionally, the Company negotiated a fixed rate funding option under which the Company may elect that any or all of the amounts funded to date be charged a fixed interest rate. The Company has the option of setting the fixed rate expiration date for any date through the end of the lease term. During the third quarter of 1998, the Company entered into agreements to sell one of its Pleasanton, California office buildings and related land, and to simultaneously lease back a substantial portion of the office space contained therein. The initial lease term is for 5 years. The Company has options to terminate up to 50% of the space as early as 4 years and the remaining 50% at the 5th year; or alternatively, the Company may extend the term of the lease in five year increments up to 20 years. Fees due upon termination, if applicable, are not significant to the overall lease payments but are being accrued over the initial term of the agreement. The sales price of approximately $50.0 million resulted in a book gain of approximately $24.4 million, which F-12 75 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) will be amortized over the lease period. The Company holds a right of first refusal to additional space within the site as other tenants' leases expire. Additionally, the Company purchased two parcels of land for $50.0 million during the third quarter of 1998. The Company has entered into an operating lease agreement for facilities that will be constructed on one of the parcels. The monthly lease amount will be determined at the end of construction when the final construction cost is known. The estimated construction cost for the facilities of $110.0 million includes interest costs during construction that are added to the lease balance rather than paid by the Company. The expected interest rate during construction is LIBOR plus 0.75% as measured on the date of each funding or rollover; this rate may change depending on certain financial ratios. At each funding or rollover date, the Company has its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount is requested. As of December 31, 1998, the Company had drawn a total of $6.1 million under the lease financing. The lease term is for 5 years with the option to purchase the building for $110.0 million at the end of the lease term. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to 85% of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. Future minimum operating lease payments under all noncancellable leases for the years ending December 31 are due as follows (in thousands): 1999.............................. $ 45,547 2000.............................. 43,410 2001.............................. 39,625 2002.............................. 34,701 2003.............................. 24,664 Thereafter........................ 17,925 -------- $205,872 ========
Rent expense totaled approximately $9.8 million, $19.6 million and $38.2 million in 1996, 1997 and 1998, respectively. The Company is party to various legal disputes and proceedings arising from the ordinary course of general business activities. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on the financial position, results of operations and cash flows of the Company. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company's future results of operations or cash flows in a particular period. (See Note 9 for additional information.) 3. STOCKHOLDERS' EQUITY Preferred Stock Under a stockholder rights plan established in 1995, every share of common stock carries the right (a "Right"), under certain circumstances, to purchase equity securities of the Company or an acquiring company. Ten days after a tender offer or acquisition of 20 percent or more of the Company's common stock, each Right may be exercised for $190 ("Exercise Price") to purchase one one-thousandth of one share of the Company's Series A Participating Preferred Stock. Each one one-thousandth of each share of Series A Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the F-13 76 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Exercise Price. Each Right expires in February 2005, and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. Common Stock The Company has never paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. At December 31, 1998, 62,971,651 authorized but unissued shares of common stock were reserved for issuance under the Company's stock plans and for outstanding warrants. Stock Dividend In December 1998, the Company declared a stock dividend of one share of Momentum Business Applications Class A Common Stock for every fifty shares of PeopleSoft stock held as of December 31, 1998, resulting in 4.7 million shares distributed. The Company's stockholders were not required to pay cash or other consideration for the Momentum Business Applications shares received. No fractional shares were distributed. The distribution is taxable as a dividend to each holder in the amount of the fair market value of the Momentum Business Applications shares distributed to each shareholder. The average market value of the shares on January 16, 1999 (the first day of trading) was $16.75. Stock Plans 1992 Employee Stock Purchase Plan Under the 1992 Employee Stock Purchase Plan ("ESPP"), eligible employees may purchase common stock at a price equal to 85 percent of the lower of the fair market value of the common stock at the beginning or end of each offering period. Participation in the offering is limited to the lesser of ten percent of an employee's compensation or $21,250 per year, may be terminated at any time by the employee and automatically ends upon termination of employment with the Company. A total of 6,700,000 shares of common stock have been reserved for issuance under this plan of which 5,288,740 shares have been issued through December 31, 1998. Under this plan, 869,956 shares, 741,628 shares and 835,166 shares were issued in 1996, 1997 and 1998, respectively. In January 1999, 840,900 shares were issued in connection with the offering period ended December 31, 1998. Subsequent six-month offering periods will commence on each January 1 and July 1. 1989 Stock Plan Pursuant to the 1989 Stock Plan, incentive and non-qualified stock options to purchase shares of the Company's common stock may be granted, and 104,600,000 shares have been reserved for issuance under this Plan. The exercise price of each incentive and non-qualified stock option shall not be less than 100 percent and 85 percent, respectively, of the fair market value of the stock on the date the option is granted. The options expire 10 years after the date of grant and are exercisable to the extent vested. Vesting is established by the Board of Directors and generally occurs at the rate of 20 percent per year from the date of grant. 1993 Red Pepper Software Company Plan In connection with the merger of PeopleSoft and Red Pepper in 1996, PeopleSoft assumed all of the outstanding stock options of Red Pepper (adjusted for the exchange ratio). As of the date of the merger, 2,163,388 shares of PeopleSoft common stock were reserved for issuance upon the exercise of options assumed in connection with the business combination. F-14 77 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1992 Intrepid Systems, Inc. Plan In connection with the merger of PeopleSoft and Intrepid in 1998, PeopleSoft assumed all of the outstanding stock options of Intrepid (adjusted for the exchange ratio). As of the date of the merger, 130,130 shares of PeopleSoft common stock were reserved for issuance upon the exercise of options assumed in connection with the business combination. Combined Option Activity Option activity under the 1989 Stock Plan, including the 1993 Red Pepper Software Company Plan and the 1992 Intrepid Systems, Inc. Plan stock options assumed by PeopleSoft as a result of those mergers and the options canceled and granted as a result of the December 14, 1998 option repricing, is as follows:
WEIGHTED AVERAGE EXERCISE PRICE SHARES ---------------- ----------- Balances at December 31, 1995.................. $ 2.408 35,697,748 Granted...................................... 12.683 11,077,536 Exercised.................................... 1.156 (6,710,906) Canceled..................................... 9.103 (1,103,748) ------- ----------- Balances at December 31, 1996.................. 5.551 38,960,630 Granted...................................... 21.691 10,870,350 Exercised.................................... 3.264 (6,160,683) Canceled..................................... 11.918 (975,225) ------- ----------- Balances at December 31, 1997.................. 9.982 42,695,072 Granted...................................... 29.729 25,055,333 Exercised.................................... 4.379 (9,250,808) Canceled..................................... 41.390 (14,445,441) ------- ----------- Balances at December 31, 1998.................. $12.459 44,054,156 ======= ===========
The exercise prices for the above grants range from $0.001 to $52.6875. At December 31, 1998, options to purchase 9,899,804 shares were exercisable and options for 8,776,235 shares were available for grant. On December 14, 1998, the Company canceled 12,891,917 options, which had exercise prices greater than $22 per share in exchange for new options with an exercise price of $17. 1992 Directors' Stock Option Plan Under the 1992 Directors' Stock Option Plan, directors who are not officers or employees may receive nonstatutory options to purchase shares of common stock. A total of 2,400,000 shares of common stock have been reserved for issuance under this plan and, as of December 31, 1998, options to purchase 594,000 shares with exercise prices of $1.766 to $39.00 per share have been granted. Under this plan, 48,000, 34,000, and 16,000 options were granted in 1996, 1997 and 1998, respectively. During 1998, options to purchase 66,000 were exercised. At December 31, 1998, options to purchase 106,400 shares were exercisable, 524,000 were outstanding and options for 1,806,000 shares were available for grant. The exercise price of each nonstatutory stock option shall not be less than 100 percent of the fair market value of the stock on the date the option is granted. The options expire 10 years after the date of grant and are exercisable to the extent vested. Vesting is established by the Board of Directors and generally occurs at the rate of 100 percent on the fifth anniversary from the date of grant. F-15 78 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-based Compensation As permitted under SFAS 123, the Company has elected to continue to follow APB Opinion No. 25 in accounting for stock-based awards to employees. Under APB Opinion No. 25, the Company generally recognizes no compensation expense with respect to such awards, since the exercise price of the stock options granted are equal to the fair market value of the underlying security on the grant date. Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using a Black-Scholes option pricing model. Limitations on the effectiveness of the Black-Scholes option valuation model are that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions including expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. Both of these plans are discussed in this Note above. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP ------------------ ------------------ 1996 1997 1998 1996 1997 1998 ---- ---- ---- ---- ---- ---- Expected life (in years)...................... 3.51 3.50 3.49 0.49 0.48 0.49 Expected volatility........................... 0.38 0.37 0.37 0.40 0.40 0.40 Risk free interest rate....................... 5.71% 6.33% 5.56% 5.23% 5.45% 5.21%
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the vesting period for options and the six-month purchase period for stock purchases under the ESPP. The Company's pro forma information follows (in thousands except for income per share information):
1996 1997 1998 ------- -------- -------- Net income As reported............................... $35,861 $108,263 $143,218 Pro forma................................. $16,072 $ 74,610 $ 80,686 Basic income per share As reported............................... $ 0.17 $ 0.49 $ 0.63 Pro forma................................. $ 0.08 $ 0.34 $ 0.35 Diluted income per share As reported............................... $ 0.15 $ 0.44 $ 0.55 Pro forma................................. $ 0.07 $ 0.31 $ 0.31
Because SFAS 123 is applicable only to stock-based awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. The weighted-average fair value of all options granted during 1996, 1997 and 1998 was $4.77, $6.66, and $13.12 per share, respectively. The weighted-average fair value of the ESPP during 1996, 1997 and 1998 was $3.56, $6.61, and $4.19 per share, respectively. F-16 79 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTIONS OUTSTANDING ------------------------------------------ WEIGHTED OPTIONS EXERCISABLE AVERAGE ----------------------------- REMAINING WEIGHTED WEIGHTED NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE EXERCISE RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE ------------------------ ---------- ------------ -------------- ---------- ---------------- $ 0.001 - 2.00................... 4,852,735 4.32 $ 0.46 2,047,225 $ 0.69 2.01 - 5.00................... 5,597,567 4.90 2.80 2,768,795 2.64 5.01 - 12.00................... 5,667,462 6.89 6.90 2,031,170 6.91 12.01 - 20.00................... 27,394,464 8.21 17.25 3,058,417 16.82 20.01 - 24.00................... 801,804 8.21 21.24 60,699 21.12 24.01 - 46.50................... 264,124 8.84 33.67 39,898 30.69 ---------- ---------- 44,578,156 10,006,204 ========== ==========
Warrants In November 1995, the Company received $21.8 million through the private placement of warrants to purchase an aggregate of 8,000,000 shares of the Company's common stock. Upon notice of exercise by the holders of the warrants, the Company, at its option, may settle such exercise by either issuing the full amount of shares and receiving cash proceeds, issuing a net amount of shares with no cash proceeds, or purchasing the warrants for an amount equal to the difference between the then fair market value of the common stock and the warrant exercise price. In November 1997, the Company issued 942,880 shares of common stock pursuant to the net exercise of warrants to purchase 1,600,000 shares of common stock at $13.75 per share. The November 1998 maturity consists of 1,600,000 warrants with an exercise price of $13.75 per share and 1,600,000 warrants with an exercise price of $16.875 per share. By mutual consent of the Company and the warrant holder, the maturity date for the warrants has been extended to early March 1999 (see Note 9). The November 1999 maturity consists of 1,600,000 warrants with an exercise price of $16.875 per share and 1,600,000 warrants with an exercise price of $19.375 per share. 4. INCOME TAXES The provision for income taxes consisted of the following components for the years ended December 31, (in thousands):
1996 1997 1998 -------- ------- -------- Current: Federal................................... $ 37,396 $60,565 $ 97,049 State..................................... 10,545 10,711 12,781 Foreign................................... 3,338 3,431 6,838 -------- ------- -------- 51,279 74,707 116,668 -------- ------- -------- Deferred: Federal................................... (20,240) (7,239) (15,509) State..................................... (5,188) 307 (2,801) -------- ------- -------- (25,428) (6,932) (18,310) -------- ------- -------- Total provision for income tax.... $ 25,851 $67,775 $ 98,358 ======== ======= ========
F-17 80 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to the Company's income before taxes as follows for the years ended December 31 (in thousands):
1996 1997 1998 ------- ------- ------- Income tax provision at federal statutory rate........................................ $21,599 $61,613 $84,552 State income tax, net of federal tax effect... 3,323 8,849 7,395 Income from tax-advantaged investments........ (1,425) (2,995) (5,480) Research and development tax credit........... (1,031) (3,211) (4,124) Non-deductible merger costs................... 1,015 -- -- Change in valuation allowance................. 1,668 2,431 6,687 Acquired in-process technology................ -- -- 4,865 Other......................................... 702 1,088 4,463 ------- ------- ------- Provision for income taxes.................... $25,851 $67,775 $98,358 ======= ======= =======
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes consisted of the following at December 31 (in thousands):
1997 1998 ------- -------- Deferred tax assets: Deferred revenue, net................................. $ 595 $ 10,275 Depreciation.......................................... -- 7,466 Research and development costs........................ 8,362 1,895 Accrued compensation.................................. 7,582 9,580 Allowance for doubtful accounts....................... 8,156 26,606 Self insured claims accruals.......................... 2,011 1,566 Deferred compensation................................. 1,355 3,212 Net operating losses and tax credits.................. 7,230 22,329 Allowance for expense reports not yet submitted....... 1,662 -- Acquisition reserves.................................. -- 2,141 Other................................................. 7,767 9,360 ------- -------- Total deferred tax assets.......................... 44,720 94,430 Valuation allowance..................................... (4,411) (11,098) ------- -------- Net deferred tax asset.................................. 40,309 83,332 Deferred tax liabilities: Purchased technology.................................. -- (12,000) Capitalized software development costs................ (1,973) (2,965) Depreciation.......................................... (1,720) -- Other................................................. (3,925) (7,207) ------- -------- Total deferred tax liabilities..................... (7,618) (22,172) ------- -------- Total net deferred tax asset.................. $32,691 $ 61,160 ======= ========
1997 1998 -------- -------- Recorded as: Current deferred taxes............................... $ 25,320 $ 53,346 Noncurrent deferred taxes............................ 7,371 7,814 -------- -------- Total net deferred taxes..................... $ 32,691 $ 61,160 ======== ========
F-18 81 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets and liabilities are classified in the consolidated balance sheet consistent with the classification of the related asset or liability. The net valuation allowance increased $6.7 million from December 31, 1997 to December 31, 1998 and $2.4 million from December 31, 1996 to December 31, 1997, primarily as a result of establishing allowances on net operating losses incurred in foreign jurisdictions and other foreign tax benefits. None of the allowance at December 31, 1998 is attributable to stock option deductions; consequently, any reversal of the valuation allowance will be reflected in a lower tax rate. Management believes future taxable income will be sufficient to realize the deferred tax benefit of the net deferred tax asset. At December 31, 1998, as a result of the acquisition of Intrepid, the Company acquired federal net operating loss carryforwards of approximately $18.7 million. These losses expire in various years between 2008 and 2018 and are subject to limitations on their utilization. The Company also has net operating loss carryforwards in certain foreign jurisdictions of approximately $28.0 million, which expire in various years. 5. RETIREMENT PLAN The Company has two defined contribution savings plans, a qualified plan (401k Plan) under the provisions of Section 401(k) of the Internal Revenue Code that covers all full-time employees and a non-qualified plan which covers employees with earnings over $160,000 per year. Under the terms of the 401k Plan, member employees may contribute varying amounts of their annual compensation (to a maximum of $10,000). The Company matches a portion of qualified employee contributions based upon years of service, up to a maximum of ten percent of the employee's compensation, subject to certain vesting provisions based on length of employee service. Company contributions to the 401k Plan totaled $0.7 million in 1996, $2.0 million in 1997, and $4.6 million in 1998. Under the terms of the non-qualified plan, member employees may contribute varying amounts of their annual compensation up to 100 percent. The Company matches a portion of non-qualified employee contributions based upon years of service, up to a maximum of $10,000, subject to certain vesting provisions based on length of employee service. Company contributions to the non-qualified plan totaled $291,000 in 1996, $249,000 in 1997, and $311,000 in 1998. 6. SEGMENT AND GEOGRAPHIC AREAS The Company adopted Statement of Financial Accounting No. 131, " Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") on January 1, 1998. SFAS 131 establishes standards for the way in which public companies disclose certain information about operating segments in the Company's financial reports. Based on the criteria of SFAS 131, the Company identified its operating committee as the chief operating decision-makers for the period ended December 31, 1998. The Company's operating committee evaluated revenue performance based on the three segments: domestic, international and middle market. The middle market segment does not meet the materiality requirements of the statement and thus is not required to be separately disclosed. Data for the two remaining segments are presented as part of the geographic disclosures below. Within the operating committee, employee headcount and operating costs are managed by functional areas, rather than by revenue segments, and are only reviewed by the operating committee on a company-wide basis. In addition, the Company does not account for or report to the operating committee its assets or capital expenditures by any segment other than the geographic segments, as disclosed below. Thus, the Company is not required to disclose any additional information pursuant to SFAS 131. The accounting policies for each of the reportable segments shown below are the same as those described in the summary of significant accounting policies. F-19 82 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1999, the Company launched three separate business divisions related to its domestic operations, which are expected to maintain their own operating results and accountability. Therefore, future reportable segments may change. International revenues from each geographic region was less than ten percent total revenues. The following table presents a summary of operating information and certain year end balance sheet information by geographic region for the years ended December 31, (in thousands):
1996 1997 1998 -------- -------- ---------- Revenues from unaffiliated customers Domestic operations..................... $377,782 $690,554 $1,106,736 International operations................ 72,270 125,097 206,937 -------- -------- ---------- Consolidated............................ $450,052 $815,651 $1,313,673 ======== ======== ========== Operating income Domestic operations..................... $ 48,313 $157,035 $ 227,604 International operations................ 7,511 9,141 (6,095) -------- -------- ---------- Consolidated............................ $ 55,824 $166,176 $ 221,509 ======== ======== ========== Identifiable assets Domestic operations..................... $488,206 $782,888 $1,239,179 International operations................ 51,874 115,448 201,426 -------- -------- ---------- Consolidated............................ $540,080 $898,336 $1,440,605 ======== ======== ==========
7. BUSINESS COMBINATIONS 1998 Business Combinations In October 1998, the Company acquired the assets and assumed certain liabilities of Intrepid. The acquired products consist of applications that streamline, automate, and augment business processes and decision support for the merchandise management and store operations of medium and large retail companies. The Company paid an aggregate purchase price of $51.5 million. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations are included in the financial statements since the acquisition date, and the assets and liabilities have been recorded based upon their fair values at the date of acquisition. Significant components of the $51.5 million purchase price included cash payments of $35.3 million, assumption of net current liabilities of $8.3 million (which includes $2.2 million to close the Intrepid facility), forgiveness of debt of $6.2 million, and transaction expenses of $1.7 million. The Company has allocated the excess purchase price over the fair value of net tangible assets acquired to the following identifiable intangible assets: $27.8 million to completed products and technology, $2.2 million to assembled workforce, $13.9 million to in-process research and development and $7.1 million to goodwill. As of the acquisition date, technological feasibility of the in-process technology has not been established and the technology has no alternative future use; therefore, the Company has expensed the amount of the purchase price allocated to in-process research and development of approximately $13.9 million as of the date of the acquisition in accordance with generally accepted accounting principles. The capitalized intangible assets will be amortized over their estimated useful lives of five years. In performing this allocation, the Company considered, among other factors, its intentions for future use of the acquired assets and analyses of historical financial performance and estimates of future performance of Intrepid's products and the research and development projects in process at the date of the acquisition. With regard to the in-process research and development projects, the Company considered, among other factors, the stage of completion of each project, the importance of each project to the overall development plan, and the F-20 83 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) projected incremental cash flows from the projects when completed and any associated risks. The projected incremental cash flows were discounted back to their present value using discount rates of 20% and 30% for developed and in-process technology, respectively. These discount rates were determined after consideration of the Company's cost of capital, the weighted average return on assets, venture capital rates of return, and revenue growth assumptions. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, achieving anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. If these projects are not successfully developed, the Company may not realize the value assigned to the in-process research and development projects. In addition, the value of the other acquired intangible assets could also be impaired. During June 1998, the Company entered into a definitive agreement to acquire all outstanding equity interest of TriMark Technologies, Inc. ("TriMark"), a leading provider of software solutions for the life insurance industry. The Company and TriMark are taking initial steps toward the life insurance industry's first single-source, integrated enterprise solution. The Company will issue a maximum of $25.0 million in common stock and options for all of the outstanding equity interests of TriMark in a transaction that is expected to close prior to the end of the first half of 1999. The amount of consideration which TriMark shareholders will receive may vary depending on several factors. The accounting treatment of this acquisition will not be determined until the acquisition is concluded. Prior to closing the transaction, the Company and TriMark will operate independently within a development, marketing, sales and support relationship. In December 1998, the Company entered into a definitive agreement to acquire all outstanding equity interest of Distinction Software, Inc., a supply chain management software company, by issuing between $5 million and $10 million in stock and options. The transaction is expected to close in the second half of 1999. The accounting treatment of this acquisition will not be determined until the acquisition is concluded. Prior to closing the transaction, the Company and Distinction will operate independently within a development, marketing, sales and support relationship. 1996 Business Combinations In 1996, the Company completed two business combinations: Red Pepper Software Company (Red Pepper) and PMI. Red Pepper is a leader in the supply chain management systems market, and PMI developed the Company's Manufacturing application suite. All of the outstanding shares of Red Pepper were acquired in exchange for approximately 10.8 million shares of common stock and the assumption, under the Company's stock option plan, of all outstanding rights to purchase Red Pepper common stock which approximated 1.1 million shares of PeopleSoft stock. The Red Pepper transaction was accounted for as a pooling of interests and the historical consolidated financial statements of PeopleSoft for the periods prior to the merger have been restated in the accompanying consolidated financial statements to include the financial position, results of operations and cash flows of Red Pepper. In addition, merger costs of $2.9 million were charged to operations in 1996. In November 1996, the Company acquired the assets and assumed certain liabilities of PMI. The acquired products consist of applications the streamline, automate, and augment business processes to provide a comprehensive, global manufacturing and supply chain management solution. The Company paid an aggregate purchase price of $30.1 million. This transaction has been accounted for under the purchase method of accounting, and accordingly, the results of the operations of PMI have been included in the Company's consolidated financial statements since November 1, 1996, and the assets and liabilities were recorded based upon their fair values at the date of the acquisition. Significant components of the $30.1 million purchase price included the issuance of common stock with a fair value of $14.4 million, issuance of common stock options to PMI employees with a fair value of $7.6 million, issuance of a note payable of $4.7 million, and forgiveness of debt and other consideration of $3.4 million. F-21 84 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company allocated the excess purchase price over the fair value of net tangible assets acquired to the following identifiable intangible assets: $6.5 million to completed products and technology, $.3 million to assembled workforce and $22.5 million to in-process research and development. As of the acquisition date, technological feasibility of the in-process technology had not been established and the technology had no alternative future use; therefore, the Company has expensed the amount of purchase price allocated to in-process research and development of approximately $22.5 million in accordance with generally accepted accounting principles. The capitalized intangible assets are being amortized over their estimated useful lives of five years. In performing this allocation, the Company considered, among other factors, that PMI was a development stage enterprise that had generated no revenues, its intentions for future use of the acquired assets and analyses of historical financial performance and estimates of future performance of PMI's products and the research and development projects in process at the date of the acquisition. With regard to the in-process research and development projects, the Company considered, among other factors, the importance of each project to the overall development plan, and the projected incremental cash flows from the projects when completed and any associated risks. The projected incremental cash flows were discounted back to their present value using discount rates of 25% and 40% for developed and in-process technology, respectively. These discount rates were determined after consideration of the Company's cost of capital, the weighted average return on assets, venture capital rates of return, and revenue growth assumptions. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, achieving anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. The Company completed the development of the acquired in-process technology into commercially viable products in 1997. 8. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is detailed below (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Cash paid for interest........................ $ 264 $ 381 $ 752 ======= ======= ======= Cash paid for income taxes.................... $25,306 $30,680 $81,379 ======= ======= =======
Supplemental schedule of non-cash activities is detailed below (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- In conjunction with the land swap: Land purchased.............................. -- -- $49,018 Less: Building and land sold, net of accumulated depreciation................. 24,604 ------- Gain........................................ 24,414 Dividend declared of Momentum Business Applications shares...................... -- -- $78,622
9. SUBSEQUENT EVENTS (UNAUDITED) PeopleSoft is taking action in the first quarter of 1999 to redeploy resources to new product development, global product support, and other strategic customer value added programs. Accordingly, PeopleSoft will redeploy 100 employees to these new strategic areas and eliminate 430 staff from other redundant and unnecessary positions primarily in the administration, sales support, and marketing support areas. This action will allow the Company to hire more staff in support of its e-business, analytic applications and ERP F-22 85 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) development as well as customer support programs. The reduction in staff represents approximately 6 percent of the Company's total workforce with over 90 percent of the reductions in North America. The Company expects to incur a one-time restructuring charge of between $4.0 million and $5.0 million for the separation arrangements. Following the Company's announcement of it's annual results in January 1999, several class action lawsuits were filed against the Company and certain of its officers and former officers in the U.S. District Court, Northern District of California. The complaints are similar and allege violations of federal and state securities laws and request unspecified monetary damages. The Company is currently waiting for these complaints to be consolidated and refiled during the Company's second quarter of 1999. Management believes that the claims alleged against it in all of the foregoing actions are without merit and intends to defend against the claims vigorously. In the opinion of management, resolution of such litigation is not expected to have a material adverse effect on the financial position of the Company. However, depending on the amount and timing, an unfavorable resolution of such litigation could materially affect the Company's future results of operations or cash flows in a particular period. The Company has received notice that the holders of the warrants (see Note 3) intend on exercising their 1998 warrants consisting of 1,600,000 warrants with an exercise price of $13.75 per share and 1,600,000 warrants with an exercise price of $16.875 per share. By mutual consent of the Company and the warrant holder, the maturity date for the warrants has been extended to March 1999. The Company has elected the net exercise provision and thus will issue approximately 572,000 shares in the first quarter of 1999 related to these warrants. F-23 86 PEOPLESOFT, INC. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly supplemental consolidated financial information for 1997 and 1998 are as follows (in thousands, except per share amounts):
QUARTER ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 1997 Total revenues.............................. $153,654 $184,376 $217,050 $260,571 Operating income............................ 27,204 34,074 43,808 61,090 Net income.................................. 17,838 22,271 28,699 39,455 Basic income per share...................... $ 0.08 $ 0.10 $ 0.13 $ 0.18 Shares used in basic per share computation............................... 216,495 218,713 221,010 222,949 Diluted income per share.................... $ 0.07 $ 0.09 $ 0.11 $ 0.16 Shares used in diluted per share computation............................... 247,693 249,208 253,830 253,052 1998 Total revenues.............................. $277,674 $320,522 $351,305 $364,172 Operating income............................ 50,995 58,266 65,327 46,921 Net income.................................. 33,754 39,201 44,166 26,097 Basic income per share...................... $ 0.15 $ 0.17 $ 0.19 $ 0.11 Shares used in basic per share computation............................... 225,402 228,001 231,078 233,134 Diluted income per share.................... $ 0.13 $ 0.15 $ 0.17 $ 0.10 Shares used in diluted per share computation............................... 256,331 258,969 257,518 252,577
F-24 87 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE -------------- ----------------------------------------------------------- ------------ 2.1(7) Agreement and Plan of Reorganization between PeopleSoft, Inc. and Red Pepper Company dated as of September 4, 1996. 2.2(16) Agreement and Plan of Merger dated September 30, 1998 between the Registrant and Intrepid Systems, Inc. 3.1(11) Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of Delaware on May 25, 1996. 3.2(11) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on June 17, 1996. 3.3(14) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on July 3, 1997. 3.4(14) Certificate of Designation as filed with the Secretary of State of the State of Delaware on March 24, 1998. 3.5 Bylaws of Registrant as amended to date. 4.2(12) First Amended and Restated Preferred Shares Rights Agreement dated December 16, 1997. 10.1(5)(11) Amended and Restated 1989 Stock Plan and forms of option agreements thereunder. 10.2(11) 1992 Employee Stock Purchase Plan as amended to date, and form of subscription agreement thereunder. 10.3(1) 1992 Directors' Stock Option Plan and forms of option agreements thereunder. 10.4(2)(5) Executive Bonus Plan. 10.5(3) Amendment and Restatement of PeopleSoft, Inc. 401(K) Plan, dated December 13, 1995, Amendment No. 1 dated December 30, 1994, and Amendment No. 2, dated August 25, 1995. 10.6(1) Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers. 10.7(3) Loan Agreement between the Registrant and West America Bank, N.A. dated October 31, 1995. 10.8(1) Office Lease for 1331 North California Boulevard dated July 23, 1990 between the Registrant and 1333 North California Boulevard, a California limited partnership, as amended by the First Amendment to Lease dated April 24, 1991 and the Second Amendment to Lease dated June 17, 1992 and related Lease Guarantees dated July 26, 1990 and June 14, 1991 between 1333 North California Boulevard and David A. Duffield. 10.9(1) Lease dated July 24, 1992 between the Registrant and Glen Pointe Associates. 10.12(1)(6) Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc., as amended by Amendment No. 1 dated September 30, 1992. 10.18(2) Lease dated June 23, 1993 between the Registrant and Westbrook Corporate Center.
88
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE -------------- ----------------------------------------------------------- ------------ 10.19(2) Lease dated January 17, 1994 between the Registrant and R-H Associates Bldg. III Corp. 10.20(2) Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.21(3) Contract of Sale and Escrow Instructions between the Company and Rosewood Owner of California (B) LLC, a California limited liability company, dated October 4, 1995. 10.22(4) Warrant Agreement between the Registrant and The First National Bank of Boston, as Warrant Agent, dated October 30, 1995. 10.23(4) Warrant Purchase Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.24(4) Registration Rights Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.25(8) Amendment No. 2 dated September 28, 1994, Amendment No. 3 dated September 21, 1995 and Amendment No. 4 dated December 28, 1995 to the Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc. (Confidential treatment requested for Amendment No. 2 and No. 4 only). 10.26(8) Amended Software Development Agreement dated December 22, 1995 between the Registrant and Solutions for Education Administrators, Inc. 10.27(8) Exclusive Marketing and Distribution Agreement dated December 22, 1995 between the Registrant and SIS Development LLC ("SIS"). 10.28(13) Amendment No. 1 dated September 19, 1994, Amendment No. 2 dated May 15, 1995 and Amendment No. 3 dated June 19, 1995 to the Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.29(8) Systems Integrator Agreement dated August 25, 1995 between the Registrant and Shared Medical Systems Corporation. 10.32(13) Lease dated December 4, 1996 between the Registrant and Lease Plan North America, Inc. 10.33(13) Purchase Agreement dated October 22, 1996 between the Registrant and Norwest Equity Partners IV, L.P. 10.34(10) Red Pepper Software Company 1993 Stock Option Plan, and forms of stock option agreement thereunder. 10.35(15) Agreement of Purchase and Sale dated July 22, 1998 between the Registrant and William Willson & Associates. 10.36(15) Lease dated September 14, 1998 between the Registrant and Hacienda Plaza Associates, LLC. 10.37 Development and License Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc. 10.38 Marketing and Distribution Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc. 10.39 Distribution Agreement dated December 30, 1998 between the Registrant and Momentum Business Applications, Inc.
89
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE -------------- ----------------------------------------------------------- ------------ 10.40 First amendment to Participation Agreement and Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust dated February 20, 1998 between the Registrant and Lease Plan North America, Inc. 10.41 Second Amendment to Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease and Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust dated September 28, 1998 between the Registrant and Lease Plan North America, Inc. 10.42 Participation Agreement dated September 28, 1998 between the Registrant and Wilmington Trust Company, ABN AMRO Leasing, Inc., ABN AMRO Bank N.V., and Financial Institutions listed in Schedule I of the Participation Agreement. 10.43 Master Lease dated September 28, 1998 between the Registrant and Wilmington Trust Company. 10.44 Appendix 1 to the Participation Agreement and Master Lease dated September 28, 1998. 21.1 Subsidiaries. 23.1 Consent of Ernst and Young LLP, Independent Auditors. 24.1 Power of Attorney (see page 61). 27.1 Financial Data Schedule.
- - --------------- (1) Incorporated by reference to the exhibit having the same number filed with the Registrant's Registration Statement on Form S-1 (No. 33-53000) filed October 7, 1992, Amendment No. 1 thereto filed October 26, 1992, Amendment No. 2 thereto filed November 10, 1992 and Amendment No. 3 thereto filed November 18, 1992, which Registration Statement became effective November 18, 1992 and the Registrant's Registration Statement on Form S-1 (No. 33-62356) filed on May 7, 1993, which Registration Statement became effective May 24, 1993. (2) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (3) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K filed with the Securities and Exchange Commission on December 15,1995. (4) Exhibits 10.22, 10.23, and 10.24 are incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, filed with the Company's Registration Statement on Form S-3 (No. 33-80755) filed with the Securities and Exchange Commission on December 22, 1995. (5) This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c). (6) Confidential treatment previously granted. (7) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-4 filed with the Securities and Exchange Commission on October 4, 1996. (8) Incorporated by reference to the exhibit having the same filed numbers with the Company's Annual Report on Form 10K for the year ended December 31, 1995. (9) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-A filed with the Securities and Exchange Commission on February 15, 1995. (10) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-8 filed with the Securities and Exchange Commission on October 24, 1996. 90 (11) Incorporated by reference to the exhibit filed with the Company's Form S-8 (No.333-08575) filed with the Securities and Exchange Commission on July 22, 1996. (12) Incorporated by reference to Exhibit 1 filed with the Company's Form 8-A/A filed with the Securities and Exchange Commission on March 25, 1998. (13) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1996. (14) Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1997. (15) Incorporated by reference to the exhibit having the same filed number with the Company's Quarterly Report on Form 10Q for the quarter ended September 30, 1998. (16) Incorporated by reference to the exhibit 10.37 filed with the Company's Quarterly Report on Form 10Q for the quarter ended September 30, 1998. (b) Reports on Form 8-K. Stock Option Repricing filed December 17, 1998. EX-3.5 2 BYLAWS OF REGISTRANT AS AMENDED TO DATE 1 EXHIBIT 3.5 BY-LAWS OF PEOPLESOFT, INC. (As Amended through February 1995) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.1 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. -1- 2 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president. No other person or persons are permitted to call a special meeting. No business may be conducted at a special meeting other than the business brought before the meeting by the board of directors or the chairman of the board or the president. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these by-laws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the -2- 3 corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these by-laws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. -3- 4 Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. -4- 5 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES Nominations of persons for election to the Board of directors of the corporation may be made at a meeting of stockholders by or at the discretion of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment -5- 6 of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies that is required by law to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the board of directors any person nominated by the Board for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. 2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before an annual meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this -6- 7 Section. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these by-laws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The Board of Directors shall consist of five (5) persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these by-laws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting unless specified otherwise in the certificate of incorporation. Directors need not be stockholders unless so required by the certificate of incorporation or these by-laws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have -7- 8 power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these by-laws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these by-laws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar -8- 9 communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. -9- 10 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.11 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. 3.12 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. -10- 11 3.13 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these by-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his or her removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, -11- 12 (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the by-laws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these by-laws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those by-laws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these by-laws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person. -12- 13 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these by-laws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these by-laws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these by-laws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these by-laws. -13- 14 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. The president shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. The president shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these by-laws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these by-laws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these by-laws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these by-laws. -14- 15 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these by-laws. The chief financial officer shall be the treasurer of the corporation. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these by-laws. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these by-Laws. 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations -15- 16 standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) and amounts paid in settlement (if such settlement is -16- 17 approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Notwithstanding the foregoing, a director, officer, employee or agent of the Corporation shall be entitled to contest any determination that the director, officer, employee or agent has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it -17- 18 shall ultimately be determined that the individual is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in any such capacity or arising out of the person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as the person would have with respect to such constituent corporation if its separate existence had continued. -18- 19 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive officer or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these by-laws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. -19- 20 The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. -20- 21 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if the person were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on -21- 22 the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. -22- 23 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The by-laws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, -23- 24 confer the power to adopt, amend or repeal by-laws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal by-laws. -24- 25 CERTIFICATE OF AMENDMENT OF BY-LAWS OF PEOPLESOFT, INC. Certificate by Secretary of Amendment The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of PeopleSoft, Inc. and that the foregoing By-Laws, comprising twenty-five (25) pages, were ratified as the Amended and Restated By-Laws of the corporation by the Board of Directors on February 15, 1995. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 15 day of February, 1995. /s/ Ronald E. F. Codd --------------------------- Ronald E. F. Codd, Secretary 26 CERTIFICATE OF AMENDMENT TO BYLAWS OF PEOPLESOFT, INC. I, Ronald E.F. Codd, Secretary of PeopleSoft, Inc., a Delaware corporation (the "Company"), hereby declare and certify that below is a true and correct copy of the amendment to the Bylaws duly adopted by the board of directors of the Company on December 15, 1995: The first sentence of Section 3.2 of Article III of the Bylaws of the Company is hereby amended, effective December 15, 1995, to read in full as follows: "The number of directors of this corporation shall not be less than five (5) nor more than nine (9), until changed, within the limits specified above, by an amendment to this Section 3.2 duly adopted by the board of directors or by the shareholders." IN WITNESS WHEREOF, I declare under penalty of perjury that the foregoing statements are true and correct. /s/ Ronald E.F. Codd ------------------------------ Ronald E.F. Codd, Secretary [seal] EX-10.37 3 DEVELOPMENT AND LICENSE AGREEMENT 1 EXHIBIT 10.37 DEVELOPMENT AND LICENSE AGREEMENT This Development and License Agreement ("Agreement") is entered into as of __________, 1998 ("Effective Date") by and between PEOPLESOFT, INC. ("PEOPLESOFT"), a Delaware corporation with a place of business at 4460 Hacienda Drive, Pleasanton, California 94588 and MOMENTUM BUSINESS APPLICATIONS, INC. ("MOMENTUM"), a Delaware corporation with a principal place of business at 1301 Harbor Bay Blvd., Alameda, California 94502. PeopleSoft and Momentum shall be collectively referred to herein as the "Parties." Whereas, the Parties intend to work together to develop software application products which may be based on PeopleSoft's PeopleTools technology as set forth herein which shall be known as the Momentum Products; Whereas, the Parties also entered into the Marketing and Distribution Agreement ("Marketing Agreement") on the Effective Date for PeopleSoft's possible distribution of the proposed Momentum Products; Whereas, the Parties have also entered into an agreement for PeopleSoft services to Momentum ("Services Agreement") as of the Effective Date whereby PeopleSoft will provide Momentum various services as specified in the Services Agreement; Whereas, this Agreement, the Services Agreement and the Marketing Agreement are separate, yet interdependent agreements in the context of the PeopleSoft/Momentum business relationship; and Whereas, this Agreement sets forth the manner in which Momentum can use Available Funds. The Parties agree as follows: DEFINITIONS "Available Funds" means the three hundred million dollars ($300,000,000) in cash funding that PeopleSoft contributed to Momentum in furtherance of the formation of Momentum plus any accrued investment income, less any amounts expended under this Agreement and for related administrative expenses (including expenses under the Services Agreement). "Contributed Technology" means any PeopleSoft software products or other technology that PeopleSoft agrees to provide to Momentum during the work plan and cost estimate approval process. "Development Costs" means the fully burdened costs incurred by PeopleSoft (including costs incurred for third party contractors hired by PeopleSoft) in developing a Momentum Product. "Developed Technology" means development tools (other than PeopleTools) which are developed or otherwise acquired by Momentum for the purpose of developing Momentum Products. "Developed Technology Royalties" mean the royalties that PeopleSoft will pay to Momentum on any software product (other than a Momentum Product) licensed by PeopleSoft to end users that was developed by PeopleSoft using Developed Technology. "Documentation" means only technical publications relating to the use of the PeopleSoft Technology, such as reference, user, installation, systems administrator and technical guides, and training curriculum delivered by PeopleSoft to Momentum. "Momentum Products" means the software applications, including pre-release versions, and associated documentation that are proposed by PeopleSoft and accepted by Momentum for development under this Agreement. "Net License Fees" means the actual amount of license fees received by PeopleSoft for an end user's use of any product containing Developed Technology, net of sales, technology witholding or VAT taxes, imputed fees for Support Services (such as bundled maintenance), consulting, and any third party royalties less PeopleSoft's actual fully burdened development costs related to the Developed Technology. "PeopleSoft Technology" means PeopleTools, Documentation and all other Contributed Technology provided by PeopleSoft to Momentum and all corrections or updates thereto. PeopleSoft Technology includes all third-party software included in PeopleTools and any Contributed Technology that PeopleSoft has the right to provide and agrees to provide to Momentum. CONFIDENTIAL Page 1 of 11 2 Technology acquired by PeopleSoft after the date of this Agreement shall not be considered PeopleSoft Technology unless such technology is expressly included in PeopleTools or provided to Momentum as Contributed Technology. "PeopleTools" means all or any portion of the underlying technology in object or source code format, tools and documentation delivered by PeopleSoft to Momentum under this Agreement and any related extensions or future enhancements all of which serves as the foundation for all PeopleSoft software products. "Purchase Option" means PeopleSoft's option to acquire all (but not less than all) of the outstanding callable Class A common stock of Momentum as set forth in Momentum's Restated Certificate of Incorporation. "Support Services" means PeopleSoft's then current technical support and maintenance services for the PeopleSoft Technology. Support Services for general customers as of the Effective Date are as set forth in Exhibit B attached hereto. The Support Services initially provided by PeopleSoft to Momentum under this Agreement shall be substantially similar to those specified in Exhibit B and may be modified as required for purposes consistent with this Agreement. 1. LICENSE GRANTS 1.1 PeopleSoft grants Momentum a perpetual (subject to the section entitled "Default and Termination"), worldwide, non-exclusive, nontransferable license to use a reasonable number of copies of the PeopleSoft Technology solely for internal use purposes connected with this Agreement and solely in conjunction with Momentum's development, support, demonstration, testing (and any related tasks) of the Momentum Products; In addition, Momentum may, with PeopleSoft's consent, sublicense third parties to use the PeopleSoft Technology for the same purposes. 1.2 To the extent that it has, or in the future obtains, the right to do so, Momentum hereby grants PeopleSoft a perpetual, non-exclusive, irrevocable, unrestricted, worldwide right to use, market, manufacture, reproduce, copy, sublicense, distribute through PeopleSoft's then current worldwide channel distribution system (under the PeopleSoft name or otherwise pursuant to PeopleSoft's then current general licensing policies and methodologies), create derivative works, enhance and modify the Developed Technology. 1.3 PeopleSoft shall provide Momentum with one copy of PeopleSoft Technology, with rights to make additional copies as reasonably necessary for the uses set forth in section 1.1. PeopleSoft shall also provide Momentum with one printed set of Documentation and Momentum shall have the option to acquire additional sets of Documentation at PeopleSoft's then current rates 2. LICENSE EXCLUSIONS 2.1 Except as expressly authorized herein, Momentum shall not: a. copy or modify the PeopleSoft Technology other than as set forth in section 1.1; b. use PeopleSoft Technology to develop any software application products that compete with PeopleSoft Technology; c. cause or permit reverse compilation or reverse assembly of all or any portion of the PeopleSoft Technology; d. distribute, disclose, market, rent, lease or transfer to any third party any portion of the PeopleSoft Technology or the Documentation, or use the PeopleSoft Technology or Documentation in any service bureau arrangement or third party training other than to third party consultants under agreement and non-disclosure as mutually agreed upon between the Parties in writing; e. disclose the results of PeopleSoft Technology performance benchmarks to any third party without PeopleSoft's prior written notice; f. export PeopleSoft Technology in violation of U.S. Department of Commerce export administration regulations; and g. invoke support libraries other than through documented API calls. 2.2 No license, right, or interest in any PeopleSoft trademarks, trade name, or service mark is granted hereunder. 3. DEVELOPMENT OF MOMENTUM PRODUCTS CONFIDENTIAL Page 2 of 11 3 3.1 Defining development projects: PeopleSoft shall propose the development of certain Momentum Products to Momentum and shall submit work plans and cost estimates for such development initiatives using Exhibit A as a general outline. Momentum may approve all or any portion of a proposed work plan and cost estimate or may determine not to approve any proposed work plan and cost estimate. Notwithstanding the foregoing, Momentum shall not be obligated to fund development of Momentum Products in excess of amounts reflected in approved work plans and cost estimates. 3.2 (a) Situations wherein PeopleSoft develops: If Momentum and PeopleSoft agree that PeopleSoft will do research and development work with respect to a Momentum Product, Momentum will pay PeopleSoft 110% of PeopleSoft's Development Costs incurred with respect to such product. PeopleSoft shall not be required to undertake activities that would result in Development Costs exceeding those reflected in approved work plans and cost estimates. Except as agreed to by the Parties, PeopleSoft shall not be required to devote any specific amount of time or resources to research and development activities under this Agreement. (b) Situations wherein Third Parties develop: The Parties intend that they will discuss and agree upon the possible use of third parties to develop Momentum Products during the budget proposal and approval process. Any agreements between Momentum and third parties relating to Momentum Products or Developed Technology must include appropriate provisions for the protection of PeopleSoft Technology and PeopleSoft's rights under this Agreement, the Marketing Agreement, and the Services Agreement and as a holder of the Momentum Class B Common Stock. Subject to the foregoing, the amount and nature of work to be performed by third parties will be determined by Momentum. 3.3 Momentum hereby grants PeopleSoft a right of first refusal with respect to any future financing proposed to be conducted by Momentum. If at any time, Momentum intends to raise more than $100,000 of capital in a transaction or series of transactions, Momentum shall provide PeopleSoft with notice of the proposed transaction including a summary of terms of the proposed transaction. If PeopleSoft desires to provide Momentum with the financing on the terms proposed by Momentum, it may do so by giving Momentum notice within 15 days of its receipt of the notice of the proposed by Momentum. If PeopleSoft does not exercise its rights hereunder, Momentum shall have 60 days from the expiration of the foregoing 15 day period to complete the financing on the terms contained in the notice provided to PeopleSoft. If Momentum does not complete the financing within said 60 day period, PeopleSoft's rights hereunder shall be deemed to be revived. 3.4 Momentum shall use diligent efforts to research and develop Momentum Products in accordance with approved work plans and cost estimates agreed to by the Parties pursuant to this Agreement. As of the Effective Date, the Parties contemplate the development of the following Momentum Products: electronic business, analytic applications and industry-specific software applications. 3.5 The Parties intend to discuss and agree upon the use of Available Funds during the work plan and cost estimate approval process. Momentum may use the Available Funds only to develop or acquire Momentum Products and related technologies and for related administrative expenses. There are no restrictions on Momentum's use of its funds other than Available Funds to conduct its business as it determines. 3.6 Momentum will invest the Available Funds in high quality marketable securities. Momentum may not encumber, pledge or otherwise take any action with respect to the Available Funds that could prevent the full expenditure of such funds under this Agreement. If PeopleSoft reasonably believes Momentum has or intends to use the Available Fund for purposes other than those allowed by this Agreement, PeopleSoft will have the right to require Momentum to make an affirmative pledge of the Available Funds to performance under this Agreement. 3.7 PeopleSoft agrees to sublicense to Momentum any required third party software in which PeopleSoft has applicable distribution rights. Momentum shall be responsible for the payment of any technology access fees or royalties due third parties for the use of such third party software. 4. FEES AND PAYMENT TERMS/DEVELOPMENT COSTS CONFIDENTIAL Page 3 of 11 4 4.1 PeopleSoft Technology shall be provided by PeopleSoft to Momentum under this Agreement at no license fee or royalty obligation. 4.2 PeopleSoft shall pay Developed Technology Royalties to Momentum equal to one percent (1%) of Net License Fees on products (other than Momentum Products) sold or licensed by PeopleSoft that were developed by PeopleSoft using Developed Technology. PeopleSoft's obligation to pay Developed Technology Royalties to Momentum shall cease ten (10) years after the Developed Technology is acquired or first identified as part of a work plan related to the development of a Momentum Product. 4.3 Momentum shall reimburse PeopleSoft for its Development Costs under section 3.2(a) on a monthly basis. 5. SUPPORT SERVICES 5.1 During the period that this Agreement and the Marketing Agreement are in effect and provided that Momentum is current on all payment obligations under the Services Agreement, at no fee to Momentum, PeopleSoft shall provide Momentum with Support Services. 6. TITLE AND PROTECTION/NON-DISCLOSURE 6.1 PeopleSoft (or its third-party providers) retains title to all portions of the PeopleSoft Technology. Any modifications to the PeopleSoft Technology made by Momentum or any of its subcontractors (including PeopleSoft) to develop a Momentum Product in accordance with this Agreement shall be owned by PeopleSoft. PeopleSoft will not be obligated to make any royalty or other payments with respect to such PeopleSoft Technology or modifications. Title to the Momentum Products shall vest in Momentum, subject to PeopleSoft's underlying right, title and interest to PeopleSoft Technology. Title to the Developed Technology shall vest in Momentum, subject to PeopleSoft's license to use the Developed Technology as set forth in section 1.2 herein. Except as may be otherwise expressly set forth in this Agreement, title to any technology developed pursuant to this Agreement will vest in both PeopleSoft and Momentum and each will have full right to make, use, license and sublicense such technology without any obligation to the other. 6.2 Title to the physical media for the PeopleSoft Technology vests in Momentum upon delivery. The PeopleSoft Technology contains valuable proprietary information, and Momentum shall not disclose the PeopleSoft Technology to anyone other than those of its employees or consultants under nondisclosure obligations who have a need to know for purposes consistent with this Agreement. Momentum shall affix, to each full or partial copy of PeopleSoft Technology made by Momentum, all copyright and proprietary information notices as affixed to the original. 6.3 All information clearly marked "confidential" or which should be reasonably understood to be confidential by either party under this Agreement and provided to the other party shall be treated as confidential and shall not be disclosed, orally or in writing by the receiving party to any third party without the prior written consent of the disclosing party. 6.4 The obligations set forth in this section entitled "Title and Protection /Non-disclosure" shall survive termination of this Agreement. 7. LIMITED WARRANTY 7.1 PeopleSoft represents that the PeopleSoft Technology does not infringe any patent, copyright or other third party intellectual property rights when used in accordance with the published specifications. PeopleSoft represents that the PeopleSoft Technology and all subsequent major releases thereon will perform substantially in accordance with the corresponding documentation for a period of one (1) year from the date of installation. PeopleSoft does not represent that the PeopleSoft Technology is error-free. In the event the PeopleSoft Technology does not perform substantially in accordance with the published specifications, PeopleSoft's sole obligation is limited to repair or replacement of the defective PeopleSoft Technology in accordance with its then current Support Services terms and CONFIDENTIAL Page 4 of 11 5 conditions, provided Momentum notifies PeopleSoft of the deficiency within the one-year period and provided Momentum has installed all PeopleSoft Technology updates provided by PeopleSoft's Support Services. 7.2 PEOPLESOFT DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 8. DISCLAIMER OF CONSEQUENTIAL DAMAGES/LIMITATION OF LIABILITY 8.1 PEOPLESOFT WILL NOT BE LIABLE FOR INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST DATA OR LOST PROFITS, HOWEVER ARISING, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 8.2 EXCLUDING DAMAGES INCURRED UNDER THE ARTICLE ENTITLED "INDEMNIFICATION", PeopleSoft's liability for damages under this Agreement shall in no event exceed the then current standard list price for a license to peopletools by Momentum. the parties agree to the allocation OF LIABILITY RISK THAT is set forth in this Section. 9. INDEMNIFICATION 9.1 PeopleSoft shall indemnify and defend Momentum against any claims that the PeopleSoft Technology infringes any patent, copyright or trade secret; provided that PeopleSoft is given prompt notice of such claim and is given information, reasonable assistance, and authority to defend or settle the claim. In the defense or settlement of the claim, PeopleSoft may obtain for Momentum the right to continue using the PeopleSoft Technology or replace or modify PeopleSoft Technology so that it becomes noninfringing while giving substantially equivalent performance. PeopleSoft shall have no liability if the alleged infringement is based on: (i) a modification of PeopleSoft Technology by anyone other than PeopleSoft; or (ii) the use of PeopleSoft Technology other than in accordance with the Documentation. 9.2 Momentum shall indemnify and defend PeopleSoft against any claims that the components of the Momentum Products or Developed Technology, that are developed by Momentum in furtherance of this Agreement and the Marketing Agreement infringes any patent, copyright or trade secret; provided that Momentum is given prompt notice of such claim and is given information, reasonable assistance, and authority to defend or settle the claim. In the defense or settlement of the claim, Momentum may obtain for PeopleSoft the right to continue using and marketing the Momentum Products or Developed Technology or replace or modify the Momentum Products or Developed Technology so that it becomes noninfringing while giving substantially equivalent performance. Momentum shall have no liability if the alleged infringement is based on: (i) a modification of the Momentum Product or Developed Technology by anyone other than Momentum or its subcontractors, if any; or (ii) the use of the Momentum Product or Developed Technology other than in accordance with the documentation provided by Momentum. To the extent Momentum elects to provide PeopleSoft with modifications to the PeopleSoft Technology, in every case and simultaneous with the delivery of such PeopleSoft Technology modifications, Momentum shall provide written notice to PeopleSoft that such PeopleSoft Technology modifications are provided "as-is" and "without any indemnification for third party infringement claims." 9.3 The obligations set forth in this section entitled "Indemnification" shall survive the termination of this Agreement. 10. DEFAULT AND TERMINATION 10.1 Any of the following shall constitute an event of default: a. Momentum fails to perform any of its obligations under the sections entitled "License Exclusions" or "Title and Protection /Non-disclosure"; or b. Either party fails to perform any other material obligation under this Agreement and such failure remains uncured for more than thirty (30) days after receipt of written notice thereof. CONFIDENTIAL Page 5 of 11 6 10.2 If an event of default occurs, the nondefaulting party, in addition to any other rights available to it under law or equity, may terminate this Agreement and all licenses granted hereunder by written notice to the defaulting party. Remedies shall be cumulative and there shall be no obligation to exercise a particular remedy. In the event this Agreement is terminated by PeopleSoft in connection with Momentum's breach of a material obligation under this Agreement, PeopleSoft shall be entitled to receive, as liquidated damages, the Available Funds. If PeopleSoft reasonably believes that such liquidated damages are inadequate, then PeopleSoft will be entitled to specific performance of Momentum's obligations under this Agreement in connection with such breach. 10.3 This Agreement will automatically terminate upon the expiration of the Purchase Option; provided, however that PeopleSoft's obligation to pay Developed Technology Royalties will continue until the expiration of the respective royalty terms, even if the Purchase Option expires unexercised. 10.4 Within fifteen (15) days after termination of this Agreement, except for copies of PeopleSoft Technology for use solely in connection with an agreed upon transition plan, Momentum shall certify in writing to PeopleSoft that all copies of the PeopleSoft Technology in any form, including partial copies within modified versions, have been destroyed or returned to PeopleSoft. The Parties shall also meet, discuss in good faith and agree to a transition plan (which shall not exceed two (2) years) to enable Momentum to transition the Momentum Products and customers using Momentum Products from PeopleTools technology to a different technology. 11. NOTICES All notices shall be in writing and hand-delivered or sent by first class mail, overnight mail, courier, or transmitted by facsimile (if confirmed by such mailing), to the addresses indicated on the first page of this Agreement, or such other address as either party may indicate by at least ten (10) days prior written notice to the other party. Notices to PeopleSoft shall be addressed to the Legal Department. 12. ASSIGNMENT Momentum may not assign this Agreement (by operation of law or otherwise) or sublicense PeopleSoft Technology without the prior written consent of PeopleSoft or as set forth in the event of certain contingencies as expressed in the Marketing Agreement, and any prohibited assignment or sublicense shall be null and void. 13. GENERAL 13.1 This Agreement is made in and shall be governed by the laws of the State of California, excluding choice of law principles. Any actions brought to enforce any of the provisions of this Agreement shall be fully and finally resolved by binding arbitration conducted by a mutually acceptable independent third party. Except for actions for breach of PeopleSoft's proprietary rights in PeopleSoft Technology or Momentum's proprietary rights in the Momentum Products, no action regardless of form, arising out of this Licensing Agreement may be brought by either party more than one year after the cause of action has accrued. 13.2 The section headings herein are provided for convenience only and have no substantive effect on the construction of this Agreement. If any provision of this Agreement is held to be unenforceable, this Agreement shall be construed without such provision. 13.3 The failure by a party to exercise any right hereunder shall not operate as a waiver of such party's right to exercise such right or any other right in the future. Neither party shall be liable to the other for any failure to perform due to causes beyond its reasonable control. 13.4 No agency, partnership or employment is created by this Agreement. Momentum shall not use the name of PeopleSoft in any advertising, public relations or media release without the prior written consent of PeopleSoft. 13.5 This Agreement replaces and supersedes any prior verbal understandings, written communications, and constitutes the entire agreement between the Parties concerning this subject matter. This Agreement may be amended only by a written document executed by a duly authorized representative of each of the Parties. This Agreement may be executed in counterparts. CONFIDENTIAL Page 6 of 11 7 This Agreement is made as of the Effective Date. MOMENTUM BUSINESS APPLICATIONS, INC. PEOPLESOFT, INC. - - ----------------------------------- ------------------------------------ Authorized Signature Authorized Signature - - ----------------------------------- ------------------------------------ Printed Name and Title Printed Name and Title CONFIDENTIAL Page 7 of 11 8 EXHIBIT A OVERVIEW OF THE DEVELOPMENT EFFORT TO CREATE MOMENTUM PRODUCTS PHASE 1. PROJECT INITIATION/GENERAL ARCHITECTURE. (a) DURATION. The approximate duration of Phase 1 shall be the first several months commencing on the Effective Date. (b) OBJECTIVES DURING PHASE 1: (1) defining the project requirements as mutually agreed. (2) Establish and maintain the development environment. (3) Evaluate possible future beta sites. (4) Generally determine the requirements and costs of documentation. (5) Preparation of the project plans which are expected to include detailed deliverables, and development milestones. (6) Preparation of the test plans. (7) Determination of an appropriate database to be used as a starting point for the Momentum Product. PHASE 2. DETAILED DESIGN AND PROTOTYPING. (a) DURATION. The Parties anticipate that Phase 2 may overlap with Phase 1 and shall commence during the __________ month of the Project and end, depending on Momentum Product within __________ months of the commencement of the project. (b) OBJECTIVES DURING PHASE 2 (1) Create all databases. (2) Develop or create functional prototypes of all modules and listed functions. (3) Participate in ongoing beta sites review and feedback. (4) Refinement of project plans, including definition of detailed requirements for all functions. (5) Refinement of test plans. PHASE 3. DEVELOPMENT. (a) DURATION. The Parties anticipate that Phase 3 shall commence in the _________ month of the project and end upon General Availability of the Momentum Product. (b) OBJECTIVES DURING PHASE 3 (1) Complete, as set forth in the project plans, the interfaces between the PeopleSoft Technology and Momentum Products.. (2) Provide the publication expertise reasonably necessary to turn the Documentation and training guide drafts into final documents ready for delivery to customers. This effort contemplates limited textual editing, document formatting and other minor preparations which are typically expected prior to publication, and which will otherwise conform the Documentation to PeopleSoft's then current style guides. (3) Undertake final testing. CONFIDENTIAL Page 8 of 11 9 EXHIBIT B SOFTWARE SUPPORT SERVICES TERMS AND CONDITIONS Software Support Services Terms and Conditions ("SUPPORT SERVICES") are referenced in and incorporated into the Software License and Services Agreement ("Agreement") between PeopleSoft and Licensee. Capitalized terms have the same meaning as they do in the Agreement. 1. COVERAGE PeopleSoft provides Licensee with Support Services for the Software at the Site in exchange for payment of the applicable Support Services fees. Only designated Licensee employees may contact PeopleSoft for the provision of Support Services. Licensee may acquire Support Services for additional Licensee sites by paying PeopleSoft the applicable annual secondary site Support Services fee. 2. SOFTWARE MAINTENANCE PeopleSoft will periodically issue the following technical and functional improvements to Software: (1) Fixes to Errors; (2) Updates; and (3) Enhancements 3. PRIORITY LEVEL OF ERRORS PeopleSoft shall address Errors in accordance with the following protocols: Priority 1-Critical Level: PeopleSoft promptly: (1) designates PeopleSoft specialist(s) to correct Error; (2) provides expanded communication on correction status; and (3) escalates troubleshooting a Workaround or Fix. Priority 2-Urgent Level: PeopleSoft promptly: (1) designates PeopleSoft specialist(s) to correct Error; (2) provides ongoing communication on correction status; and (3) initiates troubleshooting a Workaround or Fix. Priority 3-Standard Level: PeopleSoft: (1) assigns PeopleSoft specialist(s) to commence correction of Error; and (2) exercises all commercially reasonable efforts to include the Fix for Error in the next Update. Priority 4-Base Level: PeopleSoft: (1) assigns Error to case management and tracking; and (2) may include the Fix for Error in the next Update. 4. TELEPHONE SUPPORT PeopleSoft provides telephone support concerning Software installation and use. Except for designated holidays, standard telephone support hours are Monday through Friday, 4:00 a.m. to 6:30 p.m., Pacific Time. Telephone Support is also available 24-hours-a-day, 7-days-a-week for in-production customers who need to resolve critical production problems outside of standard support hours. 5. ACCOUNT MANAGER PeopleSoft assigns an account manager to assist with the support relationship between PeopleSoft and Licensee. Licensee will reimburse PeopleSoft for the reasonable travel and living expenses of the account manager for on-site support activity. 6. PEOPLESOFT CUSTOMER CONNECTION a. PeopleSoft Customer Connection is an on-line, self-service system that features postings by PeopleSoft and customers regarding technical and non-technical topics of interest. Licensee may access PeopleSoft Customer Connection via Internet access at its own expense. b. Software Updates, Enhancements, and Fixes may be delivered to Licensee through PeopleSoft Customer Connection, or by mail from PeopleSoft on Licensee's written request. PeopleSoft information posted to Customer Connection is confidential and proprietary and shall only be used in connection with Licensee's use of the Software and informational communications with other PeopleSoft Customer Connection participants. PeopleSoft shall have the right to publish, modify and distribute any information or software provided by Licensee to Customer Connection in all languages. Licensee shall not use PeopleSoft Customer Connection for advertising or public relations purposes and shall only submit information to PeopleSoft Customer Connection that Licensee owns or has permission to use in such manner. c. To diminish exposure to software viruses, PeopleSoft tests and scans all information entered by PeopleSoft for software viruses prior to submitting it to PeopleSoft Customer Connection. Licensee shall also use a reliable virus detection system on any software or information posted to PeopleSoft Customer Connection, utilize back-up procedures, monitor access to PeopleSoft Customer Connection, promptly notify PeopleSoft of any virus detected within Licensee's systems associated with PeopleSoft Customer Connection and generally exercise a reasonable degree of caution when utilizing information from PeopleSoft Customer Connection. PeopleSoft does not warrant that PeopleSoft Customer Connection will operate without interruption or without errors. PeopleSoft reserves the right to modify or suspend PeopleSoft CONFIDENTIAL Page 9 of 11 10 Customer Connection service in connection with PeopleSoft's provision of Support Services. PeopleSoft assumes no responsibility for anything posted by anyone other than PeopleSoft, including, but not limited to, information about PeopleSoft software, modification code, or portions thereof. 7. FEES The initial period of Support Services for the Site is indicated in the Schedule and included in the Software license fee; thereafter, in the event Licensee elects to continue to receive Support Services, Licensee shall pay PeopleSoft the annual Support Services fee as set forth in the Schedule. Support Services are billed on an annual basis, payable in advance. Unless Licensee has provided proof of tax-exempt status, Licensee is responsible for all taxes associated with Support Services, excluding taxes based on PeopleSoft's income. Licensee's payment shall be due within thirty (30) days of receipt of the PeopleSoft invoice. Should Licensee elect not to renew Support Services and subsequently requests Support Services, PeopleSoft shall reinstate Support Services only after Licensee pays PeopleSoft the annual then-current fee plus all cumulative fees that would have been payable had Licensee not suspended Support Services. 8. TERM AND TERMINATION Unless otherwise expressly set forth in the Agreement, Support Services shall be provided for a period of one (1) year from the Schedule Effective Date, and shall be extended each additional year unless terminated by either party. Each one (1) year term shall commence on the anniversary of the Schedule Effective Date. Either party may terminate the Support Services provisions at the end of any support term by giving the other party written notice at least ninety (90) days prior to the end of the term. If Licensee fails to make payment pursuant to the section titled "Fees", or Licensee breaches the Support Services provisions and such breach has not been cured within thirty (30) days of receipt of written notice of breach, PeopleSoft may suspend or cancel Support Services. 9. EXCLUSIONS PeopleSoft shall have no obligation to support: a. Substantially altered, damaged or modified Software; b. Software that is not the then-current release, or a Previous Sequential Release; c. Errors caused by Licensee's negligence, hardware malfunction, or other causes beyond PeopleSoft's reasonable control; d. Software installed in a hardware or operating environment not supported by PeopleSoft; and e. Third party software not licensed through PeopleSoft. 10. GENERAL All Updates, Enhancements and Fixes provided to Licensee are subject to the terms and conditions of the Agreement. PeopleSoft may modify Support Services on an annual basis to reflect current market condition upon reasonable notice. 11. DEFINITIONS "ENHANCEMENT" means a technical or functional addition to the Software delivered with a new Software release to improve functionality and/or operations. "ERROR" means a Software malfunction that degrades the use of the Software. "FIX" means the repair or replacement of source, object or executable code Software versions to remedy an Error. "PREVIOUS SEQUENTIAL RELEASE" means a Software release for a particular operating environment that has been replaced by a subsequent Software release in the same operating environment. PeopleSoft will support a Previous Sequential Release for a period of eighteen (18) months after release of the subsequent release. Multiple Previous Sequential Releases may be supported at any given time. "PRIORITY 1" means an Error that renders the Software inoperative or causes the Software to fail catastrophically. "PRIORITY 2" means an Error that affects performance of the Software and prohibits Licensee's use of the Software. "PRIORITY 3" means an Error that affects performance of the Software, but does not prohibit Licensee's use of the Software. CONFIDENTIAL Page 10 of 11 11 "PRIORITY 4" means an Error that causes only a minor impact on the use of the Software. "UPDATE" means all published revisions to the Documentation and one (1) copy of the new Software release not designated by PeopleSoft as new products or functionality for which it charges separately. "WORKAROUND" means a change in the procedures followed or data supplied to avoid an Error without significantly impairing Software performance. CONFIDENTIAL Page 11 of 11 EX-10.38 4 MARKETING AND DISTRIBUTION AGREEMENT 1 EXHIBIT 10.38 MARKETING AND DISTRIBUTION AGREEMENT This marketing and distribution agreement ("Marketing Agreement") is made as of December ___, 1998 ("Effective Date") by and between PeopleSoft, Inc. ("PEOPLESOFT"), a Delaware corporation having its principal place of business at 4460 Hacienda Drive, Pleasanton, California 94588 and Momentum Business Applications, Inc., ("MOMENTUM") a Delaware corporation having its principal place of business at 1301 Harbor Bay Boulevard, Alameda California 94502. Whereas the parties have entered into a development and license agreement (the "DEVELOPMENT AGREEMENT") pursuant to which PeopleSoft has licensed PeopleSoft Technology to Momentum for the development by Momentum of certain products, including electronic business applications, analytic applications and industry-specific applications; and Whereas, the parties desire to set forth the various marketing and support requirements for the marketing and distribution of the Momentum Products by PeopleSoft as set forth herein. The parties agree as follows: 1. DEFINITIONS "Development Costs" means the costs incurred by Momentum in developing any Momentum Product. "Developed Technology" shall have the meaning assigned to it in the Development Agreement. "Documentation" means only technical publications relating to the use of the PeopleSoft Technology, such as reference, user, installation, training curriculum, systems administrator and technical guides, delivered by PeopleSoft to Momentum. "End User" means any end customer using the Momentum Products. "Enhancement Costs" means the fully burdened costs (including any costs incurred for third party contractors hired by PeopleSoft) that PeopleSoft incurs enhancements, fixes, updates or improvements which improve the functionality and operations of a Licensed Product. "Excluded Parties" means those entities that, at the end of the License Option Term, PeopleSoft reasonably believes are competitors of PeopleSoft. PeopleSoft shall provide a list of Excluded Parties to Momentum at such time. "First-Line Support" means only the routing of Momentum Products technical support telephone inquiries to the Second-Line Support organization. First-Line Support includes responsibility for handling all PeopleTools technical support inquiries received from End Users. "Generally Available Product" means a Momentum Product, which has successfully completed PeopleSoft release testing (in accordance with PeopleSoft's then current PeopleSoft release model) with the level of functionality specified in such product's work plan and which becomes commercially available for production use. "License Option" means PeopleSoft's right to acquire an exclusive license for the commercialization of a Momentum Product pursuant to the section entitled "License Option" hereof. "License Option Term" means the period from which a work plan for a product is approved by Momentum pursuant to the Development Agreement until the end of the earlier of (i) the thirtieth (30th) day after such Momentum Product becomes a Generally Available Product or (ii) the expiration of the Purchase Option. "Licensed Product" means a Momentum Product for which PeopleSoft has exercised its License Option. "Momentum Products" shall have the meaning assigned to it in the Development Agreement. "Net Revenues" means the actual amount of license fees received by PeopleSoft, either from an End User or from a third party, for an End User's use of a Momentum Product or Licensed Product and any Upgrades and Updates CONFIDENTIAL Page 1 of 13 2 thereto, net of sales, technology withholding or VAT taxes, imputed fees for Support Services (such as bundled maintenance), consulting, Enhancement Costs (if applicable) and any third party PeopleSoft Technology royalties. "PeopleSoft Technology" shall have the meaning assigned to it in the Development Agreement. "PeopleTools" means all or any portion of the underlying technology in object or source code form, tools and documentation delivered by PeopleSoft to Momentum under the Development Agreement, and any related extensions or future enhancements, which serve as the foundation for all PeopleSoft software products. "Pre-Release License" means the license granted by Momentum to PeopleSoft in the section entitled Pre-Release Marketing and Distribution License/ Responsibilities. "Pre-Release Royalty" means the royalties payable by PeopleSoft as set forth in Exhibit A (section 2) for any Momentum Product commercialized by PeopleSoft prior to the exercise of the License Option. "Pre-Release Term" means the period from which a work plan for a product is approved by Momentum pursuant to the Development Agreement until the earlier of (1) PeopleSoft's exercise of the License Option, or (2) the end of the License Option Term. "Pricing Addendum" means the separately executed addendum to this Marketing Agreement which states the commercial terms of this Agreement. The Pricing Addendum is attached as Exhibit A and is hereby incorporated herein as part of this Marketing Agreement. "Product Payments" means the royalties payable by PeopleSoft as set forth in Exhibit A (section 3(a)) for any Licensed Product. "Purchase Option" means PeopleSoft's option to acquire all (but not less than all) of the outstanding Class A Common Stock of Momentum as set forth in Momentum's Restated Certificate of Incorporation. "Second-Line Support" means the general level of Support Services without First-Line Support obligations. "Support Services" means PeopleSoft's then current technical support and maintenance services for the PeopleSoft Technology. Support Services for general customers as of the Effective Date are as set forth in Exhibit B attached hereto. "Term" shall mean the exercise or expiration of the Purchase Option. "Upgrade" means the right to use the Momentum Products on a designated computer with increased processing power or an increase in the number of users to the next pricing increment and generally in each case a requirement for a payment of applicable Upgrade fees to PeopleSoft. "Updates" means one (1) copy of all published revisions and corrections to the printed documentation and one (1) copy of corrections and new releases of the Momentum Products. 2. PRE-RELEASE MARKETING AND DISTRIBUTION LICENSE/RESPONSIBILITIES 2.1 For the Pre-Release Term, Momentum grants to PeopleSoft the exclusive license to market and distribute pre-release versions of the Momentum Products to any End Users through its then current worldwide channel distribution system under the PeopleSoft name or otherwise pursuant to PeopleSoft's then current general licensing policies and methodologies. PeopleSoft shall use commercially reasonable efforts to promptly market and distribute such pre-release versions of Momentum Products to select customers in accordance with its standard practices. Any customers licensed by PeopleSoft during the Pre-Release Term must be reasonably acceptable to Momentum. 2.2 PeopleSoft shall have the right to use a reasonable number of copies of the Momentum Products, at no royalty to Momentum, for training, marketing, sales and support purposes. 2.3 PeopleSoft shall have complete responsibility, at its expense, for all marketing, pre-sales and sales activities associated with the Momentum Products. CONFIDENTIAL Page 2 of 13 3 2.4 PeopleSoft shall establish all then-current commercially reasonable local country suggested list prices for the Momentum Products and associated services. 3. ROYALTIES/PAYMENTS FOR PRE-RELEASE TERM 3.1 For each pre-release copy of Momentum Products licensed by PeopleSoft to an End User, PeopleSoft shall pay Momentum a royalty (the "Pre-Release Royalty") as set forth in the Pricing Addendum. PeopleSoft may license a reasonable number of royalty-free copies of the Momentum Products for End User evaluation purposes. 3.2 PeopleSoft shall pay to Momentum all royalties and fees due to Momentum under this Marketing Agreement within thirty (30) days of the end of the calendar quarter in which the Net Revenues are recorded by PeopleSoft. 4. SUPPORT SERVICES FOR PRE-RELEASE TERM 4.1 Momentum and PeopleSoft shall work together to provide joint post-sales support to End Users. 4.2 PeopleSoft shall provide all support for PeopleTools to End Users, commensurate with PeopleSoft's then current standard Support Services terms and conditions. A copy of the Support Services terms and conditions as of the Effective Date is included as Exhibit B. 4.3 PeopleSoft shall provide the End User with First-Line Support and Second-Line Support for the Momentum Products and shall retain all associated support revenues. PeopleSoft's responsibility to provide Updates and enhancements to End Users is limited only to the distribution of any releases, Updates and enhancements provided to PeopleSoft by Momentum, as well as the distribution to End Users of any new releases, Updates or enhancements of PeopleTools. 5. SUPPORT SERVICES FEES FOR PRE-RELEASE TERM 5.1 As of the Effective Date, PeopleSoft incorporates the first year of Support Services fees into the license fee. Currently, Support Services fees are listed at eighteen percent (18%) of the software license fee. 5.2 PeopleSoft shall retain all revenues from such Support Services as set forth in Exhibit A. 6. LICENSE OPTION 6.1 Momentum hereby grants to PeopleSoft a License Option to acquire a license to exclusively commercialize each Momentum Product . This License Option shall be exercisable on a worldwide basis at any time during the License Option Term. Upon exercise of the License Option, PeopleSoft shall obtain a perpetual, exclusive license (with the right to sublicense through multiple tiers of sublicense) to develop, make, have made, use, support, market, enhance and distribute the Licensed Product subject to the obligation to make Product Payments as set forth in Exhibit A (section 3 (a)) hereto. PeopleSoft shall also have the right to buyout the Product Payments as set forth in Exhibit A (Section 3 (b)). 6.2 Upon exercise of the License Option with respect to a Momentum Product, sections 2, 3, 4 and 5 above shall no longer apply with respect to such Momentum Product and PeopleSoft shall assume sole and full responsibility for any product development, support, training, consulting, bug fixes, modifications and enhancements with respect to the Licensed Product. 6.3 At the end of the License Option Term for a Momentum Product, if PeopleSoft has not exercised its License Option with respect to said Momentum Product, (1) PeopleSoft shall grant to Momentum a perpetual, nonexclusive license to market, distribute and sublicense the PeopleSoft Technology, only to the extent incorporated into such Momentum Product, to all third parties that are not then Excluded Parties, subject to the terms and conditions of PeopleSoft's then-standard end user license agreement. The royalty rate payable by Momentum to PeopleSoft for such distribution shall be substantially similar to PeopleSoft's then current royalty rates which PeopleSoft receives from third parties marketing PeopleSoft Technology; and (2) Momentum shall grant to PeopleSoft a perpetual, royalty-free, non-exclusive license to (a) license CONFIDENTIAL Page 3 of 13 4 the then most recent version of such Momentum Product, and any new releases, Updates or enhancements thereto, to any End Users granted licenses by PeopleSoft pursuant to the Pre-Release License, and (b) use a reasonable number of copies of Momentum Products and any new releases, Updates or enhancements thereto, for internal use, training and support purposes. 7. DISTRIBUTION LIMITATION Regardless of whether PeopleSoft exercises the License Option, PeopleSoft warrants that it will not, without the prior written consent, if required, of the U.S. Department of Commerce, export directly or indirectly Momentum Products to any prohibited country specified in then current U.S. Department of Commerce Export Administration Regulations. With regard to the license grant in section 6.3(2) above, Momentum warrants that it will not, without the prior written consent, if required, of the U.S. Department of Commerce, export directly or indirectly PeopleSoft Technology incorporated into Momentum Products to any prohibited country specified in then current U.S. Department of Commerce Export Administration Regulations. 8. LICENSE TO USE MOMENTUM TRADEMARKS AND TRADENAMES Regardless of whether PeopleSoft exercises the License Option, Momentum provides to PeopleSoft a royalty-free license to use Momentum's tradenames and trademarks which relate to the Momentum Products in connection with PeopleSoft's distribution of the Momentum Products or marketing materials associated with this Marketing Agreement, provided PeopleSoft clearly identifies Momentum's ownership of such names or marks. 9. TERM 9.1 This Marketing Agreement shall expire at the Term. 9.2 This Marketing Agreement shall automatically terminate in the event PeopleSoft acquires all ownership interest to Momentum. 10. RECORDS AND REPORTS/PAYMENTS 10.1 PeopleSoft shall keep full, true and accurate records and accounts in accordance with generally accepted accounting practices to show the amount of fees payable to Momentum. These records and accounts shall include for each copy of Momentum Products distributed: a. the name and address of the End User; b. the date of shipment and receipt of payments from End Users; c. the computation of the net licenses fee; and d. a copy of each signed end user license agreement. 10.2 PeopleSoft shall keep these records at PeopleSoft's principal place of business. Momentum shall have the right to conduct an audit of such records once per calendar year upon the giving of at least five (5) business days prior written notice to PeopleSoft to determine PeopleSoft's compliance with this Marketing Agreement. Momentum shall bear the expenses of the audit, however, in the event any such audit reveals that PeopleSoft has understated the amount of fees that PeopleSoft is obligated to pay Momentum under this Marketing Agreement by more than five percent (5%), PeopleSoft shall pay, in addition to any fees contractually due, all reasonable costs and fees associated with the audit. 10.3 Thirty (30) days after the end of each calendar quarter, PeopleSoft shall develop, implement and provide Momentum with a quarterly royalty report in accordance with its standard reporting practices that is structured as a summary report with availability to detailed backup information. The expectation is that key information concerning the Momentum Products module(s) licensed, customer name, ship date, quantity, standard list price, actual fee received, reductions for bundled services, Net License Fee and actual royalty rate will be provided in the quarterly report provided to Momentum. 10.4 All payments shall be made in U.S. dollars. CONFIDENTIAL Page 4 of 13 5 11. TITLE AND PROTECTION/NON DISCLOSURE 11.1 All right, title and interest to the Momentum Products shall vest in Momentum, subject to PeopleSoft's underlying right, title and interest in and to the PeopleSoft Technology. 11.2 PeopleSoft shall affix, to any media containing a copy of all or any portion of the Momentum Products and to each whole or partial copy of documentation, all copyright, proprietary information notices and restricted rights legends as were affixed to the original media or documents. All Momentum Products Distributed to the federal government shall contain the correct "Restricted Rights" legend as defined in DFAR 52.227-7013 (c) (1) (ii) or pertinent subsequent citation. 11.3 Title to the physical media for the Momentum Products vests in PeopleSoft upon delivery. The Momentum Products contains valuable proprietary information, and other than as set forth herein, PeopleSoft shall not disclose any such information to anyone other than those of its employees or consultants under nondisclosure obligations who have a need to know for purposes consistent with this Marketing Agreement. PeopleSoft shall affix, to each full or partial copy of Momentum Products made by PeopleSoft, all copyright and proprietary information notices as affixed to the original. 11.4 All information (1) clearly marked "confidential" by either party under this Marketing Agreement and provided to the other party, or (2) which should reasonably be understood to be confidential in nature by the receiving party, shall be treated as confidential and shall not be disclosed, orally or in writing by the receiving party to any third party without the prior written consent of the disclosing party. 12. LIMITED WARRANTY 12.1 Momentum represents that each of the Momentum Products does not infringe any patent, copyright or other third party intellectual property rights when used in accordance with the published specifications for such Momentum Product. Momentum represents that each of the Momentum Products and all subsequent major releases thereon will perform substantially in accordance with the corresponding documentation for such Momentum Product for a period of one (1) year from the date of installation. Momentum does not represent that any of the Momentum Products is error-free. In the event that any of the Momentum Products does not perform substantially in accordance with the published specifications for such Momentum Product, Momentum's sole obligation is limited to repair or replacement of such defective Momentum Product in accordance with its then current support services terms and conditions, provided PeopleSoft notifies Momentum of the deficiency within the one-year period and provided PeopleSoft has installed all Momentum Products updates provided by Momentum's support services. 12.2 MOMENTUM DISCLAIMS ALL OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 12.3 PeopleSoft represents that the PeopleSoft Technology does not infringe any patent, copyright or other third party intellectual property rights when used in accordance with the published specifications. PeopleSoft represents that the PeopleSoft Technology and all subsequent major releases thereon will perform substantially in accordance with the corresponding documentation for a period of one (1) year from the date of installation at Momentum. PeopleSoft does not represent that the PeopleSoft Technology is error-free. In the event the PeopleSoft Technology does not perform substantially in accordance with the published specifications, PeopleSoft's sole obligation is limited to repair or replacement of the defective PeopleSoft Technology in accordance with its then current Support Services terms and conditions, provided Momentum notifies PeopleSoft of the deficiency within the one-year period and provided Momentum has installed all PeopleSoft Technology updates provided by PeopleSoft's Support Services. 12.4 PEOPLESOFT DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 13. DISCLAIMER OF CONSEQUENTIAL DAMAGES/LIMITATION OF LIABILITY CONFIDENTIAL Page 5 of 13 6 13.1 NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST DATA OR LOST PROFITS, HOWEVER ARISING, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 13.2 EXCLUDING DAMAGES INCURRED UNDER THE ARTICLE ENTITLED "INDEMNIFICATION", EACH PARTY'S liability for damages under this MARKETING Agreement shall in no event exceed the AMOUNT OF ROYALTIES THAT PEOPLESOFT HAS PAID TO MOMENTUM IN THE PRECEDING TWELVE (12) MONTHS. the parties agree to the allocation OF LIABILITY RISK WHICH IS SET FORTH IN THIS SECTION. 14. INDEMNIFICATION 14.1 Momentum shall indemnify and defend PeopleSoft against any claims that the components of the Momentum Products (excluding PeopleSoft Technology) infringes any patent, copyright or trade secret; provided that Momentum is given prompt notice of such claim and is given information, reasonable assistance, and authority to defend or settle the claim. In the defense or settlement of the claim, Momentum may obtain for PeopleSoft the right to continue using and marketing the Momentum Products or replace or modify Momentum Products so that it becomes noninfringing while giving substantially equivalent performance. Momentum shall have no liability if the alleged infringement is based on: (i) a modification of Momentum Products by anyone other than Momentum or its subcontractors, if any; or (ii) the use of the Momentum Products other than in accordance with the documentation provided by Momentum. 14.2 PeopleSoft shall indemnify and defend Momentum against any claims that the PeopleSoft Technology infringes any patent, copyright or trade secret; provided that PeopleSoft is given prompt notice of such claim and is given information, reasonable assistance, and authority to defend or settle the claim. In the defense or settlement of the claim, PeopleSoft may obtain for Momentum the right to continue using the PeopleSoft Technology or replace or modify PeopleSoft Technology so that it becomes noninfringing while giving substantially equivalent performance. PeopleSoft shall have no liability if the alleged infringement is based on: (i) a modification of PeopleSoft Technology by anyone other than PeopleSoft; or (ii) the use of PeopleSoft Technology other than in accordance with the Documentation. 15. DEFAULT 15.1 It shall be an event of default if either party (1) fails to perform any of its material obligations (including any payment obligations) under this Marketing Agreement or otherwise materially breaches this Marketing Agreement and such material breach remains uncured for more than thirty (30) days after receipt of written notice specifying the material breach thereof, or (2) enters into any proceeding, voluntary or involuntary, in bankruptcy, reorganization or similar arrangement for the benefit of its creditors. 15.2 If an event of default occurs, the nondefaulting party in addition to any other rights available to it under law or equity, may terminate this Marketing Agreement by written notice to the defaulting party. In the event this Marketing Agreement is terminated by PeopleSoft in connection with Momentum's breach of a material obligation under this Marketing Agreement, PeopleSoft shall be entitled to receive, as liquidated damages, the Available Funds. If PeopleSoft reasonably believes that such liquidated damages are inadequate, then PeopleSoft will be entitled to specific performance of Momentum's obligations under this Marketing Agreement in connection with such breach. Remedies shall be cumulative and there shall be no obligation to exercise a particular remedy. 16. TERMINATION 16.1 Any licenses granted pursuant to Sections 6.1, 6.3 and 8 and any sublicenses granted pursuant to Section 2.1 shall survive the termination of this Agreement. 16.2 Within thirty (30) days of termination, PeopleSoft shall pay Momentum all sums due under this Marketing Agreement. CONFIDENTIAL Page 6 of 13 7 16.3 Prior to termination, the parties shall meet, discuss and agree on a transition plan to address technical support plans for existing End Users and then-current commercially reasonable payments from Momentum to PeopleSoft for continuing PeopleTools Support Services from PeopleSoft directly to Momentum. 16.4 In addition to this section, the sections entitled "Distribution Limitation," "Royalties/Payments," "Records and Reports/Payments," "Title and Protection/Non-disclosure," "Limited Warranty," "Disclaimer of Consequential Damages/Limitation of Liability," and "Indemnification," shall survive termination of this Marketing Agreement. 17. NOTICES All notices shall be in writing and hand-delivered or sent by first class mail, overnight mail, courier, or transmitted by facsimile (if confirmed by such mailing), to the addresses indicated on the first page of this Agreement, or such other address as either party may indicate by at least ten (10) days prior written notice to the other party. Notices to PeopleSoft shall be addressed to the Office of the General Counsel, Corporate Legal Department. 18. GENERAL 18.1 This Marketing Agreement is made in and shall be governed by the laws of the State of California, excluding choice of law principles. Any actions brought to enforce any of the provisions of this Marketing Agreement shall be fully and finally resolved by binding arbitration under the rules of the American Arbitration Association conducted by a mutually acceptable independent third party in San Francisco, California. Except for actions for breach of PeopleSoft's proprietary rights in PeopleSoft Technology, or Momentum's proprietary rights in the Momentum Products or Developed Technology, no action regardless of form, arising out of this Marketing Agreement may be brought by either party more than one year after the cause of action has accrued. 18.2 The section headings herein are provided for convenience only and have no substantive effect on the construction of this Marketing Agreement. If any provision of this Marketing Agreement is held to be unenforceable, this Marketing Agreement shall be construed without such provision. 18.3 The failure by a party to exercise any right hereunder shall not operate as a waiver of such party's right to exercise such right or any other right in the future. Neither party shall be liable to the other for any failure to perform due to causes beyond its reasonably foreseeable control. 18.4 Neither party shall assign this Marketing Agreement, delegate any duty or assign any right hereunder without the prior written consent of the other (such consent not to be unreasonably withheld) and any such attempted assignment or delegation shall be void. 18.5 No agency, partnership or employment is created by this Marketing Agreement. Momentum shall not use the name of PeopleSoft in any advertising, public relations or media release without the prior written consent of PeopleSoft. CONFIDENTIAL Page 7 of 13 8 18.6 This Marketing Agreement replaces and supersedes any prior verbal understandings, written communications, and constitutes the entire agreement between the parties concerning the subject matter hereof. This Marketing Agreement may be amended only by a written document executed by a duly authorized representative of each of the parties. This Marketing Agreement may be executed in counterparts. IN WITNESS WHEREOF, the parties have executed this Marketing Agreement as of the Effective Date. MOMENTUM BUSINESS APPLICATIONS, INC. PEOPLESOFT, INC. - - ----------------------------------- -------------------------------- Authorized Signature Authorized Signature - - ----------------------------------- -------------------------------- Printed Name and Title Printed Name and Title CONFIDENTIAL Page 8 of 13 9 EXHIBIT A PRICING ADDENDUM TO MARKETING AND DISTRIBUTION AGREEMENT This pricing addendum ("Pricing Addendum") is part of the Marketing and Distribution Agreement ("Marketing Agreement") between PeopleSoft and Momentum. 1. DEFINITIONS Unless otherwise defined herein, capitalized terms used in this Pricing Addendum shall have the same meaning as those referenced in the Marketing Agreement. 2. PRE-RELEASE ROYALTY THE FOLLOWING SECTION SHALL APPLY ONLY TO MOMENTUM PRODUCTS COMMERCIALIZED BY PEOPLESOFT PRIOR TO ITS EXERCISE OF THE LICENSE OPTION. PeopleSoft shall establish competitive list prices for the Momentum Products in accordance with then-current market conditions. For each Momentum Product commercialized by PeopleSoft or its channel partners for use by End Users, prior to the exercise or the License Option with respect to such Momentum Product, PeopleSoft shall pay Momentum SIX PERCENT (6%) of Net Revenues. If PeopleSoft products and Momentum Products are licensed under the same license agreement as a packaged solution for use by an End User, the Net Revenues payable to Momentum will be appropriately pro-rated based on the associated weight of each component's respective list price. 3. PRODUCT PAYMENTS AND PRODUCT PAYMENTS BUYOUT OPTION THE FOLLOWING SECTION SHALL APPLY ONLY TO MOMENTUM PRODUCTS COMMERCIALIZED BY PEOPLESOFT SUBSEQUENT TO ITS EXERCISE OF THE LICENSE OPTION. (a) Product Payments. PeopleSoft will make Product Payments to Momentum with respect to each Licensed Product equal to the sum of (i) 1% of Net Revenues plus (ii) an additional 0.1% of such Net Revenues for each $1 million of Development Costs with respect to such Licensed Product; provided, however, that the royalty rate shall not exceed six percent (6%) of Net Revenues. Subject to PeopleSoft's product payment buy-out option described in section 3(b) below, Product Payments will be payable until 10 years after General Availability of the Licensed Product. The parties agree that if PeopleSoft chooses to have a third party distribute a Licensed Product, the parties will negotiate an appropriate increase in the royalty rate paid by PeopleSoft. (b) Product Payments Buyout Option PeopleSoft will have the right to buy-out Momentum's right to receive Product Payments for any Licensed Product. The buy-out option may be exercised for any Licensed Product at any time beginning twelve months after the Licensed Product is declared a Generally Available Product. The buy-out price will be 15 times the payment made by or due from PeopleSoft to Momentum with respect to sales of such Licensed Product for the four quarters immediately preceding the quarter in which the buy-out option is exercised or, in the event that such Licensed Product has not been a License Product for all of each of such four quarters, the buy-out price will be 15 times the annualized payment for such Licensed Product. 4. SUPPORT SERVICES FEES CONFIDENTIAL Page 9 of 13 10 As of the Effective Date, the parties' expectation is that as PeopleSoft collects Support Services revenue from its End Users, (either on a stand-alone basis or as part of the license fee revenue) and PeopleSoft retains all such revenues. 5. PRECEDENCE AND AMENDMENT In the event of conflict, this Pricing Addendum shall take precedence over the Marketing Agreement. This Pricing Addendum and the Marketing Agreement and associated Exhibits are the entire agreement between the parties concerning the subject matter herein and may only be modified by a written amendment executed by the parties authorized signatories. This Pricing Addendum is effective as of the Effective Date. MOMENTUM BUSINESS APPLICATIONS, INC. PEOPLESOFT, INC. - - ------------------------------------ -------------------------------- Authorized Signature Authorized Signature - - ----------------------------------- -------------------------------- Printed Name and Title Printed Name and Title CONFIDENTIAL Page 10 of 13 11 EXHIBIT B SOFTWARE SUPPORT SERVICES TERMS AND CONDITIONS Software Support Services Terms and Conditions ("SUPPORT SERVICES") are referenced in and incorporated into the Software License and Services Agreement ("Agreement") between PeopleSoft and Licensee. Capitalized terms have the same meaning as they do in the Agreement. 1. COVERAGE PeopleSoft provides Licensee with Support Services for the Software at the Site in exchange for payment of the applicable Support Services fees. Only designated Licensee employees may contact PeopleSoft for the provision of Support Services. Licensee may acquire Support Services for additional Licensee sites by paying PeopleSoft the applicable annual secondary site Support Services fee. 2. SOFTWARE MAINTENANCE PeopleSoft will periodically issue the following technical and functional improvements to Software: (1) Fixes to Errors; (2) Updates; and (3) Enhancements 3. PRIORITY LEVEL OF ERRORS PeopleSoft shall address Errors in accordance with the following protocols: Priority 1-Critical Level: PeopleSoft promptly: (1) designates PeopleSoft specialist(s) to correct Error; (2) provides expanded communication on correction status; and (3) escalates troubleshooting a Workaround or Fix. Priority 2-Urgent Level: PeopleSoft promptly: (1) designates PeopleSoft specialist(s) to correct Error; (2) provides ongoing communication on correction status; and (3) initiates troubleshooting a Workaround or Fix. Priority 3-Standard Level: PeopleSoft: (1) assigns PeopleSoft specialist(s) to commence correction of Error; and (2) exercises all commercially reasonable efforts to include the Fix for Error in the next Update. Priority 4-Base Level: PeopleSoft: (1) assigns Error to case management and tracking; and (2) may include the Fix for Error in the next Update. 4. TELEPHONE SUPPORT PeopleSoft provides telephone support concerning Software installation and use. Except for designated holidays, standard telephone support hours are Monday through Friday, 4:00 a.m. to 6:30 p.m., Pacific Time. Telephone Support is also available 24-hours-a-day, 7-days-a-week for in-production customers who need to resolve critical production problems outside of standard support hours. 5. ACCOUNT MANAGER PeopleSoft assigns an account manager to assist with the support relationship between PeopleSoft and Licensee. Licensee will reimburse PeopleSoft for the reasonable travel and living expenses of the account manager for on-site support activity. 6. PEOPLESOFT CUSTOMER CONNECTION a. PeopleSoft Customer Connection is an on-line, self-service system that features postings by PeopleSoft and customers regarding technical and non-technical topics of interest. Licensee may access PeopleSoft Customer Connection via Internet access at its own expense. b. Software Updates, Enhancements, and Fixes may be delivered to Licensee through PeopleSoft Customer Connection, or by mail from PeopleSoft on Licensee's written request. PeopleSoft information posted to Customer Connection is confidential and proprietary and shall only be used in connection with Licensee's use of the Software and informational communications with other PeopleSoft Customer Connection participants. PeopleSoft shall have the right to publish, modify and distribute any information or software provided by Licensee to Customer Connection in all languages. Licensee shall not use PeopleSoft Customer Connection for advertising or public relations purposes and shall only submit information to PeopleSoft Customer Connection that Licensee owns or has permission to use in such manner. c. To diminish exposure to software viruses, PeopleSoft tests and scans all information entered by PeopleSoft for software viruses prior to submitting it to PeopleSoft Customer Connection. Licensee shall also use a reliable virus detection system on any software or information posted to PeopleSoft Customer Connection, utilize back-up procedures, monitor access to PeopleSoft Customer Connection, promptly notify PeopleSoft of any virus detected within Licensee's systems associated with PeopleSoft Customer Connection and generally exercise a reasonable degree of caution when utilizing information from PeopleSoft Customer Connection. PeopleSoft does not warrant that PeopleSoft Customer Connection will operate without interruption or without errors. CONFIDENTIAL Page 11 of 13 12 PeopleSoft reserves the right to modify or suspend PeopleSoft Customer Connection service in connection with PeopleSoft's provision of Support Services. PeopleSoft assumes no responsibility for anything posted by anyone other than PeopleSoft, including, but not limited to, information about PeopleSoft software, modification code, or portions thereof. 7. FEES The initial period of Support Services for the Site is indicated in the Schedule and included in the Software license fee; thereafter, in the event Licensee elects to continue to receive Support Services, Licensee shall pay PeopleSoft the annual Support Services fee as set forth in the Schedule. Support Services are billed on an annual basis, payable in advance. Unless Licensee has provided proof of tax-exempt status, Licensee is responsible for all taxes associated with Support Services, excluding taxes based on PeopleSoft's income. Licensee's payment shall be due within thirty (30) days of receipt of the PeopleSoft invoice. Should Licensee elect not to renew Support Services and subsequently requests Support Services, PeopleSoft shall reinstate Support Services only after Licensee pays PeopleSoft the annual then-current fee plus all cumulative fees that would have been payable had Licensee not suspended Support Services. 8. TERM AND TERMINATION Unless otherwise expressly set forth in the Agreement, Support Services shall be provided for a period of one (1) year from the Schedule Effective Date, and shall be extended each additional year unless terminated by either party. Each one (1) year term shall commence on the anniversary of the Schedule Effective Date. Either party may terminate the Support Services provisions at the end of any support term by giving the other party written notice at least ninety (90) days prior to the end of the term. If Licensee fails to make payment pursuant to the section titled "Fees", or Licensee breaches the Support Services provisions and such breach has not been cured within thirty (30) days of receipt of written notice of breach, PeopleSoft may suspend or cancel Support Services. 9. EXCLUSIONS PeopleSoft shall have no obligation to support: a. Substantially altered, damaged or modified Software; b. Software that is not the then-current release, or a Previous Sequential Release; c. Errors caused by Licensee's negligence, hardware malfunction, or other causes beyond PeopleSoft's reasonable control; d. Software installed in a hardware or operating environment not supported by PeopleSoft; and e. Third party software not licensed through PeopleSoft. 10. GENERAL All Updates, Enhancements and Fixes provided to Licensee are subject to the terms and conditions of the Agreement. PeopleSoft may modify Support Services on an annual basis to reflect current market condition upon reasonable notice. 11. DEFINITIONS "ENHANCEMENT" means a technical or functional addition to the Software delivered with a new Software release to improve functionality and/or operations. "ERROR" means a Software malfunction that degrades the use of the Software. "FIX" means the repair or replacement of source, object or executable code Software versions to remedy an Error. "PREVIOUS SEQUENTIAL RELEASE" means a Software release for a particular operating environment that has been replaced by a subsequent Software release in the same operating environment. PeopleSoft will support a Previous Sequential Release for a period of eighteen (18) months after release of the subsequent release. Multiple Previous Sequential Releases may be supported at any given time. "PRIORITY 1" means an Error that renders the Software inoperative or causes the Software to fail catastrophically. "PRIORITY 2" means an Error that affects performance of the Software and prohibits Licensee's use of the Software. CONFIDENTIAL Page 12 of 13 13 "PRIORITY 3" means an Error that affects performance of the Software, but does not prohibit Licensee's use of the Software. "PRIORITY 4" means an Error that causes only a minor impact on the use of the Software. "UPDATE" means all published revisions to the Documentation and one (1) copy of the new Software release not designated by PeopleSoft as new products or functionality for which it charges separately. "WORKAROUND" means a change in the procedures followed or data supplied to avoid an Error without significantly impairing Software performance. CONFIDENTIAL Page 13 of 13 EX-10.39 5 DISTRIBUTION AGREEMENT DATED DECEMBER 30,1998 1 EXHIBIT 10.39 DISTRIBUTION AGREEMENT This Distribution Agreement (the "Agreement") is made as of the __ day of December 1998 between PeopleSoft, Inc., a Delaware corporation ("PeopleSoft"), and Momentum Business Applications, Inc. a Delaware corporation ("Momentum"). B A C K G R O U N D A. PeopleSoft is the holder of all of the issued and outstanding shares of capital stock of Momentum. PeopleSoft intends to contribute $300 million to Momentum, to license certain technology to Momentum, and to make other arrangements in order to establish Momentum as a separate enterprise for the purpose of developing certain software products and commercializing such products, most likely through licensing to PeopleSoft. B. PeopleSoft intends to distribute all of the Momentum Shares (as defined below) to the holders of its Common Stock. NOW, THEREFORE, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Action" shall mean any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. 1.2 "Agent" shall mean Boston EquiServe, L.P., as distribution agent, appointed by PeopleSoft to distribute certificates representing the Momentum Shares pursuant to the Distribution. 1.3 "PeopleSoft/Momentum Agreements" shall mean this Agreement, the Development Agreement, the Marketing Agreement, the Services Agreement and the Purchase Option. 1.4 "PeopleSoft Common Stock" shall mean the Common Stock, par value $0.01 per share, of PeopleSoft. 1.5 "Commission" shall mean the Securities and Exchange Commission. 1.6 "Momentum Shares" shall mean the Class A Common Stock, par value $0.001 per share, of Momentum. 2 1.7 "Development Agreement" shall mean the Development and License Agreement dated as of the date hereof between PeopleSoft and Momentum. 1.8 "Distribution" shall mean the distribution of Momentum Shares to holders of record on December __, 1998 of PeopleSoft Common Stock immediately following completion of the transactions contemplated in Sections 2 and 3 hereof. 1.9 "Distribution Date" shall mean the proposed date of effecting the Distribution, which is anticipated to occur on or about December __, 1998. 1.10 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.11 "Form 8-A" shall mean the registration statement on Form 8-A to be filed by Momentum with the Commission to effect the registration of the Momentum Shares pursuant to the Exchange Act. 1.12 "Marketing Agreement" shall mean the Marketing and Distribution Agreement dated as of the date hereof between PeopleSoft and Momentum. 1.13 "Momentum Registration Statement" shall mean the registration statement on Form S-1 registering the issuance of Momentum Shares pursuant to the Distribution. 1.14 "PeopleSoft Registration Statement" shall mean the Registration Statement on Form S-3 registering shares of PeopleSoft Common Stock which may be issued upon exercise of the Purchase Option. 1.15 "Prospectus" shall mean the joint prospectus to be distributed to the holders of PeopleSoft Common Stock in connection with the Distribution relating to the PeopleSoft Registration Statement and the Momentum Registration Statement. 1.16 "Purchase Option" shall mean that certain option contained in Momentum's Restated Certificate of Incorporation pursuant to which PeopleSoft has the right to purchase all, but not less than all, of the outstanding Momentum Shares. 1.17 "Record Date" shall mean the close of business on December __, 1998 or such other date as is determined by the PeopleSoft Board of Directors or any committee thereof. 1.18 "Registration Statement" shall mean the registration statement on Form S-1 registering the issuance of Momentum Shares pursuant to the Distribution. 1.19 "Services Agreement" shall mean the Services Agreement dated as of the date hereof between PeopleSoft and Momentum. 1.20 "Securities Act" shall mean the Securities Act of 1933, as amended. -2- 3 2. Preliminary Action. 2.1 Registration Statement and Prospectus. Momentum has prepared and filed the Momentum Registration Statement with the Commission, and PeopleSoft has prepared and filed, the PeopleSoft Registration Statement with the Commission. Subject to the conditions set forth herein, PeopleSoft and Momentum shall use reasonable efforts to cause the both registration statements to become effective under the Securities Act. Momentum and PeopleSoft have prepared, and PeopleSoft shall cause to be mailed, the Prospectus to the record holders on the Record Date of PeopleSoft Common Stock and PeopleSoft. 2.2 Form 8-A. Momentum has prepared and filed with the Commission a Form 8-A which includes or incorporates by reference relevant portions of the Registration Statement. Subject to the conditions set forth herein, Momentum shall use reasonable efforts to cause the Form 8-A to become effective under the Exchange Act. 2.3 Blue Sky. Momentum shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the Distribution to permit the Momentum Shares to be distributed as described in the Prospectus. 2.4 Listing. Momentum has prepared and filed an application to effect the listing of the Momentum Shares on the Nasdaq National Market. Momentum shall use reasonable efforts to cause the Momentum Shares to be so listed. 2.5 No Representations or Warranties; Consents. Each party hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, representing or warranting in any way that the obtaining of any consents or approvals, the execution and delivery of any agreements or the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable laws. Notwithstanding the foregoing, the parties shall use reasonable efforts to obtain all consents and approvals, to enter into all agreements and to make all filings and applications which may be required for the consummation of the transactions contemplated by this Agreement, including, without limitation, all applicable regulatory filings or consents under federal or state laws and all necessary consents, approvals, agreements, filings and applications. 3. Issue and Sale of Momentum Shares. 3.1 Purchase of Momentum Class A Common Stock. Prior to the Distribution Date, in consideration of, among other things, a $300 million capital contribution to Momentum by PeopleSoft, Momentum will issue to PeopleSoft that number of Momentum Shares such that PeopleSoft may distribute to holders of PeopleSoft Common Stock one Momentum Share for every 50 shares of PeopleSoft Common Stock held on the Record Date. PeopleSoft and Momentum acknowledge that all of the Momentum Shares held by PeopleSoft will be distributed by PeopleSoft to the holders of outstanding shares of PeopleSoft Common Stock. -3- 4 4. The Distribution. 4.1 The Distribution. Momentum shall take all steps required by PeopleSoft or the Agent to effect the Distribution. Prior to the Distribution, and upon receipt of the capital contribution described in Section 3 hereof, Momentum shall cause to be issued to PeopleSoft a certificate or certificates representing a sufficient number of Momentum Shares so that PeopleSoft may distribute one Momentum Share for every 50 shares of PeopleSoft Common Stock held on the Record Date. 4.2 Expenses of Distribution. All expenses related in any way to the Distribution, including without limitation all legal, financial advisory and accounting fees of PeopleSoft and Momentum, shall be borne by PeopleSoft. 5. Additional Assurances: Indemnification. 5.1 Mutual Assurances. PeopleSoft and Momentum agree to cooperate with respect to the implementation of the PeopleSoft/Momentum Agreements and to execute such further documents and instruments as may be necessary to confirm the transactions contemplated thereby. 5.2 Indemnification. If PeopleSoft exercises the Purchase Option, from and after such exercise, PeopleSoft shall indemnify, defend and hold harmless Momentum's officers and directors to the same extent as provided in Momentum's Restated Certificate of Incorporation. 5.3 Notice. Any person entitled to indemnification pursuant to Section 5.2 shall give PeopleSoft prompt notice in writing, in the manner set forth in Section 7.7 below, of any claim or demand made against such person for which such person may be entitled to indemnification under Section 5.2. 6. Conditions to Effectiveness of Distribution. The Distribution shall be subject to the satisfaction or waiver by PeopleSoft of the following conditions and the satisfaction or waiver by Momentum of the conditions in Sections 6.8 and 6.9: 6.1 Board Approval. The PeopleSoft/Momentum Agreements (including exhibits and schedules) shall have been approved by the Board of Directors of PeopleSoft and Momentum and shall have been executed and delivered by appropriate officers of PeopleSoft and Momentum, and the PeopleSoft Board of Directors (or a committee thereof) shall have declared a dividend of the Momentum Shares as of the Record Date to the holders of record of the PeopleSoft Common Stock. 6.2 Securities Law Compliance. The transactions contemplated hereby shall be in compliance with applicable federal and state securities laws, and the Momentum Registration Statement and PeopleSoft Registration Statement shall have been declared effective and no stop orders shall have been instituted with respect thereto under the Securities Act. -4- 5 6.3 Restated Certificate of Incorporation. The Restated Certificate of Incorporation of Momentum shall have been adopted by the Board of Directors, approved by PeopleSoft as sole stockholder of Momentum, and filed with the Delaware Secretary of State. 6.4 Form 8-A Effective. The Form 8-A shall have become effective under the Exchange Act. 6.5 Listing Application Approved. The Momentum Shares shall be approved for quotation on the Nasdaq National Market. 6.6 Fairness Opinion. PeopleSoft shall have received an opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated, investment advisor to PeopleSoft, in form and substance satisfactory to PeopleSoft, to the effect that (i) from a financial point of view, the Distribution provides a reasonable structure to pursue the financial objectives described in the Prospectus of PeopleSoft and (ii) from a financial point of view, the Distribution is fair to the stockholders of PeopleSoft. 6.7 Permits and Licenses. Momentum shall have received such permits and licenses as may be necessary for the purpose of commencing operations contemplated by the PeopleSoft/Momentum Agreements. 6.8 Consents. Each of PeopleSoft and Momentum shall have received such consents, and shall have received executed copies of such agreements or amendments of agreements, as it shall deem necessary in connection with the completion of the transaction contemplated by this Agreement. 6.9 Other Instruments. All actions and other documents and instruments deemed necessary or advisable in connection with the transactions contemplated hereby shall have been taken or executed, as the case may be, in form and substance satisfactory to PeopleSoft and Momentum. 6.10 Legal Proceedings. No legal proceedings affecting or arising out of the transactions contemplated hereby or which could otherwise affect PeopleSoft or Momentum in a materially adverse manner shall have been commenced or threatened against PeopleSoft, Momentum or the directors or officers of either PeopleSoft or Momentum. 6.11 Material Changes. No material adverse change shall have occurred with respect to PeopleSoft or Momentum, the securities markets (either generally or with respect to PeopleSoft or Momentum) or general economic or financial conditions which shall, in the reasonable judgment of PeopleSoft, make the transactions contemplated by this Agreement inadvisable. 6.12 Other Conditions. Such other conditions as may be set by the PeopleSoft Board of Directors or any committee thereof in the resolutions authorizing the Distribution shall have been satisfied. -5- 6 7. Miscellaneous. 7.1 Waiver, Remedies and Amendment. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 7.2 Assignment. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that PeopleSoft may assign such rights and obligations hereunder to an Affiliate of PeopleSoft or to an Affiliate of PeopleSoft or to any person or entity with which PeopleSoft is merged or consolidated or which acquires all or substantially all of the assets of PeopleSoft. 7.3 Arbitration. (a) All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the city of San Francisco, state of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 7.7 of this Agreement shall be valid and sufficient. (b) In any arbitration pursuant to this Section 7.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by PeopleSoft and one arbitrator shall be appointed by Momentum within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 7.3, the "commencement of the -6- 7 arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 7.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 7.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 7.6 Headings. The headings set forth at the beginning of the various sections of this Agreement are for convenience and form no part of the Agreement between the parties. 7.7 Notices. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid. If to PeopleSoft: PeopleSoft, Inc. 4660 Hacienda Drive Pleasanton, California 94588 Attention: General Counsel If to Momentum: Momentum Business Applications, Inc. 1301 Harbor Bay Blvd. Alameda, California 94502 Attention: President All notices shall be deemed to be effective five days after the date of mailing. Either party may change the address at which notice is to be received by written notice pursuant to this Section 7.7. 7.8 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect. 7.9 Relationship of the Parties. For all purposes of this Agreement, Momentum and PeopleSoft shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute Momentum and PeopleSoft as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. -7- 8 Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way to obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 7.10 Survival. The provisions of Sections 1, 5, 7.1, 7.3, 7.5, 7.7, 7.8 and this Section 7.10 shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. -8- 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PEOPLESOFT, INC. By: ---------------------------------------------- Title: -------------------------------------------- MOMENTUM BUSINESS APPLICATIONS, INC. By: ---------------------------------------------- Title: -------------------------------------------- -9- EX-10.40 6 FIRST AMENDMENT TO PARTICIPATION AGREEMENT 1 EXHIBIT 10.40 FIRST AMENDMENT TO PARTICIPATION AGREEMENT AND APPENDIX 1 This FIRST AMENDMENT TO PARTICIPATION AGREEMENT and APPENDIX 1 TO PARTICIPATION AGREEMENT, MASTER LEASE AND CONSTRUCTION DEED OF TRUST (this "Amendment"), dated as of February 20, 1998, is by and among PEOPLESOFT, INC., a Delaware corporation, as Lessee (together with its permitted successors and assigns, the "Lessee"); LEASE PLAN NORTH AMERICA, INC., an Illinois corporation, as Lessor (together with its permitted successors and assigns, the "Lessor"); ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as a Participant, CREDIT LYONNAIS LOS ANGELES BRANCH, as a Participant, THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY, as a Participant, KEYBANK NATIONAL ASSOCIATION, as a Participant, MELLON BANK, N.A., as a Participant, THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY, as a Participant (together with their permitted successors and assigns, each a "Participant" and collectively the "Participants"); and ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as Agent (in such capacity, together with its successors in such capacity, the "Agent") for the Participants. RECITALS: A. The Lessee, the Lessor, the Participants and the Agent are parties to that certain Participation Agreement dated as of December 4, 1996 (as amended, restated, supplemented or otherwise modified from time to time, the "Participation Agreement"); B. Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust (as amended, restated, supplemented or otherwise modified from time to time,"Appendix 1") is part of the Participation Agreement, the Lease and the Mortgage and contains defined terms and rules of construction applicable to the Operative Documents; C. The parties desire to amend certain provisions of the Participation Agreement and Appendix 1, all on the terms and conditions set forth in this Amendment; and D. Each capitalized term used in this Amendment and not otherwise defined in this Amendment shall have the meaning ascribed thereto in Appendix 1; this Amendment shall constitute an Operative Document; and these Recitals shall be construed as part of this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Amendments to the Participation Agreement. The Participation Agreement is hereby amended as follows: 2 (a) The Participation Agreement is hereby amended by deleting Section 3.4 in its entirety and replacing it with the following: "SECTION 3.4. Procedures for Advances. (a) Funding Request. With respect to each funding of an Advance, the Lessee shall give the Lessor and the Agent prior written notice not later than 11:00 a.m., New York time, four (4) Business Days (in the case of a Fixed Rate Advance) or three (3) Business Days in the case of a Eurodollar Rate Advance) prior to the proposed Funding Date, pursuant, in each case, to a Funding Request substantially in the form of Exhibit B-1 (a "Funding Request"), specifying (i) the proposed Funding Date, (ii) the amount and purpose of the Advance requested, (iii) whether such Advance is to be comprised of a Eurodollar Rate Advance or a Fixed Rate Advance, (iv) the initial Interest Period for any such Eurodollar Rate Advance, (v) the payee of such Advance, and (vi) the allocation of such Advance to the respective Land Interest Acquisition Cost and Property Improvements Costs of the Property (and pro rata portions of the related remittances from the Participants shall likewise be deemed to be so allocated). The Agent shall promptly forward a copy of such Funding Request to each Participant. The Lessee shall not request more than one Funding Date during any calendar month. Each Eurodollar Rate Advance (other than an Interest Payment Advance) shall be in a minimum amount of $1,000,000 or in amounts of $100,000 in excess thereof. Subject to the satisfaction or waiver of the conditions precedent to such Advance set forth in Section 3.4 and Section 6, each Participant shall purchase its Participation Interest in such Advance by making available to the Lessor its proportionate share of such Advance in immediately available federal funds by wire transfer to the Agent for deposit to the Lessee's demand deposit account with the Agent not later than 1:00 p.m. New York time, on the applicable Funding Date. Upon (i) the Lessee's receipt of the funds provided by the Participants with respect to an Advance, and (ii) satisfaction or waiver of the conditions precedent to such Advance set forth in Section 6, the Lessee shall (1) in the case of an Advance for the acquisition of the Land Interest, pay the acquisition price for such Land Interest to the Existing Owner, and (2) in the case of other Advances, pay or retain as payment or reimbursement of, Property Improvements Costs, in each case from the funds provided by the Participants for such Advance. (b) Procedure for Fixed Rate Advances. (i) When the Lessee wishes to request the Lessor to make, and the Participants to submit through the Agent an offer to purchase Participation Interests in, a Fixed Rate Advance or convert a Eurodollar Rate Advance to a Fixed Rate Advance or continue a Fixed Rate Advance as another Fixed Rate Advance, it shall transmit to the Agent by facsimile transmission a request in substantially the form of Exhibit B-2 (a "Fixed Rate Request") so as to be received no later than 12:00 noon (New York 3 time) four (4) Business Days prior to the date of the proposed Fixed Rate Advance, conversion or continuation specifying: (1) the proposed date of such Advance, conversion or continuation, which shall be a Business Day and, (A) if a conversion from a Eurodollar Rate Advance, shall be the last day of the applicable Interest Period with respect to the Advance to be converted or (B) if a continuation of a Fixed Rate Advance, shall be the last day of the Fixed Rate Period applicable thereto; (2) the aggregate amount of such Fixed Rate Advance, conversion or continuation, which shall be a minimum amount of $5,000,000; and (3) the maturity date with respect thereto (the "Fixed Rate Maturity Date"), which shall be a Business Day not later than the Maturity Date. (ii) Upon receipt of a Fixed Rate Request from the Lessee, the Agent will promptly forward such Fixed Rate Request to the Participants by facsimile transmission. (iii) (1) Each Participant, upon receipt of a Fixed Rate Request, shall submit an offer (a "Fixed Rate Offer") to purchase its Participation Interest in the applicable Fixed Rate Advance, convert its Participation Interest in the applicable Eurodollar Rate Advance to the requested Fixed Rate Advance or continue its Participation Interest in the applicable Fixed Rate Advance to the requested Fixed Rate Advance in response to such Fixed Rate Request. Each Fixed Rate Offer must comply with the requirements of this subsection (iii) and must be submitted to the Agent by facsimile transmission not later than 11:00 a.m. (New York time) three (3) Business Days prior to the proposed Funding Date, conversion date or continuation date. (2) Each Fixed Rate Offer shall specify: (A) the proposed date of the Advance, conversion or continuation; (B) the principal amount of such Participant's Participation Interest in the Advance, conversion or continuation for which such Fixed Rate Offer is being made, which principal amount must be equal 4 to such Participant's pro rata share of the aggregate amount requested; (C) the fixed rate per annum (rounded upward to the nearest 1/100th of 1%) offered for such Fixed Rate Advance; and (D) the Fixed Rate Maturity Date with respect to such Fixed Rate Advance (which shall be the date requested by the Lessee) (the period from the date any Fixed Rate Advance is made to its Fixed Rate Maturity Date is referred to as a "Fixed Rate Period"). (iv) Promptly on receipt on the third Business Day prior to the proposed Funding Date or conversion or continuation date, the Agent will notify the Lessee of the terms of all Fixed Rate Offers submitted by the Participants with respect to the Fixed Rate Request. The Agent's notice to the Lessee shall specify (1) the aggregate amount for which offers have been received; and (2) the respective amounts and interest rates, as the case may be, and the weighted average interest rate so offered. Subject only to the provisions of Section 6 and to the Lessee's right to reject all Fixed Rate Offers set forth in Section 3.4(b)(v), any Fixed Rate Offer shall be irrevocable. (v) Not later than 11:30 a.m. (New York time) on the proposed Funding Date or conversion or continuation date, the Lessee shall notify the Agent of its acceptance or non-acceptance of the Fixed Rate Offers which it has received pursuant to Section 3.4(b)(iv). The Lessee shall be under no obligation to accept any offer, but if any offer is rejected, all Fixed Rate Offers with respect to the same Fixed Rate Request must be rejected. If the Lessee accepts any Fixed Rate Offer, the Lessee must accept all Fixed Rate Offers with respect to the same Fixed Rate Request only in whole. If the Fixed Rate Offers are rejected or if no response is received from the Lessee, the Lessee may elect to have the applicable Advance be a Eurodollar Rate Advance pursuant to Section 3.4(a) or (c) hereof provided the conditions thereto are met. Otherwise, the Advance that was the subject of such Fixed Rate Request shall be a Eurodollar Rate Advance with an Interest Period of one month commencing on the applicable Funding Date or proposed conversion date, provided, that no Interest Period shall commence or terminate on or after the Maturity Date. (c) Conversion and Continuation Procedures. The Lessee may (i)(A) on the last day of any Fixed Rate Period, convert all or any part of any Fixed Rate Advance to a Eurodollar Rate Advance or (B) on the last day of any Interest Period, continue the applicable Eurodollar Rate Advance as a Eurodollar Rate Advance for a successive Interest Period, by giving notice to the Agent by 12:00 5 noon, New York time, on a day which is at least three Business Days prior to the proposed date of such conversion or continuation or (ii) on the last day of any Fixed Rate Period, continue all or any part of any Fixed Rate Advance as another Fixed Rate Advance by giving the notice and following the procedure set forth in Section 3.4(b). Each such notice with respect to the conversion into or continuation of a Eurodollar Rate Advance shall be irrevocable, shall be effective upon receipt by the Agent, shall be in writing (or by telephone to be confirmed in writing by the Lessee on the Business Day such telephonic notice was given), shall specify the Type, the date and amount of the conversion or continuation, the Advances to be converted or continued and the Interest Period applicable thereto. If the Lessee fails to give appropriate notice pursuant to this Section 3.4(c) or Section 3.4(b), such Advance shall automatically become a Eurodollar Rate Advance with an Interest Period of one month at the end of its then current Fixed Rate Period or Interest Period, provided, that no Interest Period shall commence or terminate on or after the Maturity Date. Promptly upon receipt of each notice of conversion or continuation, the Agent shall advise each Participant thereof. No Fixed Rate Advance shall be converted or continued on any day other than the last day of the Fixed Rate Period relating to such Advance. (b) The Participation Agreement is further amended by deleting Section 3.8 in its entirety and replacing it with the following: "SECTION 3.8. Types of Advances; Interest Rates; Procedures. (a) Each Advance shall be comprised of either a Fixed Rate Advance or a Eurodollar Rate Advance (each being herein called a "Type" of Advance), as the Lessee shall specify in the related Funding Request or notice of conversion or continuation pursuant to Section 3.4. Each Fixed Rate Advance shall bear interest for each day during the Fixed Rate Period with respect thereto at a rate per annum equal to the Fixed Rate determined with respect to such Fixed Rate Period plus the Applicable Margin. (b) Each Eurodollar Rate Advance shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin; provided, however, that: (i) each Advance outstanding during the period beginning on the Closing Date and ending on the date three (3) Business Days thereafter shall bear interest during such period at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin; and (ii) an Advance shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin to the extent expressly required by the terms hereof. 6 The Lessee shall give irrevocable written notice to the Agent, in accordance with Section 3.4 and the applicable provisions of the term "Interest Period" set forth in Appendix 1, of the length of each Interest Period to be applicable to each Eurodollar Rate Advance, such notice to be given (i) for the initial Interest Period for each Eurodollar Rate Advance, in the Acquisition Request or Funding Request, as the case may be, for such Eurodollar Rate Advance and (ii) for each subsequent Interest Period for each Eurodollar Rate Advance, at least three (3) Business Days prior to the last day of the immediately preceding Interest Period. (c) If all or a portion of (i) the amount of any Advance, (ii) any interest payable thereon or (iii) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate. (d) Interest shall be payable in immediately available funds (except as provided in paragraph (e) below) in arrears on each Scheduled Payment Date, provided that (i) interest accruing pursuant to paragraph (c) of this Section 3.8 shall be payable from time to time on demand and (ii) each prepayment of Advances shall be accompanied by accrued interest to the date of such prepayment on the amount of Advances so prepaid plus amounts payable under Section 13.6 hereof. The Lessor shall provide the Lessee with not less than five (5) days' notice of the amount of Basic Rent due on any Scheduled Payment Date. (e) On each date which is three (3) Business Days prior to each Scheduled Payment Date during the Construction Period, unless the Lessee notifies the Lessor prior to such date that the Lessee desires to pay in cash on the Schedule Payment Date the accrued interest on Advances allocated to Property Improvement Costs during the Construction Period and makes such cash payment on the Scheduled Payment Date, the Lessee shall be deemed to have requested an Advance comprised of an Interest Payment Advance pursuant to Section 3.4 and the Lessor shall be deemed to have requested a purchase pursuant to Section 3.2 of Participation Interests in such Advance in an amount equal to the aggregate amount of the Basic Rent due and payable on such date with respect to accrued interest on outstanding Advances. Each Interest Payment Advance shall initially be deemed to be a Eurodollar Rate Advance having a one month Interest Period. The Funding Date with respect to any such Interest Payment Advance and purchase of Participation Interests therein shall be the relevant Scheduled Payment Date (provided that such Advance and the purchase of such Participation Interests shall be subject to satisfaction of the applicable conditions precedent set forth in Section 6) and the proceeds of such payment shall be applied to pay such accrued interest. On each such Funding Date, the Property Cost shall be increased by an amount equal to the Basic Rent paid on such date with respect to such Property with the proceeds of such payment, and the Land Interest Acquisition Cost and Property Improvements Costs shall be increased by their pro rata portions of such Advance. The Lessor shall provide the Lessee on a monthly 7 basis with a detailed statement or other form of confirmation showing all deemed Interest Payment Advances made to the Lessee pursuant to this Section 3.8(e)." (c) The Participation Agreement is further amended by deleting Section 3.9 in its entirety and replacing it with the following: "SECTION 3.9. Computation of Interest. (a) Whenever it is calculated on the basis of the Alternate Base Rate, interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and when ever it is calculated on the basis of a Eurodollar Rate or a Fixed Rate, interest shall be calculated on the basis of a 360-day year for the actual days elapsed. The Agent shall as soon as practicable after the commencement of each Interest Period or Fixed Rate Period notify the Lessor, the Lessee and the Participants of each determination of a Eurodollar Rate or a Fixed Rate. Any change in the interest rate on an Advance resulting from a change in the Alternate Base Rate, the Eurocurrency Reserve Requirements or the Applicable Margin shall become effective as of the opening of business on the day on which such change becomes effective. The Agent shall as soon as practicable notify the Lessor, the Lessee and the Participants of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Lessor, the Lessee and the Participants in the absence of manifest error. The Agent shall, at the request of such parties, deliver to such parties a statement showing the quotations used by the Agent in determining any interest rate pursuant to Section 3.9(a)." (d) The Participation Agreement is further amended by deleting Section 11.4 in its entirety and replacing it with the following: "SECTION 11.4.Refusal to Give Consents or Fund. If any Participant declines to consent to any amendment, modification, waiver, release or consent for which such Participant's consent is requested or required by reason of this Agreement, or if any Participant fails to pay any amount owed by it hereunder, the Lessor shall have the right, but not the obligation and without limiting any other remedy of the Lessor, to terminate such Participant's rights to receive any further payments under Section 3 of this Agreement (other than payments required because of the Lessor's collection of any Rent applied by the Lessor as reimbursement for a Defaulted Amount or interest on a Defaulted Amount) by paying such Participant a termination fee equal to the total of: (i) all amounts actually advanced by such Participant to the Lessor under Section 3.4 hereof before the termination; excluding, however, any such amounts that were repaid to such Participant before the 8 termination by actual payments made to such Participant by the Lessor of, or the Lessor's offset against, sums representing: (A) Such Participant's Commitment Percentage times any payments of the principal of any Advance received by the Lessor under the Lease; plus (B) Such Participant's Commitment Percentage times any sales proceeds received by the Lessor under the Lease; and (ii) such Participant's Participation Interest in any accrued but unpaid Basic Rent owing with respect to Fixed Rate Advances and such Participant's Commitment Percentage, times: (A) the then accrued but unpaid Basic Rent owing with respect to Eurodollar Rate Advances or Advances bearing interest based upon the Alternate Base Rate and Commitment Fees due under the Lease and hereunder; plus (B) interest on past due amounts described in the preceding clauses (ii) and (ii)(A) computed at the Federal Funds Effective Rate; plus (C) interest on any amounts (other than interest itself) past due from the Lessee or its designees under the Operative Documents, computed at the Federal Funds Effective Rate. Such Participant's rights to receive payments equal to such Participant's Commitment Percentage of or participation interest in any Rent applied by the Lessor as reimbursement for a Defaulted Amount or interest on a Defaulted Amount shall not be impaired or affected by any termination contemplated in this Section 11.4; accordingly, the Lessor shall not, as a condition to such a termination, be required to reimburse such Participant for any payments such Participant has made in connection with Defaulted Amounts pursuant to Section 3.3." (e) The Participation Agreement is further amended by deleting Section 13.6 in its entirety and replacing it with the following: "SECTION 13.6.Funding Losses. If any payment of any Eurodollar Rate Advance or any portion of any Participation Interest therein is made on any day other than the last day of an Interest Period applicable thereto, or if any payment of any Fixed Rate Advance or any portion of any Participation Interest therein is made on any day other than the last day of the Fixed Rate Period 9 applicable thereto, or if the Lessee fails to utilize the proceeds of any purchase of Participation Interests after notice has been given to any Participant in accordance with Section 3 or 4, the Lessee shall reimburse each Participant within fifteen (15) days after demand for any resulting loss, expense, breakage costs or swap breakage costs incurred by it, including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, provided that in the case of a Eurodollar Rate Advance or a Fixed Rate Advance, such Participant shall have delivered to the Lessee a certificate as to the amount of such loss, expense or costs, which certificate shall be conclusive in the absence of manifest error, and provided further that in the case of a Eurodollar Rate Advance, such loss shall in no event exceed the interest on such Advance which would have been payable for the balance of such Interest Period, less the amount actually earned by such Participant on such Advance." (f) The Participation Agreement is further amended by deleting Sections 13.11 and 13.12 in their entirety and replacing them with the following: "SECTION 13.11. Notice and Mitigation. Each demand for payment of Supplemental Rent pursuant to Sections 13.6, 13.7, 13.9 or 13.10 must be accompanied by a certificate of the Person claiming compensation (an "Affected Person") setting forth in reasonable detail the computation of such compensation (including the reasons therefor), which certificate shall be conclusive and binding for all purposes absent manifest error. Prior to demand by an Affected Person for Supplemental Rent pursuant to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.9 or 13.10, such Affected Person agrees that it will use its reasonable efforts to reduce and eliminate any claim for compensation including, subject to Applicable Law, a change in applicable lending office for this transaction; provided, however, that nothing herein shall obligate an Affected Person to take any action which, in the opinion of such Affected Person, is unlawful, or results in any unreimbursed costs or expenses to such Affected Person, which costs or expenses would not have been incurred but for such action. No Affected Person shall be entitled to any compensation under this Section 13.11 with respect to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.9 or 13.10 unless at the time it requests such compensation it is the policy or general practice of such Affected Person to demand compensation for comparable costs in similar circumstances under comparable provisions of documents to which it is a party. SECTION 13.12.Substitution of Participant. If (i) the obligation of any Participant to purchase or maintain its Participation Interest has been suspended pursuant to this Section 13, or (ii) any Participant has demanded compensation or given notice of its intention to demand compensation under Section 13.11 with respect to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.9 or 13.10, the Lessee shall have the right, with the assistance of the Agent, to seek one or more mutually satisfactory substitute banks 10 or financial institutions (which may be one or more of the Participants) to replace such Participant under the Operative Documents." (g) The Participation Agreement is further amended by deleting Exhibit B in its entirety and replacing it with Exhibit B-1 in the form attached hereto as Exhibit A. (h) The Participation Agreement is further amended by adding a new Exhibit B-2 thereto in the form attached as Exhibit B. (i) The Participation Agreement is further amended by (i) deleting in the Table of Contents and list of Exhibits references to the titles of Sections, Subsections and Exhibits deleted under this Amendment and (ii) replacing them with the titles of the Sections, Subsections and Exhibits added under this Amendment. 2. Amendments to Appendix 1. Appendix 1 is hereby amended as follows (and each of the Lease, the Mortgage and each other Operative Document incorporating Appendix 1 shall be deemed to be so amended): (a) The following defined terms are hereby deleted in their entirety and replaced with the corresponding terms set forth in Section 2(b) hereof: "Expiration Date," "Interest Period," "Maturity Date," "Participation Interest," "Renewal Term" and "Scheduled Payment Date." (b) Appendix 1 is further amended by adding the following terms in alphabetical order: " 'Eurodollar Rate Advance' means any Advance bearing interest at a rate per annum equal to the sum of (i) the Eurodollar Rate applicable to such Advance plus (ii) the Applicable Margin. 'Expiration Date' means February 27, 2003, or the scheduled expiration of the Renewal Term, if any. 'First Amendment' means the First Amendment to Participation Agreement, Master Lease and Construction Deed of Trust dated as of the First Amendment Effective Date, by and among the Lessee, the Lessor, the Participants and the Agent. 'First Amendment Effective Date' means February 20, 1998. 'Fixed Rate' means, as to any Advance as to which the Lessee has elected the application of the Fixed Rate pursuant to Section 3.4(b) of the Participation Agreement, the weighted average fixed rate of interest accepted by the Lessee and applicable to such Advance pursuant to Section 3.4(b) of the Participation Agreement. 11 'Fixed Rate Advance' means any Advance bearing interest at a rate per annum equal to the sum of (i) the Fixed Rate applicable to such Advance as determined pursuant to Section 3.4(b) of the Participation Agreement plus (ii) the Applicable Margin. 'Fixed Rate Offer' is defined in Section 3.4(b) of the Participation Agreement. 'Fixed Rate Period' is defined in Section 3.4(b) of the Participation Agreement. 'Fixed Rate Request' is defined in Section 3.4(b) of the Participation Agreement. 'Interest Period' means, with respect to any Eurodollar Rate Advance: (a) during the Syndication Period: (i) initially, the period commencing on the funding with respect to such Advance and ending one month thereafter; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Advance and ending one month thereafter; and (b) subsequent to the Syndication Period, each period commencing on the last day of the next preceding Interest Period applicable to such Advance, or the date such Advance is made or converted from a Fixed Rate Advance, and ending one, two, three, six, nine or twelve months thereafter, as selected by the Lessee by irrevocable notice to the Lessor and the Agent not less than three (3) Business Days prior to the first day of such Interest Period; provided that, the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Expiration Date shall end on the Expiration Date; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of the Interest Period) shall end on the last Business Day of a calendar month; and (iv) The Lessee shall select Interest Periods so as not to require a payment or prepayment of any Advance during an Interest Period for such Advance. 12 'Maturity Date' means February 27, 2003, as such date may be accelerated or extended pursuant to Section 3.7 of the Participation Agreement. 'Participation Interest' means, as to each Participant, a participation interest in the Lease and the right to receive that percentage of the following payments actually received by the Lessor from or on behalf of the Lessee as is set forth on Schedule I to the Participation Agreement, subject to the provisions of Sections 3.11 - 3.21 and Section 11 of the Participation Agreement: (i) Basic Rent, provided, that each Participant's participation interest in any Fixed Rate Advance shall bear interest at the fixed rate offered by such Participant in its Fixed Rate Offer delivered with respect thereto under the Participation Agreement plus the Applicable Margin, (ii) Supplemental Rent, (iii) Asset Termination Value, (iv) Purchase Option Price, (v) Net Sales Proceeds, (vi) Residual Value Guarantee Amount, (vii) the Shortfall Amount, and (viii) other payments in respect of indemnities or pursuant to the Guarantee or the exercise of remedies under the Operative Documents, excluding, however, (x) any Excepted Payments and (y) as to a particular Participant, any payments on account of any Advances and any Required Supplemental Payments (and interest thereon) for which the Lessor has not received payment from such Participant of such Participant's Commitment Percentage thereof. For example, if the Lessor elects to pay for insurance required of the Lessee by the Lease because of the Lessee's failure to obtain such insurance, the Lessor's receipt of reimbursement for the cost of such insurance from the Lessee shall be included within "Participation Interest" for purposes of this Agreement only if such Participant has paid to the Lessor such Participant's Commitment Percentage of such cost pursuant to Section 11.6 or Section 11.7 of the Participation Agreement. 'Renewal Term' means the three-year period which immediately follows February 27, 2003, if the Lessee has exercised its Renewal Option pursuant to Section 21.1 of the Lease. 'Scheduled Payment Date' means (a) as to interest on any Eurodollar Rate Advances having an Interest Period of three months or less, the last day of each month, (b) as to interest on any Eurodollar Rate Advances having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period, (c) as to interest on Fixed Rate Advances, the last day of each March, June, September and December of each year and the maturity date of such Advance, and (d) as to the principal amount of the Advances, each date indicated on Schedule 1 to the Lease as being a payment date with respect to such portion of the Property Improvements Cost, if any. 13 'Type' is defined in Section 3.8(a) of the Participation Agreement." 3. Reference to and Effect on the Participation Agreement, Appendix 1 and Other Operative Documents. 3.1 Except as specifically amended above, the Participation Agreement, Appendix 1 and the other Operative Documents, and each of the Schedules, Exhibits and Appendices thereto, shall remain in full force and effect and the Participation Agreement, Appendix 1 and the other Operative Documents, each as amended by this Amendment, are hereby ratified and confirmed in all respects. 3.2 Upon the effectiveness of this Amendment each reference in the Participation Agreement, Appendix 1 and the other Operative Documents to "this Agreement," "hereunder," "hereof," or words of similar import, shall, in each case, mean and be a reference to the Participation Agreement, Appendix 1 and the other Operative Documents, as applicable, as amended hereby. 4. Miscellaneous. 4.1 Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 4.2 Counterparts. This Amendment may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. 4.3 Effective Date. This Amendment shall be effective as of the date first above written when executed by all of the parties hereto. 4.4 GOVERNING LAW. THIS AMENDMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAW OF THE STATE OF CALIFORNIA (EXCLUDING ANY CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. * * * * [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, each party hereto has caused this First Amendment to be duly executed and delivered as of the date first written above. PEOPLESOFT, INC. as Lessee 14 By: ________________________________ Title: _____________________________ LEASE PLAN NORTH AMERICA, INC., as Lessor By: ________________________________ Title: _____________________________ ABN AMRO BANK N.V., SAN FRANCISCO BRANCH, as a Participant By: ________________________________ Title: _____________________________ By: ________________________________ Title: _____________________________ ABN AMRO BANK N.V., SAN FRANCISCO BRANCH, as Agent By: ________________________________ Title: _____________________________ By: ________________________________ Title: _____________________________ CREDIT LYONNAIS LOS ANGELES BRANCH, as a Participant By: ________________________________ Title: _____________________________ THE INDUSTRIAL BANK OF JAPAN, 15 LIMITED SAN FRANCISCO AGENCY, as a Participant By: _______________________________ Title: ____________________________ KEYBANK NATIONAL ASSOCIATION, as a Participant By: _______________________________ Title: ____________________________ MELLON BANK, N.A., as a Participant By: _______________________________ Title: ____________________________ THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY, as a Participant By: _______________________________ Title: ____________________________ EXHIBIT A "EXHIBIT B-1 TO PARTICIPATION AGREEMENT FORM OF FUNDING REQUEST 16 TO: ABN AMRO Bank N.V., San Francisco International Branch, as Agent, and Lease Plan North America, Inc., as Lessor Reference is hereby made to the Participation Agreement dated as of December 4, 1996, as it may be amended from time to time (the "Participation Agreement"), among PeopleSoft, Inc., a Delaware corporation (the "Lessee"), as Lessee, Lease Plan North America, Inc., as Lessor, ABN AMRO Bank N.V., San Francisco International Branch, as Agent and Participant, and the other Participants a party thereto. Capitalized terms not otherwise defined herein are used herein as defined in the Participation Agreement. The Lessee hereby notifies you that: (i) The Lessee requests the making of an Advance in the aggregate amount of $__________ on ____________, allocated to the Tranche A Participation Interests as $________ and the Tranche B Participation Interests as $_________; (ii) such Advance is to be comprised of a [Eurodollar Rate Advance][Fixed Rate Advance];1/ [(iii) the initial Interest Period for such Eurodollar Rate Advance will begin on ______________ and end on _________________]1/ ; and (iv) the Advance will be allocated to the respective Land Interest Acquisition Cost and Property Improvements Costs of the Property as set forth on Schedule A hereto. In connection with such requested Advance, the Lessee hereby represents and warrants to you as follows: (a) on the requested Funding Date the representations and warranties of the Lessee contained in each of the Operative Documents shall be true and correct [in all material respects 2/ as though made on and as of such date; (b) on the requested Funding Date title to the Property shall conform to the representations and warranties set forth in Section 8.4(c) of the Participation Agreement; (c) on the requested Funding Date there shall not have occurred and be continuing any Event of Default or, to the knowledge of the Lessee, Default under any of the Operative Documents and no Event of Default or, to the knowledge of the Lessee, Default under any of the Operative Documents will have occurred after giving effect to the making of the Advance; and 17 (d) after giving effect to the Advance requested hereby, the Available Commitments of the Participants will not be exceeded. Please wire transfer the proceeds of the Advance as set forth in the letter of direction attached as Schedule B hereto. The Lessee has caused this Funding Request to be executed and delivered by its duly authorized Responsible Officer this ___ day of _____________, ______ [TO BE DELIVERED NOT LATER THAN 11:00 A.M., NEW YORK TIME, FOUR (IN CASE OF A FIXED RATE ADVANCE) OR THREE (IN CASE OF A EURODOLLAR RATE ADVANCE) BUSINESS DAYS PRIOR TO THE REQUESTED FUNDING DATE]. PEOPLESOFT, INC. By:________________________________ Name:______________________________ Title:_____________________________" EXHIBIT B "EXHIBIT B-2 TO PARTICIPATION AGREEMENT FORM OF FIXED RATE REQUEST ______________, ____ TO: ABN AMRO Bank N.V., San Francisco International Branch, as Agent, and Lease Plan North America, Inc., as Lessor Reference is hereby made to the Participation Agreement dated as of December 4, 1996, as it may be amended from time to time (the "Participation Agreement"), among PeopleSoft, Inc., a Delaware corporation (the "Lessee"), as Lessee, Lease Plan North America, Inc., as Lessor, ABN AMRO Bank N.V., San Francisco International Branch, as Agent and Participant, and the other Participants a party thereto. Capitalized terms not otherwise defined herein are used herein as defined in the Participation Agreement. This is a Fixed Rate Request for a Fixed Rate Advance pursuant to Section 3.4(b) of the Participation Agreement as follows: 1. Funding Date or date of conversion or continuation: _______________, ____. 18 2. The aggregate amount of the proposed Fixed Rate Advance is $____________. 3. Fixed Rate Maturity Date: _________, ______. PEOPLESOFT, INC. By:_________________________________ Name:_______________________________ Title:______________________________ DOCUMENT NUMBER: 283140.6 FEBRUARY 20, 1998 EX-10.41 7 SECOND AMENDMENT TO PARTICIPTION AGREEMENT 1 EXHIBIT 10.41 SECOND AMENDMENT TO PARTICIPATION AGREEMENT, MASTER LEASE, GUARANTEE, CONSTRUCTION DEED OF TRUST, CASH COLLATERAL AGREEMENT, ASSIGNMENT OF LEASE AND APPENDIX 1 This SECOND AMENDMENT TO PARTICIPATION AGREEMENT, MASTER LEASE, GUARANTEE, CONSTRUCTION DEED OF TRUST, CASH COLLATERAL AGREEMENT, ASSIGNMENT OF LEASE and APPENDIX 1 TO PARTICIPATION AGREEMENT, MASTER LEASE AND CONSTRUCTION DEED OF TRUST (this "Amendment"), dated as of September 28, 1998, is by and among PEOPLESOFT, INC., a Delaware corporation, as Lessee (together with its permitted successors and assigns, the "Lessee"); LEASE PLAN NORTH AMERICA, INC., an Illinois corporation, as Lessor (together with its permitted successors and assigns, the "Lessor"); ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as a Participant, CREDIT LYONNAIS LOS ANGELES BRANCH, as a Participant, THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY, as a Participant, KEYBANK NATIONAL ASSOCIATION, as a Participant, MELLON BANK, N.A., as a Participant, THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY, as a Participant (together with their permitted successors and assigns, each a "Participant" and collectively the "Participants"); and ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as Agent (in such capacity, together with its successors in such capacity, the "Agent") for the Participants. RECITALS: A. The Lessee, the Lessor, the Participants and the Agent are parties to that certain Participation Agreement dated as of December 4, 1996, as amended on February 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Participation Agreement"); B. Appendix 1 to Participation Agreement, Master Lease and Construction Deed of Trust (as amended, restated, supplemented or otherwise modified from time to time,"Appendix 1") is part of the Participation Agreement, the Lease and the Mortgage and contains defined terms and rules of construction applicable to the Operative Documents; C. The parties desire to amend certain provisions of the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease and Appendix 1, all on the terms and conditions set forth in this Amendment; and D. Each capitalized term used in this Amendment and not otherwise defined in this Amendment shall have the meaning ascribed thereto in Appendix 1; this Amendment shall constitute an Operative Document; and these Recitals shall be construed as part of this Amendment. 2 NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. Amendments to the Participation Agreement. The Participation Agreement is hereby amended as follows: (a) Section 3.4(b)(i) of the Participation Agreement is hereby amended by adding the following at the end of said section: "The Lessee shall pay to the Agent a fee of $1,000 for each Fixed Rate Request." (b) Section 3.4(b)(v) of the Participation Agreement is hereby amended by deleting the words "Not later than 11:30 a.m. (New York time) on" and substituting therefor the following: "Promptly upon receipt of the Agent's notice referred to in Section 3.5(b)(iv) above, on the third Business Day prior to". (c) Section 3.8(e) of the Participation Agreement is hereby amended by deleting the word "Schedule" in the third line thereof and substituting therefor the word "Scheduled". (d) Section 10.1(f) of the Participation Agreement is hereby amended by adding the following at the end of said section: ", provided that the Consolidated Quick Ratio shall be reduced to .95 to 1.0 solely for the fiscal quarter in which the Momentum Distribution is made." (e) Section 10.1(g) of the Participation Agreement is hereby amended by deleting the words "at September 30, 1996" in the third line thereof and substituting in their place the following "at the end of the fiscal quarter ending June 30, 1998 (as adjusted for the fiscal quarter in which the Momentum Transaction is consummated)". (f) Section 10.1(j) of the Participation Agreement is hereby amended by deleting "or" in the second line thereof and substituting in its place the word "and". (g) Section 10.1(l) of the Participation Agreement is hereby amended by deleting the figure "$20,000,000" in the second line of clause (v) thereof and substituting in its place the figure "$50,000,000". (h) Section 10.1(m) of the Participation Agreement is hereby amended (i) by adding the following after the word "California" in the second line of clause (iv): ", Lot 56 and the Dublin Parcel", (ii) by deleting the word "and" at the end of 3 clause (v) and (iii) by adding the following at the end of clause (vi): "and (vii) the Lessee may make the Momentum Distribution." (i) Section 10.1(o) of the Participation Agreement is hereby amended (i) by deleting the second "and" in the third line thereof and substituting a comma therefor and (ii) by adding the following at the end of said section: "and (iii) the Lessee may make the Restricted Payments contemplated by the Momentum Transaction." (j) Section 10.1(p) of the Participation Agreement is hereby amended by adding at the end of said section the following: "and the investment contemplated by the Momentum Transaction." (k) Exhibit R (Form of Compliance Certificate) is hereby amended (i) by adding the following at the end of Section 1(f): "(or .95 solely for the fiscal quarter in which the Momentum Distribution is made)", (ii) by deleting the words "at September 30, 1996" in Section 2(b)(i) and substituting therefor the following "at the end of the fiscal quarter ending June 30, 1998 (as adjusted for the fiscal quarter in which the Momentum Transaction is consummated)" and (iii) by deleting the word "or" in Section 5(f) and substituting therefor the word "and". 2. Amendments to Master Lease. The Master Lease is hereby amended as follows: (a) Section 12.4 of the Master Lease is hereby amended by deleting the words "and the Ground Lease" in the second line thereof. (b) Section 14.2 of the Master Lease is hereby amended by deleting clauses (i) and (ii) in their entirety and substituting in their place the following: "(i) first, to the exclusion of other facilities covered by such policy other than the New Property, to the repair, rebuilding and restoration of any damage to the Property and the New Property covered by such policy on a pro rata basis, if so required in order to complete such repair, rebuilding or restoration, up to the lesser of (A) the extent of the loss suffered and (B) $23,000,000 per occurrence, and (ii) second, if the loss suffered is in excess of $23,000,000 per occurrence, any such proceeds in excess of $23,000,000 per occurrence shall be shared between the loss payees under this Lease and the lease referred to in the New Participation Agreement, on the one hand, and other parties having an insured interest with respect to such event covered by such policy, on the other hand, based on the proportion that the loss suffered with respect to the Property and the New Property, on the one hand, bears to the aggregate loss suffered by the Property, the New Property and all other properties insured by such policy, on the other hand." 4 (c) Section 17.1(h) of the Master Lease is hereby amended by deleting the reference to "$2,500,000" in line one thereof and substituting therefor "$10,000,000". (d) Section 17.1(k) of the Master Lease is hereby deleted in its entirety and replaced with the following: "(k) Intentionally Omitted;" (e) Section 17.2(j) of the Master Lease is hereby deleted in its entirety. (f) Section 20.3 of the Master Lease is hereby amended by deleting the following at the end of said section: "other than a Financial Covenant Event of Default (except as provided in Section 17.2(j))." 3. Amendments to Guarantee. The Guarantee is hereby amended as follows: (a) The definition of the term "Obligations" is hereby amended by deleting the following proviso from clause (i): "provided, however, the term "Obligations" shall not include the Lessor's obligation under the Participation Agreement to pay the Tranche B Participation Interest Balances following the occurrence of a Lease Event of Default constituting a Financial Covenant Event of Default (unless the Lessee would be required to pay Asset Termination Value under the circumstances contemplated in Section 17.2(j) of the Lease, in which event the term "Obligations" shall include the obligation of the Lessor to pay the Tranche B Participation Interest Balances of all Tranche B Participants)". (b) Section 11.1(e) of the Guarantee is hereby amended by deleting the reference to "$2,500,000" in line one thereof and substituting therefor $10,000,000". 4. Amendments to Construction Deed of Trust, Security Agreement, Fixture Filing and Financing Statement. The Construction Deed of Trust, Security Agreement, Fixture Filing and Financing Statement is hereby amended as follows: (a) Section B1 of the Construction Deed of Trust is hereby amended by deleting the words "(other than a Financial Covenant Event of Default)" in the second line thereof. 5 (b) Section C11 of the Construction Deed of Trust is hereby amended by deleting the words "and the Ground Lease" in the fourth line thereof. 5. Amendment to Cash Collateral Agreement. The Cash Collateral Agreement is hereby amended by deleting the following proviso from Section 8 thereof: "provided, however, that (i) if the only Event of Default which has occurred is a Financial Covenant Event of Default, neither Agent nor Depositary Bank may exercise the foregoing rights and remedies against that portion of the Collateral representing the Tranche B Participation Interests in the Advances while Lessee is properly exercising its right to remarket the Property pursuant to Section 17.2(j) of the Lease; and (ii) if, following the occurrence of such a Financial Covenant Event of Default, the Lessor thereafter becomes entitled under such Section 17.2(j) to recover the entire Asset Termination Value remaining unpaid due to the occurrence of an Event of Default that is not a Financial Covenant Event of Default, Agent or Depositary Bank may collect, proceed against or realize upon any or all of the Collateral without the limitation contained in clause (i) of this proviso." 6. Amendment to Assignment to Lease. The Assignment of Lease is hereby amended by deleting the words "or the Ground Lessor" in the third line of Section 10(b) thereof. 7. Amendments to Appendix 1. Appendix 1 is hereby amended as follows (and each of the Lease, the Mortgage and each other Operative Document incorporating Appendix 1 shall be deemed to be so amended): (a) The definition of the term "Event of Default" is deleted in its entirety and replaced with the following: " 'Event of Default' means a Lease Event of Default, a Construction Agency Agreement Event of Default or a Guarantee Event of Default." (b) The definition of the term "Financial Covenant Event of Default" is deleted in its entirety. (c) Appendix 1 is further amended by adding the following defined terms in alphabetical order: " 'Dublin Parcel' means an approximately 49.0744 acre parcel forming a portion of that certain real property located in the City of Dublin, 6 California, south of Dublin Boulevard, west of Hacienda Drive, north of I-580 and east of Arnold Road." " 'Lot 56' means an approximately 20.538 acre parcel commonly known as Lot 56C in the Hacienda Business Park, Pleasanton, California." " 'Momentum Distribution' is defined in the definition of the term 'Momentum Transaction.'" " 'Momentum Transaction' means a transaction to be consummated by the Lessee consisting of (i) the establishment of a new entity ("Momentum") for the purpose of developing enterprise application software for selected industry markets, (ii) distribution by the Lessee to Momentum of an amount not to exceed $300,000,000 (the "Momentum Distribution") and (iii) the distribution of the shares of callable common stock of Momentum to the stockholders of the Lessee." " 'New Participation Agreement' means the Participation Agreement dated as of September 28, 1998, as amended among the Lessee, Wilmington Trust Company, as Owner Trustee, as Lessor, ABN AMRO Bank N.V., as Indenture Trustee, ABN AMRO Leasing, Inc., as Certificate Purchaser, and the Note Purchasers identified on Schedule I thereto." " 'New Property' means the property subject to the New Participation Agreement." 8. Reference to and Effect on the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease, Appendix 1 and Other Operative Documents. 8.1 Except as specifically amended above, the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease, Appendix 1 and the other Operative Documents, and each of the Schedules, Exhibits and Appendices thereto, shall remain in full force and effect and the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease, Appendix 1 and the other Operative Documents, each as amended by this Amendment, are hereby ratified and confirmed in all respects. 8.2 Upon the effectiveness of this Amendment each reference in the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of Lease, Appendix 1 and the other Operative Documents to "this Agreement," "hereunder," "hereof," or words of similar import, shall, in each case, mean and be a reference to the Participation Agreement, Master Lease, Guarantee, Construction Deed of Trust, Cash Collateral Agreement, Assignment of 7 Lease, Appendix 1 and the other Operative Documents, as applicable, as amended hereby. 9. Miscellaneous. 9.1 Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9.2 Counterparts. This Amendment may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. 9.3 Effective Date. This Amendment shall be effective as of the date first above written when executed by all of the parties hereto. 9.4 GOVERNING LAW. THIS AMENDMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAW OF THE STATE OF CALIFORNIA (EXCLUDING ANY CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. * * * * [SIGNATURE PAGE FOLLOWS] DOCUMENT NUMBER: 357594.7 DECEMBER 9, 1998 IN WITNESS WHEREOF, each party hereto has caused this Second Amendment to be duly executed and delivered as of the date first written above. 8 PEOPLESOFT, INC. as Lessee By: ________________________________ Title: _____________________________ LEASE PLAN NORTH AMERICA, INC., as Lessor By: ________________________________ Title: _____________________________ ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as a Participant By: ________________________________ Title: _____________________________ By: ________________________________ Title: _____________________________ ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as Agent By: ________________________________ Title: _____________________________ By: ________________________________ Title: _____________________________ CREDIT LYONNAIS LOS ANGELES BRANCH, as a Participant By: ________________________________ Title: _____________________________ 9 THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY, as a Participant By: ________________________________ Title: _____________________________ KEYBANK NATIONAL ASSOCIATION, as a Participant By: ________________________________ Title: _____________________________ MELLON BANK, N.A., as a Participant By: ________________________________ Title: _____________________________ THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY, as a Participant By: ________________________________ Title: _____________________________ EX-10.42 8 PARTICIPATION AGREEMENT DATED SEPTEMBER 28, 1998 1 EXHIBIT 10.42 PARTICIPATION AGREEMENT dated as of September 28, 1998 among PEOPLESOFT, INC., as Lessee, WILMINGTON TRUST COMPANY, not in its individual capacity, except as expressly stated herein, but solely as Owner Trustee, as Lessor, ABN AMRO LEASING, INC., as Certificate Purchaser, ABN AMRO BANK N.V., not in its individual capacity, except as expressly stated herein, but solely as Indenture Trustee and THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE I, as Note Purchasers PeopleSoft Hacienda II Lease Facility TABLE OF CONTENTS 2
Page SECTION 1. DEFINITIONS; INTERPRETATION 2 SECTION 2. CLOSING DATE 2 SECTION 3. ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES 2 SECTION 3.1. Owner Trustee Commitment 2 SECTION 3.2. Certificate Purchasers' Commitments 3 SECTION 3.3. Note Purchasers' Commitments 3 SECTION 3.4. Procedures for Acquisition of the Ground Lease Interest 3 SECTION 3.5. Procedures for Advances 3 SECTION 3.6. Allocation of Commitments 6 SECTION 3.7. Use of Commitments 6 SECTION 3.8. Termination, Reduction or Extension of Participants' Commitments 7 SECTION 3.9. Types of Advances; Interest and Certificate Yield Rates; Procedures 9 SECTION 3.10. Computation of Interest and Certificate Yield 11 SECTION 4. FEES 12 SECTION 4.1. Commitment Fees 12 SECTION 4.2. Underwriting Fee 12 SECTION 4.3. Administrative Fee 12 SECTION 4.4. Overdue Fees 12 SECTION 4.5. Extension Fee 12 SECTION 5. CERTAIN INTENTIONS OF THE PARTIES 12 SECTION 5.1. Nature of Transaction 12 SECTION 5.2. Amounts Due Under Lease 14 SECTION 6. CONDITIONS PRECEDENT TO CLOSING DATE,ACQUISITION OF GROUND LEASE INTEREST AND ADVANCES 15 SECTION 6.1. Conditions Precedent Documentation 15 (a) Acquisition and Funding Request 15 (b) Closing Date; Operative Documents 15 (c) Environmental Certificate 16 (d) Appraisal 16 (e) Ground Lease 16 (f) Lease Supplement; Equipment Schedule 16 (g) Survey and Title Insurance 16 (h) Evidence of Recording and Filing 17 (i) Evidence of Insurance 17 (j) Evidence of Use of Proceeds 17 (k) Taxes 17
3 (l) Opinions of Counsel 17 (m) Approvals 18 (n) Litigation 18 (o) Requirements of Law 18 (p) Responsible Officer's Certificate of the Lessee 18 (q) The Lessee's Resolutions and Incumbency Certificate, etc 18 (r) Responsible Officer's Certificate of the Guarantor 19 (s) The Guarantor's Resolutions and Incumbency Certificate, etc 19 (t) Ground Lease Interest Acquisition Date 19 (u) No Material Adverse Effect 19 (v) Officer's Certificate of the Lessor 19 (w) The Lessor's Resolutions and Incumbency Certificate, etc 19 (x) Construction Budget; Plans and Specifications 20 (y) Sale of All Notes and Certificates 20 (z) Legal Fees and Expenses 20 SECTION 6.2. Further Conditions Precedent 20 (a) Representations and Warranties 20 (b) Performance of Covenants 20 (c) Title 20 (d) No Default 21 SECTION 6.3. Conditions Precedent to Closing Date 21 (a) Operative Documents 21 (b) Representations and Warranties 21 (c) Performance of Covenants 21 (d) No Default 21 SECTION 7. COMPLETION DATE CONDITIONS 21 SECTION 7.1. Conditions 21 (a) Construction Completion 21 (b) Architect's Certificate; DateDown Endorsement 22 (c) Lessee Certification 22 SECTION 8. REPRESENTATIONS 22 SECTION 8.1. Representations of the Bank and the Lessor 22 (a) Due Organization, etc 22 (b) Authorization; No Conflict 23 (c) Enforceability, etc 23 (d) Litigation 23 (e) Assignment 23 (f) Defaults 23 (g) Use of Proceeds 24 (h) Securities Act 24 (i) Chief Place of Business 24 (j) Federal Reserve Regulations 24 (k) Investment Company Act 24 (l) No Plan Assets 24
4 SECTION 8.2. Representations of the Participants 24 (i) Due Organization, etc 26 (ii) Authorization; No Conflict 26 (iii) Enforceability, etc 26 (iv) Litigation 27 (v) Defaults 27 (vi) Securities Act 27 (vii) Investment Company Act 27 SECTION 8.3. Representations of the Lessee 27 (a) Corporate Status 27 (b) Corporate Power and Authority 27 (c) No Violation 28 (d) Litigation 28 (e) Governmental Approvals 28 (f) Investment Company Act 28 (g) Public Utility Holding Company Act 28 (h) Information 29 (i) Taxes 29 (j) Compliance with ERISA 29 (k) Environmental and Other Regulations 29 (l) Offer of Securities, etc 29 (m) Financial Statements 30 (n) No Material Adverse Change 30 (o) No Defaults 30 (p) Properties; Leases 30 (q) Licenses, Permits, etc 31 (r) Year 2000 31 SECTION 8.4. Representations of the Lessee With Respect to the Property on the Ground Lease Interest Acquisition Date 31 (a) Representations 31 (b) Property 31 (c) Title 33 (d) Insurance 33 (e) Lease 33 (f) Protection of Interests 33 (g) Flood Hazard Areas 33 (h) Conditions Precedent 33 SECTION 8.5. Representations of the Lessee With Respect to Each Advance 34 (a) Representations 34 (b) Improvements 34 (c) No Liens 34 (d) Advance 34 (e) Lease 34 (f) Protection of Interests 34 (g) Title Insurance Date Down Endorsement 35 SECTION 8.6. Representations and Warranties of the Indenture Trustee 35
5 (a) Due Organization 35 (b) Due Authorization; Enforceability 35 (c) No Violation 35 (d) Litigation 36 SECTION 9. PAYMENT OF CERTAIN EXPENSES 36 SECTION 9.1. Transaction Expenses 36 SECTION 9.2. Brokers' Fees and Stamp Taxes 37 SECTION 9.3. Obligations 37 SECTION 10. OTHER COVENANTS AND AGREEMENTS 37 SECTION 10.1. Covenants of the Lessee 37 (a) Information 37 (b) Compliance with Laws 39 (c) Further Assurances 39 (d) Existence; Franchises; Businesses 39 (e) Books and Records 39 (f) Minimum Consolidated Quick Ratio 39 (g) Minimum Consolidated Tangible Net Worth 40 (h) Maximum Consolidated Debt to Consolidated Total Capital Ratio 40 (i) Minimum Consolidated Fixed Charge Ratio 40 (j) Minimum Consolidated Cash Balances 40 (k) Liens 40 (l) Mergers, Acquisitions, Etc 41 (m) Asset Dispositions 41 (n) Transactions with Affiliates 42 (o) Restricted Payments 42 (p) Investments 42 (q) Maintenance and Repair 43 (r) Payment of Taxes 43 (s) Insurance 43 SECTION 10.2. Cooperation with the Lessee 43 SECTION 10.3. Covenants of the Owner Trustee, the Certificate Holders, and the Bank 43 (a) Discharge of Liens 43 (b) Trust Agreement 43 (c) Successor Owner Trustee 44 (d) Indebtedness; Other Business 44 (e) Instructions 44 (f) Change of Chief Place of Business 44 (g) Performance of Covenants 44 SECTION 11. LESSEE DIRECTIONS 45 SECTION 12. TRANSFERS OF PARTICIPANTS' INTERESTS 45
6 SECTION 12.1. Restrictions on and Effect of Transfer by Participants 45 (a) Transfer of Notes 45 (b) Note Transfer Procedures 45 (c) Transfers of Certificates 46 (d) Effect 48 (e) Arranger's Fee 48 SECTION 12.2. Covenants and Agreements of Participants 48 (a) Participations 48 (b) Transferee Indemnities 49 SECTION 12.3. Future Participants 49 SECTION 13. INDEMNIFICATION 49 SECTION 13.1. General Indemnification 49 SECTION 13.2. End of Term Indemnity 51 SECTION 13.3. Environmental Indemnity 52 SECTION 13.4. Proceedings in Respect of Claims 54 SECTION 13.5. General Impositions Indemnity 55 (a) Indemnification 55 (b) Payments 56 (c) Reports and Returns 56 (d) Income Inclusions 57 (e) Withholding Taxes 57 (f) Contests of Impositions 57 (g) Documentation of Withholding Status 59 (h) Limitation on Tax Indemnification 60 SECTION 13.6. Funding Losses 60 SECTION 13.7. Regulation D Compensation 60 SECTION 13.8. Basis for Determining Interest Rate or Certificate Yield Rate Inadequate or Unfair 61 SECTION 13.9. Illegality 61 SECTION 13.10. Increased Cost and Reduced Return 62 SECTION 13.11. Notice and Mitigation 63 SECTION 13.12. Substitution of Participant 63 SECTION 13.13. Indemnity Payments in Addition to Residual Value Guarantee Amount 64 SECTION 13.14. Limitations on Indemnification 64 SECTION 13.15. Lessor Indemnification 64 (a) Indemnified Losses 64 (c) No Indemnification for Certain Matters. 65 (d) Limitations on Indemnification by Lessor. 65 (d) Repayment to the Lessor. 65 (f) Survival, Reinstatement. 66 (g) Indemnification Procedures 66 SECTION 14. THE INDENTURE TRUSTEE 66
7 SECTION 15. MISCELLANEOUS 66 SECTION 15.1. Survival of Agreements 66 SECTION 15.2. No Broker, etc 67 SECTION 15.3. Notices 67 SECTION 15.4. Counterparts 67 SECTION 15.5. Amendments 67 SECTION 15.6. Headings, etc 68 SECTION 15.7. Parties in Interest 68 SECTION 15.8. GOVERNING LAW 69 SECTION 15.9. Severability 69 SECTION 15.10. Liability Limited 69 SECTION 15.11. Further Assurances 69 SECTION 15.12. Submission to Jurisdiction 70 SECTION 15.13. Confidentiality 70 SECTION 15.14. WAIVER OF JURY TRIAL 70 SECTION 15.15. Usury Savings Clause 70 SCHEDULES SCHEDULE I Participants' Commitments SCHEDULE II Notice Information and Funding Offices SCHEDULE III Environmental Matters SCHEDULE IV Intellectual Property Matters APPENDICES APPENDIX 1 Definitions and Interpretation EXHIBITS EXHIBIT A Form of Acquisition Request EXHIBIT B-1 Form of Funding Request EXHIBIT B-2 Form of Fixed Rate Request EXHIBIT C Form of Environmental Certificate EXHIBIT D Opinion of Special Counsel to Lessee EXHIBIT E Opinion of Special Counsel to Owner Trustee EXHIBIT F Opinion of Special Counsel to Co-Trustee EXHIBIT G Ground Lease EXHIBIT H Form of Architect's Completion Certificate EXHIBIT I Form of Lessee's Completion Certificate EXHIBIT J Form of Assignment and Acceptance EXHIBIT K Form of Participant's Letter
8 EXHIBIT L Assignment of Lease and Consent to Assignment EXHIBIT M Construction Agency Agreement EXHIBIT N Construction Agency Agreement Assignment EXHIBIT O Guarantee EXHIBIT P Cash Collateral Agreement EXHIBIT Q Leasehold Construction Deed of Trust EXHIBIT R Form of Financial Covenant Compliance Certificate
PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT, dated as of September 28, 1998 (this "Participation Agreement"), is entered into by and among PEOPLESOFT, INC., a Delaware corporation, as Lessee (together with its permitted successors and assigns, the "Lessee"); WILMINGTON TRUST COMPANY, a Delaware banking corporation, not in its individual capacity, except as expressly stated herein, but solely as Owner Trustee (together with its successors in such capacity, the "Owner Trustee" or the "Lessor"); ABN AMRO LEASING, INC., as Certificate Purchaser (the "Certificate Purchaser"); ABN AMRO BANK N.V., not in its individual capacity except as expressly stated herein, but solely as Indenture Trustee (together with its successors in such capacity, the "Indenture Trustee"); and the financial institutions listed on Schedule I, as Note Purchasers (the "Note Purchasers"). PRELIMINARY STATEMENT In accordance with the terms of the Trust Agreement, this Participation Agreement, the Lease, the Indenture and the other Operative Documents, A. the Trust under the Trust Agreement has been created for the purpose of providing financing for the construction of two office buildings, one common building containing a cafeteria and fitness center, a parking structure and the Data Center, on the real property located in Pleasanton, California to be owned by the Ground Lessor, leased to the Lessor and subleased to the Lessee, and the Improvements to be constructed and owned by the Lessor and leased to the Lessee; B. the Lessor contemplates acquiring a leasehold interest in such parcel of land by leasing the Land, as lessee, from the Ground Lessor, as ground lessor; C. using Advances from the Lessor, the Lessee contemplates building, as Construction Agent, certain Improvements on such Land for the Lessor, acquiring certain items of Equipment, if any, to be used in connection with such Improvements, and subleasing as Lessee, the Land and leasing the Improvements and Equipment from the Lessor under the Lease; D. the Certificate Purchasers are willing to provide a portion of the funding of the costs of construction of the Property and acquisition of the Equipment; 9 E. the Lessor wishes to obtain, and the Note Purchasers are willing to provide, limited recourse financing of the remaining portion of the funding of the costs of construction of the Property and acquisition of the Equipment; F. concurrently with the execution and delivery of this Agreement, the Indenture Trustee is entering into the Indenture, pursuant to which Indenture, among other things, (i) the Owner Trustee creates a security interest in the Property for the benefit of the Participants, and (ii) provision is made for the issuance of Notes to the Note Holders as evidence of the participation of each Note Holder in the Advances for the Property; and G. concurrently with the execution and delivery of this Agreement, the Owner Trustee is entering into (i) the Mortgage, pursuant to which Mortgage the Owner Trustee grants a mortgage on the Property, and (ii) the other Security Documents, in each case for the benefit of the Participants. In consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION Unless the context shall otherwise require, capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix 1 hereto for all purposes hereof; and the rules of interpretation set forth in Appendix 1 hereto shall apply to this Participation Agreement. SECTION 2. CLOSING DATE The closing date (the "Closing Date") shall occur on such date as the parties may agree, which shall be the earliest date on which all the conditions precedent thereto set forth in Sections 6.1, 6.2 and 6.3 hereof shall have been satisfied or waived by the applicable parties as set forth therein. SECTION 3. ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES 10 SECTION 3.1. Owner Trustee Commitment. Subject to the conditions and terms hereof, the Owner Trustee shall take the following actions at the written request of the Lessee from time to time during the Commitment Period: (a) enter into the Ground Lease and the other Operative Documents to which it is to be a party; (b) make Advances (out of funds provided by the Participants) for the purpose of financing the construction of the Improvements and the acquisition of the Equipment, if any; (c) lease the Land pursuant to the Ground Lease; and (d) sublease the Land and lease the Improvements and Equipment, if any, as Lessor to the Lessee under the Lease. SECTION 3.2. Certificate Purchasers' Commitments. Subject to the terms and conditions hereof, each Certificate Purchaser severally shall make available to the Lessor at the request of the Lessee from time to time during the Commitment Period on each Funding Date an amount (each a "Certificate Purchaser Amount") in immediately available funds equal to such Certificate Purchaser's Commitment Percentage of the amount of the Advance being funded on such Funding Date. Notwithstanding any other provision hereof, no Certificate Purchaser shall be obligated to make available any Certificate Purchaser Amount if, after giving effect to the proposed Certificate Purchaser Amount, the outstanding aggregate amount of Certificate Purchaser Amounts of such Certificate Purchaser would exceed such Certificate Purchaser's Commitment. SECTION 3.3. Note Purchasers' Commitments. Subject to the terms and conditions hereof, each Note Purchaser severally shall make Loans to the Lessor at the request of the Lessee from time to time during the Commitment Period on each Funding Date in an amount in immediately available funds equal to such Note Purchaser's Commitment Percentage of the amount of the Advance being funded on such Funding Date. Notwithstanding any other provision hereof, no Note Purchaser shall be obligated to make any Loan if, after giving effect to the proposed Loan, the outstanding aggregate amount of such Note Purchaser's Loans would exceed such Note Purchaser's Commitment. SECTION 3.4. Procedures for Acquisition of the Ground Lease Interest. The Lessee shall give the Owner Trustee and the Indenture Trustee prior written notice not later than 10:00 a.m., San Francisco time, three Business Days prior to the proposed Ground Lease Interest Acquisition Date, pursuant to an Acquisition Request substantially in the form of Exhibit A (an "Acquisition Request"), specifying with respect to such Ground Lease Interest: (i) the proposed Ground Lease Interest Acquisition Date, (ii) the Ground Lease Interest to be acquired and (iii) the Property Improvements Costs to be funded in connection with the acquisition of the Ground Lease Interest. The Indenture Trustee shall promptly forward a copy of such Acquisition Request to each Certificate Purchaser and each Note Purchaser. 11 SECTION 3.5. Procedures for Advances. (a) Funding Request. With respect to each funding of an Advance, the Lessee shall give the Lessor and the Indenture Trustee prior written notice not later than 11:00 a.m., New York time, four (4) Business Days (in the case of a Fixed Rate Advance) or three (3) Business Days in the case of a Eurodollar Rate Advance) prior to the proposed Funding Date, pursuant, in each case, to a Funding Request substantially in the form of Exhibit B-1 (a "Funding Request"), specifying (i) the proposed Funding Date, (ii) the amount and purpose of the Advance requested, (iii) whether such Advance is to be comprised of a Eurodollar Rate Advance or a Fixed Rate Advance, (iv) the initial Interest Period for any such Eurodollar Rate Advance, (v) the payee of such Advance and (vi) that the Advance will be utilized to fund Property Improvements Costs. The Indenture Trustee shall promptly forward a copy of such Funding Request to each Participant. The Lessee shall not request more than one Funding Date during any calendar month. Each Eurodollar Rate Advance (other than an Interest Payment Advance or an amount to be capitalized pursuant to Section 3.9(f)) shall be in a minimum amount of $1,000,000 or in amounts of $100,000 in excess thereof. Subject to the satisfaction or waiver of the conditions precedent to such Advance set forth in Section 3.5 and Section 6, each Participant shall fund its pro rata share of such Advance by making available to the Lessor its proportionate share of such Advance as Loans or Certificate Purchaser Amounts, as the case may be, in immediately available federal funds by wire transfer to the Agent for deposit to the Lessee's demand deposit account with the Indenture Trustee not later than 1:00 p.m. New York time, on the applicable Funding Date. Upon (i) the Lessee's receipt of the funds provided by the Participants with respect to an Advance, and (ii) satisfaction or waiver of the conditions precedent to such Advance set forth in Section 6, the Lessee shall pay or retain as payment or reimbursement of Property Improvements Costs, in each case from the funds provided by the Participants for such Advance. (b) Procedure for Fixed Rate Advances. (i) When the Lessee wishes to request the Lessor to make, and the Participants to submit through the Agent an offer to fund, Loans and Certificate Purchaser Amounts with respect to a Fixed Rate Advance or convert a Eurodollar Rate Advance to a Fixed Rate Advance or continue a Fixed Rate Advance as another Fixed Rate Advance, it shall transmit to the Indenture Trustee by facsimile transmission a request in substantially the form of Exhibit B-2 (a "Fixed Rate Request") so as to be received no later than 12:00 noon (New York time) four (4) Business Days prior to the date of the proposed Fixed Rate Advance, conversion or continuation specifying: (1) the proposed date of such Advance, conversion or continuation, which shall be a Business Day and, (A) if a conversion from a Eurodollar Rate Advance, shall be the last day of the applicable Interest Period with respect to the Advance to be converted or (B) 12 if a continuation of a Fixed Rate Advance, shall be the last day of the Fixed Rate Period applicable thereto; (2) the aggregate amount of such Fixed Rate Advance, conversion or continuation, which shall be a minimum amount of $5,000,000; and (3) the maturity date with respect thereto (the "Fixed Rate Maturity Date"), which shall be a Business Day not later than the Maturity Date. The Lessee shall pay to the Indenture Trustee a fee of $1,000 for each Fixed Rate Request. (ii) Upon receipt of a Fixed Rate Request from the Lessee, the Indenture Trustee will promptly forward such Fixed Rate Request to the Participants by facsimile transmission. (iii)(1) Each Participant, upon receipt of a Fixed Rate Request, shall submit an offer (a "Fixed Rate Offer") to fund its Loans or Certificate Purchaser Amounts with respect to the applicable Fixed Rate Advance, convert its Loans or Certificate Purchaser Amounts with respect to the applicable Eurodollar Rate Advance to the requested Fixed Rate Advance or continue its Loans or Certificate Purchaser Amounts with respect to the applicable Fixed Rate Advance to the requested Fixed Rate Advance in response to such Fixed Rate Request. Each Fixed Rate Offer must comply with the requirements of this subsection (iii) and must be submitted to the Indenture Trustee by facsimile transmission not later than 11:00 a.m. (New York time) three (3) Business Days prior to the proposed Funding Date, conversion date or continuation date. (2) Each Fixed Rate Offer shall specify: (A) the proposed date of the Advance, conversion or continuation; (B) the principal amount of such Participant's Loans or Certificate Purchaser Amounts with respect to the Advance, conversion or continuation for which such Fixed Rate Offer is being made, which principal amount must be equal to such Participant's pro rata share of the aggregate amount requested; (C) the fixed rate per annum (rounded upward to the nearest 1/100th of 1%) offered for such Fixed Rate Advance; and 13 (D) the Fixed Rate Maturity Date with respect to such Fixed Rate Advance (which shall be the date requested by the Lessee) (the period from the date any Fixed Rate Advance is made to its Fixed Rate Maturity Date is referred to as a "Fixed Rate Period"). (iv) Promptly on receipt on the third Business Day prior to the proposed Funding Date or conversion or continuation date, the Indenture Trustee will notify the Lessee of the terms of all Fixed Rate Offers submitted by the Participants with respect to the Fixed Rate Request. The Indenture Trustee's notice to the Lessee shall specify (1) the aggregate amount for which offers have been received; and (2) the respective amounts and interest rates, as the case may be, and the weighted average interest rate so offered. Subject only to the provisions of Section 6 and to the Lessee's right to reject all Fixed Rate Offers set forth in Section 3.5(b)(v), any Fixed Rate Offer shall be irrevocable. (v) Promptly upon receipt of the Indenture Trustee's notice referred to in Section 3.5(b)(iv) above, on the third Business Day prior to the proposed Funding Date or conversion or continuation date, the Lessee shall notify the Indenture Trustee of its acceptance or non-acceptance of the Fixed Rate Offers which it has received pursuant to Section 3.5(b)(iv). The Lessee shall be under no obligation to accept any offer, but if any offer is rejected, all Fixed Rate Offers with respect to the same Fixed Rate Request must be rejected. If the Lessee accepts any Fixed Rate Offer, the Lessee must accept all Fixed Rate Offers with respect to the same Fixed Rate Request only in whole. If the Fixed Rate Offers are rejected or if no response is received from the Lessee, the Lessee may elect to have the applicable Advance be a Eurodollar Rate Advance pursuant to Section 3.5(a) or (c) hereof provided the conditions thereto are met. Otherwise, the Advance that was the subject of such Fixed Rate Request shall be a Eurodollar Rate Advance with an Interest Period of one month commencing on the applicable Funding Date or proposed conversion date, provided, that no Interest Period shall commence or terminate on or after the Maturity Date. (c) Conversion and Continuation Procedures. The Lessee may (i)(A) on the last day of any Fixed Rate Period, convert all or any part of any Fixed Rate Advance to a Eurodollar Rate Advance or (B) on the last day of any Interest Period, continue the applicable Eurodollar Rate Advance as a Eurodollar Rate Advance for a successive Interest Period, by giving notice to the Indenture Trustee by 12:00 noon, New York time, on a day which is at least three Business Days prior to the proposed date of such conversion or continuation or (ii) on the last day of any Fixed Rate Period, continue all or any part of any Fixed Rate Advance as another Fixed Rate Advance by giving the notice and following the procedure set forth in Section 3.5(b). Each such notice with respect to the conversion into or continuation of a Eurodollar Rate Advance shall be irrevocable, shall be effective upon receipt by the Indenture Trustee, shall be in writing (or by telephone to be confirmed in writing by the Lessee on the Business Day such telephonic notice was given), shall specify the Type, the date and amount of the conversion or 14 continuation, the Advances to be converted or continued and the Interest Period applicable thereto. If the Lessee fails to give appropriate notice pursuant to this Section 3.5(c) or Section 3.5(b), such Advance shall automatically become a Eurodollar Rate Advance with an Interest Period of one month at the end of its then current Fixed Rate Period or Interest Period, provided, that no Interest Period shall commence or terminate on or after the Maturity Date. Promptly upon receipt of each notice of conversion or continuation, the Indenture Trustee shall advise each Participant thereof. No Fixed Rate Advance shall be converted or continued on any day other than the last day of the Fixed Rate Period relating to such Advance. SECTION 3.6. Allocation of Commitments. Schedule I hereto contains an allocation for each Participant of (i) the amount of its Commitment representing its Tranche A Loan Commitment ("Tranche A Loan Commitment"), (ii) the amount of its commitment representing its Tranche B Loan Commitment ("Tranche B Loan Commitment"), (iii) the amount of its commitment representing its Certificate Purchaser Commitment ("Certificate Commitment"), (iv) the amount of its Commitment (and allocation to its Tranche A Loan Commitment and Tranche B Loan Commitment) allocated to the 364 Day Commitment, and (v) the amount of its Commitment (and allocation to its Tranche A Loan Commitment, Tranche B Loan Commitment and Certificate Commitment) allocated to the Eighteen Month Commitment. The Lessee, the Lessor and the Participants have approved all such allocations and commitments. Schedule I shall be amended as required to reflect changes in the allocations set forth thereon due to the addition of additional Participants pursuant to Section 12.1. SECTION 3.7. Use of Commitments. (a) All remittances by each Participant to the Lessor to fund Advances shall be allocated first, to the 364 Day Commitment of such Participant, and second, to the Eighteen Month Commitment of such Participant. Unless extended as provided in this Section 3.7, the 364 Day Commitment shall terminate on the day which is 364 days after the Closing Date and the unused portion thereof shall not be available to the Lessor thereafter. The Lessee shall notify the Lessor, the Indenture Trustee and each Participant not less than forty-five (45) days prior to the expiration date of the 364 Day Commitment whether it wishes to extend the availability of the unused portion of the 364 Day Commitment to the Six Month Extension Termination Date. The availability of the unused portion of the 364 Day Commitment shall not be extended unless the Indenture Trustee and each Participant, in its sole discretion, has notified the Lessor and the Indenture Trustee within fifteen (15) days prior to such termination date that it will permit the unused portion of its 364 Day Commitment to be extended to the Six Month Extension Termination Date commencing on the Extension Date. The Indenture Trustee shall notify the Lessee whether the Participants have agreed to permit the extension of such unused portion of the 364 Day Commitment to the Six Month Extension Termination Date. Any portion that is so extended shall bear Commitment Fees from and after the Extension Date at a rate applicable to the 364 Day Commitment. The parties hereto shall amend Schedule I hereto in connection with any such extension. 15 (b) If the 364 Day Commitment is extended pursuant to Section 3.7(a), the Lessee shall pay to each Participant its pro rata share of the Extension Fee on the Extension Date. SECTION 3.8. Termination, Reduction or Extension of Participants' Commitments. (a) The Lessor shall have the right, upon not less than five (5) Business Days' written notice to the Indenture Trustee, to terminate the Participants' Commitments or, from time to time, to reduce the amount of the Participants' Commitments, provided that (i) after giving effect to such reduction, the aggregate outstanding principal amount of the Tranche A Loans shall not exceed the aggregate Tranche A Loan Commitments, (ii) after giving effect to such reduction, the aggregate outstanding principal amount of the Tranche B Loans shall not exceed the aggregate Tranche B Loan Commitments, (iii) after giving affect to such reduction, the aggregate principal amount of the Certificates shall not exceed the aggregate Certificate Commitments, and (iv) any such reduction shall be made pro rata among the Participants' Commitments within each tranche. At any time other than during the continuance of an Event of Default the Lessor shall exercise such right only as directed by the Lessee and after the occurrence and during the continuance of an Event of Default the Lessor shall exercise such right only as directed by the Required Participants. (b) The Lessee may, by written request to the Lessor and Indenture Trustee (which the Indenture Trustee shall promptly forward to each Participant) given at any time from time to time after six (6) months after the Closing Date, request (an "Extension Request") that the Maturity Date be extended to the date that is five (5) years after the date requested by the Lessee (the "Extension Effective Date"). No later than the date (the "Extension Response Date") which is (30) days after such request has been delivered to each of the Participants, each Participant will notify the Lessor in writing (with a copy to the Indenture Trustee and the Lessee) whether or not it consents to such Extension Request (which consent may be granted or denied by each Participant in its sole discretion and may be conditioned on receipt of such financial information or other documentation as may be specified by such Participant including without limitation satisfactory appraisals of the Property), provided that any Participant that fails to so advise the Lessor on or prior to the Extension Response Date shall be deemed to have denied such Extension Request. The extension of the Maturity Date contemplated by any Extension Request shall become effective as of the Extension Effective Date on or after the Extension Response Date on which all of the Participants (other than non-consenting Participants (each a "Non-Consenting Participant") which have been replaced by Replacement Participants in accordance with Section 3.8(c)) shall have consented to such Extension Request; provided that: (A) on both the date of the Extension Request and the Extension Effective Date, (x) each of the representations and warranties made by the Lessee and the Lessor in or pursuant to the Operative Documents shall be true and correct in all material respects as if made on and as of each such date, except for representations and warranties made as of a specific date, 16 which shall be true and correct in all material respects as of such date, (y) no Event of Default shall have occurred and be continuing, and (z) on each of such dates the Indenture Trustee shall have received a certificate of the Lessee and the Lessor, each as to itself, as to the matters set forth in clause (x) above and from the Lessee as to the matters set forth in clause (y) above, and (B) the Indenture Trustee and the Required Participants shall have received satisfactory evidence that the Expiration Date shall, after giving effect to any extension thereof which has become effective on or prior to such Extension Effective Date, occur on the Maturity Date as so extended. (c) The Lessee shall be permitted to replace any Non-Consenting Participant under this Section 3.8 with a replacement bank or other financial institution (a "Replacement Participant") at any time on or prior to the date which is thirty (30) days after the relevant Extension Response Date; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) the Replacement Participant shall purchase, at par, all of the Notes and/or Certificates of such Non-Consenting Participant on or prior to the date of replacement, (iii) the Lessee shall be liable to such Non-Consenting Participant under Section 13 of this Agreement if any Advance (or Loan or Certificate Purchaser Amount with respect thereto) shall be prepaid (or purchased) other than on the last day of the Interest Period or Interest Periods relating thereto, (iv) the Replacement Participant, if not already a Participant, shall be reasonably satisfactory to the Required Participants, (v) such replacement shall be made in accordance with the provisions of Section 12 of this Agreement (provided that the Lessee or the relevant Replacement Participant shall be obligated to pay or cause to be paid the Transaction Expenses arising in connection therewith), (vi) the Replacement Participant shall have agreed to be subject to all of the terms and conditions of this Agreement (including the extension of the Maturity Date contemplated by the relevant Extension Request) and the other Operative Documents, and (vii) at any time other than during the continuance of an Event of Default, the Lessee shall have the exclusive right to designate the Replacement Participant. The Indenture Trustee hereby agrees to cooperate with the Lessee in the Lessee's efforts to arrange one or more Replacement Participants as contemplated by this Section 3.8(c). SECTION 3.9. Types of Advances; Interest and Certificate Yield Rates; Procedures. (a) Each Advance shall be comprised of either a Fixed Rate Advance or a Eurodollar Rate Advance (each being herein called a "Type" of Advance), as the Lessee shall specify in the related Funding Request or notice of conversion or continuation pursuant to Section 3.5. Each Fixed Rate Advance (and Loan and Certificate Purchaser Amount with respect to such Fixed Rate Advance) shall bear interest or, with respect to a Certificate Purchaser Amount, yield ("Certificate Yield"), as the case may be, for each 17 day during the Fixed Rate Period with respect thereto at a rate per annum equal to the Fixed Rate determined with respect to such Fixed Rate Period plus the Applicable Margin. (b) Each Eurodollar Rate Advance (and Loan and Certificate Purchaser Amount with respect to such Eurodollar Rate Advance) shall bear interest or Certificate Yield, as the case may be, for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin; provided, however, that: (i) each Advance and related Loan and Certificate Purchaser Amount outstanding during the period beginning on the Closing Date and ending on the date three (3) Business Days thereafter shall bear interest or Certificate Yield during such period at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin; and (ii) an Advance and related Loan and Certificate Purchaser Amount shall bear interest or Certificate Yield, as the case may be, at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin to the extent expressly required by the terms hereof. The Lessee shall give irrevocable written notice to the Indenture Trustee, in accordance with Section 3.5 and the applicable provisions of the term "Interest Period" set forth in Appendix 1, of the length of each Interest Period to be applicable to each Eurodollar Rate Advance. (c) If all or a portion of (i) the amount of any Loans or Certificate Purchaser Amounts with respect to any Advance, (ii) any interest or Certificate Yield payable thereon or (iii) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate. (d) Interest and Certificate Yield shall be payable in immediately available funds (except as provided in paragraph (e) below) in arrears on each Scheduled Payment Date, provided that (i) interest accruing pursuant to paragraph (c) of this Section 3.9 shall be payable from time to time on demand and (ii) each prepayment of Advances shall be accompanied by accrued interest to the date of such prepayment on the amount of Advances so prepaid plus amounts payable under Section 13.6 hereof. The Indenture Trustee shall provide the Lessee with not less than five (5) days' notice of the amount of Basic Rent due on any Scheduled Payment Date. (e) On each date which is three (3) Business Days prior to each Scheduled Payment Date during the Construction Period, unless the Lessee notifies the Lessor prior to such date that the Lessee desires to pay in cash on the Scheduled Payment Date the accrued interest and Certificate Yield on Loans and Certificate Purchaser Amounts, respectively, with respect to Advances allocated to Property Improvement Costs during the Construction Period and makes such cash payment on the Scheduled Payment Date, 18 the Lessee shall be deemed to have requested an Advance comprised of an Interest Payment Advance pursuant to Section 3.5 and the Lessor shall be deemed to have requested a funding of Loans and Certificate Purchaser Amounts pursuant to Sections 3.2 and 3.3 with respect to such Advance in an amount equal to the aggregate amount of the Basic Rent due and payable on such date with respect to accrued interest and Certificate Yield on Loans and Certificate Purchaser Amounts, respectively, with respect to outstanding Advances. Each Interest Payment Advance shall initially be deemed to be a Eurodollar Rate Advance having a one month Interest Period. The Funding Date with respect to any such Interest Payment Advance (and related Loans and Certificate Purchaser Amounts and with respect thereto) shall be the relevant Scheduled Payment Date (provided that such Advance and such funding shall be subject to satisfaction of the applicable conditions precedent set forth in Section 6) and the proceeds of such payment shall be applied to pay such accrued interest and Certificate Yield. On each such Funding Date during the Construction Period, the Property Cost and Property Improvements Cost shall be increased by an amount equal to the Basic Rent paid on such date with respect to such Property with the proceeds of such payment. The Indenture Trustee shall provide the Lessee on a monthly basis with a detailed statement or other form of confirmation showing all deemed Interest Payment Advances made to the Lessee pursuant to this Section 3.9(e). (f) Capitalization of Certain Amounts During Construction Period. (i) On each date during the Construction Period that any amount is payable by the Lessee under the Operative Documents on account of (A) Basic Rent (to the extent provided in Section 3.9(e)), (B) fees pursuant to Section 4 or (c) Supplemental Rent consisting of amounts payable by the Lessor as rent or otherwise under the Ground Lease, such amounts shall be capitalized by automatically treating such amount as an Advance and related Loans and Certificate Purchaser Amounts made on such date. (ii) If any Lessor Party shall request the Lessor to capitalize the amount of (A) any Claims or Taxes pursuant to Section 13.1(z) or 13.5(a), (B) any increased costs or reduced amounts pursuant to clause (2) of Section 13.10(a) or (C) any loss or liability pursuant to Section 24.1 of the Lease, any such amount shall be capitalized by automatically treating such amount as an Advance and related Loans and Certificate Purchaser Amounts (funded by such Lessor Party); provided, however, that the Lessee shall have no obligation to pay any such amounts if the Lessee exercises the Remarketing Option or is otherwise required to pay the Residual Value Guarantee Amount in accordance with the Lease and the other Operative Documents, except to the extent such amounts may be included in the Residual Value Guarantee Amount. If any such capitalized amounts are included in the Asset Termination Value, Lease Balance or Participant Balance (the "3.9(f)(ii) portion" of the Asset Termination Value, Lease Balance or Participant Balance), all the Lessee payments and other amounts applied to the Asset Termination Value, Lease Balance or Participant Balance shall be applied as follows: 19 (1) If any 3.9(f)(ii) portion is outstanding when a payment is to be applied to the Asset Termination Value, Lease Balance or Participant Balance, such payment shall first be applied to the 3.9(f)(ii) portion of the Asset Termination Value, Lease Balance or Participant Balance and shall be shared by the Lessor Parties that funded such 3.9(f)(ii) portion of the Asset Termination Value, Lease Balance, or Participant Balance pro rata based on the amounts so funded by and owed to such Lessor Parties. (2) If any amount of such payment then remains, such remaining amount shall be applied to all other amounts included in the Asset Termination Value, Lease Balance or Participant Balance (the "project costs portion" of the Asset Termination Value, Lease Balance or Participant Balance) and shall be shared by the Participants as provided in Section 6.2 to Section 6.10 of the Indenture. The Indenture Trustee shall notify the Lessee, the Lessor and each Participant of each amount capitalized and treated as an Advance (and related Loans and Certificate Purchaser Amounts) under this Section 3.9(f)(ii) within fifteen (15) days after each such Advance. (iii) Transaction Expenses incurred during the Construction Period shall be funded as Advances and related Loans and Certificate Purchaser Amounts and capitalized to the extent set forth in Section 9.1. SECTION 3.10. Computation of Interest and Certificate Yield. (a) For purposes of determining the Alternate Base Rate, interest and Certificate Yield shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and for purposes of determining a Eurodollar Rate or a Fixed Rate, interest and Certificate Yield shall be calculated on the basis of a 360-day year for the actual days elapsed. The Indenture Trustee shall as soon as practicable after the commencement of each Interest Period or Fixed Rate Period notify the Lessor, the Lessee and the Participants of each determination of a Eurodollar Rate or a Fixed Rate. Any change in the interest rate on an Advance and related Loans and Certificate Purchaser Amounts resulting from a change in the Alternate Base Rate, the Eurocurrency Reserve Requirements or the Applicable Margin shall become effective as of the opening of business on the day on which such change becomes effective. The Indenture Trustee shall as soon as practicable notify the Lessor, the Lessee and the Participants of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Indenture Trustee pursuant to any provision of this Agreement shall be conclusive and binding on the Lessor, the Lessee and the Participants in the absence of manifest error. The Indenture Trustee shall, at the request of such parties, deliver to such parties a statement showing the quotations used by the Indenture Trustee in determining any interest rate pursuant to Section 3.9(a). 20 SECTION 4. FEES SECTION 4.1. Commitment Fees. The Lessee shall pay to the Indenture Trustee for the account of each Participant a commitment fee (the "Commitment Fees") for the period from and including the Closing Date to the earlier of (i) the Completion Date or (ii) the Outside Completion Date, computed in the case of each Participant at a rate per annum equal to the Commitment Fee Rate applicable to the 364 Day Commitment or the Eighteen Month Commitment, as the case may be, on the amount of the Available Commitment of such Participant, in each case during the period for which payment is made, payable on each Commitment Fee Payment Date. Commitment Fees shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. SECTION 4.2. Underwriting Fee. The Lessee shall pay to the Arranger the underwriting fee (the "Underwriting Fee") referred to in, and at such times as provided in, the Arranger Fee Letter. SECTION 4.3. Administrative Fee. The Lessee shall pay an administrative fee (the "Administrative Fee") to the Arranger for its own account as provided in, and at such times as provided in, the Arranger Fee Letter. SECTION 4.4. Overdue Fees. If all or a portion of any fee due hereunder shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee on demand, at a rate per annum equal to the Overdue Rate from the date of such nonpayment until such amount is paid in full (as well after as before judgment). SECTION 4.5. Extension Fee. The Lessee shall pay the Extension Fee to the Indenture Trustee for the account of each Participant agreeing to an extension of the 364 Day Commitment if any portion of the 364 Day Commitment is extended pursuant to Section 3.7. The Extension Fee shall be payable on the Extension Date. SECTION 5. CERTAIN INTENTIONS OF THE PARTIES SECTION 5.1. Nature of Transaction. (a) It is the intent of the parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, for purposes of Lessee's financial reporting, and (ii) for purposes of federal, state and local income or franchise taxes and for any other tax imposed on or measured by income, the transaction contemplated hereby is a financing arrangement and preserves ownership in the Property in the Lessee. 21 Accordingly, and notwithstanding any provision of this Participation Agreement to the contrary, the parties hereto agree and declare that: (i) the transactions contemplated by the Lease are intended to have a dual, rather than single, form; and (ii) all references in this Participation Agreement to the "lease" of the Property which fail to reference such dual form do so as a matter of convenience only and do not reflect the intent of parties hereto as to the true form of such arrangements. Nevertheless, the Lessee acknowledges and agrees that neither the Indenture Trustee, the Lessor nor any Participant has made any representations or warranties to the Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Anything to the contrary in the Operative Documents notwithstanding, the parties hereto intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any proceedings under commercial or real estate law, any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting the Lessee, the Lessor, or any Participant or any enforcement or collection actions, (i) the transactions evidenced by the Lease are loans made by the Lessor and the Participants as unrelated third party lenders to the Lessee secured by the Property, (ii) the obligations of the Lessee under the Lease to pay Basic Rent and Supplemental Rent or Asset Termination Value in connection with a purchase of the Property pursuant to the Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the Participants to the Lessee, and (iii) the Lease grants a security interest and mortgage or deed of trust or lien, as the case may be, in the Property to the Lessor and the Participants to secure the Lessee's performance under and payment of all amounts under the Lease and the other Operative Documents. (c) Specifically, without limiting the generality of subsection (b) of this Section 5.1, the parties hereto further intend and agree that, for the purpose of securing the Lessee's obligations for the repayment of the above-described loans from the Lessor and the Participants to the Lessee, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code (and specifically, a construction mortgage, as said term is defined in Section 9-313(1)(c) of the Uniform Commercial Code) and a real property mortgage or deed of trust; (ii) the conveyance provided for in Article II of the Lease shall be deemed to be a grant by the Lessee to the Lessor and the Participants of a mortgage lien and security interest in all of the Lessee's right, title and interest in and to the Property and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property (it being understood that Lessee hereby mortgages and warrants and grants a security interest in the Property to Lessor and the Participants to secure such loans); (iii) the possession by the Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or 22 chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under Applicable Law. The Lessor and the Lessee shall, to the extent consistent with the Lease, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be reasonably necessary to ensure that, if the Lease were deemed to create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under Applicable Law and will be maintained as such throughout the Term. (d) Specifically, without limiting the generality of subsections (a), (b) and (c) of this Section 5.1, the parties hereto intend and agree that, for purposes of filing federal, state and local returns, reports and other statements relating to income or franchise taxes, or any other taxes imposed upon or measured by income, (i) the Lessee shall be entitled to take any deduction, credit, allowance or other reporting position consistent with its status as owner of the Property; and (ii) neither the Lessor nor any Participant shall take an initial position on its federal, state and local returns, reports and other statements relating to income or franchise taxes that is inconsistent with the Lessee's status as owner of the Property. (e) If the transaction evidenced by this Agreement and the other Operative Documents can no longer be treated as an operating lease pursuant to GAAP for accounting purposes, all provisions in the Operative Documents limiting the Lessee's obligation to pay the Lease Balance or Asset Termination Value (including the Remarketing Option) shall no longer apply. If any such change in accounting treatment shall occur, the Lessee shall enter into such amendments to the Operative Documents as the Lessor or the Required Participants may reasonably request to reflect the foregoing. SECTION 5.2. Amounts Due Under Lease. Anything else herein or elsewhere to the contrary notwithstanding, it is the intention of the Lessee, the Lessor, the Participants and the Indenture Trustee that: (i) the amount and timing of installments of Basic Rent due and payable from time to time from the Lessee under the Lease shall be equal to the aggregate payments due and payable as interest and principal on the Notes and Certificate Yield on, and the Certificate Purchaser Amounts with respect to, the Certificates on each Payment Date; (ii) if the Lessee elects the Purchase Option or becomes obligated to purchase the Property under the Lease, the Notes, the Certificate Purchaser Amounts, all interest and Certificate Yield, thereon and all other obligations of the Lessee owing to the Certificate Holders, the Owner Trustee, the Note Holders and the Indenture Trustee shall be paid in full by the Lessee; (iii) if the Lessee properly elects the Remarketing Option, the Lessee shall only be required to pay to the Lessor the proceeds of the sale of the Property, the Residual Value Guarantee Amount and any amounts due pursuant to Section 13 of this Participation Agreement and Section 22.1 of the Lease; and (iv) upon an Event of Default resulting in an acceleration of the Lessee's obligation to purchase the 23 Property under the Lease, the amounts then due and payable by the Lessee under the Lease shall include all amounts necessary to pay in full the Asset Termination Value, plus all other amounts then due from the Lessee to the Note Holders, the Indenture Trustee, the Certificate Holders and the Owner Trustee under the Operative Documents. SECTION 6. CONDITIONS PRECEDENT TO CLOSING DATE, ACQUISITION OF GROUND LEASE INTEREST AND ADVANCES SECTION 6.1. Conditions Precedent -- Documentation. The obligation of the Lessor to acquire the Ground Lease Interest by ground lease on the Ground Lease Interest Acquisition Date, the obligation of the Lessor to make an Advance to finance the acquisition of Equipment or the construction of any Improvements or the funding of any Interest Payment Advance or other Section 3.9(f)(ii) portion on any Funding Date, and the obligation of each Participant to purchase its respective Notes and/or Certificates on the Closing Date and to make available to the Lessor its related portion of each such Advance on such Funding Date are subject to satisfaction or waiver of the following conditions precedent and the conditions precedent set forth in Section 6.2 and Section 6.3 (it being understood that the Lessor's obligation to acquire such Ground Lease Interest or to finance such Equipment, if any, or Improvements shall not be subject to the conditions precedent set forth in this Section 6.1, Section 6.2 or Section 6.3 to the extent such conditions are actions required of the Lessor) on or prior to the Closing Date, Ground Lease Interest Acquisition Date or such Funding Date, as the case may be: (a) Acquisition and Funding Request. Prior to the Ground Lease Interest Acquisition Date or applicable Funding Date, the Indenture Trustee and the Lessor shall have received a fully executed counterpart of the Acquisition Request or Funding Request, as the case may be, appropriately completed by the Lessee, in accordance with Sections 3.4 and 3.5, respectively; provided, that this condition shall be deemed to have been satisfied in connection with an Interest Payment Advance or funding of a Section 3.9(f)(ii) portion pursuant to Section 3.9 hereof. (b) Closing Date; Operative Documents. The Closing Date shall have occurred and each of the Operative Documents to be entered into on the Closing Date shall have been duly authorized, executed and delivered by the parties thereto, and shall be in full force and effect, including, without limitation, (i) this Participation Agreement, (ii) the Lease, (iii) the Indenture, (iv) the Notes, (v) the Trust Agreement, (vi) the Certificates, (vii) the Guarantee, (viii) the Cash Collateral Agreement, (ix) the Construction Agency Agreement, (x) the Construction Agency Agreement Assignment, (xi) the Mortgage, (xii) the Assignment of Lease, (xiii) the Consent to Assignment, (xv) the Ground Lease and (xvi) the Appointment of Co-Trustee. No Default or Event of Default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Documents), and the Lessor, the Indenture Trustee and each Participant shall each have received a fully executed copy of each of such Operative 24 Documents (other than (A) the Lease and Lease Supplement, of which the Indenture Trustee shall receive the originals and the Lessor and the Certificate Purchasers shall receive specimens, (B) the Certificates, of which each Certificate Purchaser shall receive its original and the Lessee, the Indenture Trustee and the Note Purchasers shall receive specimens), and (C) the Notes, of which each Note Purchaser shall receive its original and the other parties shall receive specimens. On or prior to the Closing Date or the Ground Lease Interest Acquisition Date, as applicable, the Operative Documents (or memoranda thereof), any supplements thereto and any financing statements in connection therewith required under the Uniform Commercial Code shall have been recorded, registered and filed, if necessary, in such manner as to enable the respective counsel to render their opinions referred to in clauses (l) below. (c) Environmental Certificate. The Indenture Trustee, each Participant and the Lessor shall have received an Environmental Certificate substantially in the form of Exhibit C (an "Environmental Certificate") with respect to the Property, provided that such Environmental Certificate shall be delivered not less than five (5) Business Days prior to the Ground Lease Interest Acquisition Date and accompanied by the Environmental Audit for the Property, each of which shall have been approved by the Indenture Trustee, the Required Participants and the Lessor, it being understood and agreed that the Lessee agrees to provide a Phase II environmental site assessment with respect to any Recognized Environmental Conditions (as defined in the certificate) shown on such certificate or indicated in the Environmental Audit within ninety (90) days following the Ground Lease Interest Acquisition Date if requested by the Required Participants, to remedy any such conditions within two hundred seventy (270) days following the Ground Lease Interest Acquisition Date and to deliver to the Indenture Trustee, the Lessor and each Participant upon completion of such remedial action a written statement by the consultant who prepared the Environmental Audit indicating that all such exceptions have been remedied in compliance with Applicable Law. (d) Appraisal. On or prior to the Ground Lease Interest Acquisition Date, the Indenture Trustee, the Lessor and the Participants shall have received an Appraisal of the Property, which Appraisal shall (i) show as of the projected Completion Date the Fair Market Sales Value of the Ground Lease Interest and the Improvements to be constructed thereon in accordance with the Plans and Specifications, and (ii) meet the other applicable requirements set forth in the definition of the term "Appraisal" contained in Appendix 1. (e) Ground Lease. As of the Ground Lease Interest Acquisition Date, the conditions to commencement of the lease term under the Ground Lease shall have been satisfied to satisfaction of, or waived by, the Ground Lessor, the Lessor and the Participants, the Ground Lease shall have been duly executed and shall be in full force and effect and the lease term thereunder shall have commenced as of such date. (f) Lease Supplement; Equipment Schedule. The Lessee and the Lessor shall have delivered (i) on or prior to the Ground Lease Interest Acquisition Date, the original counterpart of the Lease Supplement executed by the Lessee and the Lessor to the 25 Indenture Trustee and (ii) on or prior to the applicable Funding Date, a duly executed Equipment Schedule covering any Equipment, if any, being acquired with the proceeds of such Advance by the Lessor. (g) Survey and Title Insurance. On or prior to the Ground Lease Interest Acquisition Date, the Lessee shall have delivered (i) an ALTA/ACSM (1992)(Urban) Survey of the Property, including Table A numbers 1, 2, 3, 4, 6, 8, 9, 10 and 11, certified to the Lessor, the Indenture Trustee, the Participants and the title company and otherwise in form reasonably acceptable to the Participants, (ii) an ALTA (1992) owners title insurance policy with extended coverage over the general exceptions, insuring leasehold title in the Lessor to the Ground Lease and the Ground Lease Interest and fee title in the Lessor to the Improvements, subject only to the Permitted Exceptions, (iii) an ALTA (1992) Loan Policy insuring the Indenture Trustee that the Lien of the Mortgage is a first and primary lien in the Lessor's interest in the Lease, in the leasehold title to the Ground Lease Interest and in the fee title to the Improvements, subject only to pending disbursements for construction and the Permitted Exceptions, and (iv) an ALTA (1992) Loan Policy insuring the Indenture Trustee that the Lien of the Lease is a first and primary Lien in the Lessee's interest in the Property; such policies each in an amount not less than the estimated Property Cost and to be reasonably satisfactory to the Lessor, the Indenture Trustee and the Participants with extended coverage, access, tax parcel, survey identicality, variable rate, future advances, usury, comprehensive, fraudulent conveyances, doing business, mechanics liens and zoning endorsements and such other endorsements as and to the extent available in such jurisdiction where the Property is located, if requested by the Required Participants. (h) Evidence of Recording and Filing. On or prior to the Ground Lease Interest Acquisition Date, the Indenture Trustee shall have received evidence reasonably satisfactory to it that each of the Ground Lease, the Lease Supplement, the Assignment of Lease and Supplement to Assignment of Lease, the Consent to Assignment and the Mortgage shall have been or are being recorded with the appropriate Governmental Authorities in the order in which such documents are listed in this clause, and the UCC Financing Statements with respect to the Property being acquired shall have been or are being filed with the appropriate Governmental Authorities. (i) Evidence of Insurance. On or prior to the Ground Lease Interest Acquisition Date, copies of the Lessee's insurance policies with respect to the Property required to be maintained pursuant to the Lease shall have been delivered to the insurance consultant of the Lessor and the Participants and such policies shall be reasonably satisfactory to such insurance consultant, the Lessor and the Participants. (j) Evidence of Use of Proceeds. On or prior to the applicable Funding Date, the Indenture Trustee and each Participant shall have received evidence reasonably satisfactory to the Indenture Trustee and each Participant as to the use of the proceeds of the Advance in accordance with the provisions of Section 8.1(g). 26 (k) Taxes. On or prior to the Ground Lease Interest Acquisition Date, all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Documents shall have been paid or provisions for such payment shall have been made to the satisfaction of the Indenture Trustee, each Participant and the Lessor. (l) Opinions of Counsel. On or prior to the Closing Date, (i) the Lessee shall have delivered to the Indenture Trustee, each Participant and the Lessor an opinion of Orrick, Herrington & Sutcliffe LLP, counsel to the Lessee, as to the matters set forth in Exhibit D (with an appropriate update on the Ground Lease Interest Acquisition Date (if different than the Closing Date) with respect to the Property and the Mortgage); (ii) the Owner Trustee shall have delivered to the Indenture Trustee, the Lessee and each Participant an opinion of counsel reasonably satisfactory to the Indenture Trustee, each Participant and the Lessee in the form set forth on Exhibit E; and (iii) Dorsey & Whitney, counsel to the Co-Trustee, shall have issued to the Lessor, the Indenture Trustee, the Lessee and the Participants its opinion to the effect and in the form set forth on Exhibit F. (m) Approvals. All necessary (or, in the reasonable opinion of the Lessor, the Participants or the Indenture Trustee or any of their respective counsel, advisable) Governmental Actions and covenants and approvals of or by any Governmental Authority or other Person, in each case required by any Requirement of Law, covenant or restriction affecting the Property or the transactions contemplated thereby shall have been obtained or made and be in full force and effect prior to the time required to be in effect. (n) Litigation. No action or proceeding shall have been instituted, nor shall any action or proceeding be threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full performance of this Participation Agreement, the Lease or any other Operative Document or any transaction contemplated hereby or thereby or (ii) which is reasonably likely to have a Material Adverse Effect. (o) Requirements of Law. In the reasonable opinion of the Lessor, the Participants, the Indenture Trustee and their respective counsel, the transactions contemplated by the Operative Documents do not and will not violate any Requirement of Law and do not and will not subject the Lessor, the Indenture Trustee or any Participant to any adverse regulatory or tax prohibitions or constraints. (p) Responsible Officer's Certificate of the Lessee. The Lessor, each Participant and the Indenture Trustee shall each have received a Responsible Officer's Certificate, dated as of the Closing Date, of the Lessee stating that (i) each and every representation and warranty of the Lessee contained in the Operative Documents to which it is a party is true and correct on and as of the Closing Date; (ii) no Default or Event of Default under the Lease, the Ground Lease or the Construction Agency Agreement has occurred and is continuing; (iii) each Operative Document to which the Lessee is a party is in full force and effect with respect to it; and (iv) the Lessee has duly 27 performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date. (q) The Lessee's Resolutions and Incumbency Certificate, etc. On or prior to the Closing Date, the Lessor, each Participant and the Indenture Trustee shall each have received (i) a certificate of the Secretary or an Assistant Secretary of the Lessee attaching and certifying as to (A) the resolutions of the Board of Directors of the Lessee, duly authorizing the execution, delivery and performance by the Lessee of documents and agreements of the type represented by each Operative Document to which it is or will be a party, (B) its articles of incorporation and bylaws, and (C) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party, and (ii) a good standing certificate from the appropriate officer of the state in which the Property is located. (r) Responsible Officer's Certificate of the Guarantor. The Lessor, each Participant and the Indenture Trustee shall each have received a Responsible Officer's Certificate, dated as of the Closing Date, of the Guarantor stating that (i) each and every representation and warranty of the Guarantor contained in the Operative Documents to which it is a party is true and correct on and as of the Closing Date; (ii) no Default or Event of Default under the Guarantee has occurred and is continuing; (iii) each Operative Document to which the Guarantor is a party is in full force and effect with respect to it; and (iv) the Guarantor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date. (s) The Guarantor's Resolutions and Incumbency Certificate, etc. On or prior to the Closing Date, the Lessor, each Participant and the Indenture Trustee shall each have received a certificate of the Secretary or an Assistant Secretary of the Guarantor attaching and certifying as to (i) the resolutions of its Board of Directors duly authorizing the execution, delivery and performance by the Guarantor of documents and agreements of the type represented by each Operative Document to which it is or will be a party (ii) its articles of incorporation and by-laws, and (iii) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party. (t) Ground Lease Interest Acquisition Date. The Ground Lease Interest Acquisition Date shall occur on or prior to September 28, 1998. (u) No Material Adverse Effect. As of each Funding Date, there shall not have occurred any Material adverse change in the Lessee's or the Guarantor's capital structure, ownership or consolidated assets, liabilities, results of operations, or financial condition from that set forth or contemplated in the most recent financial statements delivered pursuant to Section 8.4(m) or Section 10.1(a), and no event or condition shall have occurred that would result in a Material Adverse Effect, provided that for purposes of this condition precedent, the Momentum Transaction shall not be deemed to constitute a Material adverse change or result in a Material Adverse Effect. 28 (v) Officer's Certificate of the Lessor. The Lessee, the Indenture Trustee and each Participant shall have received a certificate of an Authorized Officer of the Lessor, dated as of the Closing Date, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Documents to which it is a party is true and correct on and as of the Closing Date, (ii) each Operative Document to which the Lessor is a party is in full force and effect with respect to it, (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date, and (iv) the Lessor has the capacity to act as a trustee and hold the Property in the jurisdiction in which the Property is located. (w) The Lessor's Resolutions and Incumbency Certificate, etc. On or prior to the Closing Date, the Lessee, the Indenture Trustee and each Participant shall have received a certificate of the Secretary or an Assistant Secretary of the Lessor attaching and certifying as to (i) the resolutions of the Board of Directors duly authorizing the execution, delivery and performance by the Lessor of documents and agreements of the type represented by each Operative Document to which it is or will be a party, (ii) the pertinent provisions of its by-laws and (iii) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party. (x) Construction Budget; Plans and Specifications. On or prior to the Ground Lease Interest Acquisition Date, each Participant shall have received a copy of the "Design Review" Plans and Specifications and Budget, each in a form reasonably satisfactory to each Participant. The Chief Financial Officer of the Lessee shall certify that the "Final" Plans and Specifications will conform to the "Design Review" Plans and Specifications in all Material respects and the Budget was prepared based on the "Design Review" Plans and Specifications. (y) Sale of All Notes and Certificates. On the Closing Date, each of the Notes and Certificates shall have been purchased by the other Note Purchasers and Certificate Purchasers, as applicable. (z) Legal Fees and Expenses. The Lessee shall have caused to be paid as provided in Section 9 all reasonable fees and expenses of attorneys for the Owner Trustee, the Indenture Trustee and any Participant (which attorneys may be employees of such Person) paid or incurred in connection with the preparation, negotiation, execution and delivery of the Operative Documents. SECTION 6.2. Further Conditions Precedent. The obligation of the Lessor to acquire the Ground Lease Interest on the Ground Lease Interest Acquisition Date or to make an Advance on any Funding Date and the obligation of each Participant to make available its related portion of such Advance on such Funding Date are subject to satisfaction or waiver of the following conditions precedent and to satisfaction on or before the Ground Lease Interest Acquisition Date, the Closing Date or such Funding 29 Date, as the case may be, of the conditions precedent set forth in Section 6.1 (it being understood that the Lessor's obligations to acquire the Ground Lease Interest and each Participant's obligation to fund an Advance shall not be subject to the conditions precedent set forth in Section 6.1, Section 6.3 and this Section 6.2 to the extent such conditions are actions required of the Lessor or such Participant, as the case may be): (a) Representations and Warranties. On such date the representations and warranties of the Lessee, the Guarantor, the Lessor, the Indenture Trustee and each Participant contained herein and in each of the other Operative Documents shall be true and correct as though made on and as of such date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date. (b) Performance of Covenants. The parties hereto shall have performed their respective agreements contained herein and in the other Operative Documents to be performed by them on or prior to such date. (c) Title. Title to the Property shall conform to the representations and warranties set forth in Section 8.4(c). (d) No Default. There shall not have occurred and be continuing any Default or Event of Default under any of the Operative Documents, and no Default or Event of Default under any of the Operative Documents will have occurred after giving effect to the acquisition of the Property and/or the making of the Advance requested by such Funding Request, as the case may be. SECTION 6.3. Conditions Precedent to Closing Date. The obligation of the Lessor, the Indenture Trustee, each Participant, the Lessee and the Guarantor to execute and deliver the Operative Documents referred to in Section 6.3(a) hereof on the Closing Date and to consummate the closing on the Closing Date are subject to satisfaction or waiver of the following conditions precedent (it being understood that such Person's obligations under this Section 6.3 shall not be subject to the conditions precedent set forth in this Section 6.3 to the extent such conditions are actions required of such Person): (a) Operative Documents. Each of the Operative Documents to be entered into on the Closing Date shall have been duly authorized, executed and delivered by the parties thereto, and shall be in full force and effect (b) Representations and Warranties. On such date the representations and warranties of the Lessee, the Guarantor, the Lessor, the Indenture Trustee and each Participant contained herein and in each of the other Operative Documents shall be true and correct as though made on and as of such date. 30 (c) Performance of Covenants. The parties hereto shall have performed their respective agreements contained herein and in the other Operative Documents to be performed by them on or prior to such date. (d) No Default. There shall not have occurred and be continuing any Default or Event of Default under any of the Operative Documents, and no Default or Event of Default under any of the Operative Documents will have occurred after giving effect to the execution and delivery of the Operative Documents. SECTION 7. COMPLETION DATE CONDITIONS SECTION 7.1. Conditions. The occurrence of the Completion Date shall be subject to the fulfillment to the satisfaction of, or waiver by, the Required Participants of the following conditions precedent at which time "Completion" shall be deemed to have occurred: (a) Construction Completion. The construction of the Improvements shall have been completed substantially in accordance with the Plans and Specifications and all Applicable Law and Insurance Requirements, and the Property shall be ready for occupancy and use as a facility described in Recital A of this Agreement. This shall require, without limiting the generality of the preceding sentence, that (i) all utilities required to adequately service the Improvements for their intended use are available and "tapped on" and hooked up pursuant to adequate permits (including any that may be required under applicable Environmental Laws) and (ii) access to the Improvements for pedestrians and motor vehicles from publicly dedicated streets and public highways is available. (b) Architect's Certificate; Date-Down Endorsement. The Lessee shall have furnished to the Lessor and the Indenture Trustee a (i) certificate of the Architect (substantially in the form of Exhibit H) dated at or about the Completion Date and stating that (a) the Improvements have been completed substantially in accordance with the Plans and Specifications and the Property is ready for occupancy, (b) the Property, as so completed, complies in all material respects with all Applicable Laws, and certifying that attached thereto are true and complete copies of an "as built" or "record" set of the Plans and Specifications, and a plat of survey of the Property "as built" showing all paving, driveways, fences and exterior improvements; and (ii) a date-down endorsement to or amendment and restatement of the title insurance policies described in Section 6.1(g). (c) Lessee Certification. The Lessee shall have furnished the Lessor and the Indenture Trustee with a certification of the Lessee (substantially in the form of Exhibit I) as follows: 31 (i) The representations and warranties of the Lessee with respect to the Property set forth in Section 8.4(b) are true and correct as of the Completion Date. All amounts owing to third parties for the construction of the Improvements have been paid in full. (ii) No changes or modifications were made to the related Plans and Specifications after the Closing Date that have had a Material adverse effect on the value, use or useful life of the Property. SECTION 8. REPRESENTATIONS SECTION 8.1. Representations of the Bank and the Lessor. Bank, in its individual capacity and the Owner Trustee, each as to itself, represents and warrants to each of the other parties hereto as follows, provided that the representations in the following paragraphs (f), (g), (h), (i), (j), (k) and (l) are made solely in its capacity as the Owner Trustee: (a) Due Organization, etc. It is a Delaware banking corporation duly organized and validly existing and in good standing under the laws of the United States and has the corporate power and authority to enter into and perform its obligations under the Trust Agreement and (assuming due authorization, execution and delivery of the Trust Agreement by the Certificate Purchasers) has the corporate and trust power and authority to act as the Owner Trustee and to enter into and perform the obligations under each of the other Operative Documents to which the Bank or the Owner Trustee, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it in connection with or as contemplated by each such Operative Document to which the Bank or the Owner Trustee, as the case may be, is or will be a party. (b) Authorization; No Conflict. The execution, delivery and performance of each Operative Document to which it is or will be a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Certificate Purchasers) as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) does or will contravene any current United States law, governmental rule or regulation relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, its articles of association or by-laws, or any indenture, mortgage, deed of trust, conditional sales contract, credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected or (iv) does or will 32 require any Governmental Action by any Governmental Authority of the United States and regulating its banking or trust powers. (c) Enforceability, etc. The Trust Agreement and, assuming the Trust Agreement is the legal, valid and binding obligation of the Certificate Purchasers, each other Operative Document to which the Bank or the Owner Trustee, as the case may be, is or will be a party have been, or on or before the Closing Date or Ground Lease Interest Acquisition Date will be, duly executed and delivered by the Bank or the Owner Trustee, as the case may be, and the Trust Agreement and each such other Operative Document to which the Bank or the Owner Trustee, as the case may be, is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against the Bank or the Owner Trustee, as the case may be, in accordance with the terms thereof, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting creditors' rights or by general equitable principles. (d) Litigation. There is no action or proceeding pending or, to its knowledge, threatened to which it is or will be a party, either in its individual capacity or as the Owner Trustee, before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability, in its individual capacity or as Owner Trustee, to perform its obligations under the Operative Documents to which it is a party, would have a material adverse effect on the financial condition of the Owner Trustee or would question the validity or enforceability of any of the Operative Documents to which it is or will become a party. (e) Assignment. It has not assigned or transferred any of its right, title or interest in or under the Lease except in accordance with the Operative Documents. (f) Defaults. No Default or Event of Default under the Operative Documents attributable to it has occurred and is continuing. (g) Use of Proceeds. The proceeds of the Notes and the Certificates shall be applied solely in accordance with the Operative Documents. (h) Securities Act. Neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or in any similar security relating to the Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than the Certificate Purchasers, the Note Purchasers and other accredited investors, and neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf will take any action which would subject the issuance or sale of any interest in the Trust Estate or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Document under the Trust Indenture Act of 1939, as amended. (i) Chief Place of Business. The Owner Trustee's chief place of business, chief executive office and office where the documents, accounts and records relating to 33 the transactions contemplated by this Participation Agreement and each other Operative Document are kept are located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration. (j) Federal Reserve Regulations. The Owner Trustee is not engaged principally in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board), and no part of the proceeds of the Notes or the Certificates will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulation G, T, U, or X of the Board. (k) Investment Company Act. The Owner Trustee is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act. (l) No Plan Assets. The Owner Trustee is not acquiring its interests in the Property with the assets of any Plan (or its related trust). SECTION 8.2. Representations of the Participants. (a) Representations of each Participant. Each Participant severally as to itself represents to the other parties hereto as follows: (i) The Notes or Certificates to be purchased by it are being acquired by it for its own account and for investment and not with a view to any distribution thereof, but without prejudice to the rights of such Participant at all times to sell or otherwise dispose of all or any part of its Notes or Certificates in accordance with the terms hereof and of the Operative Documents and under an exemption from the Securities Act and otherwise in compliance with all applicable state securities laws, subject, nevertheless to any requirement of law that the disposition of such Participant's Notes or Certificates at all times shall be within its control. (ii) Each Participant, by its purchase and acceptance of a Note or Certificate, hereby represents and warrants to each of the other parties hereto that at least one of the following statements is an accurate representation as to the source of funds to be used by such Participant to make its investment hereunder: (A) If such Participant is an insurance company, no part of such funds constitutes assets allocated to any separate account maintained by it in which any Plan (or its related trust) has any interest; or (B) If such Participant is an insurance company, to the extent that any part of such funds constitutes assets allocated to any separate account maintained by it, it has disclosed in writing to 34 the Lessee, the other Participants, the Owner Trustee, and the Indenture Trustee the names of each Plan whose assets in such account exceed ten percent of the total assets or are expected to exceed ten percent of the total assets of such account as of the date of such investment (for the purposes of this subdivision (B), all Plans maintained by the same employer or employee organization are deemed to be a single plan); or (C) If such Participant is a bank, to the extent that any part of such funds constitutes assets allocated to any bank collective investment vehicle maintained by it, it has disclosed in writing to the Lessee, the Participants, the Owner Trustee, and the Indenture Trustee the names of each Plan whose assets in such vehicle exceed ten percent of the total assets or are expected to exceed ten percent of the total assets of such vehicle as of the date of such investment (for the purpose of this subdivision (C), all Plans maintained by the same employer or employee organization are deemed to be a single plan); or (D) If such Participant is other than an insurance company, no part of such funds constitutes assets of any Plan (other than a governmental plan exempt from the coverage of ERISA); or (E) If such Participant is an insurance company, such funds constitute assets allocated to a general account and such general account is an "insurance company general account" as such term is defined in Section V(e) of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and such investment is eligible for and satisfies the requirements of PTE 95-60; or (F) If such funds constitute assets of a specific Plan, complete and correct information as to the identity of which such Participant has disclosed in writing to the Lessee, the other Participants, the Owner Trustee and the Indenture Trustee; or (G) The source of funds is an "investment fund" managed by a "qualified professional asset manager" or "QPAM" (as defined in Part V of PTE 84-14, issued March 13, 1984), provided that no other party to the transactions described in this Agreement and no "affiliate" of such other party (as defined in Section V(C) of PTE 84-14) has at this time, and during the immediately preceding one year, exercised the authority to appoint or terminate said QPAM as manager of the assets of any plan identified in writing pursuant to clause (F) or to 35 negotiate the terms of said QPAM's management agreement on behalf of any such identified plans. (b) Representations of each Certificate Purchaser. Each Certificate Purchaser severally as to itself represents and warrants to each of the other parties hereto as follows: (i) Due Organization, etc. It is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party. (ii) Authorization; No Conflict. The execution, delivery and performance of each Operative Document to which it is or will be a party has been duly authorized by all necessary action on its part and neither the execution and delivery by it thereof, nor the consummation of the transactions by it contemplated thereby, nor compliance by it with any of the terms and provisions thereof (A) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (B) does or will contravene any current United States law, governmental rule or regulation specifically applicable to it, (C) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, its certificate of incorporation or bylaws, or any indenture, mortgage, deed of trust, conditional sales contract, credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected which would have a material adverse effect on the ability of such Certificate Purchaser to perform its obligations under the Operative Documents to which it is a Party or (D) based upon the representations of the Lessee contained in Section 8.4(j), does or will require on its behalf any Governmental Action by any Governmental Authority not already expressly provided for in the Operative Documents. (iii) Enforceability, etc. Each Operative Document to which such Certificate Purchaser is or will be a party has been or on or before the Closing Date or Ground Lease Interest Acquisition Date will be, duly executed and delivered by such Certificate Purchaser and each such Operative Document to which such Certificate Purchaser is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against such Certificate Purchaser in accordance with the terms thereof, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting creditors' rights or by general equitable principles. (iv) Litigation. There is no action or proceeding pending or, to its knowledge, threatened to which it is a party on the Closing Date before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability to perform its obligations under the Operative Documents to which it is a party, would have a material adverse effect on the financial condition of such 36 Certificate Purchaser or would question the validity or enforceability of any of the Operative Documents to which it is or will become a party. (v) Defaults. No Default or Event of Default under the Operative Documents attributable to it has occurred and is continuing. (vi) Securities Act. Neither such Certificate Purchaser nor any Person authorized by such Certificate Purchaser to act on its behalf has offered or sold any interest in the Trust Estate, or in any similar security relating to the Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person and neither such Certificate Purchaser nor any Person authorized by such Certificate Purchaser to act on its behalf will take any action which would subject the issuance or sale of any interest in the Trust Estate to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Document under the Trust Indenture Act of 1939, as amended. (vii) Investment Company Act. Such Certificate Purchaser is not an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act. SECTION 8.3. Representations of the Lessee. The Lessee represents and warrants to each of the other parties hereto that: (a) Corporate Status. The Lessee (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (ii) has duly qualified and is authorized to do business and has obtained a certificate of authority to transact business as a foreign corporation in the jurisdiction where the Property is located and in each other jurisdiction where the failure to so qualify is reasonably likely to be Material. (b) Corporate Power and Authority. The Lessee has corporate power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is or will be a party and has or will have duly executed and delivered each Operative Document required to be executed and delivered by it and, assuming the due authorization, execution and delivery thereof on the part of each other party thereto, each such Operative Document constitutes or will constitute a legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights or by general equitable principles. (c) No Violation. Neither the execution, delivery and performance by the Lessee of the Operative Documents to which it is or will be a party nor compliance with 37 the terms and provisions thereof, nor the consummation by the Lessee of the transactions contemplated therein (i) will result in a violation by the Lessee of any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality having jurisdiction over the Lessee or the Property that would (x) adversely affect the validity or enforceability of the Operative Documents to which the Lessee is a party, or the title to, or value or condition of, the Property, or (y) have a Material Adverse Effect on the consolidated financial position, business or consolidated results of operations of the Lessee, or (z) have an adverse effect on the ability of the Lessee to perform its obligations under the Operative Documents, (ii) will conflict with or result in any breach under, or (other than pursuant to the Operative Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Lessee pursuant to the terms of, any indenture, loan agreement or other agreement for borrowed money to which the Lessee is a party or by which it or any of its property or assets is bound or to which it may be subject (other than Permitted Liens), or (iii) will violate any provision of the certificate or articles of incorporation or bylaws of the Lessee. (d) Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Lessee, threatened (i) that are reasonably likely to have a Material Adverse Effect or (ii) that question the validity of the Operative Documents or the rights or remedies of the Lessor, the Indenture Trustee or the Participants with respect to the Lessee or the Property under the Operative Documents. (e) Governmental Approvals. No Governmental Action by any Governmental Authority having jurisdiction over the Lessee or the Property is required to authorize or is required in connection with (i) the execution, delivery and performance by the Lessee of any Operative Document or (ii) the legality, validity, binding effect or enforceability against the Lessee of any Operative Document, except for the filing or recording of the Operative Documents listed in Section 8.4(f) hereof with the appropriate Governmental Authorities, all of which will have been completed on or prior to the Ground Lease Interest Acquisition Date. (f) Investment Company Act. The Lessee is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act. (g) Public Utility Holding Company Act. The Lessee is not a "holding company, or a "subsidiary company," or an "affiliate" of a "holding company, or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (h) Information. The information and materials regarding the Lessee and the Property which were provided by the Lessee to one or more of the Participants prior to the Closing Date or the Ground Lease Interest Acquisition Date are true and accurate in all material respects on the date as of which such information and materials are dated or certified and not incomplete by omitting to state any material fact necessary to make such 38 information not misleading at such time in light of the circumstances under which such information was provided. (i) Taxes. All United States federal income tax returns and all other Material tax returns which are required to have been filed have been or will be prepared in accordance with applicable law and filed by or on behalf of the Lessee by the respective due dates, including extensions, and all taxes due with respect to the Lessee pursuant to such returns or pursuant to any assessment received by the Lessee have been or will be paid. The charges, accruals and reserves on the books of the Lessee in respect of taxes or other governmental charges are, in the opinion of the Lessee, adequate. (j) Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all Material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. The execution and delivery of this Agreement, including the issuance and sale of the Notes and the Certificates and the consummation of the transactions contemplated hereby and thereby under the Operative Documents on the Closing Date will not involve any prohibited transactions, within the meaning of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code, involving the use of "Plan assets" (as defined in Regulation Section 2510.3-010 of ERISA). The representation by the Lessee in the preceding sentence is made in reliance upon the subject to the correctness of the representations by the Participants in Section 8.2(a) hereof. (k) Environmental and Other Regulations. Except as set forth in Schedule III attached hereto, the Lessee is in compliance with, and the Property is in compliance in all material respects with, all Environmental Laws in the jurisdiction in which the Property is located and in all other domestic jurisdictions, other than, with respect to such other jurisdictions, those Environmental Laws the non-compliance with which would not have a Material Adverse Effect. (l) Offer of Securities, etc. Neither the Lessee nor any Person authorized to act on its behalf has, directly or indirectly, offered (i) any interest in the Property, the Lease or the Trust Estate or any other interest similar thereto (the sale or offer of which would be integrated with the sale or offer of such interest in the Property, the Lease or the Trust Estate), for sale to, or solicited any offer to acquire any of the same from, any Person other than the Participants, the Owner Trustee, the Indenture Trustee and other "accredited investors" (as defined in Regulation D of the Securities and Exchange Commission) or (ii) any Notes or any other similar securities (the sale or offer of which 39 would be integrated with the sale or offer of the Notes, for sale to, or solicited any offer to acquire any of the same from, any Person other than the Participants and other "accredited investors" (as defined in Regulation D of the Securities and Exchange Commission)). (m) Financial Statements. (i) The audited consolidated statement of financial position of the Lessee and its consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of income, stockholders equity and cash flows for the fiscal year then ended, reported on by Ernst & Young LLP, a copy of which has been delivered to each of the Lessor, the Participants and the Indenture Trustee, present fairly in all material respects, in conformity with generally accepted accounting principles, the financial position of the Lessee as of such date and its results of operations and cash flows for such fiscal year. (ii) The unaudited consolidated statement of financial position of the Lessee and its consolidated Subsidiaries as of June 30, 1998 and the related unaudited consolidated statements of income, stockholders equity and cash flows for the year to date, a copy of which has been delivered to each of the Lessor, the Participants and the Indenture Trustee, present fairly in all material respects, in conformity with generally accepted accounting principles applied on a basis substantially consistent with the financial statements referred to in clause (i) of this subsection (m), the consolidated financial position of the Lessee as of such date and its consolidated results of operations and cash flows for such year-to-date period (subject to normal year-end adjustments). (n) No Material Adverse Change. Since December 31, 1997, there has been no Material adverse change in the condition (financial or otherwise), business, operations, assets, liabilities or properties of the Lessee and its consolidated Subsidiaries taken as a whole, and there has been no damage, destruction or loss of the physical property (whether or not covered by insurance) of the Lessee and its consolidated Subsidiaries which taken as a whole materially and adversely affects their business or operations or the ability of the Lessee to perform its obligations under the Operative Documents to which it is a party, provided that for purposes of this representation and warranty, the Momentum Transaction shall not be deemed to constitute a Material adverse change or result in a Material Adverse Effect. (o) No Defaults. Neither the Lessee nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party or by which it is bound, which default, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (p) Properties; Leases. The Lessee and its respective Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are 40 Material, including all properties reflected in the Lessee's most recent audited financial statements referred to in Section 8.3(m) or purported to have been acquired by the Lessee or any of its Subsidiaries after the date of such audited financial statements (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited in any Operative Document other than Permitted Liens. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. (q) Licenses, Permits, etc. Except as disclosed in Schedule IV, (i) The Lessee and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (ii) To the best knowledge of the Lessee, no product of the Lessee or any of its Subsidiaries infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (iii) To the best knowledge of the Lessee, there is no Material violation by any Person of any right of the Lessee or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Lessee or any of its Subsidiaries. (r) Year 2000. The Lessee and its Subsidiaries have reviewed or are reviewing the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 problem" (that is, the risk that computer applications used by the Lessee and its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such review and program, the Lessee believes that the "Year 2000 Problem" will not have a Material Adverse Effect on the Lessee. SECTION 8.4. Representations of the Lessee With Respect to the Property on the Ground Lease Interest Acquisition Date. The Lessee hereby represents and warrants as follows as of the Ground Lease Interest Acquisition Date: (a) Representations. The representations and warranties of the Construction Agent and the Lessee set forth in the Operative Documents are true and correct. The Construction Agent and the Lessee are in compliance in with their respective obligations under the Operative Documents and there exists no Default or Event of Default. (b) Property. The Property consists of the Ground Lease Interest on which facilities of the type described in Recital A of this Agreement will be constructed 41 pursuant to the Construction Agency Agreement. The Property is located in the State of California. The Property as improved substantially in accordance with the related Plans and Specifications and the anticipated use thereof by the Lessee and its agents, assignees, employees, invitees, lessees, licensees, contractors and tenants will comply in all material respects with all Requirements of Law (including, without limitation, Title III of the Americans with Disabilities Act, all zoning and land use laws and Environmental Laws) and Insurance Requirements, except for such Requirements of Law as the Lessee shall be contesting in good faith by appropriate proceedings. The related Plans and Specifications have been or will be prepared in all material respects in accordance with applicable Requirements of Law (including, without limitation, Title III of the Americans with Disabilities Act, applicable Environmental Laws and building, planning, zoning and fire codes) and upon completion of the facility substantially in accordance with the Plans and Specifications, such facility and the other Improvements on such Property will not encroach in any manner onto any adjoining land (except as permitted by express written easements or as insured by appropriate title insurance) and such facility and other Improvements will comply in all Material respects with all applicable Requirements of Law (including, without limitation, Title III of the Americans with Disabilities Act, all applicable Environmental Laws and building, planning, zoning and fire codes). Upon completion of such facility substantially in accordance with the related Plans and Specifications, the Improvements including, without limitation, structural members, the plumbing, heating, air conditioning and electrical systems thereof, and all water, sewer, electric, gas, telephone and drainage facilities will be completed in a workmanlike manner and will be in first class working condition and fit for use as a suburban office facility, and all other utilities required to adequately service the Improvements for their intended use are or will be available and "tapped on" and hooked up pursuant to adequate permits (including any that may be required under applicable Environmental Laws). There is no action, suit or proceeding (including any proceeding in condemnation or eminent domain or under any Environmental Law) pending or, to the best of the Lessee's knowledge, threatened with respect to the Lessee, its Affiliates or such Property which adversely affects the title to, or the use, operation or value of, the Property. No fire or other casualty with respect to the Property has occurred. The Property has available all material services of public facilities and other utilities necessary for use and operation of such facility and the other Improvements for their primary intended purposes, including, without limitation, adequate water, gas and electrical supply, storm and sanitary sewerage facilities, telephone, other required public utilities and means of access to such facility from publicly dedicated streets and public highways for pedestrians and motor vehicles. All utilities serving such Property, or proposed to serve such Property in accordance with the related Plans and Specifications, are located in, and vehicular access to the Improvements on such Property is provided by, either public rights-of-way abutting such Property or Appurtenant Rights. All material licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof and dedication, required for (x) the use, treatment, storage, transport, disposal or disposition of any Hazardous Substance on, at, under or from such Property during the construction of the Improvements thereon, and (y) construction of such Improvements in accordance with the related Plans and Specifications and the 42 Construction Agency Agreement have either been obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, or will be obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, prior to commencing any such construction or use and operation, as applicable and will in each case be maintained by the Lessee during the periods for which they are required by Applicable Law or such Governmental Authorities. (c) Title. Upon execution and recordation of the Ground Lease, the Ground Lease will create a valid and subsisting leasehold estate in the Land in favor of the Lessor, subject only to Permitted Exceptions. (d) Insurance. The Lessee has obtained insurance coverage covering the Property which meets the requirements of Article XIV of the Lease, and such coverage is in full force and effect. (e) Lease. Upon the execution and delivery of the Lease Supplement to the Lease, (i) the Lessee will have unconditionally accepted the Property and will be bound by the terms of the Lease Supplement and will have a valid leasehold or subleasehold interest in the Property, subject only to the Permitted Exceptions; (ii) the Lessee's obligation to pay Rent will be an independent covenant and no right of deduction or offset will exist with respect to any Rent or other sums payable under the Lease; and (iii) no Rent under the Lease will have been prepaid and the Lessee will have no right to prepay the Rent, except as specifically set forth therein. (f) Protection of Interests. (i) On the Ground Lease Interest Acquisition Date, the Lease Supplement, the Assignment of Lease, the Supplement to Assignment of Lease, the Consent to Assignment and the Mortgage are each in a form sufficient, and if recorded with the Official Records of Alameda County will have been recorded in all recording offices necessary, to grant perfected first priority liens (other than Permitted Exceptions) on the Property to the Indenture Trustee or the Lessor, as the case may be, (ii) the Indenture Trustee Financing Statements are each in a form sufficient, and if filed with the Official Records of Alameda County and the office of the Secretary of State of California, will have been filed in all filing offices necessary, to create a valid and perfected first (other than Permitted Exceptions) priority security interest in the Lessor's interest in all Equipment, if any, to be located on the Property and the Improvements; and (iii) the Lessor Financing Statements are each in a form sufficient, and if filed with the Official Records of Alameda County and the office of the Secretary of State of California will have been filed in all filing offices necessary, to perfect the Lessor's interest under the Lease to the extent the Lease is a security agreement. (g) Flood Hazard Areas. No portion of the Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any portion of the Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for the Property or 43 such portion thereof in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. (h) Conditions Precedent. All conditions precedent contained in this Agreement and in the other Operative Documents relating to the acquisition and leasing of the Property by the Lessor have been satisfied in full or waived. SECTION 8.5. Representations of the Lessee With Respect to Each Advance. The Lessee hereby represents and warrants as of each Funding Date on which an Advance is made as follows: (a) Representations. The representations and warranties of the Construction Agent and the Lessee set forth in the Operative Documents (including the representations and warranties set forth in Sections 8.3 and 8.4) are true and correct in all Material respects on and as of such Funding Date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all Material respects on and as of such earlier date. The Construction Agent and the Lessee are in compliance in all Material respects with their respective obligations under the Operative Documents and there exists no Event of Default or, to the Lessee's knowledge, Default. No Event of Default or, to the Lessee's knowledge, Default will occur as a result of, or after giving effect to, the Advance requested by the Acquisition Request or the Funding Request on such date. (b) Improvements. Construction of the Improvements to date has been performed in a good and workmanlike manner, substantially in accordance with the Plans and Specifications and in compliance with all Insurance Requirements and Requirements of Law. (c) No Liens. There have been no Liens against the Property since the recordation of the Ground Lease, the Lease Supplement, the Assignment of Lease, the Consent to Assignment or the Mortgage other than Permitted Exceptions and Lessor Liens, if any. The Certificate Purchaser Amounts and Loans funding such Advance are secured by the Lien of the Mortgage. (d) Advance. The amount of the Advance requested represents amounts owing or amounts that the Lessee reasonably believes will be due in the one hundred twenty (120) days following such Advance from the Lessee to third parties in respect of Property Improvements Costs, or amounts paid by the Lessee to third parties in respect of Property Costs for which the Lessee has not previously been reimbursed by an Advance. The conditions precedent to such Advance and the related remittances by the Participants with respect thereto set forth in Section 6 have been satisfied. (e) Lease. Upon the execution and delivery of each Equipment Schedule to the Lease, the Lessee will have unconditionally accepted the Equipment, if any, subject to the Lease Supplement and will have good and marketable title to a valid and subsisting leasehold interest in such Equipment, subject only to Permitted Exceptions. 44 (f) Protection of Interests. On each Funding Date for the acquisition of Equipment, (i) the Lease Supplement, the applicable Equipment Schedule and the Mortgage are each a form sufficient to grant perfected Liens on the Lessee's and the Lessor's interests, respectively, in the Equipment to the Lessor and Indenture Trustee, respectively, (ii) the Indenture Trustee Financing Statements are each in a form sufficient, and if filed with the Official Records of Alameda County and the Office of the Secretary of State of California, will have been filed in all filing offices necessary, to create a valid and perfected first priority security interest in such interest in such Equipment, and (iii) the Lessor Financing Statements are each in a form sufficient, and if filed with the Official Records of Alameda County and the Office of the Secretary of State of California, will have been filed in all filing offices necessary, to perfect the Lessor's interest in such Equipment under the Lease to the extent the Lease is a security agreement. (g) Title Insurance Date Down Endorsement. Prior to each Advance during the Construction Period and prior to an Advance following the Construction Period for Property Improvement Costs to which a mechanics' lien could take priority over the lien of the Mortgage or the lien of the Lease, the Lessee shall furnish the Lessor an endorsement or other coverage reasonably acceptable to the Indenture Trustee from the title insurance company issuing the policies pursuant to Section 6.1, insuring the Lessor and the Indenture Trustee that (i) all mechanics' or similar liens and claims for such liens which could arise from that part of the Property Improvements Costs previously paid for, if any, or to be paid for with the then proposed Advance, have been waived and (ii) there has not been filed with respect to all or any parts of the Ground Lease Interest and Improvements any mechanics' or similar liens or claims of such liens that are not discharged of record, or insured over by the title insurance company, in respect of any part of the Ground Lease Interest and Improvements. The Lessee shall pay or cause to be paid the cost of any such endorsement or coverage. SECTION 8.6. 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) Due Organization. It is a corporation duly organized and validly existing under the laws of The Netherlands and has corporate power and authority to enter into and perform its obligations under this Agreement and each other Operative Documents to which it is or will be party. (b) Due Authorization; Enforceability. This Agreement and each other Operative Document to which it is or will be a party (as the Indenture Trustee and, to the extent expressly so provided therein, in its individual capacity) have been, or when executed and delivered will be, duly authorized by all necessary corporate action on the part of the Indenture Trustee and have been, or on the Closing Date or Ground Lease Interest Acquisition Date will have been, duly executed and delivered by the Indenture Trustee (as the Indenture Trustee or in its individual capacity, as the case may be), and, 45 assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto and that this Agreement and each other Operative Document to which it is or will be a party constitutes the legal, valid and binding obligation of the other parties hereto and thereto, are or, upon execution and delivery thereof, will be legal, valid and binding obligations of the Indenture Trustee (as the Indenture Trustee or in its individual capacity, as the case may be), enforceable against it in accordance with their respective terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights or by general equitable principles. The Notes issued on the Closing Date will have been duly authenticated on the Closing Date. (c) No Violation. The execution, delivery and performance by the Indenture Trustee of this Agreement and each other Operative Document to which it is or will be a party are not and will not be inconsistent with the articles of incorporation or by-laws of the Indenture Trustee, do not and will not contravene any applicable law, rule or regulation of the [State of Delaware] or any federal law, rule or regulation of the United States of America governing its banking, trust or fiduciary activities and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it or its properties are bound, or require any consent or approval of any Governmental Authority under any applicable law, rule or regulation of the State of Delaware or any federal law, rule or regulation of the United States of America governing its banking, trust or fiduciary activities. (d) Litigation. There are no actions or proceedings pending or, to its knowledge, threatened, to which it is or will be a party, either in its individual capacity or as Indenture Trustee, before any court, tribunal, administrative agency, board or arbitrator in the State of Delaware that concern the Property or the transaction contemplated by the Operative Documents or that, if adversely determined, would materially and adversely affect is ability to perform its obligations under the Operative Documents to which it is a party, would have a material adverse effect on the financial condition of the Indenture Trustee or would question the validity or enforceability of any of the Operative Documents to which it is or is to become a party. SECTION 9. PAYMENT OF CERTAIN EXPENSES The Lessee agrees, for the benefit of the Lessor, the Indenture Trustee and the Participants, that: SECTION 9.1. Transaction Expenses. (a) During the Construction Period, (i) the Lessee shall pay from time to time all Transaction Expenses of the Lessee and the Ground Lessor in respect of the transactions consummated on the Closing Date, the Ground Lease Interest Acquisition Date or any Funding Date, and (ii) all other 46 Transaction Expenses shall be capitalized and paid as Advances funded by related Loans and Certificate Purchaser Amounts on the date of payment. (b) On the Closing Date and during the Construction Period, the following Transaction Expenses shall be paid as Advances (and funded by related Loans and Certificate Purchaser Amounts) and subsequent to the Construction Period, the Lessee shall pay, as the case may be, (i) the initial and annual fee of Bank for acting as Owner Trustee and all expenses of the Owner Trustee and any necessary co-trustees (including reasonable counsel fees and expenses) or any successor Owner Trustee, for acting as Owner Trustee under the Trust Agreement, (ii) the initial and annual fee of the Indenture Trustee (including reasonable counsel fees and expenses) or any successor Indenture Trustee for acting as Indenture Trustee under the Indenture, (iii) all Transaction Expenses of the Lessor, (iv) the Commitment Fees, (v) the Underwriting Fee, (vi) the Administrative Fee, (vii) all Transaction Expenses incurred by the Indenture Trustee, the Participants or the Lessor in entering into any future amendments or supplements with respect to any of the Operative Documents, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers or consents hereto or thereto, in each case (except after the occurrence of an Event of Default) which have been requested by or approved by the Lessee, (viii) all Transaction Expenses incurred by the Lessor, the Participants or the Indenture Trustee in connection with any purchase of the Property by the Lessee or other Person pursuant to Articles XVI, XVII, XX or XXII of the Lease, and (ix) all Transaction Expenses incurred by any of the other parties hereto in respect of enforcement of any of their rights or remedies against the Lessee in respect of the Operative Documents. The Lessee shall pay its own Transaction Expenses and those of the Ground Lessor. SECTION 9.2. Brokers' Fees and Stamp Taxes. The Lessee shall pay or cause to be paid any brokers' fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents. SECTION 9.3. Obligations. The Lessee shall pay on or before the due date thereof, all costs, expenses and other amounts required to be paid the Owner Trustee under the Mortgage, the Indenture (other than the principal of, and interest on, the Notes) and the Assignment of Lease. SECTION 10. OTHER COVENANTS AND AGREEMENTS SECTION 10.1. Covenants of the Lessee. The Lessee hereby agrees that so long as this Participation Agreement is in effect: 47 (a) Information. The Lessee will deliver to the Lessor, the Participants and the Indenture Trustee: (i) as soon as available and in any event within ninety (90) days after the end of each fiscal year of the Lessee, a statement of financial position of the Lessee and its consolidated subsidiaries as of the end of such fiscal year and the related consolidated statements of income, stockholders equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by independent public accountants of nationally recognized standing, together with a Responsible Officer's Certificate from the chief financial officer of the Lessee substantially in the form of Exhibit R hereto containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in this Section 10.1; (ii) as soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Lessee, an unaudited consolidated statement of financial position of the Lessee as of the end of such period and the related consolidated statements of income, stockholders equity and cash flows for such period and for the portion of the Lessee's fiscal year ended at the end of such period, together with a Responsible Officer's Certificate of the chief financial officer of the Lessee or other officer responsible for the financial affairs of the Lessee substantially in the form of Exhibit R hereto containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in this Section 10.1 and stating that no Default known to the Lessee or Event of Default has occurred or is continuing or, if any Default known to the Lessee or Event of Default has occurred and is continuing, describing it and the steps, if any, being taken to cure it; (iii) promptly after the filing thereof, if applicable, copies (without exhibits thereto other than, in the case of reports on Form 10-K, the portions of the annual report incorporated therein by reference) of all reports on Forms 10-K, 10-Q and 8-K (or their equivalents), which the Lessee shall have filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended; (iv) if and when any member of the ERISA Group (1) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV or ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (2) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (3) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to 48 administer any Plan, a copy of such notice; (4) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application; (5) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (6) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (7) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Lessee setting forth details as to such occurrence and action, if any, which the Lessee or applicable member of the ERISA Group is required or proposes to take; (v) promptly after the occurrence of any Default known to the Lessee or Event of Default, notice thereof in writing, together with information regarding the steps, if any, being taken to cure it; and (vi) from time to time such additional information regarding the Lessee, the Lessee or the Property as the Lessor or the Indenture Trustee, at the request of any Participant, may reasonably request. (vii) statements of financial performance and compliance certificates required to be provided by the Lessee to the Lessor, the Indenture Trustee and the Participants herein shall: (i) include a statement that the Year 2000 remediation efforts of the Lessee and its Subsidiaries are ongoing and no substantial changes have occurred in the disclosures on this subject contained in the most recent filings made by the Lessee to the Securities and Exchange Commission and; (ii) indicate whether an auditor, regulator, or third party consultant has issued a management letter or other communication regarding the Year 2000 exposure, program or progress of the Lessee and/or its Subsidiaries. (b) Compliance with Laws. The Lessee will, and will cause its Subsidiaries to, comply in all material respects with all applicable laws, ordinances, rules, regulations, orders and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and such contest is not reasonably likely to result in a Material Adverse Effect. (c) Further Assurances. The Lessee shall take or cause to be taken from time to time all action necessary to assure during the Term that title to the Property remains in the Lessor as contemplated by Section 12.1 of the Lease, that the Lessor holds a perfected Lien on the Property securing the Lease Balance as contemplated by Section 7.1 of the Lease, and that the Indenture Trustee holds a perfected Lien on the Property, the Lease and the Indenture Trust Estate securing the repayment of the Notes and Certificates. 49 (d) Existence; Franchises; Businesses. Except as otherwise expressly permitted in this Agreement, the Lessee shall, and shall cause each Subsidiary to (i) maintain in full force and effect its separate existence and all rights, licenses, leases and franchises reasonably necessary to the conduct of its business, and (ii) continue doing business as a whole in the lines of business in which they were engaged on the Closing Date. (e) Books and Records. The Lessee shall, and shall cause each Subsidiary to, maintain its books and records in accordance with GAAP, and permit the Lessor and each Participant to make or cause to be made inspections and audits of any books, records and papers of the Lessee and its Subsidiaries and to make extracts therefrom at all such reasonable times after reasonable notice and as often as any such Person may reasonably require, provided that (i) at any time other than during the continuance of an Event of Default, such Person shall not make such inspections and audits more often than once yearly without a specific reasonable purpose and (ii) at any time after the occurrence and during the continuance of an Event of Default, (A) the Lessee shall pay for the cost and expense of any such inspections and audits and (B) the Lessor and each Participant shall have the right to speak directly with the auditors of the Lessee in the presence of the Lessee. (f) Minimum Consolidated Quick Ratio. The Lessee shall maintain at all times a minimum Consolidated Quick Ratio of 1.00 to 1.00, provided that the Consolidated Quick Ratio shall be reduced to .95 to 1.0 solely for the fiscal quarter in which the Momentum Distribution is made. (g) Minimum Consolidated Tangible Net Worth. At no time will the Lessee's Consolidated Tangible Net Worth be less than an amount equal to the sum of (i) eighty-five percent (85%) of the Lessee's Consolidated Tangible Net Worth at the end of the fiscal quarter ending June 30, 1998 (as adjusted for the fiscal quarter in which the Momentum Transaction is consummated) plus (ii) an amount equal to seventy-five percent (75%) of the Lessee's Consolidated Net Income for each fiscal quarter of the Lessee beginning with the quarter ending after June 30, 1998 (but with no deduction on account of negative Consolidated Net Income for any fiscal quarter, unless such negative Consolidated Net Income was caused solely by charges taken for the purchase of in-process research and development, in which case such amount shall be deducted) plus (iii) one hundred percent (100%) of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Board of Directors of the Lessee), received by the Lessee from the issuance and sale after June 30, 1998 of any capital stock of the Lessee (other than the issuance and sale of any capital stock (x) to a Subsidiary of the Lessee or (y) which is required to be redeemed, or is redeemable at the option of the holder, if certain events or conditions occur or exist or otherwise) or in connection with the conversion or exchange of any Indebtedness of the Lessee into capital stock of the Lessee after June 30, 1998. (h) Maximum Consolidated Debt to Consolidated Total Capital Ratio. At no time shall the ratio of the Lessee's Consolidated Debt to Consolidated Total Capital be 50 greater than 0.35 to 1.00, provided that prior to the Lessee or any Subsidiary incurring any new Debt, the Lessee shall prepare a pro forma consolidated balance sheet as of the end of the Lessee's next preceding fiscal quarter reflecting such new Debt and the application of the proceeds thereof, and such pro forma must show that the financial covenants contained in Sections 10.1 (f)-(j) would not be violated as a result of the incurrence of such new Debt. (i) Minimum Consolidated Fixed Charge Ratio. The Lessee shall maintain at all times a minimum Consolidated Fixed Charge Ratio of 1.5 to 1.00 as measured at the end of any fiscal quarter on a rolling four quarter basis. (j) Minimum Consolidated Cash Balances. At no time shall the Lessee's Consolidated Cash Balance fall below Lessee's Adjusted Consolidated Total Liabilities and 150% of Adjusted Consolidated Current Liabilities. (k) Liens. The Lessee shall not, and shall not permit any Subsidiary to, create, assume, or permit to exist, any Lien on any of its property or assets now owned or hereafter acquired except (i) Liens in favor of the Lessor or the Indenture Trustee under the Operative Documents, (ii) statutory Liens of landlords, (iii) easements, rights-of-way, zoning and similar restrictions and other similar charges or encumbrances not interfering with the ordinary conduct of business on assets other than the Property and which do not detract materially from the value of the property to which they attached or impair materially the use thereof, (iv) Liens created to secure purchase money Indebtedness or Capitalized Lease Obligations, provided that such Liens are only in respect of the property or assets subject to, and secure only, such Indebtedness, (v) Permitted Liens and (vi) Liens in an amount (exclusive of other Liens permitted under this Section 10.1(k)) at any time not to exceed 10% of the Lessee's Consolidated Tangible Assets at such time to secure any Indebtedness of the Lessee and Liens permitted under Section 10.1(k)(i) of the Participation Agreement dated as of December 4, 1996, as amended (the "Initial Participation Agreement") among the Lessee and the Lessor, the Indenture Trustee and the Participants (as such terms are defined therein). Notwithstanding the foregoing there shall be no Liens on any of the Cash Collateral or the Collateral other than Liens in favor of the Lessor and the Indenture Trustee, for the benefit of the Participants. (l) Mergers, Acquisitions, Etc.. The Lessee shall not, nor shall it permit any Subsidiary to, enter into any merger, consolidation or amalgamation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), acquire or establish any Subsidiary or acquire all or substantially all of the assets of any other Person; provided, however, that as long as no Default of which the Lessee has knowledge or could have obtained knowledge through the exercise of reasonable diligence in the ordinary course of business or resulting from any affirmative act of the Lessee or Event of Default shall have occurred before or immediately after giving effect thereto: (i) any Subsidiary of the Lessee may be merged or consolidated with or into the Lessee (provided, however, that the Lessee shall be the continuing or surviving corporation) or with or into any one or more wholly-owned Subsidiaries 51 of the Lessee (provided, however, that the wholly-owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); (ii) the Lessee may merge or consolidate with any other Person so long as the Lessee is the surviving corporation; (iii) the Lessee and its Subsidiaries may make any Investment permitted by Section 10.1(p); (iv) the Lessee and its Subsidiaries may make any acquisition in which the consideration paid consists entirely of common stock of the Lessee or any of its Subsidiaries; and (v) the Lessee and its Subsidiaries may make any acquisition in which the cash portion of the consideration paid is $50,000,000 or less. (m) Asset Dispositions. The Lessee shall not, nor shall it permit any Subsidiary to, Transfer any of its assets or property, whether now owned or hereafter acquired; provided, however, that as long as no Default of which the Lessee has knowledge or could have obtained knowledge through the exercise of reasonable diligence in the ordinary course of business or resulting from any affirmative act of the Lessee or Event of Default shall have occurred before or immediately after giving effect thereto: (i) any wholly-owned Subsidiary may Transfer any or all of its assets (upon voluntary liquidation or otherwise) to the Lessee or any other wholly-owned Subsidiary of the Lessee; (ii) the Lessee and its Subsidiaries may Transfer any surplus, damaged, worn or obsolete equipment (other than the Equipment, unless the Lessee has purchased the same or substituted equipment therefor as permitted by the Lease) or inventory for not less than fair market value; (iii) the Lessee and its Subsidiaries may Transfer any defaulted receivables to a collection agency in the ordinary course of business; (iv) the Lessee may Transfer Lot 56 and the Dublin Parcel; (v) the Lessee may Transfer receivables to PeopleSoft Credit Corp. in connection with the financing by the Lessee of any initial sale of a particular software license to a third party; (vi) the Lessee and its Subsidiaries may Transfer any other assets or property (other than the Property or the property (as defined in the Initial Participation Agreement)), provided that the aggregate value of such assets and property (based on the greater of the fair market value or book value of such assets or properties) 52 so Transferred in any fiscal year on a rolling aggregate basis does not exceed fifteen percent (15%) of the Lessee's Consolidated Tangible Net Worth as measured at the end of each fiscal quarter of the Lessee; and (vii) the Lessee may make the Momentum Distribution. (n) Transactions with Affiliates. The Lessee shall not, nor shall it permit any Subsidiary to, conduct any business or enter into any transaction or series of similar transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Lessee or any legal or beneficial owner of 5% or more of any class of capital stock of the Lessee or with any Affiliate of such owner unless the terms of such business, transaction or series of transactions are (i) as favorable to the Lessee or such Subsidiary as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm's-length dealings with an unrelated third Person or, if such transaction is not one which by its nature could be obtained from such Person, is on fair and reasonable terms and (ii) are in the ordinary course of business or, if not in the ordinary course of business, are set forth in writing and the board of directors of the Lessee or such Subsidiary, as the case may be, has determined in good faith that such business or transaction or series of transactions meet the applicable criteria set forth in clause (i) above. (o) Restricted Payments. The Lessee shall not, nor shall it cause or permit any of its Subsidiaries to, make any Restricted Payment; provided, that (i) Lessee's Subsidiaries may make dividends, distributions and payments to the Lessee, (ii) the Lessee may make Restricted Payments consisting of payments made to repurchase or retire, or payments upon the exercise or conversion of, warrants outstanding on the Closing Date to purchase the Company's common stock and (iii) the Lessee may make the Restricted Payments contemplated by the Momentum Transaction. (p) Investments. The Lessee shall not, nor shall it permit any of its Subsidiaries to, make any investment in, or make or accrue loans or advances of money to any Person, through the direct or indirect lending of money, holding of securities or otherwise, other than Permitted Investments and the investment contemplated by the Momentum Transaction. (q) Maintenance and Repair. The Lessee, at its sole cost and expense, shall, and shall cause each of its Subsidiaries to, maintain its properties in good working order, mechanical condition and repair and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all Requirements of Law in all material respects, insurance requirements and contractual requirements and on a basis consistent with the operation and maintenance of commercial properties comparable in type and location to such properties and in compliance with prudent industry practice. 53 (r) Payment of Taxes. The Lessee and each of its Subsidiaries shall promptly pay when due all taxes, assessments or other charges owing by the Lessee or such Subsidiary, except for such taxes, assessments and other charges that are being contested in good faith by appropriate proceedings and adequate reserves shall have been set aside therefor in accordance with GAAP. (s) Insurance. The Lessee shall maintain, and cause each Subsidiary to maintain, such insurance as may be required by law and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated. SECTION 10.2. Cooperation with the Lessee. The Lessor, the Participants and the Indenture Trustee shall, to the extent reasonably requested by the Lessee (but without assuming additional liabilities, duties or other obligations on account thereof), at the Lessee's expense, cooperate with the Lessee in connection with its covenants contained herein including, without limitation, at any time and from time to time, upon the request of the Lessee, to promptly and duly execute and deliver any and all such further instruments, documents and financing statements (and continuation statements related thereto) as the Lessee may reasonably request in order to perform such covenants. SECTION 10.3. Covenants of the Owner Trustee, the Certificate Holders, and the Bank. Each of the Owner Trustee, the Certificate Holders and the Bank, as applicable, hereby agrees with the other parties hereto that so long as this Participation Agreement is in effect: (a) Discharge of Liens. Each of the Certificate Holders, the Owner Trustee and Bank, each agreeing as to itself only, will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Property attributable to it; provided, however, that the Certificate Holders, the Owner Trustee and Bank shall not be required to so discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger of impairment of the Liens of the Liability or the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, the Property or title thereto or any interest therein or the payment of Rent. (b) Trust Agreement. Without prejudice to any right under the Trust Agreement of the Owner Trustee to resign, or the Certificate Holders' right under the Trust Agreement to remove the institution acting as Owner Trustee, each of the Certificate Holders and the Owner Trustee hereby agrees with the Lessee, each Note Holder and the Indenture Trustee (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article V of the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of any such party without the prior written consent of such party and (iii) to comply with all of the terms of the 54 Trust Agreement, the nonperformance of which would adversely affect any such party or the Property or title thereto or any interest therein or the payment of Rent. (c) Successor Owner Trustee. The Owner Trustee or any successor may resign or be removed by the Certificate Holders as Owner Trustee, a successor Owner Trustee may be appointed, and a corporation may become the Owner Trustee under the Trust Agreement, only in accordance with the provisions of Article IV of the Trust Agreement and, in the absence of a Default or an Event of Default, with the consent of the Lessee, which consent shall not be unreasonably withheld or delayed. (d) Indebtedness; Other Business. The Owner Trustee, in its capacity as Owner Trustee under the Trust Agreement, and not in its individual capacity, shall not contract for, create, incur or assume any indebtedness, or enter into any business or other activity, other than pursuant to or under the Operative Documents. (e) Instructions. The Certificate Holders shall give the Owner Trustee all instructions necessary for the Owner Trustee to carry out the Certificate Purchasers' and the Owner Trustee's obligations under the Operative Documents, including without limitation the Indenture and the Security Documents and shall not instruct the Owner Trustee to take any action in contravention of the Operative Documents. (f) Change of Chief Place of Business. The Owner Trustee shall give prompt notice to the Lessee and the Indenture Trustee if the Owner Trustee's name changes or the chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to the Property are kept, shall cease to be located as set forth in Section 8.1(i). (g) Performance of Covenants. The Lessor will (i) cause its representations and warranties contained herein and each of the other Operative Documents to be true and correct as of the date made or deemed made herein or therein, (ii) perform on a timely basis its covenants and agreements contained herein and in the other Operative Documents and (iii) deliver on a timely basis all certificates, statements and other documents required to be delivered by it herein and in the other Operative Documents. SECTION 11. LESSEE DIRECTIONS The Note Holders, the Indenture Trustee, the Certificate Purchasers, the Lessee and the Owner Trustee hereby agree that, so long as no Default or Event of Default under the Lease exists, the Lessee shall have the exclusive right to approve any successor Indenture Trustee pursuant to Section 7.8 of the Indenture. 55 SECTION 12. TRANSFERS OF PARTICIPANTS' INTERESTS SECTION 12.1. Restrictions on and Effect of Transfer by Participants. (a) Transfer of Notes. Each Note Holder agrees that it will transfer any Notes held by it only in a transaction which is exempt from registration under the Securities Act and otherwise in accordance with applicable federal and state securities laws, the terms hereof and of the Security Documents. By acceptance of any Notes, each Note Holder shall be deemed to have made the representations set forth in Section 8.2(a) hereof and such acceptance shall constitute such Note Holder's agreement to be bound by the terms and provisions of this Agreement and the Security Documents. (b) Note Transfer Procedures. Each of the parties hereto, and each other Note Holder, by its acceptance of a Note, hereby agrees as follows: (i) On or prior to the date of any transfer of a Note by a Note Holder, such Note Holder shall furnish to the Certificate Holders, the Owner Trustee, the Indenture Trustee and the Lessee a written notice (a "Transfer Notice") (A) setting forth the name of the proposed transferee, (B) specifying the particular representation contained in Section 8.2(a)(ii) hereof that shall be deemed made by the transferee Note Holder upon such transfer and (C) in the event that such notice shall specify that the representation that shall be deemed made by the proposed transferee is of the type set forth in subparagraph (B), (C), or (E) of Section 8.2(a)(ii) hereof, such notice shall be given not less than ten days prior to the date of transfer and shall further set forth the information required to be disclosed pursuant to such subparagraph; and (ii) In the event that the Transfer Notice shall contain information of the type described in clause (C) of the preceding paragraph, then the Lessee shall use commercially reasonable efforts to determine as promptly as practicable (but in no event later than ten days following receipt of the Transfer Notice) whether, as a result of matters relating to the Lessee or the Certificate Holders or any of their respective Affiliates, the proposed transfer could result in a prohibited transaction, within the meaning of section 406 or 407 of ERISA or in a transaction in connection with which a tax could be imposed pursuant to Section 4975 of the Code (or any successor provision thereto); and (iii) In the event that the Lessee shall determine that the proposed transfer could result in such a prohibited transaction or a transaction in connection with which a tax could be imposed pursuant to Section 4975 of the Code, then (a) the Lessee shall thereupon furnish written notice to such Note Holder and such other party describing in reasonable detail the basis of such conclusion and (b) such Note Holder shall refrain from consummating the proposed transaction, unless and until such Note Holder shall obtain the written concurrence of the Lessee and the Certificate Holders to such transfer. Upon the request of such Note Holder, 56 the Lessee and the Certificate Holders, as appropriate, agree to confer in good faith regarding such conclusion. (iv) Prior to a refinancing, if any, of the Notes and Certificates in the private placement market, the restrictions on transfer applicable to Certificate Holders set forth in Section 12.1(c) shall be equally applicable to transfers of Notes by Note Holders and each Note Holder wishing to transfer any Note shall comply therewith, substituting "Note Holder", "Notes" and "Note Purchaser" for "Certificate Holder", "Certificates" and "Certificate Purchaser" as required. (c) Transfers of Certificates. No Certificate Holder may (without, in the absence of a continuing Lease Default or Lease Event of Default, the prior written consent of the Lessee (not to be unreasonably withheld)) assign, convey or otherwise transfer all or any portion of its right, title or interest in, to or under its Certificates or any of the Operative Documents, or the Property, provided that (1) any Certificate Holder may pledge its interest without the consent of the Lessee to any Federal Reserve Bank, (2) each transferee must be an Institutional Investor, (3) without the prior written consent of the Lessee, any Certificate Purchaser may transfer all or any portion of its interest to any Institutional Investor that has either capital, surplus and undivided profits of at least $40,000,000 or a net worth of at least $40,000,000 and (4) without the prior written consent of the Lessee, each Certificate Purchaser may transfer all or any portion of its interest to any Affiliate of such Participant or to any other existing Participant; provided that in the case of any transfer (other than to such Affiliate) each of the following conditions and any other applicable conditions of the other Operative Documents are satisfied: (i) Required Notice and Effective Date. If a Certificate Holder desires to effect a transfer of its Certificates (or any portion thereof), it shall give written notice of each such proposed transfer to the Lessee, the Indenture Trustee and each other Participant at least five (5) Business Days prior to such proposed transfer, setting forth the name of such proposed transferee, the percentage or interest to be retained by such Participant, if any, and the date on which such transfer is proposed to become effective. All reasonable out-of-pocket costs (including, without limitation, legal expenses) incurred by the Lessor, the Indenture Trustee or any Participant in connection with any such disposition by such Participant under this Section 12.1(c) shall be borne by such transferring Participant. In the event of a transfer under this Section 12.1(c), any expenses incurred by the transferee in connection with its review of the Operative Documents and its investigation of the transactions contemplated thereby shall be borne by such transferee or the relevant Participant, as they may determine, but shall not be considered costs and expenses which the Lessee is obligated to pay or reimburse under Section 9. Any such proposed transfer shall become effective upon the later of (i) the date proposed in the transfer notice referred to above and (ii) the date on which all conditions to such transfer set forth in this Section 12.1(c) shall have been satisfied. 57 (ii) Assumption of Obligations. Any transferee of a Certificate Holder's interest pursuant to this Section 12.1 shall execute and deliver to the Indenture Trustee, the Lessor and the Lessee an Assignment and Acceptance in substantially the form attached hereto as Exhibit J ("Assignment and Acceptance"), duly executed by such transferee and the transferring Participant, and a letter in substantially the form of the Participant's Letter attached hereto as Exhibit K ("Participant's Letter"), duly executed by such transferee, and thereupon the obligations of the transferring Participant under the Operative Documents shall be proportionately released and reduced to the extent of such transfer. Upon any such transfer as above provided, the transferee shall be deemed to be bound by all obligations (whether or not yet accrued) under, and to have become a party to, all Operative Documents to which its transferor was a party, shall be deemed the pertinent "Participant" for all purposes of the Operative Documents and shall be deemed to have made that portion of the payments pursuant to this Participation Agreement previously made or deemed to have been made by the transferor represented by the interest being conveyed; and each reference herein and in the other Operative Documents to the pertinent "Certificate Purchaser" or "Certificate Holder" shall thereafter be deemed a reference to the transferee, to the extent of such transfer, for all purposes. Upon any such transfer, the Indenture Trustee shall deliver to each Participant, the Lessor and the Lessee a new Schedule I and Schedule II to this Agreement, revised to reflect the relevant information for such new Participant and the Commitment of such new Participant (and the revised Commitment of the transferor Participant if it shall not have transferred its entire interest). (iii) Representations. Notwithstanding anything to the contrary set forth above, no Certificate Holder may assign, convey or transfer its interest to any Person, unless such Person shall have delivered to the Indenture Trustee, the Lessor and the Lessee a certificate confirming the accuracy of the representations and warranties set forth in Section 8 with respect to such Person (other than as such representation or warranty relates to the execution and delivery of Operative Documents) and representing that such Person has, independently and without reliance upon the Indenture Trustee, any other Participant or, except to the extent of the Lessee's representations made under the Operative Documents when made, the Lessee, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into this transaction, the Property and the Lessee and made its own decision to enter into this transaction. (iv) Applicable Law. Such transfer shall comply with Applicable Law and shall not require registration under any securities law applicable thereto. (v) At-Risk Requirements. Any transferee of a Certificate Holder's interest pursuant to this Section 12.1 agrees to comply with the "at-risk" requirements under GAAP with respect to such interest as set forth in Issues 90-15, 96-21 and 97-1 of The Emerging Issues Task Force Abstracts published by the Financial Accounting Standards Board, provided that the foregoing transfer restriction shall 58 not apply (A) after the occurrence and during the continuance of an Event of Default or (B) to any transfer necessitated as a result of any of the events specified in Section 13.9. (d) Effect. From and after any transfer of its Notes or Certificates, the transferring Participant shall be released, to the extent assumed by the transferee, from its liability and obligations hereunder and under the other Operative Documents to which such transferor is a party in respect of obligations to be performed on or after the date of such transfer. Upon any transfer by a Participant as above provided, any such transferee shall be deemed a "Participant" for all purposes of such documents and each reference herein to a Participant shall thereafter be deemed a reference to such transferee for all purposes to the extent of such transfer, except as the context may otherwise require. Notwithstanding any transfer as provided in this Section 12.1, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer, including, without limitation, rights to indemnification under this Participation Agreement or any other Operative Document. (e) Arranger's Fee. Each transferring Participant shall pay to the Arranger a transfer fee of $2,500. SECTION 12.2. Covenants and Agreements of Participants. (a) Participations. Each Participant covenants and agrees that it will not grant participations in its Notes or Certificates to any Person (a "Sub-Participant") unless such participation complies with Applicable Law and does not require registration under any securities law applicable thereto and such Sub-Participant (i) is a bank or other financial institution and (ii) represents and warrants, in writing, to such Participant for the benefit of the Participants, the Lessor and the Lessee that (A) no part of the funds used by it to acquire an interest in any Participation Interest constitutes assets of any "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code) and (B) such Sub-Participant is acquiring its interest for investment purposes without a view to the distribution thereof. Any such Person shall require any transferee of its interest in its Notes or Certificates to make the representations and warranties set forth in the preceding sentence, in writing, to such Person for its benefit and the benefit of the Participants, the Lessor, the Indenture Trustee and Lessee. In the event of any such sale by a Participant of a participating interest in its Notes or Certificates to a Sub-Participant, such Participant's obligations under this Participation Agreement and under the other Operative Documents shall remain unchanged, such Participant shall remain solely responsible for the performance thereof, such Participant shall remain the holder of its Notes or Certificates, for all purposes under this Participation Agreement and under the other Operative Documents, and the Lessor, the Indenture Trustee and, except as set forth in Section 12.2(b), the Lessee shall continue to deal solely and directly with such Participant in connection with such Participant's rights and obligations under this Participation Agreement and under the other Operative Documents. 59 (b) Transferee Indemnities. Each Sub-Participant shall be entitled to the benefits of Sections 13.5, 13.6, and 13.7 and 13.10 with respect to its participation in the Notes or Certificates outstanding from time to time; provided that no Sub-Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Participant would have been entitled to receive in respect of the amount of the participation transferred by such transferor Participant to such Sub-Participant had no such transfer or participation occurred. SECTION 12.3. Future Participants. Each Participant shall be deemed to be bound by and, upon compliance with the requirements of this Section 12, will be entitled to all of the benefits of the provisions of, this Participation Agreement. SECTION 13. INDEMNIFICATION SECTION 13.1. General Indemnification. The Lessee agrees, whether or not any of the transactions contemplated hereby shall be consummated, to assume liability for, and to indemnify, protect, defend, save and keep harmless each Indemnitee, on an After Tax Basis, from and against, any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee (whether because of action or omission by such Indemnitee or otherwise), whether or not such Indemnitee shall also be indemnified as to any such Claim by any other Person and whether or not such Claim arises or accrues prior to the Closing Date or after the Expiration Date, in any way relating to or arising out of: (a) any of the Operative Documents or any of the transactions contemplated thereby or any violation thereof by the Lessee, and any amendment, modification or waiver in respect thereof; (b) the Property, the Lease, the Ground Lease, the Trust Estate, the Indenture Trust Estate or any part thereof or interest therein; (c) the purchase, design, construction, preparation, installation, inspection, delivery, non-delivery, acceptance, rejection, ownership, management, possession, operation, rental, lease, sublease, repossession, maintenance, repair, alteration, modification, addition or substitution, storage, transfer of title, redelivery, use, financing, refinancing, disposition, operation, condition, sale (including, without limitation, any sale pursuant to Sections 16.2, 16.3, 16.4, 17.2(c), 17.2(e) or 17.4 of the Lease or any sale pursuant to Articles XX or XXII of the Lease), return or other disposition of all or any part or any interest in the Property or the imposition of any Lien (or incurring of any liability to refund or pay over any amount as a result of any Lien) thereon, including, without limitation: (1) Claims or penalties arising from any violation of federal, state or local law, rule, regulation or order or in tort (strict liability or otherwise), (2) latent or other defects, whether or not discoverable, (3) any Claim based upon a violation or 60 alleged violation of the terms of any restriction, easement, condition or covenant or other matter affecting title to the Property, (4) the making of any Modifications in violation of any standards imposed by any insurance policies required to be maintained by Lessee pursuant to the Lease which are in effect at any time with respect to the Property or any part thereof, (5) any Claim for patent, trademark or copyright infringement, and (6) Claims arising from any public improvements with respect to the Property resulting in any charge or special assessments being levied against the Property or any plans to widen, modify or realign any street or highway adjacent to the Property; (d) the offer, issuance or sale of the Notes and Certificates, provided that (i) the Lessor shall not be entitled to indemnification under this clause (d) if it shall have been determined by a court of competent jurisdiction to have breached its representation set forth in Section 8.1(h), (ii) no Participant shall be entitled to indemnification under this clause (d) if it shall have been determined by a court of competent jurisdiction to have breached its representation set forth in Section 8.2(b)(vi) and (iii) neither the Lessor, the Indenture Trustee nor any Participant shall be entitled to indemnification under this clause (d) with respect to any Claim which a court of competent jurisdiction determines to have arisen out of any misrepresentation of a material fact made by the Lessor, the Indenture Trustee or such Participant, unless the misrepresentation was made in reliance upon and in conformity with information furnished to the Lessor, the Indenture Trustee or such Participant, as applicable, by the Lessee; (e) the breach by the Lessee of any covenant, representation or warranty made by it or deemed made by it in any Operative Document or any certificate required to be delivered by any Operative Document; (f) the retaining or employment of any broker, finder or financial advisor by the Lessee to act on its behalf in connection with this Participation Agreement, or the incurring of any fees or commissions to which the Lessor might be subjected by virtue of entering into the transactions contemplated by this Participation Agreement; (g) the existence of any Lien on or with respect to the Property, the Improvements, the Equipment, any Basic Rent or Supplemental Rent, the Cash Collateral, title thereto, or any interest therein including any Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of the Property or by reason of labor or materials furnished or claimed to have been furnished to the Lessee, the Existing Owner, the Lessor or any of their contractors or agents or by reason of the financing of the Property or any personalty or equipment purchased or leased by the Lessee or Improvements or Modifications constructed by the Lessee, except Lessor Liens and Liens in favor of the Indenture Trustee or the Lessor; (h) the transactions contemplated by the Lessee hereby or by any other Operative Document, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA and any prohibited transaction described in Section 4975(c) of the Code (other than any Claim resulting from a breach of representation or warranty of the Lessor or any Participant); or 61 (i) the lease of the Ground Lease Interest and the purchase or ownership of the other Property by the Lessor, or any matters arising therefrom or related thereto; provided, however, the Lessee shall not be required to indemnify (x) the Lessor for any Claim to the extent arising from any misrepresentation by the Lessor under Section 8.1 (e) or (l) or from the failure by the Lessor to comply with Section 10.3 (a), or (y) any Indemnitee under this Section 13.1 for any of the following: (1) any Claim to the extent resulting from the willful misconduct or gross negligence of such Indemnitee (it being understood that the Lessee shall be required to indemnify an Indemnitee even if the ordinary (but not gross) negligence of such Indemnitee caused or contributed to such Claim), (2) any Claim resulting from Lessor Liens which the Lessor is responsible for discharging under the Operative Documents, (3) any Claim to the extent attributable to acts or events occurring after the expiration of the Term or the return or remarketing of the Property so long as the Lessor, the Indenture Trustee and the Participants are not exercising remedies against the Lessee in respect of the Operative Documents and no Default or Event of Default under the Lease has occurred and is continuing, (4) any Imposition or other claims for Taxes of the type(s) described in Section 13.5 and (5) any Claims of the type(s) described in Sections 13.2 (only with respect to claims in respect of a decline in the Fair Market Sales Value of the Property as a result of an event described in Section 13.2(b) and the Lessee's exercise of the Remarketing Option), 13.6, 13.7, 13.8 and 13.10, or (z) any Indemnitee for any such Claim under this Section 13.1 arising during the Construction Period except as follows: (1) The Lessee shall indemnify the Indemnitees as provided in this Section 13.1 from and against any and all such liabilities, losses, damages and expenses caused by or arising from any failure by the Lessee to comply with any of its obligations under the Operative Documents (including its insurance obligations), any representation by the Lessee in any of the Operative Documents not being true, any negligence or willful misconduct of the Lessee, or any claim by any third-party against the Lessee (or against any Indemnitee) based upon the alleged action or inaction by the Lessee. (2) If any Lessor Party incurs any such claims or expenses for which the Lessee is not obligated to indemnify such Lessor Party pursuant to clause (z) (1) of Section 13.1, such claims shall, if such Lessor Party shall so request by a written notice to the Lessor, be capitalized pursuant to Section 3.9(f). It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of and shall be separate and independent from any remedy under the Lease or any other Operative Document. Without limiting the express rights of any Indemnitee under this Section 13.1, this Section 13.1 shall be construed as an indemnity only and not a guaranty of residual value of the Property or as a guaranty of the Participation Interests. 62 SECTION 13.2. End of Term Indemnity. (a) If the Lessee elects the Remarketing Option and there would, after giving effect to the proposed remarketing transactions, be a Shortfall Amount, then prior to the Maturity Date and as a condition to the Lessee's right to complete the remarketing of the Property pursuant to Section 22.1 of the Lease, the Lessee shall cause to be delivered to the Lessor at least 30 days prior to the Expiration Date, at the Lessee's sole cost and expense, an Appraisal in form and substance satisfactory to the Lessor, the Indenture Trustee and the Required Participants (the "End of the Term Report") which shall state the appraiser's conclusions as to the reason for any decline in the Fair Market Sales Value of the Property from that anticipated for such date in the Appraisal delivered on the Closing Date. (b) Prior to the Expiration Date, the Lessee shall pay to the Lessor an amount (not to exceed the Shortfall Amount) equal to the portion of the Shortfall Amount that the End of the Term Report demonstrates was the result of a decline in the Fair Market Sales Value of the Property due to: (i) extraordinary wear and tear, excessive usage, failure to maintain, to repair, to restore, to rebuild or to replace, failure to comply with the Lease and all applicable laws, failure to use, workmanship, method of installation or removal or maintenance, repair, rebuilding or replacement (excepting in each case ordinary wear and tear); (ii) any Modification made to, or any rebuilding of, the Property or any part thereof by the Lessee without the consent of the Lessor; or (iii) the existence of any Hazardous Activity, Hazardous Substance or Environmental Violations; or (iv) any restoration or rebuilding carried out by the Lessee or any sublessee; or (v) any condemnation of any portion of the Property pursuant to Article XV of the Lease; or (vi) any use of the Property or any part thereof by the Lessee or any sublessee other than as a suburban office facility; or (vii) any grant, release, dedication, transfer, annexation or amendment made pursuant to Section 12.2 of the Lease; or (viii) the failure of the Lessor to have a good and marketable leasehold or fee estate in the Property, as required by the Operative Documents, free and clear of all Liens (including Permitted Liens) and exceptions to title, except (A) such Liens or exceptions to title that existed on the Ground Lease Interest Acquisition 63 Date and were disclosed in the policy of title insurance delivered pursuant to Section 6.1; (B) Lessor Liens and (C) other Liens specifically consented to by the Lessor. SECTION 13.3. Environmental Indemnity. Without limitation of the other provisions of this Section 13, the Lessee hereby agrees to indemnify, hold harmless and defend each Indemnitee from and against any and all claims (including without limitation third party claims for personal injury or real or personal property damage), losses (including but not limited to any loss of value of the Property), damages, liabilities, fines, penalties, charges, administrative and judicial proceedings (including informal proceedings) and orders, judgments, remedial action, requirements, enforcement actions of any kind, and all reasonable and documented costs and expenses incurred in connection therewith (including but not limited to reasonable and documented attorneys' and/or paralegals' fees and expenses), including, but not limited to, all costs incurred in connection with any investigation or monitoring of site conditions or any clean-up, remedial, removal or restoration work by any federal, state or local government agency, which such Indemnitee becomes subject to because of its involvement with the Property, the transactions contemplated by the Operative Documents or any other matter referred to in paragraphs (a) through (i) of Section 13.1 arising in whole or in part, out of: (a) the presence on or under the Property of any Hazardous Substances, or any Releases or discharges of any Hazardous Substances on, under, from or onto the Property; (b) any activity, including, without limitation, construction, carried on or undertaken on or off the Property, and whether by the Lessee, the Lessor, the Ground Lessor or any predecessor in title or any employees, agents, contractors or subcontractors of the Lessee, the Lessor, the Ground Lessor or any predecessor in title, or any other Persons (including such Indemnitee), in connection with the handling, treatment, removal, storage, decontamination, cleanup, transport or disposal of any Hazardous Substances that at any time are located or present on or under or that at any time migrate, flow, percolate, diffuse or in any way move onto or under the Property; (c) loss of or damage to any property or the environment (including, without limitation, cleanup costs, response costs, remediation and removal costs, cost of corrective action, costs of financial assurance, fines and penalties and natural resource damages), or death or injury to any Person, and all expenses associated with the protection of wildlife, aquatic species, vegetation, flora and fauna, and any mitigative action required by or under Environmental Laws; (d) any claim concerning lack of compliance with Environmental Laws, or any act or omission causing an environmental condition that requires remediation or would allow any Governmental Authority to record a Lien on the land records; (e) any residual contamination on or under the Property, or affecting any natural resources, or any contamination of any property or natural resources arising in 64 connection with the generation, use, handling, storage, transport or disposal of any such Hazardous Substances, and irrespective of whether any of such activities were or will be undertaken in accordance with applicable Environmental Laws; or (f) any material inaccuracies, misrepresentations, misstatements, and omissions and any conflicting information contained in or omitted from the Environmental Audit; provided, however, the Lessee shall not be required to indemnify any Indemnitee under this Section 13.3 for (1) any Claim to the extent resulting from the willful misconduct or gross negligence of such Indemnitee (it being understood that the Lessee shall be required to indemnify an Indemnitee even if the ordinary (but not gross) negligence of such Indemnitee caused or contributed to such Claim), (2) subject to the provisions Section 15.2 of the Lease, any Claim to the extent attributable to acts or events occurring after the expiration of the Term or the return or remarketing of the Property so long as the Lessor, the Indenture Trustee and the Participants are not exercising remedies against the Lessee in respect of the Operative Documents and no Default or Event of Default under the Lease has occurred and is continuing, (3) any Imposition or other claims for Taxes of the type(s) described in Section 13.5 or (4) any Claims of the type(s) described in Sections 13.2 (only with respect to claims in respect of a decline in the Fair Market Sales Value of the Property and the Lessee's exercise of the Remarketing Option), 13.6, 13.7, 13.8 and 13.10. It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of and shall be separate and independent from any remedy under the Lease or any other Operative Document. SECTION 13.4. Proceedings in Respect of Claims. With respect to any amount that the Lessee is requested by an Indemnitee to pay by reason of Section 13.1 or 13.3, such Indemnitee shall, if so requested by the Lessee and prior to any payment, submit such additional information to the Lessee as the Lessee may reasonably request and which is in the possession of such Indemnitee to substantiate properly the requested payment. In case any action, suit or proceeding shall be brought against any Indemnitee, such Indemnitee shall notify the Lessee of the commencement thereof, and if the Construction Period limitation on indemnification set forth in clause (z) of the proviso to Section 13.1 does not apply, the Lessee shall be entitled, at its expense, to participate in, and, to the extent that the Lessee desires to, assume and control the defense thereof; provided, however, that the Lessee shall have acknowledged in writing its obligation to fully indemnify such Indemnitee in respect of such action, suit or proceeding, and the Lessee shall keep such Indemnitee fully apprised of the status of such action, suit or proceeding and shall provide such Indemnitee with all information with respect to such action, suit or proceeding as such Indemnitee shall reasonably request, and provided further, that the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any possibility of imposition of criminal liability or any risk of material civil liability on such Indemnitee or will involve 65 a material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Property or any part thereof unless, in the case of civil liability or Lien, the Lessee shall have posted a bond or other security satisfactory to the relevant Indemnitee in respect to such risk or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest, (B) such proceeding involves Claims not fully indemnified by the Lessee which the Lessee and the Indemnitee have been unable to sever from the indemnified claim(s), or (C) an Event of Default under the Lease has occurred and is continuing. The Indemnitee may participate in a reasonable manner at its own expense and with its own counsel in any proceeding conducted by the Lessee in accordance with the foregoing. The Lessee shall not enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 13.1 or 13.3 without the prior written consent of the Indemnitee which consent shall not be unreasonably withheld in the case of a money settlement not involving an admission of liability of such Indemnitee. Each Indemnitee shall at the expense of the Lessee cooperate with and supply the Lessee with such information and documents reasonably requested by the Lessee as are necessary or advisable for the Lessee to participate in any action, suit or proceeding to the extent permitted by Section 13.1 or 13.3. Unless an Event of Default under the Lease shall have occurred and be continuing, no Indemnitee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 13.1 or 13.3 without the prior written consent of the Lessee, which consent shall not be unreasonably withheld, unless such Indemnitee waives its right to be indemnified under Section 13.1 or 13.3 with respect to such Claim. Upon payment in full of any Claim by the Lessee pursuant to Section 13.1 or 13.3 to or on behalf of an Indemnitee, the Lessee, without any further action, shall be subrogated to any and all claims that such Indemnitee may have relating thereto (other than claims in respect of insurance policies maintained by such Indemnitee at its own expense), and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents, instruments and agreements as may be necessary to preserve any such claims and otherwise cooperate with the Lessee and give such further assurances as are necessary or advisable to enable the Lessee vigorously to pursue such claims. Any amount payable to an Indemnitee pursuant to Section 13.1 or 13.3 shall be paid to such Indemnitee promptly upon receipt of a written demand therefor from such Indemnitee, accompanied by a written statement describing in reasonable detail the basis for such indemnity and the computation of the amount so payable and, if requested by the Lessee, such determination shall be verified by a nationally recognized independent accounting firm mutually acceptable to the Lessee and the Indemnitee at the expense of the Lessee. SECTION 13.5. General Impositions Indemnity. 66 (a) Indemnification. The Lessee shall pay and assume liability for, and does hereby agree to indemnify, protect and defend the Property and all Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis; provided, however, that the Lessee shall have no obligation to indemnify any Indemnitee for any such Impositions under this Section 13.5 arising during the Construction Period except as follows: (1) The Lessee shall indemnify the Indemnitees as provided in this Section 13.5 from and against any and all such Impositions caused by or arising from any failure by the Lessee to comply with any of its obligations under the Operative Documents (including its insurance obligations), any representation by the Lessee in any of the Operative Documents not being true, any negligence or willful misconduct of the Lessee, or any claim by any third-party against the Lessee (or against any Indemnitee) based upon the alleged action or inaction by the Lessee. (2) If any Lessor Party incurs any such claims or expenses for which the Lessee is not obligated to indemnify such Lessor Party pursuant to Section 13.5(a), such liabilities, losses, damages and expenses shall, if such Lessor Party shall so request by a written notice to the Lessor, be capitalized pursuant to Section 3.9(f). (b) Payments. (i) Subject to the terms of Section 13.5(a) and (f), the Lessee shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnitee, as appropriate, and the Lessee shall at its own expense, upon such Indemnitee's reasonable request, furnish to such Indemnitee copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 13.5(f) and which the Lessee pays directly to the taxing authorities, the Lessee shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Lessee reimburses an Indemnitee, the Lessee shall do so within twenty (20) days after receipt by the Lessee of demand by such Indemnitee describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable), but in no event shall the Lessee be required to pay such reimbursement prior to thirty (30) days before the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which a contest is conducted pursuant to Section 13.5(f), the Lessee shall pay such Impositions or reimburse such Indemnitee for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 13.5(f). (iii) At the Lessee's request, the amount of any indemnification payment by the Lessee pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Lessee and the Indemnitee. The fees and expenses of such independent public 67 accounting firm shall be paid by the Lessee unless such verification shall result in an adjustment in the Lessee's favor of 5% or more of the payment as computed by the Indemnitee, in which case such fee shall be paid by the Indemnitee. (c) Reports and Returns. (i) The Lessee shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of the Property. In case any other report or tax return shall be required to be made with respect to any obligations of the Lessee under or arising out of subsection (a) and of which the Lessee has knowledge or should have knowledge, the Lessee, at its sole cost and expense, shall notify the relevant Indemnitee of such requirement and (except if such Indemnitee notifies the Lessee that such Indemnitee intends to file such report or return) (A) to the extent required or permitted by and consistent with Applicable Law, make and file in its own name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnitee, advise such Indemnitee of such fact and prepare such return, statement or report for filing by such Indemnitee or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Lessee under or arising out of subsection (a), provide such Indemnitee at the Lessee's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Lessee under or arising out of subsection (a). Such Indemnitee shall, upon the Lessee's request and at the Lessee's expense, provide any data maintained by such Indemnitee (and not otherwise available to or within the control of the Lessee) with respect to the Property which the Lessee may reasonably require to prepare any required tax returns or reports. Each Indemnitee agrees to use its best efforts to send to the Lessee a copy of any written request or other notice that the Indemnitee receives with respect to any reports or returns required to be filed with respect to the Property or the transactions contemplated by the Operative Documents, it being understood that no Indemnitee shall have any liability for failure to provide such copies. (d) Income Inclusions. If as a result of the payment or reimbursement by the Lessee of any expenses of the Lessor or the payment of any Transaction Expenses incurred in connection with the transactions contemplated by the Operative Documents, the Lessor or any Participant shall suffer a net increase in any federal, state or local income tax liability, the Lessee shall indemnify such Persons (without duplication of any indemnification required by subsection (a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings realized or reasonably expected to be realized by such person in respect thereof, as well as any interest, penalties and additions to tax payable by the Lessor, or any Participant or such Affiliate, in respect thereof. (e) Withholding Taxes. As between the Lessee on one hand, and the Lessor or the Indenture Trustee and any Participant on the other hand, the Lessee shall be responsible for, and, subject to the provisions of Sections 13.5(g) and (h), the Lessee shall indemnify and hold harmless the Lessor, the Indenture Trustee and the Participants (without duplication of any indemnification required by subsection (a)) on an After Tax 68 Basis against, any obligation for United States or foreign withholding taxes imposed in respect of payments with respect to the Participation Interests or with respect to Rent payments under the Lease or payments of the Asset Termination Value or Purchase Option Price (and, if the Lessor, the Indenture Trustee or any Participant receives a demand for such payment from any taxing authority, the Lessee shall discharge such demand on behalf of the Lessor, the Indenture Trustee or such Participant). Notwithstanding the foregoing, the Lessee shall not be responsible for any payment of any withholding tax if the Lessee is not liable under the Operative Documents for payment of the ultimate tax. (f) Contests of Impositions. (i) If a written claim is made against any Indemnitee or if any proceeding shall be commenced against such Indemnitee (including a written notice of such proceeding), for any Impositions, such Indemnitee shall promptly notify the Lessee in writing and shall not take action with respect to such claim or proceeding without the consent of the Lessee for thirty (30) days after the receipt of such notice by the Lessee; provided, however, that, in the case of any such claim or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnitee shall, in such notice to the Lessee, inform the Lessee of such shorter period, and no action shall be taken with respect to such claim or proceeding without the consent of the Lessee before 2 days before the end of such shorter period; provided, further, that the failure of such Indemnitee to give the notices referred to this sentence shall not diminish the Lessee's obligation hereunder except to the extent such failure precludes the Lessee from contesting all or part of such claim. (ii) If, within thirty (30) days of receipt of such notice from the Indemnitee (or such shorter period as the Indemnitee has notified the Lessee is required by law or regulation for the Indemnitee to commence such contest), the Lessee shall request in writing that such Indemnitee contest such Imposition, the Indemnitee shall, at the expense of the Lessee, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest involves a tax other than a tax on net income and can be pursued independently from any other proceeding involving a tax liability of such Indemnitee, the Indemnitee, at the Lessee's request, shall allow the Lessee to conduct and control such contest and (B) in the case of any contest, the Indemnitee may request the Lessee to conduct and control such contest) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Lessee from time to time. (iii) The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided, that all decisions ultimately shall be 69 made in the sole discretion of the controlling party. The parties agree that an Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Indemnitee shall waive its rights to any indemnity from the Lessee that otherwise would be payable in respect of such claim (and any future claim by any taxing authority, the contest of which is precluded by reason of such resolution of such claim) and shall pay to the Lessee any amount previously paid or advanced by the Lessee pursuant to this Section 13.5 by way of indemnification or advance for the payment of an Imposition other than expenses of such contest. (iv) Notwithstanding the foregoing provisions of this Section 13.5, an Indemnitee shall not be required to take any action and the Lessee shall not be permitted to contest any Impositions in its own name or that of the Indemnitee unless (A) the Lessee shall have agreed such Imposition is subject to indemnity hereunder and shall pay to such Indemnitee on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnitee actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a claim that must be pursued in the name of an Indemnitee (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in any audit involving such Indemnitee for which the Lessee may be liable to pay an indemnity under this Section 13.5) exceeds $100,000, (C) the Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of the Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, the Lessee shall provide to the Indemnitee an interest-free advance in an amount equal to the Imposition that the Indemnitee is required to pay (with no additional net after-tax cost to such Indemnitee), (E) in the case of a claim that must be pursued in the name of an Indemnitee (or an Affiliate thereof), the Lessee shall have provided to such Indemnitee an opinion of independent tax counsel selected by the Indemnitee and reasonably satisfactory to the Lessee stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that there is substantial authority for the position asserted in such appeal) and (F) no Event of Default hereunder shall have occurred and be continuing. In no event shall an Indemnitee be required to appeal an adverse judicial determination to the United States Supreme Court. In addition, an Indemnitee shall not be required to contest any claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 13.5, unless there shall have been a change in law (or interpretation thereof) and the Indemnitee shall have received, at the Lessee's expense, an opinion of independent tax counsel selected by the Indemnitee and reasonably acceptable to 70 the Lessee stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnitee will prevail in such contest. (g) Documentation of Withholding Status. Each Participant (or any successor thereto or transferee thereof) that is organized under the laws of a jurisdiction outside of the United States of America and each Lessor or Indenture Trustee that is organized under the laws of a jurisdiction outside of the United States of America shall: (i) on or before the date it becomes a party to any Operative Document, deliver to the Lessor and the Lessee any certificates, documents, or other evidence that shall be required by the Code or Treasury Regulations issued pursuant thereto to establish its exemption from United States Federal withholding requirements, including (A) two valid, duly completed, original copies of Internal Revenue Service Form 1001 or Form 4224 or successor applicable form, properly and duly executed, certifying in each case that such party is entitled to receive payments pursuant to the Operative Documents without deduction or withholding of United States Federal income taxes, or (B) a valid, duly completed, original copy of Internal Revenue Service Form W-8 or Form W-9 or applicable successor form, properly and duly executed, certifying that such party is entitled to an exemption from United States of America backup withholding tax; and (ii) so long as it shall be legally entitled to do so, on or before the date that any such form described above expires or becomes obsolete, or after the occurrence of any event requiring a change in the most recent such form previously delivered to the Lessor and the Lessee, deliver to the Lessee two further valid, duly completed, original copies of any such form or certification, properly and duly executed. (h) Limitation on Tax Indemnification. The Lessee shall not be required to indemnify any Indemnitee, or to pay any increased amounts to any Indemnitee or tax authority with respect to any Impositions pursuant to this Section 13.5 to the extent that such Imposition is attributable to such Indemnitee's failure to comply with the provisions of Section 13.5(g) (and, in such case, the Lessee may deduct and withhold all Taxes required by law as a result of such noncompliance from payments made by the Lessee pursuant to the Operative Documents). (i) Tax Savings. In the event an Indemnitee receives a refund (or similar tax savings) in respect of any Imposition paid or reimbursed by the Lessee, such Indemnitee shall within thirty (30) days thereafter remit the amount of such refund (or tax savings) to the Lessee, provided that the amount so remitted shall not exceed the lesser of: (i) the amount received by such Indemnitee as a refund (or tax savings) net of all reasonable costs and expenses incurred by such Indemnitee in connection with obtaining and paying such amount; and (ii) (a) the amount of all prior payments by the Lessee to such Indemnitee with respect to Impositions, plus any refunded interest, less (b) the amount of all prior payments by the Indemnitee to the Lessee under this Section 13.5(i). 71 SECTION 13.6. Funding Losses. If any payment of any Eurodollar Rate Advance or any portion of any Loan or Certificate Purchaser Amount with respect thereto is made on any day other than the last day of an Interest Period applicable thereto, or if any payment of any Fixed Rate Advance or any portion of any Loan or Certificate Purchaser Amount with respect thereto is made on any day other than the last day of the Fixed Rate Period applicable thereto, or if the Lessee fails to utilize the proceeds of any Loans or Certificate Purchaser Amounts after notice has been given to the Lessor or any Participant in accordance with Section 3 or 4, the Lessee shall reimburse the Lessor and each Participant within fifteen (15) days after demand for any resulting loss, expense, breakage costs or swap breakage costs incurred by it, including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, provided that in the case of a Eurodollar Rate Advance or a Fixed Rate Advance, such Participant or the Lessor shall have delivered to the Lessee a certificate as to the amount of such loss, expense or costs, which certificate shall be conclusive in the absence of manifest error, and provided further that in the case of a Eurodollar Rate Advance, such loss shall in no event exceed the interest or Certificate Yield on the Loans or Certificate Purchaser Amounts funding such Advance which would have been payable for the balance of such Interest Period, less the amount actually earned by the Lessor or such Participant on such Loans or Certificate Purchaser Amounts. SECTION 13.7. Regulation D Compensation. For so long as any Participant or the Lessor is required to increase its existing reserve percentage against "Eurocurrency Liabilities" (or any other category of liabilities which include deposits by reference to which the interest rate or Certificate Yield rate on its Loans or Certificate Purchaser Amounts or Advances is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Participant to United States residents), and, as a result, the cost to such Participant (or its Funding Office) or the Lessor of making or maintaining its Loans or Certificate Purchaser Amounts with respect to any Advance is increased, then such Participant or the Lessor may require the Lessee to pay, contemporaneously with each payment of interest or Certificate Yield on the Loans or Certificate Purchaser Amounts an additional amount at a rate per annum up to but not exceeding the excess of (i) (A) the applicable Eurodollar Rate divided by (B) one minus the Eurocurrency Reserve Requirements and (ii) the applicable Eurodollar Rate. SECTION 13.8. Basis for Determining Interest Rate or Certificate Yield Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period: (a) deposits in dollars (in the applicable amounts) are not being offered to the Indenture Trustee in the relevant market for such Interest Period or any Participants shall advise the Indenture Trustee that the Eurodollar Rate as determined by the Indenture Trustee will not adequately and fairly reflect the cost to such Participant of funding its Loans or Certificate Purchaser Amounts with respect to any Advance for such Interest Period; or 72 (b) any Participant determines that, by reason of the adoption, on or after the date of this Participation Agreement, of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Participant (or its Funding Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or governmental agency, it is restricted, directly or indirectly, in the amount it may hold of (i) a category of liabilities that includes deposits by reference to which, or on the basis of which, the interest rates or Certificate Yield rates applicable to Advances based on the Eurodollar Rate are directly or indirectly determined, or (ii) the category of assets which includes Advances based on the Eurodollar Rate; the Indenture Trustee shall forthwith give notice thereof to the Lessee and the Participants, whereupon until the Indenture Trustee notifies the Lessee that the circumstances giving rise to such suspension no longer exist, each outstanding Loan and Certificate Purchaser Amount shall begin to bear interest at the Alternate Base Rate plus the Applicable Margin on the last day of the then current Interest Period applicable thereto. SECTION 13.9. Illegality. If, on or after the date of this Participation Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Participant (or its Funding Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for any Participant (or its Funding Office) to make, maintain or fund its Loans or Certificate Purchaser Amounts with respect to any Advance and such Participant shall so notify the Indenture Trustee, the Indenture Trustee shall forthwith give notice thereof to the other Participants and the Lessee, whereupon until such Participant notifies the Lessee and the Indenture Trustee that the circumstances giving rise to such suspension no longer exist, the obligation of such Participant to fund its Loans or Certificate Purchaser Amounts with respect to any Advance shall be suspended. If such notice is given, each outstanding Loan and Certificate Purchaser Amount of such Participant then outstanding shall begin to bear interest at the Alternate Base Rate plus the Applicable Margin either (a) on the last day of the then current Interest Period applicable to such Advance if such Participant may lawfully continue to maintain and fund such Loan or Certificate Purchaser Amount to such day or (b) immediately if such Participant shall determine that it may not lawfully continue to maintain and fund such Loan or Certificate Purchaser Amount to such day. SECTION 13.10.Increased Cost and Reduced Return. (a) In the event that the adoption of any applicable law, rule or regulation, or any change therein or in the interpretation or application thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Participant or the Lessor with any request or directive after the date 73 hereof (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) does or shall subject such Participant or the Lessor to any additional tax of any kind whatsoever with respect to the Operative Documents or any Loan or Certificate Purchaser Amount or Advance made by it, or change the basis or the applicable rate of taxation of payments to such Participant or the Lessor of principal, Certificate Purchaser Amount, Certificate Yield or any other amount payable hereunder (except for the imposition of or change in any tax on or measured by the overall net income of such Participant or the Lessor (other than any such tax imposed by means of withholding)); or (ii) does or shall impose, modify or hold applicable any reserve, special deposit, insurance assessment, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Participant or the Lessor which are not otherwise included in determination of the rate of interest or Certificate Yield rate on Advances hereunder; and the result of any of the foregoing is to increase the cost to such Participant of making or maintaining its Loan or Certificate Purchaser Amounts or Advances or to reduce any amount receivable hereunder with respect thereto, then in any such case, the Lessee shall promptly pay such Participant or the Lessor, upon its demand, any additional amounts necessary to compensate such Participant or the Lessor for such increased cost or reduced amount receivable which such Participant or the Lessor deems to be material as determined by such Participant or the Lessor; provided, however, that the Lessee shall have no obligation to pay any additional amounts under this Section 13.10(a) on account of any increased costs or reduced amounts arising during the Construction Period except as follows: (1) The Lessee shall pay any additional amounts under this Section 13.10(a) on account of any increased costs or reduced amounts caused by or arising from any failure by the Lessee to comply with any of its obligation under the Operative Documents (including its insurance obligations), any representation by the Lessee in any of the Operative Documents not being true, any negligence or willful misconduct of the Lessee, or any claim by any third-party against the Lessee (or against any Lessor Party) based upon the alleged action or inaction by the Lessee. (2) If any Lessor Party incurs any such increased costs or reduced amounts for which the Lessee is not obligated to pay additional amounts pursuant to clause (1) above, the amount of such increased costs and reduced amounts shall, if such Lessor Party shall so request by a written notice to the Lessor, be capitalized pursuant to Section 3.9(f). 74 (b) If any Participant or the Lessor shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency has or would have the effect of reducing the rate of return on capital of such Participant or the Lessor (or any entity directly or indirectly controlling such Participant or the Lessor) as a consequence of such Participant's or the Lessor's obligations under the Operative Documents to a level below that which such Participant or the Lessor (or any entity directly or indirectly controlling such Participant or the Lessor) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Participant or the Lessor to be material, then from time to time, within 15 days after demand by such Participant or the Lessor (with a copy to the Indenture Trustee), the Lessee shall pay to such Participant or the Lessor such additional amount or amounts as will compensate such Participant or the Lessor (or its parent) for such reduction. SECTION 13.11.Notice and Mitigation. Each demand for payment of Supplemental Rent pursuant to Sections 13.6, 13.7, 13.9 or 13.10 must be accompanied by a certificate of the Person claiming compensation (an "Affected Person") setting forth in reasonable detail the computation of such compensation (including the reasons therefor), which certificate shall be conclusive and binding for all purposes absent manifest error. Prior to demand by an Affected Person for Supplemental Rent pursuant to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.9 or 13.10, such Affected Person agrees that it will use its reasonable efforts to reduce and eliminate any claim for compensation including, subject to Applicable Law, a change in applicable lending office for this transaction; provided, however, that nothing herein shall obligate an Affected Person to take any action which, in the opinion of such Affected Person, is unlawful, or results in any unreimbursed costs or expenses to such Affected Person, which costs or expenses would not have been incurred but for such action. No Affected Person shall be entitled to any compensation under this Section 13.11 with respect to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.9 or 13.10 unless at the time it requests such compensation it is the policy or general practice of such Affected Person to demand compensation for comparable costs in similar circumstances under comparable provisions of documents to which it is a party. SECTION 13.12.Substitution of Participant. If (i) the obligation of any Participant to make Loans or fund Certificate Purchaser Amounts has been suspended pursuant to this Section 13, or (ii) any Participant has demanded compensation or given notice of its intention to demand compensation under Section 13.11 with respect to Sections 13.6 (other than a demand relating to Fixed Rate Advances), 13.7, 13.8, 13.9 or 13.10, the Lessee shall have the right, with the assistance of the Indenture Trustee, to seek one or more mutually satisfactory substitute banks or financial institutions (which may be one or more of the Participants) to replace such Participant under the Operative Documents. 75 SECTION 13.13.Indemnity Payments in Addition to Residual Value Guarantee Amount. The Lessee acknowledges and agrees that its obligations to make indemnity payments under this Section 13 are separate from, in addition to, and do not reduce, its obligation to pay the Residual Value Guarantee Amount under the Lease; provided, that except as otherwise set forth in Section 13.2 hereof, the Shortfall Amount payable by the Lessee in connection with the Remarketing Option under the Lease shall not be increased under this Section 13. SECTION 13.14.Limitations on Indemnification. Notwithstanding any other provisions of Sections 13.1, 13.5 or 13.10 (the "Indemnification Sections") to the contrary, during the Construction Period, the Lessee (i) shall only be obligated to indemnify the Lessor (and not any other Indemnitee, except to the extent any Claims of such Indemnitee, Impositions against such Indemnitee, or losses, costs or expenses suffered or incurred by such Indemnitee arise solely from a Fully Indemnifiable Event) for any Claims of the Lessor under Section 13.1, Impositions against the Lessor under Section 13.5, or losses, costs or expenses suffered or incurred by the Lessor under Section 13.10 (collectively "Lessor Losses") provided, that such Lessor Losses shall include costs and expenses of the Lessor under Section 13.15 and (ii) shall have no right to contest any matter covered under Section 13.1, 13.5 or 13.10, notwithstanding the language of Section 13.1, 13.5 or 13.10, if such matter is not fully indemnifiable by the Lessee because of the operation of Section 13.14 or because such matter is not indemnifiable due to the exclusions set forth in Section 13.1 (z), 13.5 (a) or 13.10(a). SECTION 13.15.Lessor Indemnification. (a) Indemnified Losses. During the Construction Period, the Lessor shall pay, indemnify, protect, defend, save and keep harmless each Indemnitee (other than the Lessor, its Affiliates, successors, assigns, directors, shareholders, partners, officers, employees and agents) (an "Indemnified Party") on an After Tax Basis from and against any Losses (as hereinafter defined) arising from Covered Matters (as hereinafter defined), subject to the limitations set forth in this Section 13.15. (b) Definitions. For purposes of this Section 13.15, the following terms shall have the meanings set forth below: "Covered Matters" means each of the matters set forth in the Indemnification Sections. "Losses" means each of the Claims, Impositions, losses, costs or expenses indemnified against pursuant to any of the Indemnification Sections. (c) No Indemnification for Certain Matters. The Lessor shall not be required to indemnify or hold harmless any Indemnified Party hereunder against any matter referred to in clause (a) of this Section (i) to the extent arising solely as a result of any Fully Indemnifiable Event or (ii) to the extent of the exceptions or exclusions from indemnification contained in any of the Indemnification Sections. 76 (d) Limitations on Indemnification by Lessor. The Lessor's obligation to indemnify and hold harmless any Indemnified Party under this Section: (i) is not an individual or personal obligation of the Lessor or the Bank, but solely its obligation as Owner Trustee, and nothing herein shall be construed as creating any liability on the Bank, individually or personally, to pay, indemnify or hold harmless any Indemnified Party under this Section; (ii) is not an obligation binding on the Trust Estate created by the Trust Agreement except to the extent of any payments received by the Lessor pursuant to the Indemnification Sections; (iii) shall be paid and discharged solely and exclusively from amounts received by the Lessor pursuant to the Indemnification Sections, and it is expressly agreed by each Indemnified Party that the sole recourse of each such Person for payment or discharge of the indemnification obligations created under this Section shall be to such amounts paid by the Lessee or the Guarantor pursuant to the Indemnification Sections; (iv) is the sole and exclusive right of each Indemnified Party against the Lessor, and any right to proceed against the Lessor individually or otherwise under common law, federal or state securities laws or otherwise for indemnification or contribution in connection with the matters covered by this Section, is hereby expressly waived by each Indemnified Party (other than claims that may be made against the Lessor or the Bank, individually or personally, for fraud, gross negligence or willful misconduct). Nothing in this Section is intended as or should be construed as a limitation on the right of any Indemnified Party to make indemnification, contribution or other claims of any kind against the Lessee or the Guarantor, to the extent that such claims otherwise may be made, with respect to any matter, including indemnification for Losses of the type referred to in this Section. (d) Repayment to the Lessor. To the extent that any payments made pursuant to the Indemnification Sections are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by the Lessor to a trustee, debtor in possession, receiver or other Person under any Bankruptcy Law, common law or equitable cause, then to such extent, the Indemnified Parties who received any such payments from the Lessor (or any portion thereof) shall repay any such amounts to the Lessor, or as may otherwise be directed by a court of competent jurisdiction. (f) Survival, Reinstatement. The indemnification obligations of the Lessor under this Section shall survive and be reinstated to the same extent, for the same period and in the same manner as the indemnification obligations of the Lessee under the Indemnification Sections. 77 (g) Indemnification Procedures. The right of any Indemnified Party to seek indemnification from the Lessor under this Section is subject to and conditioned upon compliance by any such Indemnified Party with the notice, cooperation, appointment of counsel, contest rights and other provisions in the Indemnification Sections as fully as if such Sections were set forth herein, except (i) that any reference in the Indemnification Sections to the Lessee shall be deemed to be a reference to the Lessor or, if the Lessor so directs in any case, the Lessor and/or the Lessee for purposes of this Section and (ii) the limitation in the Indemnification Sections on the number of counsel that may be engaged to represent Indemnified Parties shall be deemed to be a reference to the same number of counsel acting on behalf of Indemnified Parties rather than Indemnitees under the Indemnification Sections, to the extent such costs are recoverable pursuant to the Indemnification Sections. SECTION 14. THE INDENTURE TRUSTEE Each Certificate Holder hereby irrevocably designates and appoints the Indenture Trustee as the agent of such Participant under this Agreement, the Indenture and the other Operative Documents to the extent set forth in the Indenture, and each Certificate Holder irrevocably authorizes the Indenture Trustee, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Operative Documents and to exercise such powers and perform such duties as are expressly delegated to the Indenture Trustee by the terms of this Agreement, the Indenture and the other Operative Documents, together with such other powers as are reasonably incidental thereto. SECTION 15. MISCELLANEOUS SECTION 15.1. Survival of Agreements. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Participation Agreement, the transfer of the Property to the Lessor, the construction of any Improvements, any disposition of any interest of the Lessor in the Property or any Improvements, payment of the Notes and Certificates and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents. Except as otherwise expressly set forth herein or in other Operative Documents, the indemnities of the parties provided for in the Operative Documents shall survive the expiration or termination of any thereof. 78 SECTION 15.2. No Broker, etc. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Participation Agreement or the transactions contemplated herein, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. SECTION 15.3. Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing and delivered (i) personally, (ii) by a nationally recognized overnight courier service, (iii) by mail (by registered or certified mail, return receipt requested, postage prepaid) or (iv) by facsimile, in each case directed to the address of such Person as indicated on Schedule II. Any such notice shall be effective upon receipt or refusal. From time to time any party may designate a new address for purposes of notice hereunder by written notice to each of the other parties hereto in accordance with this Section. SECTION 15.4. Counterparts. This Participation Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 15.5. Amendments. Subject to the provisions of Section 8.1 of the Indenture, no Operative Document nor any of the terms thereof may be terminated, amended, supplemented, waived or modified with respect to the Lessee, the Lessor, the Bank, the Indenture Trustee or any Participant, except (a) in the case of a termination, amendment, supplement, waiver or modification to be binding on the Lessee, the Lessor, the Bank, or the Indenture Trustee, with the written agreement or consent of such party, and (b) in the case of a termination, amendment, supplement, waiver or modification to be binding on the Participants, with the written agreement or consent of the Required Participants; provided, however, that (x) no such termination, amendment, supplement, waiver or modification shall without written agreement or consent of each Participant: (i) modify any of the provisions of this Section 15.5, change the definition of "Required Participants" or modify or waive any provision of an Operative Agreement requiring action by the foregoing; (ii) amend, modify, waive or supplement any of the provisions of Section 3.8 or Sections 5, and 6 of the Indenture or the representations of such Participant in Section 8 or the covenants in Sections 7 and 10 of this Participation Agreement; 79 (iii) reduce, modify, amend or waive any fees or indemnities in favor of any Participant, including without limitation amounts payable pursuant to Section 13 (except that any Person may consent to any reduction, modification, amendment or waiver of any indemnity payable to it); (iv) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any Operative Agreement), any payment in respect of its Note or Certificate, or any payment of the Asset Termination Value, Commitment Fee, Residual Value Guarantee Amount, amounts due pursuant to Section 22.2 of the Lease, interest, Certificate Yield or, subject to clause (iii) above, any other amount payable under the Lease or this Participation Agreement, or modify the definition or method of calculation of Rent (other than pursuant to the terms of any Operative Agreement), Asset Termination Value, Commitment Fee, Shortfall Amount, Residual Value Guarantee Amount, Property Improvements Cost, Participant Balance, Tranche A Participant Balance, Tranche B Participant Balance, or any other definition which would affect the amounts to be advanced or which are payable under the Operative Documents; (v) consent to any assignment of the Lease, releasing the Lessee from its obligations in respect of the payments of Rent and the Asset Termination Value or changing the absolute and unconditional character of such obligation; (vi) except as authorized by the Operative Documents, release the Lessor's interest in all or a substantial part of the Property; (vii) amend the definition of "Event of Default;" (viii) terminate or release the Guarantee or amend, supplement, waive or modify any provision thereof; (ix) increase the amount of the Commitment of such Participant; and (y) no other termination, amendment, supplement, waiver or modification shall, without the written agreement or consent of the Lessor and the Required Participants, be made to the Lease or Section 6 of this Participation Agreement. SECTION 15.6. Headings, etc. The Table of Contents and headings of the various Sections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. SECTION 15.7. Parties in Interest. Except as expressly provided herein, none of the provisions of this Participation Agreement are intended for the benefit of any Person except the parties hereto. Subject to the provisions of Section 25.1 of the Lease, 80 the Lessee shall not assign or transfer any of its rights or obligations under the Operative Documents without the prior written consent of the Lessor, the Indenture Trustee and the Participants, except that the Lessee may without such consent assign rights or obligations of the Lessee under the Operative Documents to a Subsidiary of the Lessee, provided that the Lessee remains primarily liable with respect to such obligations and provides its full unconditional and irrevocable guaranty of such Subsidiary's obligations under the Operative Documents, such guaranty to be in form and substance reasonably satisfactory to the Required Participants. SECTION 15.8. GOVERNING LAW. THIS PARTICIPATION AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAW OF THE STATE OF CALIFORNIA (EXCLUDING ANY CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SECTION 15.9. Severability. Any provision of this Participation Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 15.10.Liability Limited. (a) The Lessee, the Indenture Trustee, and the Participants each acknowledge and agree that the Owner Trustee is (except as otherwise expressly provided herein or therein) entering into this Participation Agreement and the other Operative Documents to which it is a party (other than the Trust Agreement), solely in its capacity as trustee under the Trust Agreement and not in its individual capacity and that Bank shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Owner Trustee in its trust capacity, except for its own gross negligence or willful misconduct and as otherwise expressly provided herein or in the other Operative Documents, and it is understood and agreed that all obligations of the Lessor to the Lessee, the Indenture Trustee, any Certificate Holder and any Note Holder under the Operative Documents are solely nonrecourse obligations (except as otherwise expressly provided therein) enforceable only against the Trust Estate. (b) Each party hereto acknowledges that the provisions of Section 7.2 of the Indenture in favor of the Indenture Trustee shall apply to the Indenture Trustee under each other Operative Document. SECTION 15.11.Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of 81 this Participation Agreement, the other Operative Documents, and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense and without need of any prior request from any other party, shall take such action as may be necessary (including any action specified in the preceding sentence), or (if the Lessor shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Document. SECTION 15.12.Submission to Jurisdiction. The Lessee hereby submits to the nonexclusive jurisdiction of the United States District Court for the Northern District of California and of any California state court sitting in San Francisco for purposes of all legal proceedings arising out of or relating to the Operative Documents or the transactions contemplated hereby. The Lessee irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 15.13.Confidentiality. The Lessor, the Indenture Trustee and each Participant represent that they will maintain the confidentiality of the transactions contemplated by, and of any written or oral information provided under, the Operative Documents by or on behalf of the Lessee (hereinafter collectively called "Confidential Information"), subject to the Lessor's, the Indenture Trustee's and each Participant's (a) obligation to disclose any such Confidential Information pursuant to a request or order under applicable laws and regulations or pursuant to a subpoena or other legal process, (b) right to disclose any such Confidential Information to its bank examiners, Affiliates, auditors, counsel and other professional advisors and to other Participants, (c) right to disclose any such Confidential Information in connection with any litigation or dispute involving the Participants and the Lessee or any of its Subsidiaries and Affiliates and (d) right to provide such information to Sub-Participants, prospective Sub-Participants to which sales of participating interests are permitted pursuant to this Participation Agreement and prospective assignees to which assignments of interests are permitted pursuant to this Participation Agreement, but only if (i) such Sub-Participant, prospective Sub-Participant or prospective assignee agrees in writing to maintain the confidentiality of such information on terms substantially similar to those of this Section as if it were a "Participant" party hereto and (ii) the Lessee receives copies of such written agreement prior to the release of such information. Notwithstanding the foregoing, any such information supplied to a Participant, Sub-Participant, prospective Sub-Participant or prospective assignee under this Participation Agreement shall cease to be Confidential Information if it is or becomes known to such Person by other than unauthorized disclosure, or if it becomes a matter of public knowledge. SECTION 15.14.WAIVER OF JURY TRIAL. EACH OF THE LESSEE, THE INDENTURE TRUSTEE, THE LESSOR, AND EACH PARTICIPANT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY 82 LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 15.15.Usury Savings Clause. Nothing contained in this Participation Agreement or the other Operative Documents shall be deemed to require the payment of interest or other charges by the Lessee or any other Person in excess of the amount which may be may lawfully be charged under any applicable usury laws. In the event that the Lessor or any other Person shall collect moneys under the Participation Agreement or any other Operative Document which are deemed to constitute interest (including, without limitation, the Basic Rent or Supplemental Rent) which would increase the effective interest rate to a rate in excess of that permitted to be charged by applicable law, all such sums deemed to constitute interest in excess of the legal rate shall, upon such determination, at the option of the Person to whom such payment was made, be returned to the Person making such payment or credited against other amounts owed by the person making such payment. [SIGNATURE PAGES FOLLOW] DOCUMENT NUMBER: 363621.7 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. PEOPLESOFT, INC., as Lessee By:_____________________________________ Mark G. Thompson, Treasurer WILMINGTON TRUST COMPANY, not in its individual capacity, except as expressly stated herein, but solely as Owner Trustee By:_____________________________________ Name: Title: ABN AMRO BANK N.V., not in its individual capacity, except as expressly stated herein, but solely as Indenture Trustee By:_____________________________________ Name: Title: 83 By:_____________________________________ Name: Title: ABN AMRO LEASING, INC., as a Certificate Purchaser By:_____________________________________ Name: Title: ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as a Note Purchaser By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: CREDIT LYONNAIS LOS ANGELES BRANCH, as a Note Purchaser By:_____________________________________ Name: Title: KEYBANK NATIONAL ASSOCIATION, as a Note Purchaser By:_____________________________________ Name: Title: BANQUE NATIONALE DE PARIS, as a Note Purchaser By:_____________________________________ Name: 84 Title: FLEET BANK, as a Note Purchaser By:_____________________________________ Name: Title: THE FUJI BANK, LIMITED, as a Note Purchaser By:_____________________________________ Name: Title: THE DAI-ICHI KANGYO BANK, LIMITED, as a Note Purchaser By:_____________________________________ Name: Title: THE BANK OF NOVA SCOTIA, as a Note Purchaser By:_____________________________________ Name: Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY, as a Note Purchaser By:_____________________________________ Name: Title: WELLS FARGO BANK, as a Note Purchaser By:_____________________________________ Name: Title: 85 //SCHEDULE I
PRE-COMPLETION POST-COMPLETION PRE-COMPLETION POST-COMPLETION COMMITMENT COMMITMENT PARTICIPANT COMMITMENTS COMMITMENTS PERCENTAGE PERCENTAGE 364 Day Commitments ABN AMRO LEASING, INC. Tranche A Loan Commitment: 0.0% 0.0% Tranche B Loan Commitment: 0.0% 0.0% Certificate Commitment: 3.0% 3.0% Total 364 Day Commitment: 3.0% 3.0% ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH Tranche A Loan Commitment: 9.85782568% 9.37535145% Tranche B Loan Commitment: 0.77853796% 1.26101218% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 10.63636364% 10.63636364% CREDIT LYONNAIS LOS ANGELES BRANCH Tranche A Loan Commitment: 9.68931584% 9.21508903% Tranche B Loan Commitment: 0.76522962% 1.23945642% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 10.45454545% 10.45454545% KEYBANK NATIONAL ASSOCIATION Tranche A Loan Commitment: 9.68931584% 9.21508903% Tranche B Loan Commitment: 0.76522962% 1.23945642% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 10.45454545% 10.45454545% BANK NATIONALE DE PARIS
86 Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% FLEET BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% MELLON BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% THE FUJI BANK, LIMITED Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% THE BANK OF NOVA SCOTIA Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937%
87 Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% WELLS FARGO BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total 364 Day Commitment: 8.18181818% 8.18181818% AGGREGATE 364 DAY TRANCHE A 89.90000000% 85.50000000% LOAN COMMITMENT OF ALL PARTICIPANTS: AGGREGATE 364 DAY TRANCHE B 7.10000000% 11.50000000% LOAN COMMITMENT OF ALL PARTICIPANTS: AGGREGATE 364 DAY CERTIFICATE 3.00000000% 3.00000000% COMMITMENT OF ALL PARTICIPANTS: AGGREGATE 364 DAY COMMITMENT $83,000,000 $83,000,000 100.00000000% 100.00000000% OF ALL PARTICIPANTS: EIGHTEEN MONTH COMMITMENTS ABN AMRO LEASING, INC. Tranche A Loan Commitment: 0.0% 0.0% Tranche B Loan Commitment: 0.0% 0.0% Certificate Commitment: 3.0% 3.0% Total Eighteen Month 3.0% 3.0% Commitment:
88 ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH Tranche A Loan Commitment: 9.85782568% 9.37535145% Tranche B Loan Commitment: 0.77853796% 1.26101218% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 10.63636364% 10.63636364% Commitment: CREDIT LYONNAIS LOS ANGELES BRANCH Tranche A Loan Commitment: 9.68931584% 9.21508903% Tranche B Loan Commitment: 0.76522962% 1.23945642% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 10.45454545% 10.45454545% Commitment: KEYBANK NATIONAL ASSOCIATION Tranche A Loan Commitment: 9.68931584% 9.21508903% Tranche B Loan Commitment: 0.76522962% 1.23945642% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 10.45454545% 10.45454545% Commitment: BANK NATIONALE DE PARIS Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: FLEET BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0%
89 Total Eighteen Month 8.18181818% 8.18181818% Commitment: MELLON BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: THE FUJI BANK, LIMITED Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: THE BANK OF NOVA SCOTIA Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937%
90 Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: WELLS FARGO BANK Tranche A Loan Commitment: 7.58294283% 7.21180881% Tranche B Loan Commitment: 0.59887535% 0.97000937% Certificate Commitment: 0.0% 0.0% Total Eighteen Month 8.18181818% 8.18181818% Commitment: AGGREGATE EIGHTEEN MONTH 89.90000000% 85.50000000% TRANCHE A LOAN COMMITMENT OF ALL PARTICIPANTS: AGGREGATE EIGHTEEN MONTH 7.10000000% 11.50000000% TRANCHE B LOAN COMMITMENT OF ALL PARTICIPANTS: AGGREGATE EIGHTEEN MONTH 3.00000000% 3.00000000% CERTIFICATE COMMITMENT OF ALL PARTICIPANTS: AGGREGATE EIGHTEEN MONTH $27,000,000 $27,000,000 100.00000000% 100.00000000% COMMITMENT OF ALL PARTICIPANTS:
// SCHEDULE II Notice Information, Funding Offices and Payment Instructions Lessee:PEOPLESOFT, INC. 4305 Hacienda Drive Pleasanton, California 94588 Attention: General Counsel Telephone: (925) 694-7180 Facsimile: (925) 694-7184 with copies to:PEOPLESOFT, INC. 4305 Hacienda Drive Pleasanton, California 94588 Attention: Director of Real Estate 91 Telephone: (925) 694-7053 Facsimile: (925) 694-7050 PEOPLESOFT, INC. 4305 Hacienda Drive Pleasanton, California 94588 Attention: Chief Financial Officer Telephone: (925) 694-7114 Facsimile: (925) 694-7190 GRIGGS RESOURCE GROUP 3470 Mt. Diablo Boulevard Suite A-205 Lafayette, California 94549 Attention: Brian Griggs Telephone: (510) 299-4870 Facsimile: (510) 299-4872 ORRICK HERRINGTON & SUTCLIFFE 400 Sansome Street San Francisco, California 94111 Attention: William Murray Telephone: (415) 773-5807 Facsimile: (415) 773-5759 Lessor:WILMINGTON TRUST COMPANY Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Facsimile: (302) 651-8882 Payments shall be made to: Wilmington Trust Company Wilmington, Delaware ABA No.: 031100092 For Credit to: PeopleSoft '98 Account No.: 46147-0 92 Attention: Charisse Rodgers, Corp Trust Administration Telephone: (302) 651-8951 Facsimile: (302) 427-4749 Indenture Trustee: ABN AMRO BANK N.V. 1325 Avenue of the Americas New York, New York 10019 Attention: Edward Corletzi Telephone: (212) 314-1721 Facsimile: (212) 314-1709 Payments shall be made to: Federal Reserve Bank of New York, New York, NY ABN AMRO Bank New York ABA No.: 026009580 For account of: ABN AMRO Bank San Francisco Account No.: 651001054541 Re: PeopleSoft, Inc. Co-Trustee: U.S. BANK TRUST NATIONAL ASSOCIATION One California Street, Suite 400 San Francisco, CA 94111 Attention: Jennifer Holder, Vice President Telephone: (415) 273-4576 Facsimile: (415) 273-4590 Payments shall be made to: ABA No.: 091000022 U.S. Bank Trust: 180121167365 San Francisco Wire Clearing: 4730027 Ref: 95457370 Attention: Jennifer Holder, Vice President Participant: ABN AMRO LEASING, INC. 135 South LaSalle Street Suite 711 Chicago, Illinois 60603 Attention: David M. Shipley 93 Telephone: (312) 904-2183 Facsimile: (312) 904-6217 Payments shall be made to: LaSalle National Bank ABA No.: 071-000-505 For account of: ABN AMRO Leasing, Inc. Account No.: 2226951 Attention: Jaime Guzman Participant: ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH 101 California Street, Suite 4550 San Francisco, California 94111-5812 Attention: Jamie Dillon Telephone: (415) 984-3750 Facsimile: (415) 362-3524 Payments shall be made to: Federal Reserve Bank of New York, New York, NY ABN AMRO Bank New York ABA No.: 026009580 For account of: ABN AMRO Bank San Francisco Account No.: 651001054541 Re: PeopleSoft, Inc. Participant: CREDIT LYONNAIS LOS ANGELES BRANCH 515 S. Flower Street, 22nd Floor Los Angeles, California 90071 Attention: Rita Raychaudhuri Telephone: (213) 362-5954 Facsimile: (213) 623-3437 Payments shall be made to: Federal Reserve Bank of New York, New York, NY Credit Lyonnais New York ABA No.: 026008073 For further credit to: Credit Lyonnais Los Angeles Branch 94 Account: Credit Lyonnais New York Re: PeopleSoft, Inc. Participant: KEYBANK NATIONAL ASSOCIATION 700 Fifth Avenue, 46th Floor M/S 31-10-4612 Seattle, Washington 98104 Attention: Rick Ameny Telephone: (206) 684-6014 Facsimile: (206) 684-6035 Payments shall be made to: KeyBank National Association, Seattle, WA ABA No.: 125000574 For further credit to: Specialty Services Team Account No.: 01500163 Re: PeopleSoft, Inc. Participant: BANQUE NATIONALE DE PARIS 180 Montgomery Street San Francisco, California 94104 Attention: Michael McCorriston Telephone: (415) 956-0707 Facsimile: (415) 296-8954 Payments shall be made to: Banque Nationale de Paris New York ABA No.: 026007689 For Credit: Banque Nationale de Paris San Francisco Account No.: 14334000176 Participant: FLEET BANK 1 Federal Street Mail Stop MAOF D07A Boston, Massachussetts 02110 Attention: Matt Glauninger Telephone: (617) 346-0029 Facsimile: (617) 346-1633 95 Payments shall be made to: Fleet Bank ABA No.: 011000138 For Credit: Commercial Loan Wire Suspense G/L Account No.: 1510351-03156 Re: PeopleSoft, Inc. Participant: MELLON BANK, N.A. 435 Tasso Street, Suite 100 Palo Alto, California 94301 Attention: Mike Rogers Telephone: (650) 326-3005 Facsimile: (650) 326-2382 Payments shall be made to: Mellon Bank, N.A., Pittsburgh, PA ABA No.: 043000261 Account No.: 990873800 - Loan Administration Re: PeopleSoft, Inc. Participant: THE FUJI BANK, LIMITED 601 California Street, Suite 500 San Francisco, California 94108 Attention: Quentin Falconer, Vice President Telephone: (415) 296-5452 Facsimile: (415) 362-4613 Payments shall be made to: Bankers Trust Company, New York, NY ABA No.: 021001033 For Credit: The Fuji Bank, Limited Los Angeles Agency Account No.: 04402840 Attention: CP&A Re: PeopleSoft, Inc. Participant: THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY 96 101 California Street, Suite 4002 San Francisco, California 94111 Attention: Mark Dirsa Telephone: (415) 393-1813 Facsimile: (415) 788-7868 Payments shall be made to: The Dai-Ichi Kangyo Bank, Limited New York Branch, New York, NY ABA No.: 026-004307 For further credit to: The Dai-Ichi Kangyo Bank, Limited San Francisco Agency Account No.: 079 740 111 268 Re: PeopleSoft, Inc. Participant: THE BANK OF NOVA SCOTIA 580 California Street Suite 2100 San Francisco, California 94104 Attention: Chris Osborn Telephone: (415) 616-4170 Facsimile: (415) 397-0791 Payments shall be made to: The Bank of Nova Scotia ABA No.: 026002532 For Credit: The Bank of Nova Scotia San Francisco Loan Service Account No.: 0610136 Re: PeopleSoft, Inc. Participant: THE INDUSTRIAL BANK OF JAPAN, LIMITED SAN FRANCISCO AGENCY 555 California Street, Suite 3110 San Francisco, California 94104 Attention: Greg Stewart Telephone: (415) 693-1824 97 Facsimile: (415) 982-1917 Payments shall be made to: Bank of America NT & SA, Concord, CA ABA No.: 121-000-358 Account: The Industrial Bank of Japan, Limited Los Angeles Agency Account No.: 62906-14014 "For Credit to IBJ SFA, A/C 2601-22011" Re: PeopleSoft, Inc. Participant: WELLS FARGO 201 3rd Street 8th Floor San Francisco, California 94103 Attention: Oscar Enriquez Telephone: (415) 477-5425 Facsimile: (415) 477-0675 Payments shall be made to: Wells Fargo Bank ABA No.: 121000248 For Credit: G/L# 2712-507201 Re: PeopleSoft, Inc. Obligor #:69-43492899 Obligation #: (to be assigned) Attention: Lily Storer Telephone: (925) 687-7359 SCHEDULE III Environmental Matters None SCHEDULE IV Intellectual Property Matters None EX-10.43 9 MASTER LEASE DATED SEPTEMBER 28, 1998 1 EXHIBIT 10.43 W&S DRAFT 9/28/98 Prepared by and upon recording return to: John R. Grier, Esq. Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 MASTER LEASE dated as of September 28, 1998 between WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee, as the Lessor and PEOPLESOFT, INC., as the Lessee PeopleSoft Hacienda II Lease Facility This Lease has been executed in counterparts. To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no lien on this Lease may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by ABN AMRO Bank N.V., as Indenture Trustee on the signature page hereof. 2 TABLE OF CONTENTS
PAGE ARTICLE I 1 1.1. Definitions; Interpretation 1 ARTICLE II 1 2.1. Acceptance and Lease of Property 1 2.2. Acceptance Procedure 2 2.3. Lease Term 2 2.4. Title 2 ARTICLE III 3 3.1. Rent 3 3.2. Payment of Basic Rent 3 3.3. Supplemental Rent 3 3.4. Method of Payment 4 ARTICLE IV 4 4.1. Utility Charges 4 ARTICLE V 4 5.1. Quiet Enjoyment 4 ARTICLE VI 5 6.1. Net Lease 5 6.2. No Termination or Abatement 6 ARTICLE VII 6 7.1. Ownership of the Property 6 ARTICLE VIII 8 8.1. Condition of the Property 8 8.2. Possession and Use of the Property 8 ARTICLE IX 9 9.1. Compliance with Requirements of Law and Insurance Requirements 9 ARTICLE X 9 10.1. Maintenance and Repair; Return 9 ARTICLE XI 10 11.1. Modifications, Substitutions and Replacements 10 ARTICLE XII 10
3 12.1. Warranty of Title 10 12.2. Grants and Releases of Easements 11 12.3. Actions Required of the Lessor 12 12.4. Further Actions By the Lessee 12 ARTICLE XIII 13 13.1. Permitted Contests Other Than in Respect of Indemnities 13 ARTICLE XIV 13 14.1. Coverage 13 14.2. Public Liability and Workers' Compensation Insurance 13 14.3. Hazard and Other Insurance 14 14.4. Terms 15 ARTICLE XV 16 15.1. Casualty and Condemnation 16 15.2. Environmental Matters 18 15.3. Notice of Environmental Matters 18 ARTICLE XVI 19 16.1. Termination by the Lessee upon Certain Events 19 16.2. Procedures 19 16.3. Termination by the Lessor upon Certain Events 20 16.4. Purchase of Property 20 ARTICLE XVII 20 17.1. Lease Events of Default 20 17.2. Remedies 23 17.3. Waiver of Certain Rights 28 17.4. Power of Sale and Foreclosure 28 17.5. Remedies Cumulative 31 17.6. Lessee's Right to Cure 31 ARTICLE XVIII 31 18.1. The Lessor's Right to Cure the Lessee's Lease Events of Default 31 ARTICLE XIX 32 19.1. Provisions Relating to the Lessee's Termination of this Lease or Exercise of Purchase Option or Obligation and Conveyance Upon Remarketing and Conveyance Upon Certain Other Events 32 ARTICLE XX 33 20.1. Purchase Option 33 20.2. Expiration Date Purchase Obligation 33 20.3. Acceleration of Purchase Obligation 34
4 ARTICLE XXI 34 21.1. Renewal 34 ARTICLE XXII 35 22.1. Option to Remarket 35 22.2. Certain Obligations Continue 38 22.3. Support Obligations 38 ARTICLE XXIII 39 23.1. Holding Over 39 ARTICLE XXIV 39 24.1. Risk of Loss 39 ARTICLE XXV 40 25.1. Subletting and Assignment 40 ARTICLE XXVI 40 26.1. Estoppel Certificates 40 ARTICLE XXVII 41 27.1. Right to Inspect 41 27.2. No Waiver 41 ARTICLE XXVIII 41 28.1. Acceptance of Surrender 41 ARTICLE XXIX 42 29.1. No Merger of Title 42 ARTICLE XXX 42 30.1. Notices 42 ARTICLE XXXI 44 31.1. Miscellaneous 44 31.2. Amendments and Modifications 44 31.3. Successors and Assigns 44 31.4. Headings and Table of Contents 44 31.5. Counterparts 44 31.6. GOVERNING LAW 44 31.7. Limitations on Recourse 44 31.8. Original Lease 45 31.9. Usury Savings Clause 45 ARTICLE XXXII 45 32.1. Ground Lease 45
5 APPENDICES APPENDIX I Definitions and Interpretation EXHIBITS EXHIBIT A Form of Lease Supplement EXHIBIT B Form of Equipment Schedule SCHEDULES SCHEDULE 1 Data Center Purchase Price SCHEDULE 14.3 Minimum Insurance Requirements MASTER LEASE THIS MASTER LEASE (including all Lease Supplements and Equipment Schedules from time to time executed and delivered, this "Lease"), dated as of September 28, 1998, between WILMINGTON TRUST COMPANY, a Delaware banking corporation, having its principal office at Rodney Square North, 1100 N. Market Street, Wilmington, Delaware 19890, not in its individual capacity, but solely as Owner Trustee, as the lessor (the "Lessor"), and PEOPLESOFT, INC., a Delaware corporation, having a principal office at 4305 Hacienda Drive, Pleasanton, California 94588, as the lessee (the "Lessee"). W I T N E S S E T H: A. WHEREAS, the Owner Trustee, in its capacity as Lessor, will ground lease the Ground Lease Interest from the Ground Lessor on the Ground Lease Interest Acquisition Date; B. WHEREAS, the Lessor desires to sublease to the Lessee, and the Lessee desires to sublease from the Lessor, the Ground Lease Interest; and C. WHEREAS, with respect to the Ground Lease Interest the Lessee, as Construction Agent, will construct certain Improvements which as constructed will be the property of the Lessor and will be leased to Lessee subject to the terms of this Lease; 6 NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1. Definitions; Interpretation. Capitalized terms used but not otherwise defined in this Lease have the respective meanings specified in Appendix 1 to this Lease; and the rules of interpretation set forth in Appendix 1 to this Lease shall apply to this Lease. ARTICLE II 2.1. Acceptance and Lease of Property. Effective as of the Closing Date, the Lessor, subject to the satisfaction or waiver of the conditions set forth in Section 6 of the Participation Agreement, hereby agrees to lease the Ground Lease Interest from the Ground Lessor on the Ground Lease Interest Acquisition Date pursuant to the terms of the Participation Agreement, and simultaneously to sublease to the Lessee hereunder for the Term (as defined in Section 2.3), the Lessor's interest in such Ground Lease Interest and the Lessor's interest in any Improvements existing thereon, and to lease to the Lessee any Improvements which thereafter may be constructed thereon and any Equipment, if any, which may be purchased for use in connection therewith pursuant to the Construction Agency Agreement, this Lease or the Participation Agreement, and the Lessee hereby agrees, expressly for the direct benefit of the Lessor, to sublease commencing on the Ground Lease Interest Acquisition Date from the Lessor for the Term, the Lessor's interest in such Ground Lease Interest to be leased by the Lessor from the Ground Lessor on such Ground Lease Interest Acquisition Date and any Improvements existing thereon and to lease any Improvements which thereafter may be constructed thereon and such Equipment pursuant to the Construction Agency Agreement, this Lease or the Participation Agreement. As used in this Lease, the term "Property" shall have the meaning given to such term in Appendix 1 hereto, and shall also include, without limitation, the right to use and enjoy (and, to the extent the following consist of contract rights, to enforce) any interests or rights of Lessor in, to or under the following, now existing or hereafter arising: any and all Permitted Exceptions (including the Development Contracts), and any other general intangibles, permits, licenses, franchises, certificates, and other rights and privileges related to the Ground Lease Interest or the underlying real property and the Property. 2.2. Acceptance Procedure. (a) The Lessor hereby authorizes one or more employees of the Lessee, to be designated by the Lessee, as the authorized representative or representatives of the Lessor to accept delivery on behalf of the Lessor of the Property identified on the Acquisition Request or an Equipment Schedule. 7 (b) The Lessee hereby agrees that such acceptance of delivery by such authorized representative or representatives and the execution and delivery by the Lessee on the Ground Lease Interest Acquisition Date of a Lease Supplement in the form of Exhibit A hereto (appropriately completed) shall, without further act, constitute the irrevocable acceptance by the Lessee of the Property which is the subject thereof for all purposes of this Lease and the other Operative Documents on the terms set forth therein and herein, and that the Property (including the Improvements constructed thereon) shall be deemed to be included in the leasehold estate of this Lease and shall be subject to the terms and conditions of this Lease as of the Ground Lease Interest Acquisition Date. (c) The Lessee hereby agrees that such acceptance of delivery by such authorized representative or representatives and the execution and delivery by the Lessee of an Equipment Schedule in the form of Exhibit B hereto (appropriately completed) on or prior to the applicable Funding Date with respect to the acquisition of Equipment shall, without further act, constitute the irrevocable acceptance of the Equipment which is the subject thereof for all purposes of this Lease and the other Operative Documents on the terms set forth therein and herein, and that the Equipment shall be deemed to be included in the leasehold estate of this Lease and shall be subject to the terms and conditions of this Lease as of such Funding Date. 2.3. Lease Term. The term of this Lease (the "Term") shall begin on the Closing Date and shall end on the fifth anniversary of the Closing Date, unless the Term is renewed or earlier terminated in accordance with the provisions of this Lease. 2.4. Title. The Ground Lease Interest is subleased, and the other Property is leased, as applicable, to the Lessee without any representation or warranty of title, condition of the Improvements or permitted uses, express or implied, by the Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions), the terms of the Ground Lease and all applicable Requirements of Law. The Lessee shall in no event have any recourse against the Lessor for any defect in or exception to title to the Property, other than for any such defect or exception constituting a Lessor Lien. The Lessee expressly waives and releases the Lessor from any common law or statutory covenant of quiet enjoyment. ARTICLE III 3.1. Rent. (a) During the Term, the Lessee shall pay Basic Rent on each Payment Date, on the date required under Section 22.1(i) in connection with the Lessee's exercise of the Remarketing Option and on any date on which this Lease shall terminate. The Lessor shall provide the Lessee with not less than five (5) days' notice of the amount of Basic Rent due on any Scheduled Payment Date. (b) Basic Rent shall be due and payable (i) during the Construction Period, in the manner set forth in Section 3.9 of the Participation Agreement and (ii) thereafter, in lawful money of the United States and shall be paid by wire transfer of immediately 8 available funds on the due date therefor to such account or accounts at such bank or banks or to the Indenture Trustee or in such other manner as the Indenture Trustee shall from time to time direct. (c) Neither the Lessee's inability or failure to take possession of all or any portion of the Property when delivered by the Lessor, nor the Lessor's inability or failure to deliver all or any portion of the Property to the Lessee on or before the Ground Lease Interest Acquisition Date or the applicable Funding Date, whether or not attributable to any act or omission of the Lessee or any act or omission of the Lessor, or for any other reason whatsoever, shall delay or otherwise affect the Lessee's obligation to pay Rent for the Property from and after commencement of the Term. 3.2. Payment of Basic Rent. Basic Rent shall be paid absolutely net to the Lessor, so that this Lease shall yield to the Lessor the full amount thereof, without setoff, deduction or reduction, whether or not the Lessee's quiet possession of the Property is disturbed. 3.3. Supplemental Rent. The Lessee shall pay to the Lessor or the Person entitled thereto any and all Supplemental Rent (including, without limitation, Ground Rent) promptly as the same shall become due and payable, provided that except for any payments of Asset Termination Value, Purchase Option Price, Residual Value Guarantee Amount or any other amount due and payable on the Expiration Date or Termination Date, the Lessor shall provide the Lessee with not less than three (3) Business Days' notice of any Supplemental Rent due and payable by the Lessee. If the Lessee fails to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee shall pay to the Lessor, as Supplemental Rent, among other things, on demand, to the extent permitted by Applicable Law, interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of the Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of the Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of the Lessee to pay and discharge any Supplemental Rent as and when due, the Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added under any agreement with a third party for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4. Method of Payment. Each payment of Rent shall be made by the Lessee to the Indenture Trustee by 12:00 noon, San Francisco time at the place of payment in funds consisting of lawful currency of the United States of America which shall be immediately available on the scheduled date when such payment shall be due, unless such scheduled date shall not be a Business Day, in which case such payment shall be made on the next succeeding Business Day or as otherwise required by the definition of 9 the term "Interest Period" set forth in Appendix 1 hereto. Payments initiated after 12:00 noon, San Francisco time shall be deemed received on the next succeeding Business Day. ARTICLE IV 4.1. Utility Charges. The Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on the Property during the Term. The Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by the Lessee and the amount of any credit or refund received by the Lessor on account of any utility charges paid by the Lessee, net of the costs and expenses reasonably incurred by the Lessor in obtaining such credit or refund, shall be promptly paid over to the Lessee. All charges for utilities imposed with respect to the Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between the Lessor and the Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof, except that if the Lessee retains possession of the Property after termination or expiration of this Lease, no such adjustment and proration shall be made. ARTICLE V 5.1. Quiet Enjoyment. LESSEE SPECIFICALLY DISCLAIMS ANY WARRANTY OF QUIET ENJOYMENT FOR ANY ACTION BY ANY PARTY, other than the obligations of the Lessor to remove Lessor Liens. ARTICLE VI 6.1. Net Lease. This Lease shall constitute a net lease. It is the further express intent of Lessor and Lessee that the obligations of Lessor and Lessee hereunder shall be separate and independent covenants and agreements and that the Basic Rent and Supplemental Rent, and all other charges and sums payable by Lessee hereunder, shall commence at the times provided herein and shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to an express provision in this Lease. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall the Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of the Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of: (i) any defect in the condition, merchantability, design, construction, quality or fitness for use of the Property or any part thereof, or the failure of the Property to comply with all Requirements of Law, including any inability to occupy or use the Property by reason of such non-compliance; (ii) any damage to, removal, abandonment, salvage, loss, contamination of or Release from, scrapping or destruction of or any requisition or taking of the Property or any part thereof; (iii) any restriction, prevention or curtailment of or 10 interference with any use of the Property or any part thereof including eviction; (iv) any defect in title to or rights to the Property or any Lien on such title or rights or on the Property (other than Lessor Liens); (v) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by the Lessor, the Indenture Trustee or any Participant; (vi) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to the Lessee, the Lessor, the Indenture Trustee, any Participant, or any other Person, or any action taken with respect to this Lease by any trustee or receiver of the Lessee, the Lessor, the Indenture Trustee, any Participant or any other Person, or by any court, in any such proceeding; (vii) any claim that the Lessee has or might have against any Person, including without limitation the Lessor, any vendor, manufacturer, contractor of or for the Property, the Indenture Trustee or any Participant; (viii) any failure on the part of the Lessor to perform or comply with any of the terms of this Lease, any other Operative Document or any other agreement; (ix) any invalidity or unenforceability or illegality or disaffirmance of this Lease or against or by the Lessee or any provision hereof or any of the other Operative Documents or any provision of any thereof; (x) the impossibility or illegality of performance by the Lessee, the Lessor or both; (xi) any action by any court, administrative agency or other Governmental Authority; (xii) any restriction, prevention or curtailment of or interference with the construction on or any use of the Property or any part thereof; (xiii) any cause or circumstance arising with respect to or out of the Ground Lease; or (xiv) any other cause or circumstances whether similar or dissimilar to the foregoing and whether or not the Lessee shall have notice or knowledge of any of the foregoing. The parties intend that the obligations of the Lessee hereunder shall be covenants and agreements that are separate and independent from any obligations of the Lessor hereunder or under any other Operative Documents and the obligations of the Lessee shall continue unaffected unless such obligations shall have been modified or terminated in accordance with an express provision of this Lease. 6.2. No Termination or Abatement. The Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting the Lessor, the Indenture Trustee or any Participant, or any action with respect to this Lease or any Operative Document which may be taken by any trustee, receiver or liquidator of the Lessor, the Indenture Trustee or any Participant or by any court with respect to the Lessor, the Indenture Trustee or any Participant. The Lessee hereby waives all right (i) to terminate or surrender this Lease (except as provided herein) or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense (other than the defense of payment) with respect to any Rent. The Lessee shall remain obligated under this Lease in accordance with its terms and the Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, the Lessee shall be bound by all of the terms and conditions contained in this Lease. 11 ARTICLE VII 7.1. Ownership of the Property. (a) It is the intent of the parties hereto that: (i) this Lease constitutes an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, for purposes of Lessee's financial reporting, and (ii) for purposes of federal, state, and local income or franchise taxes and for any other tax imposed on or measured by income, the transaction contemplated hereby is a financing arrangement and preserves ownership in the Property in the Lessee. Accordingly, and notwithstanding any provision of this lease to the contrary, the parties hereto agree and declare that: (i) the transactions contemplated by the Lease are intended to have a dual, rather than single, form; and (ii) all references in this Lease to the "lease" of the Property which fail to reference such duel form do so as a matter of convenience only and do not reflect the intent of parties hereto as to the true form of such arrangements. Nevertheless, the Lessee acknowledges and agrees that neither the Indenture Trustee, the Lessor nor any Participant has made any representations or warranties to the Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Anything to the contrary in the Operative Documents notwithstanding, the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by this Lease in the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting the Lessee, the Lessor, or any Participant or any enforcement or collection actions, (i) the transactions evidenced by this Lease are loans made by the Lessor and the Participants as unrelated third party lenders to the Lessee secured by the Property, (ii) the obligations of the Lessee under this Lease to pay Basic Rent and Supplemental Rent or Asset Termination Value in connection with a purchase of the Property pursuant to this Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the Participants to the Lessee, and (iii) this Lease grants a security interest and mortgage or deed of trust or lien, as the case may be, in the Property to the Lessor and the Participants secure the Lessee's performance under and payment of all amounts under this Lease and the other Operative Documents. (c) Specifically, without limiting the generality of subsection (b) of this Section 7.1, the Lessor and the Lessee further intend and agree that, for the purpose of securing the Lessee's obligations for the repayment of the above-described loans from the Lessor and the Participants to the Lessee, (i) this Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code (and specifically, a construction mortgage, as said term is defined in Section 9-313(1)(c) of the Uniform Commercial Code) and a real property mortgage or deed of trust; (ii) the conveyance provided for in Article II shall be deemed 12 to be a grant by the Lessee to the Lessor and the Participants of a mortgage lien and security interest in all of the Lessee's right, title and interest in and to the Property and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property (it being understood that Lessee hereby mortgages and warrants and grants a security interest in the Property to Lessor and the Participants to secure such loans); (iii) the possession by the Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under Applicable Law. The Lessor and the Lessee shall, to the extent consistent with this Lease, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if this Lease were deemed to create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under Applicable Law and will be maintained as such throughout the Term. (d) Specifically, without limiting the generality of subsection (a), (b) and (c) of this Section 7.1, the parties hereto intend and agree that, for purposes of filing federal, state and local returns, reports and other statements relating to income or franchise taxes, or any other taxes imposed upon or measured by income, (i) the Lessee shall be entitled to take any deduction, credit, allowance or other reporting position consistent with its status as owner of the Property; and (ii) neither the Lessor nor any Participant shall take an initial position on its federal, state and local returns, reports and other statements relating to income or franchise taxes that is inconsistent with the Lessee's status as owner of the Property. (e) If the transaction evidenced by this Agreement and the other Operative Documents can no longer be treated as an operating lease pursuant to GAAP for accounting purposes, all provisions in the Operative Documents limiting the Lessee's obligation to pay the Lease Balance or Asset Termination Value (including the Remarketing Option) on the Expiration Date shall no longer apply. If any such change in accounting treatment shall occur, the Lessee shall enter into such amendments to the Operative Documents as the Lessor or the Required Participants may reasonably request to reflect the foregoing. ARTICLE VIII 8.1. Condition of the Property. THE LESSEE ACKNOWLEDGES AND AGREES THAT ALTHOUGH THE LESSOR WILL HOLD LEASEHOLD OR FEE TITLE TO THE PROPERTY, AS APPLICABLE, THE LESSEE IS SOLELY 13 RESPONSIBLE FOR THE IMPROVEMENTS AND ANY ALTERATIONS OR MODIFICATIONS. THE LESSEE FURTHER ACKNOWLEDGES AND AGREES THAT IT IS LEASING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY THE LESSOR, THE BANK, THE INDENTURE TRUSTEE OR ANY PARTICIPANT AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, AND (D) VIOLATIONS OF REQUIREMENTS OF LAW WHICH MAY EXIST ON THE DATE HEREOF. NEITHER THE LESSOR, THE BANK, THE INDENTURE TRUSTEE NOR ANY PARTICIPANT HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE (INCLUDING BUT NOT LIMITED TO ANY IMPLIED LIABILITY RELATING TO A COVENANT OF QUIET ENJOYMENT, WHICH THE LESSEE HEREBY EXPRESSLY WAIVES), VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND NEITHER THE LESSOR, THE BANK, THE INDENTURE TRUSTEE NOR ANY PARTICIPANT SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY REQUIREMENT OF LAW. 8.2. Possession and Use of the Property. The Property shall only be used in a manner consistent with all Requirements of Law, other properties located within the Hacienda Business Park, and any covenants, conditions and restrictions of record and any ordinance or law affecting the use and occupancy of the Property; and provided that such uses do not increase the liability, directly or indirectly, of the Lessor or adversely affect the value, utility or remaining useful life of the Property. The Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Property as contemplated by this Lease and the Construction Agency Agreement. The Lessee shall not commit or permit any waste of the Property or any part thereof. ARTICLE IX 9.1. Compliance with Requirements of Law and Insurance Requirements. Subject to the terms of Article XIII relating to permitted contests, the Lessee, at its sole cost and expense, shall (a) comply with all Requirements of Law (including all Environmental Laws) and comply with all Insurance Requirements relating to the Property, including the construction, use, operation, maintenance, repair and restoration thereof and the remarketing thereof pursuant to Article XXII, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or interfere with the use and enjoyment of the Property, and (b) procure, maintain and 14 comply with all licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of the Property and for the use, operation, maintenance, repair and restoration of the Improvements. ARTICLE X 10.1. Maintenance and Repair; Return. (a) The Lessee, at its sole cost and expense, shall maintain the Property in good working order, mechanical condition and repair and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all Requirements of Law and Insurance Requirements and on a basis consistent with the operation and maintenance of commercial properties comparable in type and location to the Property and in compliance with prudent industry practice. (b) The Lessor shall under no circumstances be required to build any improvements on the Property, make any repairs, replacements, alterations or renewals of any nature or description to the Property, make any expenditure whatsoever in connection with this Lease (except for Advances required under the Participation Agreement) or maintain the Property in any way. The Lessor shall not be required to maintain, repair or rebuild all or any part of the Property, and the Lessee waives any right to (i) require the Lessor to maintain, repair, or rebuild all or any part of the Property, or (ii) make repairs at the expense of the Lessor pursuant to any Requirement of Law, Insurance Requirement, contract, agreement, or covenant, condition or restriction in effect at any time during the Term. (c) The Lessee shall, upon the expiration or earlier termination of this Lease, vacate and surrender the Property to the Lessor in its then-current, "AS IS" condition, subject to the Lessee's obligations under Sections 9.1, 10.1(a), 11.1, 12.1, 15.1(e), 15.2, 22.1 and 23.1. (d) The Lessee warrants that, subject to delays to the extent permitted under the terms of the Construction Agency Agreement, it shall cause the Improvements currently under construction or currently planned to be constructed on the Property to be designed and constructed in a workmanlike manner and in accordance with all Requirements of Law, prior to the Outside Completion Date so that, prior to such date, such Improvements will be fit for their intended purpose. ARTICLE XI 11.1. Modifications, Substitutions and Replacements. (a) After Completion of the Improvements, the Lessee, at its sole cost and expense, may at any time and from time to time make alterations, renovations, improvements and additions to the Property or any part thereof and substitutions and replacements therefor (collectively, "Modifications"); provided that: (i) no Modification shall impair the value, utility or 15 useful life of the Property or any part thereof from that which existed immediately prior to such Modification; (ii) the Modification shall be done expeditiously and in a good and workmanlike manner; (iii) the Lessee shall comply with all Requirements of Law (including all Environmental Laws) and comply with all Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of the Property shall not be adversely affected; (iv) subject to the terms of Article XIII relating to permitted contests, the Lessee shall pay all costs and expenses and shall discharge (or cause to be insured or bonded over) within sixty (60) days after the same shall be filed (or otherwise become effective) any Liens arising with respect to the Modification; and (v) such Modifications shall comply with Sections 8.2 and 10.1. All Modifications (other than those that both are not Modifications required to be made pursuant to a Requirement of Law or an Insurance Requirement ("Required Modification") and are readily removable without impairing the value, utility or remaining useful life of the Property) shall remain part of the realty and shall be subject to this Lease, and title thereto shall immediately vest in the Lessor. So long as no Lease Event of Default has occurred and is continuing, the Lessee may place upon the Property any trade fixtures, machinery, equipment or other property belonging to the Lessee or third parties and may remove the same at any time during the Term, subject, however, to the terms of Section 10.1(a); provided that such trade fixtures, machinery, equipment or other property do not impair the value, utility or remaining useful life of the Property; provided, further, that the Lessee shall keep and maintain at the Property and shall not remove from the Property any Fixtures or Equipment financed or otherwise paid for (directly or indirectly) by the Lessor or any Participant pursuant to the Participation Agreement, unless it replaces such Fixtures or Equipment with Fixtures or Equipment of equal or greater value, as evidenced by an appraisal, invoice or other documentation satisfactory to the Lessor, not subject to any Liens other than Permitted Liens. (b) The Lessee shall deliver to the Lessor and the Indenture Trustee a brief written narrative of the work to be done in connection with any Modification to the Property the cost of which is anticipated to exceed $500,000 in the aggregate. ARTICLE XII 12.1. Warranty of Title. (a) The Lessee agrees that except as otherwise provided herein and subject to the terms of Article XIII relating to permitted contests, the Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon the Property (or the Lessor's interest therein) or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Indenture Trustee pursuant to the Participation Agreement or the other Operative Documents, other than Permitted Exceptions and Lessor Liens. 16 (b) Nothing contained in this Lease shall be construed as constituting the consent or request of the Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Property or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, THE BANK, ANY PARTICIPANT NOR THE INDENTURE TRUSTEE IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE PROPERTY. 12.2. Grants and Releases of Easements. Provided that no Lease Event of Default shall have occurred and be continuing and subject to the provisions of Articles VIII, IX, X and XI, the Lessor hereby consents in each instance to the following actions by the Lessee (provided, that the same are permitted by the Ground Lease), in the name and stead of the Lessor, but at the Lessee's sole cost and expense: (a) the granting of easements, licenses, rights-of-way and other rights and privileges in the nature of easements reasonably necessary or desirable for the completion of construction of the Improvements, use, repair, operation or maintenance of the Property as herein provided; (b) the release of existing easements or other rights in the nature of easements which are for the benefit of the Property; (c) the execution of petitions to have the Property annexed to any municipal corporation or utility district; (d) the execution of amendments to any covenants and restrictions affecting the Property; and (e) the Lessee's obtaining all necessary Governmental Actions necessary for completion of the construction of the Improvements described in the Participation Agreement or the making of any Modifications; provided, however, in each case the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate stating that (i) such grant, release, dedication or transfer does not materially impair the value, utility and remaining useful life of the Property, (ii) such grant, release, dedication or transfer is reasonably necessary in connection with the completion of construction of the Improvements, use, operation maintenance, alteration or improvement of the Property, (iii) the Lessee shall remain obligated under this Lease and under any instrument executed by the Lessee consenting to the assignment of the Lessor's interest in this Lease as security for indebtedness, in each such case in accordance with their terms, as though such grant, release, dedication or transfer, had not been effected, (iv) the Lessee shall pay and perform any obligations of the Lessor under such grant, release, dedication or transfer, and (v) such easements, rights-of-way and other rights shall be subordinate and subject to the Lien of the Mortgage and the Indenture. Without limiting the effectiveness of the foregoing, provided that no Lease Event of Default shall have occurred and be continuing, the Lessor shall, upon the request of the Lessee, and at the Lessee's sole cost and expense, execute and deliver any instruments necessary or appropriate to confirm any such grant, release, dedication or transfer to any Person permitted under this Section 12.2. 17 12.3. Actions Required of the Lessor. So long as no Lease Event of Default shall have occurred and be continuing, the Lessor shall, at no cost or expense to the Lessor, cooperate with the Lessee in connection with actions contemplated in clauses (a) through (e) of Section 12.2, and under Article XI above, including execution of documents and taking such other action required by the Permitted Exceptions or by Applicable Laws; provided, that (i) such actions shall be limited to actions that can only be taken by the Lessor as the owner or ground lessee of the Property, as opposed to any action that can be taken by the Lessee or any third party (and the payment of any monetary obligation shall not be an action required of the Lessor under this subparagraph unless the Lessor shall first have received funds from the Lessee, in excess of any other amounts due from the Lessee hereunder, sufficient to pay such monetary obligations), (ii) the Lessee requests the action to be taken by the Lessor (which request must be specific and in writing, if required by Lessor at the time the request is made), and (iii) the action to be taken will not constitute a violation of any Applicable Laws or subject the Lessor to any liability whatsoever, unless such liability is covered by the indemnification obligations under Section 13.1 of the Participation Agreement. 12.4. Further Actions By the Lessee. Subject to the other terms and conditions of this Lease and the Ground Lease, the Lessee shall be entitled to do any of the following in the Lessee's own name and to the exclusion of the Lessor during the Term without any notice to or consent of the Lessor so long as no Lease Event of Default has occurred and is continuing and so long as the Lessee does not thereby create any encumbrance or cloud on the Lessor's title to the Property (other than a Permitted Exception): (a) to perform obligations arising under and to exercise and enforce the rights of the Lessee or the owner of the Property under the Development Contracts and other Permitted Exceptions; (b) to perform obligations arising under and to exercise and enforce the rights of the Lessee or the owner of the Property with respect to any other contracts or documents (such as plans and specifications) included within the Property; and (c) to recover and retain any monetary damages or other benefit inuring to the Lessee or the owner of the Property through the enforcement of any rights, contracts or other documents included within the Property (including without limitation the Development Contracts and other Permitted Encumbrances and any ordinances, regulations and laws); provided, that to the extent any such monetary damages may become payable as compensation for an adverse impact on value of the Property, the rights of Lessor and Lessee hereunder with respect to the collection and application of such monetary damages shall be the same as for condemnation proceeds payable because of a taking of all or any part of the Property. Without limiting the generality of the foregoing, subject to the terms of the Ground Lease, the Lessee shall be entitled to any and all refunds 18 received by the Lessor with respect to any assessment bonds or assessment districts applicable to the Property for such periods or portions thereof ending on the earlier of the Termination Date or the Expiration Date or other date of termination of this Lease unless the Lessee has purchased the Property, in which event the Lessee shall be entitled to all such refunds regardless of the period to which they are applicable. ARTICLE XIII 13.1. Permitted Contests Other Than in Respect of Indemnities. Except to the extent otherwise provided for in Section 13 of the Participation Agreement, the Lessee, on its own or on the Lessor's behalf but at the Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Requirement of Law, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and the Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection thereof from, and suspend the enforcement thereof against, the Property, the Collateral, the Lessor, the Indenture Trustee and the Participants or the Lessee shall have bonded or otherwise secured such amount in a manner satisfactory to the Lessor and the Indenture Trustee; (b) there shall be no risk of the imposition of a Lien (other than Permitted Exceptions) on the Property or the Collateral and no part of the Property nor any Rent would be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability on the Lessor, the Indenture Trustee or any Participant for failure to comply therewith (unless, in the case of civil liability, the Lessee shall have bonded or otherwise secured such amount in a manner satisfactory to the Lessor and the Indenture Trustee); and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then the Lessee shall deliver to the Lessor a Responsible Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. The Lessor, at the Lessee's sole cost and expense, shall execute and deliver to the Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by the Lessee, shall join as a party therein at the Lessee's sole cost and expense. ARTICLE XIV 14.1. Coverage. During the Construction Period, the Lessee shall arrange for insurance as agent for the Lessor and the incremental cost of such insurance shall be capitalized as a project cost. After the Construction Period, the Lessee, at its sole cost and expense, shall at all times carry and maintain insurance coverage. Such insurance, both during and after the Construction Period, shall provide for coverage as specified in Sections 14.2 through 14.4 hereof. 19 14.2. Public Liability and Workers' Compensation Insurance. The Lessee shall procure and carry commercial general liability insurance, including contractual liability, for claims for injuries or death sustained by persons or damage to property while on the Property and such other commercial general liability coverages as are ordinarily procured by Persons who own or operate similar properties and consistent with prudent business practice, which policies shall include contractual liability endorsements covering the Lessee's indemnification obligations in Section 13.1 of the Participation Agreement. Such insurance shall be on terms and in amounts (which shall be acceptable to the Lessor and in the event of liability insurance shall be maintained at a level set forth on Schedule 14.3 that are no less favorable than insurance maintained by the Lessee with respect to similar properties that it owns and that are in accordance with prudent business practice and may be provided under blanket policies maintained by or on behalf of the Lessee. The policy shall be endorsed to name the Lessor, the Bank, the Indenture Trustee and each Participant as additional insureds. The policy shall also specifically provide that the policy shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which the Lessor, the Bank, the Indenture Trustee or the Participants may have in force. The Lessee shall, in the construction of the Improvements and the operation of the Property (including in connection with any Modifications thereof) comply with the applicable workers' compensation laws and protect the Lessor, the Bank, the Indenture Trustee and the Participants against any liability under such laws. 14.3. Hazard and Other Insurance. The Lessee shall keep, or cause to be kept, the Property insured against loss or damage by fire, flood, earthquakes, and other risks in an amount not less than the greater of the amount set forth on Schedule 14.3 and the then current replacement cost of the buildings and improvements on the Property and on terms that are no less favorable than insurance covering other similar properties owned or leased by the Lessee or any of its Affiliates and that are in accordance with prudent business practice; provided that the Lessee shall be required to maintain earthquake coverage only if commercially reasonably available and, if obtained, in a minimum amount equal to 100% of the probable maximum loss with respect to the Property as demonstrated by a professional engineer qualified to make such a determination selected by the Lessee as reasonably approved by the Lessor and the Indenture Trustee. Earthquake insurance shall be deemed to be commercially reasonably available if it is offered by more than one insurance carrier. The Lessee may provide such coverage under blanket policies maintained by the Lessee; provided that if the Lessee does not elect to terminate the Lease pursuant to Article XVI hereof following the occurrence of an event covered by any such blanket policy, the proceeds of any such blanket policy shall be applied (i) first, to the exclusion of other facilities covered by such policy other than the Initial Property, to the repair, rebuilding and restoration of any damage to the Property and the Initial Property covered by such policy on a pro rata basis, if so required in order to complete such repair, rebuilding or restoration, up to the lesser of (A) the extent of the loss suffered and (B) $23,000,000 per occurrence, and (ii) second, if the loss suffered is in excess of $23,000,000 per occurrence, any such proceeds in excess of $23,000,000 per occurrence shall be shared between the loss payees under this Lease and the lease referred to in the Initial Participation Agreement, on the one hand, and other 20 parties having an insured interest with respect to such event covered by such policy, on the other hand, based on the proportion that the loss suffered with respect to the Property and the Initial Property, on the one hand, bears to the aggregate loss suffered by the Property, the Initial Property and all other properties insured by such policy, on the other hand. During the construction of any Improvements the Lessee shall also maintain builders' risk insurance. Each policy of insurance maintained by the Lessee pursuant to this Section 14.3 shall provide that all insurance proceeds in respect of any loss or occurrence shall be paid to and adjusted solely by Indenture Trustee (at the Lessee's expense) during the Construction Period, and thereafter, by (and such proceeds shall be paid to) the Lessee, except (i) insurance proceeds in excess of $5,000,000 shall be paid to the Indenture Trustee and applied to the repair, rebuilding or restoration of the Property in accordance with Article XV and (ii) from and after the date on which the insurer receives written notice from the Lessor or the Indenture Trustee that a Lease Event of Default exists (and unless and until such insurer receives written notice from the Lessor or the Indenture Trustee that all Lease Events of Default have been cured), all losses shall be adjusted solely by, and all insurance proceeds shall be paid solely to, the Indenture Trustee (or the Lessor if the Notes have been fully paid) for application pursuant to Article XV. 14.4. Terms. (a) The Lessee shall furnish the Lessor and the Indenture Trustee with certified copies of the insurance policies showing the insurance required under Sections 14.2 and 14.3 to be in effect and naming the Lessor, the Bank, the Indenture Trustee and each Participant as additional insureds and, with respect to the insurance required under Section 14.3, loss payees, and showing the mortgagee endorsement required by Section 14.4(c). All such insurance shall be at the cost and expense of the Lessee. Such policies shall include a provision for advance written notice by the insurer to the Lessor, the Indenture Trustee and the Lessee of ten (10) days in the event of cancellation of such coverage for non-payment of premiums or thirty (30) days in the event of cancellation of such insurance for any other reason. (b) The Lessee agrees that the insurance policy or policies required by Sections 14.2 and 14.3 shall include (i) an appropriate clause pursuant to which such policy shall provide that it will not be invalidated should the Lessee waive, in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policy, and that the insurance in favor of the Lessor, the Bank, the Indenture Trustee and the Participants, and their respective rights under and interests in said policies shall not be invalidated or reduced by any act or omission or negligence of the Lessee or any other Person having any interest in the Property, and (ii) a so-called "Waiver of Subrogation Clause". The Lessee hereby waives any and all such rights against the Lessor, the Bank, the Indenture Trustee and the Participants to the extent of payments made under such policies. (c) All such insurance shall be written by reputable insurance companies that are financially sound and solvent and otherwise reasonably appropriate considering the amount and type of insurance being provided by such companies; provided that the Lessee may self insure such coverage through its domestic insurance captive subsidiary. 21 Any third-party insurance company selected by the Lessee which is rated in Best's Key Rating Guide or any successor thereto (or if there be none, an organization having a similar national reputation) shall have a general policyholder rating of "A" and a financial rating of at least VII in Best's Key Rating Guide or be otherwise acceptable to the Lessor, the Indenture Trustee and the Required Participants. All insurance policies required by Section 14.3 shall include a standard form mortgagee endorsement in favor of the Indenture Trustee. (d) The Lessor shall not carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV except that the Lessor may carry separate liability insurance (at its sole cost) so long as (i) the Lessee's insurance is designated as primary and in no event excess or contributory to any insurance the Lessor may have in force which would apply to a loss covered under the Lessee's policy and (ii) each such insurance policy will not cause the Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. (e) The Lessee shall pay as they become due all premiums for the insurance required by Section 14.2 and Section 14.3, and shall renew or replace each policy prior to the expiration date thereof. Throughout the Term, at the time each of the Lessee's insurance policies is renewed (but in no event less frequently than once each year), the Lessee shall deliver to the Lessor and the Indenture Trustee certified copies of the insurance policies required by this Article XIV to be maintained by the Lessee with respect to the Property. (f) The Lessee hereby waives, releases and discharges the Lessor, the Indenture Trustee and each Participant and their agents and employees from all claims whatsoever arising out of loss, claim, expense or damage to or destruction covered or coverable by insurance required under this Article XIV notwithstanding that such loss, claim, expense or damage may have been caused by the Lessor, the Indenture Trustee or any Participant or any of their agents or employees, and the Lessee agrees to look to the insurance coverage only in the event of such loss. ARTICLE XV 15.1. Casualty and Condemnation. (a) Subject to the provisions of Article XIV, this Article XV and (in the event the Lessee delivers, or is obligated to deliver, a Termination Notice) Article XVI, and prior to the occurrence and continuation of a Lease Event of Default, the Lessee shall be entitled to receive (and the Lessor shall pay over to the Lessee, if received by the Lessor, and hereby irrevocably assigns to the Lessee all of the Lessor's right, title and interest in) any award, compensation or insurance proceeds to which the Lessee or the Lessor may become entitled by reason of their respective interests in the Property (i) if all or a portion of the Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to the Property or any part thereof, is the subject of a Condemnation; provided, however, 22 subject to Article XIV, if the amount of such proceeds is in excess of $5,000,000 or if a Lease Event of Default shall have occurred and be continuing, such award, compensation or insurance proceeds shall be paid directly to the Indenture Trustee or, if received by the Lessee, shall be held in trust for the Indenture Trustee, and shall be paid over by the Lessee to the Indenture Trustee (or, if the Notes have been fully paid, to the Lessor) and held in accordance with the terms of this paragraph (a). If, contrary to such provision, any such award, compensation or insurance proceeds are paid to the Lessor or the Lessee rather than to the Indenture Trustee, the Lessor and the Lessee, as the case may be, hereby agree to transfer any such payment to the Indenture Trustee. All amounts held by the Lessor or the Indenture Trustee under the preceding sentence on account of any award, compensation or insurance proceeds either paid directly to the Lessor or the Indenture Trustee or turned over to the Lessor or the Indenture Trustee shall either be (i) paid to the Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with paragraph (e) of this Section 15.1, or (ii) applied to the purchase price of the Property on the Termination Date, with any Excess Proceeds being payable to the Lessee. (b) In any proceeding or action under the control of the Lessor pursuant to the terms of Section 14.3, the Lessee may participate and shall pay all expenses of such proceeding and its participation. At the Lessee's reasonable request, and at the Lessee's sole cost and expense, the Lessor and the Indenture Trustee shall participate in any such proceeding, action, negotiation, prosecution or adjustment under the control of the Lessee. The Lessor and the Lessee agree that this Lease shall control the rights of the Lessor and the Lessee in and to any such award, compensation or insurance payment. (c) If the Lessor or the Lessee shall receive notice of a Casualty or of an actual, pending or threatened Condemnation of the Property or any interest therein, the Lessor or the Lessee, as the case may be, shall give notice thereof to the other and to the Indenture Trustee promptly after the receipt of such notice. (d) In the event of a Casualty or receipt of notice by the Lessee or the Lessor of a Condemnation, the Lessee may deliver to the Lessor and the Indenture Trustee a Termination Notice with respect to the Property pursuant to Section 16.1. If the Lessee does not deliver a Termination Notice within ninety (90) days after such occurrence, then this Lease shall (subject to the terms and conditions thereof) remain in full force and effect, and the Lessee shall, at the Lessee's sole cost and expense, promptly and diligently restore the Property pursuant to paragraph (e) of this Section 15.1 and otherwise in accordance with this Lease. If the Lessee delivers a Termination Notice within ninety (90) days after such occurrence, a Significant Event shall irrevocably be deemed to have occurred with respect to the Property, and, in such event, this Lease shall terminate and the Lessee shall purchase the Property on the next Payment Date (or, if such Payment Date is within fifteen (15) days of the Lessor's receipt of such Termination Notice, on the Payment Date next following such Payment Date) (a "Termination Date") pursuant to Article XVI hereof. (e) If pursuant to this Section 15.1 this Lease shall continue in full force and effect following a Casualty or Condemnation, the Lessee shall, at its sole cost and 23 expense (and, without limitation, if any award, compensation or insurance payment is not sufficient to restore the Property in accordance with this paragraph, the Lessee shall pay the shortfall), promptly and diligently repair any damage to the Property caused by such Casualty or Condemnation or substitute new Equipment for the affected Equipment in conformity with the requirements of Sections 10.1 and 11.1 using the as-built Plans and Specifications for the Property (as modified to give effect to any subsequent Modifications, any Condemnation affecting the Property and all applicable Requirements of Law) so as to restore the Property to at least the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation; provided, the substitution of any Equipment for any such affected Equipment shall, at the Lessor's reasonable request, be subject to delivery of an independent third-party appraisal reasonably satisfactory to the Lessor and the Required Participants by an appraiser satisfactory to the Lessor and the Required Participants showing both (i) a current Fair Market Sales Value and (ii) expected Fair Market Sales Value as of the then current Expiration Date and the dates on which any potential Renewal Term would expire, in each case equal to or greater than such values at such dates for the Equipment being replaced. In the event of such restoration, title to the Property shall remain with the Lessor; provided, that (i) title to any such substituted equipment shall vest in the Lessor and such equipment shall constitute Equipment thereafter for all purposes of this Lease, and (ii) the Lessor shall assign all of its right, title and interest to the Lessee in any such replaced equipment without representation or warranty of any kind other than that such equipment is free of Lessor Liens. Upon completion of such restoration, the Lessee shall furnish the Lessor an architect's certificate of substantial completion and a Responsible Officer's Certificate confirming that such restoration has been completed pursuant to this Lease. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect the Lessee's obligations to pay Rent pursuant to Section 3.1 or to perform its obligations and pay any amounts due on the Expiration Date or pursuant to Articles XIX and XX. (g) Any Excess Proceeds received by the Lessor or the Indenture Trustee in respect of a Casualty or Condemnation shall be turned over to the Lessee, provided that no Lease Event of Default or Lease Default has occurred and is continuing. 15.2. Environmental Matters. Promptly upon the Lessee's actual knowledge of the presence of Hazardous Substances in any portion of the Property in concentrations and conditions that constitute an Environmental Violation where the cost to remediate such Environmental Violation in compliance with all Environmental Laws would, in the opinion of the Lessee, be at least $500,000, the Lessee shall notify the Lessor in writing of such condition. In the event of such Environmental Violation, the Lessee shall, not later than thirty (30) days after the Lessee has actual knowledge of such Environmental Violation, either, if such Environmental Violation is a Significant Event, deliver to the Lessor and the Indenture Trustee a Responsible Officer's Certificate and a Termination Notice with respect to the Property pursuant to Section 16.1, or, if such Environmental Violation is not a Significant Event, at the Lessee's sole cost and expense, promptly and 24 diligently commence any Response Actions necessary to investigate, remove, clean up or remediate the Environmental Violation in accordance with the terms of Section 9.1. If the Lessee does not deliver a Termination Notice with respect to the Property pursuant to Section 16.1, the Lessee shall, upon completion of Response Actions by the Lessee, cause to be prepared by an environmental consultant reasonably acceptable to the Lessor a report describing the Environmental Violation and the Response Actions taken by the Lessee (or its agents) for such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in compliance in all material respects with applicable Environmental Law. Each such Environmental Violation shall be remedied prior to the Expiration Date. Nothing in this Article XV shall reduce or limit the Lessee's obligations under Sections 13.1, 13.2 or 13.3 of the Participation Agreement. 15.3. Notice of Environmental Matters. Promptly, but in any event within the thirty (30) Business Days from the date the Lessee has actual knowledge thereof, the Lessee shall provide to the Lessor written notice of any pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with the Property where the cost to remediate the underlying condition or the aggregate indemnifiable exposure under Section 13.2 of the Participation Agreement is estimated by the Lessee to be at least $500,000. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and the Lessee's proposed response thereto. In addition, the Lessee shall provide to the Lessor, within thirty (30) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with the Property where the cost to remediate such Environmental Violation in compliance with all Environmental Laws would, in the opinion of the Lessee, be at least $500,000. The Lessee shall also promptly provide such detailed reports of any such environmental claims as may reasonably be requested by the Lessor and the Indenture Trustee. ARTICLE XVI 16.1. Termination by the Lessee upon Certain Events. If either: (i) the Lessee or the Lessor shall have received notice of a Condemnation, and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate that such Condemnation is a Significant Condemnation; or (ii) a Casualty occurs, and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate that such Casualty is a Significant Casualty; or (iii) an Environmental Violation occurs or is discovered and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate stating that, in the reasonable, good-faith judgment of the Lessee, the cost to remediate the same will cause the same to be a Significant Event, or (iv) if the Lessee shall not have delivered a Termination Notice with respect to such Environmental Violation described in clause (iii) but the requirements of Section 16.4 are met with respect to such Environmental Violation; then, (A) the Lessee shall, simultaneously with the delivery of the Responsible Officer's Certificate pursuant to the preceding clause (i), (ii) or (iii) deliver a written notice in the form described in Section 16.2(a) (a "Termination Notice"), or (B) if clause (iv) is applicable, the Lessor may deliver Termination Notice pursuant to Section 16.4. 25 16.2. Procedures. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the Property or the affected portion thereof on a date that is no later than thirty (30) days after the occurrence of the applicable event described in clause (i), (ii), (iii) or (iv) of Section 16.1 (the "Termination Date"), such termination to be effective upon the Lessee's payment of the Asset Termination Value (or portion thereof representing the Property Cost of the affected portion of the Property) (offsetting against such amount the aggregate amount of the Cash Collateral, if any); and (ii) a binding and irrevocable agreement of the Lessee to pay the Asset Termination Value or a portion thereof (offsetting against such amount the aggregate amount of the Cash Collateral, if any), and purchase the Property on the Termination Date. (b) On the Termination Date, the Lessee shall pay to the Lessor the Asset Termination Value (or such portion thereof, as applicable), plus all other amounts owing in respect of Rent for the Property (including Supplemental Rent) theretofore accruing, and the Lessor shall convey the Lessor's interest in the Property or such portion thereof to the Lessee (or the Lessee's designee) all in accordance with Section 19.1, as well as any Net Proceeds with respect to the Casualty or Condemnation giving rise to the termination of this Lease with respect to the Property theretofore received by the Lessor. 16.3. Termination by the Lessor upon Certain Events. If the Lessor reasonably determines that any change in, or change in the interpretation of, any applicable law after the date hereof would result in it or any Participant being unable to continue to hold legal or beneficial title to all or any portion of the Property or, except as provided in Section 16.4 hereof, subject it or any Participant to onerous regulations or onerous liability on account thereof, the Lessor may deliver a Termination Notice with respect to the Lease to the Indenture Trustee, the Participants and the Lessee, such termination to be effective on the Termination Date specified therein. Prior to delivering a Termination Notice, the Lessor agrees that it will use its reasonable efforts to reduce or eliminate the consequences of any such onerous regulation or onerous liability, including, subject to Applicable Law, a change in the applicable lending office for this transaction; provided, however, that nothing herein shall obligate the Lessor to take any action which, in the opinion of the Lessor, is unlawful, or results in any unreimbursed cost or expense to the Lessor, which cost or expense would not have been incurred but for such action. In the event the Lessor exercises its termination option, the Lessee may exercise the Remarketing Option provided in Section 22.1 hereof by giving notice to the Lessor within ten (10) Business Days of receipt of the notice from the Lessor. If the Lessee does not exercise its Remarketing Option, the Lessee shall be obligated to purchase the Property in accordance with Section 20.2 hereof on the Termination Date for the purchase price set forth therein. 16.4. Purchase of Property. Upon receipt of any notice pursuant to Section 15.2 or 15.3, the Lessor or the Required Participants, at the Lessee's expense, shall have the right to select an independent environmental consultant acceptable to the Lessee, which acceptance shall not be unreasonably withheld or delayed, to determine the estimated cost of conducting any clean-up or remediation required as a result of the Environmental 26 Violation disclosed in such notice. If such independent environmental consultant determines that the cost of any such clean-up or remediation would exceed $2,500,000, the Lessor shall, at the direction of the Required Participants, require the Lessee to purchase, or arrange for an Affiliate or other third party to purchase, the Property on the Expiration Date by delivering a Termination Notice following the requirements of Section 16.2 hereof. ARTICLE XVII 17.1. Lease Events of Default. The occurrence of any one or more of the following events (whether such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall constitute a "Lease Event of Default": (a) the Lessee shall fail to make payment of (i) any Basic Rent (provided that the Lessor has given the notice of amount due required under Section 3.1 when required) (other than a payment of Basic Rent due on the Expiration Date or Termination Date) within five (5) Business Days after the same has become due and payable or (ii) Basic Rent, Purchase Option Price, Asset Termination Value or Residual Value Guarantee Amount or other amounts due on the Expiration Date or the Termination Date, including, without limitation, amounts due pursuant to Sections 16.2, 16.3, 16.4, 20.1, 20.2, 20.3 or 22.1, after the same has become due and payable; (b) the Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in clause (a) of this Section) due and payable within thirty (30) days after written notice thereof; (c) the Lessee shall fail to maintain insurance as required by Article XIV of this Lease; (d) the Lessee shall fail to observe or perform any term, covenant or condition of the Lessee under this Lease, the Participation Agreement or any other Operative Document to which it is a party other than those described in Section 17.1(a), (b),or (c) hereof, or any representation or warranty set forth in this Lease or in any other Operative Document or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any Material way, and such failure or misrepresentation or breach of warranty shall remain uncured for a period of thirty (30) days after receipt of written notice thereof; provided, that if such failure to perform is not capable of being cured within such period but is capable of being cured within one hundred eighty (180) days after the occurrence of such default and the Lessee is proceeding diligently to cure such default, the Lessee shall be entitled to request an additional period (not to exceed one hundred eighty (180) days from the date of such 27 default) to cure such default, which extended cure period may be granted by the Lessor and the Required Participants in their sole discretion; (e) the Lessee shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof, (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or the whole or any substantial part of its property, (v) fail to cause the discharge of any custodian, trustee or receiver appointed for the Lessee or the whole or a substantial part of its property within sixty (60) days after such appointment, or (vi) file a petition or answer seeking or consenting to reorganization under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof; (f) insolvency proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof shall be filed against the Lessee and not dismissed within sixty (60) days from the date of its filing, or a court of competent jurisdiction shall enter an order or decree appointing, without the consent of the Lessee, a receiver of the Lessee or the whole or a substantial part of its property, and such order or decree shall not be vacated or set aside within sixty (60) days from the date of the entry thereof; (g) if any of the following shall occur, and the aggregate liability of the Lessee in respect thereof would exceed $5,000,000: (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay under Title IV of ERISA; or (ii) notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or (iii) the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (iv) there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $5,000,000; (h) a judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Lessee or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed (pursuant to laws, rules or court orders) for a period of thirty (30) days; (i) the Guarantor, the Lessee or any of their respective Subsidiaries (i) shall default in the payment when due, whether at stated maturity or otherwise, of principal or interest in respect of Indebtedness (other than under the Operative Documents) or 28 obligations in respect of Consolidated Off-Balance Sheet Debt having an aggregate principal amount of $5,000,000 or more; or (ii) shall fail to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Consolidated Off-Balance Sheet Debt, if the effect of any such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) or the lessor or the lenders under any such Consolidated Off-Balance Sheet Debt to cause such Indebtedness or Consolidated Off-Balance Sheet Debt to be declared to be due and payable prior to its stated maturity, or cash collateral in respect thereof to be demanded or, in the case of Consolidated Off-Balance Sheet Debt, demand that the Lessee purchase the property covered by such Consolidated Off-Balance Sheet Debt; (j) a Guarantee Event of Default shall have occurred and be continuing; (k) [intentionally omitted] (l) a Construction Agency Agreement Event of Default shall have occurred and be continuing; or (m) an Environmental Violation shall occur that, in the reasonable opinion of the Lessor and the Required Participants, based on an Environmental Audit, constitutes a Significant Event and the Lessee shall not, within thirty (30) days after notice from the Lessor, have delivered a Termination Notice with respect thereto pursuant to Section 16.1 hereof or, if so delivered, repurchase of the Property shall not have been consummated on the Termination Date pursuant to Section 16.2 hereof; (n) the Lessee shall have elected to or be required to purchase the Property pursuant to Sections 16.3 or 16.4 hereof and such purchase shall not have been consummated on the Termination Date pursuant to either such Section; or (o) a Ground Lease Event of Default shall have occurred and be continuing; or the Lessee shall fail to comply with its covenants set forth in Section 32.1 hereof; or the Ground Lease shall, in whole or in part, terminate, cease to be effective or cease to be the legal, valid and binding obligation of the Lessee. 17.2. Remedies. Upon the occurrence of any Lease Event of Default and at any time thereafter, the Lessor may, so long as such Lease Event of Default is continuing, do one or more of the following as the Lessor in its sole discretion shall determine, without limiting any other right or remedy the Lessor may have on account of such Lease Event of Default (including, without limitation, the obligation of the Lessee to purchase the Property as set forth in Section 20.3): (a) The Lessor may, by notice to the Lessee, rescind or terminate this Lease as to all or any portion of the Property as of the date specified in such notice; however, (i) no reletting, reentry or taking of possession of the Property (or any portion thereof) by the 29 Lessor will be construed as an election on the Lessor's part to terminate this Lease unless a written notice of such intention is given to the Lessee, (ii) notwithstanding any reletting, reentry or taking of possession, the Lessor may at any time thereafter elect to terminate this Lease for a continuing Lease Event of Default, and (iii) no act or thing done by the Lessor or any of its agents, representatives or employees and no agreement accepting a surrender of the Property shall be valid unless the same be made in writing and executed by the Lessor; (b) The Lessor may (i) demand that the Lessee, and the Lessee shall upon the written demand of the Lessor, return the Property promptly to the Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Articles VIII, IX and X hereof as if the Property 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 and (ii) without prejudice to any other remedy which the Lessor may have for possession of the Property, and to the extent and in the manner permitted by Applicable Law, enter upon the Property and take immediate possession of (to the exclusion of the Lessee) the Property or any part thereof and expel or remove the Lessee and any other Person who may be occupying the Property, by summary proceedings or otherwise, all without liability to the Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise and, in addition to the Lessor's other damages, the Lessee shall be responsible for all costs and expenses incurred by the Lessor and/or the Indenture Trustee or the Participants in connection with any reletting, including, without limitation, brokers' fees and all costs of any alterations or repairs made by the Lessor; (c) The Lessor may (i) sell all or any part of the Property at public or private sale, as the Lessor may determine, free and clear of any rights of the Lessee and without any duty to account to the Lessee with respect to such action or inaction or any proceeds with respect thereto (except to the extent required by clause (ii) below if the Lessor shall elect to exercise its rights thereunder) in which event the Lessee's obligation to pay Basic Rent hereunder for periods commencing after the date of such sale shall be terminated or proportionately reduced, as the case may be; and (ii) if the Lessor shall so elect, demand that the Lessee pay to the Lessor, and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (the parties agreeing that the Lessor's actual damages would be difficult to predict, but the aforementioned liquidated damages represent a reasonable approximation of such amount) (in lieu of Basic Rent due for periods commencing on or after the Payment Date coinciding with such date of sale (or, if the sale date is not a Payment Date, the Payment Date next preceding the date of such sale)), an amount equal to (subject to Section 17.2(j)) (A) the excess, if any, of (1) the Asset Termination Value calculated as of such Payment Date (including all Rent due and unpaid to and including such Payment Date) less the aggregate amount of the Cash Collateral, if any, permitted to be retained by the Lessor, the Indenture Trustee or the Participants, over (2) the net proceeds of such sale, if any (that is, after deducting all costs and expenses incurred by the Lessor, the Indenture Trustee and the Participants incident to such conveyance, including, without limitation, 30 repossession costs, brokerage commissions, prorations, transfer taxes, fees and expenses for counsel, title insurance fees, survey costs, recording fees, and any repair or alteration costs); plus (B) all damages, costs and expenses of the Lessor under the Ground Lease; plus (C) interest at the Overdue Rate on the foregoing amount from such Payment Date until the date of payment; (d) The Lessor may terminate the Commitments and its obligation to make Advances as provided in Section 3.8 of the Participation Agreement; (e) Unless the Property has been sold in its entirety, the Lessor may, subject to Section 17.2(j), whether or not the Lessor shall have exercised or shall thereafter at any time exercise any of its rights under paragraph (b), (c) or (d) of this Section 17.2 with respect to the Property or portions thereof, demand, by written notice to the Lessee specifying a date (a "Termination Date") not earlier than 10 days after the date of such notice, that the Lessee purchase, on such Termination Date, the Property (or the remaining portion thereof) in accordance with the provisions of Article XIX and Section 20.3; provided, that the Lessee shall remain liable for all damages, costs and expenses of the Lessor under the Ground Lease; (f) The Lessor may exercise any other right or remedy that may be available to it under the Operative Documents or otherwise under Applicable Law, or proceed by appropriate court action (legal or equitable) to enforce the terms hereof or to recover damages for the breach hereof. Separate suits may be brought to collect any such damages for any period(s), and such suits shall not in any manner prejudice the Lessor's right to collect any such damages for any subsequent period(s), or the Lessor may defer any such suit until after the expiration of the Term, in which event such suit shall be deemed not to have accrued until the expiration of the Term; or (g) The Lessor may retain and apply against the Lessor's damages all sums which the Lessor would, absent such Lease Event of Default, be required to pay to, or turn over to, the Lessee pursuant to the terms of this Lease. (h) In addition to the other rights and remedies set forth herein, Lessor shall have the right to continue this Lease in effect and, as permitted by Section 1951.4 of the California Civil Code, to enforce, by suit or otherwise, all covenants and conditions hereof to be performed or complied with by Lessee and exercise all of Lessor's rights and remedies under this Lease, including, without limitation, the right to recover Basic Rent and Supplemental Rent from Lessee as it becomes due under this Lease, even though Lessee shall have breached this Lease and abandoned the Property. Acts of maintenance or preservation, or efforts by Lessor or on Lessor's behalf to relet the Property, or the appointment of a receiver upon the initiative of Lessor to protect Lessor's interest under this Lease shall not constitute a termination of Lessee's right to possession of the Property; provided, however, that the foregoing enumeration shall not be construed as in any way limiting the actions Lessor may take without terminating Lessee's right to possession. In furtherance of the rights hereby granted to Lessor, and to the extent, permitted by law, Lessee hereby appoints Lessor its agent and attorney-in-fact, which 31 appointment shall be deemed to be coupled with an interest and is irrevocable, with power of substitution, to enter the Property upon a Lease Event of Default hereunder and remove therefrom all persons and property (with the right to store such property on the Property in a public warehouse or elsewhere at the cost and risk and for the account of Lessee) and to alter the Property in such manner as Lessor may deem necessary or advisable so as to put the Property in good order and to make the same rentable and from time to time sublet the Property or any part thereof for such term or terms whether or not extending beyond the then current term of this Lease (but such sublease may provide for a new and successive lease to commence immediately upon the termination of this Lease), at such rentals and upon such other terms as Lessor in its sole discretion may deem advisable, and with the right to make alterations and repairs to the Property; and Lessee agrees to pay to Lessor on demand all reasonable expenses incurred by Lessor in such subletting, and in altering, repairing and putting the Property in good order and condition, and in reletting the same, including fees of attorneys and architects, and all other reasonable expenses or commissions. Lessor shall be Lessee's agent and representative on the Property in respect of all matters arising under or in connection with any such sublease made for Lessee by Lessor. Under each such sublease, Lessee shall retain the right to enter upon and use the Property, subject to the terms and conditions of such sublease and the rights of the sublessee thereunder. Lessee further agrees to pay to Lessor, following the date of such subletting, to and including the date provided in this Lease for the expiration of the Lease Term, the sums of money which would have been payable by Lessee as Basic Rent and Supplemental Rent, deducting only the net amount of rent, if any, which Lessor shall actually receive (after deducting from the gross receipts the expenses, costs and payments of Lessor which in accordance with the terms of this Lease would have been borne by Lessee) in the meantime from and by any such subletting of the Property, and Lessee hereby agrees to remain liable for all sums otherwise payable by Lessee under this Lease, including, but not limited to, the expenses of Lessor aforesaid, as well as for any deficiency aforesaid. Lessor shall have the right from time to time to begin and maintain successive actions or other legal proceedings against Lessee for the recovery of such deficiency, expenses or damages or for a sum equal to any installments of Basic Rent or Supplemental Rent and other sums payable hereunder, and to recover the same upon the liability of Lessee herein provided, which liability it is expressly covenanted shall survive the commencement or determination of any action to secure possession of the Property. Nothing herein contained shall be deemed to require Lessor to wait to begin such action or other legal proceedings until the date when this Lease would have expired by limitation had there been no such Lease Event of Default. Notwithstanding any such subletting without termination, pursuant to the terms hereof, Lessor shall retain the right to and may at any time thereafter elect to terminate this Lease or Lessee's right to possession of the Property for any previous breach which remains uncured or for any subsequent breach by giving Lessee written notice thereof as herein provided, and in such event Lessee shall forfeit any rights or interest under any such sublease and thereafter the obligations of any such sublessee shall run directly to Lessor for its own account. Upon application by Lessor, a receiver may be appointed to take possession of the Property, exercise all rights granted to Lessor as agent and attorney-in-fact for Lessee set forth in this Section 17.2(h) and apply any rentals collected from the Property as hereinabove provided. No taking of possession of the 32 Property or other act by Lessor as the agent and attorney-in-fact for Lessee pursuant to the foregoing provisions, nor any subletting by Lessor for Lessee pursuant to the foregoing provisions, nor any such appointment of a receiver shall constitute or be construed as an election by Lessor to terminate this Lease or Lessee's right to possession of the Property unless a written notice of such intention be given to Lessee. (i) In the event of any termination of the Lease Term pursuant to Section 17.2(a) or as permitted by law, Lessee shall quit and surrender the Property to Lessor, and Lessor may without further notice enter upon, reenter, possess and repossess the same by summary proceedings, ejectment or otherwise, and again have, repossess and enjoy the same as if this Lease had not been made, and in any such event neither Lessee nor any Person claiming through or under Lessee by virtue of any law or an order of any court shall be entitled to possession or to remain in possession of the Property but shall forthwith quit and surrender the Property, and Lessor shall, notwithstanding any other provision of this Lease, be entitled to recover from Lessee the aggregate of all amounts Lessor is permitted to recover from Lessee, including: (i) the worth at the time of award, as computed below, of the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) which had been earned at the time of termination of this Lease; (ii) the worth at the time of award of the amount by which the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) which would have been earned after the time of termination of this Lease until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) for the balance of the term after the time of award exceeds the amount of such rental loss for said balance of the term that Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; including without limitation any loss or damage arising out of the failure of Lessor to receive the benefit of the performance by Lessee of any obligation to purchase the Property under the provisions of this Lease. Lessee acknowledges and agrees that, in reliance upon this Lease and Lessee's covenants and agreements hereunder and the creditworthiness and financial condition of Lessee, Lessor has entered into certain special transactions to finance the costs of purchasing the Ground Lease Interest and constructing the Improvements and, in connection with such financing transactions, Lessor has incurred and will continue to incur indebtedness and liabilities under and pursuant to the Participation Agreement and the other Operative Documents. Lessee 33 acknowledges and agrees that a Lease Event of Default will cause Lessor substantial damage and detriment due to its obligations and liabilities under the Participation Agreement and the other Operative Documents, including, without limitation, the failure of Lessor to be fully compensated for the Advances made to Lessee. Accordingly, in order to compensate Lessor for all detriment proximately caused by Lessee's failure to perform its obligations under this Lease, Lessor shall be permitted to recover from Lessee, without limitation, all amounts necessary for Lessor to be fully compensated for all of the Advances made to the Lessee. The "worth at the time of award, of the amounts referred to in the foregoing subsections 17.2(i) (i) and (ii) shall be computed by allowing interest at the Overdue Rate (or at the highest rate permitted by applicable law, whichever is less) on each rental installment from the date the same was due hereunder to the time of award. The "worth at the time of award" of the amount referred to in the foregoing subparagraph (iii) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). As used herein, the term "time of award" shall mean either (A) the date upon which Lessee pays to Lessor the amount recoverable by Lessor as hereinabove set forth or (B) the date of entry of any determination, order or judgment of any court, other legally constituted body, or any arbitrator(s), determining the amount recoverable, whichever first occurs. If the time of award is determined under clause (B), above, then the amount recoverable by Lessor hereunder shall bear interest from the time of award until paid at the Overdue Rate (or at the highest rate permitted by applicable law, whichever is less). Nothing herein contained shall limit or prejudice the right of Lessor, and Lessor is hereby expressly granted the right, in any bankruptcy or reorganization or insolvency proceedings, to prove for and obtain as damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law whether such amount shall be greater or less than the amounts referred to above. (j) Notwithstanding anything contained in this Lease to the contrary, in the event that the Lease Event of Default resulting in the exercise of remedies by the Lessor hereunder is solely an Event of Default described in Section 17.1 (l) occurring during the Construction Period, the Lessee shall, at the request of the Lessor, (i) (A) return the Property to the Lessor or a Person designated by the Lessor on a date specified by the Lessor (which date shall constitute the Expiration Date) and/or (B) remarket the Property for the Lessor as the Lessor's agent subject to the Lessor's direction, and at the Lessee's expense and (ii) pay to the Lessor (A) the maximum Residual Value Guarantee Amount on the date that is ten (10) days after the Lessor furnishes the Lessee notice that it will require the Lessee to return or remarket the Property), (B) all breakage costs incurred by the Participants for the duration of all then current Interest Periods or Fixed Rate Periods under the Participation Agreement with respect to the amount so paid following notices thereof by the Indenture Trustee, (C) the other costs and expenses of the sale of the Property, and (D) all Rent and other amounts payable under this Lease and the other Operative Documents; provided, that the Lessor may recover from the Lessee, and the Lessee shall be obligated to pay to the Lessor, the Asset Termination Value as of 34 such date (notwithstanding the limitation to maximum Residual Value Guarantee Amount contained in clause (A) above) if a Fully Indemnifiable Event has occurred. 17.3. Waiver of Certain Rights. If this Lease shall be terminated pursuant to Section 17.2, the Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt or limiting the Lessor with respect to the election of remedies; and (d) any other rights which might otherwise limit or modify any of the Lessor's rights or remedies under this Article XVII. 17.4. Power of Sale and Foreclosure. Subject to Article XXII below, in the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust or other secured financing, and subject to the availability of such remedy under applicable law, then the Lessor and the Lessee agree that the Lessee hereby mortgages and grants to Lessor a Lien against the Property WITH POWER OF SALE, for the purpose of securing all of Lessee's obligations hereunder (including the payment of Basic Rent, Supplemental Rent and the Asset Termination Value or Purchase Option Price) (collectively, the "Obligations"). In each case, upon the occurrence of any Lease Event of Default, the Lessor shall have the power and authority, to the extent provided by law, to exercise the following rights and remedies: (a) To declare the Obligations immediately due and payable; (b) With or without notice, and without releasing Lessee from any obligation hereunder, to cure any default of Lessee and, in connection therewith, to enter upon the Property and to perform such acts and things as Lessor deems necessary or desirable to inspect, investigate, assess and protect the Property, including, without limitation of any of its other rights: to obtain a court order to enforce Lessor's right to enter and inspect the Property pursuant to California Civil Code Section 2929.5, to which the decision of Lessor as to whether there exists a release or threatened release of a Hazardous Substance onto the Property shall be deemed reasonable and conclusive as between the parties hereto; to have a receiver appointed pursuant to California Code of Civil Procedure Section 564 to enforce Lessor's right to enter and inspect the Property for Hazardous Substances; to appear in and defend any action or proceeding purporting to affect the Property or the rights or powers of Lessor hereunder; to pay, purchase, contest or compromise any encumbrance, charge, lien or claim of lien which, in the judgment of Lessor, is prior or superior hereto, the judgment of Lessor being conclusive as between the parties hereto; to pay any premiums or charges with respect to insurance required to be carried hereunder; and to employ counsel, accountants, contractors and other appropriate persons to assist Lessor; (c) To commence and maintain an action or actions in any court of competent jurisdiction to foreclose this instrument as a mortgage or to obtain specific enforcement of the covenants of Lessee hereunder, and Lessee agrees that such covenants shall be specifically enforceable by injunction or any other appropriate equitable remedy 35 and that for the purposes of any suit brought hereunder, Lessee waives the defense of laches and any applicable statute of limitations; (d) Lessor or its employees, acting by themselves or through a court-appointed receiver, may enter upon, possess, manage, operate, dispose of and contract to dispose of the Property or any part thereof; negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures; contract for goods and services, hire agents, employees and counsel, make repairs, alterations and improvements to the Property necessary, in Lessor's judgment, to protect or enhance the security hereof; to incur the risks and obligations ordinarily incurred by owners of property (without any personal obligation on the part of the receiver); and/or to take any and all other actions which may be necessary or desirable to comply with Lessee's obligations hereunder and under the Operative Documents. All sums realized by Lessor under this Section 17.4(d), less all costs and expenses incurred by it under this Section 17.4(d), including attorneys' fees, and less such sums as Lessor deems appropriate as a reserve to meet future expenses under this Section 17.4(d), shall be applied on any Obligations secured hereby in such order as Lessor shall determine. Neither application of said sums to said indebtedness nor any other action taken by Lessor under this Section 17.4(d) shall cure or waive any Lease Event of Default or notice of default hereunder or nullify the effect of any such notice of default. Lessor, or any employee or agent of Lessor, or a receiver appointed by a court, may take any action or proceeding hereunder without regard to (i) the adequacy of the security for the indebtedness secured hereunder, (ii) the existence of a declaration that the indebtedness secured hereby has been declared immediately due and payable, or (iii) the filing of a notice of default; (e) To execute a written notice of such Lease Event of Default and of its election to cause the Property to be sold to satisfy the obligations secured hereby. Lessor shall give and record such notice as the law then requires as a condition precedent to a nonjudicial foreclosure sale. When the minimum period of time required by law after such notice has elapsed, Lessor, without notice to or demand upon Lessee except as otherwise required by law, shall sell the Property at the time and place of sale fixed by it in the notice of sale and in such order as it or Lessor may determine, at public auction to the highest bidder for cash, in lawful money of the United States, payable at time of sale (the Obligations hereby secured being the equivalent of cash for purposes of said sale). If the Property consists of several lots, parcels, or items of property, Lessor may: (i) designate the order in which such lots, parcels, or items shall be offered for sale or sold, or (ii) elect to sell such lots, parcels or items through a single sale, through two or more successive sales, or in any other manner Lessor deems in its best interest. Lessee shall have no right to direct the order in which the Property is sold. Lessor may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at such time fixed by the preceding postponement. Lessor shall deliver to the purchaser at such sale a deed or other appropriate transfer instrument conveying the Property or portion thereof so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Lessor or Lessee may purchase at such sale. 36 In connection with any sale or sales hereunder, Lessor may elect to treat any of the Property which consists of a right in action or which is property that can be severed from the real property covered hereby or any improvements thereon without causing structural damage thereto as if the same were personal property or a fixture, as the case may be, and dispose of the same in accordance with applicable law, separate and apart from the sale of real property. Any sale of any personal property or fixtures hereunder shall be conducted in any manner permitted by the UCC. After deducting all costs, fees and expenses of Lessor and of this trust, including all costs of evidence of title and attorneys' fees in connection with sale, Lessor shall apply the proceeds of sale to payment of all sums so expended under the terms hereof not then repaid; the payment of all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto; (f) To resort to and realize upon the Property and any other security now or hereafter held by Lessor in such order and manner as Lessor may, in its sole discretion, determine; and resort to any or all such security may be taken concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken non-judicial proceedings, or both; (g) To commence and maintain an action or actions in any court of competent jurisdiction pursuant to California Code of Civil Procedure Section 736, whether commenced prior to foreclosure of the Property or after foreclosure of the Property, and to seek the recovery of any and all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of-pocket costs or expenses actually incurred by Lessor (collectively, the "Environmental Costs") incurred or advanced by Lessor relating to the cleanup, remediation or other response action required by Applicable Law or which Lessor believes necessary to protect the Property, it being conclusively presumed between Lessor and Lessee that all such Environmental Costs incurred or advanced by Lessor relating to the cleanup, remediation or other response action of or to the Property were made by Lessor in good faith. All Environmental Costs incurred by Lessor pursuant to this Section 17.4(g) (including, without limitation, court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Overdue Rate from the date of expenditure until said sums have been paid. Lessor shall be entitled to bid, at the sale of the Property held pursuant to Section 17.4(e) above, the amount of said costs, expenses and interest in addition to the amount of the other Obligations hereby secured as a credit bid, the equivalent of cash. For the purposes of any action brought under this Section 17.4(g), Lessee hereby waives the defense of laches and any applicable statute of limitations; and (h) To waive its lien against the Property or any portion thereof, whether fixtures or personal property, to the extent such property is found to be environmentally impaired in accordance with California Code of Civil Procedure Section 726.5 and to exercise any and all rights and remedies of an unsecured creditor against 37 Lessee and all of Lessee's assets and property for the recovery of any deficiency and Environmental Costs, including, but not limited to, seeking an attachment order pursuant to California Code of Civil Procedure Section 483.010. As between Lessor and Lessee, for purposes of California Code of Civil Procedure Section 726.5, Lessee shall have the burden of proving that Lessee or any related party (or any affiliate or agent of Lessee or any related party) was not in any way negligent in permitting the release or threatened release of the Hazardous Substance. For the purposes of any action brought under this paragraph, Lessee hereby waives the defense of laches and any applicable statute of limitations. (i) All costs and expenses incurred by Lessor pursuant to Section 17.4 (including without limitation court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Overdue Rate, from the date of expenditure until said sums have been paid. Lessor shall be entitled to bid, at the sale of the Property held pursuant to subsection 17.4(e) above, the amount of said costs, expenses and interest in addition to the amount of the other Obligations hereby secured as a credit bid, which shall be deemed the equivalent of cash. (j) Lessee hereby waives any right to require that any security given hereunder or under any other agreement securing the Obligations be marshalled and further waives any right otherwise available in respect to marshalling of assets which secure any Obligation or to require Lessor to pursue its remedies against any such assets. 17.5. Remedies Cumulative. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including, without limitation, any mortgage foreclosure remedies. 17.6. Lessee's Right to Cure. Notwithstanding any provision contained in the Lease or any other Operative Agreement, if a Lease Event of Default has occurred and is continuing, the Lessee shall have the right to cure such Lease Event of Default by exercising its Purchase Option at any time prior to the termination of the Lessee's possessory interest in the Property and the thirty (30) day period following the occurrence of a Lease Event of Default and purchasing the Property at any time prior to such time as a foreclosure upon or sale of the Property has been completed. ARTICLE XVIII 18.1. The Lessor's Right to Cure the Lessee's Lease Events of Default. The Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to), upon not less than three (3) Business Days' notice to the Lessee, remedy any Lease Event of Default for the account and at the sole cost and expense of the Lessee, including the failure by the Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of the Lessee, enter upon the 38 Property for such purpose and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of the Lessee. All out-of-pocket costs and expenses so incurred (including fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by the Lessor, shall be paid by the Lessee to the Lessor on demand, as Supplemental Rent. ARTICLE XIX 19.1. Provisions Relating to the Lessee's Termination of this Lease or Exercise of Purchase Option or Obligation and Conveyance Upon Remarketing and Conveyance Upon Certain Other Events. (a) In connection with any termination of this Lease pursuant to the terms of Article XVI (if the Lessee is obligated to purchase the Property), or in connection with the Lessee's exercise of its Purchase Option, Partial Purchase Option or Expiration Date Purchase Obligation, upon the date on which this Lease is to terminate or upon the Expiration Date, and upon tender by the Lessee of the amounts set forth in Sections 16.2(b), 20.1, 20.2 or 20.3, as applicable: (i) the Lessor shall execute and deliver to the Lessee (or to the Lessee's designee) at the Lessee's cost and expense an assignment without recourse of the Lessor's right, title and interest in the Property or applicable portion thereof and the Ground Lease (except for the Lessor's indemnities thereunder) (which shall include a release, quitclaim and assignment of all of the Lessor's right, title and interest in and to any Net Proceeds with respect to the Property or such portion thereof not previously received by the Lessor), subject to the Permitted Exceptions (other than Lessor Liens) and any encumbrance caused by the fault, neglect or intention of the Lessee, in recordable form and otherwise in conformity with local custom and free and clear of the Mortgage and any Lessor Liens attributable to the Lessor; and (ii) the Lessee shall execute and deliver to the Lessor an assumption of all of the Lessor's obligations under the Ground Lease.. The Improvements and the Equipment shall be conveyed to the Lessee "AS IS" and in their then present condition of title and physical condition free of any Lessor Liens. (b) If the Lessee properly exercises the Remarketing Option or is required to remarket the Property or return the Property to the Lessor pursuant to Section 17.2, then the Lessee shall, on the Expiration Date, and at its own cost, transfer possession of the Property (or remaining portion thereof), together with the Lessor's rights under the Ground Lease (except for the Lessor's rights of indemnification), to the independent purchaser thereof, by surrendering the same into the possession of the Lessor or such purchaser, as the case may be, free and clear of all Liens other than Lessor Liens, in good condition (as modified by Modifications permitted by this Lease), ordinary wear and tear excepted, in compliance with Applicable Law, and in "broom-swept clean" condition. The Lessee shall cooperate reasonably with the Lessor and the independent purchaser of the Property (or remaining portion thereof) in order to facilitate the purchase by such purchaser of the Property (or remaining portion thereof) which cooperation shall include the following, all of which the Lessee shall do on or before the Expiration Date: providing all books and records regarding the maintenance and ownership of the Property 39 and all know-how, data and technical information relating thereto, providing a current copy of the "as built" Plans and Specifications for the Property (or remaining portion thereof), granting or assigning all licenses necessary for the operation and maintenance of the Property and cooperating reasonably in seeking and obtaining all necessary Governmental Action and complying with the revision of Section 22.3 hereof. The obligations of the Lessee under this paragraph shall survive the expiration or termination of this Lease. ARTICLE XX 20.1. Purchase Option. (a) Without limitation of the Lessee's purchase obligation pursuant to Sections 20.2 or 20.3, unless the Lessee shall have given notice of its intention to exercise the Remarketing Option and the Lessor shall have entered into a binding contract to sell the Property, the Lessee shall have the option (exercisable by giving the Lessor irrevocable written notice (the "Purchase Notice") of the Lessee's election to exercise such option) to purchase, or to designate a third party to purchase, (i) all of the Property (the "Purchase Option") or (ii) the Data Center (the "Partial Purchase Option"), in each case, together with the Lessor's rights under the Ground Lease with respect to all or such portion of the Property, as applicable (except for the Lessor's rights of indemnification), on the date specified in such Purchase Notice, which date shall be a Payment Date. The purchase price in respect of the Property shall be as follows: (i) in respect of the entire Property, the Asset Termination Value and (ii) in respect of the Data Center, as set forth on Schedule 1 hereto, plus, in each case, all other amounts owing in respect of Rent (including Supplemental Rent) theretofore accruing with respect to all or such portion of the Property, as the case may be (the "Purchase Option Price") (offsetting against such amount the aggregate amount or such proportionate amount of the Cash Collateral, if any). The Lessee shall deliver the Purchase Notice to the Lessor not less than sixty (60) days prior to the purchase date. If the Lessee exercises its Purchase Option or Partial Purchase Option, pursuant to this Section 20.1, the Lessor shall (x) transfer to the Lessee all of the Lessor's right, title and interest in and to all or the applicable portion of the Property, together with the Lessor's rights under the Ground Lease with respect to all or such portion of the Property, as applicable (except for the Lessor's rights of indemnification), as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price and all Rent and other amounts then due and payable under this Lease and any other Operative Document, in accordance with Section 19.l(a), and (y) enter into such cross parking and access easement agreements as may be reasonably necessary in order to ensure access to and adequate parking for the Data Center and the remaining Property. (b) The purchase by the Lessee on any Payment Date of the Data Center pursuant to this Section 20.1 is subject to receipt by the Lessor, on or prior to such date, of new Appraisals for all sub-tracts and tracts of the Property that are to remain subject to the Lease after such date, which appraisals (i) each shall be dated a recent date prior to such date and (ii) together shall assess the aggregate Fair Market Sales Value of all such remaining sub-tracts and tracts of the Property at not less than the Fair Market Sales 40 Value therefor as of the Maturity Date as set forth in the Appraisal delivered to Lessor on the Closing Date. 20.2. Expiration Date Purchase Obligation. Unless (a) the Lessee shall have properly exercised the Purchase Option pursuant to Section 20.1 and purchased the Property pursuant thereto, (b) the Lessee shall have properly exercised the Remarketing Option and shall have fulfilled all of the conditions of clauses (a) through (j) of Section 22.1 hereof or (c) the Lessee shall have properly exercised the Renewal Option pursuant to Section 21.1 and the terms and conditions of a Renewal Term shall have been agreed upon pursuant to such Section, then, subject to the terms, conditions and provisions set forth in this Article, and in accordance with the terms of Section 19.1(a), the Lessee shall purchase from the Lessor, and the Lessor shall assign to the Lessee without recourse, on the Expiration Date of the Term (as such Term may be renewed pursuant to Section 21.1) all of the Lessor's right, title and interest in the Property, together with the Lessor's rights under the Ground Lease (except for the Lessor's rights of indemnification), (subject to all existing Liens, other than the Mortgage and Lessor Liens) for an amount equal to the Asset Termination Value (offsetting against such amount the aggregate amount of the Cash Collateral, if any). The Lessee may designate, in a notice given to the Lessor not less than ten (10) Business Days prior to the closing of such purchase (time being of the essence), the transferee or transferees to whom the conveyance shall be made (if other than to the Lessee), in which case such conveyance shall (subject to the terms and conditions set forth herein) be made to such designee; provided, however, that such designation of a transferee or transferees shall not cause the Lessee to be released, fully or partially, from any of its obligations under this Lease, including, without limitation, the obligation to pay the Lessor an amount equal to the Asset Termination Value that was not fully and finally paid by such designee on such Expiration Date. 20.3. Acceleration of Purchase Obligation. (a) The Lessee shall be obligated to purchase for an amount equal to the Asset Termination Value (offsetting against such amount the aggregate amount of the Cash Collateral, if any, permitted to be retained by the Lessor, the Indenture Trustee and the Participants), the Lessor's interest in the Property (notwithstanding any prior election to exercise its Purchase Option pursuant to Section 20.1) (i) automatically and without notice upon the occurrence of any Lease Event of Default specified in clause (e) or (f) of Section 17.1, and (ii) as provided for at Section 17.2(e) immediately upon written demand of the Lessor upon the occurrence of any other Lease Event of Default (except as provided in Section 17.2(j)). (b) The Lessee shall be obligated to purchase for an amount equal to the Asset Termination Value (plus all other amounts owing in respect of Rent (including Supplemental Rent) theretofore accruing) (offsetting against such amount the aggregate amount of the Cash Collateral, if any, permitted to be retained by the Lessor, the Indenture Trustee and the Participants), immediately upon written demand of the Lessor, the Lessor's interest in the Property at any time during the term when the Lessor's interest in the Property is foreclosed due to an event arising out of a violation of the warranty of title contained in Section 12.1 hereof and the Lessor ceases to have title as contemplated by Section 12.1. 41 ARTICLE XXI 21.1. Renewal. (a) Subject to the conditions set forth herein, the Lessee shall have the option (the "Renewal Option") by written request (the "Renewal Request") to the Lessor, each Participant and the Indenture Trustee given at any time and from time to time after six months after the Closing Date to renew the Term for a five year period commencing on the date requested by the Lessee (the "Renewal Effective Date"). No later than the date (the "Renewal Response Date") which is thirty (30) days after such request has been delivered to each of the Lessor, each Participant and the Indenture Trustee, the Lessor will notify the Lessee in writing (with a copy to the Indenture Trustee) whether or not it consents to such Renewal Request (which consent may be granted or denied in its sole discretion and may be conditioned on receipt of such financial information or other documentation as may be specified by the Lessor including without limitation a satisfactory appraisal of the Property), provided that if the Lessor shall fail to notify the Lessee on or prior to the Renewal Response Date, it shall be deemed to have denied such Renewal Request. The renewal of the Term contemplated by any Renewal Request shall become effective as of the Renewal Effective Date on or after the Renewal Response Date on which the Lessor shall have consented to such Renewal Request; provided that such renewal shall be subject to and conditioned upon the following: (A) on both the Expiration Date then in effect and the date of the Renewal Request, (i) no Lease Default or Lease Event of Default shall have occurred and be continuing, and (ii) the Lessor and the Indenture Trustee shall have received a Responsible Officer's Certificate of the Lessee as to the matters set forth in clause (i) above, (B) the Lessee shall not have exercised the Remarketing Option, and (C) the Participants shall have agreed to extend the Maturity Date contemporaneously therewith pursuant to Section 3.6 of the Participation Agreement such that the Renewal Term will expire on the same date as the extended Maturity Date. (b) The renewal of this Lease shall be on the same terms and conditions as are set forth in this Lease for the original Term, with such modifications thereto, if any, as the parties hereto and to the other Operative Documents may negotiate based upon the current credit information regarding the Lessee, interest rates and such other factors as the Lessor may consider relevant. ARTICLE XXII 42 22.1. Option to Remarket. Subject to the fulfillment of each of the conditions set forth in this Section 22.1, the Lessee shall have the option (the "Remarketing Option") to market for the Lessor and complete the sale of all, but not less than all, of the Lessor's interest in the Property, together with the Lessor's rights under the Ground Lease (except for the Lessor's rights of indemnification), on the Expiration Date for the Lessor. The Lessee's effective exercise and consummation of the Remarketing Option shall be subject to the due and timely fulfillment of each of the following provisions as of the dates set forth below. (a) Not later than one hundred eighty (180) days prior to the Expiration Date, the Lessee shall give to the Lessor written notice of the Lessee's exercise of the Remarketing Option, which exercise shall be irrevocable (except by delivery of a Purchase Notice and consummation of the exercise of the Purchase Option prior to the earlier of (i) the Expiration Date or (ii) the date on which the Lessor enters into a binding contract to sell the Property pursuant to the exercise of the Remarketing Option). (b) The Lessee shall deliver to the Lessor an Environmental Audit of the Property together with its notice of exercise of the Remarketing Option. Such Environmental Audit shall be prepared by an environmental consultant selected by the Lessor in the Lessor's reasonable discretion and shall contain no change in the environmental status of the Property from that existing at the Ground Lease Interest Acquisition Date. If such Environmental Audit indicates any material exceptions reasonably requiring remedy or further investigation, the Lessee shall have also delivered a Phase Two environmental assessment by such environmental consultant prior to the Expiration Date showing the completion of the remedying of such exceptions in compliance with Applicable Law. (c) On the date of the Lessee's notice to the Lessor of the Lessee's exercise of the Remarketing Option, no Lease Event of Default or Lease Default shall exist, and thereafter, no uncured Lease Event of Default shall exist. (d) The Lessee shall have completed in all Material respects all Modifications, restoration and rebuilding of the Property pursuant to Sections 11.1 and 15.1 (as the case may be) and shall have fulfilled in all Material respects all of the conditions and requirements in connection therewith pursuant to said Sections, in each case by the date on which the Lessor receives the Lessee's notice of the Lessee's exercise of the Remarketing Option (time being of the essence), regardless of whether the same shall be within the Lessee's control. The Lessee shall have also paid the cost of all Modifications commenced prior to the Expiration Date. The Lessee shall not have been excused pursuant to Section 13.1 from complying with any Applicable Law that involved the extension of the ultimate imposition of such Applicable Law beyond the last day of the Term. Any Liens on the Property that were contested by the Lessee shall have been removed before the Expiration Date. 43 (e) During the Marketing Period, the Lessee shall, as nonexclusive agent for the Lessor, use commercially reasonable efforts to sell the Lessor's interest in the Property, together with the Lessor's rights under the Ground Lease (except for the Lessor's rights of indemnification), on or prior to the Expiration Date (without diminishing the Lessee's obligation to consummate the sale on the Expiration Date) and will attempt to obtain the highest purchase price therefor and for not less than the Fair Market Sales Value. The Lessee will be responsible for hiring and compensating brokers and making the Property available for inspection by prospective purchasers. The Lessee shall promptly upon request permit inspection of the Property and any maintenance records relating to the Property by the Lessor, any Participant and any potential purchasers, and shall otherwise do all things necessary to sell and deliver possession of the Property to any purchaser. All such marketing of the Property shall be at the Lessee's sole expense. The Lessee shall allow the Lessor and any potential qualified purchaser reasonable access to the Property for the purpose of inspecting the same. (f) The Lessee shall submit all bids to the Lessor, the Indenture Trustee and the Participants, and the Lessor will have the right to review the same and the right to submit any one or more bids. All bids shall be on an all-cash basis unless the Lessor, the Indenture Trustee and the Participants shall otherwise agree in their sole discretion. The Lessee shall procure bids from one or more bona fide prospective purchasers and shall deliver to the Lessor, the Indenture Trustee and the Participants not less than ninety (90) days prior to the Expiration Date a binding written unconditional (except as set forth below), irrevocable offer by such purchaser or purchasers offering the highest bid to purchase the Property, together with the Lessor's rights under the Ground Lease (except for the Lessor's rights of indemnification). No such purchaser shall be the Lessee, or any Subsidiary or Affiliate of the Lessee. The written offer must specify the Expiration Date as the closing date unless the Lessor, the Indenture Trustee and the Participants shall otherwise agree in their sole discretion. (g) In connection with any such sale of the Property, the Lessee will provide to the purchaser all customary "seller's" indemnities, representations and warranties regarding title, absence of Liens (except Lessor Liens) and the condition of the Property, as well as such other terms and conditions as may be negotiated between the Lessee and the purchaser. The Lessee shall have obtained, at its cost and expense, all required governmental and regulatory consents and approvals and shall have made all filings as required by Applicable Law in order to carry out and complete the transfer of the Property and such rights under the Ground Lease. As to the Lessor, any such sale shall be made on an "as is, with all faults" basis without representation or warranty by the Lessor other than the absence of Lessor Liens. Any agreement as to such sale shall be made subject to the Lessor's rights hereunder. (h) The Lessee shall pay directly, and not from the sale proceeds, all prorations, credits, costs and expenses of the sale of the Property and such rights under the Ground Lease, whether incurred by the Lessor or the Lessee, including without limitation, the cost of all title insurance, surveys, environmental reports, appraisals, transfer taxes, the Lessor's and the Indenture Trustee's reasonable attorneys' fees, the 44 Lessee's attorneys' fees, commissions, escrow fees, recording fees, and all applicable documentary and other transfer taxes. (i) The Lessee shall pay to the Indenture Trustee on or prior to the Expiration Date (or to such other Person as the Indenture Trustee shall notify the Lessee in writing, or in the case of Supplemental Rent, to the Person entitled thereto) an amount equal to the Residual Value Guarantee Amount plus all Rent and all other amounts under this Lease and the other Operative Documents which have accrued or will accrue prior to or as of the Expiration Date, in the type of funds specified in Section 3.4 hereof. (j) If the selling price of the Property and such rights under the Ground Lease is less than the difference between (A) the Asset Termination Value minus (B) the Residual Value Guarantee Amount, then the Lessee shall have caused to be delivered to the Lessor, the Indenture Trustee and each Participant the appraisal required by Section 13.2 of the Participation Agreement thirty (30) Business Days prior to the Expiration Date and shall pay to the Indenture Trustee on or prior to the Expiration Date (or to such other person as the Indenture Trustee shall notify the Lessee in writing) the amounts required to be paid pursuant to Section 13.2 of the Participation Agreement. (k) The purchase of the Property shall be consummated on the Expiration Date following the payment by the Lessee pursuant to paragraphs (i) and (j) above and contemporaneously with the Lessee's surrender of the Property pursuant to Section 19.1(b) and the gross proceeds (the "Gross Proceeds") of the sale of the Property (i.e., without deduction for any marketing, closing or other costs, prorations or commissions) shall be paid directly to the Indenture Trustee; provided, however, that if the sum of the Gross Proceeds from such sale plus the Residual Value Guarantee Amount paid by the Lessee pursuant to paragraph (i) above exceeds the Asset Termination Value, then the excess shall be paid to the Lessee on the Expiration Date. (l) The Lessee shall not be entitled to exercise or consummate the Remarketing Option if a circumstance that would permit the Lessor to require the Lessee to repurchase the Property under Section 16.4 exists and is continuing. If one or more of the foregoing provisions shall not be fulfilled as of the date set forth above, then the Lessor shall declare by written notice to the Lessee the Remarketing Option to be null and void (whether or not it has been theretofore exercised by the Lessee) as to the Property, in which event all of the Lessee's rights under this Section 22.1 shall immediately terminate and the Lessee shall be obligated to vacate the Property on the Expiration Date and comply with the obligations set forth in Section 22.3. Except as expressly set forth herein, the Lessee shall have no right, power or authority to bind the Lessor in connection with any proposed sale of the Property. 22.2. Certain Obligations Continue. During the Marketing Period, the obligation of the Lessee to pay Rent (including the installment of Basic Rent due on the fifth anniversary of the Closing Date or at the end of the Renewal Term, or on the Expiration Date, as the case may be) shall continue undiminished until payment in full to 45 the Indenture Trustee of the Gross Proceeds, the Residual Value Guarantee Amount, and all other amounts due to the Lessor with respect to the Property under the Operative Documents. The Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of the Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. 22.3. Support Obligations. In the event that (A) the Lessee does not elect to purchase the Property on the Expiration Date, (B) this Lease is terminated without a purchase of the Property by the Lessee as expressly permitted herein or (C) pursuant to the Lessor's exercise of remedies under Article XVII, this Lease is terminated, the Lessee shall provide the Lessor or other purchaser of the Property, effective on the Expiration Date or earlier termination date of this Lease, with (i) all permits, certificates of occupancy, governmental licenses and authorizations necessary to use and operate the Property for its intended purposes (to the extent such items are transferable or may be obtained by the Lessee on behalf of another party), (ii) such easements, licenses, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, repair, access to or maintenance of the Property as the Lessor shall request, and (iii) a services agreement covering such services as the Lessor may request in order to use and operate the Property for its intended purposes at such rates (not in excess of arm's length fair market rates) as shall be acceptable to the Lessor and the Lessee. All assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this Section 22.3 shall be in form satisfactory to the Lessor and shall be fully assignable (including both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. ARTICLE XXIII 23.1. Holding Over. If the Lessee shall for any reason remain in possession of the Property after the expiration or earlier termination of this Lease (unless the Property is conveyed to the Lessee), such possession shall be as a tenancy at sufferance during which time the Lessee shall continue to pay Supplemental Rent that would be payable by the Lessee hereunder were the Lease then in full force and effect and the Lessee shall continue to pay Basic Rent at an annual rate equal to 110% of the average rate of Basic Rent payable hereunder during the Term. Such Basic Rent shall be payable from time to time upon demand by the Lessor. During any period of tenancy at sufferance, the Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of the Lessor to the holding over of the Lessee after the expiration or earlier termination of this Lease (unless the Property is conveyed to the Lessee), and nothing contained herein shall be read or construed to relieve the Lessee of its obligations to purchase or remarket the Property on the Expiration Date pursuant to Article XX or Article XXII or as preventing the Lessor from maintaining a suit for 46 possession of the Property or exercising any other remedy available to the Lessor at law or in equity or hereunder. ARTICLE XXIV 24.1. Risk of Loss. The Lessee assumes all risks of loss arising from any Casualty or Condemnation which arises or occurs prior to the Expiration Date or while the Lessee is in possession of the Property and all liability for all personal injuries and deaths and damages to property suffered by any Person or property on or in connection with the Property which arises or occurs prior to the Expiration Date or while the Lessee is in possession of the Property, except in each case to the extent any such loss or liability is primarily caused by the gross negligence or willful misconduct of a Lessor Party; provided, however, that the Lessee shall have no obligation under this Section 24.1 on account of any such loss or liability arising during the Construction Period except as follows: (a) The Lessee shall be liable to the Lessor under this Section 24.1 for all such losses and liabilities caused by or arising from any failure by the Lessee to comply with any of its obligations under the Operative Documents (including its insurance obligations), any representation by the Lessee in any of the Operative Documents not being true, any negligence or willful misconduct of the Lessee, or any claim by any third-party against the Lessee (or against the Lessor) based upon any alleged action or inaction by the Lessee. (b) If any Lessor Party incurs any such loss or liability for which the Lessee is not liable pursuant to Section 24.1(a), the amount of such loss or liability shall, if such Lessor Party shall so request by a written notice to the Lessor, be capitalized pursuant to Section 3.9(f) of the Participation Agreement. The Lessee hereby waives the provisions of California Civil Code Sections 1932(1), 1932(2) and 1933(4), and any and all other applicable existing or future laws, ordinances and governmental regulations permitting the termination of this Lease as a result of the damage or destruction of the Property by fire, the elements, casualties, thefts, riots, wars or otherwise, and the Lessor shall in no event be answerable or accountable for any risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of any such event. ARTICLE XXV 25.1. Subletting and Assignment. The Lessee may assign with recourse this Lease or any of its rights or obligations hereunder in whole or in part to any Person, in which case the Lessee shall guarantee performance of the obligations of such assignee under this Lease by a guaranty in form and substance acceptable to the Lessor and the Required Participants. The Lessee may, without the consent of the Lessor, sublease the 47 Property or portion thereof to any Person, provided, that any sublessee shall agree to abide by the applicable terms of this Lease and the Lessee shall provide to the Lessor a copy of any such subleases. No assignment, sublease or other relinquishment of possession of the Property shall in any way discharge or diminish any of the Lessee's obligations to the Lessor hereunder and the Lessee shall remain directly and primarily liable under this Lease as to the Property, or portion thereof, so assigned or sublet. Any sublease of the Property shall be made subject to and subordinated to this Lease and to the rights of the Lessor hereunder, and shall expressly provide for the surrender of the Property (or portion thereof) after a Lease Event of Default hereunder. All such subleases shall expressly provide for termination at or prior to the earlier of the applicable Expiration Date or other date of termination of this Lease unless the Lessee shall have purchased the Property pursuant to Article XX. No assignee or sublessee shall be permitted to engage in any activities on the Property other than those permitted pursuant to the terms of Section 8.2, without the prior written consent of the Lessor. ARTICLE XXVI 26.1. Estoppel Certificates. At any time and from time to time upon not less than twenty (20) days' prior request by the Lessor or the Lessee (the "Requesting Party"), the other party (whichever party shall have received such request, the "Certifying Party") shall furnish to the Requesting Party (but not more than four times per year unless required to satisfy the requirements of any sublessees and only to the extent that the required information has been provided to the Certifying Party by the other party) a certificate signed by an individual having the office of vice president or higher in the Certifying Party certifying that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not the Requesting Party is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Lease as the Requesting Party may reasonably request. Any such certificate furnished pursuant to this Article XXVI may be relied upon by the Requesting Party, and any existing or prospective mortgagee, purchaser or lender, and any accountant or auditor, of, from or to the Requesting Party (or any Affiliate thereof). ARTICLE XXVII 27.1. Right to Inspect. During the Term, the Lessee shall upon reasonable notice (but in any event not less than forty-eight (48) hours' notice) from the Lessor (except that no notice shall be required if a Lease Event of Default has occurred and is continuing), permit the Lessor, the Indenture Trustee and their respective authorized representatives to inspect the Property during normal business hours, provided that such inspections shall not unreasonably interfere with the Lessee's business operations at the Property. 48 27.2. No Waiver. No failure by the Lessor or the Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVIII 28.1. Acceptance of Surrender. No surrender to the Lessor of this Lease or of all or any portion of any Property or of any part of any thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by the Lessor and, prior to the payment or performance of all obligations under the Indenture and termination of the Commitments, the Indenture Trustee, and no act by the Lessor or the Indenture Trustee or any representative or agent of the Lessor or the Indenture Trustee, other than a written acceptance, shall constitute an acceptance of any such surrender. ARTICLE XXIX 29.1. No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, or (b) the fee title in the Property, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person. ARTICLE XXX 30.1. Notices. All notices, demands, requests, consents, approvals and other communications hereunder shall be in writing and delivered (i) personally, (ii) by a nationally recognized overnight courier service, (iii) by mail (by registered or certified mail, return receipt requested, postage prepaid) or (iv) by facsimile, addressed to the respective parties, as follows: If to the Lessee: PeopleSoft, Inc. 4305 Hacienda Drive Pleasanton, California 94588 Attention: General Counsel Telephone: (925) 694-7180 Facsimile: (925) 694-7184 49 with copies to: PeopleSoft, Inc. 4305 Hacienda Drive Pleasanton, California 94588 Attention: Director of Real Estate Telephone: (925) 694-7053 Facsimile: (925) 694-7050 PeopleSoft, Inc. 4305 Hacienda Drive Pleasanton, California 94588 Attention: Chief Financial Officer Telephone: (925) 694-7114 Facsimile: (925) 694-7190 Griggs Resource Group 3470 Mt. Diablo Blvd. Suite A-205 Lafayette, California 94549 Attention: Brian Griggs Telephone: (510) 299-4870 Facsimile: (510) 299-4872 Orrick Herrington & Sutcliffe 400 Sansome Street San Francisco, California 94111 Attention: William Murray Telephone: (415) 773-5807 Facsimile: (415) 773-5759 If to the Lessor: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Facsimile: (302) 651-8882 If to the Indenture Trustee: ABN AMRO Bank N.V. 50 1325 Avenue of the Americas 9th Floor New York, New York 10019 Attention: Edward Corletzi Telephone: (212) 314-1721 Facsimile: (212) 314-1709 or such additional parties and/or other address as such party may hereafter designate (provided, however, in no event shall either party be obligated to notify, in the aggregate, more than five (5) designees of the other party), and shall be effective upon receipt or refusal thereof. ARTICLE XXXI 31.1. Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of the Lessee or the Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any term or provision of this Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. If any right or option of the Lessee provided in this Lease, including any right or option described in Articles XV, XVI, XX, XXI or XXII, would, in the absence of the limitation imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule of law relating to the vesting of an interest in or the suspension of the power of alienation of property, then such right or option shall be exercisable only during the period which shall end twenty-one (21) years after the date of death of the last survivor of the descendants of Franklin D. Roosevelt, the former president of the United States, Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the founder of the Standard Oil Company, known to be alive on the date of the execution, acknowledgment and delivery of this Lease. 31.2. Amendments and Modifications. Subject to the requirements, restrictions and conditions set forth in the Participation Agreement, neither this Lease, any Lease Supplement nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by the Lessor and the Lessee. In the event of any conflict or inconsistency between the terms hereof and the terms of the Participation Agreement, the Participation Agreement shall control. 31.3. Successors and Assigns. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 31.4. Headings and Table of Contents. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 51 31.5. Counterparts. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 31.6. GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 31.7. Limitations on Recourse. The parties hereto agree that Wilmington Trust Company, in its individual capacity (in such capacity, "Bank") shall have no personal liability whatsoever to the Lessee or its respective successors and assigns for any claim based on or in respect of this Lease or any of the other Operative Documents or arising in any way from the transactions contemplated hereby or thereby; provided, however, that the Bank shall be liable in its individual capacity (a) for its own willful misconduct or gross negligence (or negligence in the handling of funds), (b) for liabilities that may result from the incorrectness of any representation or warranty expressly made by it in Section 8.1 of the Participation Agreement or (c) for any Taxes based on or measured by any fees, commission or compensation received by it for acting as the Lessor as contemplated by the Operative Documents. It is understood and agreed that, except as provided in the preceding proviso: (i) the Bank shall have no personal liability under any of the Operative Documents as a result of acting pursuant to and consistent with any of the Operative Documents; (ii) all obligations of the Bank to the Lessee are solely nonrecourse obligations except to the extent that it has received payment from others and are enforceable solely against the Lessor's interest in the Property; (iii) all such personal liability of the Bank is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Documents by the Lessor; and (iv) this Lease is executed and delivered by the Bank solely in the exercise of the powers expressly conferred upon it as the Lessor under the Trust Agreement. 31.8. Original Lease. The single executed original of this Lease marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Indenture Trustee therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease (the "Original Executed Counterpart"). To the extent that this Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. 31.9. Usury Savings Clause. Nothing continued in this Lease or the other Operative Documents shall be deemed to require the payment of interest or other charges by the Lessee or any other Person in excess of the amount which may lawfully be charged under any applicable usury laws. In the event that the Lessor or any other Person shall collect moneys under this Lease or any other Operative Document which are deemed to constitute interest (including, without limitation, the Basic Rent or 52 Supplemental Rent) which would increase the effective interest rate to a rate in excess of that permitted to be charged by applicable law, all such sums deemed to constitute interest in excess of the legal rate shall, upon such determination, at the option of the Person to whom such payment was made, be returned to the Person making such payment or credited against other amounts owed by the person making such payment. ARTICLE XXXII 32.1. Ground Lease. During the Term, the Lessee shall observe and perform all of the obligations of the Lessor under the Ground Lease. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee, as Lessor By: ______________________________ Name: ______________________________ Title:______________________________ PEOPLESOFT, INC., a Delaware corporation, as Lessee By: ________________________________ Mark G. Thompson, Treasurer STATE OF DELAWARE ) ) SS.: COUNTY OF NEW CASTLE ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared ___________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, 53 upon oath, acknowledged himself to be a _________________ of Wilmington Trust Company, the within named bargainor, a corporation, and that he as such ________________, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such ________________. WITNESS my hand and seal, at office, on this the ____ day of September, 1998. ________________________________________ Notary Public My Commission Expires: _________________________________ STATE OF CALIFORNIA ) ) SS.: COUNTY OF ALAMEDA ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared Mark G. Thompson, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself to be the Treasurer of PEOPLESOFT, INC., the within named bargainor, a corporation, and that he as such Treasurer being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such Treasurer. WITNESS my hand and seal, at office, on this the ____day of September, 1998. ________________________________________ Notary Public My Commission Expires: _________________________________ THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART. 54 Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as of September 28, 1998. ABN AMRO BANK N.V., as Indenture Trustee By: _________________________________ Name: _________________________________ Title: _________________________________ By: _________________________________ Name: _________________________________ Title: _________________________________ SCHEDULE 1 TO THE LEASE Data Center Release Price $27,500,000 SCHEDULE 14.3 TO THE LEASE Minimum Insurance Requirements (i) Commercial general liability insurance, umbrella insurance and excess liability insurance, each written on an "occurrence basis," including contractual liability and products and completed operations hazards, covering claims for bodily injury, personal injury or death sustained by persons or damage to property, in an amount of not less than $50,000,000 per occurrence and $50,000,000 annual aggregate; (ii) Workers compensation insurance for statutory limits and employer's liability insurance covering injury, death or disease sustained by employees, in an amount not less than $1,000,000 for disease and $1,000,000 for bodily injury or death by accident; and 55 (iii) "All risk" property insurance covering loss or damage in an amount not less than the then current replacement cost of the buildings and improvements on the Property, including loss or damage by earthquake in an amount of not less than 100% of the probable maximum loss to the Property, as determined by a professional engineer qualified to make such a determination selected by the Lessee and approved by the Lessor. Prepared by and upon recording return to: John R. Grier, Esq. Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 EXHIBIT A TO THE LEASE LEASE SUPPLEMENT NO. 1 (And Memorandum of Lease) THIS LEASE SUPPLEMENT NO. 1 (And Memorandum of Lease) (this "Lease Supplement") dated as of September 28, 1998, between WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee, as lessor (the "Lessor"), and PeopleSoft, Inc., a Delaware corporation, as lessee (the "Lessee"). WHEREAS, the Lessor is the holder of a leasehold interest in the parcels of land described on Schedule 1 hereto and wishes to sublease such Ground Lease Interest and lease all Improvements thereon or which may thereafter be constructed thereon pursuant to the Construction Agency Agreement or the Lease to the Lessee (the Ground Lease Interest and such Improvements being collectively called the "Property"); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions; Interpretation. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix 1 to the Master Lease, dated as of September 28, 1998, between the Lessee and the Lessor; and the rules of interpretation set forth in Appendix 1 to the Lease shall apply to this Lease Supplement. SECTION 2. The Property. Attached hereto as Schedule I is the description of a certain Ground Lease Interest. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Property shall be subject to the terms and provisions of the Lease. Subject to the terms and conditions of the Lease, the Lessor hereby leases to the Lessee for the Term (as defined below) of the Lease, the Lessor's 56 interest in the Property, and the Lessee hereby agrees, expressly for the direct benefit of the Lessor, to lease from the Lessor for the Term, the Lessor's interest in the Property. SECTION 3. Parties and Addresses. The Lease is dated as of September 28, 1998, between the Lessor, whose principal office is at Rodney Square North, 1100 N. Market Street, Wilmington, Delaware 19890 and the Lessee, whose principal office is 4305 Hacienda Drive, Pleasanton, California 94588. SECTION 4. Lease Term. The term of the Lease (the "Term") shall begin on September 28, 1998, and shall end on September 28, 2003, unless the Term is renewed or earlier terminated in accordance with the provisions of the Lease. The Lease contains extension options which give Lessee the right, subject to the terms thereof, to extend the term of the Lease. SECTION 5. Ownership of the Property. (a) It is the intent of the parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, for purposes of Lessee's financial reporting, and (ii) for purposes of Federal and state income tax, the transaction contemplated hereby and by the Lease is a financing arrangement and preserves ownership in the Property in the Lessee. Accordingly, and notwithstanding any provision of this lease to the contrary, the parties hereto agree and declare that: (i) the transactions contemplated by the Lease are intended to have a dual, rather than single, form; and (ii) all references in the Lease to the "lease" of the Property which fail to reference such duel form do so as a matter of convenience only and do not reflect the intent of parties hereto as to the true form of such arrangements. Nevertheless, the Lessee acknowledges and agrees that neither the Indenture Trustee, the Lessor nor any Participant has made any representations or warranties to the Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Anything to the contrary in the Operative Documents notwithstanding, the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting the Lessee, the Lessor or any Participant or any enforcement or collection actions, (i) the transactions evidenced by the Lease are loans made by the Lessor and the Participants as unrelated third party lenders to the Lessee secured by the Property, (ii) the obligations of the Lessee under the Lease to pay Basic Rent and Supplemental Rent or Asset Termination Value in connection with any purchase of the Property pursuant to the Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the Participants to the Lessee, and (iii) the Lease grants a security interest and mortgage or deed of trust or lien, as the case may be, in the Property to the Lessor and the Participants to secure the Lessee's 57 performance under and payment of all amounts under the Lease and the other Operative Documents. (c) Specifically, but without limiting the generality of subsection (b) of this Section 5, the Lessor and the Lessee further intend and agree that, for the purpose of securing the Lessee's obligations for the repayment of the above-described loans from the Certificate Purchaser and the Lenders to the Lessee, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code and a real property mortgage or deed of trust; (ii) the conveyance provided for hereby and in Article II of the Lease shall be deemed to be a grant by the Lessee to the Lessor and the Participants of a mortgage lien and security interest in all of the Lessee's right, title and interest in and to the Property and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property (it being understood that Lessee hereby mortgages and warrants and grants a security interest in the Property to the Lessor and the Participants to secure the loans); (iii) the possession by the Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under Applicable Law. The Lessor and the Lessee shall, to the extent consistent with the Lease, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if the Lease and this Lease Supplement were deemed to create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under Applicable Law and will be maintained as such throughout the Term. (d) Specifically, without limiting the generality of subsection (a), (b) and (c) of this Section 5, the parties hereto intend and agree that, for purposes of filing federal, state and local returns, reports and other statements relating to income or franchise taxes, or any other taxes imposed upon or measured by income, (i) the Lessee shall be entitled to take any deduction, credit, allowance or other reporting position consistent with its status as owner of the Property; and (ii) neither the Lessor nor any Participant shall take an initial position on its federal, state and local returns, reports and other statements relating to income or franchise taxes that is inconsistent with the Lessee's status as owner of the Property. (e) If the transaction evidenced by the Lease and the other Operative Documents can no longer be treated as an operating lease pursuant to GAAP for accounting purposes, all provisions in the Operative Documents limiting the Lessee's obligation to pay the Lease Balance or Asset Termination Value (including the Remarketing Option) on the Expiration Date shall no longer apply. If any such change in 58 accounting treatment shall occur, the Lessee shall enter into such amendments to the Operative Documents as the Lessor or the Required Participants may reasonably request to reflect the foregoing. SECTION 6. Lease Events of Default and Remedies. Sections 17.2 through 17.5 of the Lease, which are hereby incorporated by reference, set forth the remedies available to Lessor in the event of a Lease Event of Default. Such remedies include, without limitation, the following provision: "Subject to Article XXII below, in the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust or other secured financing, and subject to the availability of such remedy under applicable law, then the Lessor and the Lessee agree that the Lessee hereby mortgages and grants to Lessor a Lien against the Property WITH POWER OF SALE, for the purpose of securing all of Lessee's obligations hereunder (including the payment of Basic Rent, Supplemental Rent, the Asset Termination Value and Purchase Option Price) (collectively, the "Obligations")." SECTION 7. Purchase Option. Sections 19 and 20 of the Lease contain various purchase options which may be exercised by Lessee during the term of the Lease subject to the terms and conditions of said Sections 19 and 20 of the Lease. SECTION 8. Liens. (a) THIS LEASE IS SUPERIOR TO A MORTGAGE IN FAVOR OF ABN AMRO BANK N.V. AS INDENTURE TRUSTEE (THE "INDENTURE TRUSTEE") UNDER THE PARTICIPATION AGREEMENT DATED AS OF SEPTEMBER 28, 1998, AMONG THE LESSEE, THE LESSOR, THE INDENTURE TRUSTEE AND THE PARTICIPANTS, EXCEPT AS AMENDED OR SUPPLEMENTED. (b) NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, THE BANK, ANY PARTICIPANT NOR THE INDENTURE TRUSTEE IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE, AND THAT NO MECHANICS'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE PROPERTY. SECTION 9. Ratification. Except as specifically modified hereby, the terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. SECTION 10. Original Lease Supplement. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Indenture Trustee therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease Supplement (the "Original Executed Counterpart"). To the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security 59 interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 11. GOVERNING LAW. THE LEASE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. SECTION 12. Counterpart Execution. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, each of the parties hereto has caused this Lease Supplement to be duly executed by an officer thereunto duly authorized as of the date and year first above written. WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee, as Lessor By: ____________________________________ Name: ____________________________________ Title: ____________________________________ PEOPLESOFT, INC., a Delaware corporation, as Lessee By: _______________________________________ Mark G. Thompson, Treasurer STATE OF DELAWARE ) ) SS.: COUNTY OF NEW CASTLE ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared , with whom I am 60 personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself to be a of WILMINGTON TRUST COMPANY, the within named bargainor, a corporation, and that he as such , being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such . WITNESS my hand and seal, at office, on this the ____ day of September, 1998. ______________________________ Notary Public My Commission Expires: _______________________________ STATE OF CALIFORNIA ) ) SS.: COUNTY OF ALAMEDA ) Before me, the undersigned, a Notary Public in and for the State and County aforesaid, personally appeared, Mark G. Thompson, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself to be the Treasurer of PEOPLESOFT, INC., the within named bargainor, a corporation, and that he as such Treasurer being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such Treasurer. WITNESS my hand and seal, at office, on this the ____ day of September, 1998. ______________________________ Notary Public My Commission Expires: _______________________________ THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART. Receipt of this original counterpart of the foregoing Lease Supplement is hereby acknowledged as of September 28, 1998. 61 ABN AMRO BANK N.V., as Indenture Trustee By: _________________________________ Name: _________________________________ Title: _________________________________ By: _________________________________ Name: _________________________________ Title: _________________________________ SCHEDULE 1 TO THE LEASE SUPPLEMENT NO. 1 Property Description EXHIBIT B TO THE LEASE [FORM OF EQUIPMENT SCHEDULE] EQUIPMENT SCHEDULE NO. Forming a part of Master Lease dated as of September 28, 1998 (the "Lease"), between Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee, as Lessor (the "Lessor"), and PeopleSoft, Inc., a Delaware corporation, as Lessee (the "Lessee"). 1. EQUIPMENT. The Equipment leased hereunder shall be as set forth in the schedule attached hereto as Annex A. TOTAL PROPERTY IMPROVEMENTS COST: $____________ 2. TERM. Upon and after the date of execution hereof, the Equipment shall be subject to the terms and conditions provided herein and in the Lease (which is incorporated herein by reference). 3. RENT. From and after the date hereof, the Basic Rent for said Equipment during the Basic Lease Term shall be payable on the dates and in the amounts set forth in Article III of the Lease which is incorporated herein by reference. 4. LESSEE CONFIRMATION. Lessee hereby confirms and warrants to Lessor that the Equipment: (a) was duly delivered to Lessee on or prior to the date hereof at the 62 locations specified in Section 5 hereof; (b) has been received, inspected and determined to be in compliance with all applicable specifications and that the Equipment is hereby accepted for all purposes of the Lease; and (c) is a part of the "Equipment" referred to in the Lease and is taken subject to all terms and conditions therein and herein provided. 5. LOCATION OF EQUIPMENT. The locations of the Equipment are specified on the Schedule of Equipment attached hereto as Annex A. 6. FINANCING STATEMENTS. Annex B attached hereto specifies the location of all UCC financing statements or other similar documents under applicable law covering the Equipment. Date of Execution: ____________, ____ WILMINGTON TRUST COMPANY, PEOPLESOFT, INC., not in its individual capacity, a Delaware corporation but solely as Owner Trustee By: _________________________ By: _________________________ Name: _________________________ Name: _________________________ Title: _________________________ Title: _________________________ ANNEX A TO EQUIPMENT SCHEDULE EQUIPMENT Approved by _____________________________ Page No. ___ of ___ total pages (Lessee to initial each page) Attached Bill of Sale dated Equipment located at: _______________, ____ and Street No. Equipment Schedule No. ___. City County State Zip 63 This location is owned, x leased, x mortgaged. Manufacturer and/or Vendor Name & Description Equipment Cost Invoice No. See Schedule 1 Attached ANNEX B TO EQUIPMENT SCHEDULE FINANCING STATEMENTS COVERING EQUIPMENT Secured Party Statement No. Filing Date Filing Location - - ------------- ------------- ----------- --------------- DOCUMENT NUMBER: 364154.5 SEPTEMBER 28, 1998 EX-10.44 10 APPENDIX 1 TO THE PARTICIPATION AGREEMENT 1 EXHIBIT 10.44 W&S DRAFT FEBRUARY 23, 1999 APPENDIX 1 to Participation Agreement, Master Lease, Indenture and Construction Deed of Trust each dated as of September 28, 1998 (PeopleSoft Hacienda II Lease Facility) DEFINITIONS AND INTERPRETATION A. Interpretation. In each Operative Document, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by the Operative Documents, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement (including any Operative Document), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of the other Operative Documents and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor; (v) reference to any Applicable Law means such Applicable Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Applicable Law means that provision of such Applicable Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision; (vi) reference in any Operative Document to any Article, Section, Appendix, Schedule or Exhibit means such Article or Section thereof or Appendix, Schedule or Exhibit thereto; 2 (vii)"hereunder", "hereof", "hereto" and words of similar import shall be deemed references to an Operative Document as a whole and not to any particular Article, Section or other provision thereof; (viii) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term; (ix) "or" is not exclusive; and (x) relative to the determination of any period of time, "from" means "from and including" and "to" means "to but excluding". B. Accounting Terms. In each Operative Document, unless expressly otherwise provided, accounting terms shall be construed and interpreted, and accounting determinations and computations shall be made, in accordance with GAAP. C. Conflict in Operative Documents. If there is any conflict between any Operative Documents, such Operative Document shall be interpreted and construed, if possible, so as to avoid or minimize such conflict but, to the extent (and only to the extent) of such conflict, the Participation Agreement shall prevail and control. D. Legal Representation of the Parties. The Operative Documents were negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring the Operative Document to be construed or interpreted against any party shall not apply to any construction or interpretation hereof or thereof. E. Defined Terms. Unless a clear contrary intention appears, terms defined herein have the respective indicated meanings when used in each Operative Document. "Acquisition Request" is defined in Section 3.4 of the Participation Agreement. "Actual Knowledge" shall mean, as it applies to the Indenture Trustee, actual knowledge of, including any written notices received by, an officer in the Corporate Trust Administration Department of the Indenture Trustee having responsibility for the administration of the transaction contemplated by the Operative Documents; provided that the Indenture Trustee shall be deemed to have "actual knowledge" of any matter as to which the Indenture Trustee has been given notice by any Note Holder pursuant to Section 12.5 of the Indenture. "Address" means, when used with respect to any Person, the notification address for such Person set forth on Schedule II to the Participation Agreement. "Advance" means advances of funds by the Lessor from the proceeds of Loans and Certificate Purchaser Amounts pursuant to Section 3 of the Participation Agreement to pay Property Improvements Costs (including all amounts capitalized under the terms of the Participation Agreement). 3 "Adjusted Consolidated Current Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of (i) Consolidated Short Term Liabilities, plus (ii) the current maturities of Consolidated Long Term Liabilities, plus (iii) the current maturities of uncollateralized Consolidated Off-Balance Sheet Debt. "Adjusted Consolidated Total Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of (i) Adjusted Consolidated Current Liabilities, (ii) Consolidated Long Term Liabilities (without duplication of amounts included in clause (i)) and (iii) uncollateralized Consolidated Off-Balance Sheet Debt (without duplication of amounts included in clause (i)). "Administrative Fee" is defined in Section 4.3 of the Participation Agreement. "Affiliate" means, when used with respect to any Person, any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common control with such Person. "After Tax Basis" means, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient calculated at the then maximum marginal federal and state income tax rates generally applicable to Persons of the same type as the recipient with respect to the receipt by the recipient of such amounts, such increased payment is equal to the payment otherwise required to be made. "Alternate Base Rate" means, for any period, an interest rate per annum equal to the lower of (i) the Participants' average cost of funds employed to fund their Participation Interests, as notified to the Indenture Trustee and the Lessee or (ii) the Federal Funds Effective Rate most recently determined by the Indenture Trustee plus 0.50%. If either of the aforesaid rates or equivalent changes from time to time after the date of the Participation Agreement, the Alternate Base Rate shall be automatically increased or decreased, if appropriate and as the case may be, without notice to the Lessee or the Lessor, as of the effective time of each change. "Applicable Law" means all existing and future applicable laws, rules, regulations (including Environmental Laws), statutes, treaties, codes, ordinances, permits, certificates, covenants, restrictions, requirements, orders and licenses of and interpretations by, any Governmental Authorities, and applicable judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi-judicial tribunal or agency of competent jurisdiction (including those pertaining to health, safety or the environment (including, without limitation, wetlands) and those pertaining to the construction, use or occupancy of the Property) and any restrictive covenant or deed restriction or easement affecting the Property. "Applicable Margin" means (i) with respect to the Loans (and related Advances) (A) except as provided in clause (B), the respective margin percentage that shall be subject to 4 adjustment (upwards or downwards, as appropriate) based on the existence of the applicable Level I, II, III or IV as at the end of any fiscal quarter as set forth below, or (C) for any portion of the Loans as to which Cash Collateral has been delivered pursuant to the Cash Collateral Agreement, .225% per annum, and (ii) with respect to the Certificate Purchaser Amounts, 2.00% per annum, regardless of whether Cash Collateral has been so delivered. The Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio shall be determined from the then most recent quarterly or annual financial statements delivered by the Lessee pursuant to Section 10.1(a) of the Participation Agreement. The adjustment, if any, to the Applicable Margin shall be effective commencing on the fifth Business Day after the delivery of such financial statements. If the Lessee shall at any time fail to timely furnish to the Participants the financial statements required to be delivered pursuant to Section 10.1(a) of the Participation Agreement and such financial statements indicate that an adjustment (upwards or downwards, as appropriate) shall be made, then such adjustment shall be made retroactively to the date on which the financial statements were due to be delivered and appropriate payments or reimbursements shall be made to reflect such adjustments. Applicable Margin Table
Applicable Margin for Eurodollar Level Rate-Based Advances ----- ------------------- Level I .625% Level II .750% Level III 1.00% Level IV 1.25%
"Appointment of Co-Trustee" means the Appointment of Co-Trustee, dated as of the Closing Date, between the Lessor and the Co-Trustee. "Appraisal" means, with respect to the Property, an appraisal, prepared by ValueQuest International, Ltd., in the case of the appraisal to be delivered on the Closing Date, and, in the case of any future appraisals, a member of the American Institute of Real Estate Appraisers with operations in Alameda or Contra Costa County, California, reasonably approved by the Lessor, the Indenture Trustee and the Required Participants, unless such designation is violative of any Applicable Law to which the Lessor, the Indenture Trustee or any Participant is subject, in which case such appraiser shall be reasonably approved by the Lessor, the Indenture Trustee and the Required Participants, in each case which in the judgment of counsel to the Lessor, the Indenture Trustee and the Required Participants, complies with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Requirements of Law, which appraisal will (i) appraise the Fair Market Sales Value of the Property as built in accordance with 5 the Plans and Specifications: on the fifth anniversary of the Closing Date; as of the commencement of the Renewal Term, if any; and at the end of the Renewal Term, if any; (ii) contain an estimate of the useful life of the Improvements as of each such date, all in a form satisfactory to the Lessor, the Indenture Trustee and the Required Participants; and (iii) be prepared in conformance with the Uniform Standards of Professional Appraisal Practice as promulgated by the Appraisal Foundation, and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. "Appurtenant Rights" means (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land or the Improvements, including, without limitation, the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to the Land. "Arranger" means ABN AMRO Bank N.V. "Arranger Fee Letter" means the letter from the Arranger to the Lessee dated as of July 31, 1998. "Asset Termination Value" means, as of any date of determination, an amount equal to (i) the sum of (A) the aggregate sum of the outstanding principal amount of the Notes (including all amounts capitalized under the terms of the Participation Agreement), (B) all accrued and unpaid interest on the Notes, (C) the aggregate sum of the Certificate Purchaser Amounts (including all amounts capitalized under the terms of the Participation Agreement), (D) all accrued and unpaid Certificate Yield on the Certificate Purchaser Amounts, and (E) all other amounts owing by the Lessee under the Operative Documents, less (ii) sum of all payments received by the Lessor, the Indenture Trustee or the Participants on account of payments to reduce Asset Termination Value, including reductions resulting from payments by the Lessor, the Lessee or the Guarantor, the proceeds from the sale of the Property and/or amounts realized from the Cash Collateral pursuant to the Cash Collateral Agreement. "Assignment and Acceptance" is defined in Section 12.1(c) of the Participation Agreement. "Assignment of Construction Documents" means the Assignment of Construction Documents, dated as of the Closing Date, in the form attached as Exhibit A to the Construction Agency Agreement. "Assignment of Lease" means the Assignment of Lease, dated as of the Closing Date, from the Lessor to the Indenture Trustee for the benefit of the Participants, and consented to by the Lessee pursuant to that certain Lessee's Consent, dated as of the Closing Date (the "Consent to Assignment")by the Lessee, as obligor, in favor of the Indenture Trustee for the benefit of the Participants, in each case in the respective forms set forth in Exhibit L to the Participation Agreement. 6 "Available Commitments" means as to any Participant at any time, an amount equal to the excess, if any, of (a) the amount of such Participant's Commitment over (b) the aggregate amount of its Loans and Certificate Purchaser Amounts with respect to all Advances made by the Lessor then outstanding. "Bank" means the institution serving as Owner Trustee or any successor financial institution acting as Owner Trustee under the Operative Documents, in each case in its individual capacity. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect. "Basic Rent" means the sum of (i) the Notes Basic Rent and (ii) the Certificate Purchaser Basic Rent, in each case, calculated as of the applicable date on which Basic Rent is due. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Board" means the Board of Governors of the Federal Reserve System of the United States (or any successor). "Budget" means a construction budget for the Improvements delivered by the Lessee to the Lessor pursuant to Section 6.1(z) of the Participation Agreement. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banks in Chicago, Illinois, San Francisco, California, New York, New York, Wilmington, Delaware or (if interest and Certificate Yield is being determined by reference to the Eurodollar Rate) London, England, are generally authorized or obligated, by law or executive order, to close. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" means any amount payable with respect to any Capital Lease or any lease of any tangible or intangible property (whether real, personal or mixed), however denoted, which is required by GAAP to be reflected as a liability on the face of the balance sheet of the lessee thereunder. "Cash Collateral" is defined in Section 1 of the Cash Collateral Agreement. "Cash Collateral Agreement" means the Cash Collateral Agreement dated as of the Closing Date among the Lessee, the Lessor, the Indenture Trustee and the Participants. 7 "Cash Collateral Agreement Supplement" is defined in Recital 4 to the Cash Collateral Agreement. "Casualty" means any damage or destruction of all or any portion of the Property as a result of a fire or other casualty. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificates" is defined in Section 2.1 of the Trust Agreement. "Certificate Commitment" means, as to any Certificate Purchaser, the obligation of such Certificate Purchaser to fund Certificate Purchaser Amounts to the Lessor under Section 3.2 of the Participation Agreement in an aggregate amount not to exceed the amount set forth opposite such Certificate Purchaser's name on Schedule I to the Participation Agreement "Certificate Holder" means any registered holder of a Certificate. "Certificate Purchaser Amount" is defined in Section 3.2 of the Participation Agreement. "Certificate Purchaser Basic Rent" means the amount of accrued Certificate Yield due on the Certificate Purchaser Amounts on any Payment Date pursuant to the Participation Agreement, the Indenture and the Trust Agreement. "Certificate Purchasers" means the Persons listed as Certificate Purchasers on Schedule I to the Participation Agreement. "Certificate Register" is defined in Section 2.4 of the Trust Agreement. "Certificate Yield" is defined in Section 3.9(a) of the Participation Agreement. "Certifying Party" is defined in Section 26.1 of the Lease. "Claims" means any and all obligations, liabilities, losses, actions, suits, judgments, penalties, fines, claims, demands, settlements, costs and expenses (including, without limitation, reasonable legal fees and expenses) of any nature whatsoever, including, as they relate to issues involving any Environmental Law or Environmental Violation, those matters set forth in Section 13.3 of the Participation Agreement. "Closing Date" is defined in Section 2 of the Participation Agreement. 8 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. "Collateral" means (i) all of the Trust Estate or Trust Indenture Estate now owned or hereafter acquired upon which a Lien is purported to be created by the Security Documents or (ii) when used in the Cash Collateral Agreement, has the meaning specified in Section 1.1 thereof. "Commitment" means (i) as to any Note Purchaser, its Tranche A Loan Commitment and/or Tranche B Loan Commitment, (ii) as to any Certificate Purchaser, its Certificate Commitment, and (iii) as to the Lessor, the obligation of the Lessor to make Advances (to the extent the Lessor receives the proceeds of the funding of the related Loans and Certificate Purchaser Amounts in accordance with the terms of the Participation Agreement. "Commitment Fees" is defined in Section 4.1 of the Participation Agreement. "Commitment Fee Payment Date" means the last day of each March, June, September and December during the Commitment Period and the Outside Completion Date or such earlier date as the Commitments shall terminate as provided in the Operative Documents. "Commitment Fee Rate" means, as to each Participant (i) as to such Participant's 364 Day Commitment and any permitted extension thereof and (ii) as to such Participant's Eighteen Month Commitment, the respective percentages that shall be subject to adjustment (upwards or downwards, as appropriate) based on the existence of the applicable Level I, II, III or IV as at the end of any fiscal quarter as set forth below. Applicable Commitment Fee Rate Table Commitment Fee Rate for 364 Day Commitment
Level Applicable Commitment Fee Rate ----- ------------------------------ Level I .125% Level II .15% Level III .1875% Level IV .225%
Commitment Fee Rate for Eighteen Month Commitment
Level Applicable Commitment Fee Rate ----- ------------------------------ Level I .225%
9 Level II .25% Level III .2875% Level IV .325%
For purposes of determining the applicable Commitment Fee Rate, the Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio shall be determined in the manner set forth in the definition of the term "Applicable Margin". "Commitment Percentage" means, (i) with respect to each Participant at any time prior to the Completion Date, the percentage which such Participant's Commitment then constitutes of the aggregate Commitments of the Participants as set forth in the column captioned "Pre-Completion Commitment Percentage" on Schedule I to the Participation Agreement and (ii) with respect to each Participant at any time after the Completion Date, the percentage which such Participant's Commitment then constitutes of the aggregate Commitments of the Participants as set forth in the column captioned "Post-Completion Commitment Percentage" on Schedule I to the Participation Agreement (or, in either case, at any time after the Commitments of the Participants shall have expired or terminated, the percentage which the aggregate amount of such Participant's Notes or Certificates then outstanding constitutes of the aggregate amount of the Notes and Certificates then outstanding). "Commitment Period" means the period from and including the Closing Date to but not including the earlier of the Completion Date or the Outside Completion Date, or such earlier date on which the Commitments shall terminate as provided in the Operative Documents. "Completion" is defined in Section 7 of the Participation Agreement. "Completion Date" means, with respect to the Property, the date on which Completion of the Improvements on such Property has occurred. "Completion Delay Event" means (a) the occurrence of any event or the existence of any condition that causes the likely Completion Date to be later than the Outside Completion Date and (b) the delivery by the Lessee to any Lessor Party at any time of any notice, certificate or other writing which indicates that the likely Completion Date will be later than the Outside Completion Date. "Condemnation" means any condemnation, requisition, confiscation, seizure or other taking or sale of the use, access, occupancy, easement rights or title to the Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Person having the power of eminent domain, including an action by a Governmental Authority after the Improvements proposed to be constructed on the Land pursuant to the Plans and 10 Specifications have been constructed to change the grade of, or widen the streets adjacent to, the Property or alter the pedestrian or vehicular traffic flow to the Property so as to result in change in access to the Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. A "Condemnation" shall be deemed to have occurred on the earliest of the dates that use, occupancy or title is taken. "Confidential Information" is defined in Section 15.13 of the Participation Agreement. "Consent to Assignment" is defined in the definition of the term "Assignment of Lease". "Consent to Construction Agency Agreement Assignment" means the Consent dated as of the Closing Date by the Lessee to the Construction Agency Agreement Assignment in the form attached to the Construction Agency Agreement Assignment. "Consolidated Cash Balance" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, (a) the sum of unencumbered (i) cash and cash equivalents plus (ii) Consolidated Short Term Investments minus (b) cash designated as collateral for any Consolidated Off-Balance Sheet Debt. "Consolidated Current Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, those liabilities of the Lessee and its Subsidiaries which are required to be classified as current liabilities on a balance sheet of the Lessee and its Subsidiaries in accordance with GAAP. "Consolidated Debt" means, for the Lessee and its consolidated Subsidiaries on a consolidated basis at any date, the sum of (i) Debt plus (ii) Consolidated Off-Balance Sheet Debt. "Consolidated Fixed Charge Ratio" means, for the Lessee and its Subsidiaries on a consolidated basis at any date the quotient of (a) the sum of (i) Consolidated Net Income, plus (ii) Consolidated Interest Expense, plus (iii) Consolidated Income Tax Expense, plus (iv) Consolidated Lease Rental Expense, plus (v) charges taken related to the acquisition of in-process research and development, divided by (b) the sum of (x) Consolidated Interest Expense plus (y) Consolidated Lease Rental Expense. "Consolidated Funded Debt" means, for the Lessee and its consolidated Subsidiaries on a consolidated basis at any date, all Debt of the Lessee and its Subsidiaries; provided, that Consolidated Funded Debt shall not include any undrawn amounts under standby letters of credit where the Lessee is the account party. "Consolidated Income Tax Expense" means, for the Lessee and its Subsidiaries on a consolidated basis for any period, the amount required to be classified as income tax 11 expense on an income statement of the Lessee and its Subsidiaries in accordance with GAAP. "Consolidated Intangible Assets" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the aggregate amount of any intangible assets of the Lessee and its Subsidiaries, including, without limitation, goodwill, franchises, licenses, patents, patent applications, trademarks, trade names, copyrights, service marks, capitalized software development expense, unamortized debt discount and expense reserves not already deducted from Consolidated Total Assets. "Consolidated Interest Expense" means for the Lessee and its Subsidiaries on a consolidated basis for any period, the amount required to be classified as interest expense on an income statement of the Lessee and its Subsidiaries in accordance with GAAP. "Consolidated Lease Rental Expense" means, for the Lessee and its Subsidiaries on a consolidated basis for any period, the amount required to be shown as rental expense in respect of operating leases on an income statement of the Lessee and its Subsidiaries in accordance with GAAP. "Consolidated Long Term Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, Indebtedness for borrowed money, whether secured or unsecured, which by the terms of the agreement governing or instrument evidencing such Indebtedness for borrowed money, whether secured or unsecured, matures more than one year from or is directly or indirectly renewable or extendible at the option of the obligor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year from the date of creation thereof, including in each instance current maturities of long-term debt (and the current portion of long-term debt in the last year of its term), revolving credit and short-term debt extendible beyond one year at the option of the debtor, and shall also include, without limitation, Indebtedness arising under or in connection with any interest rate swap agreement or arrangements. "Consolidated Net Income" means, for the Lessee and its consolidated Subsidiaries for any period, the gross revenues from operations of the Lessee and its Subsidiaries less all their operating and non-operating expenses (including without limitation, taxes on income) as determined in accordance with GAAP. "Consolidated Net Worth" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the difference between (a) Consolidated Total Assets and (b) Consolidated Total Liabilities, excluding Consolidated Off-Balance Sheet Debt, all as determined in accordance with GAAP. "Consolidated Off-Balance Sheet Debt" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the maximum amount of that portion of the rental payments (including basic, supplemental and additional rent) representing payments of principal and not interest required to be made by the Lessee and any of its Subsidiaries 12 under any synthetic lease or other off-balance sheet financing arrangement, including in the amount of such payments the maximum amount of all payments (including payments of termination value) representing payments of principal and not interest required to be made in connection with any purchase of the property or assets subject thereto by the Lessee or any of its Subsidiaries at the expiration of the term of such lease or arrangement. "Consolidated Quick Ratio" means, for the Lessee and its Subsidiaries on a consolidated basis, at any date, the ratio of (a) the sum of (i) unencumbered cash and cash equivalents (including all Cash Collateral for this purpose) plus (ii) Consolidated Short Term Investments maturing in less than one year from such date plus (iii) the net amount of accounts receivable, divided by (b) the sum of (i) Consolidated Current Liabilities plus (ii) Consolidated Off-Balance Sheet Debt maturing within one year of such date. "Consolidated Short Term Investments" means, for the Lessee and its consolidated Subsidiaries on a consolidated basis at any date, investments described in clause (i) of the definition of the term "Permitted Investments" which mature less than one year from the date of creation thereof. "Consolidated Short Term Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, Indebtedness for borrowed money, whether secured or unsecured, which by the terms of the agreement governing or instrument evidencing such Indebtedness for borrowed money, whether secured or unsecured, matures within one year or less from the date of creation thereof. "Consolidated Tangible Net Worth" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the difference between (a) Consolidated Net Worth and (b) Consolidated Intangible Assets. "Consolidated Total Assets" means for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of all assets less depreciation, amortization and other reserves of the Lessee and its Subsidiaries determined in accordance with GAAP. "Consolidated Total Capital" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of (i) Consolidated Debt plus (ii) Consolidated Tangible Net Worth. "Consolidated Tangible Assets" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the difference between (a) Consolidated Total Assets and (b) Consolidated Intangible Assets. "Consolidated Total Liabilities" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of (i) Consolidated Current Liabilities, plus (ii) Consolidated Long Term Liabilities (without duplication of amounts included in clause (i)) plus (iii) the Consolidated Off-Balance Sheet Debt. 13 "Construction Agency Agreement" means the Construction Agency Agreement, dated as of the Closing Date, between the Lessor and the Construction Agent, in the form of Exhibit M to the Participation Agreement. "Construction Agency Agreement Assignment" means the Assignment of Construction Agency Agreement, dated as of the Closing Date, from the Lessor to the Indenture Trustee, for the benefit of the Participants, in the form of Exhibit N to the Participation Agreement. "Construction Agency Agreement Event of Default" means a "Construction Agency Agreement Event of Default" as defined in Section 5.1 of the Construction Agency Agreement. "Construction Agent" means the Lessee, as construction agent under the Construction Agency Agreement. "Construction Commencement Date" is defined in Section 2.3 of the Construction Agency Agreement. "Construction Period" means, with respect to the Property, the period commencing on the Construction Commencement Date and ending on the earlier of the Completion Date and the Outside Completion Date for the Property. "Construction Termination Event" means (a) the occurrence or existence of any Cost Overrun Event or Completion Delay Event, (b) the incurrence by any Lessor Party of any liabilities, losses, damages or expenses excluded from the Lessee's obligations under clause (z) of Section 13.1 of the Participation Agreement or Section 13.5(a) of the Participation Agreement by the proviso to such section, (c) the incurrence by any Lessor Party of any increased costs or reduced amounts excluded from the Lessee's obligations under Section 13.10(a) of the Participation Agreement by the proviso to such section or (d) the occurrence or existence of any loss or liability excluded from the Lessee's obligations under Section 24.1 of the Lease Agreement by the proviso to such section. "Contingent Obligation" means, with respect to any Person, without duplication, (a) any Guaranty Obligation of that Person; and (b) any direct or indirect obligation or liability, contingent or otherwise, of that Person (i) in respect of any letters of credit, acceptances, bank guaranties, surety bonds or similar instruments issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, (ii) as a partner or joint venturer in any partnership or joint venture, (iii) incurred pursuant to any interest rate swap, currency swap, forward, cap, floor or other similar contract that is not entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Person or (iv) with respect to noncollateralized Consolidated Off-Balance Sheet Debt. The amount of any Contingent Obligation shall (subject, in the case of Guaranty Obligations, to the last sentence of the definition of "Guaranty Obligation") be deemed equal to the maximum reasonably anticipated liability in respect thereof. 14 "Control" means (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, the possession directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Cost Overrun Event" means (a) the delivery by the Lessee of an Advance Request for any Advance that will reduce the Unused Total Commitment to $0 prior to the Completion Date, (b) the occurrence of any event or the existence of any condition that causes the likely aggregate remaining cost for Completion of the Improvements at any time to exceed the Unused Total Commitment at such time or (c) the delivery by the Lessee to any Lessor Party at any time of any notice, certificate or other writing which indicates that the likely aggregate remaining cost for Completion of the Improvements at such time will exceed the Unused Total Commitment at such time. "Co-Trustee" means U.S. Bank Trust National Association, a national banking association. "Covered Matters" is defined in Section 13.15(b) of the Participation Agreement. "Data Center" means that certain two-story structure of approximately 76,000 total square feet to be constructed at the north west end of Lot 57 of the Hacienda Business Park, Pleasanton, California, and to be commonly known as 5840 Owens Drive. "Debt" means, for the Lessee and its Subsidiaries on a consolidated basis at any date, the sum of (i) Consolidated Long Term Liabilities, plus (ii) Capitalized Lease Obligations plus (iii) Contingent Obligations. "Default" means any event or condition which, with the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Defaulting Participant" means, at any time, any of the Participants which at such time has (i) failed to make a payment when due to the Lessor equal to its Commitment Percentage of an Advance, (ii) has been notified of such failure by the Lessor, and (iii) has not cured such failure by making such payment, together with interest at the Late Payment Rate. "Designated Payment Date" means the Expiration Date, the Termination Date or other date of termination of the Lease. "Deposit Accounts" is defined in Section 2.01 of the Cash Collateral Agreement. "Depositary Bank" is defined in Section 2.02 of the Cash Collateral Agreement. 15 "Development Contracts" means the agreements relating to construction of the Improvements to be finalized before the commencement of such construction, as such agreements may be modified from time to time with any required consent of the Lessor pursuant to Sections 12.2, 12.3 and 12.4 of the Lease or the Construction Agency Agreement and any applications, permits, contracts or documents concerning the use or development of or construction of improvements on the Property that the Lessor may hereafter execute or to which the Lessor may consent at the request of the Lessee pursuant to Sections 12.2, 12.3 or 12.4 of the Lease or the Construction Agency Agreement. "Dollars" and "$" mean dollars in lawful currency of the United States of America. "Dublin Parcel" means an approximately 49.0744 acre parcel forming a portion of that certain real property located in the City of Dublin, California, south of Dublin Boulevard, west of Hacienda Drive, north of I-580 and east of Arnold Road. "Eighteen-Month Commitment" means $27,000,000. The Eighteen month Commitment expires on the earlier of the Completion Date or the Outside Completion Date. "End of the Term Report" is defined in Section 13.2 of the Participation Agreement. "Enforcement Date" is defined in Section 7.4 of the Indenture. "Environmental Audit" means a Phase One environmental site assessment (the scope and performance of which meets or exceeds ASTM Standard Practice E1527-93 Standard Practice for Environmental Site Assessments: Phase One Environmental Site Assessment Process) of the Property to be acquired by the Lessor on the Ground Lease Interest Acquisition Date or of the Property to be remarketed under the Remarketing Option under the Lease. "Environmental Certificate" is defined in Section 6.1(c) of the Participation Agreement. "Environmental Law" means, whenever enacted or promulgated, any Federal, state, county or local law, statute, ordinance, rule, regulation, license, permit, authorization, approval, covenant, criteria, guideline, administrative or court order, judgment, decree, injunction, code or requirement or any agreement with a Governmental Authority: (x) relating to pollution (or the cleanup, removal, remediation or encapsulation thereof, or any other response thereto), or the regulation or protection of human health, safety or the environment, including air, water, vapor, surface water, groundwater, drinking water, land (including surface or subsurface), plant, aquatic and animal life, or (y) concerning exposure to, or the use, containment, storage, recycling, treatment, generation, discharge, emission, Release or threatened Release, 16 transportation, processing, handling, labeling, containment, production, disposal or remediation of any Hazardous Substance, Hazardous Condition or Hazardous Activity; in each case as amended and as now or hereafter in effect, and any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries (whether personal or property) or damages due to or threatened as a result of the presence of, exposure to, or ingestion of, any Hazardous Substance, whether such common law or equitable doctrine is now or hereafter recognized or developed. Applicable laws include, but are not limited to, CERCLA; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the National Environmental Policy Act, 42 U.S.C. Section 4321; the Refuse Act, 33 U.S.C. Sections 401 et seq.; the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Sections 1801-1812; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Sections 136 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; and the Occupational Safety and Health Act of 1970, each as amended and as now or hereafter in effect, and their state and local counterparts or equivalents, including any regulations promulgated thereunder. "Environmental Violation" means any activity, occurrence or condition or omission that violates or results in non-compliance with any Environmental Law. "Equipment" means equipment, apparatus, furnishings, fittings and personal property of every kind and nature whatsoever purchased by the Lessor using the proceeds of the Participation Interests in the Advances now or subsequently attached to, contained in or used or usable in any way in connection with any operation or letting of the Property, including but without limiting the generality of the foregoing, all equipment, screens, awnings, shades, blinds, curtains, draperies, artwork, carpets, rugs, storm doors and windows, shelving, counters, furniture and furnishings, heating, electrical, and mechanical equipment, lighting, switchboards, plumbing, ventilation, air conditioning and air-cooling apparatus, refrigerating, and incinerating equipment, escalators, elevators, loading and unloading equipment and systems, cleaning systems (including window cleaning apparatus), telephones, communication systems (including satellite dishes and antennae), televisions, computers, sprinkler systems and other fire prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of every kind and description. "Equipment Schedule" means each Equipment Schedule in the form of Exhibit B to the Lease. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time or any successor Federal statute. 17 "ERISA Affiliate" means each entity required to be aggregated with the Lessee pursuant to the requirements of Section 414(b) or (c) of the Code. "ERISA Group" means the Lessee and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Lessee, are treated as a single employer under Section 414 of the Code. "Eurocurrency Reserve Requirements" means, for any day as applied to an Advance, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "Eurodollar Rate" means, with respect to each day during each Interest Period, the rate per annum determined by the Indenture Trustee to be the offered rate per annum at which deposits in Dollars appear with respect to such Interest Period on the Reuters Screen LIBOR Page (or any successor page), or if such offered rate is not available, then the rate per annum at which deposits in Dollars appear with respect to such Interest Period on the Telerate Page 3750 (or any successor page) in each case as of 11:00 a.m. (London time), two Business Days prior to the beginning of such Interest Period or in the event that the foregoing offered rates are not available, then the average (rounded upward to the nearest whole multiple of one sixteenth of one percent per annum, if such average is not such a multiple) of the respective rates notified to the Indenture Trustee by each of the Participants as the rates at which such Participant's Funding Office is offered Dollar deposits at or about 11:00 a.m. (London time), two Business Days prior to the beginning of such Interest Period in the interbank Eurodollar market for delivery on the first day of such Interest Period for the number of days comprised therein in an amount comparable to the amount of the Advances estimated to be outstanding during such Interest Period. "Eurodollar Rate Advance" means any Advance (and related Loans and Certificate Purchaser Amounts) bearing interest or Certificate Yield at a rate per annum equal to the sum of (i) the Eurodollar Rate applicable to such Advance plus (ii) the Applicable Margin. "Event of Default" means a Lease Event of Default, a Construction Agency Agreement Event of Default, a Guarantee Event of Default, a Ground Lease Event of Default or an Indenture Event of Default. "Excepted Payments" means: (a) all indemnity payments (including indemnity payments made pursuant to Section 13 of the Participation Agreement) to which the Lessor (both 18 in its individual capacity and as Owner Trustee) or any Certificate Holder, or any of their respective Affiliates, agents, officers, directors or employees is entitled, provided that during the Construction Period, indemnity payments made to the Lessor pursuant to Section 13.14 of the Participation Agreement for Losses of the Lessor arising out of its indemnification obligations under Section 13.15 of the Participation Agreement shall not constitute Excepted Payments; (b) any amounts (other than Basic Rent or amounts payable by Lessee pursuant to Section 16.2, Section 16.3, Section 16.4 or Articles XVII, XX or XXII of the Lease) payable under any Operative Document to reimburse the Lessor, any Certificate Holder or any of their respective Affiliates (including the reasonable expenses of the Lessor or any Certificate Holder incurred in connection with any such payment) for performing or complying with any of the obligations of the Lessee under and as permitted by any Operative Document, except to the extent that one or more Participants have indemnified the Lessor with respect thereto pursuant to the Participation Agreement; (c) any amount payable to any Certificate Holder by any transferee permitted under the Operative Documents of the interest of such Certificate Holder as the purchase price of such Certificate Holder's interest in the Trust; (d) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies other than such proceeds or payments payable to the Indenture Trustee or the Lessor under policies required to be maintained by the Lessee under the Operative Documents; (e) any insurance proceeds under policies maintained by the Lessor or any Certificate Holder; (f) Transaction Expenses or other amounts or expenses paid or payable to or for the benefit of the Bank in its individual capacity; (g) all right, title and interest of the Lessor or any Certificate Holder to the Property or any portion thereof or any other property to the extent any of the foregoing has been released from the Lien of the Indenture, the Mortgage, the Assignment of Lease and the Construction Agency Agreement Assignment pursuant to the terms thereof following the payment of the Participant Balances of all of the Note Holders and all amounts due and owing to the Indenture Trustee; and (h) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (g) above. "Excepted Rights" means the following described rights and privileges: 19 (a) as and to the extent provided for in the Operative Documents, the right of the Owner Trustee and the Certificate Holders, but not to the exclusion of the Indenture Trustee or any other Person, to receive from the Lessee certificates and other documents and information which the Lessee is required to give or furnish to Owner Trustee or the Certificate Holders pursuant to any Operative Document, and to inspect the Property and all records relating thereto; (b) all rights of the Owner Trustee and the Certificate Holders under the Lease or the Trust Agreement to demand, collect, sue for or otherwise obtain all amounts from the Lessee due the Owner Trustee or the Certificate Holders on account of any Excepted Payments; provided that the rights excepted and reserved by this clause (b) shall not be deemed to include the exercise of any remedies provided for in Article XVII of the Lease other than the right to proceed by appropriate court action or actions to recover damages for the breach thereof; (c) the right of the Owner Trustee, as Lessor, but not to the exclusion of the Indenture Trustee, to seek specific performance of the covenants of the Lessee under the Lease relating to the protection, insurance and maintenance of the Property (but excluding any right to declare the Lease to be in default and to enforce any remedies under Article XVII thereof) and to maintain separate insurance with respect to the Property pursuant to Article XIV of the Lease; and (d) the right of the Owner Trustee, as Lessor, but not to the exclusion of the Indenture Trustee, to perform for the Lessee under Section XVII of the Lease. "Excess Proceeds" means the excess, if any, of the aggregate of all awards, compensation or insurance proceeds payable in connection with a Casualty or Condemnation over the Asset Termination Value paid by the Lessee pursuant to Articles XIV and XV of the Lease with respect to such Casualty or Condemnation. "Expiration Date" means the fifth anniversary of the Closing Date or the scheduled expiration of the then current Renewal Term, if any. "Expiration Date Purchase Obligation" means the Lessee's obligation, pursuant to Section 20.2 of the Lease, to purchase all (but not less than all) of the Property on the Expiration Date. "Extension Date" means, if the Extension Fee is payable, the date which is 364 days after the Closing Date. "Extension Effective Date" is defined in Section 3.8(b) of the Participation Agreement. "Extension Fee" means an amount equal to (i) 0.10% multiplied by (ii) the aggregate amount of the 364 Day Commitment that is extended pursuant to Section 3.8 of the Participation Agreement. 20 "Extension Request" is defined in Section 3.8(b) of the Participation Agreement. "Extension Response Date" is defined in Section 3.8(b) of the Participation Agreement. "Fair Market Sales Value" means, with respect to the Property, the amount, which in any event shall not be less than zero, that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, for the ownership of the Property. The Fair Market Sales Value of the Property shall be determined based on the assumption that, except for purposes of Article XVII of the Lease and Section 13.2 of the Participation Agreement, the Property is in the condition and state of repair required under Section 10.1 of the Lease and the Lessee is in compliance with the other requirements of the Operative Documents. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of quotations for such day on such transaction received by the Indenture Trustee from three Federal funds brokers of recognized standing selected by it. "Fixed Rate" means, as to any Advance (and related Loans and Certificate Purchaser Amounts) as to which the Lessee has elected the application of the Fixed Rate pursuant to Section 3.5(b) of the Participation Agreement, the weighted average fixed rate of interest and Certificate Yield accepted by the Lessee and applicable to such Advance pursuant to Section 3.5(b) of the Participation Agreement. "Fixed Rate Advance" means any Advance bearing interest and Certificate Yield at a rate per annum equal to the sum of (i) the Fixed Rate applicable to such Advance as determined pursuant to Section 3.5(b) of the Participation Agreement plus (ii) the Applicable Margin. "Fixed Rate Maturity Date" is defined in Section 3.5(b) of the Participation Agreement. "Fixed Rate Offer" is defined in Section 3.5(b) of the Participation Agreement. "Fixed Rate Period" is defined in Section 3.5(b) of the Participation Agreement. "Fixed Rate Request" is defined in Section 3.5(b) of the Participation Agreement. 21 "Fixtures" means all fixtures relating to the Improvements, including all components thereof, located in or on the Improvements, together with all replacements, modifications, alterations and additions thereto. "Fully Indemnifiable Event" means the occurrence of any of the following events: (i) a Lease Event of Default specified in Section 17.1(e) or (f) of the Lease or (ii) the Lessee has committed fraud, misapplication of funds, illegal acts or willful misconduct in respect of the Property, the Operative Documents or any actions or transactions in connection therewith. "Funding Date" means any Business Day on which Advances are funded pursuant to the Participation Agreement. "Funding Office" means the office of each Participant identified on Schedule II to the Participation Agreement as its Funding Office. "Funding Request" is defined in Section 3.5(a) of the Participation Agreement. "GAAP" means United States generally accepted accounting principles (including principles of consolidation), in effect from time to time. "Governmental Action" means all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Applicable Law, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operation of the Property. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Gross Proceeds" is defined in Section 22.1(k) of the Lease. "Ground Lease" means, in respect of the Property, the Ground Lease Agreement, dated as of the Closing Date, between the Lessor, as ground lessee, and the Ground Lessor, as ground lessor. "Ground Lease Commencement Date" is defined in Section 2.02 of the Ground Lease. "Ground Lease Event of Default" means any event of default under the Ground Lease. "Ground Lease Expiration Date" is defined in Section 4.02 of the Ground Lease. 22 "Ground Lease Interest" means the leasehold interest in the Land and the other Ground Lease Property acquired by the Lessor by ground lease from the Ground Lessor. "Ground Lease Interest Acquisition Date" means the date on which the Lessor acquires the Ground Lease Interest, which date shall be specified in the Acquisition Request. "Ground Lease Option Price" is defined in Section 6.02 of the Ground Lease. "Ground Lease Property" is defined in Section 2.01 of the Ground Lease. "Ground Lease Purchase Option Date" is defined in Section 6.01 of the Ground Lease. "Ground Lease Termination Date" is defined in Section 2.02 of the Ground Lease. "Ground Lessor" means PeopleSoft Properties, Inc., a California corporation, or any successor as ground lessor under the Ground Lease. "Ground Rent" means all rents and other amounts payable by the Lessor, as ground lessee, under the Ground Lease. "Guarantee" means the Guarantee executed by the Guarantor in favor of the Indenture Trustee, for the benefit of the Participants, in the form of Exhibit O to the Participation Agreement. "Guarantee Event of Default" is defined in the Guarantee. "Guarantor" means PeopleSoft, Inc. a Delaware corporation. "Guaranty Obligation" means, with respect to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof. 23 "Hazardous Activity" means any activity, process, procedure or undertaking that directly or indirectly (i) produces, generates or creates any Hazardous Substance; (ii) causes or results in (or threatens to cause or result in) the Release of any Hazardous Substance into the environment (including air, water vapor, surface water, groundwater, drinking water, land (including surface or subsurface), plant, aquatic and animal life); (iii) involves the containment or storage of any Hazardous Substance; or (iv) would be regulated as hazardous waste treatment, storage or disposal within the meaning of any Environmental Law. "Hazardous Condition" means any condition that violates, or that results in noncompliance with, any Environmental Law. "Hazardous Substance" means any of the following: (i) any petroleum or petroleum product, explosives, radioactive materials, asbestos, formaldehyde, polychlorinated biphenyls, lead and radon gas; or (ii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous to the environment or human health or safety; or (iii) any substance, material, product, derivative, compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant that would support the assertion of any claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law. "Impositions" means, except to the extent described in the following sentence, any and all liabilities, losses, expenses, costs, charges and Liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes") including (i) real and personal property taxes, including personal property taxes on any property covered by the Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate transfer taxes, mortgage taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; (vi) assessments on the Property, including all assessments for public improvements or benefits, whether or not such improvements are commenced or completed within the Term; and (vii) any tax, Lien, assessment or charge asserted, imposed or assessed by the PBGC or any governmental authority succeeding to or performing functions similar to, the PBGC, and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Governmental Authority upon or with respect to (a) the Property or any part thereof or interest therein; (b) the purchase, sale, leasing, financing, refinancing, demolition, construction, alteration, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, 24 transfer of title, return or other disposition of the Property or any part thereof or interest therein; (c) the Participation Interests with respect to the Property or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from the Property or any part thereof or interest therein; (e) the Operative Documents, the performance thereof, or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to the Property or any part thereof or interest therein upon the sale or disposition thereof; (g) any contract (including the Construction Agency Agreement) relating to the construction, acquisition or delivery of the Improvements or any part thereof or interest therein; or (h) otherwise in connection with the transactions contemplated by the Operative Documents. The term "Imposition" shall not mean or include the following (in each case only to the extent such Taxes would have applied if the Lease were structured as a loan): (i) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, transfer or property taxes) that are imposed on an Indemnitee by the United States federal government that are based on or measured by the net income (including taxes based on capital gains and minimum taxes) of such Person; provided, that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, transfer or property taxes) that are imposed by any state or local jurisdiction or taxing authority within any state or local jurisdiction and that are franchise taxes or are based upon or measured by the net income or net receipts; provided, that this clause (ii) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made (anything to the contrary notwithstanding, nothing in the Operative Documents shall be construed to impose upon Lessee any liability for Taxes imposed upon an Indemnitee to the extent imposed with respect to any activities of such Indemnitee other than under the transactions contemplated by the Operative Documents); (iii)any Tax or imposition for so long as, but only for so long as, it is being contested in accordance with the provisions of Section 13.5 of the Participation Agreement; (iv) any Taxes which are imposed on an Indemnitee as a result of the gross negligence or wilful misconduct of such Indemnitee itself (as opposed to gross negligence or wilful misconduct imputed to such Indemnitee), but not Taxes imposed as a result of ordinary negligence of such Indemnitee; or (v) any California withholding Taxes imposed upon payments to the Lessor as a result of the Lessor failing to be qualified to do business in the State of California. 25 Any Tax excluded from the defined term "Imposition" in any one of the foregoing clauses (i) through (v) shall not be construed as constituting an Imposition by any provision of any other of the aforementioned clauses. "Improvements" means all buildings, structures, Fixtures, Equipment, and other improvements of every kind existing on the Ground Lease Interest Acquisition Date and at any time and from time to time and either constructed pursuant to the Construction Agency Agreement or those purchased with amounts advanced by the Participants pursuant to the Participation Agreement (or those becoming the property of the Lessor pursuant to Article XI of the Lease) on or under the Land, together with any and all appurtenances to such buildings, structures, or improvements, including sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including all Modifications and other additions to or changes in the Improvements at any time. "Indebtedness" with respect to any Person means, as of the date of determination thereof, (i) all items which in accordance with GAAP would be included in determining total liabilities on the liability side of such Person's balance sheet as at such date, (ii) all indebtedness of such Person or any Person secured by any Lien with respect to any property or asset owned or held by such Person, regardless of whether the indebtedness secured thereby shall have been assumed by such Person, (iii) all indebtedness of other Persons which such Person has directly or indirectly guaranteed (whether by discount or otherwise), endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse to such Person or with respect to which such Person is otherwise directly or indirectly liable, including, without limitation, indebtedness in effect guaranteed by such Person through any agreement (contingent or otherwise) to (A) purchase, repurchase or otherwise acquire such Indebtedness or any security therefor, (B) provide funds for the payment of discharge of such indebtedness or any other liability of the obligor of such indebtedness (whether in the form of loans, advances, stock purchases, capital contribution or otherwise), (C) maintain the solvency of any balance sheet or other financial condition of the obligor of such indebtedness, or (D) make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non-furnishing thereof, if in any such case the purpose or intent of such agreement is to provide assurance that such indebtedness will be paid or discharged or that any agreements relating thereto will be complied with or that the holders of such indebtedness will be protected against loss in respect thereof, (iv) all of such Person's Capitalized Lease Obligations, and (v) all actual or contingent reimbursement obligations with respect to letters of credit issued for such Person's account. "Indebtedness Hereby Secured" means the aggregate of all outstanding indebtedness for borrowed money evidenced by the Notes and interest thereon and all additional amounts and other sums at any time due and owing from, and required to be paid by the Owner Trustee, as borrower in respect thereof under the terms of the Notes, the Indenture, the Mortgage or the Assignment of Lease. 26 "Indemnification Sections" is defined in Section 13.14(c) of the Participation Agreement. "Indemnified Party" is defined in Section 13.15(a) of the Participation Agreement. "Indemnitee" means the Lessor, the Owner Trustee, the Bank, the Indenture Trustee, in its individual capacity and as trustee, the Participants, their respective Affiliates and their respective successors, assigns, directors, shareholders, partners, officers, employees and agents. "Indenture" means the Trust Indenture, dated as of the Closing Date, between the Lessor, as borrower, and the Indenture Trustee. "Indenture Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Indenture Event of Default. "Indenture Event of Default" is defined in Section 6.1 of the Indenture. "Indenture Trustee" means ABN AMRO Bank N.V. and any successor or replacement Indenture Trustee expressly permitted under the Operative Documents. "Initial Participation Agreement" is defined in Section 10.1(k) of the Participation Agreement. "Initial Property" means the property subject to the Initial Participation Agreement. "Institutional Investor" means (x) a corporation, a commercial finance company, a leasing company, a securities company, a bank, a bank holding company, trust company or savings and loan association or an insurance company organized under the laws of the United States or any state or any duly licensed domestic branch of a foreign bank, and (y) a collective investment fund, endowment, foundation, educational institution, real estate investment trust or any other Person organized under the laws of the United States or any state or political subdivision thereof and, in the case of an entity described in clause (y), which is generally recognized in the financing or real estate field as an institutional investor or which owns other real properties which are net leased to major United States corporations, and (z) a "qualified institutional buyer" under Rule 144A of the U.S. Securities and Exchange commission promulgated under the Securities Act. "Insurance Requirements" means all terms and conditions of any insurance policy required by the Lease to be maintained by the Lessee, and all requirements of the issuer of any such policy. "Interest Payment Advance" means any Advance made to fund the payment of interest or Certificate Yield accruing on Advances allocated to Property Improvements Costs during the Construction Period. 27 "Interest Period" means, with respect to any Eurodollar Rate Advance: (a) initially, the period commencing on the funding of such Advance or the conversion or continuation of such Advance as a Eurodollar Rate Advance, and ending one, two, three or six months thereafter, as selected by the Lessee by irrevocable notice to the Lessor and the Indenture Trustee not less than three (3) Business Days prior to the first day of such Interest Period; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Advance, or the date such Advance is made or converted from a Fixed Rate Advance, and ending one, two, three or six months thereafter, as selected by the Lessee by irrevocable notice to the Lessor and the Indenture Trustee not less than three (3) Business Days prior to the first day of such Interest Period; provided that, the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Expiration Date shall end on the Expiration Date; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of the Interest Period) shall end on the last Business Day of a calendar month; and (iv) The Lessee shall select Interest Periods so as not to require a payment or prepayment of any Advance during an Interest Period for such Advance. "Investment Company Act" means the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Land" means the parcel of real property described on Schedule 1 of the Lease Supplement and all Appurtenant Rights attached thereto. "Lease" means the Master Lease, dated as of the Closing Date, between the Lessor and the Lessee, together with the Lease Supplement and all Equipment Schedules thereto. "Lease Balance" means, as of any date of determination, an amount equal to (i) the sum of (A) the aggregate sum of the outstanding principal amount of the Notes (including all amounts capitalized under the terms of the Participation Agreement), (B) all accrued and unpaid interest on the Notes, (C) the aggregate sum of the Certificate Purchaser 28 Amounts (including all amounts capitalized under the terms of the Participation Agreement), (D) all accrued and unpaid Certificate Yield on the Certificate Purchaser Amounts, and (E) all other amounts owing by the Lessee under the Operative Documents, less (ii) sum of all payments received by the Lessor, the Indenture Trustee or the Participants on account of payments to reduce the Lease Balance, including reductions resulting from payments by the Lessor, the Lessee or the Guarantor, proceeds from the sale of the Property and/or amounts realized from the Cash Collateral pursuant to the Cash Collateral Agreement. "Lease Default" means any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 17.1 of the Lease. "Lease Supplement" means the Lease Supplement substantially in the form of Exhibit A to the Lease together with all attachments and schedules thereto, as such Lease Supplement may be supplemented, amended or modified from time to time. "Leasehold Mortgagee" is defined in Section 3.07(c)(iii) of the Ground Lease. "Leasehold Mortgages" is defined in Section 3.07(c)(i) of the Ground Lease. "Lessee" means PeopleSoft, Inc., a Delaware corporation, as Lessee under the Lease, and its successors and assigns expressly permitted under the Operative Documents. "Lessor" means the Owner Trustee, as Lessor under the Lease, and its successors and assigns expressly permitted under the Operative Documents. "Lessee Obligations" is defined in Section 1.01 of the Cash Collateral Agreement. "Lessor Losses" is defined in Section 13.14 of the Participation Agreement. "Lessor Financing Statements" means UCC financing statements appropriately completed and executed for filing in the applicable jurisdiction in order to protect the Lessor's interest under the Lease to the extent the Lease is a security agreement. "Lessor Lien" means any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor or the Bank not resulting from the transactions contemplated by the Operative Documents, (b) any act or omission of the Lessor or the Bank which is not required by the Operative Documents or is in violation of any of the terms of the Operative Documents, (c) any claim against the Lessor or the Bank with respect to Taxes or Transaction Expenses against which Lessee is not required to indemnify the Lessor or the Bank in its individual capacity, pursuant to Sections 9 or 13.5 of the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Property, the Trust Estate or the Operative Documents other than the transfer of title to or 29 possession of the Property by the Lessor pursuant to and in accordance with the Lease, the Indenture or the Participation Agreement or pursuant to the exercise of the remedies set forth in Article XVII of the Lease. "Lessor Parties" means the Lessor, the Bank, the Participants and the Indenture Trustee. "Level I" means at any time that the Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio at the end of any fiscal quarter is less than .10 to 1.0. "Level II" means at any time that the Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio at the end of the applicable fiscal quarter is greater than or equal to .10 to 1.0 but is less than .20 to 1.0. "Level III" means at any time that the Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio at the end of the applicable fiscal quarter is greater than or equal to .20 to 1.0 but is less than .25 to 1.0. "Level IV" means at any time that the Lessee's Consolidated Funded Debt to Consolidated Total Capital ratio at the end of the applicable fiscal quarter is greater than or equal to .25 to 1.0 but is less than .35 to 1.0. "Lien" means any mortgage, deed of trust, pledge, security interest, encumbrance, lien, easement, servitude or charge of any kind, including, without limitation, any irrevocable license, conditional sale or other title retention agreement, any lease in the nature thereof, or any other right of or arrangement with any creditor to have its claim satisfied out of any specified property or asset with the proceeds therefrom prior to the satisfaction of the claims of the general creditors of the owner thereof, whether or not filed or recorded, or the filing of, or agreement to execute as "debtor", any financing or continuation statement under the Uniform Commercial Code of any jurisdiction or any federal, state or local lien imposed pursuant to any Environmental Law. "Loans" means Tranche A Loans and Tranche B Loans. "Loan Value" means with respect to the Property subject to the Lease an amount determined by multiplying the aggregate unpaid principal amount of the Notes, or unpaid Certificate Purchaser Amounts of the Certificates, immediately prior to the date on which the Loan Value is to be paid by a fraction in which the numerator is the portion of the Asset Termination Value to be repaid pursuant to Article XVI of the Lease in connection with a Significant Casualty or Significant Condemnation and the denominator is the Asset Termination Value of the Property then subject to the Lease. "Losses" is defined in Section 13.15(b) of the Participation Agreement. "Lot 56" means an approximately 20.538 acre parcel commonly known as Lot 56C in the Hacienda Business Park, Pleasanton, California. 30 "Marketing Period" means the period commencing on the date one hundred eighty (180) days prior to the Expiration Date and ending on the Expiration Date. "Material", "Materially", and "Material Adverse Effect" mean material to, or a material adverse effect on, (i) the consolidated financial position, business or consolidated results of operations of the Lessee or the Guarantor, (ii) the ability of the Lessee or the Guarantor to perform its obligations under any of the Operative Documents, (iii) the value or condition of the Property or the Lessor's interests therein or title thereto, or (iv) the ability of the Lessor, the Indenture Trustee or any Participant to enforce any of its rights or remedies under any Operative Document. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "Maturity Date" means the fifth anniversary of the Closing Date, as such date may be accelerated or extended pursuant to Section 3.8 of the Participation Agreement. "Memorandum of Ground Lease" means the Memorandum of Lease to be executed, delivered and recorded pursuant to the Ground Lease. "Modifications" is defined in Section 11.1(a) of the Lease. "Momentum Distribution" is defined in the definition of the term Momentum Transaction. "Momentum Transaction" means a transaction to be consummated by the Lessee consisting of (i) the establishment of a new entity ("Momentum") for the purpose of developing enterprise application software for selected industry markets, (ii) distribution by the Lessee to Momentum of an amount not to exceed $300,000,000 (the "Momentum Distribution") and (iii) the distribution of the shares of callable common stock of Momentum to the stockholders of the Lessee. "Mortgage" means, with respect to the Property, a Construction Deed of Trust, Security Agreement and Financing Statement substantially in the form attached as Exhibit Q to the Participation Agreement, made by the Lessor in favor of a trustee for the Indenture Trustee for the benefit of the Participants and satisfactory in form and substance to the Indenture Trustee and the Required Participants in order to create a first priority mortgage lien on the Lessor's Ground Lease Interest, a first priority mortgage lien on Lessor's fee interest in the Improvements and a first priority security interest in the Equipment. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. 31 "Net Proceeds" means all amounts paid in connection with any Casualty or Condemnation, and all interest earned thereon, less the expense of claiming and collecting such amounts, including all costs and expenses in connection therewith for which the Indenture Trustee or the Lessor is entitled to be reimbursed pursuant to the Lease. "Non-Consenting Participant" means any Participant which has denied, or is deemed to have denied, an Extension Request pursuant to Section 3.8(b) of the Participation Agreement. "Note Holder" means any holder of a Note. "Note Purchaser's Commitment" means, as to any Note Purchaser, its Tranche A Loan Commitment and its Tranche B Loan Commitment. "Note Purchasers" means the Persons listed as Note Purchasers on Schedule I to the Participation Agreement. "Notes" means the Tranche A Notes and the Tranche B Notes, collectively. "Notes Basic Rent" means the sum of (i) the principal due on the Notes on any Scheduled Payment Date pursuant to the Indenture, plus (ii) the interest due on the Notes on each Payment Date pursuant to the Indenture. "Notice of Ground Lease Purchase Option Exercise" is defined in Section 6.01 of the Ground Lease. "Notice of Ground Lease Rent Increase" is defined in Section 2.03 of the Ground Lease. "Notice of Security Interest" is defined in Section 2.01(a) of the Cash Collateral Agreement. "Operative Documents" means the following: (a) the Participation Agreement; (b) the Lease and Lease Supplement; (c) the Guarantee; (d) the Ground Lease and Memorandum of Ground Lease; (e) the Construction Agency Agreement; (f) the Assignment of Lease and each Supplement to the Assignment of Lease; (g) the Consent to Assignment; (h) the Equipment Schedules; (i) the Mortgage; 32 (j) the Construction Agency Agreement Assignment; (k) the Consent to Construction Agency Agreement Assignment; (l) the Assignment of Construction Documents; (m) the Cash Collateral Agreement; (n) the Indenture; (o) the Notes; (p) the Certificates; (q) the Trust Agreement; and (r) the Appointment of Co-Trustee. "Option Exercise Notification Date" is defined in Section 6.01 of the Ground Lease. "Original Executed Counterpart" is defined in Section 31.8 of the Lease. "Outside Completion Date" means the eighteenth monthly anniversary of the Closing Date. "Outstanding" when used with respect to the Notes, means as of the date of determination, all Notes theretofore issued and delivered under the Indenture, except: (i) Notes theretofore canceled by the Indenture Trustee or delivered to the Indenture Trustee for cancellation; (ii) Notes or portions thereof for whose payment or redemption money in the necessary amount is on deposit with the Indenture Trustee, provided that such Notes are to be redeemed and notice of such redemption has been duly given and not revoked or otherwise withdrawn pursuant to the Indenture; and (iii) Notes paid, or in exchange for which, or in lieu of which other Notes have been authenticated and delivered pursuant to the Indenture. "Overdue Rate" means (i) with respect to the Notes, the interest rate then applicable thereto plus 2% per annum, and (ii) with respect to the Certificates, the Certificate Yield rate then applicable thereto plus 2% per annum. "Owner Trustee" means Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee under the Trust Agreement, and any successor or replacement Owner Trustee expressly permitted under the Operative Documents. "Partial Purchase Option" is defined in Section 20.1(a) of the Lease. "Participant Balance" means, for any Note Holder or Certificate Holder as of any date of determination, an amount equal to the outstanding unpaid principal amount or Certificate Purchaser Amounts of the applicable series of Notes or Certificates held by 33 such Note Holder or Certificate Holder, together with all accrued and unpaid interest and Certificate Yield thereon. "Participants" means the Note Purchasers, the Certificate Purchasers and all future Note Holders and Certificate Holders, collectively. "Participant's Letter" is defined in Section 12.1(c) of the Participation Agreement. "Participation Agreement" means the Participation Agreement, dated as of the Closing Date, among the Lessee, the Lessor, the Participants and the Indenture Trustee. "Payment Date" means (a) any Scheduled Payment Date and (b) any date on which interest or Certificate Yield is payable pursuant to Section 4 of the Indenture or Section 2.7 of the Trust Agreement in connection with any payment or prepayment of the Notes and/or the Certificates. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Exceptions" means (i) Liens of the types described in clauses (i), (ii), (iii), (v), (vii) and (viii) of the definition of Permitted Liens; and (ii) all encumbrances, exceptions, restrictions, easements, rights of way, servitudes, encroachments and irregularities in title, other than Liens which, in the reasonable assessment of the Construction Agent, do not materially impair the value of the Property or the use of the Property for its intended purpose. "Permitted Investments" means (i) the investments permitted by the Lessee's investment guidelines as approved by the Lessee's board of directors from time to time, a copy of which shall be provided to the Indenture Trustee and the Participants, (ii) existing investments in Subsidiaries, (iii) investments in new Subsidiaries after the Closing Date in an aggregate amount at any time not to exceed 20% of the Lessee's Consolidated Tangible Net Worth at such time, and (iv) loans or advances to employees of the Lessee or its Subsidiaries in the ordinary course of business. "Permitted Liens" means: (i) the respective rights and interests of the parties to the Operative Documents as provided in the Operative Documents; (ii) the rights of any sublessee or assignee under a sublease or an assignment expressly permitted by the terms of the Lease; (iii) Liens for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 13.1 of the Lease; 34 (iv) Liens arising by operation of law, materialmen's, mechanics', workers', repairmen's, employees', carriers', warehousemen's and other like Liens in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than 60 days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; (v) Liens of any of the types referred to in clause (iv) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor have been made), which bonding (or arrangements) shall comply with applicable Requirements of Law, and has effectively stayed any execution or enforcement of such Liens; (vi) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings to contest set forth in Section 13.1 of the Lease; (vii) all encumbrances, exceptions, restrictions, easements, rights of way, servitudes, encroachments and irregularities in title, other than Liens which, in the reasonable assessment of the Indenture Trustee, do not materially impair the value of the Property or the use of the Property for its intended purpose; (viii) easements, rights of way and other encumbrances on title to real property pursuant to Section 12.2 of the Lease; and (ix) a Lien consisting of a deposit or pledge made, in the ordinary course of business, in connection with, or to secure payment of, obligations under worker's compensation, unemployment insurance or similar legislation. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, governmental authority or any other entity. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. 35 "Plans and Specifications" means, with respect to the Property, (a) prior to the submittal of final plans and specifications in connection with the application for a building permit for any Improvements on the Property, the plans and specifications submitted in connection with the design review approval for such Improvements (such plans and specifications may also be referred to herein as the "Design Review Plans and Specifications"), and (b) after the submittal of final plans and specifications in connection with the application for a building permit for any Improvements on the Property, such final plans and specifications. Any such final plans and specifications shall not vary materially from the Design Review Plans and Specifications without the written consent of the Owner Trustee and the Indenture Trustee. "Project Costs" means the Lease Balance less any amounts included therein not constituting project costs within the meaning of such term under GAAP in effect on the date of the Participation Agreement. Project costs shall include, without limitation, the incremental cost of insurance, if any, required by Article 14 of the Lease. "Property" means (i) the Ground Lease Interest and (ii) all of the Improvements, Equipment and Fixtures at any time located on or under such Ground Lease Interest other than Equipment and Fixtures not financed by an Advance and not becoming property of the Lessor under Article XI of the Lease. "Property Balance" means, as of any date of determination, with respect to the Property, an amount equal to (i) the sum of (A) the aggregate sum of the outstanding principal amount of the Notes (including all amounts capitalized under the terms of the Participation Agreement), (B) all accrued and unpaid interest on the Notes, (C) the aggregate sum of the Certificate Purchaser Amounts (including all amounts capitalized under the terms of the Participation Agreement), (D) all accrued and unpaid Certificate Yield on the Certificate Purchaser Amounts, and (E) all other amounts owing by the Lessee under the Operative Documents, less (ii) sum of all payments received by the Lessor, the Indenture Trustee or the Participants on account of payments to reduce Asset Termination Value, including reductions resulting from payments by the Lessor, the Lessee or the Guarantor, the proceeds from the sale of the Property and/or amounts realized from the Cash Collateral pursuant to the Cash Collateral Agreement. "Property Cost" means, with respect to the Property, the aggregate amount of all Property Improvements Costs. "Property Improvements Costs" means, with respect to the Property, the amount funded to or on behalf of the Construction Agent or the Lessee by the Lessor under the Participation Agreement and the Construction Agency Agreement to construct any Improvements, Fixtures or Modifications, to purchase Equipment to be used on the Property in accordance with the Plans and Specifications therefor and the Operative Documents and to pay Transaction Expenses during the Construction Period that are to be capitalized under Section 9.1 of the Participation Agreement, as set forth in the Acquisition Request and Funding Requests therefor (including interest on the Notes and Certificate Yield on the Certificate Purchaser Amounts during the Construction Period 36 applied to such cost and funded by an Interest Payment Advance and amounts funded by one or more Lessor Parties and capitalized under Section 3.9(f) of the Participation Agreement). "Proportionate Share" is defined in Section 1.01(b) of the Cash Collateral Agreement. "Purchase Notice" is defined in Section 20.1(a) of the Lease. "Purchase Option" is defined in Section 20.1(a) of the Lease. "Purchase Option Price" is defined in Section 20.1(a) of the Lease. "Related Agreements" means all chattel paper, accounts, instruments, documents, investment property and general intangibles relating to any of the Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of any of the Land, Improvements or Appurtenant Rights, including (a) all plans, specifications, construction agreements, maps, surveys, studies, books of account, records, files, insurance policies, guarantees and warranties relating to such Land or Improvements or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights (including the Construction Contracts and the Plans and Specifications); (b) all architectural, engineering, construction and management contracts, all supply and service contracts for water, sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other utilities relating to such Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights; and (c) all guaranties and warranties, letters of credit, and documents relating to such Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights and all computer software specifically relating to the design maintenance, operation or construction of the Improvements. "Related Permits" shall mean all licenses, authorizations, certificates, variances, consents, approvals and other permits, now or hereafter pertaining to any of the Land, Improvements or Appurtenant Rights and all trademarks or business names relating to any of the Land, Improvements or Appurtenant Rights or the present or future development, construction, operation or use of any of the Land, Improvements or Appurtenant Rights. "Release" means any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Substance. "Remarketing Option" is defined in Section 22.1 of the Lease. "Renewal Effective Date" is defined in Section 21.1(a) of the Lease. 37 "Renewal Option" is defined in Section 21.1(a) of the Lease. "Renewal Request" is defined in Section 21.1(a) of the Lease. "Renewal Response Date" is defined in Section 21.1(a) of the Lease. "Renewal Term" means each five year renewal period commencing on each Renewal Effective Date with respect to which the Lessee has exercised its Renewal Option pursuant to Section 21.1 of the Lease. "Rent" means, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Rent Increase Notification Date" is defined in Section 2.03 of the Ground Lease. "Replacement Participant" is defined in Section 3.8(c) of the Participation Agreement. "Requesting Party" is defined in Section 26.1 of the Lease. "Required Certificate Holders" means, at any time, the holders of 66-2/3% of the outstanding stated amount of all Certificates. "Required Modification" is defined in Section 11.1(a) of the Lease. "Required Note Holders" means, at any time, the holders of 66-2/3% in aggregate principal of the Outstanding Notes. "Required Participants" means, at any time, the Required Note Holders and the Required Certificate Holders. "Requirement of Law" means all Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Property, the Improvements or the demolition, construction, use or alteration thereof, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to the Property or in any way limit the use and enjoyment thereof (including all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. Section 1201 et. seq. and any other similar Federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to the Lessee affecting the Property, the Appurtenant Rights and any easements, licenses or other agreements entered into pursuant to Section 12.2 of the Lease. 38 "Residual Value Guarantee Amount" means, as of any date of determination, an amount equal to the aggregate Tranche A Proportionate Share of the Lease Balance; provided, however, that if (i) a Cost Overrun Event has occurred and the Lessee has itself funded (without reimbursement from Advances) any additional Property Improvement Costs or Transaction Expenses of constructing the Improvements caused by such Cost Overrun Event or (ii) any amount has been capitalized pursuant to clause (ii) of Section 3.9(f) of the Participation Agreement, then the Residual Value Guaranty Amount shall be an amount equal to the remainder of (A) the total Tranche A Proportionate Share of the total Project Costs of the Improvements minus (B) the aggregate amount of any such overrun costs and expenses so funded by the Lessee (and not reimbursed from Advances). "Response Actions" means remove, removal, remedy, and remedial action as those terms are defined in CERCLA, 42 U.S.C. Section 9601. "Responsible Officer" means the President, any Vice President, the Treasurer or the Controller of any Person. "Responsible Officer's Certificate" means a certificate signed by any Responsible Officer, which certificate shall certify as true and correct the subject matter being certified to in such certificate. "Restricted Payment" means (i) the declaration or payment of any dividend or the incurrence of any liability to make any payment or distribution of cash or other property or assets in respect of a Person's stock, (ii) any payment on account of the purchase, redemption, defeasance or other retirement of a Person's stock or any other payment or distribution made in respect thereof, either directly or indirectly, or (iii) any payment, loan, contribution, or other transfer of funds or other property to any stockholder of such Person. "Scheduled Payment Date" means (a) as to interest on any Note or the Certificate Yield on any Certificate Purchaser Amount having an Interest Period of three months or less, the last day of each month, (b) as to interest on any Note or the Certificate Yield on any Certificate Purchaser Amount having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period, (c) as to the interest or Certificate Yield on Fixed Rate Advances, the last day of each March, June, September and December of each year and the maturity date of such Advance (and related Loans and Certificate Purchaser Amounts), and (d) as to the principal amount of the Notes and the Certificate Purchaser Amounts, each date indicated on Schedule 1 to the Lease as being a payment date with respect to such portion of the Property Improvements Cost, if any. "Securities Accounts" is defined in Section 2.01(b) of the Cash Collateral Agreement. 39 "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Security Documents" means the collective reference to the Lease, the Indenture, Mortgage, the Assignment of Lease, the Construction Agency Agreement Assignment, the Assignment of Construction Documents, the Cash Collateral Agreement and all other security documents hereafter delivered to the Indenture Trustee granting a Lien on any asset or assets of any Person to secure the obligations and liabilities of the Lessor to the Indenture Trustee and the Participants under the Participation Agreement or of the Lessee to the Lessor under the Lease. "Shortfall Amount" means, as of the Expiration Date, the amount that the Asset Termination Value will exceed the aggregate of the Gross Proceeds and the Residual Value Guarantee Amount upon the completion of a sale of the Property pursuant to Article XXII of the Lease. "Significant Casualty" means (i) a Casualty that results in an insurance settlement on the basis of a total loss, or a constructive or compromised total loss, or (ii) a Casualty that in the reasonable, good faith judgment of the Lessee (as evidenced by a Responsible Officer's Certificate delivered to the Lessor pursuant to Section 16.1 of the Lease) either (a) renders the Property unsuitable for continued use as a commercial property of the type of such property immediately prior to such Casualty or (b) is so substantial in nature that restoration of the Property to substantially its condition as existed immediately prior to such Casualty would be impracticable or impossible. "Significant Condemnation" means (i) a Condemnation that involves a taking of Lessor's entire title to the related Ground Lease Interest, (ii) a Condemnation that results in loss of possession of the Property by the Lessee for a period in excess of one hundred eighty (180) consecutive days, or (iii) a Condemnation that in the reasonable, good faith judgment of the Lessee (as evidenced by a Responsible Officer's Certificate delivered to the Lessor pursuant to Section 16.1 of the Lease) either (a) renders the Property unsuitable for continued use as commercial of the type of such property immediately prior to such Condemnation or (b) is such that restoration of the Property to substantially its condition as existed immediately prior to such Condemnation would be impracticable or impossible. "Significant Event" means (i) a Significant Casualty, (ii) a Significant Condemnation, (iii) an event where the restoration of the Property subject to a Casualty or Condemnation shall not be completed prior to the earlier of (A) the 180th day prior to the Expiration Date or (B) twelve (12) months following the occurrence of such Casualty or Condemnation or (iv) the occurrence of an Environmental Violation where the costs to clean up or remediate the same are reasonably estimated by the Lessee to exceed $1,000,000. 40 "Six Month Extension Termination Date" means, if the 364 Day Commitment is extended pursuant to Section 3.8(b) of the Participation Agreement, the date which is six months after the expiration of the 364 Day Commitment. "Sub-Participant" is defined in Section 12.2(a) of the Participation Agreement. "Subsidiary" of any Person means any corporation, partnership, joint venture, trust or estate of which (or in which) more than 50% of: (a) the outstanding capital stock having Voting Power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might having Voting Power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership or joint venture, or (c) the beneficial interest of such trust or estate, is at the time directly or indirectly owned by such Person, by such Person and one or more of its Subsidiaries or by one or more of such Person's Subsidiaries. "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay to Lessor or any other Person under the Lease, or under any of the other Operative Documents, including, without limitation, payments of the Residual Value Guarantee Amount, the Shortfall Amount and payments pursuant to Sections 16.2, 16.3. 16.4 or 17.6 of the Lease and Articles XX and XXII of the Lease. "Supplement to Assignment of Lease" means the Supplement substantially in the form of Exhibit A to the Assignment of Lease together with all attachments and schedules thereto, as such Supplement to Assignment of Lease may be supplemented, amended or modified from time to time. "Taxes" is defined in the definition of Impositions. "Term" is defined in Section 2.3 of the Lease. "Termination Date" is defined in Section 15.1(d), 16.2(a) and 17.2(e) of the Lease. "Termination Notice" is defined in Section 16.1 of the Lease. "364 Day Commitment" means $83,000,000. "Total Commitment" means the amount set forth as such in Schedule I to the Participation Agreement or, if such amount is reduced pursuant to Subparagraph 3.8(a) of the Participation Agreement, the amount to which so reduced. 41 "Tranche A Loans" is defined in Section 1.1 of the Indenture. "Tranche A Loan Commitment" means, as to any Note Purchaser, the obligation of such Note Purchaser to purchase Tranche A Notes from the Owner Trustee under Sections 3.3 and Section 3.6 of the Participation Agreement in an aggregate principal amount not to exceed the amount set forth opposite such Note Purchaser's name, at any time prior to Completion, under the column heading "Pre-Completion Commitments" and, at any time after Completion, under the column heading "Post-Completion Commitments" on Schedule I to the Participation Agreement. "Tranche A Note Holders" means Note Holders holding Tranche A Notes. "Tranche A Notes" is defined in Section 1.4 of the Indenture. "Tranche A Participant Balance" means for each Tranche A Participant as of any date of determination an amount equal to (i) the sum of the outstanding principal amount of the Tranche A Notes held by such Tranche A Participant (including amounts capitalized under Section 3.9(f) of the Participation Agreement), together with all accrued and unpaid interest thereon, and all other amounts owing by the Lessee to such Tranche A Participant under the Operative Documents, less (ii) the sum of all payments received by the Tranche A Participant on account of payments to reduce the outstanding principal amount of the Tranche A Notes held by such Tranche A Participant, including reductions resulting from payments by the Lessor, the Lessee and the Guarantor, proceeds from the sale of the Property and/or amounts realized from the Cash Collateral pursuant to the Cash Collateral Agreement. "Tranche A Proportionate Share" means (a) at any time prior to the Completion Date, eighty-nine and nine-tenths percent (89.9%) and (b) at any time on or after the Completion Date, eighty-five and five-tenths percent (85.5%). "Tranche B Loans" is defined in Section 1.2 of the Indenture. "Tranche B Loan Commitment" means, as to any Note Purchaser, the obligation of such Note Purchaser to purchase Tranche B Notes from the Owner Trustee under Sections 3.3 and 3.6 of the Participation Agreement in an aggregate principal amount not to exceed the amount set forth opposite such Note Purchaser's name, at any time prior to Completion, under the column heading "Pre-Completion Commitments" and, at any time after Completion, under the column heading "Post-Completion Commitments" on Schedule I to the Participation Agreement. "Tranche B Note Holders" means Note Holders holding Trance B Notes. "Tranche B Notes" is defined in Section 1.4 of the Indenture. 42 "Tranche B Participant Balance" means for each Tranche B Participant as of any date of determination an amount equal to (i) the sum of the outstanding principal amount of the Tranche B Notes held by such Tranche B Participant (including amounts capitalized under Section 3.9(f) of the Participation Agreement, together with all accrued and unpaid interest thereon, and all other amounts owing by the Lessee to such Tranche B Participant under the Operative Documents, less (ii) the sum of all payments received by the Tranche B Participant on account of payments to reduce the outstanding principal amount of the Tranche B Notes held by such Tranche B Participant, including reductions resulting from payments by the Lessor, the Lessee and the Guarantor, proceeds from the sale of the Property and/or amounts realized from the Cash Collateral pursuant to the Cash Collateral Agreement. "Transaction Expenses" means all costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Documents and the transactions contemplated by the Operative Documents including without limitation: (a) the reasonable fees, out-of-pocket expenses and disbursements of counsel for each of the Bank, the Lessor, the Arranger, the Indenture Trustee and the Ground Lessor, in negotiating the terms of the Operative Documents and the other transaction documents, preparing for the closing under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Documents; (b) the reasonable fees, out-of-pocket expenses and disbursements of counsel, and (without duplication) the reasonable allocated cost of internal legal services and all disbursements of internal counsel of each of the Bank, the Lessor, the Arranger, the Indenture Trustee and the Ground Lessor in connection with (1) any amendment, supplement, waiver or consent with respect to any Operative Documents requested or approved by the Lessee and (2) any enforcement of any rights or remedies against the Lessee in respect of the Operative Documents; (c) any other reasonable fees, out-of-pocket expenses, disbursements or cost of any party to the Operative Documents or any of the other transaction documents; (d) any and all Taxes and fees incurred in recording, registering or filing any Operative Document or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Documents; (e) any title fees, premiums and escrow costs and other expenses relating to title insurance and the closing contemplated by the Transaction Documents; 43 (f) all expenses relating to all Environmental Audits; (g) all expenses relating to all Appraisals, provided that such expenses shall not exceed $8,000 with respect to the Appraisal delivered on the Closing Date; and (h) all expenses relating to Arranger's insurance consultant. "Transfer" means any conveyance, sale, assignment, transfer or other disposition. "Transfer Notice" is defined in Section 12.1(b) of the Participation Agreement. "Trust" means the trust created by the Trust Agreement. "Trust Agreement" means the Trust Agreement, dated as of September ___, 1998, among the Certificate Purchasers and the Bank. "Trust Estate" is defined in Section 1.2(a) of the Trust Agreement. "Trustee Financing Statements" means UCC financing statements appropriately completed and executed for filing in the applicable jurisdiction in order to perfect a security interest in favor of the Indenture Trustee for the ratable benefit of the Participants in the Equipment located on the Property or in any Improvements on the Property. "Trust Indenture Estate" is defined in the "Now, Therefore" clause at the beginning of the Indenture. "Type" is defined in Section 3.9(a) of the Participation Agreement. "UCC Financing Statements" means collectively the Trustee Financing Statements and the Lessor Financing Statements. "Underwriting Fee" is defined in Section 4.2 of the Participation Agreement. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Uniform Commercial Code" and "UCC" means the Uniform Commercial Code as in effect in any applicable jurisdiction. 44 "Unused" means, with respect to the Total Commitment at any time, the remainder of (a) the Total Commitment at such time minus (b) the aggregate amount of all Advances made prior to such time. "Voting Power" means, with respect to securities issued by any Person, the combined voting power of all securities of such person which are issued and outstanding at the time of determination and which are entitled to vote in the election of directors of such Person, other than securities having such power only by reason of the happening of a contingency. DOCUMENT NUMBER: 365933.8 DECEMBER 9, 1998 EX-21.1 11 SUBSIDIARIES 1 EXHIBIT 21.1 DIRECT SUBSIDIARIES OF PEOPLESOFT, INC.
INCORP/FORMED IN PEOPLESOFT ARGENTINA S.A. Argentina PEOPLESOFT CREDIT CORPORATION California, USA PEOPLESOFT DO BRASIL LTDA Brazil PEOPLESOFT FRANCE S.A. France PEOPLESOFT GERMANY GMBH Germany PEOPLESOFT IBERICA, S.L. Spain PEOPLESOFT JAPAN K.K. Japan PEOPLESOFT MEXICO SA DE CV Mexico PEOPLESOFT PROPERTIES, INC. California, USA PEOPLESOFT UK LTD. United Kingdom PEOPLESOFT USA, INC. California, USA PEOPLESOFT VENTURES, INC. California, USA PSFT INTERNATIONAL HOLDINGS C.V. Netherlands PeopleSoft Schweiz A.G. Switzerland PeopleSoft Italia Srl. Italy PeopleSoft C.I. Holdings Ltd. Cayman Islands Intrepid Systems (UK) Ltd. United Kingdom
INDIRECT SUBSIDIARIES OF PEOPLESOFT, INC.
INCORP/FORMED IN PEOPLESOFT ASIA PTE. LTD. Singapore PEOPLESOFT AUSTRALIA PTY. LTD. Australia PEOPLESOFT, B.V. Netherlands PEOPLESOFT CANADA CO. Canada PEOPLESOFT C.I. LTD. Cayman Islands PEOPLESOFT INTERNATIONAL B.V. Netherlands PEOPLESOFT NEW ZEALAND New Zealand PEOPLESOFT SOUTH AFRICA (PTY) LIMITED South Africa PeopleSoft Malaysia Sdn Bdh Malaysia PeopleSoft Venezuela SA Venezuela PeopleSoft Hong Kong Limited Hong Kong
EX-23.1 12 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-80755, No. 333-20555, and No. 333-36951) of PeopleSoft, Inc. and in the related Prospectuses and in the Registration Statements (Form S-8) pertaining to the Amended and Restated 1989 Stock Plan, the 1992 Directors' Plan, the Amended and Restated 1992 Employee Stock Purchase Plan of PeopleSoft, Inc., the Red Pepper Software Company 1993 stock option plan and the Intrepid Systems, Inc. 1992 stock option plan, of our report dated January 26, 1999, with respect to the consolidated financial statements of PeopleSoft, Inc. included in this Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange Commission. Ernst & Young LLP Walnut Creek, California March 29, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 480,086 206,242 425,414 40,001 0 1,163,515 314,765 128,509 1,440,605 668,487 0 0 0 2,339 661,953 1,440,605 0 1,313,673 0 1,092,164 0 27,773 752 241,576 98,358 143,218 0 0 0 143,218 0.63 0.55
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